|UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


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


For the quarterly period ended June 30, 2003 Commission file number 0-37053


FIRST FEDERAL
BANCSHARES, INC. (Exact name of
registrant as specified in its charter)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|109 East Depot Street,
Colchester, Illinois 62326 (Address of Principal
Executive Offices) (Zip Code)

(309) 776-3225(Registrants telephone number, including area code)


Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [    ]


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


State the number of shares
outstanding of each of the issuers classes of common equity as of the latest
practicable date.


      As of August 1, 2003 the
        Registrant had outstanding 2,070,490 shares of common stock.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|FIRST FEDERAL
BANCSHARES, INC.


Form 10-Q Quarterly Report


Index
|-------------------------------------------------------------------

|                               |                                                                                          | Page
|------------------------------ | ---------------------------------------------------------------------------------------- | ----
|PART I  Financial Information
|                              
|Item 1                         | Financial Statements                                                                     | 1   
|                              
|Item 2                         | Managements Discussion and Analysis of Financial Condition and    Results of Operations | 8   
|                              
|Item 3                         | Quantitative and Qualitative Disclosures About Market Risk                               | 11  
|                              
|Item 4                         | Controls and Procedures                                                                  | 13  
|                              
|PART II  Other Information   
|                              
|Item 1                         | Legal Proceedings                                                                        | 14  
|                              
|Item 2                         | Changes in Securities and Use of Proceeds                                                | 14  
|                              
|Item 3                         | Defaults Upon Senior Securities                                                          | 14  
|                              
|Item 4                         | Submission of Matters to a Vote of Securities Holders                                    | 14  
|                              
|Item 5                         | Other Information                                                                        | 15  
|                              
|Item 6                         | Exhibits and Reports on Form 8-K                                                         | 15  
|                              
|SIGNATURES                     |                                                                                          | 16  

---

PART I  FINANCIAL
INFORMATION ITEM 1. FINANCIAL
STATEMENTS First Federal Bancshares, Inc. and
Subsidiary Consolidated Statements of Financial Condition (in thousands of dollars,
except share data) (unaudited) June 30,
2003
     December 31,
2002ASSETSCash and cash equivalents
     $35,733
        
     $42,827Time deposits in other financial institutions
     295
        
     295Securities available-for-sale
     157,778
        
     91,562Securities held-to-maturity (fair value:December 31 - $24,764)
     
        
     24,471Loans receivable, net
     136,371
        
     150,269Real estate owned, net
     146
        
     277Premises and equipment
     3,495
        
     3,294Accrued interest receivable
     1,659
        
     1,473Goodwill
     1,515
        
     1,515Core deposits and other intangibles
     308
        
     327Other assets
     192
        
     90TOTAL ASSETS
     $337,492
        
     $316,400LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIESDeposits
     $270,653
        
     $263,834Advances from borrowers for taxes and insurance
     280
        
     167Federal Home Loan Bank advances
     4,000
        
     4,000Accrued interest payable
     542
        
     606Other liabilities
     1,487
        
     762Due to broker
     12,064
        
     Total liabilities
     289,026
        
     269,369SHAREHOLDERS EQUITYPreferred stock, $.01 par value, 1,000,000 shares authorized;none issued or outstanding
     
        
     Common stock, $.01 par value, 4,000,000 shares authorized;2,242,500 shares issued
     22
        
     22Additional paid-in capital
     22,655
        
     22,629Unearned ESOP shares
     (1,300
        )
     (1,390
        )Unearned stock awards
     (880
        )
     (1,016
        )Treasury stock (June 30 - 179,079 shares,     December 31 - 180,557)
     (3,283
        )
     (3,272
        )Retained earnings
     29,129
        
     28,090Accumulated other comprehensive income
     2,123
        
     1,968Total shareholders equity
     48,466
        
     47,031TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
     $337,492
        
     $316,400 See
notes to consolidated financial statements. 1


---

First Federal
Bancshares, Inc. and Subsidiary Consolidated Statements
of Income (in thousands of
dollars, except share data) (unaudited) Three Months
Ended June 30,
     Six Months
Ended June 30,2003
     2002
     2003
     2002Interest incomeLoans
     $2,313
        
