UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington
D.C. 20549


FORM
10-Q





ý
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended September 30,
  2008





OR





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








Commission
File Number 0-25509





First Federal Bankshares,
Inc.


(Exact
name of Registrant as specified in its charter)





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





712-277-0200


(Registrant's
telephone number)








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


YES
þ    NO
o


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





Large
      accelerated filer  o
            Accelerated
      filer oNon-accelerated
      filer  o (Do not check is
      a smaller reporting company)
            Smaller
      reporting company þ





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


YES
o    NO
þ





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




Class
            Outstanding at
      November 18, 2008Common
      Stock, $.01 par value
            3,304,471








FIRST
FEDERAL BANKSHARES, INC.





INDEX





PagePART
      I.
            FINANCIAL INFORMATIONITEM
      1.
            Financial Statements of First Federal Bankshares, Inc. and
      Subsidiaries
            1Consolidated Statements of Financial Condition at September 30,
      2008 and June 30, 2008
            1Consolidated Statements of Operations for the three month
      periods ended September 30, 2008 and 2007
            2Consolidated Statements of Changes in Stockholders’ Equity for
      the three month periods ended September 30, 2008 and
    2007
            3Consolidated Statements of Comprehensive Income (Loss) for the
      three month periods ended September 30, 2008 and 2007
            4Consolidated Statements of Cash Flows for the three month
      periods ended September 30, 2008 and 2007
            5Notes to Consolidated Financial Statements
            6ITEM
      2.
            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            12ITEM
      3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            22ITEM
      4.
            Controls and Procedures
            23PART
      II.
            OTHER INFORMATION
            23ITEM
      1.
            Legal Proceedings
            23ITEM
      1A.
            Risk Factors
            23ITEM
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            23ITEM
      3.
            Defaults upon Senior Securities
            23ITEM
      4.
            Submission of Matters to a Vote of Security
      Holders
            23ITEM
      5.
            Other Information
            23ITEM
      6.
            Exhibits
            24Signatures
            25








Index


PART
      I.               FINANCIAL  INFORMATIONITEM
      1.               FINANCIAL  STATEMENTSFirst Federal Bankshares, Inc. and SubsidiariesConsolidated  Statements
      of Financial Condition (Unaudited)September
      30,
            
            
            June
      30,2008
            
            
            2008ASSETSCash
      and due from banks
            
            $
            10,108,672
            
            
            $
            12,491,282Securities
      available-for-sale (amortized cost $98,308,939 and $101,872,241,
      respectively)
            
            
            76,952,850
            
            
            
            84,229,406Securities
      held-to-maturity (fair value $6,641,873 and $7,031,673,
      respectively)
            
            
            6,659,621
            
            
            
            6,999,724Mortgage
      loans held for sale
            
            
            802,777
            
            
            
            1,102,250Loans
      receivable
            
            
            370,755,679
            
            
            
            413,712,503Less
      allowance for loan losses
            
            
            5,486,933
            
            
            
            5,893,793Net
      loans
            
            
            365,268,746
            
            
            
            407,818,710Office
      property and equipment, net
            
            
            16,916,819
            
            
            
            18,761,786Federal
      Home Loan Bank ("FHLB") stock, at cost
            
            
            3,759,600
            
            
            
            4,283,000Foreclosed
      and repossessed assets
            
            
            9,882,628
            
            
            
            873,159Assets
      held for sale
            
            
            28,376,938
            
            
            
            -Accrued
      interest receivable
            
            
            2,568,323
            
            
            
            2,534,503Deferred
      tax asset
            
            
            11,311,000
            
            
            
            9,870,000Other
      assets
            
            
            16,799,527
            
            
            
            16,042,504Total
      assets
            
            $
            549,407,501
            
            
            $
            565,006,324LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDeposit
      liabilities
            
            $
            382,476,464
            
            
            $
            446,568,327Advances
      from FHLB and other borrowings
            
            
            77,809,607
            
            
            
            81,636,814Advance
      payments by borrowers for taxes and insurance
            
            
            381,877
            
            
            
            884,437Liabilities
      held for sale
            
            
            56,269,969
            
            
            
            -Accrued
      interest payable
            
            
            1,734,059
            
            
            
            1,800,967Accrued
      expenses and other liabilities
            
            
            2,523,149
            
            
            
            2,124,234Total
      liabilities
            
            
            521,195,125
            
            
            
            533,014,779COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYPreferred
      stock, $.01 par value, authorized 1,000,000 shares; issued
      none
            
            
            -
            
            
            
            -Common
      stock, $.01 par value, authorized 12,000,000 shares;issued
      5,068,726 shares
            
            
            50,639
            
            
            
            50,639Additional
      paid-in capital
            
            
            39,534,919
            
            
            
            39,505,397Retained
      earnings, substantially restricted
            
            
            31,073,060
            
            
            
            32,581,696Treasury
      stock, at cost, 1,764,255 shares
            
            
            (28,535,663
            )
            
            
            (28,535,663
            )Accumulated
      other comprehensive (loss)
            
            
            (13,390,089
            )
            
            
            (11,061,834
            )Unearned
      ESOP
            
            
            (520,490
            )
            
            
            (548,690
            )Total
      stockholders’ equity
            
            
            28,212,376
            
            
            
            31,991,545Total
      liabilities and stockholders’ equity
            
            $
            549,407,501
            
            
            $
            565,006,324




See
      Notes to Consolidated Financial Statements.


1
 Index


First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Operations (Unaudited)Three
      months endedSeptember
      30,2008
            
            
            2007Interest
      income:Loans
      receivable
            
            $
            6,212,058
            
            
            $
            7,430,449Investment
      securities
            
            
            1,470,194
            
            
            
            2,024,811Deposits
      in other financial institutions
            
            
            514
            
            
            
            50,440Total
      interest income
            
            
            7,682,766
            
            
            
            9,505,700Interest
      expense:Deposits
            
            
            2,538,868
            
            
            
            4,562,263Advances
      from FHLB and other borrowings
            
            
            639,383
            
            
            
            863,977Total
      interest expense
            
            
            3,178,251
            
            
            
            5,426,240Net
      interest income
            
            
            4,504,515
            
            
            
            4,079,460Provision
      for loan losses
            
            
            712,857
            
            
            
            20,648Net
      interest income after provision for loan losses
            
            
            3,791,658
            
            
            
            4,058,812Non-interest
      income (loss):Service
      charges on deposit accounts
            
            
            1,032,330
            
            
            
            783,298Fees
      on commercial and consumer loans
            
            
            38,476
            
            
            
            97,760Other-than-temporary
      impairment of investment securities
            
            
            (1,799,719
            )
            
            
            -Mortgage
      banking revenue
            
            
            80,378
            
            
            
            193,876Earnings
      from bank owned life insurance
            
            
            145,639
            
            
            
            136,555Other
      income
            
            
            218,762
            
            
            
            308,845Total
      non-interest income (loss)
            
            
            (284,134
            )
            
            
            1,520,334Non-interest
      expense:Compensation
      and benefits
            
            
            2,648,831
            
            
            
            2,806,201Office
      property and equipment
            
            
            709,482
            
            
            
            701,246Data
      processing, ATM and debit card transaction costs,and
      other item processing expense
            
            
            481,803
            
            
            
            370,009Professional,
      insurance and regulatory expense
            
            
            350,724
            
            
            
            254,891Advertising,
      donations and public relations
            
            
            222,447
            
            
            
            463,725Communications,
      postage and office supplies
            
            
            201,857
            
            
            
            210,760Loss
      on other real estate owned
            
            
            73,954
            
            
            
            54,702Other
      expense
            
            
            211,749
            
            
            
            187,999Total
      non-interest expense
            
            
            4,900,847
            
            
            
            5,049,533Income
      (loss) before income tax expense (benefit)
            
            
            (1,393,323
            )
            
            
            529,613Income
      tax expense (benefit)
            
            
            (595,000
            )
            
            
            115,000Net
      income (loss)
            
            $
            (798,323
            )
            
            $
            414,613Per
      share information:Basic
      earnings (loss) per share
            
            $
            (0.24
            )
            
            $
            0.13Diluted
      earnings (loss) per share
            
            $
            (0.24
            )
            
            $
            0.13




See
      Notes to Consolidated Financial Statements.


