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,
  2009





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).


YES
o    NO
o


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





Large
accelerated filer  o                                                      Accelerated
filer o


Non-accelerated
filer  o (Do
not check if a smaller reporting
company)                   Smaller
reporting company þ





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


YES
o    NO
þ





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


Class
              Outstanding at June
      30, 2009Common
      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,
      2009 and June 30, 2008
            1Consolidated Statements of Operations for the three and nine
      month periods ended March 31, 2009 and 2008
            2Consolidated Statements of Stockholders’ Equity for the nine
      month periods ended March 31, 2009 and 2008
            3Consolidated Statements of Comprehensive Loss for the three and
      nine month periods ended March 31, 2009 and 2008
            4Consolidated Statements of Cash Flows for the nine month
      periods ended March 31, 2009 and 2008
            5Notes to Consolidated Financial Statements
            6ITEM
      2.
            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            21ITEM
      3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            34ITEM
      4T.
            Controls and Procedures
            34PART
      II.
            OTHER INFORMATION
            35ITEM
      1.
            Legal Proceedings
            35ITEM
      1A.
            Risk Factors
            35ITEM
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            35ITEM
      3.
            Defaults upon Senior Securities
            35ITEM
      4.
            Submission of Matters to a Vote of Security
      Holders
            35ITEM
      5.
            Other Information
            35ITEM
      6.
            Exhibits
            36Signatures
            37











PART
      I.               FINANCIAL  INFORMATIONITEM
      1.               FINANCIAL  STATEMENTSFirst
      Federal Bankshares, Inc. and SubsidiariesConsolidated  Statements of Financial Condition (Unaudited)March
      31,
                            
                            
                            June
      30,2009
                            
                            
                            2008ASSETSCash
      and due from banks
                            
                            $
                            8,157,829
                            
                            
                            $
                            12,491,282Interest-bearing
      deposits in other financial institutions
                            
                            
                            16,927,000
                            
                            
                            
                            -Cash
      and cash equivalents
                            
                            $
                            25,084,829
                            
                            
                            $
                            12,491,282Securities
      available-for-sale (amortized cost $89,933,637 and $101,872,241,
      respectively)
                            
                            
                            47,388,210
                            
                            
                            
                            84,229,406Securities
      held-to-maturity (fair value $6,027,853 and $7,031,673,
      respectively)
                            
                            
                            5,978,381
                            
                            
                            
                            6,999,724Mortgage
      loans held for sale
                            
                            
                            2,528,500
                            
                            
                            
                            1,102,250Loans
      receivable
                            
                            
                            355,567,509
                            
                            
                            
                            413,712,503Less
      allowance for loan losses
                            
                            
                            6,231,237
                            
                            
                            
                            5,893,793Net
      loans
                            
                            
                            349,336,272
                            
                            
                            
                            407,818,710Office
      property and equipment, net
                            
                            
                            16,303,699
                            
                            
                            
                            18,761,786Federal
      Home Loan Bank ("FHLB") stock, at cost
                            
                            
                            5,879,000
                            
                            
                            
                            4,283,000Foreclosed
      and repossessed assets
                            
                            
                            7,926,965
                            
                            
                            
                            873,159Accrued
      interest receivable
                            
                            
                            2,054,305
                            
                            
                            
                            2,534,503Deferred
      tax asset
                            
                            
                            19,364,000
                            
                            
                            
                            9,870,000Other
      assets
                            
                            
                            16,772,627
                            
                            
                            
                            16,042,504Total
      assets
                            
                            $
                            498,616,788
                            
                            
                            $
                            565,006,324LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDeposit
      liabilities
                            
                            $
                            387,334,912
                            
                            
                            $
                            446,568,327Advances
      from FHLB and other borrowings
                            
                            
                            91,317,218
                            
                            
                            
                            81,636,814Advance
      payments by borrowers for taxes and insurance
                            
                            
                            298,644
                            
                            
                            
                            884,437Accrued
      interest payable
                            
                            
                            1,597,808
                            
                            
                            
                            1,800,967Accrued
      expenses and other liabilities
                            
                            
                            2,722,705
                            
                            
                            
                            2,124,234Total
      liabilities
                            
                            
                            483,271,287
                            
                            
                            
                            533,014,779COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYPreferred
      stock, $.01 par value, authorized 1,000,000 shares; issued
      none
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $.01 par value, authorized 12,000,000 shares;issued
      5,068,726 shares
                            
                            
                            50,651
                            
                            
                            
                            50,639Additional
      paid-in capital
                            
                            
                            39,572,280
                            
                            
                            
                            39,505,397Retained
      earnings, substantially restricted
                            
                            
                            31,399,213
                            
                            
                            
                            32,581,696Treasury
      stock, at cost, 1,764,255 shares
                            
                            
                            (28,535,663
                            )
                            
                            
                            (28,535,663
                            )Accumulated
      other comprehensive (loss):Unrealized
      losses on available for sale securities for which a portion of other
      thantemporary
      impairment has been recorded in earnings
                            
                            
                            (4,657,006
                            )
                            
                            
                            -Other
                            
                            
                            (22,018,644
                            )
                            
                            
                            (11,061,834
                            )Unearned
      ESOP
                            
                            
                            (465,330
                            )
                            
                            
                            (548,690
                            )Total
      stockholders’ equity
                            
                            
                            15,345,501
                            
                            
                            
                            31,991,545Total
      liabilities and stockholders’ equity
                            
                            $
                            498,616,788
                            
                            
                            $
                            565,006,324See
      Notes to Consolidated Financial Statements.


1
 
  First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Operations (Unaudited)Three
      months ended
                                        
                                        
                                        Nine
      months endedMarch
      31,
                                        
                                        
                                        March
      31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Interest
      income:Loans
      receivable
                                        
                                        $
                                        5,080,980
                                        
                                        
                                        $
                                        6,641,165
                                        
                                        
                                        $
                                        17,137,727
                                        
                                        
                                        $
                                        21,474,432Investment
      securities
                                        
                                        
                                        1,126,992
                                        
                                        
                                        
                                        1,864,437
                                        
                                        
                                        
                                        4,085,229
                                        
                                        
                                        
                                        5,883,674Deposits
      in other financial institutions
                                        
                                        
                                        1,762
                                        
                                        
                                        
                                        66,944
                                        
                                        
                                        
                                        2,652
                                        
                                        
                                        
                                        124,993Total
      interest income
                                        
                                        
                                        6,209,734
                                        
                                        
                                        
                                        8,572,546
                                        
                                        
                                        
                                        21,225,608
                                        
                                        
                                        
                                        27,483,099Interest
      expense:Deposits
                                        
                                        
                                        1,951,753
                                        
                                        
                                        
                                        3,570,052
                                        
                                        
                                        
                                        6,886,202
                                        
                                        
                                        
                                        12,046,935Advances
      from FHLB and other borrowings
                                        
                                        
                                        594,769
                                        
                                        
                                        
                                        1,092,033
                                        
                                        
                                        
                                        1,775,887
                                        
                                        
                                        
                                        3,244,971Total
      interest expense
                                        
                                        
                                        2,546,522
                                        
                                        
                                        
                                        4,662,085
                                        
                                        
                                        
                                        8,662,089
                                        
                                        
                                        
                                        15,291,906Net
      interest income
                                        
                                        
                                        3,663,212
                                        
                                        
                                        
                                        3,910,461
                                        
                                        
                                        
                                        12,563,519
                                        
                                        
                                        
                                        12,191,193Provision
      for loan losses
                                        
                                        
                                        106,645
                                        
                                        
                                        
                                        2,681,059
                                        
                                        
                                        
                                        2,124,308
                                        
                                        
                                        
                                        3,194,096Net
      interest income after provision for loan losses
                                        
                                        
                                        3,556,567
                                        
                                        
                                        
                                        1,229,402
                                        
                                        
                                        
                                        10,439,211
                                        
                                        
                                        
                                        8,997,097Non-interest
      income:Service
      charges on deposit accounts
                                        
                                        
                                        833,075
                                        
                                        
                                        
                                        773,793
                                        
                                        
                                        
                                        2,896,289
                                        
                                        
                                        
                                        2,391,645Service
      charges on commercial and consumer loans
                                        
                                        
                                        43,111
                                        
                                        
                                        
                                        57,706
                                        
                                        
                                        
                                        123,133
                                        
                                        
                                        
                                        278,321Gain
      on sale of bank branch offices
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,569,830
                                        
                                        
                                        
                                        -Gain
      on sale of real estate held for development
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        46,610Gain
      (loss) on sale of office property and equipment
                                        
                                        
                                        365
                                        
                                        
                                        
                                        (19
                                        )
                                        
                                        
                                        (80,840
                                        )
                                        
                                        
                                        3,803Mortgage
      banking revenue
                                        
                                        
                                        351,851
                                        
                                        
                                        
                                        148,381
                                        
                                        
                                        
                                        598,632
                                        
                                        
                                        
                                        519,252Earnings
      from bank owned life insurance
                                        
                                        
                                        146,639
                                        
                                        
                                        
                                        138,981
                                        
                                        
                                        
                                        439,305
                                        
                                        
                                        
                                        413,655Other
      income
                                        
                                        
                                        306,557
                                        
                                        
                                        
                                        275,178
                                        
                                        
                                        
                                        761,818
                                        
                                        
                                        
                                        834,341Total
      non-interest income
                                        
                                        
                                        1,681,598
                                        
                                        
                                        
                                        1,394,020
                                        
                                        
                                        
                                        10,308,167
                                        
                                        
                                        
                                        4,487,627Non-interest
      expense:Compensation
      and benefits
                                        
                                        
                                        2,382,148
                                        
                                        
                                        
                                        2,932,250
                                        
                                        
                                        
                                        7,669,853
                                        
                                        
                                        
                                        8,563,378Restructuring
      costs
                                        
                                        
                                        206,151
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        708,756
                                        
                                        
                                        
                                        -Office
      property and equipment
                                        
                                        
                                        808,035
                                        
                                        
                                        
                                        788,462
                                        
                                        
                                        
                                        2,209,687
                                        
                                        
                                        
                                        2,306,397Data
      processing, ATM and debit card transaction costs,and
      other item processing expense
                                        
                                        
                                        271,457
                                        
                                        
                                        
                                        336,582
                                        
                                        
                                        
                                        1,201,996
                                        
                                        
                                        
                                        1,007,211Professional,
      insurance and regulatory expense
                                        
                                        
                                        451,032
                                        
                                        
                                        
                                        282,510
                                        
                                        
                                        
                                        1,270,478
                                        
                                        
                                        
                                        789,571Advertising,
      donations and public relations
                                        
                                        
                                        168,683
                                        
                                        
                                        
                                        287,678
                                        
                                        
                                        
                                        738,283
                                        
                                        
                                        
                                        1,054,004Communications,
      postage and office supplies
                                        
                                        
                                        196,288
                                        
                                        
                                        
                                        212,127
                                        
                                        
                                        
                                        597,154
                                        
                                        
                                        
                                        647,440Loss
      on other real estate owned
                                        
                                        
                                        149,266
                                        
                                        
                                        
                                        186,960
                                        
                                        
                                        
                                        489,632
                                        
                                        
                                        
                                        255,668Other
      expense
                                        
                                        
                                        217,308
                                        
                                        
                                        
                                        164,342
                                        
                                        
                                        
                                        657,220
                                        
                                        
                                        
                                        553,070Total
      non-interest expense
                                        
                                        
                                        4,850,368
                                        
                                        
                                        
                                        5,190,911
                                        
                                        
                                        
                                        15,543,059
                                        
                                        
                                        
                                        15,176,739Impairment
      on securities:Total
      other-than-temporary impairment losses
                                        
                                        
                                        (17,006,418
                                        )
                                        
                                        
                                        (489,526
                                        )
                                        
                                        
                                        (30,114,305
                                        )
                                        
                                        
                                        (3,760,120
                                        )Portion
      of loss recognized in other comprehensive income (before
      taxes)
                                        
                                        
                                        11,776,292
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        23,084,460
                                        
                                        
                                        
                                        -Net
      impairment losses recognized in earnings
                                        
                                        
                                        (5,230,126
                                        )
                                        
                                        
                                        (489,526
                                        )
                                        
                                        
                                        (7,029,845
                                        )
                                        
                                        
                                        (3,760,120
                                        )(Loss)
      before income tax (benefit)
                                        
                                        
                                        (4,842,329
                                        )
                                        
                                        
                                        (3,057,015
                                        )
                                        
                                        
                                        (1,825,526
                                        )
                                        
                                        
                                        (5,452,135
                                        )Income
      tax (benefit)
                                        
                                        
                                        (1,851,000
                                        )
                                        
                                        
                                        (1,210,000
                                        )
                                        
                                        
                                        (913,000
                                        )
                                        
                                        
                                        (2,267,000
                                        )Net
      (loss)
                                        
                                        $
                                        (2,991,329
                                        )
                                        
                                        $
                                        (1,847,015
                                        )
                                        
                                        $
                                        (912,526
                                        )
                                        
                                        $
                                        (3,185,135
                                        )Per
      share information:than
      temporary impairment has been recorded in earnings
                                        
                                        $
                                        (0.91
                                        )
                                        
                                        $
                                        (0.57
                                        )
                                        
                                        $
                                        (0.28
                                        )
                                        
                                        $
                                        (0.98
                                        )Diluted
      (loss) per share
                                        
                                        $
                                        (0.91
                                        )
                                        
                                        $
                                        (0.57
                                        )
                                        
                                        $
                                        (0.28
                                        )
                                        
                                        $
                                        (0.98
                                        )See
      Notes to Consolidated Financial Statements.
  2
  First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Stockholders' Equity  (Unaudited)Nine
      MonthsEnded
      March 31,2009
                                    
                                    
                                    2008Capital
      Stock:Beginning
      of year balance
                                    
                                    $
                                    50,639
                                    
                                    
                                    $
                                    50,604Restricted
      shares vested: 1,200 and 2,062 shares, respectively
                                    
                                    
                                    12
                                    
                                    
                                    
                                    20Stock
      options exercised: 1,500 shares in 2008
                                    
                                    
                                    -
                                    
                                    
                                    
                                    15End
      of period balance
                                    
                                    
                                    50,651
                                    
                                    
                                    
                                    50,639Additional
      paid-in capital:Beginning
      of year balance
                                    
                                    
                                    39,505,397
                                    
                                    
                                    
                                    39,230,016Stock
      options exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    14,860Stock
      compensation expense
                                    
                                    
                                    103,497
                                    
                                    
                                    
                                    129,640Stock
      appreciation (depreciation) of allocated ESOP shares
                                    
                                    
                                    (57,133
                                    )
                                    
                                    
                                    49,342Amortization
      of employee stock grants
                                    
                                    
                                    20,531
                                    
                                    
                                    
                                    35,949Restricted
      shares vested: 1,200 and 2,062 shares, respectively
                                    
                                    
                                    (12
                                    )
                                    
                                    
                                    (20
                                    )End
      of period balance
                                    
                                    
                                    39,572,280
                                    
                                    
                                    
                                    39,459,787Retained
      earnings, substantially restricted:Beginning
      of year balance
                                    
                                    
                                    32,581,696
                                    
                                    
                                    
                                    58,704,525Adoption
      of FIN 48
                                    
                                    
                                    -
                                    
                                    
                                    
                                    180,000Adoption
      of SFAS 156
                                    
                                    
                                    -
                                    
                                    
                                    
                                    79,374Adoption
      of EITF 06-04
                                    
                                    
                                    (710,313
                                    )
                                    
                                    
                                    -Adoption
      of FSP FAS 115-2
                                    
                                    
                                    440,356
                                    
                                    
                                    
                                    -Net
      (loss)
                                    
                                    
                                    (912,526
                                    )
                                    
                                    
                                    (3,185,135
                                    )Dividends
      paid on common stock: $0.315 per share in 2008
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,022,950
                                    )End
      of period balance
                                    
                                    
                                    31,399,213
                                    
                                    
                                    
                                    54,755,814Treasury
      stock, at cost:Beginning
      of year balance
                                    
                                    
                                    (28,535,663
                                    )
                                    
                                    
                                    (26,885,723
                                    )Treasury
      stock acquired: 87,000 shares in 2008
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1,649,940
                                    )End
      of period balance
                                    
                                    
                                    (28,535,663
                                    )
                                    
                                    
                                    (28,535,663
                                    )Accumulated
      other comprehensive (loss):Beginning
      of year balance
                                    
                                    
                                    (11,061,834
                                    )
                                    
                                    
                                    (179,360
                                    )Adoption
      of FSP FAS 115-2
                                    
                                    
                                    (440,356
                                    )
                                    
                                    
                                    -Net
      change in unrealized losses on securities available-for-sale for
      whicha
      portion of other-than-temporary impairment has been recorded in
      earnings,net
      of tax of $6,199,000 and none, respectively
                                    
                                    
                                    (10,420,894
                                    )
                                    
                                    
                                    -Net
      change in unrealized losses on all other securities
      available-for-sale,net
      of tax of $5,449,000 and $5,737,000, respectively
                                    
                                    
                                    (9,160,411
                                    )
                                    
                                    
                                    (9,644,095
                                    )Less
      reclassification adjustment for net realized losses included in net
      loss,net
      of tax of $2,622,000 and $1,403,000, respectively
                                    
                                    
                                    4,407,845
                                    
                                    
                                    
                                    2,357,120End
      of period balance
                                    
                                    
                                    (26,675,650
                                    )
                                    
                                    
                                    (7,466,335
                                    )Unearned
      ESOP shares:Beginning
      of year balance
                                    
                                    
                                    (548,690
                                    )
                                    
                                    
                                    (664,840
                                    )ESOP
      shares allocated
                                    
                                    
                                    83,360
                                    
                                    
                                    
                                    87,690End
      of period balance
                                    
                                    
                                    (465,330
                                    )
                                    
                                    
                                    (577,150
                                    )Total
      stockholders' equity
                                    
                                    $
                                    15,345,501
                                    
                                    
                                    $
                                    57,687,092See
      Notes to Consolidated Financial Statements.
  3
  First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Comprehensive (Loss) (Unaudited)Three
      Months Ended
                                      
