UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington
D.C. 20549


FORM
10-Q





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





OR





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








Commission
File Number 0-25509





First Federal Bankshares,
Inc.


(Exact
name of Registrant as specified in its charter)





Delaware
            42-1485449(State
      or other jurisdiction of
            (I.R.S.
      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, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check One)


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





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


YES
o    NO
þ





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




Class
            Outstanding at May 16,
      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 March 31,
      2008 and June 30, 2007
            1Consolidated Statements of Operations for the three and nine
      month periods ended March 31, 2008 and 2007
            2Consolidated Statements of Changes in Stockholders’ Equity for
      the three and nine month periods ended March 31, 2008 and
      2007
            3Consolidated Statements of Comprehensive Income (Loss) for
      the  three and nine month periods ended March 31, 2008 and
      2007
            4Consolidated Statements of Cash Flows for the  nine
      month periods ended March 31, 2008 and 2007
            5Notes to Consolidated Financial Statements
            6ITEM
      2.
            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            14ITEM
      3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            27ITEM
      4.
            Controls and Procedures
            27PART
      II.
            OTHER INFORMATION
            27ITEM
      1.
            Legal Proceedings
            27ITEM
      1A.
            Risk Factors
            27ITEM
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            28ITEM
      3.
            Defaults upon Senior Securities
            28ITEM
      4.
            Submission of Matters to a Vote of Security
      Holders
            28ITEM
      5.
            Other Information
            28ITEM
      6.
            Exhibits
            28Signatures
            29








Index


PART
      I.               FINANCIAL  INFORMATIONITEM
      1.               FINANCIAL  STATEMENTSFirst
      Federal Bankshares, Inc. and SubsidiariesConsolidated  Statements
      of Financial Condition (Unaudited)March
      31,
            
            
            June
      30,2008
            
            
            2007ASSETSCash
      and due from banks
            
            $
            13,238,045
            
            
            $
            11,613,908Interest-bearing
      deposits in other financial institutions
            
            
            -
            
            
            
            14,124,559Cash
      and cash equivalents
            
            
            13,238,045
            
            
            
            25,738,467Securities
      available-for-sale (amortized cost $108,882,846 and $122,595,377,
      respectively)
            
            
            96,975,511
            
            
            
            122,309,017Securities
      held-to-maturity (fair value $8,453,190 and $9,472,865,
      respectively)
            
            
            8,327,942
            
            
            
            9,549,072Mortgage
      loans held for sale
            
            
            3,042,178
            
            
            
            2,130,709Loans
      receivable
            
            
            411,005,041
            
            
            
            429,751,342Allowance
      for loan losses
            
            
            (4,693,223
            )
            
            
            (1,797,393
            )Net
      loans
            
            
            406,311,818
            
            
            
            427,953,949Federal
      Home Loan Bank ("FHLB") stock, at cost
            
            
            4,794,500
            
            
            
            3,559,600Office
      property and equipment, net
            
            
            18,857,967
            
            
            
            16,204,913Accrued
      interest receivable
            
            
            2,801,489
            
            
            
            2,939,993Goodwill
            
            
            18,417,040
            
            
            
            18,417,040Foreclosed
      and repossessed assets
            
            
            3,419,300
            
            
            
            2,156,217Deferred
      tax asset
            
            
            5,234,000
            
            
            
            165,000Other
      assets
            
            
            15,908,342
            
            
            
            14,692,533Total
      assets
            
            $
            597,328,132
            
            
            $
            645,816,510LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDeposit
      liabilities
            
            $
            464,179,835
            
            
            $
            507,865,063Advances
      from FHLB and other borrowings
            
            
            70,124,509
            
            
            
            62,202,229Advance
      payments by borrowers for taxes and insurance
            
            
            407,136
            
            
            
            916,021Accrued
      interest payable
            
            
            3,109,739
            
            
            
            2,690,658Accrued
      expenses and other liabilities
            
            
            1,819,821
            
            
            
            1,887,317Total
      liabilities
            
            
            539,641,040
            
            
            
            575,561,288COMMITMENTS
      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 and 5,067,226 shares, respectively
            