2
 Index




First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Stockholders' Equity (Unaudited)Three
      MonthsEnded
      September 30,2008
              
              
              2007Capital
      Stock:Beginning
      of year balance
              
              $
              50,639
              
              
              $
              50,604End
      of period balance
              
              
              50,639
              
              
              
              50,604Additional
      paid-in capital:Beginning
      of year balance
              
              
              39,505,397
              
              
              
              39,230,016Stock
      compensation expense
              
              
              34,585
              
              
              
              45,398Stock
      appreciation (depreciation) of allocated ESOP shares
              
              
              (13,340
              )
              
              
              23,859Amortization
      of employee stock grants
              
              
              8,277
              
              
              
              15,003End
      of period balance
              
              
              39,534,919
              
              
              
              39,314,276Retained
      earnings, substantially restricted:Beginning
      of year balance
              
              
              32,581,696
              
              
              
              58,704,525Adoption
      of FIN 48
              
              
              -
              
              
              
              180,000Adoption
      of SFAS 156
              
              
              -
              
              
              
              79,374Adoption
      of EITF 06-04
              
              
              (710,313
              )
              
              
              -Net
      income (loss)
              
              
              (798,323
              )
              
              
              414,613Dividends
      paid on common stock: $0.105 per share in 2007
              
              
              -
              
              
              
              (343,192
              )End
      of period balance
              
              
              31,073,060
              
              
              
              59,035,320Treasury
      stock, at cost:Beginning
      of year balance
              
              
              (28,535,663
              )
              
              
              (26,885,723
              )Treasury
      stock acquired: 87,000 shares in 2007
              
              
              -
              
              
              
              (1,649,940
              )End
      of period balance
              
              
              (28,535,663
              )
              
              
              (28,535,663
              )Accumulated
      other comprehensive (loss):Beginning
      of year balance
              
              
              (11,061,834
              )
              
              
              (179,360
              )Net
      change in unrealized losses on securitiesavailable-for-sale,
      net of tax of $2,056,000 and $745,000, respectively
              
              
              (3,456,974
              )
              
              
              (1,252,886
              )Less
      reclassification adjustment for net realized lossesincluded
      in net income, net of tax of $671,000 in 2008
              
              
              1,128,719
              
              
              
              -End
      of period balance
              
              
              (13,390,089
              )
              
              
              (1,432,246
              )Unearned
      ESOP shares:Beginning
      of year balance
              
              
              (548,690
              )
              
              
              (664,840
              )ESOP
      shares allocated
              
              
              28,200
              
              
              
              29,620End
      of period balance
              
              
              (520,490
              )
              
              
              (635,220
              )Total
      stockholders' equity
              
              $
              28,212,376
              
              
              $
              67,797,071
  See
      Notes to Consolidated Financial Statements.


3
 Index


First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Comprehensive Income (Loss) (Unaudited)Three
      Months EndedSeptember
      30,2008
            
            
            2007Net
      income (loss)
            
            $
            (798,323
            )
            
            $
            414,613Net
      change in unrealized losses on securities
    available-for-sale,net
      of tax of $2,056,000 and $745,000, respectively
            
            
            (3,456,974
            )
            
            
            (1,252,886
            )Less
      reclassification adjustment for net realized lossesincluded
      in net income, net of tax of $671,000 in 2008
            
            
            1,128,719
            
            
            
            -Total
      comprehensive (loss)
            
            $
            (3,126,578
            )
            
            $
            (838,273
            )




See
      Notes to Consolidated Financial Statements.


4
 Index


First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Cash Flows (Unaudited)
            
            Three
      months endedSeptember
      30,2008
            
            
            2007Cash
      flows from continuing operating activities:Net
      income (loss)
            
            $
            (798,323
            )
            
            $
            414,613Adjustments
      to reconcile net income (loss) from operations tonet
      cash provided by operating activities:Loans
      originated for sale to investors
            
            
            (9,611,000
            )
            
            
            (17,772,000
            )Proceeds
      from sale of loans originated for sale
            
            
            9,220,490
            
            
            
            18,186,637Provision
      for losses on loans
            
            
            712,857
            
            
            
            20,648Depreciation
      and amortization
            
            
            303,925
            
            
            
            283,050Provision
      for deferred taxes
            
            
            (184,000
            )
            
            
            26,000Equity-based
      compensation
            
            
            57,722
            
            
            
            113,880Mortgage
      banking revenue
            
            
            (80,378
            )
            
            
            (193,876
            )Other-than-temporary
      impairment of investment securities
            
            
            1,799,719
            
            
            
            -Amortization
      of premiums and discounts on loans,mortgage-backed
      securities and investment securities
            
            
            214,208
            
            
            
            6,043(Increase)
      in accrued interest receivable
            
            
            (265,729
            )
            
            
            (230,565
            )Decrease
      (increase) in other assets
            
            
            (322,533
            )
            
            
            293,311Increase
      in accrued interest payable
            
            
            136,198
            
            
            
            105,458Increase
      (decrease) in accrued expenses and other liabilities
            
            
            (183,398
            )
            
            
            110,815Increase
      (decrease) in accrued taxes on income
            
            
            (411,000
            )
            
            
            84,252Net
      cash provided by operating activities
            
            
            588,758
            
            
            
            1,448,266Cash
      flows from continuing investing activities:Proceeds
      from maturities of securities held-to-maturity
            
            
            337,605
            
            
            
            319,906Purchase
      of securities available-for-sale
            
            
            (2,495,521
            )
            
            
            -Proceeds
      from maturities of securities available-for-sale
            
            
            4,382,543
            
            
            
            6,855,107Redemption
      (purchase) of FHLB stock
            
            
            523,400
            
            
            
            (1,351,400
            )Loans
      purchased
            
            
            (1,416,000
            )
            
            
            (2,698,000
            )Decrease
      (increase) in loans receivable
            
            
            7,046,625
            
            
            
            (1,424,280
            )Purchase
      of office property and equipment
            
            
            (46,305
            )
            
            
            (1,943,520
            )Proceeds
      from sale of foreclosed real estate
            
            
            1,104,823
            
            
            
            31,466Expenditures
      on foreclosed real estate
            
            
            (53,771
            )
            
            
            -Proceeds
      from sale of real estate held for development
            
            
            -
            
            
            
            394,647Expenditures
      on real estate held for development
            
            
            -
            
            
            
            (229,723
            )Net
      cash provided by (used in) investing activities
            
            
            9,383,399
            
            
            
            (45,797
            )Cash
      flows from continuing financing activities:(Decrease)
      in deposits
            
            
            (10,721,585
            )
            
            
            (40,584,776
            )Proceeds
      from advances from FHLB and other borrowings
            
            
            33,209,500
            
            
            
            37,429,000Repayment
      of advances from FHLB and other borrowings
            
            
            (34,340,122
            )
            
            
            (9,249,964
            )Net
      (decrease) in advance payments by borrowers for taxes and
      insurance
            
            
            (502,560
            )
            
            
            (608,256
            )Repurchase
      of common stock
            
            
            -
            
            
            
            (1,649,940
            )Cash
      dividends paid
            
            
            -
            
            
            
            (343,192
            )Net
      cash used in financing activities
            
            
            (12,354,767
            )
            
            
            (15,007,128
            )Net
      decrease in cash and cash equivalents
            
            
            (2,382,610
            )
            
            
            (13,604,659
            )Beginning
      of year
            
            
            12,491,282
            
            
            
            25,738,467End
      of year
            
            $
            10,108,672
            
            
            $
            12,133,808SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the period for:Interest
            
            $
            3,042,053
            
            
            $
            5,320,783Income
      taxes paid
            
            
            -
            
            
            
            4,748SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING ANDFINANCING
      ACTIVITIESProperty
      acquired in settlement of loans
            
            
            10,095,425
            
            
            
            164,913See
      Notes to Consolidated Financial Statements.


5
 Index


FIRST
FEDERAL BANKSHARES, INC. and SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note
      1.
            Basis
      of presentation





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





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





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





Critical
Judgments and Estimates   The Company describes all of its
significant accounting policies in Note 1 of the Company's Audited Consolidated
Financial Statements in its 2008 Annual Report on Form
10-K.   Particular attention should be paid to the Company’s
allowance for losses on loans, “other than temporary” impairment of investment
securities, valuation of deferred tax assets, and the fair value of financial
instruments which require significant management judgments and estimates because
of the inherent uncertainties surrounding the subjective nature of these
areas.  Information on the impact loss allowances and “other than
temporary” losses have had on the Company's financial condition and results of
operations for the three month periods ended September 30, 2008 and 2007, can be
found below, in the sections entitled "Results of Operations – Provision for
Losses on Loans," “Financial Condition – Non-Performing and Classified Assets,”
and "Results of Operations – Other than Temporary Impairment."





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





Note
      2.
            Organization





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





Note
      3.
            Use
      of Estimates





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





Note
      4.
            Effect
      of New Accounting Standards





In
September 2006, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.  In March 2007, the EITF reached a final
conclusion on Issue 06−10, Accounting for Collateral Assignment Split-Dollar
Life Insurance Arrangements.  The consensus stipulates that an
agreement by an employer to share a portion of the proceeds of a life insurance
policy with an employee during the postretirement period is a postretirement
benefit arrangement required to be accounted for.  The consensus
concludes that the purchase of a split-


6
 Index


dollar
life insurance policy does not constitute a settlement and, therefore, a
liability for the postretirement obligation must be recognized. Issue 06-04 is
effective for annual reporting periods beginning after December 15, 2007, with
earlier adoption permitted.  The Company adopted EITF 06-04 on July 1,
2008.  EITF 06-04 allows the Company to record the initial recognition
of the liability through stockholders’ equity.  Upon the adoption of
EITF 06-04 the Company’s stockholders’ equity decreased by approximately
$710,000.  Ongoing expenses will be recognized through the current
year operations.  Management estimates the first year’s expense will
be approximately $30,000, or less than $0.01 earnings per share.