                                      
                                      Nine
      Months EndedMarch
      31,
                                      
                                      
                                      March
      31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Net
      (loss)
                                      
                                      $
                                      (2,991,329
                                      )
                                      
                                      $
                                      (1,847,015
                                      )
                                      
                                      $
                                      (912,526
                                      )
                                      
                                      $
                                      (3,185,135
                                      )Net
      change in unrealized losses on securities
    available-for-salefor
      which a portion of other-than-temporary impairment hasbeen
      recorded in earnings, net of tax of $3,409,000, none,$6,199,000
      and none, respectively
                                      
                                      
                                      (5,730,010
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (10,420,894
                                      )
                                      
                                      
                                      -Net
      change in unrealized losses on all other securitiesavailable-for-sale,
      net of tax of $3,051,000, $3,120,000,$5,449,000
      and $5,737,000, respectively
                                      
                                      
                                      (5,128,669
                                      )
                                      
                                      
                                      (5,243,634
                                      )
                                      
                                      
                                      (9,160,411
                                      )
                                      
                                      
                                      (9,644,095
                                      )Less
      reclassification adjustment for net realized losses
    includedin
      net loss, net of tax of $1,951,000, $183,000$2,622,000
      and $1,403,000, respectively
                                      
                                      
                                      3,279,126
                                      
                                      
                                      
                                      306,526
                                      
                                      
                                      
                                      4,407,845
                                      
                                      
                                      
                                      2,357,120Total
      comprehensive (loss)
                                      
                                      $
                                      (10,570,882
                                      )
                                      
                                      $
                                      (6,784,123
                                      )
                                      
                                      $
                                      (16,085,986
                                      )
                                      
                                      $
                                      (10,472,110
                                      )See
      Notes to Consolidated Financial Statements.
    4
  First
      Federal Bankshares, Inc. and SubsidiariesConsolidated
      Statements of Cash Flows (Unaudited)
                              
                              Nine
      months endedMarch
      31,2009
                              
                              
                              2008Cash
      flows from operating activities:Net
      (loss)
                              
                              $
                              (912,526
                              )
                              
                              $
                              (3,185,135
                              )Adjustments
      to reconcile net (loss) from operations tonet
      cash provided by operating activities:Loans
      originated for sale to investors
                              
                              
                              (31,007,772
                              )
                              
                              
                              (51,446,000
                              )Proceeds
      from sale of loans originated for sale
                              
                              
                              31,161,703
                              
                              
                              
                              51,789,360Provision
      for losses on loans
                              
                              
                              2,124,308
                              
                              
                              
                              3,194,096Depreciation
      and amortization
                              
                              
                              796,328
                              
                              
                              
                              1,104,005Provision
      for deferred taxes
                              
                              
                              (467,000
                              )
                              
                              
                              (555,000
                              )Equity-based
      compensation
                              
                              
                              150,254
                              
                              
                              
                              302,621Excess
      tax benefit resulting from stock options exercised
                              
                              
                              -
                              
                              
                              
                              (1,000
                              )Mortgage
      banking revenue
                              
                              
                              (598,632
                              )
                              
                              
                              (519,252
                              )Other-than-temporary
      impairment of investment securities
                              
                              
                              7,029,845
                              
                              
                              
                              3,760,120Gain
      on sale of bank branch office
                              
                              
                              (5,569,830
                              )
                              
                              
                              -Net
      (gain) loss on sale of office property and equipment
                              
                              
                              80,840
                              
                              
                              
                              (3,803
                              )Net
      gain on sale of real estate held for development
                              
                              
                              -
                              
                              
                              
                              (46,610
                              )Valuation
      writedown on foreclosed real estate
                              
                              
                              459,500
                              
                              
                              
                              212,810Amortization
      of premiums and discounts on loans,mortgage-backed securities and investment securities
                              
                              
                              275,501
                              
                              
                              
                              50,476(Increase)
      decrease in accrued interest receivable
                              
                              
                              (910,998
                              )
                              
                              
                              138,504(Increase)
      in other assets
                              
                              
                              (69,544
                              )
                              
                              
                              (212,474
                              )Increase
      in accrued interest payable
                              
                              
                              44,620
                              
                              
                              
                              419,081(Decrease)
      in accrued expenses and other liabilities
                              
                              
                              (70,164
                              )
                              
                              
                              (67,496
                              )(Decrease)
      in accrued taxes on income
                              
                              
                              (741,986
                              )
                              
                              
                              (1,627,391
                              )Net
      cash provided by operating activities
                              
                              
                              1,774,447
                              
                              
                              
                              3,306,912Cash
      flows from investing activities:Proceeds
      from maturities of securities held-to-maturity
                              
                              
                              1,014,068
                              
                              
                              
                              1,210,945Purchase
      of securities available-for-sale
                              
                              
                              (10,115,084
                              )
                              
                              
                              (3,171,641
                              )Proceeds
      from maturities of securities available-for-sale
                              
                              
                              17,026,471
                              
                              
                              
                              13,085,412(Purchase)
      of FHLB stock
                              
                              
                              (1,596,000
                              )
                              
                              
                              (1,234,900
                              )Loans
      purchased
                              
                              
                              (3,816,000
                              )
                              
                              
                              (6,831,000
                              )Cash
      effect of bank branch office sales
                              
                              
                              (20,734,872
                              )
                              
                              
                              -Decrease
      in loans receivable
                              
                              
                              22,948,783
                              
                              
                              
                              22,340,902Proceeds
      from sale of property and equipment
                              
                              
                              92,834
                              
                              
                              
                              3,892Purchase
      of office property and equipment
                              
                              
                              (87,898
                              )
                              
                              
                              (3,494,201
                              )Proceeds
      from sale of foreclosed real estate
                              
                              
                              3,133,719
                              
                              
                              
                              717,281Expenditures
      on foreclosed real estate
                              
                              
                              (188,539
                              )
                              
                              
                              -Proceeds
      from sale of real estate held for development
                              
                              
                              -
                              
                              
                              
                              804,844Expenditures
      on real estate held for development
                              
                              
                              -
                              
                              
                              
                              (309,020
                              )Net
      cash provided by investing activities
                              
                              
                              7,677,482
                              
                              
                              
                              23,122,514Cash
      flows from financing activities:(Decrease)
      in deposits
                              
                              
                              (6,022,725
                              )
                              
                              
                              (43,685,228
                              )Proceeds
      from advances from FHLB and other borrowingsRepayment
      of advances from FHLB and other borrowings
                              
                              
                              
                              
                              
                              
                              (100,428,965
                              )than
      temporary impairment has been recorded in earnings
                              
                              
                              (4,657,006
                              )
                              
                              
                              (508,885
                              )Issuance
      of common stock under stock options exercised
                              
                              
                              (22,018,644
                              )
                              
                              
                              (11,061,834
                              )Excess
      tax benefit resulting from stock options exercised
                              
                              
                              -
                              
                              
                              
                              1,000Repurchase
      of common stock
                              
                              
                              -
                              
                              
                              
                              (1,649,940
                              )Cash
      dividends paid
                              
                              
                              -
                              
                              
                              
                              (1,022,950
                              )Net
      cash provided by (used in) financing activities
                              
                              
                              (32,698,375
                              )
                              
                              
                              (158,356,802
                              )Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              (23,246,446
                              )
                              
                              
                              (131,927,376
                              )Beginning
      of year
                              
                              
                              12,491,282
                              
                              
                              
                              25,738,467End
      of year
                              
                              $
                              (10,755,164
                              )
                              
                              $
                              (106,188,909
                              )SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the period for:Interest
                              
                              $
                              8,865,248
                              
                              
                              $
                              14,872,825Income
      taxes paid
                              
                              
                              295,986
                              
                              
                              
                              (86,508
                              )SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING ANDFINANCING
      ACTIVITIESProperty
      acquired in settlement of loans
                              
                              
                              10,377,080
                              
                              
                              
                              2,200,905See
      Notes to Consolidated Financial Statements.


5





FIRST
FEDERAL BANKSHARES, INC. and SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
1.   Basis of presentation





The
consolidated financial statements as of and for the three and nine month periods
ended March 31, 2009 and 2008, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosure normally included in year-end financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to these rules and
regulations.  These consolidated financial statements should be read
in conjunction with the Company’s audited consolidated financial statements and
notes that are included in its Annual Report for the year ended June 30, 2008,
filed on Form 10-K.





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





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





Critical
Judgments and Estimates   The Company described its
significant accounting policies in Note 1 of the Company's Audited Consolidated
Financial Statements in its 2008 Annual Report on Form
10-K.   Particular attention should be paid to the Company’s
allowance for losses on loans, “other than temporary” impairment of investment
securities, valuation of deferred tax assets, and the fair value of financial
instruments, which are considered to be critical accounting policies, and which
require significant management judgments and estimates because of the inherent
uncertainties surrounding the subjective nature of these areas.





With the
adoption of FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of
Other-than-Temporary Impairments (“FSP 115-2”) the determination of the
“credit related” portion of the “other than temporary” impairment has become a
significant accounting policy. To determine the “credit related” portion, the
Company used a discounted cash flow analysis.  Cash flow models were
prepared by an independent third party consultant using default assumptions and
were used by management to determine if the net present value of the cash flows
expected on the security were equivalent to or greater than the original cash
flows projected on the security when purchased.  The cash flows are
discounted at the original purchased yield.  If the net present value
of the projected cash flows was less than the cost basis of the security, the
difference is considered credit related and is recorded through
earnings.





Information
on the impact loss allowances and “other than temporary” losses have had on the
Company's financial condition and results of operations for the three and nine
month periods ended March 31, 2009 and 2008, can be found below, in the sections
entitled "Results of Operations – Provision for Losses on Loans," “Financial
Condition – Non-Performing and Classified Assets,” and "Results of Operations –
Other than Temporary Impairment."





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





Note
2.   Organization





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





Note
3.   Use of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of


6


assets
and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.





Note
4.   Effect of New Accounting Standards





In
October 2008, the FASB issued FSP SFAS 157-3, Determining the Fair Value of a
Financial Asset in a Market That is Not Active (“FSP
157-3”).  FSP 157-3 clarifies the application of SFAS No. 157, Fair
Value Measurements(“SFAS 157”), in an
inactive market.  FSP 157-3 addresses application issues such as how
management’s internal assumptions should be considered when measuring fair value
when relevant observable data do not exist, how observable market information in
a market that is not active should be considered when measuring fair value, and
how the use of market quotes should be considered when assessing the relevance
of observable and unobservable data available to measure fair
value.  FSP 157-3 was effective upon issuance.  The
Company’s adoption of FSP 157-3 impacted how securities shown on the statement
of financial condition are valued.  See Note 7 and 8 of this Form 10-Q
for additional information regarding fair value.




On April
9, 2009, the FASB finalized three FASB Staff Positions (“FSPs”) regarding the
accounting treatment for investments including our portfolio of
securities.  These FSPs changed the method for determining if an
“other than temporary” impairment (“OTTI”) exists and the amount of OTTI to be
recorded through an entity’s statement of operations. The changes brought about
by the FSPs provide greater clarity and reflect a more accurate representation
of the credit and noncredit components of an OTTI condition. The three FSPs are
as follows:





·
            FSP SFAS 115-2 and SFAS 124-2,Recognition
      and Presentation of Other-than-Temporary Impairments(“FSP 115-2/SFAS 124-2”) provide
      additional guidance designed to create greater clarity and consistency in
      accounting for and presenting impairment losses on
      securities.    This FSP is effective for interim
      reporting periods ending after June 15, 2009, with early adoption
      permitted for periods ending after March 15, 2009.  The Company
      elected early adoption of this FSP in its interim consolidated financial
      statements for the three months ended March 31,
    2009.


·
            FSP SFAS 157-4Determining
      Fair Value When the Volume and Level of Activity for the Assets or
      Liability Have Significantly Decreased and Identifying Transactions That
      Are Not Orderly(“FSP 157-4”) provides guidelines for making fair value measurements more
      consistent with the principles presented in SFAS 157,Fair Value
      Measurements.  FSP 157-4 provides
      additional guidance for estimating fair value when the volume and level of
      activity for the asset or liability has significantly
      decreased.  FSP 157-4 emphasizes that even if there has been a
      significant decrease in the volume and level of activity for the asset or
      liability and regardless of the valuation technique(s) used, the objective
      of a fair value measurement remains the same.  Fair value is the
      price that would be received to sell an asset or paid to transfer a
      liability in an orderly transaction (that is, not a forced liquidation or
      distressed sale) between market participants at the measurement date under
      current market conditions.  FSP 157-4 is effective for all
      periods ending after June 15, 2009, and shall be applied
      prospectively.  Early adoption is permitted for all periods
      ending after March 15, 2009, and the Company elected early adoption of
      this FSP in its interim consolidated financial statements for the three
      months ended March 31, 2009.


·
            FSP SFAS 107-1 and APB 28-1,Interim
      Disclosures about Fair Value of Financial Instrumentsenhances consistency in
      financial reporting by increasing the frequency of fair value
      disclosures.  This FSP is effective for interim reporting
      periods ending after June 15, 2009, with early adoption permitted for
      periods ending after March 15, 2009.  The Company did not elect
      early adoption of this FSP.





FSP
115-2/124-2 and FSP 157-4 are effective for all periods ending after June 15,
2009; however as permitted under the pronouncement, the Company early adopted on
January 1, 2009, and increased the beginning balance of retained earnings
$440,000 with a corresponding adjustment to accumulated other comprehensive
income for OTTI recorded in previous periods on securities in the Company’s
portfolio at January 1, 2009, that would not have been required had the FSP been
effective for those periods.  As a result of the adoption of the FSPs,
for the three months ended March 31, 2009, $11.8 million of OTTI remained in
other comprehensive income that would have been reported in the statement of
operations under the prior guidance.


7


In January 2009, the FASB issued FSP
EITF 99-20-1, Amendments to the Impairment Guidance of EITF
99-20.  This FSP amends the impairment guidance in EITF 99-20,
Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interest That Continue to be Held by a Transferor in Securitized
Financial Assets to align it with the impairment guidance within SFAS No. 115 by
removing from EITF 99-20 the requirement to place exclusive reliance on market
participants’ assumptions about future cash flows when evaluating an asset for
“other than temporary” impairment.  Both standards will now require
that assumptions about future cash flows consider reasonable management judgment
about the probability that the holder of an asset will be unable to collect all
amounts due.  FSP EITF 99-20-1 is effective for interim and annual
reporting periods ending after December 15, 2008.  The adoption of FSP
EITF 99-20-1 did not impact the Company’s financial position, results of
operations, or cash flows.





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





In
September 2006, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.  In March 2007, the EITF reached a final
conclusion on Issue 06−10, Accounting for Collateral Assignment Split-Dollar
Life Insurance Arrangements.  The consensus stipulates that an
agreement by an employer to share a portion of the proceeds of a life insurance
policy with an employee during the postretirement period is a postretirement
benefit arrangement required to be accounted for.  The consensus
concludes that the purchase of a split-dollar life insurance policy does not
constitute a settlement and, therefore, a liability for the postretirement
obligation must be recognized. Issue 06-04 is effective for annual reporting
periods beginning after December 15, 2007, with earlier adoption
permitted.  The Company adopted EITF 06-04 on July 1,
2008.  EITF 06-04 allows the Company to record the initial recognition
of the liability through stockholders’ equity.  Upon the adoption of
EITF 06-04 the Company’s stockholders’ equity decreased by approximately
$710,000.  Ongoing expenses will be recognized through the current
year operations.  Management estimates the first year’s expense will
be approximately $30,000, or less than $0.01 per share.





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





In
September 2006 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No.
157”). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value
measurement.  SFAS No. 157 also emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy with the highest priority being quoted prices in active
markets.  Under SFAS No. 157, fair value measurements are disclosed by
level within that hierarchy.  The Company adopted SFAS No. 157 for the
fiscal year beginning July 1, 2008, except for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis for which delayed application is
permitted until our fiscal


8


year
beginning July 1, 2009.  Foreclosed and repossessed assets are the
only significant assets or liabilities of the Company for which the deferral is
applicable.  The adoption of the remaining provisions of SFAS No. 157
is not expected to have a material impact on the Company’s financial position,
results of operations or cash flows.





Note
5.  (Loss) Per Share





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





Three
      Months Ended
                                    
                                    
                                    Nine
      Months EndedMarch
      31,
                                    
                                    
                                    March
      31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Basic
      (loss) per share computation:Net
      (loss)
                                    
                                    $
                                    (2,991,329
                                    )
                                    
                                    $
                                    (1,847,015
                                    )
                                    
                                    $
                                    (912,526
                                    )
                                    
                                    $
                                    (3,185,135
                                    )Weighted
      average common shares outstanding
                                    
                                    
                                    3,304,471
                                    
                                    
                                    
                                    3,238,079
                                    
                                    
                                    
                                    3,304,471
                                    
                                    
                                    
                                    3,245,390Basic
      earnings (loss) per share
                                    
                                    $
                                    (0.91
                                    )
                                    
                                    $
                                    (0.57
                                    )
                                    
                                    $
                                    (0.28
                                    )
                                    
                                    $
                                    (0.98
                                    )Diluted
      (loss) per share computation:Net
      (loss)
                                    
                                    $
                                    (2,991,329
                                    )
                                    
                                    $
                                    (1,847,015
                                    )
                                    
                                    $
                                    (912,526
                                    )
                                    
                                    $
                                    (3,185,135
                                    )Weighted
      average common shares outstanding
                                    
                                    
                                    3,304,471
                                    
                                    
                                    
                                    3,238,079
                                    
                                    
                                    
                                    3,304,471
                                    
                                    
                                    
                                    3,245,390Incremental
      option and recognition and retention planshares
      using treasury stock method
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Diluted
      shares outstanding
                                    
                                    
                                    3,304,471
                                    
                                    
                                    
                                    3,238,079
                                    
                                    
                                    
                                    3,304,471
                                    
                                    
                                    
                                    3,245,390Diluted
      (loss) per share
                                    
                                    $
                                    (0.91
                                    )
                                    
                                    $
                                    (0.57
                                    )
                                    
                                    $
                                    (0.28
                                    )
                                    
                                    $
                                    (0.98
                                    )Anti-dilutive
      options not included in diluted shares outstanding
                                    
                                    
                                    165,519
                                    
                                    
                                    
                                    153,181
                                    
                                    
                                    
                                    165,519
                                    
                                    
                                    
                                    103,596





Note
6.  Dividends





No cash
dividends were paid during the three months ended March 31, 2009.