            
            50,639
            
            
            
            50,604Additional
      paid-in capital
            
            
            39,459,787
            
            
            
            39,230,016Retained
      earnings, substantially restricted
            
            
            54,755,814
            
            
            
            58,704,525Treasury
      stock, at cost, 1,764,255 shares and 1,677,255 shares,
      respectively
            
            
            (28,535,663
            )
            
            
            (26,885,723
            )Accumulated
      other comprehensive loss
            
            
            (7,466,335
            )
            
            
            (179,360
            )Unearned
      ESOP
            
            
            (577,150
            )
            
            
            (664,840
            )Total
      stockholders’ equity
            
            
            57,687,092
            
            
            
            70,255,222Total
      liabilities and stockholders’ equity
            
            $
            597,328,132
            
            
            $
            645,816,510See
      Notes to Consolidated Financial Statements.






1
 Index




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


See Notes
to Consolidated Financial Statements.






2
 Index




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









3
 Index




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






4
 Index




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




5
 Index


FIRST
FEDERAL BANKSHARES, INC. and SUBSIDIARIES


NOTES
TOCONSOLIDATED FINANCIAL STATEMENTS





Note
1.  Basis of presentation





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





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





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





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





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





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





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





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





Note
2.  Organization





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


6
 Index











Note
3.  Discontinued Operations





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





Note
4.  Effect of New Accounting Standards





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





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





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





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


7
 Index





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





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





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





Note
5.  Earnings Per Share





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


8
 Index


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





Note
6.  Dividends





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





Note
7.  Operating Segments





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





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


9
 Index





Three
      Months Ended March 31, 2008(Dollars
      in Thousands)
              
              Banking
              
              
              Other
              
              
              ConsolidatedInterest
      income
              
              $
              8,573
              
              
              
              -
              
              
              $
              8,573Interest
      expense
              
              
              4,662
              
              
              
              -
              
              
              
              4,662Net
      interest income
              
              
              3,911
              
              
              
              -
              
              
              
              3,911Provision
      for loan losses
              
              
              2,681
              
              
              
              -
              
              
              
              2,681Net
      interest income after provision for loan losses
              
              
              1,230
              
              
              
              -
              
              
              
              1,230Non-interest
      income
              
              
              904
              
              
              
              -
              
              
              
              904Non-interest
      expense
              
              
              5,191
              
              
              
              -
              
              
              
              5,191Loss
      before income tax benefit
              
              
              (3,057
              )
              
              
              -
              
              
              
              (3,057
              )Income
      tax benefit
              
              
              (1,210
              )
              
              
              -
              
              
              
              (1,210
              )Net
      income (loss)
              
              $
              (1,847
              )
              
              
              -
              
              
              $
              (1,847
              )Depreciation
      and amortization
              
              $
              384
              
              
              
              -
              
              
              $
              384
  Three
      Months Ended March 31, 2007(Dollars
      in Thousands)
              
              Banking
              
              
              Other
              
              
              ConsolidatedInterest
      income
              
              $
              8,945
              
              
              
              -
              
              
              $
              8,945Interest
      expense
              
              
              5,102
              
              
              
              -
              
              
              
              5,102Net
      interest income
              
              
              3,843
              
              
              
              -
              
              
              
              3,843Provision
      for loan losses
              
              
              31
              
              
              
              -
              
              
              
              31Net
      interest income after provision for loan losses
              
              
              3,812
              
              
              
              -
              
              
              
              3,812Non-interest
      income
              
              
              1,338
              
              
              $
              15
              
              
              
              1,353Non-interest
      expense
              
              
              4,526
              
              
              
              13
              
              
              
              4,539Income
      before income taxes and discontinued operations
              
              
              624
              
              
              
              2
              
              
              
              626Income
      taxes
              
              
              120
              
              
              
              -
              
              
              
              120Income
      from continuing operations
              
              
              504
              
              
              
              2
              
              
              
              506Income
      from discontinued operations, net of tax (includinggain
      on disposal of $510, net of tax, in 2007)
              
              
              -
              
              
              
              514
              
              
              