In September 2006, the FASB issued
Statement No. 157 (“SFAS 157”),Fair Value
Measurements.  SFAS 157 establishes a
framework for measuring fair value and expanding fair value measurement
disclosures. SFAS No. 157 also establishes a fair value hierarchy that
distinguishes between independent observable inputs and unobservable inputs
based on the best information available. When issued, SFAS No. 157 was effective
for fiscal years beginning after November 15, 2007.  In February 2008,
the FASB issued Staff Position (“FSP”) No. 157−2,Effective Date of
FASB Statement No. 157, to
allow entities to electively defer the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for those items recognized or
disclosed at fair value on an annual or more frequently recurring basis, until
fiscal years beginning after November 15, 2008. Nonfinancial assets measured at
fair value on a nonrecurring basis include nonfinancial assets and liabilities
measured at fair value in the second step of a goodwill impairment test, as well
as intangible assets and other nonfinancial long−lived assets measured at fair
value for impairment assessment. The Company adopted SFAS No. 157 effective July
1, 2008 for financial assets and liabilities and elected to defer adoption of
SFAS No. 157 for nonfinancial assets and liabilities until July 1,
2009.  For the Company this deferral primarily applies to foreclosed
and repossessed assets.  In October 2008 the FASB issued Staff
Position No. 157-3,Determining the
Fair Value of a Financial Asset in a Market that is not Active,which amended SFAS 157.  FSP
No. 157-3 clarifies how the fair value of a financial instrument is determined
when the market for the financial asset is inactive.  FSP No. 157-3
was adopted by the Company effective as of September 30, 2008.





In February 2007, the FASB issued
Statement No. 159, (“SFAS 159”) The Fair Value Option for Financial
Assets and Financial Liabilities – Including an  amendment of FASB
Statement No. 115.  This Statement provides entities with an
option to report selected financial assets at fair value.  The
objective of the Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in earnings caused by
measuring related assets and liabilities differently without having to apply the
complex provisions of hedge accounting.  This Statement was effective
for the Company on July 1, 2008.  The Company did not elect to apply
the provisions of SFAS 159 to eligible items as of the date of
adoption.   As such, the adoption of SFAS  159 did not
impact the Company’s financial position, results of operations, or cash
flows.





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





Note
      5.
            Earnings
      (Loss) Per Share





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


7
 Index


Three
      Months EndedSeptember
      30,2008
              
              
              2007Basic
      earnings (loss) per share computation:Net
      income (loss)
              
              $
              (798,323
              )
              
              $
              414,613Weighted
      average common shares outstanding
              
              
              3,304,471
              
              
              
              3,263,662Basic
      earnings (loss) per share
              
              $
              (0.24
              )
              
              $
              0.13Diluted
      earnings (loss) per share computation: (1)Net
      income (loss)
              
              $
              (798,323
              )
              
              $
              414,613Weighted
      average common shares outstanding
              
              
              3,304,471
              
              
              
              3,263,662Incremental
      option and recognition and retention plan sharesusing
      treasury stock method
              
              
              -
              
              
              
              13,687Diluted
      shares outstanding
              
              
              3,304,471
              
              
              
              3,277,349Diluted
      earnings (loss) per share
              
              $
              (0.24
              )
              
              $
              0.13(1) 
       Common shares issuable upon exercise of options and vesting of
      recognition and retention plan shares have not
      been included in the computation for the three months ended September 30,
      2008 because their inclusion would
      have had an antidilutive effect.





Note
      6.
            Dividends





No cash
dividends were paid during the three months ended September 30,
2008.





Note
      7.
            Fair
      Value Measurements





SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS 157 also establishes a fair value hierarchy that
prioritizes the use of inputs used in valuation methodologies into the following
three levels:





•Level 1 Inputs— Unadjusted
quoted prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date.





•Level 2 Inputs— Inputs other
than quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. These might include quoted prices for
similar assets or liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are
derived principally from or corroborated by market data by correlation or other
means.





•Level 3 Inputs— Unobservable
inputs for determining the fair values of assets or liabilities that reflect an
entity’s own assumptions about the assumptions that market participants would
use in pricing the assets or liabilities.





Financial
assets and financial liabilities measured at fair value on a recurring basis as
of September 30, 2008 are as follows:


8
 Index


Description
              
              Total
              
              
              Quoted
      Prices inActive Markets forIdentical Assets(Level
      1)
              
              
              Significant
      Other Observable Inputs(Level 2)
              
              
              SignificantUnobservable
      Inputs (Level 3)Securities
      available-for-sale
              
              $
              76,952,850
              
              
              
              -
              
              
              $
              42,526,236
              
              
              $
              34,426,614Mortgage
      Servicing Rights
              
              
              626,008
              
              
              
              -
              
              
              
              -
              
              
              
              626,008




A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.





In
general, fair value is based upon quoted market prices, where
available.  If such quoted market prices are not available, fair value
is based upon internally developed models or obtained from third parties that
primarily use, as inputs, observable market-based
parameters.  Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value, or the lower of the cost or
fair value.  These adjustments may include unobservable
parameters.  Any such valuation adjustments have been applied
consistently over time.  The Company’s valuation methodologies may
produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values as of September 30,
2008.  While management believes the Company’s valuation methodologies
are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the
reporting date.  One of the more subjective inputs to fair value in
inactive markets is the risk-adjusted discount rate utilized in the fair value
calculation.  Management has used risk-adjusted discount rates
reflecting the current illiquid markets over the expected life of the
securities, which we believe is appropriate yet conservative.





Investment Securities Available for
Sale. Certain investment securities available for sale are classified
within level 2 of the valuation hierarchy. The Company obtains fair value
measurements for investment securities from an independent pricing service. The
fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels,
trade execution data, market consensus prepayment speeds, credit information and
the bond’s terms and conditions, among other things.





In
certain cases, where the pricing service cannot obtain fair values and/or there
is limited activity or less transparency around inputs to the valuation,
investment securities are classified within level 3 of the valuation
hierarchy.  Upon adoption of SFAS 157 on July 1, 2008, the Company has
classified trust preferred collateralized debt obligations with a total fair
value of approximately $34.4 million as level 3.  Because the market
is inactive for these securities, observable market data was not
available.  The fair value of these securities was determined by
discounting the expected cash flows over the life of the
security.  The discount rate was determined by observing discount
rates of similar rated financial corporate debt securities as published by third
party broker/dealers.  Adjustments to this discount rate were made for
illiquidity and credit risk.


Mortgage Servicing
RightsThe fair value of mortgage servicing rights are
determined by an independent valuation service.  The valuation service
utilizes discounted cash flow modeling techniques, which consider observable
data that includes consensus prepayment speeds and the predominant risk
characteristics of the underlying loans including loan type, note rate and loan
term.


Mortgage Loans Held For
Sale.Mortgage loans held for sale are required to be measured
at the lower of cost or fair value. As of September 30, 2008, the Company has
$802,777 of loans held for sale. Management obtains quotes or bids on all or
part of these loans directly from the purchasing institution. As of September
30, 2008, the entire balance of loans held for sale was recorded at
cost.




Certain
assets are measured at fair value on a nonrecurring basis, that is, they are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).  Financial assets and financial
liabilities measured at fair value on a nonrecurring basis as of September 30,
2008 were as follows:




Description
              
              Total
              
              
              Quoted
      Prices in Active Markets forIdentical Assets (Level
      1)
              
              
              Significant
      Other Observable Inputs(Level 2)
              
              
              Significant
      Unobservable Inputs (Level 3)Loans
      receivable
              
              $
              3,681,838
              
              
              
              -
              
              
              
              -
              
              
              $
              3,681,838


9
 Index


The
specific reserves for collateral dependent impaired loans are based on the fair
value of the collateral less estimated costs to sell.  The fair value
of collateral was determined based on appraisals.  In some cases,
adjustments were made to the appraised values due to various factors including
the age of the appraisal, age of comparables included in the appraisal, and
known changes in the market and in the collateral.  When significant
adjustments were based on unobservable inputs, the resulting fair value
measurement has been categorized as a Level 3 measurement.  Specific
reserves were calculated for impaired loans with an aggregate carrying amount of
$5.2 million during the quarter ended September 30, 2008.  The
collateral underlying these loans had a fair value of $4.1 million less
estimated costs to sell of  $418,000 , resulting in a specific reserve
in the allowance for loan losses of $1.5 million.




Note
      8.
            “Other
      than Temporary” Impairment on Investment
  Securities





In
estimating “other than temporary” impairment losses on investment securities
(except for those securities accounted for under EITF 99-20 – see the following
paragraph) management considers (a) the length of time and the extent to which
the fair value has been less than cost, (b) the financial condition and
near-term prospects of the issuer, and (c) the intent and ability of the Company
to retain the security for a period of time sufficient to allow for an
anticipated recovery in fair value.