     $1,925
        
     $4,941
        
     $3,928Securities
     1,346
        
     1,217
        
     2,683
        
     2,417Other interest income
     109
        
     98
        
     176
        
     171Total interest income
     3,768
        
     3,240
        
     7,800
        
     6,516Interest expenseDeposits
     1,707
        
     1,450
        
     3,483
        
     2,951Federal Home Loan Bank advances
     39
        
     39
        
     78
        
     75Total interest expense
     1,746
        
     1,489
        
     3,561
        
     3,026Net interest income
     2,022
        
     1,751
        
     4,239
        
     3,490Provision for loan losses
     
        
     
        
     
        
     7Net interest income after provision forloan losses
     2,022
        
     1,751
        
     4,239
        
     3,483Noninterest incomeService charges
     53
        
     31
        
     100
        
     63Other fee income
     58
        
     32
        
     106
        
     63Net gain on sale of securities
     247
        
     31
        
     312
        
     53Recovery of impairment loss
     355
        
     
        
     355
        
     Other income
     17
        
     7
        
     55
        
     30Total noninterest income
     730
        
     101
        
     928
        
     209Noninterest expenseCompensation and benefits
     1,017
        
     689
        
     1,874
        
     1,301Occupancy and equipment
     124
        
     85
        
     267
        
     159Data processing
     165
        
     131
        
     352
        
     259Federal insurance premiums
     33
        
     24
        
     66
        
     48Advertising
     35
        
     25
        
     77
        
     51Professional fees
     90
        
     43
        
     169
        
     84Other noninterest expenses
     8
        
     100
        
     90
        
     176Total noninterest expense
     1,472
        
     1,097
        
     2,895
        
     2,078Income before income taxes
     1,280
        
     755
        
     2,272
        
     1,614Provision for income taxes
     492
        
     270
        
     867
        
     612Net income
     $788
        
     $485
        
     $1,405
        
     1,002Earnings per shareBasic
     $.42
        
     $.26
        
     $.75
        
     $.54Diluted
     $.40
        
     $.26
        
     $.72
        
     $.53Weighted average shares
     1,869,251
        
     1,860,446
        
     1,864,335
        
     1,864,559Comprehensive income
     $955
        
     $1,025
        
     $1,560
        
     $1,292 See
notes to consolidated financial statements. 2


---

First Federal
Bancshares, Inc. and Subsidiary Consolidated Statements
of Shareholders Equity Six months ended June
30, 2002 and 2003(in thousands of
dollars, except share data) (unaudited) Common
Stock
     Additional
Paid-in
Capital
     Unearned
ESOP
Shares
     Unearned
Stock
Awards
     Treasury
Stock
     Retained
Earnings
     Accumulated
Other
Compre-
hensive
Income
     Total
Stock-
holders'
EquityBalance at December 31, 2001
     
     
     $22
        
     $21,418
        
     $(1,570
        )
     $(1,287
        )
     $(2,322
        )
     $26,745
        
     $695
        
     $43,701Purchase of 104,610 shares of treasurystock
     
        
     
        
     
        
     
        
     (1,899
        )
     
        
     
        
     (1,899
        )ESOP shares earned
     
        
     63
        
     90
        
     
        
     
        
     
        
     
        
     153Stock awards earned
     
        
     
        
     
        
     136
        
     
        
     
        
     
        
     136Dividends declared ($.16 per share)
     
        
     
        
     
        
     
        
     
        
     (311
        )
     
        
     (311
        )Comprehensive incomeNet income
     
        
     
        
     
        
     
        
     
        
     1,002
        
     
        
     1,002Change in fair value of securities classifiedas available-for-sale, net of reclassificationand tax effects
     
        
     
        
     
        
     
        
     
        
     
        
     290
        
     290Total comprehensive income
     1,292Balance at June 30, 2002
     $22
        
     $21,481
        
     $(1,480
        )
     $(1,151
        )
     $(4,221
        )
     $27,436
        
     $985
        
     $43,072Balance at December 31, 2002
     $22
        
     $22,629
        
     $(1,390
        )
     $(1,016
        )
     $(3,272
        )
     $28,090
        
     $1,968
        
     $47,031Purchase of  10,225 shares of treasury    stock
     
        
     
        
     
        
     
        
     (223
        )
     
        
     
        
     (223
        )Options exercised (12,176 shares)
     
        
     (75
        )
     
        
     
        
     212
        
     
        
     
        
     137ESOP shares earned
     
        
     101
        
     90
        
     
        
     
        
     
        
     
        
     191Stock awards earned
     
        
     
        
     
        
     136
        
     
        
     
        
     
        
     136Dividends declared ($.19 per share)
     
        
     
        
     
        
     
        
     
        
     (366
        )
     
        
     (366
        )Comprehensive incomeNet income
     
        
     