Note
7.  Fair Value Measurements





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





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





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





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





As
discussed in Note 4- Effect of
New Accounting Standards, FSP 157-3 and FSP 157-4 clarify the application
of SFAS 157 in an inactive market.  FSP 157-3 addresses application
issues such as how management’s internal assumptions should be considered in
measuring fair value when relevant observable data does not exist, how
observable market information in a market that is not active should be
considered when measuring fair value, and how the use of market quotes should be
considered when assessing the relevance of observable and unobservable
data


9


available
to measure fair value.  FSP 157-3 was effective upon
issuance.  FSP 157-4 provides additional guidance for estimating fair
value when the volume and level of activity for the asset or liability has
significantly decreased. The Company early adopted FSP 157-4 effective March 31,
2009.  The Company’s adoption of both FSP 157-3 and FSP 157-4 impact
how securities shown on the Consolidated Statements of Financial Condition were
valued at March 31, 2009.





Financial
assets and financial liabilities measured at fair value on a recurring basis as
of March 31, 2009 were as follows:





Description
                          
                          Total
                          
                          
                          Quoted
      Pricesin Active Markets for Identical
      Assets (Level 1)
                          
                          
                          Significant
      Other Observable Inputs (Level 2)
                          
                          
                          Significant
      Unobservable Inputs (Level 3)Available-for-sale
      securities:U S
      government agency securities
                          
                          $
                          3,928,840
                          
                          
                          
                          -
                          
                          
                          $
                          3,928,840
                          
                          
                          
                          -Local
      government securities
                          
                          
                          3,254,534
                          
                          
                          
                          -
                          
                          
                          
                          3,254,534
                          
                          
                          
                          -Collateralized
      debt obligations with credit losses
                          
                          
                          539,178
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          539,178Collateralized
      debt obligations without credit losses
                          
                          
                          11,968,807
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          11,968,807Collateralized
      mortgage obligations
                          
                          
                          16,701,423
                          
                          
                          
                          -
                          
                          
                          
                          14,558,886
                          
                          
                          
                          2,142,537Mortgage
      backed securities
                          
                          
                          7,956,363
                          
                          
                          
                          
                          
                          
                          
                          7,956,361Corporate
      debt securities
                          
                          
                          2,464,820
                          
                          
                          
                          -
                          
                          
                          
                          2,464,820
                          
                          
                          
                          -Other
      securities
                          
                          
                          574,243
                          
                          
                          
                          -
                          
                          
                          
                          574,243
                          
                          
                          
                          -Total
      available-for-sale securities
                          
                          
                          47,388,208
                          
                          
                          
                          -
                          
                          
                          
                          32,737,684
                          
                          
                          
                          14,650,522Mortgage
      servicing rights
                          
                          
                          590,552
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          590,552Total
      assets measured at fair value on a recurring basis
                          
                          $
                          47,978,760
                          
                          
                          
                          -
                          
                          
                          $
                          32,737,684
                          
                          
                          $
                          15,241,074




The
Company believes that the estimate of fair value of our securities is a
“critical accounting estimate” because (1) it is highly susceptible to change
from period to period as a result of the volatile financial markets and because
it requires the Company to make significant assumptions about the fair value of
a substantial asset; and (2) the impact of a large decline in the fair value of
this asset can and has resulted in a significant decline in earnings,
shareholders’ equity, and regulatory capital which may adversely affect the
Company going forward.





In
accordance with the FASB guidance in effect at March 31, 2009, the Company
reviewed a variety of alternative pricing information for these securities
including pricing provided by independent investment banking/brokerage and
financial consulting sources, along with internally prepared
valuations.  The range of values for the trust preferred CDO
securities as of March 31, 2009 was $0.03 to $0.33 per $1.00 of par value, and
reflected the illiquid and inactive market for these types of
securities.  Additionally, the Company valued one collateralized
mortgage obligation using values based on Level 3 inputs provided by an
independent investment banking/brokerage firm.  The estimates of fair
value were predominately based on a discounted cash flow model.





For the
quarter ended March 31, 2009, the Company reviewed all investments for OTTI
under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities(“SFAS 115”) and
EITF 99-20-1, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial
Assets(“EITF 99-20-1”).  According to SFAS 115, for individual
securities classified as either available-for-sale or held-to-maturity, a
company shall determine whether a decline in fair value below amortized cost
basis is OTTI.  If the decline in fair value is judged to be OTTI, the
cost basis of the individual security is written down to fair value and the
write-down is included as an impairment charge.  FSP 115-2 updates
this method to include a write-down of only the portion of OTTI that relates to
credit loss.  The remaining difference between fair value and
amortized cost is recognized in other comprehensive income (non-credit loss
portion).  As discussed in Note 4- Effect of New Accounting Standards,
the Company adopted FSP 157-4, FSP 115-2 and FSP 124-2 as of January 1,
2009.  FSP 157-4 provides guidance on how to use modeled values rather
than broker/dealer prices to


10


determine
fair value in an illiquid and inactive market.  The Company adopted
and utilized this guidance for the quarter ended March 31, 2009 to determine the
fair value of its securities as well as FSP 115-2 and FSP 124-2 for the
bifurcation of other-than-temporary impairment losses recognized in earnings
(credit loss portion) and other comprehensive income (non-credit loss
portion).





To
determine if a security was temporarily impaired, the Company used a discounted
cash flow analysis.  Cash flow models used were provided by
independent third party consultants using default assumptions to determine if
the net present value of the cash flows expected on the security were equivalent
to or greater than the original cash flows projected on the security when
purchased.  The cash flows are discounted at rates approximating the
respective coupon rates.  If the net present value of the projected
cash flows was less than the cost basis of the security, the difference was
considered credit related and was recorded through earnings.





The
following table presents the changes in assets with significant unobservable
inputs (Level 3) for the three months and nine months ended March 31,
2009:





Description
                          
                          Mortgage
      servicingrights
                          
                          
                          Collateralized
      mortgage obligations
                          
                          
                          CDO's
      with credit losses
                          
                          
                          CDO's
      without credit losses
                          
                          
                          TotalBeginning
      balance at January 1, 2009
                          
                          $
                          499,267
                          
                          
                          
                          -
                          
                          
                          $
                          2,522,033
                          
                          
                          $
                          25,761,599
                          
                          
                          $
                          28,782,899Transfers
      in and between categories
                          
                          
                          -
                          
                          
                          $
                          2,819,328
                          
                          
                          
                          2,050,000
                          
                          
                          
                          (2,050,000
                          )
                          
                          
                          2,819,328Capitalization
      of interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          634,693
                          
                          
                          
                          182,359
                          
                          
                          
                          817,052Total
      gains or losses (realized/unrealized):Included
      in earnings
                          
                          
                          91,285
                          
                          
                          
                          (1,109,596
                          )
                          
                          
                          (2,693,542
                          )
                          
                          
                          (1,187,185
                          )
                          
                          
                          (4,899,038
                          )Included
      in other comprehensive income
                          
                          
                          -
                          
                          
                          
                          533,650
                          
                          
                          
                          (1,974,006
                          )
                          
                          
                          (10,698,135
                          )
                          
                          
                          (12,138,491
                          )Paydowns
      and maturities
                          
                          
                          -
                          
                          
                          
                          (100,845
                          )
                          
                          
                          -
                          
                          
                          
                          (39,831
                          )
                          
                          
                          (140,676
                          )Ending
      balance at March 31, 2009
                          
                          $
                          590,552
                          
                          
                          $
                          2,142,537
                          
                          
                          $
                          539,178
                          
                          
                          $
                          11,968,807
                          
                          
                          $
                          15,241,074




Description
                          
                          Mortgage
      servicing rights
                          
                          
                          Collateralized
      mortgage obligations
                          
                          
                          CDO's
      with credit losses
                          
                          
                          CDO's
      without credit losses
                          
                          
                          TotalBeginning
      balance at July 1, 2008
                          
                          $
                          676,634
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          $
                          39,437,752
                          
                          
                          $
                          40,114,386Transfers
      in and between categories
                          
                          
                          -
                          
                          
                          $
                          2,819,328
                          
                          
                          $
                          7,535,272
                          
                          
                          
                          (7,535,272
                          )
                          
                          
                          2,819,328Capitalization
      of interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          711,134
                          
                          
                          
                          600,630
                          
                          
                          
                          1,311,764Total
      gains or losses (realized/unrealized):Included
      in earnings
                          
                          
                          (86,082
                          )
                          
                          
                          (1,109,596
                          )
                          
                          
                          (3,940,878
                          )
                          
                          
                          (1,739,568
                          )
                          
                          
                          (6,876,124
                          )Included
      in other comprehensive income
                          
                          
                          -
                          
                          
                          
                          533,650
                          
                          
                          
                          (3,766,350
                          )
                          
                          
                          (18,472,185
                          )
                          
                          
                          (21,704,885
                          )Paydowns
      and maturities
                          
                          
                          -
                          
                          
                          
                          (100,845
                          )
                          
                          
                          -
                          
                          
                          
                          (322,550
                          )
                          
                          
                          (423,395
                          )Ending
      balance at March 31, 2009
                          
                          $
                          590,552
                          
                          
                          $
                          2,142,537
                          
                          
                          $
                          539,178
                          
                          
                          $
                          11,968,807
                          
                          
                          $
                          15,241,074





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





Collateralized Mortgage Obligations,
CDOs with credit losses and CDOs without credit losses. Certain
investment securities available for sale are classified within level 2 of the
valuation hierarchy. The Company obtains fair value measurements for investment
securities from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond’s terms and
conditions, among other things.


11


In
certain cases, where the pricing service cannot obtain fair values and/or there
is limited activity or less transparency around inputs to the valuation,
investment securities are classified within level 3 of the valuation
hierarchy.  Upon adoption of SFAS 157 on July 1, 2008, the Company had
a total of $39.4 million of available-for-sale securities with significant
unobservable inputs (Level 3).  Because the market is inactive for
these securities, observable market data was not available.  The fair
value of these securities was determined by discounting the expected cash flows
over the life of the security.  The discount rate was determined by
observing discount rates of similar-rated financial corporate debt securities as
published by third party broker/dealers.  Adjustments to this discount
rate were made for various factors including illiquidity and credit
risk.





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





Certain
assets are measured at fair value on a nonrecurring basis, that is, they are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).  Financial assets and financial
liabilities measured at fair value on a nonrecurring basis as of March 31, 2009
were as follows:





Description
                        
                        Total
                        
                        
                        Quoted
      Prices in Active Markets for Identical Assets (Level
      1)
                        
                        
                        Significant
      Other Observable Inputs(Level 2)
                        
                        
                        Significant
      Unobservable Inputs (Level 3)Loans
      receivable
                        
                        $
                        6,233,913
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        6,233,913




The
specific allowances for collateral dependent impaired loans are based on the
fair value of the collateral less estimated costs to sell.  The fair
value of collateral was determined based on appraisals.  In some
cases, adjustments were made to the appraised values due to various factors
including the age of the appraisal, age of comparables included in the
appraisal, and known changes in the market and in the
collateral.  When significant adjustments were based on unobservable
inputs, the resulting fair value measurement has been categorized as a Level 3
measurement.  Specific allowances were calculated for impaired loans
with an aggregate principal balance of $7.6 million during the quarter ended
March 31, 2009.  The collateral underlying these loans had a fair
value of $6.2 million less estimated costs to sell of $570,000, resulting in a
specific allowance of $2.0 million.








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





As a
result of the accounting changes mentioned in note 7 – Fair Value Measurements
and note 4 – Effects of New Accounting Standards, for the three months ended
March 31, 2009 the Company recognized $17.0 million in total “other than
temporary” impairment charges of which $5.2 million was recognized as OTTI
losses recorded through earnings.  For the nine months ended March 31,
2009, the Company recognized $30.1 million in total “other than temporary”
impairment charges of which $7.0 million was recognized as OTTI losses recorded
through earnings.  The Company engaged independent consulting firms to
assist in the valuation of the Company’s trust preferred securities and
collateralized mortgage obligations.  Based on the consulting firm’s
findings, management determined the Company’s trust preferred CDO securities had
an aggregate fair value of $12.5 million at March 31, 2009.  Seven of
the securities were determined to have OTTI write downs that were recognized in
earnings. Two of the seven securities with an original par value of $4.4 million
incurred an OTTI charge of $1.2 million for the three months ended March 31,
2009.  The Company does not have the ability and intent to hold these
securities because they exceed the Bank’s loans-to-one-borrower limit and,
pursuant to an agreement with the Bank’s federal regulator, will be sold when
liquidity returns to the market. The remaining five of the seven securities with
an original par value of $17.0 million had OTTI write down of $2.7 million for
the three months ended March 31, 2009.  To determine the write down on
these securities, the investment consulting firm projected cash flows for each
collateralized debt obligation and discounted the cash flows at the original
purchased yield.  The consulting firm analyzed each underlying bank or
insurance company and assigned a probability of default.  Those
default assumptions were then used to determine the


12


projected
cash flow of the security.  In addition, the consulting firm assumed
no prepayments of the underlying debt.  If the net present value of
the cash flows was less than the cost basis of the security, the difference is
considered credit related and is recorded through earnings.





Three of
the Company’s collateralized mortgage debt obligations with an original par
value of $14.0 million were also determined to be “other than temporarily”
impaired.  Total “other than temporary” impairment on these securities
as of March 31, 2009, was approximately $3.1 million. To determine the write
down on these securities, management engaged a third party investment advisor to
project cash flows for each collateralized mortgage obligation.  To
determine the write down on these securities, the investment consulting firm
projected cash flows for security and discounted the cash flows at the original
purchased yield.  If the net present value of the cash flows was less
than the cost basis of the security, the difference is considered credit related
and is recorded through earnings.  The “other than temporary” loss
related to credit and recognized in earnings totaled $1.3 million.





The
following table presents a summary of the significant inputs considered in
determining the measurement of the credit loss recognized in earnings for the
Company’s collateralized mortgage obligations.





Collateralized
      Mortgage ObligationsExpected
      average life of the security (in years):Range
                  1.58
      to 6.46Weighted
      average
                  3.87Estimated
      lifetime cummulative defaults:Range
                  15.63%
      to 38.98%Weighted
      average
                  24.48%Estimated
      prepayment speed (annual CRR):Range
                  3.47%
      to 8.66%Weighted
      average
                  7.04%





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.”





The
following table sets forth information regarding the changes of the Company’s
OTTI losses related to credit and recognized in earnings for the three months
ended March 31, 2009.





Three
      months endedMarch
      31,2009Balance
      at beginning of period
                        
                        
                        -Additions:Initial
      credit impairments
                        
                        $
                        3,803,138Balance
      at end of period
                        
                        $
                        3,803,138







13





Note
9.  Non-Performing Assets





Non-performing
assets at March 31, 2009 increased to $29.6 million as compared to $18.6 million
at June 30, 2008.  Non-performing assets as a percentage of total
assets increased from 3.30% at June 30, 2008, to 5.93% as of March 31,
2009.  The increase in non-performing assets is primarily due to a
loan relationship totaling $7.5 million that was originated for the purchase and
renovation of an existing office building in downtown Des
Moines.  That loan was placed on non-accrual status during the current
quarter.  This loan relationship had previously been identified by
management as a classified asset and was rated as “Substandard.”  In
addition, a $3.1 million loan to a real estate holding company for a formal wear
manufacturer and distributor was placed on non-accrual during the current
quarter.





The
following table sets forth information regarding non-accrual loans and other
non-performing assets at the dates indicated.





(Dollars
      in Thousands)
                          
                          March
      31, 2009
                          
                          
                          June
      30, 2008Loans
      accounted for on a non-accrual basis:One-
      to four-family residential
                          
                          $
                          1,329
                          
                          
                          $
                          1,167Multi-family
      residential
                          
                          
                          1,613
                          
                          
                          
                          3,230Non-residential
      real estate
                          
                          
                          16,645
                          
                          
                          
                          11,825Commercial
      business
                          
                          
                          1,795
                          
                          
                          
                          1,428Consumer
                          
                          
                          282
                          
                          
                          
                          99Total
      non-performing loans
                          
                          
                          21,664
                          
                          
                          
                          17,749Foreclosed
      and repossessed assets
                          
                          
                          7,927
                          
                          
                          
                          873Total
      non-performing assets
                          
                          $
                          29,591
                          
                          
                          
                          18,622Restructured
      loans not included in other non-performing categories
above
                          
                          $
                          5,362
                          
                          
                          $
                          5,206Non-performing
      loans as a percentage of total loans
                          
                          
                          6.09
                          %
                          
                          
                          4.29
                          %Non-performing
      assets as a percentage of total assets
                          
                          
                          5.93
                          %
                          
                          
                          3.30
                          %





Loans are
considered impaired when it is probable the Company will be unable to collect
all contractual principal and interest payments due in accordance with the terms
of the loan agreement, including loans placed on non-accrual.  The
following table sets forth information on impaired loans at March 31, 2009.