The
Company holds certain securities which are accounted for under EITF 99-20 “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial
Assets”.  Under EITF 99-20, these securities are evaluated for
“other than temporary” impairment using a method which compares the present
value of the cash flows assumed by market participants at the balance sheet date
to those at the date of purchase (or previous impairment date, if
applicable).  The discount rate used is assumed to be the discount
rate used at the time of purchase.  If the present value of the cash
flows at the balance sheet date is less than the purchase date, “other than
temporary” impairment is deemed to have occurred and a charge to earnings is
recorded to write down the security to market value at the balance sheet
date.  The write down of the asset is recorded as a
discount.





The
Company recognized $1.8 million in “other than temporary” impairment charges for
the three months ended September 30, 2008.  The “other than temporary”
impairment charge related to six trust-preferred pooled securities that the
Company owns.   Two bonds with an original par value of $6.0
million were downgraded from investment grade status to non-investment grade
status during the three months ended September 30, 2008,  resulting in
an “other than temporary” impairment charge of $0.2 million for the three months
ended September 30, 2008.  Two bonds with an original par value of
$6.0 million incurred a $1.0 million “other than temporary” charge for the three
months ended September 30, 2008 due to differences between the expected cash
flow and the cash flow that a current market participant would use to evaluate
these securities as required by EITF 99-20.  In that analysis, the
Company assumed that the default rates of the underlying collateral would be
similar to the default rates experienced in the savings and loan crisis (1988
through 1992) and then declining to a historical default rate which includes the
aforementioned five years.  If actual default rates are less than the
aforementioned scenario, the cash flows of the security will increase and may
equal what was expected when the security was purchased.  Two
securities with an original par value of $4.0 million incurred an “other than
temporary charge” of $0.6 million for the three months ended September 30,
2008.  This “other than temporary” impairment charge was a result of
the Office of Thrift Supervision (“OTS”) concluding these two securities are
over the loans to one borrower limit and the Company has agreed to sell the
portion of the securities that is over the loans to one borrower limit when
liquidity returns to the marketplace.  Since the Company does not have
the ability to hold these securities until market value recovery an “other than
temporary” impairment charge was recognized.  For further discussion,
please refer to Item 2 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations “Financial Condition – Securities
Available-for-Sale and Held-to-Maturity” and “Financial Condition –
Stockholders’ Equity.”





10
 Index


Note
      9.
            Non-Performing
      Assets





Non-performing
assets at September 30, 2008 and June 30, 2008, were $18.6
million.  Non-performing assets as a percentage of total assets
increased slightly from 3.30% at June 30, 2008, to 3.39% as of September 30,
2008.  The following table sets forth information regarding
non-accrual loans and other non-performing assets at the dates
indicated.




(Dollars
      in Thousands)
              
              September
      30, 2008
              
              
              June
      30, 2008Loans
      accounted for on a non-accrual basis:One-
      to four-family residential
              
              $
              286
              
              
              $
              1,167Multi-family
      residential
              
              
              821
              
              
              
              3,230Non-residential
      real estate
              
              
              7,387
              
              
              
              11,825Commercial
      business
              
              
              50
              
              
              
              1,428Consumer
              
              
              211
              
              
              
              99Total
      non-performing loans
              
              
              8,755
              
              
              
              17,749Foreclosed
      and repossessed assets
              
              
              9,883
              
              
              
              873Total
      non-performing assets
              
              $
              18,638
              
              
              
              18,622Restructured
      loans not included in other non-performing categories
above
              
              $
              5,200
              
              
              $
              5,206Non-performing
      loans as a percentage of total loans
              
              
              2.36
              %
              
              
              4.29
              %Non-performing
      assets as a percentage of total assets
              
              
              3.39
              %
              
              
              3.30
              %





Note
      10.
            Assets
      and Liabilities Held for Sale





In
September 2008 the Company entered into a definitive agreement to sell the
Company’s banking center in Grinnell, Iowa.  The
sale is subject to regulatory approval which is expected during the quarter
ended December 31, 2008.  It is anticipated the Company will record a
gain of $5.5 million.   As of September 30, 2008 the following
amounts of assets and liabilities, which are expected to be included in the
sale, have been classified as held for sale in the consolidated statement of
financial condition:







AmountAssetsLoans
      receivable
              
              $
              26,671,697Office
      property and equipment, net
              
              
              1,598,761Accrued
      interest receivable
              
              
              106,480Total
      assets held for sale
              
              $
              28,376,938LiabilitiesDeposit
      liabilities
              
              $
              53,370,278Other
      borrowings
              
              
              2,696,585Accrued
      interest payable
              
              
              203,106Total
      liabilities held for sale
              
              $
              56,269,969





11
 Index


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





Forward-Looking
Statements





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





Results
of Operations





Quarter
Overview   The Company’s recognized a net loss for the
three months ended September 30, 2008, of $798,000 or $0.24 per diluted share
compared to net income of $415,000 or $0.13 per diluted share in the same period
last year.  These amounts represent an annualized return on average
assets (“ROA”) of (0.57%) and 0.26%, respectively, and an annualized return on
average equity (“ROE”) of (9.85%) and 2.39%, respectively.  During the
most recent quarter the Company recognized $1.8 million of “other than
temporary” impairment charges on the Company’s trust-preferred pooled securities
portfolio.  Excluding this write down, management estimates the
Company would have reported net income of $330,000 or $0.10 per diluted
share.





The
following paragraphs discuss the aforementioned changes in more detail along
with other changes in the components of net income during the three month period
ended September 30, 2008 and 2007.





Net Interest
Income Net interest income for three-month period ended September 30,
2008, was $4.5 million compared to $4.1 million for the three-month period ended
September 30, 2007.  The net interest margin improved 72 basis points
to 3.62% for the three months ended September 30, 2008, from 2.90% for the three
months ended September 30, 2008September 30, 2007.  The increase in
margin was due to a generally lower interest rate environment that decreased the
cost of the Company’s interest-bearing liabilities faster than the yields on
interest-earning assets.  The margin improvement was partially offset
by a decrease in the Company’s average interest-earning
assets.  Average earning assets for the three months ended September
30, 2008decreased $67.4 million to $501.7 million as compared to the same period
last year.





The
following tables set forth information regarding the average balances of the
Company’s assets, liabilities, and equity, as well as the average yield on
assets and average cost of liabilities for the periods indicated.  The
information is based on daily average balances during the three-month periods
ended September 30, 2008 and 2007.








12
 Index


Three
      months ended September 30,2008
              
              
              2007Average
              
              
              
              
              
              Average
              
              
              Average
              
              
              
              
              
              Average(Dollars
      in thousands)
              
              Balance
              
              
              Interest
              
              
              Yield/Cost
              
              
              Balance
              
              
              Interest
              
              
              Yield/CostInterest-earning
      assets:Loans
      receivable (1)
              
              $
              407,076
              
              
              $
              6,212
              
              
              
              6.05
              %
              
              $
              432,897
              
              
              $
              7,430
              
              
              
              6.81
              %Investment
      securities (2)
              
              
              94,467
              
              
              
              1,470
              
              
              
              6.34
              %
              
              
              132,316
              
              
              
              2,025
              
              
              
              6.21
              %Deposits
      in other financial institutions
              
              
              120
              
              
              
              1
              
              
              
              1.69
              %
              
              
              3,885
              
              
              
              51
              
              
              
              5.15
              %Total
      interest-earning assets
              
              
              501,663
              
              
              
              7,683
              
              
              
              6.11
              %
              
              
              569,098
              
              
              
              9,506
              
              
              
              6.66
              %Non-interest-earning
      assets
              
              
              54,054
              
              
              
              
              
              
              
              
              
              
              
              62,422Total
      assets
              
              $
              555,717
              
              
              
              
              
              
              
              
              
              
              $
              631,520Interest-bearing
      liabilities:Deposit
      liabilities
              
              $
              391,081
              
              
              
              2,539
              
              
              
              2.58
              %
              
              $
              448,957
              
              
              
              4,562
              
              
              
              4.03
              %Borrowings
              
              
              82,049
              
              
              
              639
              
              
              
              3.09
              %
              
              
              65,940
              
              
              
              864
              
              
              
              5.20
              %Total
      interest-bearing liabilities
              
              
              473,130
              
              
              
              3,178
              
              
              
              2.67
              %
              
              
              514,897
              
              
              
              5,426
              
              
              
              4.18
              %Non-interest-bearing:Deposit
      liabilities
              
              
              45,955
              
              
              
              
              
              
              
              
              
              
              
              42,388Other
      liabilities
              
              
              4,214
              
              
              
              
              
              
              
              
              
              
              
              4,826Total
      liabilities
              
              
              523,299
              
              
              
              
              
              
              
              
              
              
              
              562,111Stockholders’
      equity
              
              
              32,418
              
              
              
              
              
              
              
              
              
              
              
              69,409Total
      liabilities andstockholders'
      equity
              
              $
              555,717
              
              
              
              
              
              
              
              
              
              
              $
              631,520Net
      interest income
              
              
              
              
              
              $
              4,505
              
              
              
              
              
              
              
              
              
              
              $
              4,080Interest
      rate spread
              
              
              
              
              
              
              
              
              
              
              3.44
              %
              
              
              
              
              
              
              
              
              
              
              2.48
              %Net
      interest margin
              
              
              
              
              
              
              
              
              
              
              3.62
              %
              
              
              
              
              
              
              
              
              
              
              2.90
              %Ratio
      of average interest-earning assetsto
      average interest-bearing liabilities
              
              
              
              
              
              
              
              
              
              
              106.03
              %
              
              
              
              
              
              
              
              
              
              
              110.53
              %


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




Provision for
Losses on LoansThe provision for loan
losses for the three months ended September 30, 2008, was $713,000 as compared
to $21,000 for the quarter ended September 30, 2007.  The increase was
a result of the Company recognizing a specific allowance of $700,000 on a loan
for the development of commercial properties in Des Moines, Iowa.  The
project is behind schedule and an appraisal that was received during the most
recent quarter showed that the property has suffereda significant decrease in
the value of the project.  As a result, a specific allowance was
warranted.