        
     
        
     
        
     
        
     1,405
        
     
        
     1,405Change in fair value of securities classifiedas available-for-sale, net of reclassificationand tax effects
     
        
     
        
     
        
     
        
     
        
     
        
     155
        
     155Total comprehensive income
     1,560Balance at June 30, 2003
     $22
        
     $22,655
        
     $(1,300
        )
     $(880
        )
     $(3,283
        )
     $29,129
        
     $2,123
        
     $48,466 See
notes to consolidated financial statements. 3


---

First Federal
Bancshares, Inc. and Subsidiary Consolidated Statements
of Cash Flows
(in thousands of dollars) (unaudited) Six Months Ended
June 30,2003
     2002CASH FLOWS FROM OPERATING ACTIVITIESNet income
     $1,405
        
     $1,002Adjustments to reconcile net income to net cash provided byoperating activitiesProvision for depreciation
     110
        
     52Loss (gain) on sale of real estate owned
     (8
        )
     (3
        )Net amortization of premiums and discounts
     6
        
     66ESOP compensation expense
     191
        
     153Stock award compensation expense
     136
        
     136Amortization of intangible assets
     20
        
     Provision for loan losses
     
        
     7Dividend reinvestments
     (459
        )
     (541
        )Federal Home Loan Bank stock dividends
     (50
        )
     (28
        )Gain on sale of securities
     (312
        )
     (53
        )Net changes inAccrued interest receivable and other assets
     (263
        )
     (218
        )Deferred loan costs
     (77
        )
     (9
        )Accrued interest payable and other liabilities
     501
        
     (263
        )Net cash provided from operating activities
     1,200
        
     301CASH FLOWS FROM INVESTING ACTIVITIESPurchase of securities available-for-sale
     (87,434
        )
     (10,344
        )Purchase of securities held-to-maturity
     (2,000
        )
     (13,348
        )Principal paydowns on mortgage-backed securitiesavailable-for-sale
     7,432
        
     4,695Principal paydowns on mortgage-backed securitesheld-to-maturity
     
        
     267Purchase of Federal Home Loan Bank stock
     (175
        )
     (54
        )Proceeds from maturities of securities available-for-sale
     30,500
        
     1,000Proceeds from maturities of securities held-to-maturity
     
        
     3,100Proceeds from sale of securities available-for-sale
     23,064
        
     16,240Purchase of loans
     (3,569
        )
     (322
        )Net decrease in loans receivable
     17,321
        
     5,436Proceeds from sale of real estate owned
     362
        
     145Purchase of property and equipment
     (311
        )
     (74
        )Net cash from investing activities
     (14,810
        )
     6,741CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits
     6,819
        
     1,396Net change in advances from borrowers for taxes and insurance
     113
        
     114Purchase of treasury stock
     (223
        )
     (1,899
        )Dividends paid
     (330
        )
     (338
        )Options exercised
     137
        
     Net cash from financing activities
     6,516
        
     727Net change in cash and cash equivalents
     (7,094
        )
     6,315Cash and cash equivalentsBeginning of period
     42,827
        
     18,249End of period
     $35,733
        
     $24,564Supplemental disclosures of cash flow informationCash paid during the period forInterest
     $3,625
        
     $3,092Taxes, net of refunds
     530
        
     681Transfers to real estate owned
     223
        
     34Transfer of securities to available-for-sale from held-to-maturityon January 24, 2003 at fair value
     24,407
        