March
      31, 2009
                                
                                
                                June
      30, 2008Recorded
                                
                                
                                Valuation
                                
                                
                                Recorded
                                
                                
                                ValuationInvestment
                                
                                
                                Allowance
                                
                                
                                Investment
                                
                                
                                AllowanceValuation
      allowance required
                                
                                $
                                7,638,757
                                
                                
                                $
                                1,974,844
                                
                                
                                $
                                5,177,034
                                
                                
                                $
                                1,650,499Valuation
      allowance not required
                                
                                
                                16,135,044
                                
                                
                                
                                -
                                
                                
                                
                                14,928,131
                                
                                
                                
                                -Total
      impaired loans and allowance
                                
                                $
                                23,773,801
                                
                                
                                $
                                1,974,844
                                
                                
                                $
                                20,105,165
                                
                                
                                $
                                1,650,499





Note
10.  Securities





The
following table sets forth information regarding the amortized cost, gross
unrealized gains and losses, and the fair value of the Company’s investment
securities at March 31, 2009 and June 30, 2008.


14


March
      31, 2009Gross
                                        
                                        
                                        GrossAmortized
                                        
                                        
                                        Unrealized
                                        
                                        
                                        UnrealizedCost
                                        
                                        
                                        Gains
                                        
                                        
                                        (Losses)
                                        
                                        
                                        Fair
      ValueAvailable-for-sale:Mortgage-backed
      securities:Governmental
      National MortgageAssociation
      (GNMA)
                                        
                                        $
                                        5,066,274
                                        
                                        
                                        $
                                        6,488
                                        
                                        
                                        $
                                        (8,706
                                        )
                                        
                                        $
                                        5,064,056Federal
      Home Loan MortgageAssociation
      (FHLMC)
                                        
                                        
                                        1,785,066
                                        
                                        
                                        
                                        31,495
                                        
                                        
                                        
                                        (2,437
                                        )
                                        
                                        
                                        1,814,124Federal
      National MortgageAssociation
      (FNMA)
                                        
                                        
                                        1,085,429
                                        
                                        
                                        
                                        3,963
                                        
                                        
                                        
                                        (11,211
                                        )
                                        
                                        
                                        1,078,181United
      States government agency securities
                                        
                                        
                                        4,000,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (71,160
                                        )
                                        
                                        
                                        3,928,840Local
      government securities
                                        
                                        
                                        3,470,000
                                        
                                        
                                        
                                        9,774
                                        
                                        
                                        
                                        (225,240
                                        )
                                        
                                        
                                        3,254,534Collateralized
      mortgage obligations
                                        
                                        
                                        18,413,747
                                        
                                        
                                        
                                        76,814
                                        
                                        
                                        
                                        (1,789,136
                                        )
                                        
                                        
                                        16,701,425CDO's
      with credit losses
                                        
                                        
                                        7,104,180
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (6,565,002
                                        )
                                        
                                        
                                        539,178CDO's
      without credit losses
                                        
                                        
                                        44,867,166
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (32,898,359
                                        )
                                        
                                        
                                        11,968,807Other
      investment securities
                                        
                                        
                                        4,141,775
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,102,710
                                        )
                                        
                                        
                                        3,039,065Total
      available-for-sale securities
                                        
                                        $
                                        89,933,637
                                        
                                        
                                        $
                                        128,534
                                        
                                        
                                        $
                                        (42,673,961
                                        )
                                        
                                        $
                                        47,388,210Held-to-maturity:Mortgage-backed
      securities:GNMA
                                        
                                        $
                                        82,359
                                        
                                        
                                        $
                                        6,137
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        88,496FHLMC
                                        
                                        
                                        559,520
                                        
                                        
                                        
                                        21,918
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        581,438FNMA
                                        
                                        
                                        1,215,177
                                        
                                        
                                        
                                        32,142
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,247,319Local
      government securities
                                        
                                        
                                        4,121,325
                                        
                                        
                                        
                                        44,088
                                        
                                        
                                        $
                                        (54,813
                                        )
                                        
                                        
                                        4,110,600Total
      held-to-maturity securities
                                        
                                        $
                                        5,978,381
                                        
                                        
                                        $
                                        104,285
                                        
                                        
                                        $
                                        (54,813
                                        )
                                        
                                        $
                                        6,027,853


15


June
      30, 2008Gross
                                        
                                        
                                        GrossAmortized
                                        
                                        
                                        Unrealized
                                        
                                        
                                        UnrealizedCost
                                        
                                        
                                        Gains
                                        
                                        
                                        (Losses)
                                        
                                        
                                        Fair
      ValueAvailable-for-sale:Mortgage-backed
      securities:Governmental
      National MortgageAssociation
      (GNMA)
                                        
                                        $
                                        2,285,146
                                        
                                        
                                        $
                                        9,828
                                        
                                        
                                        $
                                        (11,636
                                        )
                                        
                                        $
                                        2,283,338Federal
      Home Loan MortgageAssociation
      (FHLMC)
                                        
                                        
                                        2,216,483
                                        
                                        
                                        
                                        11,080
                                        
                                        
                                        
                                        (3,113
                                        )
                                        
                                        
                                        2,224,450Federal
      National MortgageAssociation
      (FNMA)
                                        
                                        
                                        1,312,962
                                        
                                        
                                        
                                        1,195
                                        
                                        
                                        
                                        (14,830
                                        )
                                        
                                        
                                        1,299,327United
      States treasury securities
                                        
                                        
                                        2,992,007
                                        
                                        
                                        
                                        15,973
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,007,980United
      States government agency securities
                                        
                                        
                                        6,998,959
                                        
                                        
                                        
                                        36,621
                                        
                                        
                                        
                                        (2,250
                                        )
                                        
                                        
                                        7,033,330Local
      government securities
                                        
                                        
                                        3,470,000
                                        
                                        
                                        
                                        9,992
                                        
                                        
                                        
                                        (4,153
                                        )
                                        
                                        
                                        3,475,839Collateralized
      mortgage obligations
                                        
                                        
                                        22,352,500
                                        
                                        
                                        
                                        21,639
                                        
                                        
                                        
                                        (846,664
                                        )
                                        
                                        
                                        21,527,475CDO's
                                        
                                        
                                        55,989,026
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (16,551,274
                                        )
                                        
                                        
                                        39,437,752Other
      investment securities
                                        
                                        
                                        4,255,158
                                        
                                        
                                        
                                        2,978
                                        
                                        
                                        
                                        (318,221
                                        )
                                        
                                        
                                        3,939,915Total
      available-for-sale securities
                                        
                                        $
                                        101,872,241
                                        
                                        
                                        $
                                        109,306
                                        
                                        
                                        $
                                        (17,752,141
                                        )
                                        
                                        $
                                        84,229,406Held-to-maturity:Mortgage-backed
      securities:GNMA
                                        
                                        $
                                        93,016
                                        
                                        
                                        $
                                        7,428
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        100,444FHLMC
                                        
                                        
                                        815,639
                                        
                                        
                                        
                                        8,728
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        824,367FNMA
                                        
                                        
                                        1,965,954
                                        
                                        
                                        
                                        32,030
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,997,984Local
      government securities
                                        
                                        
                                        4,125,115
                                        
                                        
                                        
                                        28,752
                                        
                                        
                                        $
                                        (44,989
                                        )
                                        
                                        
                                        4,108,878Total
      held-to-maturity securities
                                        
                                        $
                                        6,999,724
                                        
                                        
                                        $
                                        76,938
                                        
                                        
                                        $
                                        (44,989
                                        )
                                        
                                        $
                                        7,031,673




The
following table sets forth information regarding fair value and net unrealized
gains or losses for the Company’s investment securities that mature in less than
twelve months and twelve months and greater at March 31, 2009 and June 30,
2008.





March
      31, 2009Less
      than 12 months
                                                                                                      
                                                                                                      
                                                                                                      12
      months or longer
                                                                                                      
                                                                                                      
                                                                                                      TotalFair
                                                                                                      
                                                                                                      
                                                                                                      Unrealized
                                                                                                      
                                                                                                      
                                                                                                      Fair
                                                                                                      
                                                                                                      
                                                                                                      Unrealized
                                                                                                      
                                                                                                      
                                                                                                      Fair
                                                                                                      
                                                                                                      
                                                                                                      UnrealizedValue
                                                                                                      
                                                                                                      
                                                                                                      (Losses)
                                                                                                      
                                                                                                      
                                                                                                      Value
                                                                                                      
                                                                                                      
                                                                                                      (Losses)
                                                                                                      
                                                                                                      
                                                                                                      Value
                                                                                                      
                                                                                                      
                                                                                                      (Losses)Mortgage-backed
      securities:GNMA
                                                                                                      
                                                                                                      $
                                                                                                      446,911
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (2,532
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      696,013
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (6,174
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      1,142,924
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (8,706
                                                                                                      )FHLMC
                                                                                                      
                                                                                                      
                                                                                                      40,404
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (159
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      141,103
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (2,278
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      181,507
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (2,437
                                                                                                      )FNMA
                                                                                                      
                                                                                                      
                                                                                                      35,736
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (37
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      838,119
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (11,174
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      873,855
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (11,211
                                                                                                      )United
      States governmentagency
      securities
                                                                                                      
                                                                                                      
                                                                                                      3,928,840
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (71,160
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,928,840
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (71,160
                                                                                                      )Local
      government securities
                                                                                                      
                                                                                                      
                                                                                                      2,860,482
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (233,692
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      387,632
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (46,361
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      3,248,114
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (280,053
                                                                                                      )Collateralized
      mortgage obligations
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10,952,595
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (1,789,136
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      10,952,595
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (1,789,136
                                                                                                      )CDO's
      with credit losses
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      539,178
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (6,565,002
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      539,178
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (6,565,002
                                                                                                      )CDO's
      without credit losses
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      11,968,807
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (32,898,359
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      11,968,807
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (32,898,359
                                                                                                      )Other
      investment securities
                                                                                                      
                                                                                                      
                                                                                                      1,849,068
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (233,900
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      1,189,820
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (868,810
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      3,038,888
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (1,102,710
                                                                                                      )Total
      securities in loss position
                                                                                                      
                                                                                                      $
                                                                                                      9,161,441
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (541,480
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      26,713,267
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (42,187,294
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      35,874,708
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (42,728,774
                                                                                                      )


16


June
      30, 2008Less
      than 12 months
                                                        
                                                        
                                                        12
      months or longer
                                                        
                                                        
                                                        TotalFair
                                                        
                                                        
                                                        Unrealized
                                                        
                                                        
                                                        Fair
                                                        
                                                        
                                                        Unrealized
                                                        
                                                        
                                                        Fair
                                                        
                                                        
                                                        UnrealizedValue
                                                        
                                                        
                                                        (Losses)
                                                        
                                                        
                                                        Value
                                                        
                                                        
                                                        (Losses)
                                                        
                                                        
                                                        Value
                                                        
                                                        
                                                        (Losses)Mortgage-backed
      securities:GNMA
                                                        
                                                        $
                                                        447,509
                                                        
                                                        
                                                        $
                                                        (1,789
                                                        )
                                                        
                                                        $
                                                        652,340
                                                        
                                                        
                                                        $
                                                        (9,847
                                                        )
                                                        
                                                        $
                                                        1,099,849
                                                        
                                                        
                                                        $
                                                        (11,636
                                                        )FHLMC
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        259,244
                                                        
                                                        
                                                        
                                                        (3,113
                                                        )
                                                        
                                                        
                                                        259,244
                                                        
                                                        
                                                        
                                                        (3,113
                                                        )FNMA
                                                        
                                                        
                                                        77,060
                                                        
                                                        
                                                        
                                                        (390
                                                        )
                                                        
                                                        
                                                        1,055,649
                                                        
                                                        
                                                        
                                                        (14,440
                                                        )
                                                        
                                                        
                                                        1,132,709
                                                        
                                                        
                                                        
                                                        (14,830
                                                        )United
      States governmentagency
      securities
                                                        
                                                        
                                                        2,996,250
                                                        
                                                        
                                                        
                                                        (2,250
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,996,250
                                                        
                                                        
                                                        
                                                        (2,250
                                                        )Local
      government securities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,513,196
                                                        
                                                        
                                                        
                                                        (49,142
                                                        )
                                                        
                                                        
                                                        2,513,196
                                                        
                                                        
                                                        
                                                        (49,142
                                                        )Collateralized
      mortgage obligations
                                                        
                                                        
                                                        5,779,944
                                                        
                                                        
                                                        
                                                        (628,659
                                                        )
                                                        
                                                        
                                                        12,204,974
                                                        
                                                        
                                                        
                                                        (218,005
                                                        )
                                                        
                                                        
                                                        17,984,918
                                                        
                                                        
                                                        
                                                        (846,664
                                                        )CDO's
                                                        
                                                        
                                                        32,044,655
                                                        
                                                        
                                                        
                                                        (16,551,274
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        32,044,655
                                                        
                                                        
                                                        
                                                        (16,551,274
                                                        )Other
      investment securities
                                                        
                                                        
                                                        3,245,130
                                                        
                                                        
                                                        
                                                        (318,221
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3,245,130
                                                        
                                                        
                                                        
                                                        (318,221
                                                        )Total
      securities in loss position
                                                        
                                                        $
                                                        44,590,548
                                                        
                                                        
                                                        $
                                                        (17,502,583
                                                        )
                                                        
                                                        $
                                                        16,685,403
                                                        
                                                        
                                                        $
                                                        (294,547
                                                        )
                                                        
                                                        $
                                                        61,275,951
                                                        
                                                        
                                                        $
                                                        (17,797,130
                                                        )




The
following table sets forth information regarding the breakout of the Company’s
available-for-sale and held-to-maturity securities at March 31, 2009 and June
30, 2008.




March
      31, 2009Available-for-sale
                                                    
                                                    
                                                    Held
      to-maturityAmortized
                                                    
                                                    
                                                    Estimated
                                                    
                                                    
                                                    Amortized
                                                    
                                                    
                                                    EstimatedCost
                                                    
                                                    
                                                    Fair
      Value
                                                    
                                                    
                                                    Cost
                                                    
                                                    
                                                    Fair
      ValueDue
      in 1 year or less
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    220,134
                                                    
                                                    
                                                    $
                                                    221,012Due
      after 1 year through 5 years
                                                    
                                                    $
                                                    5,500,000
                                                    
                                                    
                                                    $
                                                    5,203,840
                                                    
                                                    
                                                    
                                                    2,040,380
                                                    
                                                    
                                                    
                                                    2,060,115Due
      after 5 years through 10 years
                                                    
                                                    
                                                    2,322,968
                                                    
                                                    
                                                    
                                                    2,258,434
                                                    
                                                    
                                                    
                                                    1,860,811
                                                    
                                                    
                                                    
                                                    1,829,473Due
      after 10 years
                                                    
                                                    
                                                    3,788,807
                                                    
                                                    
                                                    
                                                    2,760,165
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Investments
      with fixed maturities
                                                    
                                                    
                                                    11,611,775
                                                    
                                                    
                                                    
                                                    10,222,439
                                                    
                                                    
                                                    
                                                    4,121,325
                                                    
                                                    
                                                    
                                                    4,110,600Collateralized
      mortgage obligations
                                                    
                                                    
                                                    18,413,747
                                                    
                                                    
                                                    
                                                    16,701,425
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -CDO's
      with credit losses
                                                    
                                                    
                                                    7,104,180
                                                    
                                                    
                                                    
                                                    539,178
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -CDO's
      without credit losses
                                                    
                                                    
                                                    44,867,166
                                                    
                                                    
                                                    
                                                    11,968,807
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Mortgage-backed
      securities
                                                    
                                                    
                                                    7,936,769
                                                    
                                                    
                                                    
                                                    7,956,361
                                                    
                                                    
                                                    
                                                    1,857,056
                                                    
                                                    
                                                    
                                                    1,917,253Total
      investment securities
                                                    
                                                    $
                                                    89,933,637
                                                    
                                                    
                                                    $
                                                    47,388,210
                                                    
                                                    
                                                    $
                                                    5,978,381
                                                    
                                                    
                                                    $
                                                    6,027,853





June
      30, 2008Available-for-sale
                                                  
                                                  
                                                  Held
      to-maturityAmortized
                                                  
                                                  
                                                  Estimated
                                                  
                                                  
                                                  Amortized
                                                  
                                                  
                                                  EstimatedCost
                                                  
                                                  
                                                  Fair
      Value
                                                  
                                                  
                                                  Cost
                                                  
                                                  
                                                  Fair
      ValueDue
      in 1 year or less
                                                  
                                                  $
                                                  6,992,466
                                                  
                                                  
                                                  $
                                                  7,045,060
                                                  
                                                  
                                                  $
                                                  220,812
                                                  
                                                  
                                                  $
                                                  225,056Due
      after 1 year through 5 years
                                                  
                                                  
                                                  4,498,500
                                                  
                                                  
                                                  
                                                  4,316,250
                                                  
                                                  
                                                  
                                                  2,040,861
                                                  
                                                  
                                                  
                                                  2,054,757Due
      after 5 years through 10 years
                                                  
                                                  
                                                  1,151,873
                                                  
                                                  
                                                  
                                                  1,156,493
                                                  
                                                  
                                                  
                                                  944,992
                                                  
                                                  
                                                  
                                                  915,587Due
      after 10 years
                                                  
                                                  
                                                  5,073,285
                                                  
                                                  
                                                  
                                                  4,939,261
                                                  
                                                  
                                                  
                                                  918,450
                                                  
                                                  
                                                  
                                                  913,478Investments
      with fixed maturities
                                                  
                                                  
                                                  17,716,124
                                                  
                                                  
                                                  
                                                  17,457,064
                                                  
                                                  
                                                  
                                                  4,125,115
                                                  
                                                  
                                                  
                                                  4,108,878Collateralized
      mortgage obligations
                                                  
                                                  
                                                  22,352,500
                                                  
                                                  
                                                  
                                                  21,527,475
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Collateralized
      debt obligations
                                                  
                                                  
                                                  55,989,026
                                                  
                                                  
                                                  
                                                  39,437,752
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Mortgage-backed
      securities
                                                  
                                                  
                                                  5,814,591
                                                  
                                                  
                                                  
                                                  5,807,115
                                                  
                                                  
                                                  
                                                  2,874,609
                                                  
                                                  
                                                  
                                                  2,922,795Total
      investment securities
                                                  
                                                  $
                                                  101,872,241
                                                  
                                                  
                                                  $
                                                  84,229,406
                                                  
                                                  
                                                  $
                                                  6,999,724
                                                  
                                                  
                                                  $
                                                  7,031,673





17








Note
11.  Taxes





Tax
effects of temporary differences that give rise to significant portions of the
deferred tax asset as of March 31, 2009 and June 30, 2008 are presented
below:




March
      31, 2009
                    
                    
                    June
      30, 2008Net
      deferred tax assets:Related
      to unrealized losses on securities available-for-sale
                    
                    $
                    15,608,000
                    
                    
                    $
                    6,581,000Other
                    
                    
                    3,756,000
                    
                    
                    
                    3,289,000Total
      net deferred tax asset
                    
                    $
                    19,364,000
                    
                    
                    $
                    9,870,000




The
Company believes the deferred tax asset related to unrealized losses on
securities available-or-sale is recoverable because the Company has the intent
and ability to hold these securities until recovery of the unrealized loss
amounts.  In addition, based upon the Company’s level of anticipated
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences.