The
Company’s allowance for loan losses totaled $5.5 million as of September 30,
2008, compared to $1.7 million as of September 30, 2007.  The
Company’s methodology for establishing allowance for loan loss is heavily
influenced by the level of the Company’s non-performing and classified
loans.  Non-performing loans and classified assets have increased over
the last year due to the well-publicized difficulties in the overall markets for
commercial and residential real estate.  Although management believes
that the Company’s present level of allowance for loan losses is adequate, there
can be no assurance that future adjustments to the allowance will not be
necessary, which could adversely affect the Company’s results of
operations.  For additional discussion, refer to “Financial Condition
– Non-Performing and Classified Assets.”





The
following table summarizes the activity in the Company’s allowance for loan
losses for the three months ended September 30, 2008 and 2007.


13
 Index


Three
      months endedSeptember
      30(Dollars
      in Thousands)
              
              2008
              
              
              2007Balance
      at beginning of period
              
              $
              5,894
              
              
              $
              1,797Provision
      for loan losses
              
              
              713
              
              
              
              21Charge-offs:Commercial
      real estate loans
              
              
              (221
              )
              
              
              -Commercial
      business loans
              
              
              (860
              )
              
              
              (56
              )Consumer
      loans
              
              
              (62
              )
              
              
              (46
              )Total
      loans charged-off
              
              
              (1,143
              )
              
              
              (102
              )Recoveries
              
              
              23
              
              
              
              27Charge-offs,
      net of recoveries
              
              
              (1,120
              )
              
              
              (75
              )Balance
      at end of period
              
              $
              5,487
              
              
              $
              1,743Allowance
      for loan losses to total loans
              
              
              1.48
              %
              
              
              0.40
              %Allowance
      for loan losses to non-performing loans
              
              
              62.67
              %
              
              
              45.40
              %Net
      annualized charge-offs to average loans outstanding
              
              
              1.10
              %
              
              
              0.07
              %





Non-Interest
Income  Excluding “other than temporary” write downs,
non-interest income totaled $1.5 million for the three months ended September
30, 2008 and 2007.The following paragraphs
discuss the principal components of non-interest income and the primary reasons
for the changes from 2007 to 2008.





Service Charges on Deposit
Accounts Service charges on deposit accounts increased 32% or
$0.2 million to $1.0 million for the three months ended September 30, 2008 as
compared to the same time period last year.  The increase was due to a
higher level of overdraft and interchange fees collected on debit card
transactions.  The higher level of fees collected was primarily due to
a significant increase in the number of checking accounts opened over the last
year.


Service Charges on Commercial and
Consumer Loan   Service charges on commercial and consumer
loans decreased $59,000 to $38,000 for the three month period ended September
30, 2008, as compared to the same period in the previous year.  The
decrease was primarily due to the decline in the number of commercial and
consumer loans prepaying as compared to the previous year.





“Other than Temporary”
ImpairmentThe Company recognized $1.8 million in “other
than temporary” impairment charges for the three months ended September 30, 2008
as compared to zero for the three months ended September 30,
2007.  The “other than temporary” impairment charge related to six
trust-preferred pooled securities that the Company owns.   Two
bonds with an original par value of $6.0 million were downgraded from investment
grade status to non-investment grade status during fiscal year 2008 resulting in
an “other than temporary” impairment charge of $0.2 million for the three months
ended September 30, 2008.  Two bonds with an original par value of
$6.0 million incurred a $1.0 million “other than temporary” charge due to
differences between the expected cash flow and the cash flow that a current
market participant would use to evaluate these securities as required by EITF
99-20.  In that analysis, the Company assumed that the default rates
of the underlying collateral would be similar to the default rates experienced
in the savings and loan crisis (1988 through 1992) and then declining to a
historical default rate which includes the aforementioned five
years.  If actual default rates are less than the aforementioned
scenario, the cash flows of the security will increase and may equal what was
expected when the security was purchased.  Two securities with an
original par value of $4.0 million incurred an “other than temporary charge” of
$0.6 million for the three months ended September 30, 2008.  This
“other than temporary” impairment charge was a result of the Office of Thrift
Supervision (“OTS”) concluding these two securities are over the loans to one
borrower limit and the Company has agreed to sell the portion of the securities
that is over the loans to one borrower limit when liquidity returns to the
marketplace.  Since the Company does not have the ability to hold
these securities until market value recovery an “other than temporary”
impairment charge was recognized.  Please refer to “Financial
Condition - Securities Available-for-Sale and Held-to-Maturity” for more
information.





Mortgage Banking
Revenue   Mortgage banking revenue consists of gain on
sale, collection of loan fees, and mortgage servicing
income.  Mortgage banking revenue declined $114,000 from $194,000 for
the three


14
 Index


months
ended September 30, 2007, to $80,000 for the three months ended September 30,
2008.  The decrease was attributable to the decline in fixed rate
mortgage origination volumes.





Other
IncomeOther income decreased $90,000 to $219,000 during
the three month period ended September 30, 2008, as compared to the same period
in the previous year.  The change was primarily due to a decrease in
sales of the Company’s fixed annuity and mutual funds.




Non-Interest
Expense  Non-interest expense for the three months ended
September 30, 2008, was $4.9 million compared to $5.0 million for the three
months ended September 30, 2007.  The following paragraphs discuss the
principal components of non-interest expense and the primary reasons for the
changes from 2007 to 2008.





Personnel
Expense    Compensation and employee benefits was
$2.6 million for the three months ended September 30, 2008, compared to $2.8
million for the three months ended September 30, 2007.The decrease in
compensation and benefit expense was attributed to a decline in costs associated
with the Company’s defined benefit pension plan partially offset by merit
increases.  The number of full-time equivalent employees was 189 as of
September 30, 2008, as compared to 191at the same time last year.





Office Property and
Equipment   Office property and equipment expense
increased $8,000 to $709,000 for the three months ended September 30, 2008,
compared to the same period in the previous year.  The increase was
primarily due to increased maintenance costs at the Company’s banking
centers.





Data Processing, ATM and Debit Card
Transaction Costs, and Other Item Processing
ExpenseData processing, ATM and debit card
transaction costs increased to $482,000 for the three months ended September 30,
2008, from $370,000 for the three months ended September 30,
2007.  This increase was partially due to the increased number of new
checking accounts opened during the last twelve months as compared to the
previous year.  In addition, the Company has been successful at
increasing the number of internet and mobile banking users and the number of
debit card transactions has increased.  As a result, processing costs
to service these channels have increased as compared to the previous
year.





Professional, Insurance, and
RegulatoryProfessional, insurance, and regulatory
expense increased $96,000 to $351,000 for the three months ended September 30,
2008, as compared to the three months ended September 30, 2007.  The
recent clarifications of the “mark-to-market” or “fair value” accounting rules
resulted in the Company incurring additional accounting and consulting
costs.





Advertising, Donations, and Public
RelationsExpenses related to advertising, donations and
public relations decreased to $222,000 for the three months ended September 30,
2008, from $464,000 for the three months ended September 30,
2007.  The decrease was due to non-recurring costs related to the
Bank’s name change that occurred in the previous year.





Communication, Postage, and Office
SuppliesCommunications, postage, and office supplies
expense decreased by $9,000 from $211,000 for the three months ended September
30, 2007, to $202,000 for the three months ended September 30,
2008.  These decreases were primarily due to costs associated with the
Bank’s name change that occurred in the previous year.  In addition,
the Company has been successful in switching the delivery of account statements
from paper to electronic delivery.





Loss on other real estate
ownedLoss on other real estate owned increased $19,000
to $74,000 for the three months ended September 30, 2008, compared to $55,000
for the three months ended September 30, 2007.  The increase was due
to an overall decline in real estate market values that has occurred over the
past year.





Other Non-Interest
ExpenseOther non-interest expense increased by $24,000
to $212,000 for the three month period ended September 30, 2008, as compared to
the same period in the previous year.  This increase was due to costs
incurred by the Company to dispose of foreclosed property.





Income Tax
Expense(Benefit)Income tax (benefit) for the three months ended September 30, 2008, was
$595,000 compared to income tax expense of $115,000 for the three months ended
September 30, 2007.   The income tax (benefit) or expense for the
three months ended September 30, 2008 and 2007 represented (43%) and 22% of
pre-tax


15
 Index


income
(loss), respectively.  The effective tax rate increased in the current
year period due to the loss benefit in addition to tax exempt
income.