     Due to broker
     12,064
        
      4


FIRST FEDERAL
BANCSHARES, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 
June 30, 2003
(table
amounts in thousands of dollars, except share data) Note 1  Basis of
Presentation The accompanying interim consolidated
financial statements have been prepared pursuant to the rules and regulations for
reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles
generally accepted in the United States of America are not included herein. These interim
statements should be read in conjunction with First Federal Bancshares, Inc.s
(First Federal Bancshares or the Company) Annual Report on Form
10-K. The December 31, 2002 balance sheet presented herein has been derived from the
audited financial statements included in the Companys Annual Report on Form 10-K,
but does not include all disclosures required by accounting principles generally accepted
in the United States of America. Interim statements are subject to
possible adjustment in connection with the annual audit of the Company for the year ending
December 31, 2003. In the opinion of management of the Company, the accompanying unaudited
interim consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the consolidated financial
position and consolidated results of operations for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results to be
expected for the full year. Note 2  Acquisition of PFSB
Bancorp, Inc. On November 22, 2002, the Company completed
the acquisition of PFSB Bancorp, Inc. (PFSB), and its wholly owned subsidiary,
Palmyra Savings, pursuant to an Agreement and Plan of Merger dated as of June 4, 2002, by
and between the Company and PFSB. The acquisition was completed through the merger of PFSB
with and into the Company. As part of the acquisition, Palmyra Savings merged with and
into First Federal Bank (First Federal or the Bank), the
Companys wholly owned subsidiary with First Federal being the surviving bank. First
Federal Bancshares paid approximately $4.4 million in cash and issued approximately
252,000 shares of the Companys common stock to the former stockholders of PFSB. The
PFSB acquisition included total assets of approximately $73.8 million and three banking
offices in northeast Missouri. As a result of the acquisition, the Company expects to be
better positioned to compete in the financial services industry in Illinois and Missouri
through expanded operations and market coverage. PFSB results of operations have been
reflected in the Companys consolidated statements of income beginning as of the
acquisition date. The total net interest income, total income, net income, and basic and
diluted earnings per share for the three and six months ended June 30, 2003 and the
proforma net interest income, total income, net income, and basic and diluted earnings per
share for the three and six months ended June 30, 2002 after giving effect to the PFSB
acquisition as if it occurred on January 1, 2002 are as follows: For the three months
Ended June 30,
     For the six months
Ended June 30,2003
     2002
     2003
     2002(in thousands, except per share data)Net interest income
     
     
     $2,022
        
     $2,314
        
     $4,239
        
     $4,559Total income
     2,752
        
     2,426
        
     5,167
        
     4,815Net income
     788
        
     499
        
     1,405
        
     1,044Basic earnings per share
     .42
        
     .24
        
     .75
        
     .50Diluted earnings per share
     .40
        
     .24
        
     .72
        
     .49  5


Note 3  Earnings
Per Share For purposes of per share
calculations, the Company had 1,933,356 and 1,855,335 shares of common stock outstanding
at June 30, 2003 and 2002. Basic earnings per share for the six months ended June 30, 2003
and 2002 were computed by dividing net income by the weighted average number of shares
outstanding. Diluted earnings per share for the six months ended June 30, 2003 and 2002
were computed by dividing net income by the weighted average number of shares outstanding,
adjusted for the dilutive effect of the outstanding stock options and stock awards.
Computations for basic and diluted earnings per share are provided below. For the three months
Ended June 30,
     For the six months
Ended June 30,2003
     2002
     2003
     2002(in thousands, except per share data)BasicNet income
     $788
        
     $485
        
     $1,405
        
     $1,002Weighted average common sharesoutstanding
     1,869
        
     1,860
        
     1,864
        
     1,865Basic earnings per common share
     $.42
        
     $.26
        
     $.75
        
     $.54DilutedNet income
     $788
        
     $485
        
     $1,405
        
     $1,002Weighted average common sharesoutstanding
     1,869
        
     1,860
        
     1,864
        
     1,865Dilutive effect of stock options
     79
        
     26
        
     74
        
     21Dilutive effect of stock awards
     12
        
     7
        
     11
        
     6Diluted average common shares
     1,960
        
     1,893
        
     1,949
        
     1,891Diluted earnings per common share
     $.40
        
     $.26
        
     $.72
        
     $.53 Note 4  Stock
Options The Company applies Accounting
Principles Board (APB) Opinion 25 and related interpretations in accounting for its stock
option plan. Accordingly, no compensation cost has been recognized at the date of grant.
Had compensation cost been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the
Companys net income and earnings per share would have been reduced to the pro forma
amounts in the table below. For purposes of pro forma disclosure, the estimated fair value
of the options is amortized to expense over the options vesting period. 6


|                               | For the three months
Ended June 30, | For the six months
Ended June 30,
|------------------------------ | ----------------------------------- | ---------------------------------
|
|
|Net income as reported         |                                     |                                  
|Pro forma net income           |                                     |                                  
|Earnings per share as reported |                                     |                                  
|Basic                          |                                     |                                  
|Diluted                        |                                     |                                  
|Pro forma earnings per share   |                                     |                                  
|Basic                          |                                     |                                  
|Diluted                        |                                     |                                  