              514Net
      income
              
              $
              504
              
              
              $
              516
              
              
              $
              1,020Depreciation
      and amortization
              
              $
              206
              
              
              
              -
              
              
              $
              206












10
 Index






Nine
      Months Ended March 31, 2008(Dollars
      in Thousands)
              
              Banking
              
              
              Other
              
              
              ConsolidatedInterest
      income
              
              $
              27,483
              
              
              
              -
              
              
              $
              27,483Interest
      expense
              
              
              15,292
              
              
              
              -
              
              
              
              15,292Net
      interest income
              
              
              12,191
              
              
              
              -
              
              
              
              12,191Provision
      for loan losses
              
              
              3,194
              
              
              
              -
              
              
              
              3,194Net
      interest income after provision for loan losses
              
              
              8,997
              
              
              
              -
              
              
              
              8,997Non-interest
      income
              
              
              678
              
              
              $
              50
              
              
              
              728Non-interest
      expense
              
              
              15,165
              
              
              
              12
              
              
              
              15,177Income
      (loss) before income tax (benefit)
              
              
              (5,490
              )
              
              
              38
              
              
              
              (5,452
              )Income
      tax benefit
              
              
              (2,281
              )
              
              
              14
              
              
              
              (2,267
              )Net
      income (loss)
              
              $
              (3,209
              )
              
              $
              24
              
              
              $
              (3,185
              )Depreciation
      and amortization
              
              $
              1,104
              
              
              
              -
              
              
              $
              1,104Total
      assets
              
              $
              597,328
              
              
              
              -
              
              
              $
              597,328
  Nine
      Months Ended March 31, 2007(Dollars
      in Thousands)
              
              Banking
              
              
              Other
              
              
              ConsolidatedInterest
      income
              
              $
              26,159
              
              
              
              -
              
              
              $
              26,159Interest
      expense
              
              
              14,348
              
              
              
              -
              
              
              
              14,348Net
      interest income
              
              
              11,811
              
              
              
              -
              
              
              
              11,811Provision
      for loan losses
              
              
              534
              
              
              
              -
              
              
              
              534Net
      interest income after provision for loan losses
              
              
              11,277
              
              
              
              -
              
              
              
              11,277Non-interest
      income
              
              
              4,380
              
              
              $
              75
              
              
              
              4,455Non-interest
      expense
              
              
              13,300
              
              
              
              62
              
              
              
              13,362Income
      before income taxes and discontinued operations
              
              
              2,357
              
              
              
              13
              
              
              
              2,370Income
      taxes
              
              
              556
              
              
              
              5
              
              
              
              561Income
      from continuing operations
              
              
              1,801
              
              
              
              8
              
              
              
              1,809Income
      from discontinued operations, net of tax (includinggain
      on disposal of $510, net of tax, in 2007)
              
              
              -
              
              
              
              590
              
              
              
              590Net
      income
              
              $
              1,801
              
              
              $
              598
              
              
              $
              2,399Depreciation
      and amortization
              
              $
              794
              
              
              
              -
              
              
              $
              794Total
      assets
              
              $
              646,769
              
              
              $
              937
              
              
              $
              647,706


Note
8.  Stock-Based Compensation





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





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




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


11
 Index


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




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





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





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





Weighted-AverageGrant-DateNumber
              
              
              Fair
      ValueNon-vested
      restricted shares
              
              
              6,400
              
              
              $
              21.02Vested
              
              
              (1,600
              )
              
              
              19.58Non-vested
      at March 31, 2008
              
              
              4,800
              
              
              $
              21.50





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





Note
9.  Other than temporary impairment on securities





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


12
 Index





Note
10.  Non-performing assets





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




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












13
 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 net loss for the three months
ended March 31, 2008, was $1.8 million or $0.57 per diluted share compared to
net income of $1.0 million or $0.30 per diluted share in the same period last
year.