Financial
Condition





Overview
Total assets decreased by $15.6 million or 3%, to $549.4 million at September
30, 2008, from $565.0 million at June 30, 2008.  During the quarter
funds from the maturity of investment securities, and loans receivable were
primarily used to fund a decline in the Company’s deposit
liabilities.  The following paragraphs discuss the aforementioned
changes in more detail along with other changes in the components of the assets
and liabilities for the period ended September 30, 2008.





Securities
Available-for-Sale and Held-for-InvestmentTotal
securities decreased by $7.6 million to $83.6 million at September 30, 2008,
from $91.2 million at June 30, 2008.  The decrease was primarily due
to the decline in market value of the Company’s trust preferred Company’s
Collateralized Debt Obligations (CDOs).  Trust preferred CDOs
represent a participation interest in a pool of trust preferred debt or
subordinated notes of banks, thrifts, insurance companies and
REITS.  As of September 30, 2008, the collateral of the CDOs purchased
by the Company are approximately 76% bank, 24% insurance companies, and less
than one percent was either homebuilders or real estate investment trusts
(“REITS”).  Investments were generally rated “A” or “triple-B” by
independent rating agencies at the time of purchase.  During the
quarter ended September 30, 2008, two bonds with a book value of $1.0 million
were downgraded to below investment grade, four bonds with a book value of $24.6
million were downgraded from “A to “triple-B” by Moody’s rating service but
remained rated “A” by Fitch rating service, and eight bonds with a book value of
$28.4 million remain either “A” or “triple-B” rated by Moody’s or Fitch rating
service.  It should be noted that bonds that were not downgraded
remained on watch for possible downgrade by the appropriate rating
service.





Federal
law and regulation generally permit the Bank to invest up to 35% of
its assets in commercial paper and corporate debt securities. Notwithstanding
this investment limit, guidance issued by the Office of Thrift Supervision
("OTS") imposes lower limits on such investments. 
The Company was advised by the OTS that the aggregate
amount of the Company's portfolio of trust-preferred pooled securities
($54.0 million amortized cost at September 30, 2008) exceeds OTS regulatory
guidelines. The Company filed a plan with the OTS on May 15, 2008, to come into
compliance with such regulatory guidelines and the timeframe for doing
so.  As part of such plan, the Company asked the OTS’ approval to
allow the Company to retain such securities, notwithstanding the regulatory
guidelines. On September 25, 2008, the Company received a letter from the OTS
that stated the OTS had no objection to the Company’s plan.  However,
the OTS did conclude two bonds were in excess of the OTS’ loans to one borrower
limit (LTOB).  As a result, the Company classified the portion over
the LTOB limit as “other than temporarily impaired” at September 30, 2008 due to
a lack of ability by the Company to hold these securities to maturity and/or
forecasted recovery.  The Company intends to sell these two securities
over the LTOB limit when liquidity returns to the market
place.  During the quarter ended September 30, 2008, the Company
recognized an additional “other than temporary” impairment charge on six trust
preferred securities that the Company owns.  Please refer to “Results
of Operations – Other than Temporary Impairment,” above, and “Financial
Condition – Stockholders’ Equity,” below, for additional discussion relating to
the Company’s trust-preferred securities (“TPSs”) portfolio.


16
 Index





The table
below sets forth information regarding the Company’s trust preferred
collateralized debt obligations at September 30, 2008.





Issuer
              
              Original
      RatingMoodys/Fitch
              
              
              Current
      Rating Moodys/Fitch
              
              Paymentin
      Kind (1)
              
              Amortized
      Cost
              
              
              Market
      Value
              
              
              Unrealized
      Gain/(Loss)
              
              
              OTTI
      chargein quarter ended September 30, 2008TPS
      considered "other than temporarily" impaired:Security
      A
              
              Baa2/BBB
              
              
              Ba1/BBB
              
              No
              
              $
              430,000
              
              
              $
              430,000
              
              
              
              -
              
              
              
              219,816Security
      B (2)
              
              A3/A-
              
              
              Baa3/A-
              
              No
              
              
              757,367
              
              
              
              757,367
              
              
              
              -
              
              
              
              240,776Security
      C (2)
              
              A3/A-
              
              
              Baa1/A-
              
              Yes
              
              
              1,279,367
              
              
              
              1,279,367
              
              
              
              -
              
              
              
              311,607Security
      D
              
              NR/BBB
              
              
              NR/BBB
              
              No
              
              
              464,155
              
              
              
              464,155
              
              
              
              -
              
              
              
              97,901Security
      E
              
              NR/BBB
              
              
              NR/BBB
              
              Yes
              
              
              1,891,566
              
              
              
              1,891,566
              
              
              
              -
              
              
              
              894,619Security
      F
              
              NR/BBB
              
              
              NR/CCC
              
              Yes
              
              
              590,000
              
              
              
              590,000
              
              
              
              -
              
              
              
              35,000TPS
      not considered "other than temporarily" impaired:Security
      B
              
              A3/A-
              
              
              Baa3/A-
              
              No
              
              
              7,300,000
              
              
              
              3,730,899
              
              
              
              (3,569,101
              )Security
      C
              
              A3/A-
              
              
              Baa1/A-
              
              No
              
              
              7,300,000
              
              
              
              3,569,143
              
              
              
              (3,730,857
              )Security
      I
              
              A2/A
              
              
              A2/A
              
              No
              
              
              6,025,165
              
              
              
              4,331,400
              
              
              
              (1,693,765
              )Security
      J
              
              A2/A
              
              
              A2/A
              
              No
              
              
              1,991,195
              
              
              
              1,415,025
              
              
              
              (576,170
              )Security
      K
              
              A3/A-
              
              
              Baa1/A
              
              No
              
              
              1,972,098
              
              
              
              1,388,474
              
              
              
              (583,624
              )Security
      L
              
              NR/BBB
              
              
              NR/BBB
              
              Yes
              
              
              5,035,323
              
              
              
              2,833,103
              
              
              
              (2,202,220
              )Security
      M
              
              A3/A-
              
              
              A3/A-
              
              No
              
              
              4,990,640
              
              
              
              3,231,938
              
              
              
              (1,758,702
              )Security
      N
              
              NR/BBB
              
              
              NR/BBB
              
              No
              
              
              2,974,352
              
              
              
              1,950,877
              
              
              
              (1,023,475
              )Security
      O
              
              NR/BBB
              
              
              NR/BBB
              
              No
              
              
              5,000,000
              
              
              
              2,916,500
              
              
              
              (2,083,500
              )Security
      P
              
              A3/A-
              
              
              Baa2/A-
              
              No
              
              
              6,000,000
              
              
              
              3,646,800
              
              
              
              (2,353,200
              )$
              54,001,228
              
              
              $
              34,426,614
              
              
              $
              (19,574,614
              )
              
              $
              1,799,719(1)
      The structure of these securities allows for payment in kind or the
      capitalization of interest to principal.(2)
      Portion of the security that is over the Bank's Loans to One Borrower
      Limit.





Loans
Receivable  Loans receivable decreased by $43.0 million to
$370.8 million as of September 30, 2008, from $413.8 million at June 30,
2008.  The decrease is partially attributable to the transfer of loans
receivable to assets held for sale.   The following table sets
forth information regarding the Company’s loan portfolio, by type of loan, on
the dates indicated.


17
 Index


September
      30, 2008
              
              
              June
      30, 2008(Dollars
      in Thousands)
              
              Amount
              
              
              %
              
              
              Amount
              
              
              %One-
      to four-family residential (1)
              
              $
              91,532
              
              
              
              25.06
              
              
              $
              111,933
              
              
              
              27.45Multi-family
      residential (1)
              
              
              37,499
              
              
              
              10.27
              
              
              
              40,451
              
              
              
              9.92Non-residential
      real estate (1)
              
              
              120,457
              
              
              
              32.98
              
              
              
              132,794
              
              
              
              32.56Commercial
      business loans
              
              
              49,735
              
              
              
              13.62
              
              
              
              62,217
              
              
              
              15.26Home
      equity and second mortgage loans
              
              
              30,407
              
              
              
              8.32
              
              
              
              33,003
              
              
              
              8.09Auto
      loans
              
              
              4,837
              
              
              
              1.32
              
              
              
              4,648
              
              
              
              1.14Other
      non-mortgage loans (2)
              
              
              36,066
              
              
              
              9.87
              
              
              
              28,700
              
              
              
              7.04Loans
      in process, unearned discounts and premiums,and
      net deferred loan fees and costs
              
              
              223
              
              
              
              0.06
              
              
              
              (33
              )
              
              
              (0.01
              )Subtotal
              
              
              370,756
              
              
              
              101.50
              
              
              
              413,713
              
              
              
              101.45Allowance
      for  loan losses
              
              
              (5,487
              )
              
              
              (1.50
              )
              
              
              (5,894
              )
              
              
              (1.45
              )Total
      loans, net
              
              $
              365,269
              
              
              
              100.00
              
              
              $
              407,819
              
              
              
              100.00(1)
      Includes construction loans.(2)
      Includes other secured and unsecured personal loans.