Note
12. Liquidity and Capital and Regulatory Status





On March
27, 2009, Moody’s Investor Service downgraded seven of the Company’s fourteen
trust preferred CDO securities to below investment grade.  On April 9,
2009, Fitch Ratings downgraded the remaining seven trust preferred CDO
securities to below investment grade.  As a result of these
downgrades, the Bank is required to apply a higher “risk weighting formula” to
these securities when calculating its regulatory capital ratios.  That
formula calls for increasing the Bank’s risk-weighted assets for these
securities to $433.8 million, well above the $52.0 million in par value held by
the Company.  Upon applying the higher level of risk weighted assets
to the Bank’s regulatory capital ratios, the calculated ratios as of March 31,
2009 were as follows:  Tier I leverage ratio of 7.85% (compared to an
adequately capitalized threshold of 4.00%); a Tier I risk-based capital ratio of
5.01% (compared to an adequately capitalized threshold of 4.00%); and a total
risk-based capital ratio of 5.52% (compared to an adequately capitalized
threshold of 8.00%).  As the Bank is less than adequately capitalized
(when measured against the total risk-based capital requirement), the Bank is
subject to a higher level of regulatory oversight and supervision.





The
Company received notification on May 10, 2009 from the OTS that the Bank is
considered significantly undercapitalized under the Prompt Corrective Action
(PCA) capital categories and that the Bank must increase its capital and return
to adequately capitalized status.  The notification directed the Bank
to prepare and submit a capital restoration plan to the OTS by June 15, 2009
that would return the Bank to adequately capitalized status by September 30,
2009.  The Company must guarantee that the Bank will comply with its
capital restoration plan until the Bank is adequately capitalized for four
consecutive quarters.  That plan was submitted on time and management
is waiting for a response from the OTS.   In addition, pursuant
to the notification, the OTS imposed on the Bank a number of operating
restrictions, including the following:





·
            The
      Bank cannot make or pay any capital distributions without the prior
      written approval of the OTS;


·
            The
      Bank’s average total assets in any calendar quarter cannot exceed average
      assets during the preceding quarter unless the increase in assets in
      consistent with a capital restoration plan that has been accepted by the
      OTS;


·
            The
      Bank may not acquire any interest in any company or insured depository
      institution, establish a new branch office, or engage in any new line of
      business;


·
            The
      Bank may not accept, renew or roll over any brokered deposit;
      and


·
            The
      Bank may not pay any bonus to a senior executive officer or provide
      compensation to any senior executive officer exceeding that officer’s
      average rate of compensation (excluding bonuses, stock options, and profit
      sharing) during the preceding 12 months, without prior written approval
      from the OTS.


18


A PCA
Directive and a consent order formalizing the foregoing are expected from the
OTS in the near future.   Any additional formal or informal
regulatory action may have a material adverse impact on the
Company.





As part
of its plan to improve its regulatory capital ratios, the Bank has engaged
Sandler O’Neill & Partners, an investment banking firm, to advise the
Company and the Bank with respect to strategic alternatives, including selected
asset and branch sales, and capital raising initiatives.  With respect
to capital raising initiatives, the Company has engaged in substantive
discussions with several private equity groups related to a potential equity
investment in the Company.  The Company has signed a letter of intent
with one private equity group pursuant to which the group would make a
significant equity investment in the Company.  However, there can be
no assurance that the Company will succeed in negotiating a definitive agreement
for such a transaction.  In addition, an investment in the Company by
one or more private equity investors would result in substantial dilution to
existing stockholders of the Company.





The
Bank's actual and required capital amounts as of March 31, 2009, and June 30,
2008, were as follows:




March
      31, 2009To
      Be WellCapitalized
      UnderFor
      Capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Prompt
      CorrectiveActual
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Adequacy
      Purposes
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Action
      ProvisionsAmount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  RatioDollars
      in ThousandsTangible
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  41,229
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.85
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  7,879
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  1.50
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -Tier
      1 leverage (core)
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,229
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.85
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  21,011
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  26,264
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.00
                                                                                                                                                                                                  %Tier
      1 risk-based capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,229
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.01
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  32,949
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  49,424
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  6.00Risk-based
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  45,486
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.52
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  65,898
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  8.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  82,373
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  10.00June
      30, 2008To
      Be WellCapitalized
      UnderFor
      Capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Prompt
      CorrectiveActual
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Adequacy
      Purposes
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Action
      ProvisionsAmount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  RatioDollars
      in ThousandsTangible
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  41,605
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.23
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  8,628
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  1.50
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -Tier
      1 leverage (core)
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,605
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.23
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  23,009
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  28,761
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.00
                                                                                                                                                                                                  %Tier
      1 risk-based capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,605
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  8.94
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  18,617
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  27,925
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  6.00Risk-based
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  45,848
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  9.85
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  37,233
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  8.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  46,542
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  10.00





The
Company is also required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation.  The Company's primary sources of
liquidity are deposits obtained through its branch office network, borrowings
from the FHLB and other sources, amortization, maturity, and prepayment of
outstanding loans and investments, and sales of loans and other
assets.  During the nine months ended March 31, 2009, the Company used
these sources of funds to fund loan commitments, purchase loans, and cover
maturing liabilities and deposit withdrawals.  The Company had a total
of $42.0 million of loan commitments outstanding as of March 31,
2009.   In addition, at March 31, 2009, the Company had $135.5
million in certificates of deposit, $83.5 million in FHLB advances, and $3.6
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.  As of March 31, 2009, the Company had $16.9 million in
interest-bearing deposits in other financial institutions available for short
term liquidity needs.  In addition, the Company could sell securities
currently available-for-sale to generate cash if needed.  The Company
also believes it


19


could
adjust the rates it offers on certificates of deposit and other deposits to
retain current deposit customers and generate new deposits if
needed.  In addition to deposits, as of March 31, 2009, the company
had borrowing capacity at the Federal Home Loan Bank to borrow an additional
$23.0 million.





Management
anticipates that the FHLB will decrease the Company’s borrowing limit at the
FHLB from 25% of total assets to 20% of total assets (or approximately from
$124.6 million to $99.7 million).  As of March 31, 2009, the Company’s
has $91.3 million in borrowings with the FHLB.  As a result, this
development is not expected to have a near-term impact on the Company’s
operations.





Subsequent
to the quarter end, the Federal Reserve informed the Company that it would
require the Company to post $6.0 million in collateral in order to cover check
inclearings going through the Federal Reserve.  The Company has posted
the collateral and does not expect a near-term impact on the Company’s
operations.





The
following table presents, as of March 31, 2009, the expected future payments of
the Bank’s contractual obligations.




Payments
      Due in:(In
      thousands)
                      
                      Less
      than One Year
                      
                      
                      One
      Year to Less Than Three Years
                      
                      
                      Three
      Years to Less Than Five Years
                      
                      
                      Five
      Years or Greater
                      
                      
                      TotalFHLB
      advances
                      
                      $
                      83,500
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      1,250
                      
                      
                      $
                      84,750Other
      borrowings (1)
                      
                      
                      3,567
                      
                      
                      
                      -
                      
                      
                      $
                      3,000
                      
                      
                      
                      -
                      
                      
                      
                      6,567Operating
      lease
                      
                      
                      141
                      
                      
                      $
                      305
                      
                      
                      
                      328
                      
                      
                      
                      166
                      
                      
                      
                      940Data
      processing
                      
                      
                      652
                      
                      
                      
                      785
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,437Off-balance-sheet
      (2)
                      
                      
                      42,008
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      42,008Total
                      
                      $
                      129,868
                      
                      
                      $
                      1,090
                      
                      
                      $
                      3,328
                      
                      
                      $
                      1,416
                      
                      
                      $
                      135,702
  (1)
                    Includes
      securities sold under repurchase agreements.(2)
                    Includes
      commitments to extend credit, net of commitments to sell
      loans.





Note
13.  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
options granted during the nine months ended March 31, 2009 under the 2006
Stock-Based Incentive Plan were as follows:





2009Dividend
      yield
                  
                  
                  0.00
                  %Expected
      volatility
                  
                  
                  80.11
                  %Risk-free
      interest rate
                  
                  
                  1.77
                  %Expected
      life of awards (in years)
                  
                  
                  5.00Weighted-average
      grant date fair value of awards granted during the year
                  
                  $
                  1.44





A summary
of option activity for the nine months ended March 31, 2009 is presented
below:


20


Weighted-Weighted-
                        
                        
                        AverageAverage
                        
                        
                        Remaining
                        
                        
                        AggregateExercise
                        
                        
                        Contractual
                        
                        
                        IntrinsicNumber
                        
                        
                        Price
                        
                        
                        Term
      (years)
                        
                        
                        ValueOutstanding
      options as of June 30, 2008
                        
                        
                        76,750
                        
                        
                        $
                        17.44Granted
                        
                        
                        25,000
                        
                        
                        
                        2.15Outstanding
      at March 31, 2009
                        
                        
                        101,750
                        
                        
                        $
                        13.68
                        
                        
                        
                        5.7
                        
                        
                        
                        -Exercisable
      at March 31, 2009
                        
                        
                        67,750
                        
                        
                        $
                        16.89
                        
                        
                        
                        4.3
                        
                        
                        
                        -





Share-based
compensation expense for the nine months ended March 31, 2009 and 2008 totaled
approximately $103,000 and $130,000, respectively. As of March 31, 2009, there
was $86,782 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements, to be recognized over a weighted-average
period of 1.4 years.





Note
14.  Bank Branch Office Sale





On
December 15, 2008, the Company sold its banking center in Grinnell, Iowa to
another financial institution.  Assets sold at book value totaled
$27.4 million.  The purchaser assumed liabilities that totaled $53.7
million and paid a 10.58% premium, or $5.6 million, on deposit balances totaling
$52.7 million.








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 recorded a net loss for the three
months ended March 31, 2009, of $3.0 million or $0.91 per diluted share,
compared to a net loss of $1.8 million, or $0.57 per diluted share for the three
months ended March 31, 2008.  Excluding OTTI charges and restructuring
costs, net income is estimated to have been $445,000 or $0.13 per share for the
three months ended March 31, 2009,compared to an estimated
net loss of $1.9 million, or $0.58 per share for the three months ended March
31, 2008





Nine Month
OverviewThe Company’s net loss for the nine months
ended March 31, 2009, was $912,000 or $0.28 per diluted share, compared to a net
loss of $3.2 million or $0.98 per diluted share in the same period last
year.  Excluding OTTI charges, restructuring costs and the gain on
sale of branch offices, net income is estimated to have been $340,000 or $0.10
per share for the nine months ended March 31, 2009,compared to an estimated
net loss of $1.3 million or $0.39 per share for the nine months ended March 31,
2008.


21


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
month periods ended March 31, 2009.





Net Interest
Income Net interest income for three-month period ended March 31, 2009,
was $3.7 million compared to $3.9 million for the three-month period ended March
31, 2008.  The net interest margin improved 43 basis points to 3.29%
for the three months ended March 31, 2009, from 2.86% for the three months ended
March 31, 2008.  For the nine-month period ended March 31, 2009, net
interest income was $12.6 million compared to $12.2 million for the nine-month
period ended March 31, 2008.  The net interest margin improved 68
basis points to 3.61% for the nine months ended March 31, 2009, from 2.93% for
the nine months ended March 31, 2008.  The increase in margin for both
periods was due to a generally lower interest rate environment that decreased
the cost of the Company’s interest-bearing liabilities faster than the decrease
of yields on interest-earning assets.  The margin improvement was
partially offset by a decrease in the Company’s average interest-earning
assets.





The
following tables set forth information regarding the average balances of the
Company’s assets, liabilities, and equity, as well as the average yield on
assets and average cost of liabilities for the periods indicated.  The
information is based on daily average balances during the three-month and
nine-month periods ended March 31, 2009 and 2008.





Three
      months ended March 31,2009
                                                                        
                                                                        
                                                                        2008Average
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        Average
                                                                        
                                                                        
                                                                        Average
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        Average(Dollars
      in thousands)
                                                                        
                                                                        Balance
                                                                        
                                                                        
                                                                        Interest
                                                                        
                                                                        
                                                                        Yield/Cost
                                                                        
                                                                        
                                                                        Balance
                                                                        
                                                                        
                                                                        Interest
                                                                        
                                                                        
                                                                        Yield/CostInterest-earning
      assets:Loans
      receivable (1)
                                                                        
                                                                        $
                                                                        369,749
                                                                        
                                                                        
                                                                        $
                                                                        5,081
                                                                        
                                                                        
                                                                        
                                                                        5.57
                                                                        %
                                                                        
                                                                        $
                                                                        416,552
                                                                        
                                                                        
                                                                        $
                                                                        6,641
                                                                        
                                                                        
                                                                        
                                                                        6.47
                                                                        %Investment
      securities (2)
                                                                        
                                                                        
                                                                        86,486
                                                                        
                                                                        
                                                                        
                                                                        1,127
                                                                        
                                                                        
                                                                        
                                                                        5.46
                                                                        %
                                                                        
                                                                        
                                                                        126,771
                                                                        
                                                                        
                                                                        
                                                                        1,864
                                                                        
                                                                        
                                                                        
                                                                        6.10
                                                                        %Deposits
      in other financial institutions
                                                                        
                                                                        
                                                                        12,021
                                                                        
                                                                        
                                                                        
                                                                        2
                                                                        
                                                                        
                                                                        
                                                                        0.06
                                                                        %
                                                                        
                                                                        
                                                                        9,802
                                                                        
                                                                        
                                                                        
                                                                        67
                                                                        
                                                                        
                                                                        
                                                                        2.77
                                                                        %Total
      interest-earning assets
                                                                        
                                                                        
                                                                        468,256
                                                                        
                                                                        
                                                                        
                                                                        6,210
                                                                        
                                                                        
                                                                        
                                                                        5.41
                                                                        %
                                                                        
                                                                        
                                                                        553,125
                                                                        
                                                                        
                                                                        
                                                                        8,572
                                                                        
                                                                        
                                                                        
                                                                        6.32
                                                                        %Non-interest-earning
      assets
                                                                        
                                                                        
                                                                        51,113
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        66,823Total
      assets
                                                                        
                                                                        $
                                                                        519,369
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        619,948Interest-bearing
      liabilities:Deposit
      liabilities
                                                                        
                                                                        $
                                                                        333,266
                                                                        
                                                                        
                                                                        
                                                                        1,952
                                                                        
                                                                        
                                                                        
                                                                        2.38
                                                                        %
                                                                        
                                                                        $
                                                                        412,414
                                                                        
                                                                        
                                                                        
                                                                        3,570
                                                                        
                                                                        
                                                                        
                                                                        3.51
                                                                        %Borrowings
                                                                        
                                                                        
                                                                        111,340
                                                                        
                                                                        
                                                                        
                                                                        595
                                                                        
                                                                        
                                                                        
                                                                        2.17
                                                                        %
                                                                        
                                                                        
                                                                        93,054
                                                                        
                                                                        
                                                                        
                                                                        1,092
                                                                        
                                                                        
                                                                        
                                                                        4.76
                                                                        %Total
      interest-bearing liabilities
                                                                        
                                                                        
                                                                        444,606
                                                                        
                                                                        
                                                                        
                                                                        2,547
                                                                        
                                                                        
                                                                        
                                                                        2.32
                                                                        %
                                                                        
                                                                        
                                                                        505,468
                                                                        
                                                                        
                                                                        
                                                                        4,662
                                                                        
                                                                        
                                                                        
                                                                        3.74
                                                                        %Non-interest-bearing:Deposit
      liabilities
                                                                        
                                                                        
                                                                        42,640
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        44,269Other
      liabilities
                                                                        
                                                                        
                                                                        4,411
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        4,709Total
      liabilities
                                                                        
                                                                        
                                                                        491,657
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        554,446Stockholders’
      equity
                                                                        
                                                                        
                                                                        27,712
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        65,502Total
      liabilities andstockholders'
      equity
                                                                        
                                                                        $
                                                                        519,369
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        619,948Net
      interest income
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        3,663
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        $
                                                                        3,910Interest
      rate spread
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3.09
                                                                        %
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2.58
                                                                        %Net
      interest margin (3)
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        3.29
                                                                        %
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2.86
                                                                        %Ratio
      of average interest-earning assetsto
      average interest-bearing liabilities
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        105.32
                                                                        %
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        109.43
                                                                        %
  (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.