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





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





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





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





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





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


14
 Index


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





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





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


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





15
 Index


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


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


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





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


16
 Index


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





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





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





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





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




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


17
 Index





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





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





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





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





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





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





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





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




18
 Index





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





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





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





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





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





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





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





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





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


19
 Index


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








Financial
Condition





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





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





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





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





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





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





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


20
 Index


March
      31, 2008
              
              
              June
      30, 2007(Dollars
      in Thousands)
              
              Amount
              
              
              %
              
              
              Amount
              
              
              %First
      mortgage loans:Secured
      by one to four family residences (1)
              
              $
              114,539
              
              
              
              28.2
              
              
              $
              124,229
              
              
              
              29.0Secured
      by multi-family and non-residential properties (2)
              
              
              175,082
              
              
              
              43.1
              
              
              
              197,952
              
              
              
              46.2Commercial
      business loans
              
              
              62,206
              
              
              
              15.3
              
              
              
              50,439
              
              
              
              11.8Home
      equity and second mortgage loans
              
              
              29,038
              
              
              
              7.2
              
              
              
              28,594
              
              
              
              6.7Other
      non-mortgage loans (3)
              
              
              30,497
              
              
              
              7.5
              
              
              
              28,996
              
              
              
              6.8Loans
      in process, unearned discounts, premiums andnet
      deferred loan fees and costs
              
              
              (357
              )
              
              
              (0.1
              )
              
              
              (459
              )
              
              
              (0.1
              )Loans
      receivable
              
              
              411,005
              
              
              
              101.2
              
              
              
              429,751
              
              
              
              100.4Allowance
      for  loan losses
              
              
              (4,693
              )
              
              
              (1.2
              )
              
              
              (1,797
              )
              
              
              (0.4
              )Net
      loans
              
              $
              406,312
              
              
              
              100.0
              
              
              $
              427,954
              
              
              
              100.0
 (1)
              Includes
      construction loans of $8.9 million and $6.4 million,
      respectively.(2)
              Includes
      construction loans of $20.1 million and $18.7 million,
      respectively.(3)
              Includes
      other secured and unsecured personal
loans.




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





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





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





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





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





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


21
 Index


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





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





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





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





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





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




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




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


22
 Index





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





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





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





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





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





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





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





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


23
 Index





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





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





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





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





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





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





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





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





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


24
 Index


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





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





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







Liquidity
and Capital




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





March
      31, 2008To
      Be WellCapitalized
      UnderFor
      Capital
              
              
              Prompt
      CorrectiveActual
              
              
              Adequacy
      Purposes
              
              
              Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioDollars
      in ThousandsTangible
      capital
              
              $
              44,420
              
              
              
              7.52
              %
              
              $
              8,856
              
              
              
              1.50
              %
              
              
              -
              
              
              
              -Tier
      1 leverage (core)
              
              
              44,420
              
              
              
              7.52
              
              
              
              23,617
              
              
              
              4.00
              
              
              $
              29,521
              
              
              
              5.00
              %Tier
      1 risk-based capital
              
              
              44,420
              
              
              
              9.60
              
              
              
              18,492
              
              
              
              4.00
              
              
              
              27,739
              
              
              
              6.00Risk-based
      capital
              
              
              48,149
              
              
              
              10.41
              
              
              
              36,985
              
              
              
              8.00
              
              
              
              46,231
              
              
              
              10.00


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


25
 Index


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





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





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




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





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





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




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


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


Off-Balance
Sheet Arrangements





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





26
 Index





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





ITEM
4. CONTROLS AND PROCEDURES





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





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





PART
II.             OTHER
INFORMATION





ITEM
1.  Legal Proceedings





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




ITEM 1A. Risk Factors




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


27
 Index





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





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





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





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





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





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





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





ITEM
3.  Defaultupon Senior Securities





None.





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





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




ITEM 5.  Other Information





(a) Not applicable.


(b) Not
applicable.





ITEM 6.  Exhibits





Exhibit 31.1
            Certification
      of Chief Executive Officer Pursuant to Section 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








28
 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:  May
      16, 2008
            BY:
            /s/ Michael W.
      DoslandMichael
      W. DoslandPresident
      and Chief Executive OfficerDATE:  May
      16, 2008
            BY:
            /s/ Michael S.
      ModerskiMichael
      S. ModerskiSenior
      Vice President, Chief Financial Officerand
      Treasurer







29