Office property
and equipment  Office property and equipment decreased from
$18.8 million at June 30, 2008, to $16.9 million at September 30,
2008.  The decrease was due to the transfer of property and equipment
of a banking center to assets held for sale depreciation of the Company’s office
equipment.





FHLB
Stock   The Company’s FHLB stock decreased from $4.3
million at June 30, 2008, to $3.8 million at September 30, 2008.  The
decrease was a direct result of the decrease in FHLB advances, which decreases
the level of FHLB stock required to be held.





Foreclosed and
Repossessed AssetsForeclosed and repossessed assets increased
$9.0 million to $9.9 million at September 30, 2008 compared to $0.9 million at
June 30, 2008.  The increase was primarily due to two large commercial
real estate relationships consisting of five different projects entering into
foreclosure proceedings.  Please refer to “Financial Condition -
Non-Performing and Classified Assets” for more detail.





Deferred Tax
Asset The Company’s deferred tax asset increased from $9.9
million at June 30, 2008 to $11.3 million at September 30, 2008.  The
increase was primarily due to deferred tax assets related to unrealized losses
on available-for-sale securities.





Deposit
Liabilities   Deposit liabilities decreased by $64.1
million, to $382.5 million at September 30, 2008, from $446.6 million at June
30, 2008.  The decrease in deposits was largely due to the
reclassification of $53.4 million in deposit liabilities of a banking center
that were transferred to liabilities held for sale at September 30, 2008 in
addition to an overall decline in the average balance of all deposit
accounts.  The decease in deposits was partially offset by the Company
issuing a $25.0 million brokered certificate of deposit.  The
following table sets forth information regarding the Company’s deposit portfolio
on the dates indicated.




September
      30, 2008
              
              
              June
      30, 2008(Dollars
      in Thousands)
              
              Amount
              
              
              %
              
              
              Amount
              
              
              %Non-interest-bearing
      checking
              
              $
              39,398
              
              
              
              10.30
              
              
              $
              48,490
              
              
              
              10.86Interest-bearing
      checking accounts
              
              
              68,191
              
              
              
              17.83
              
              
              
              98,410
              
              
              
              22.04Money
      market accounts
              
              
              40,292
              
              
              
              10.53
              
              
              
              54,539
              
              
              
              12.21Savings
      accounts
              
              
              20,346
              
              
              
              5.32
              
              
              
              24,959
              
              
              
              5.59Certificates
      of deposit
              
              
              214,249
              
              
              
              56.02
              
              
              
              220,170
              
              
              
              49.30Total
      deposits
              
              $
              382,476
              
              
              
              100.00
              
              
              $
              446,568
              
              
              
              100.00





FHLB Advances and
Other BorrowingsThe Company’s FHLB advances and other
borrowings decreased $3.8 million, to $77.8 million at September 30, 2008, from
$81.6 million at June 30, 2008.  The decrease was due to
the


18
 Index


transfer
of $2.7 million of repurchase agreements to liabilities held for sale and to a
decline of overnight FHLB borrowings during the most recent
quarter.





Stockholders’
Equity Total stockholders’ equity decreased by $3.8 million from $32.0
million at June 30, 2008, to $28.2 million at September 30, 2008.  The
decrease was attributable to the net loss recognized during the most recent
quarter and an increase in accumulated other comprehensive loss.  This
increase was caused by a decline in the fair value of the Company’s remaining
TPS portfolio.  The cash flows of the Company’s TPSs are derived from
trust preferred securities and subordinated debt issued by well-diversified
pools of banks and thrifts (76%), insurance companies (24%), and
REIT/homebuilders (1%).  The Company’s TPS securities are secured
through a combination of subordination from lower classes within the TPS
structures, as well as over-collateralization of available future contractual
cash flows.





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





Non-Performing
and Classified AssetsNon-performing assets at September
30, 2008 and June 30, 2008, was $18.6 million.  Non-performing assets
as a percentage of total assets increased slightly from 3.30% at June 30, 2008,
to 3.39% as of September 30, 2008.  The following table sets forth
information regarding non-accrual loans and other non-performing assets at the
dates indicated.





(Dollars
      in Thousands)
              
              September
      30, 2008
              
              
              June
      30, 2008Loans
      accounted for on a non-accrual basis:One-
      to four-family residential
              
              $
              286
              
              
              $
              1,167Multi-family
      residential
              
              
              821
              
              
              
              3,230Non-residential
      real estate
              
              
              7,387
              
              
              
              11,825Commercial
      business
              
              
              50
              
              
              
              1,428Consumer
              
              
              211
              
              
              
              99Total
      non-performing loans
              
              
              8,755
              
              
              
              17,749Foreclosed
      and repossessed assets
              
              
              9,883
              
              
              
              873Total
      non-performing assets
              
              $
              18,638
              
              
              
              18,622Restructured
      loans not included in other non-performing categories
above
              
              $
              5,200
              
              
              $
              5,206Non-performing
      loans as a percentage of total loans
              
              
              2.36
              %
              
              
              4.29
              %Non-performing
      assets as a percentage of total assets
              
              
              3.39
              %
              
              
              3.30
              %





As of
September 30, 2008, the Company’s adversely classified assets totaled $26.3
million (which includes non-performing loans in the above table) compared to
$24.2 million, at of June 30, 2008.  Adversely classified assets
include loans rated “Substandard”, “Doubtful”, or “Loss”, as well as foreclosed
and repossessed assets.  Although the Company’s classified assets
increased, management believes the allowance for loan loss was
adequate.





The
Company was closely monitoring six classified assets totaling $19.1 million that
are included in the $26.3 million total.  These loan relationships
were classified “Substandard” as of that date.  The following
paragraphs contain a brief discussion of each relationship.





The
Company originated a total of $8.5 million of loans to various real estate
projects in Des Moines, Iowa that had a common guarantor.  The
guarantor has experienced financial difficulties.  As a result cash
flow was not


19
 Index


sufficient
to service the debt.  As a result, the Company foreclosed on all
properties and the relationship was transferred to foreclosed and repossessed
assets.  Some properties have been sold which has brought the balance
down to $7.6 million. Management does not anticipate a loss on this loan at
this time.  However, there can be no assurances.





In
October 2003, the Company purchased a $3.2 million loan.  The borrower
is a real estate holding company for a formal wear manufacturer and
distributor.  The borrower recently has been delinquent with
payments.  In addition, the Company has had difficulty receiving
financial statements from the borrower.  As a result, management has
classified this loan as “Substandard” and it was placed on non-accrual
status.  Management does not anticipate a loss on this loan at this
time.  However, there can be no assurances.





In May
2007, the Company purchased a participation in a $33.0 million loan for
construction of a bio-diesel plant in south-eastern Nebraska.  The
current balance is $3.2 million.  In February 2008 the Company was
notified that the parent company was having financial difficulties and was
unable to support this project.  As a result, the plant has not been
completed.  The bank group has agreed to allow the borrower to use
escrow funds and proceeds from the sale of raw materials in order to complete
the project.  Construction was expected to be completed by June of
2008.  The deadline was not met and the bank group decided to start
foreclosure proceedings.  Management has classified this loan as
“Substandard” and it was placed on non-accrual status.  Management
does not anticipate a loss on this loan at this time.  However, there
can be no assurances.





In 2007,
the Company originated a $2.4 million loan for the construction of commercial
properties.  The project is behind schedule due to numerous weather
related delays.  Management has classified this loan
“Substandard”.  An updated appraisal of this property was received
recently.  The value of this property has declined significantly and a
$700,000 specific allowance was warranted and recorded during the quarter ended
September 30, 2008.





In August
2003, the Company purchased a loan to a garage door company in
Colorado.  The Balance at September 30, 2008 was $1.6
million.  Cash flow from the business is not sufficient to service the
debt.  The guarantors have injected cash into the business to keep the
loan current.  However, recently, the loan has become
delinquent.  As a result management has classified this loan as
“Substandard”.  The loan remains on accrual
status.   Management does not anticipate a loss on this loan at
this time.  However, there can be no assurances.





In 2003,
the Company originated a $1.3 million loan for development of land in Des
Moines, Iowa.  Current principal balance of this loan is $1.1
million.  During the most recent quarter, foreclosure proceedings
commenced and it was transferred to foreclosed assets.  Management
does not anticipate a loss on this loan at this time.  However, there
can be no assurances.