22


Nine
      months ended March 31,2009
                                                                          
                                                                          2008Average
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Average
                                                                          
                                                                          
                                                                          Average
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          Average(Dollars
      in thousands)
                                                                          
                                                                          Balance
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          Yield/Cost
                                                                          
                                                                          
                                                                          Balance
                                                                          
                                                                          
                                                                          Interest
                                                                          
                                                                          
                                                                          Yield/CostInterest-earning
      assets:Loans
      receivable (1)
                                                                          
                                                                          $
                                                                          390,089
                                                                          
                                                                          
                                                                          $
                                                                          17,138
                                                                          
                                                                          
                                                                          
                                                                          5.85
                                                                          %
                                                                          
                                                                          $
                                                                          428,187
                                                                          
                                                                          
                                                                          $
                                                                          21,474
                                                                          
                                                                          
                                                                          
                                                                          6.68
                                                                          %Investment
      securities (2)
                                                                          
                                                                          
                                                                          86,999
                                                                          
                                                                          
                                                                          
                                                                          4,085
                                                                          
                                                                          
                                                                          
                                                                          6.43
                                                                          %
                                                                          
                                                                          
                                                                          128,535
                                                                          
                                                                          
                                                                          
                                                                          5,884
                                                                          
                                                                          
                                                                          
                                                                          6.24
                                                                          %Deposits
      in other financial institutions
                                                                          
                                                                          
                                                                          5,765
                                                                          
                                                                          
                                                                          
                                                                          3
                                                                          
                                                                          
                                                                          
                                                                          0.06
                                                                          %
                                                                          
                                                                          
                                                                          4,807
                                                                          
                                                                          
                                                                          
                                                                          125
                                                                          
                                                                          
                                                                          
                                                                          3.46
                                                                          %Total
      interest-earning assets
                                                                          
                                                                          
                                                                          482,853
                                                                          
                                                                          
                                                                          
                                                                          21,226
                                                                          
                                                                          
                                                                          
                                                                          5.89
                                                                          %
                                                                          
                                                                          
                                                                          561,529
                                                                          
                                                                          
                                                                          
                                                                          27,483
                                                                          
                                                                          
                                                                          
                                                                          6.55
                                                                          %Non-interest-earning
      assets
                                                                          
                                                                          
                                                                          58,293
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          64,796Total
      assets
                                                                          
                                                                          $
                                                                          541,146
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          626,325Interest-bearing
      liabilities:Deposit
      liabilities
                                                                          
                                                                          $
                                                                          365,774
                                                                          
                                                                          
                                                                          
                                                                          6,886
                                                                          
                                                                          
                                                                          
                                                                          2.51
                                                                          %
                                                                          
                                                                          $
                                                                          424,035
                                                                          
                                                                          
                                                                          
                                                                          12,047
                                                                          
                                                                          
                                                                          
                                                                          3.78
                                                                          %Borrowings
                                                                          
                                                                          
                                                                          97,270
                                                                          
                                                                          
                                                                          
                                                                          1,776
                                                                          
                                                                          
                                                                          
                                                                          2.43
                                                                          %
                                                                          
                                                                          
                                                                          86,409
                                                                          
                                                                          
                                                                          
                                                                          3,245
                                                                          
                                                                          
                                                                          
                                                                          5.00
                                                                          %Total
      interest-bearing liabilities
                                                                          
                                                                          
                                                                          463,044
                                                                          
                                                                          
                                                                          
                                                                          8,662
                                                                          
                                                                          
                                                                          
                                                                          2.49
                                                                          %
                                                                          
                                                                          
                                                                          510,444
                                                                          
                                                                          
                                                                          
                                                                          15,292
                                                                          
                                                                          
                                                                          
                                                                          3.99
                                                                          %Non-interest-bearing:Deposit
      liabilities
                                                                          
                                                                          
                                                                          43,504
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          43,207Other
      liabilities
                                                                          
                                                                          
                                                                          4,578
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          4,860Total
      liabilities
                                                                          
                                                                          
                                                                          511,126
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          558,511Stockholders’
      equity
                                                                          
                                                                          
                                                                          30,020
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          67,814Total
      liabilities andstockholders'
      equity
                                                                          
                                                                          $
                                                                          541,146
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          626,325Net
      interest income
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          12,564
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          $
                                                                          12,191Interest
      rate spread
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3.40
                                                                          %
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.56
                                                                          %Net
      interest margin (3)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          3.61
                                                                          %
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          2.93
                                                                          %Ratio
      of average interest-earning assetsto
      average interest-bearing liabilities
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          104.28
                                                                          %
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          110.01
                                                                          %
  (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 LoansThe provision for loan
losses for the three months ended March 31, 2009, was $0.1 million as compared
to $2.7 million for the quarter ended March 31, 2008.  For the nine
months ended March 31, 2009, the provision for loan losses decreased to $2.1
million from $3.2 million during the same time period last year.  The
decrease in both periods was attributed to the Company increasing its allowance
for loan loss in the previous year in response to a deterioration of the
Company’s asset quality and specific allowances that were recognized in the
previous periods.





The
Company’s allowance for loan losses totaled $6.2 million as of March 31, 2009,
compared to $5.9 million as of March 31, 2008.  The Company’s
methodology for establishing allowance for loan loss is heavily influenced by
the level of the Company’s non-performing and classified
loans.  Non-performing loans and classified assets have increased over
the last year due to the well-publicized difficulties in the overall markets for
commercial and residential real estate.  Although management believes
that the Company’s present level of allowance for loan losses is adequate, there
can be no assurance that future adjustments to the allowance will not be
necessary, which could adversely affect the Company’s results of
operations.  For additional discussion, refer to “Financial Condition
– Non-Performing and Classified Assets.”





The
following table summarizes the activity in the Company’s allowance for loan
losses for the three and nine months ended March 31, 2009 and
2008.


23


Three
      months ended
                                  
                                  
                                  Nine
      months endedMarch
      31,
                                  
                                  
                                  March
      31,(Dollars
      in Thousands)
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Balance
      at beginning of period
                                  
                                  $
                                  6,654
                                  
                                  
                                  $
                                  2,056
                                  
                                  
                                  $
                                  5,894
                                  
                                  
                                  $
                                  1,797Provision
      for loan losses
                                  
                                  
                                  106
                                  
                                  
                                  
                                  2,681
                                  
                                  
                                  
                                  2,124
                                  
                                  
                                  
                                  3,194Charge-offs:Commercial
      real estate loans
                                  
                                  
                                  (251
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (472
                                  )
                                  
                                  
                                  (182
                                  )Commercial
      business loans
                                  
                                  
                                  (126
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (986
                                  )
                                  
                                  
                                  (71
                                  )Consumer
      loans
                                  
                                  
                                  (168
                                  )
                                  
                                  
                                  (70
                                  )
                                  
                                  
                                  (388
                                  )
                                  
                                  
                                  (149
                                  )Total
      loans charged-off
                                  
                                  
                                  (545
                                  )
                                  
                                  
                                  (70
                                  )
                                  
                                  
                                  (1,846
                                  )
                                  
                                  
                                  (402
                                  )Recoveries
                                  
                                  
                                  16
                                  
                                  
                                  
                                  26
                                  
                                  
                                  
                                  59
                                  
                                  
                                  
                                  104Charge-offs,
      net of recoveries
                                  
                                  
                                  (529
                                  )
                                  
                                  
                                  (44
                                  )
                                  
                                  
                                  (1,787
                                  )
                                  
                                  
                                  (298
                                  )Balance
      at end of period
                                  
                                  $
                                  6,231
                                  
                                  
                                  $
                                  4,693
                                  
                                  
                                  $
                                  6,231
                                  
                                  
                                  $
                                  4,693Allowance
      for loan losses to total loans
                                  
                                  
                                  1.75
                                  %
                                  
                                  
                                  1.14
                                  %
                                  
                                  
                                  1.75
                                  %
                                  
                                  
                                  1.14
                                  %Allowance
      for loan losses to non-performing loans
                                  
                                  
                                  28.76
                                  %
                                  
                                  
                                  50.54
                                  %
                                  
                                  
                                  28.76
                                  %
                                  
                                  
                                  50.54
                                  %Net
      annualized charge-offs to average loans outstanding
                                  
                                  
                                  0.57
                                  %
                                  
                                  
                                  0.04
                                  %
                                  
                                  
                                  0.61
                                  %
                                  
                                  
                                  0.09
                                  %





Non-Interest
Income  Non-interest income totaled $1.7 million for the three
months ended March 31, 2009, compared to $1.4 million during the same period in
2008.  For the nine months ended March 31, 2009, non-interest income
totaled $10.3 million compared to $4.5 million for the nine month period ended
March 31, 2008.  The following paragraphs discuss the principal
components of non-interest income and the primary reasons for the changes from
2008 to 2009.





Service Charges on Deposit
Accounts Service charges on deposits increased $60,000 to
$830,000 for the three month period ended March 31, 2009, as compared to the
same period in the previous year.  For the nine months ended March 31,
2009, service charges on deposit accounts totaled $2.9 million as compared to
$2.4 million for the nine months ended March 31, 2008.  The increase
was due to a higher level of overdraft and interchange fees collected on debit
card transactions.  The higher level of fees collected was primarily
due to a significant increase in the number of checking accounts opened over the
last year.





Service Charges on Commercial and
Consumer Loans   Service charges on commercial and
consumer loans decreased $15,000 to $43,000 for the three month period ended
March 31, 2009, as compared to the same period in the previous
year.  For the nine months ended March 31, 2009, service charges on
loans decreased $155,000 to $123,000.  The decrease was primarily due
to a reduction in the collection of prepayment penalties on commercial and
commercial real estate loans during the current periods as compared to the
previous periods.





Gain of Sale of Bank BranchesOn December 15, 2008, the Bank completed the sale of its Grinnell, Iowa,
branch office to Lincoln Savings Bank. As a result of this transaction, the Bank
recognized a gain on sale of $5.6 million.





Mortgage Banking
Revenue   Mortgage banking revenue consists of gain on
sale, collection of loan fees, and mortgage servicing
income.  Mortgage banking revenue increased to $352,000 for the three
months ended March 31, 2009, from $148,000 for the three months ended March 31,
2008.  For the nine months ended March 31, 2009, mortgage banking
revenue increased to $599,000 from $519,000 for the nine months ended March 31,
2008.  The change in revenue is attributable to an increase in fixed
rate mortgage origination volumes due to the overall decline in market interest
rates.  In addition, during the most recent quarter, the Company sold
approximately $13.0 million of agency conforming mortgage loans at a gain of
approximately $100,000.  Subsequent to the quarter end, the Company
was informed that, due to the Company’s capital levels, it was suspended from
selling loans to FNMA. Management believes the suspension would be lifted when
the Company regains “well capitalized” status.  The Company began to
sell loans to another investor and is in the process of adding additional
investors.  As a result, management believes the suspension from
selling loans to FNMA will not have a significant impact on operations or future
revenue.


24


Earnings from Bank Owned Life
InsuranceEarnings from bank owned life insurance
increased $8,000 to $147,000 for the three months ended March 31,
2009.  For the nine months ended March 31, 2009, earnings for bank
owned life insurance increased $25,000 to $439,000 from $414,000 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 increased $32,000 to $307,000 during
the three month period ended March 31, 2009, as compared to the same period in
the previous year.  For the nine months ended March 31, 2009, other
income declined to $762,000 from $834,000 for the nine months ended March 31,
2008.  The differences between the two periods were primarily due to
changes in the sales of fixed annuities and mutual funds.




Non-Interest
Expense  Non-interest expense for the three months ended March
31, 2009, was $4.9 million compared to $5.2 million for the three months ended
March 31, 2008.  For the nine months ended March 31, 2009,
non-interest expense totaled $15.5 million compared to $15.2 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 2008 to 2009.





Personnel
Expense    Compensation and employee benefit expense
was $2.4 million for the three months ended March 31, 2009, compared to $2.9
million for the three months ended March 31, 2008.  For the nine
months ended March 31, 2009, compensation and employee benefits decreased to
$7.7 million compared to $8.6 million for the nine months ended March 31,
2008.  The decrease in compensation and benefit expense was primarily
due to the sale of the Grinnell, Iowa branch and the reorganization plan that
the Company implemented in the previous quarter and continued during the current
quarter.





Restructuring
Costs  In order to reduce non-interest expense, the Company
implemented a reorganization plan that reduced the full time equivalent
employees to 149 at March 31, 2009, as compared to 196 in the previous year. The
decrease in full time equivalent employees also includes the Grinnell, Iowa
branch staff which consisted of eight full time equivalent
employees.  Management anticipates a savings of approximately $2.5
million a year.  One time costs associated with that reorganization
plan were $206,000 and $708,000 for the three and nine months ended March 31,
2009, respectively.





Office Property and
Equipment   Office property and equipment expense
increased $20,000 to $808,000 for the three months ended March 31, 2009, as
compared to the same period in the previous year.  The increase is
attributed to expenses associated with the reconfiguration of some of the
Company’s office space as a result of the Company’s reorganization. For the nine
months ended March 31, 2009 and 2008, office property and equipment expense
totaled $2.2 million as compared to $2.3 million for the nine months ending
March 31, 2008.  The decrease in office, property and equipment
expense was due to less depreciation expense as a result of the sale of the
Company’s Grinnell, Iowa branch.





Data Processing, ATM and Debit Card
Transaction Costs, and Other Item Processing ExpenseData processing, ATM
and debit card transaction costs decreased to $271,000 for the three months
ended March 31, 2009, from $336,000 for the three months ended March 31,
2008.  The decrease in expense for was attributed to a decline in
software and hardware maintenance costs as compared to the same time period in
the previous year.  For the nine months ended March 31, 2009 data
processing, ATM and debit card transaction costs totaled $1.2 million as
compared to $1.0 million for the nine months ended March 31,
2008.  This increase was partially due to the increased number of new
checking accounts opened during the last twelve months as compared to the
previous year.  In addition, the Company has been successful at
increasing the number of internet and mobile banking users and the number of
debit card transactions has increased.  As a result, processing costs
to service these channels have increased as compared to the previous
year.





Professional, Insurance, and
RegulatoryProfessional, insurance and regulatory
expense for the three months ended March 31, 2009, increased to $451,000 from
$282,000 for the same period a year ago.  For the nine months ended
March 31, 2009, professional, insurance, and regulatory expense increased
$480,000 to $1.3 million as compared to the nine months ended March 31,
2008.  The increase in expense for both periods is primarily due to
costs incurred from clarifications of “mark-to-market” or “fair value”
accounting rules and consulting costs associated with the sale of the Grinnell,
Iowa branch.  Subsequent to the quarter end, the Company renewed its
directors and officers


25


insurance
policy (D&O) insurance.  The cost of this policy has increased
from approximately $30,000 per quarter to approximately $180,000 per quarter
commencing during the Company’s fourth fiscal quarter.





Advertising, Donations, and Public
RelationsExpenses related to advertising, donations and
public relations decreased to $169,000 for the three months ended March 31,
2009, from $288,000 for the three months ended March 31, 2008.  For
the nine months ended March 31, 2009, advertising, donations and public
relations expense decreased to $738,000 from $1.1 million for the nine months
ended March 31, 2008.  The decrease in expenses was due to
non-recurring costs related to the Bank’s name change that occurred in the
previous year.  In addition, during the quarter, the Company changed
its focus to a lower cost; more individual customer focused advertising campaign
as compared to a higher cost, mass marketing effort.





Communication, Postage, and Office
SuppliesCommunications, postage, and office supplies
expense decreased by $16,000 from $212,000 for the three months ended March 31,
2008, to $196,000 for the three months ended March 31, 2009.  For the
nine months ended March 31, 2009, communication postage and office supply
expense decreased to $597,000 as compared to $647,000 for the three months ended
March 31, 2008.   These decreases were primarily due to costs
associated with the Bank’s name change that occurred in the previous
year.  In addition, the Company has been successful in switching the
delivery of account statements from paper to electronic delivery.





Loss on other real estate
ownedLoss on other real estate owned decreased to
$149,000 for the three months ended March 31, 2009, compared to $187,000 for the
three months ended March 31, 2008.  For the nine months ended March
31, 2009, loss on other real estate owned totaled $490,000 compared to $256,000
for the nine months ended March 31, 2008.  The increase in expense
during the fiscal year was due to an overall decline in real estate market
values on properties the Company has received in foreclosure.





Other Non-Interest
ExpenseOther non-interest expense increased from
$164,000 for the three months ended March 31, 2008, to $218,000 for the three
months ended March 31, 2009.  For the nine months ended March 31,
2009, other expense increased to $657,000 compared to $554,000 for the nine
months ended March 31, 2008.  This increase was due to costs incurred
by the Company to dispose of foreclosed property.





“Other than Temporary”
ImpairmentFor
the three months ended March 31, 2009, the Company recognized $17.0 million in
total “other than temporary” impairment charges of which $5.2 million was
recognized as OTTI losses recorded through earnings.  For the nine
months ended March 31, 2009, the Company recognized $30.1 million in total
“other than temporary” impairment charges of which $7.0 million was recognized
as OTTI losses recorded through earnings.  The Company engaged
independent consulting firms to assist in the valuation of the Company’s trust
preferred securities and collateralized mortgage obligations.  Based
on the consulting firm’s findings, management determined the Company’s trust
preferred CDO securities had an aggregate fair value of $12.5 million at March
31, 2009.  Seven of the securities were determined to have OTTI write
downs that were recognized in earnings. Two of the seven securities with an
original par value of $4.4 million incurred an OTTI charge of $1.2 million for
the three months ended March 31, 2009.  The Company does not have the
ability and intent to hold these securities because they exceed the Bank’s
loans-to-one-borrower limit and, pursuant to an agreement with the Bank’s
federal regulator, will be sold when liquidity returns to the market. The
remaining five of the seven securities with an original par value of $17.0
million had OTTI write down of $2.7 million for the three months ended March 31,
2009.  To determine the write down on these securities, the investment
consulting firm projected cash flows for each collateralized debt obligation and
discounted the cash flows at the original purchased yield.  The
consulting firm analyzed each underlying bank or insurance company and assigned
a probability of default.  Those default assumptions were then used to
determine the projected cash flow of the security.  If the net present
value of the cash flows was less than the cost basis of the security, the
difference is considered credit related and is recorded through
earnings.





Three of
the Company’s collateralized mortgage obligations with an original par value of
$14.0 million were also determined to be “other than temporarily”
impaired.  Total “other than temporary” impairment on these securities
as of March 31, 2009, was approximately $3.1 million. To determine the write
down on these securities, management engaged a third party investment advisor to
project cash flows for each mortgage backed security.  To determine
the write down on these securities, the investment consulting firm projected
cash flows for security and discounted the cash flows at the original purchased
yield.  If the net present value of the cash flows was less than the
cost basis of the security, the difference is considered credit related and is
recorded through earnings.  The “other than temporary” loss related to
credit and recognized in earnings totaled $1.3 million.