Pursuant to its 2001 stock-based
incentive plan, the Company awarded 89,700 shares of restricted stock during 2001. These
shares vest over a five-year period. The unamortized cost of shares not yet earned
(vested) is reported as a reduction of shareholders equity. Note 5  Transfer of
Securities Held to Maturity During the first quarter of 2003, as
a result of the acquisition of PFSB, changes in the structure of the balance sheet, and
for asset/liability management purposes, management revised the Company policy to classify
all securities as available for sale. Effective January 31, 2003, the Company reclassified
all of its securities held-to-maturity to securities available-for-sale. The securities
that were reclassified had a book value of $24.2 million and a fair value of $24.5 million
as of that date. The reclassification of these securities resulted in a decrease in
securities held-to-maturity of $24.5 million from December 31, 2002 to March 31, 2003, and
the majority of the $35.2 million increase in available-for-sale securities during the
same period. Note 6  Subsequent
Events On July 18, 2003, First Federal
Bancshares, Inc. announced that the Bank, entered into a definitive agreement for the sale
of its Mt. Sterling, Illinois branch office to Beardstown Savings s.b. The sale includes
the assumption of approximately $6.9 million in deposits. No loans are being sold as part
of this transaction. The transaction is expected to be completed during the third quarter
of 2003, pending regulatory approvals. 7


ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF
OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains certain
forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities Reform Act
of 1995 as amended, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions and
describe future plans, strategies and expectations of the Company, are generally
identifiable by use of the words such as believe, expect,
intend, anticipate, estimate, project, or
similar expressions. The Companys ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a material
adverse affect on the operations and future prospects of the Company and its wholly-owned
subsidiaries include, but are not limited to, changes in: interest rates; general economic
conditions; legislative/regulatory provisions; monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve Board; the
quality or composition of the loan or investment portfolios; demand for loan products;
deposit flows; competition; demand for financial services in the Companys market
area; and accounting principles, policies, and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and its
business, including additional factors that could materially affect the Companys
financial results, is included in the Companys filings with the Securities and
Exchange Commission. The following discussion compares the
financial condition of First Federal Bancshares and its wholly owned subsidiary, First
Federal, at June 30, 2003 to its financial condition at December 31, 2002 and the
results of its operations for the three-month and six-month periods ended June 30, 2003 to
the same periods in 2002. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein. FINANCIAL CONDITION Total assets were $337.5 million at
June 30, 2003 and $316.4 million at December 31, 2002. During the six months ended
June 30, 2003, cash and cash equivalents decreased $7.1 million primarily due to the
timing of called and purchased securities. Loans decreased $13.9 million primarily as a
result of portfolio loans refinancing into the Federal Home Loan Bank Mortgage Partnership
Finance fixed rate program and also to other competitors due to the lower interest rate
environment. Securities available-for-sale increased $66.2 million to $157.8 million
partially due to the Companys reevaluation of the classification of the securities
portfolio effective January 31, 2003. As a result of the acquisition of PFSB, changes in
the structure of the balance sheet, and for asset/liability management purposes,
management revised the Company policy to classify all securities as available-for-sale.
The securities that were reclassified had a book value of $24.2 million and a fair value
of $24.5 million as of that date. The reclassification of these securities resulted in a
decrease in securities held-to-maturity of $24.5 million from December 31, 2002 to June
30, 2003. The remaining $41.7 increase in securities available-for-sale was primarily a
result of additional purchases funded through an increase in customer deposits, a decrease
in cash and cash equivalents and the loan portfolio, and principal paydowns of securities
available-for-sale. The allowance for loan losses was
$922,000 at June 30, 2003 and $976,000 at December 31, 2002. There were no impaired
loans at either date. The allowance for loan losses represented .67% of total loans and
49.80% of nonperforming loans at June 30, 2003 compared to .65% of total loans and 50.89%
of nonperforming loans at December 31, 2002. Nonperforming assets totaled $2.0 million and
$2.2 million at June 30, 2003 and December 31, 2002, respectively. The ratio of
non-performing assets to total assets at June 30, 2003 was .60% compared to .69% at
December 31, 2002. 8