Liquidity
and Capital




The
Bank is required to maintain specified amounts of capital pursuant to
regulations promulgated by the OTS and the FDIC.  The Bank's objective
is to maintain its regulatory capital in an amount sufficient to be classified
in the highest regulatory capital category (i.e., as a "well-capitalized"
institution).  At September 30, 2008, the Bank's regulatory capital
exceeded all regulatory minimum requirements, as well as the amount required to
be classified as an "adequately-capitalized" institution.  Because the
Company is considered “adequately capitalized” the Company can no longer issue
brokered certificates of deposit unless the Company receives a waiver from the
Federal Deposit Insurance Corporation.  Management believes the
Company has sufficient liquidity to meet the funding needs without having to
issue brokered certificates of deposit.  The Bank's actual and
required capital amounts and ratios as of September 30, 2008, and June 30, 2008,
were as follows:





20
 Index




September
      30, 2008To
      Be WellCapitalized
      UnderFor
      Capital
              
              
              Prompt
      CorrectiveActual
              
              
              Adequacy
      Purposes
              
              
              Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioDollars
      in ThousandsTangible
      capital
              
              $
              40,181
              
              
              
              7.15
              %
              
              $
              8,432
              
              
              
              1.50
              %
              
              
              -
              
              
              
              -Tier
      1 leverage (core)
              
              
              40,181
              
              
              
              7.15
              
              
              
              22,485
              
              
              
              4.00
              
              
              $
              28,107
              
              
              
              5.00
              %Tier
      1 risk-based capital
              
              
              40,181
              
              
              
              8.79
              
              
              
              18,293
              
              
              
              4.00
              
              
              
              27,440
              
              
              
              6.00Risk-based
      capital
              
              
              44,183
              
              
              
              9.66
              
              
              
              36,586
              
              
              
              8.00
              
              
              
              45,733
              
              
              
              10.00
  June
      30, 2008To
      Be WellCapitalized
      UnderFor
      Capital
              
              
              Prompt
      CorrectiveActual
              
              
              Adequacy
      Purposes
              
              
              Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioDollars
      in ThousandsTangible
      capital
              
              $
              41,605
              
              
              
              7.23
              %
              
              $
              8,628
              
              
              
              1.50
              %
              
              
              -
              
              
              
              -Tier
      1 leverage (core)
              
              
              41,605
              
              
              
              7.23
              
              
              
              23,009
              
              
              
              4.00
              
              
              $
              28,761
              
              
              
              5.00
              %Tier
      1 risk-based capital
              
              
              41,605
              
              
              
              8.94
              
              
              
              18,617
              
              
              
              4.00
              
              
              
              27,925
              
              
              
              6.00Risk-based
      capital
              
              
              45,848
              
              
              
              9.85
              
              
              
              37,233
              
              
              
              8.00
              
              
              
              46,542
              
              
              
              10.00


Should
some or all of the Company’s trust preferred collateralized debt obligations
become “other than temporarily” impaired, this would reduce regulatory capital
and depending on the amount involved, could reduce the Bank’s capital position
to “under-capitalized” which would subject the Bank to a number of regulatory
sanctions including a prohibition on dividends or other capital distributions
restrictions from borrowing from the Federal Reserve System discount window and
the requirement to file a capital plan which could require the Bank to shrink
its asset size, raise additional equity or other actions to bring the Bank to
regulatory capital compliance.




The
actual amount of regulatory capital reductions triggered would depend on which
securities are determined to be “other than temporarily” impaired, the fair
value of those securities at the time that the impairment is determined (prices
generally decline on impaired securities) and whether related deferred tax asset
would be allowable.  Such amounts could exceed the unrealized loss at
September 30, 2008.


On
September 18, 2008, the Company entered into a definitive agreement to sell one
the Company’s banking centers in Grinnell, Iowa.  The sale is subject
to regulatory approval which is expected during the quarter ended December 31,
2008.  Management expects to recognize a pre-tax gain of approximately
$5.5 million.  This sale includes the approximate amount of the
following assets and liabilities: loans of $26.0 million, other assets of $1.8
million, deposits of $53.4 million and other borrowings (repurchase agreements)
of $2.7 million with cash to the buyer of approximately $22.8 million. As a
result of this sale, the Company’s anticipates its total risk-based capital to
exceed the “well-capitalized” level at December 31, 2008.  The assets
and liabilities expected to be sold have been classified as held for sale in the
consolidated statement of financial condition as of September 30,
2008.





The
Company is also required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation.  The Company's primary sources of
liquidity are deposits obtained through its branch office network, borrowings
from the FHLB and other sources, amortization, maturity, and prepayment of
outstanding loans and investments, and sales of loans and other
assets.  During the three months ended September 30, 2008, the Company
used these sources of funds to fund loan commitments, purchase loans, and cover
maturing liabilities and deposit withdrawals.  The Company had a total
of $42.3 million of loan commitments outstanding as of September 30,
2008.   In addition, at September 30, 2008, the Company had
$147.7 million in certificates of deposit, $58.3 million in FHLB advances, and
$10.0 million in other borrowings that were scheduled to mature within one
year.


21
 Index


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





The
following table presents, as of September 30, 2008, the expected future payments
of the Bank’s contractual obligations.





Payments
      Due in:(In
      thousands)
              
              Less
      than OneYear
              
              
              One
      Year toLess ThanThree Years
              
              
              Three
      Yearsto Less ThanFive Years
              
              
              Five
      Years orGreater
              
              
              TotalFHLB
      advances
              
              $
              58,257
              
              
              $
              8,000
              
              
              
              -
              
              
              $
              1,250
              
              
              $
              67,507Other
      borrowings (1)
              
              
              9,999
              
              
              
              -
              
              
              $
              3,000
              
              
              
              
              
              
              
              12,999Operating
      lease
              
              
              142
              
              
              
              305
              
              
              
              330
              
              
              
              258
              
              
              
              1,035Data
      processing
              
              
              683
              
              
              
              260
              
              
              
              30
              
              
              
              -
              
              
              
              973Off-balance-sheet
      (2)
              
              
              42,334
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,334Total
              
              $
              111,415
              
              
              $
              8,565
              
              
              $
              3,360
              
              
              $
              1,508
              
              
              $
              124,848
  (1)
              Includes
      securities sold under repurchase agreements.(2)
              Includes
      commitments to extend credit, net of commitments to sell
      loans.








Off-Balance
Sheet Arrangements





In
addition to the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with accounting principles generally
accepted in the United States of America are not recorded in our financial
statements.  These transactions involve, to varying degrees, elements
of credit, interest rate and liquidity risk.  Such transactions are
used primarily to manage customers’ requests for funding and take the form of
loan commitments, lines of credit and letters of credit.  For the
three months ended September 30, 2008, the Company engaged in no off-balance
sheet transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Market
risk is the risk of loss arising from adverse changes in market prices and
interest rates. The Company’s market risk is primarily comprised of interest
rate risk resulting from its core banking activities of lending and deposit
taking.  Interest rate risk is the risk that changes in market
interest rates might adversely affect the Company’s net interest income or the
economic value of its portfolio of assets, liabilities and off-balance-sheet
contracts.  Management continually develops and applies strategies to
mitigate this risk.  The Company primarily relies on the OTS Net
Portfolio Value Model (the “Model”) to measure its susceptibility to interest
rate changes.  For various assumed hypothetical changes in market
interest rates, the Model estimates the current economic value of each type of
asset, liability and off-balance-sheet contract.  The present value of
expected net cash flows from existing assets minus the present value of expected
net cash flows from existing liabilities plus or minus the present value of
expected net cash flows from existing off-balance-sheet contracts results in a
net portfolio value (“NPV”) estimate.  An analysis of the changes in
NPV in the event of hypothetical changes in interest rates is presented in the
Form 10-K filed by the Company for the fiscal year ended June 30,
2008.  The Company’s NPV ratio after a 200 basis point rate-shock was
7.87% at June 30, 2008, compared to 9.16% at June 30, 2007, as measured by the
Model.  As of that date, the Company’s interest rate risk, as measured
by the Model, was within the Company’s Asset Liability Policy guidelines and the
OTS “level of risk” was reported as “minimal”.  Management does not
believe that the Company’s primary market risk exposures and how those exposures
were managed during the three months ended September 30, 2008, have changed
significantly when compared to the immediately preceding quarter ended June 30,
2008.  However, the


22
 Index


Company’s
primary market risk exposure has not yet been quantified at September 30, 2008,
and the complexity of the Model makes it difficult to accurately predict
results.





ITEM
4. CONTROLS AND PROCEDURES





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





Under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, the Company also
conducted an evaluation of the Company’s internal control over financial
reporting to determine whether any changes occurred during the Company’s fiscal
quarter
ended            September
30, 2008, that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.  Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this report, there have been no significant changes in the Company’s internal
control over financial reporting that occurred during the Company’s first fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.





PART
      II.
            OTHER
      INFORMATION





ITEM 1.  Legal
Proceedings





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




ITEM 1A.
Risk Factors





There
have been no material changes to the risk factors disclosed in the Company’s
2008 Annual Report on Form 10-K.





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





There
were no sales of unregistered securities during the nine months ended September
30, 2008.





There
were no share repurchases during the quarter ended September 30,
2008.




ITEM 3.  Default
upon Senior Securities





None.





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





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





ITEM 5.  Other
Information





(a) Not applicable.


23
 Index


(b) Not
applicable.





ITEM 6.  Exhibits





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





24
 Index


SIGNATURES





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








FIRST
FEDERAL BANKSHARES, INC.











DATE:  November
      21, 2008
            BY:
            /s/Barry E.
      BackhausBarry
      E. BackhausPresident
      and Chief Executive OfficerDATE:  November
      21, 2008
            BY:
            /s/ Michael S.
      ModerskiMichael
      S. ModerskiSenior
      Vice President, Chief Financial Officerand
      Treasurer







25