26


The
effects of the trust preferred CDO securities on the Company’s earnings and
capital position will continue to be influenced by market conditions and other
factors, including specific issuer credit deterioration, deferral and default
rates of specific issuer financial institutions, failure or government seizure
of the underlying financial institution, rating agency actions, and the prices
at which observable market transactions in these types of securities
occur.  While management closely monitors the performance of the
Company’s trust preferred CDO securities and does not intend to sell these
securities prior to the recovery in value, the current market environment
significantly limits the Company’s ability to mitigate its exposure to future
OTTI write downs and price changes in these securities.  Accordingly,
if market conditions deteriorate further, it is likely that the Company would
then determine additional credit write downs on the Company’s trust preferred
CDO securities.  Such a determination would have a further material
adverse impact on the Company’s earnings, shareholders’ equity and regulatory
capital.





The
effects of the collateralized mortgage obligations on the Company’s earnings and
capital position will be influenced by market conditions and other factors,
including past due foreclosure and recovery rates of the underlying residential
mortgages in the mortgage backed security.  If these conditions
deteriorate further, it is likely that the Company would then determine
additional credit write downs on the Company’s residential mortgage backed
securities.  Such a determination would have a further material
adverse impact on the Company’s earnings, shareholders’ equity and regulatory
capital.





Income
TaxBenefitIncome tax benefit for the three months ended March 31, 2009, was $1.9
million compared to $1.2 million for the three months ended March 31,
2008.   For the nine months ended March 31, 2009, income tax
benefit was $913,000 compared to $2.3 million for the nine months ended March
31, 2008.  The income tax benefit for the three months ended March 31,
2009 and 2008 represented 38% and 40% of pre-tax loss,
respectively.  The income tax benefit for the nine months ended March
31, 2009 and 2008, represented 50% and 41% of pre-tax loss,
respectively.  Differences in the income tax benefit as a percentage
of the pre-tax loss were attributable to the level of non-taxable income as
compared to the Company’s loss before the income tax benefit.








Financial
Condition





Overview
Total assets decreased by $66.4 million to $498.6 million at March 31, 2009,
from $565.0 million at June 30, 2008.  On December 15, 2008, the
Company completed the sale of its Grinnell, Iowa branch (“Branch”) to Lincoln
Savings Bank.  Lincoln Savings Bank purchased at book value: the
Branch, including equipment, furniture and fixtures associated with the Branch;
the loans associated with the Branch; and the Bank's ATM located at Grinnell
College.  As of the closing date these assets totaled $27.4
million.  In addition, Lincoln Savings Bank assumed certain
liabilities; primarily, the deposits housed at the Branch, and paid a 10.58%
premium, or $5.6 million, on $52.7 million in deposits.  As of the
closing date, the liabilities assumed by Lincoln Savings Bank totaled $53.7
million.   In addition, during the most recent quarter, the
Company sold approximately $13.0 million of agency conforming residential
loans.





Securities
Available-for-Sale and Held-for-InvestmentTotal
securities decreased by $37.8 million to $53.4 million at March 31, 2009, from
$91.2 million at June 30, 2008.  The decrease was primarily due to the
decline in market value of the Company’s collateralized mortgage obligations
(“CMOs”) and trust preferred Collateralized Debt Obligations
(“CDOs”).  Trust preferred CDOs represent a participation interest in
a pool of trust preferred debt or subordinated notes of banks, thrifts,
insurance companies and REITS.  As of March 31, 2009, the collateral
of the CDOs purchased by the Company are approximately 76% bank, 24% insurance
companies, and less than one percent was either homebuilders or real estate
investment trusts (“REITS”).  Investments were generally rated “A” or
“triple-B” by independent rating agencies at the time of purchase.





Federal
law and regulation generally permit the Bank to invest up to 35% of
its assets in commercial paper and corporate debt securities. Notwithstanding
this investment limit, guidance issued by the Office of Thrift Supervision
("OTS") imposes lower limits on such investments. 
The Company was advised by the OTS that the aggregate
amount of the Company's portfolio of trust-preferred pooled securities
exceeds OTS regulatory guidelines. The Company filed a plan with the OTS on
May 15, 2008, to come into compliance with such regulatory guidelines and
the timeframe for doing so.  As part of such plan, the Company asked
the OTS for approval to allow the Company to retain such securities,
notwithstanding the regulatory guidelines. On September 25, 2008, the Company
received a letter from the OTS that stated the OTS had no objection to the
Company’s plan.  However, the OTS did conclude two bonds were in
excess of the OTS loans to one borrower limit (LTOB).  As a result,
the Company


27


classified
the portion over the LTOB limit as “other than temporarily impaired” at
September 30, 2008 due to a lack of ability by the Company to hold these
securities to maturity and/or forecasted recovery.  The Company
intends to sell these two securities over the LTOB limit when liquidity returns
to the market place.  Please refer to “Results of Operations – Other
than Temporary Impairment,” above, and “Financial Condition – Stockholders’
Equity,” below, for additional discussion relating to the Company’s
trust-preferred securities (“TPSs”) portfolio.





The table
below sets forth information regarding the Company’s securities that were
considered “other than temporary” impaired at March 31, 2009.





Issuer
                                            
                                            Original
      rating
                                              (3)
                                            
                                            Current
      rating
                                              (3)
                                            Payment
                                              in
      kind
                                              (1)
                                            
                                            Amortized
                                              cost
                                            
                                            
                                            Market
      value
                                            
                                            
                                            Unrealized
                                              (loss)
                                            
                                            
                                            Total
      other-
                                              than-
                                              temporary
                                              impairment
                                              losses
                                            
                                            
                                            Impairment
                                              losses
                                              recognized
      in
                                              earningsFor
      the nine months ended
                                              March
      31, 2009TPS
      considered "other than temporarily" impaired:Security
      A
                                            
                                            Baa2/BBB
                                            
                                            Ca/CC
                                            No
                                            
                                            $
                                            795,826
                                            
                                            
                                            $
                                            269,200
                                            
                                            
                                            $
                                            (526,626
                                            )
                                            
                                            $
                                            380,800
                                            
                                            
                                            $
                                            219,816Security
      B
                                            
                                            A3/A-
                                            
                                            Ca/CC
                                            Yes
                                            
                                            
                                            7,300,000
                                            
                                            
                                            
                                            2,012,252
                                            
                                            
                                            
                                            (5,287,748
                                            )
                                            
                                            
                                            3,626,278
                                            
                                            
                                            
                                            -Security
      B (2)
                                            
                                            A3/A-
                                            
                                            Ca/CC
                                            Yes
                                            
                                            
                                            432,157
                                            
                                            
                                            
                                            432,157
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            652,036Security
      C
                                            
                                            A3/A-
                                            
                                            Ca/CC
                                            Yes
                                            
                                            
                                            7,300,000
                                            
                                            
                                            
                                            1,859,768
                                            
                                            
                                            
                                            (5,440,232
                                            )
                                            
                                            
                                            3,667,800
                                            
                                            
                                            
                                            -Security
      C (2)
                                            
                                            A3/A-
                                            
                                            Ca/CC
                                            Yes
                                            
                                            
                                            722,431
                                            
                                            
                                            
                                            722,431
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,087,532Security
      D
                                            
                                            NR/BBB
                                            
                                            NR/C
                                            Yes
                                            
                                            
                                            822,325
                                            
                                            
                                            
                                            112,361
                                            
                                            
                                            
                                            (709,964
                                            )
                                            
                                            
                                            461,726
                                            
                                            
                                            
                                            99,536Security
      E
                                            
                                            NR/BBB
                                            
                                            NR/C
                                            Yes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,786,185
                                            
                                            
                                            
                                            2,971,584Security
      F
                                            
                                            NR/BBB
                                            
                                            NR/C
                                            Yes
                                            
                                            
                                            1,011,731
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,011,731
                                            )
                                            
                                            
                                            625,000
                                            
                                            
                                            
                                            39,810Security
      O
                                            
                                            NR/BBB
                                            
                                            NR/C
                                            Yes
                                            
                                            
                                            4,474,298
                                            
                                            
                                            
                                            157,617
                                            
                                            
                                            
                                            (4,316,681
                                            )
                                            
                                            
                                            2,742,383
                                            
                                            
                                            
                                            610,132Security
      I
                                            
                                            A2/A
                                            
                                            Ca/CCC
                                            No
                                            
                                            
                                            5,945,411
                                            
                                            
                                            
                                            1,842,913
                                            
                                            
                                            
                                            (4,102,498
                                            )
                                            
                                            
                                            2,771,087
                                            
                                            
                                            
                                            -Security
      J
                                            
                                            A2/A
                                            
                                            Ca/CC
                                            Yes
                                            
                                            
                                            1,992,666
                                            
                                            
                                            
                                            554,229
                                            
                                            
                                            
                                            (1,438,437
                                            )
                                            
                                            
                                            904,724
                                            
                                            
                                            
                                            -Security
      K
                                            
                                            A3/A-
                                            
                                            Ca/C
                                            Yes
                                            
                                            
                                            1,999,247
                                            
                                            
                                            
                                            491,112
                                            
                                            
                                            
                                            (1,508,135
                                            )
                                            
                                            
                                            758,581
                                            
                                            
                                            
                                            -Security
      L
                                            
                                            NR/BBB
                                            
                                            NR/C
                                            Yes
                                            
                                            
                                            5,208,647
                                            
                                            
                                            
                                            327,874
                                            
                                            
                                            
                                            (4,880,773
                                            )
                                            
                                            
                                            2,412,545
                                            
                                            
                                            
                                            -Security
      M
                                            
                                            A3/A-
                                            
                                            Caa3/CC
                                            No
                                            
                                            
                                            4,934,514
                                            
                                            
                                            
                                            1,426,568
                                            
                                            
                                            
                                            (3,507,946
                                            )
                                            
                                            
                                            1,949,600
                                            
                                            
                                            
                                            -Security
      N
                                            
                                            NR/BBB
                                            
                                            NR/C
                                            Yes
                                            
                                            
                                            3,032,092
                                            
                                            
                                            
                                            283,501
                                            
                                            
                                            
                                            (2,748,591
                                            )
                                            
                                            
                                            1,449,059
                                            
                                            
                                            
                                            -Security
      P
                                            
                                            A3/A-
                                            
                                            Ca/C
                                            No
                                            
                                            
                                            6,000,000
                                            
                                            
                                            
                                            2,016,000
                                            
                                            
                                            
                                            (3,984,000
                                            )
                                            
                                            
                                            2,394,000
                                            
                                            
                                            
                                            -Total
      TPS "other than temporarily" impaired
                                            
                                            
                                            51,971,345
                                            
                                            
                                            
                                            12,507,983
                                            
                                            
                                            
                                            (39,463,362
                                            )
                                            
                                            
                                            26,929,768
                                            
                                            
                                            
                                            5,680,446CMO
      considered "other than temporarily" impaired:Security
      S (4)
                                            
                                            AAA/AAA
                                            
                                            B/B
                                            N/A
                                            
                                            
                                            3,263,516
                                            
                                            
                                            
                                            2,142,537
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,050,155
                                            
                                            
                                            
                                            1,109,596Security
      T (5)
                                            
                                            Aaa/AAA
                                            
                                            Caa1/BBB
                                            N/A
                                            
                                            
                                            2,997,540
                                            
                                            
                                            
                                            1,913,125
                                            
                                            
                                            
                                            (862,442
                                            )
                                            
                                            
                                            1,279,567
                                            
                                            
                                            
                                            239,803Security
      U (5)
                                            
                                            AAA/AAA
                                            
                                            Ba1/A
                                            N/A
                                            
                                            
                                            4,815,719
                                            
                                            
                                            
                                            4,102,344
                                            
                                            
                                            
                                            (713,376
                                            )
                                            
                                            
                                            854,815
                                            
                                            
                                            
                                            -Total
      CMO "other than temporarily" impaired
                                            
                                            
                                            11,076,775
                                            
                                            
                                            
                                            8,158,006
                                            
                                            
                                            
                                            (1,575,818
                                            )
                                            
                                            
                                            3,184,537
                                            
                                            
                                            
                                            1,349,399Total
      "other than temporarily impaired" securities
                                            
                                            $
                                            63,048,120
                                            
                                            
                                            $
                                            20,665,989
                                            
                                            
                                            $
                                            (41,039,180
                                            )
                                            
                                            $
                                            30,114,305
                                            
                                            
                                            $
                                            7,029,845




(1)
      The structure of these securities allows for payment in kind or the
      capitalization of interest to principal.(2)
      Portion of the security that is over the Bank's Loans to One Borrower
      Limit.(3)
      Ratings presented are Moodys/Fitch except for Securities S, T and U which
      are separately noted.(4)
      Ratings presented are S&P/Fitch.(5)
      Ratings presented are
Moodys/S&P.




The investment portfolio is evaluated
quarterly for other-than-temporary declines in the market value of individual
investment securities.  Consideration is given to the length of time and
the extent to which fair value has been less than cost, the financial condition
and near term prospects of the issuer, the investment rating of the security,
the expected cash flows, the intent and ability of the Company to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in fair value, and other factors.  Generally, no one factor is considered
presumptive or determinative, but rather all factors are considered based on
their relative weighting.  As these factors and considerations change, the
assessment of other-than-temporary impairment is reconsidered, which may result
in additional securities being considered “other than temporarily” impaired in
future periods.





The
effects of the trust preferred CDO securities on the Company’s earnings and
capital position will continue to be influenced by market conditions and other
factors, including specific issuer credit deterioration, deferral
and


28


default
rates of specific issuer financial institutions, failure or government seizure
of the underlying financial institution, rating agency actions, and the prices
at which observable market transactions in these types of securities
occur.  While management closely monitors the performance of the
Company’s trust preferred CDO securities and does not intend to sell these
securities prior to the recovery in value, the current market environment
significantly limits the Company’s ability to mitigate its exposure to future
OTTI write downs and price changes in these securities.  Accordingly,
if market conditions deteriorate further, it is likely that the Company would
then determine additional credit write downs on the Company’s trust preferred
CDO securities.  Such a determination would have a further material
adverse impact on the Company’s earnings, shareholders’ equity and regulatory
capital.





The
effects of the CMOs on the Company’s earnings and capital position will be
influenced by market conditions and other factors, including past due
foreclosure and recovery rates of the underlying residential mortgages in the
mortgage backed security.  If these conditions deteriorate further, it
is likely that the Company would then determine additional credit write downs on
the Company’s residential mortgage backed securities.  Such a
determination would have a further material adverse impact on the Company’s
earnings, shareholders’ equity and regulatory capital.





Loans
Receivable  Loans receivable decreased by $58.1million to
$355.6 million as of March 31, 2009, from $413.7 million at June 30,
2008.  The decrease is partially attributable to the sale of the
branch in Grinnell, Iowa and the sale of approximately $13.0 million of agency
conforming residential loans.    The following table sets
forth information regarding the Company’s loan portfolio, by type of loan, on
the dates indicated.





March
      31, 2009
                                    
                                    
                                    June
      30, 2008(Dollars
      in Thousands)
                                    
                                    Amount
                                    
                                    
                                    %
                                    
                                    
                                    Amount
                                    
                                    
                                    %One-
      to four-family residential (1)
                                    
                                    $
                                    76,322
                                    
                                    
                                    
                                    21.84
                                    
                                    
                                    $
                                    111,933
                                    
                                    
                                    
                                    27.45Multi-family
      residential (1)
                                    
                                    
                                    31,874
                                    
                                    
                                    
                                    9.12
                                    
                                    
                                    
                                    40,451
                                    
                                    
                                    
                                    9.92Non-residential
      real estate (1)
                                    
                                    
                                    113,105
                                    
                                    
                                    
                                    32.38
                                    
                                    
                                    
                                    132,794
                                    
                                    
                                    
                                    32.56Commercial
      business loans
                                    
                                    
                                    54,728
                                    
                                    
                                    
                                    15.67
                                    
                                    
                                    
                                    62,217
                                    
                                    
                                    
                                    15.26Home
      equity and second mortgage loans
                                    
                                    
                                    31,518
                                    
                                    
                                    
                                    9.02
                                    
                                    
                                    
                                    33,003
                                    
                                    
                                    
                                    8.09Auto
      loans
                                    
                                    
                                    4,676
                                    
                                    
                                    
                                    1.34
                                    
                                    
                                    
                                    4,648
                                    
                                    
                                    
                                    1.14Education
      loans
                                    
                                    
                                    7,955
                                    
                                    
                                    
                                    2.28
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Other
      non-mortgage loans (2)
                                    
                                    
                                    34,966
                                    
                                    
                                    
                                    10.01
                                    
                                    
                                    
                                    28,700
                                    
                                    
                                    
                                    7.04Loans
      in process, unearned discounts and premiums,and
      net deferred loan fees and costs
                                    
                                    
                                    423
                                    
                                    
                                    
                                    0.12
                                    
                                    
                                    
                                    (33
                                    )
                                    
                                    
                                    (0.01
                                    )Subtotal
                                    
                                    
                                    355,567
                                    
                                    
                                    
                                    101.78
                                    
                                    
                                    
                                    413,713
                                    
                                    
                                    
                                    101.45Allowance
      for  loan losses
                                    
                                    
                                    (6,231
                                    )
                                    
                                    
                                    (1.78
                                    )
                                    
                                    
                                    (5,894
                                    )
                                    
                                    
                                    (1.45
                                    )Total
      loans, net
                                    
                                    $
                                    349,336
                                    
                                    
                                    
                                    100.00
                                    
                                    
                                    $
                                    407,819
                                    
                                    
                                    
                                    100.00(1)
      Includes construction loans.(2)
      Includes other secured and unsecured personal loans.




Office property
and equipment  Office property and equipment decreased from
$18.8 million at June 30, 2008, to $16.3 million at March 31,
2009.  The decrease is primarily attributable to the aforementioned
sale of the branch in Grinnell, Iowa and depreciation of the Company’s office
equipment.





FHLB
Stock   The Company’s FHLB stock increased from $4.3
million at June 30, 2008, to $5.9 million at March 31, 2009.  The
increase was a direct result of the increase in FHLB advances, which increases
the level of FHLB stock required to be held.  The purchase of stock is
required in order to receive advances.  FHLB stock is historically
purchased and sold at par. On May 14, 2009, the Board of Directors of the FHLB –
Des Moines approved a first quarter 2009 dividend at an annualized rate of 1.0
percent.  The dividend was paid on May 22, 2009.





Foreclosed and
Repossessed AssetsForeclosed and repossessed assets increased
to $7.9 million at March 31, 2009 compared to $0.9 million at June 30,
2008.  The increase was primarily due to two large commercial real
estate relationships consisting of five different projects entering into
foreclosure proceedings.  However, the amount of foreclosed and
repossessed assets decreased from the prior quarter.   At
December 31, 2008, foreclosed and


29


repossessed
assets were $8.6 million.  Please refer to “Financial Condition -
Non-Performing and Classified Assets” for more detail.





Deferred Tax
Asset The Company’s deferred tax asset increased from $9.9
million at June 30, 2008 to $19.4 million at March 31, 2009.  The
increase was primarily due to deferred tax assets related to unrealized losses
on available-for-sale securities.





Deposit
Liabilities   Deposit liabilities decreased by $59.3
million, to $387.3 million at March 31, 2009, from $446.6 million at June 30,
2008.  The decrease in deposits was largely due to the aforementioned
sale of the branch in Grinnell, Iowa.   However, deposit
liabilities increased during the most recent quarter.  As of December
31, 2008, deposit liabilities were $369.7 million.  The increase in
deposit liabilities during the quarter was attributable to a renewed focus on
small business and relationship building.




March
      31, 2009
                                  
                                  
                                  June
      30, 2008(Dollars
      in Thousands)
                                  
                                  Amount
                                  
                                  
                                  %
                                  
                                  
                                  Amount
                                  
                                  
                                  %Non-interest-bearing
      checking
                                  
                                  $
                                  45,422
                                  
                                  
                                  
                                  11.73
                                  
                                  
                                  $
                                  48,490
                                  
                                  
                                  
                                  10.86Interest-bearing
      checking accounts
                                  
                                  
                                  70,479
                                  
                                  
                                  
                                  18.20
                                  
                                  
                                  
                                  98,410
                                  
                                  
                                  
                                  22.04Money
      market accounts
                                  
                                  
                                  39,286
                                  
                                  
                                  
                                  10.14
                                  
                                  
                                  
                                  54,539
                                  
                                  
                                  
                                  12.21Savings
      accounts
                                  
                                  
                                  22,796
                                  
                                  
                                  
                                  5.89
                                  
                                  
                                  
                                  24,959
                                  
                                  
                                  
                                  5.59Certificates
      of deposit
                                  
                                  
                                  209,352
                                  
                                  
                                  
                                  54.04
                                  
                                  
                                  
                                  220,170
                                  
                                  
                                  
                                  49.30Total
      deposits
                                  
                                  $
                                  387,335
                                  
                                  
                                  
                                  100.00
                                  
                                  
                                  $
                                  446,568
                                  
                                  
                                  
                                  100.00





FHLB Advances and
Other BorrowingsThe Company’s FHLB advances and other
borrowings increased $9.7 million, to $91.3 million at March 31, 2009, from
$81.6 million at June 30, 2008.  The change was due to increased
borrowings to assist in the funding of Grinnell, Iowa branch sale.





Stockholders’
Equity Total stockholders’ equity decreased by $16.6 million from $32.0
million at June 30, 2008, to $15.4 million at March 31, 2009.  The
decrease was primarily attributable to an increase in accumulated other
comprehensive loss.  The increase in accumulated other comprehensive
loss was caused by a decline in the fair value of the Company’s TPS portfolio
and CMO 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 (less than 1%).  The Company’s TPS securities are
secured through a combination of subordination from lower classes within the TPS
structures, as well as over-collateralization of available future contractual
cash flows.





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





Non-Performing
and Classified AssetsNon-performing assets at March 31,
2009, increased to $29.6 million as compared to $18.6 million at June 30,
2008.  Non-performing assets as a percentage of total assets increased
from 3.30% at June 30, 2008, to 5.92% as of March 31, 2009.  The
increase in non-performing assets is primarily due to a $7.5 million loan
originated to an investor group for the purchase and renovation of an existing
office building into condominiums in Des Moines that was placed on non-accrual
during the current quarter.  In addition, a $3.1 million loan to a
real estate holding company for a formal wear manufacturer and distributor was
placed on non-accrual during the current quarter.





The
following table sets forth information regarding non-accrual loans and other
non-performing assets at the dates indicated.


30


(Dollars
      in Thousands)
                          
                          March
      31, 2009
                          
                          
                          June
      30, 2008Loans
      accounted for on a non-accrual basis:One-
      to four-family residential
                          
                          $
                          1,329
                          
                          
                          $
                          1,167Multi-family
      residential
                          
                          
                          1,613
                          
                          
                          
                          3,230Non-residential
      real estate
                          
                          
                          16,645
                          
                          
                          
                          11,825Commercial
      business
                          
                          
                          1,795
                          
                          
                          
                          1,428Consumer
                          
                          
                          282
                          
                          
                          
                          99Total
      non-performing loans
                          
                          
                          21,664
                          
                          
                          
                          17,749Foreclosed
      and repossessed assets
                          
                          
                          7,927
                          
                          
                          
                          873Total
      non-performing assets
                          
                          $
                          29,591
                          
                          
                          
                          18,622Restructured
      loans not included in other non-performing categories
above
                          
                          $
                          5,362
                          
                          
                          $
                          5,206Non-performing
      loans as a percentage of total loans
                          
                          
                          6.09
                          %
                          
                          
                          4.29
                          %Non-performing
      assets as a percentage of total assets
                          
                          
                          5.93
                          %
                          
                          
                          3.30
                          %





As of
March 31, 2009, the Company’s adversely classified assets totaled $37.2 million
(which includes non-performing loans in the above table) compared to $24.2
million, as of June 30, 2008.  Adversely classified assets include
loans rated “Substandard”, “Doubtful”, or “Loss”, as well as foreclosed and
repossessed assets.  Although the Company’s classified assets
increased, management believes the allowance for loan loss was
adequate.





The
Company was closely monitoring nine classified assets totaling $31.5 million
that are included in the $37.2 million total.  These loan
relationships were classified “Substandard” as of that date.  The
following paragraphs contain a brief discussion of each
relationship.





In 2005,
the Company 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 $7.5
million.  Condominium sales have been slow and the project has not met
its sales targets.  Management recently started foreclosure action on
this loan and has placed it on nonaccrual status.  This loan
relationship has been classified “Substandard.”   Management does
not anticipate a loss on this loan at this time.





The
Company originated a total of $8.5 million of loans to various real estate
projects in Des Moines, Iowa that had a common guarantor.  The
guarantor has experienced financial difficulties.  As a result, cash
flow was not sufficient to service the debt.  As a result, the Company
foreclosed on all properties and the relationship was transferred to foreclosed
and repossessed assets in September 2008.  Some properties have been
sold which has brought the balance down to $6.8 million.  Management
does not anticipate a loss on this loan at this time.





In
October 2003, the Company purchased a $3.1 million loan.  The borrower
is a real estate holding company for a formal wear manufacturer and
distributor.  The Company recently started foreclosure action against
the borrower.  As a result, 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.





In
October 2007, the Company originated loans totaling $3.1 million for the
development of residential properties in Minnesota.  The project is
behind schedule and a recent appraisal revealed a significant decrease in the
value of the project.  As a result, the loan was placed on non-accrual
and a currently has a specific allowance of $785,000.





In May
2007, the Company purchased a participation in a $33.0 million loan for
construction of a bio-diesel plant in south-eastern Nebraska.  The
current balance is $3.2 million is currently in foreclosure
proceedings.  Management has classified this loan as “Substandard” and
it was placed on non-accrual status.  Management does not anticipate a
loss on this loan at this time.


31





In 2005,
the Company purchased a participation in a $60.0 million loan for a residential
condominium and hotel project in Minneapolis, MN.  The current balance
is $3.1 million. Over 60% of the condominiums in the project have contracts to
sell but have been unable to close due to the condominium purchasers being
unable to obtain “jumbo” loan financing.  As a result, the condominium
project is unable to cash flow and has strained the cash flow of the entire
project.  As a result, management has classified this loan as
“Substandard”.  Management does not anticipate a loss on this loan at
this time.





In
2007, the Company originated a $2.4 million loan for the construction of
commercial properties.  The project is behind schedule due to numerous
weather related delays.  Management has classified this loan
“Substandard” and it is on non-accrual status.  The Company recently
received a new appraisal on the property.  The new appraisal supports
the current loan balance and would normally result in a zero specific
allowance.  However, due to the uncertainty of this project,
management decided to lower the specific allowance to $340,000 from $700,000 on
this loan relationship.





In August
2003, the Company purchased a loan to a garage door company in
Colorado.  The balance at March 31, 2009 was $1.6
million.  Cash flow from the business is not sufficient to service the
debt.  The guarantors have injected cash into the business to keep the
loan current.  As a result, management has classified this loan as
“Substandard”.  The loan remains on accrual
status.   Management does not anticipate a loss on this loan at
this time.





In 2003,
the Company originated a $1.3 million loan for development of land in Des
Moines, Iowa.  The current principal balance of this loan is $0.7
million.  The Company foreclosed on all properties and the
relationship was transferred to foreclosed and repossessed assets.





Liquidity
and Capital


On
March 27, 2009, Moody’s Investor Service downgraded seven of the Company’s
fourteen trust preferred CDO securities to below investment grade.  On
April 9, 2009, Fitch Ratings downgraded the remaining seven trust preferred CDO
securities to below investment grade.  As a result of these
downgrades, the Bank is required to apply a higher “risk weighting formula” to
these securities when calculating its regulatory capital ratios.  That
formula calls for increasing the Bank’s risk-weighted assets for these
securities to $433.8 million, well above the $49.7 million in par value held by
the Company.  Upon applying the higher level of risk weighted assets
to the Bank’s regulatory capital ratios, the calculated ratios as of March 31,
2009 were as follows:  Tier I leverage ratio of 7.85% (compared to an
adequately capitalized threshold of 4.00%); a Tier I risk-based capital ratio of
5.01% (compared to an adequately capitalized threshold of 4.00%); and a total
risk-based capital ratio of 5.52% (compared to an adequately capitalized
threshold of 8.00%).  As the Bank is less than adequately capitalized
(when measured against the total risk-based capital requirement), the Bank is
subject to a higher level of regulatory oversight and supervision.





In light
of these developments, the Company received a formal regulatory letter on May
10, 2009.  The letter requires the Bank to increase its capital to
return to adequately capitalized status and file a capital restoration plan by
June 15, 2009.   In addition, the Company is subject to a number
of restrictions including but not limited to:


·
            The
      Company cannot make or pay any capital distributions without prior written
      approval of the OTS.


·
            The
      Company’s average total assets cannot in any calendar quarter exceed
      average assets during the previous quarter without prior written approval
      of the OTS.


·
            The
      Company may not acquire any interest in any company or insured depository
      institution.


·
            The
      Company may not accept any new brokered
deposit.


·
            The
      Company may not pay any bonus to a senior executive officer or provide
      compensation to any senior executive officer exceeding that officers
      average rate of compensation (excluding bonuses, stock options, and profit
      sharing) without written approval from the
OTS.





The
Company also believes a formal regulatory action is
imminent.   This action would formalize the restrictions stated
above into a required board resolution. Any additional formal or
informal regulatory action may have a material adverse impact on the
Company.


32





As
part of the plan to improve capital adequacy, the Company has engaged Sandler
O’Neill & Partners, an investment banking firm, to advise the Company with
respect to strategic alternatives, including selected asset and branch
sales.  The Company also has engaged in substantive negotiations with
several private equity groups related to a potential equity investment in the
Company.  There can be no assurance that these discussions will result
in a transaction. In addition, an investment in the Company by one or more
private equity investors would result in substantial dilution to existing
stockholders of the Company.





The
Bank's actual and required capital amounts as of March 31, 2009, and June 30,
2008, were as follows:




March
      31, 2009To
      Be WellCapitalized
      UnderFor
      Capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Prompt
      CorrectiveActual
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Adequacy
      Purposes
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Action
      ProvisionsAmount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  RatioDollars
      in ThousandsTangible
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  41,229
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.85
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  7,879
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  1.50
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -Tier
      1 leverage (core)
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,229
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.85
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  21,011
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  26,264
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.00
                                                                                                                                                                                                  %Tier
      1 risk-based capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,229
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.01
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  32,949
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  49,424
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  6.00Risk-based
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  45,486
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.52
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  65,898
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  8.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  82,373
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  10.00June
      30, 2008To
      Be WellCapitalized
      UnderFor
      Capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Prompt
      CorrectiveActual
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Adequacy
      Purposes
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Action
      ProvisionsAmount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Ratio
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  Amount
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  RatioDollars
      in ThousandsTangible
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  41,605
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.23
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  8,628
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  1.50
                                                                                                                                                                                                  %
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  -Tier
      1 leverage (core)
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,605
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  7.23
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  23,009
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  $
                                                                                                                                                                                                  28,761
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  5.00
                                                                                                                                                                                                  %Tier
      1 risk-based capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  41,605
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  8.94
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  18,617
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  4.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  27,925
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  6.00Risk-based
      capital
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  45,848
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  9.85
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  37,233
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  8.00
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  46,542
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  
                                                                                                                                                                                                  10.00




The
Company is also required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation.  The Company's primary sources of
liquidity are deposits obtained through its branch office network, borrowings
from the FHLB and other sources, amortization, maturity, and prepayment of
outstanding loans and investments, and sales of loans and other
assets.  During the nine months ended March 31, 2009, the Company used
these sources of funds to fund loan commitments, purchase loans, and cover
maturing liabilities and deposit withdrawals.  The Company had a total
of $42.0 million of loan commitments outstanding as of March 31,
2009.   In addition, at March 31, 2009, the Company had $135.5
million in certificates of deposit, $83.5 million in FHLB advances, and $3.6
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.  As of March 31, 2009, the Company had $16.9 million in
interest-bearing deposits in other financial institutions available for short
term liquidity needs.  In addition, the Company could sell securities
currently available-for-sale to generate cash if needed.  The Company
also believes it could adjust the rates it offers on certificates of deposit and
other deposits to retain current deposit customers and generate new deposits if
needed.  In addition to deposits, as of March 31, 2009, the company
had borrowing capacity at the Federal Home Loan Bank to borrow an additional
$23.0 million.


33


Management
anticipates that the FHLB will decrease the Company’s borrowing limit at the
FHLB from 25% of total assets to 20% of total assets (or approximately from
$124.6 million to $99.7 million).  As of March 31, 2009, the Company’s
has $91.3 million in borrowings with the FHLB.  As a result, this
development is not expected to have a near-term impact on the Company’s
operations.





Subsequent
to the quarter end, the Federal Reserve informed the Company that it would
require the Company to post $6.0 million in collateral in order to cover check
inclearings going through the Federal Reserve.  The Company has posted
the collateral and does not expect a near-term impact on the Company’s
operations.





The
following table presents, as of March 31, 2009, the expected future payments of
the Bank’s contractual obligations.




Payments
      Due in:(In
      thousands)
                    
                    Less
      than One Year
                    
                    
                    One
      Year to Less Than Three Years
                    
                    
                    Three
      Years to Less Than Five Years
                    
                    
                    Five
      Years orGreater
                    
                    
                    TotalFHLB
      advances
                    
                    $
                    83,500
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    1,250
                    
                    
                    $
                    84,750Other
      borrowings (1)
                    
                    
                    3,567
                    
                    
                    
                    -
                    
                    
                    $
                    3,000
                    
                    
                    
                    -
                    
                    
                    
                    6,567Operating
      lease
                    
                    
                    141
                    
                    
                    $
                    305
                    
                    
                    
                    328
                    
                    
                    
                    166
                    
                    
                    
                    940Data
      processing
                    
                    
                    652
                    
                    
                    
                    785
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,437Off-balance-sheet
      (2)
                    
                    
                    42,008
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    42,008Total
                    
                    $
                    129,868
                    
                    
                    $
                    1,090
                    
                    
                    $
                    3,328
                    
                    
                    $
                    1,416
                    
                    
                    $
                    135,702
  (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 nine
months ended March 31, 2009, the Company engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





This
disclosure is not required under smaller reporting company
requirements.





ITEM
4T. 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, 2009, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal


34


control
over financial reporting.  Based on such evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this report, there have been no significant changes in the
Company’s internal control over financial reporting that occurred during the
Company’s first fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





PART
II.         OTHER
INFORMATION





ITEM 1.  Legal
Proceedings





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




ITEM 1A.
Risk Factors





This
disclosure is not required under smaller reporting company
requirements.





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





There
were no sales of unregistered securities during the three months ended March 31,
2009.





There
were no share repurchases during the quarter ended March 31, 2009.





ITEM 3.  Default
upon Senior Securities





None.





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





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




ITEM 5.  Other
Information





(a) Not
applicable.


(b) Not
applicable.





35


ITEM 6.  Exhibits





Exhibit 31.1
              Certification
      of Chief Executive Officer Pursuant to Section
  302


Exhibit 31.2
              Certification
      of Chief Financial Officer Pursuant to Section
  302


Exhibit 32
              Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002












36


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:  June
      30, 2009
            BY:
            /s/Levon L.
      MathewsLevon
      L. MathewsPresident
      and Chief Executive OfficerDATE:  June
      30, 2009
            BY:
            /s/ Michael S.
      ModerskiMichael
      S. ModerskiSenior
      Vice President, Chief Financial Officerand
      Treasurer







37