Total liabilities at June 30, 2003
were $289.0 million compared to $269.4 million at December 31, 2002, an increase of
$19.6 million, primarily due to the $12.1 million due to broker recorded in June 2003
resulting from securities traded but not yet settled and an increase in customer deposits
of $6.8 million. The increased funds from customer deposits have been invested in
interest-earning assets. Shareholders equity at June 30,
2003 was $48.5 million compared to $47.0 million at December 31, 2002, an increase of
$1.5 million. The increase primarily reflects net income of $1.4 million. RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002 Net income increased $303,000 to
$788,000 for the quarter ended June 30, 2003 compared to the same period in 2002. The
increase in net income was primarily a result of an increase in net interest income and an
increase in non-interest income offset by increases in noninterest expense and the income
tax provision. Net interest income was $2.0 million
for the quarter ended June 30, 2003 compared to $1.8 million for the same prior year
period. The increase in net interest income was primarily a result of an increase in
volume of interest-earning assets as a result of the acquisition of PFSB in the last
quarter of 2002, partially offset by decreases in the net interest spread and the net
interest margin to 2.27% and 2.58%, respectively, for the quarter ended June 20, 2003 from
2.42% and 2.93% for the same period in June 30, 2002. The average yield on
interest-earning assets decreased to 4.81% for the quarter ended June 30, 2003 from 5.43%
for the same quarter in 2002, while the average yield on interest-bearing liabilities
decreased to 2.54% for the quarter ended June 30, 2003 from 3.01% for the same period in
2002. These decreases reflect the overall decrease in market rates from the prior year.
The decrease in the spread and the margin was due largely to the decrease in the yield of
interest-earning assets exceeding the decrease in the cost of funds as interest-earning
assets and interest-bearing liabilities repriced downward in reaction to the continued
decreasing interest rate environment. The ratio of average interest-earning assets to
average interest-bearing liabilities decreased to 114.05% from 120.65% for the three-month
periods, respectively. The provision for loan losses was
zero for the quarters ended June 30, 2003 and June 30, 2002. Management considered the
allowance for loan losses to be adequate during both periods due to relatively stable
delinquency trends. On a quarterly basis, management of
the Company meets to review the allowance for loan losses. Management classifies loans in
compliance with regulatory classifications. Classified loans are individually reviewed to
arrive at specific reserves for those loans. Once the specific portion of the allowance is
calculated, management calculates a historical portion for each loan category based on
loan loss history, peer data, current economic conditions and trends in the portfolio,
including delinquencies and impairments, as well as changes in the composition of the loan
portfolio. Although management believes that the allowance for loan losses reflected
probable incurred losses on existing loans at June 30, 2003, there can be no assurance
that such losses will not exceed estimated amounts. Future adjustments to the allowance
may be necessary due to economic, operating, regulatory and other conditions that may be
beyond the Companys control. The allowance for loan losses as of June 30, 2003 was
maintained at a level that represents managements best estimate of losses in the
loan portfolio and such losses were both probable and reasonably estimatable. Noninterest income was $730,000 for
the three-month period ended June 30, 2003 compared to $101,000 for the same period in
2002. The increase in noninterest income was primarily a result of a $216,000 increase in
net gains on the sale of securities and a $355,000 recovery from an impairment loss
related to certificates of deposit purchased through a broker who was charged by the SEC
with securities fraud in relation to these certificates. Services charges increased
$22,000 and other fee income increased $26,000. The increases in service charges and fee
income are primarily a result of the acquisition of PFSB resulting in an increase in
deposits and associated fee income. Noninterest expense was $1.5 million
and $1.1 million for the quarters ended June 30, 2003 and 2002. The increase in
noninterest expense primarily reflects increased compensation and benefits expense of
$328,000 associated with an increase in the number of employees as a result of the PFSB
acquisition in November 2002, and an increase in employee benefits including health
insurance premiums and retirement funds. Occupancy and equipment expense, data processing
expense, advertising expense, and professional fees also experienced increases during the
period, primarily due to the acquisition. Other noninterest expense decreased from
$100,000 for the quarter ended June 30, 2002 to $8,000 for the same period in 2003 as a
result of decreased loan expenses on portfolio loans because the Federal Home Loan
Banks Mortgage Partnership Finance Program was the major source of lending during
the quarter. MPF loans originated in the second quarter of 2002 totaled $1.1 million
compared to $11.3 million during the second quarter of 2003. 9


The Companys federal income tax
expense increased $222,000 to $492,000 for the quarter ended June 30, 2003 compared to
$270,000 during the same period in 2002. Income tax expense was approximately 38% and 36%
of pretax income in both periods, respectively. RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002 Net income increased $403,000 to
$1.4 million for the six months ended June 30, 2003 compared to the same period in 2002.
The increase in net income was primarily a result of an increase in net interest income
and an increase in non-interest income, offset by increases in noninterest expense and the
income tax provision. Net interest income was $4.2 million
for the six months ended June 30, 2003 compared to $3.5 million for the same period in
2002. The increase in net interest income was primarily a result of an increase in volume
as a result of the acquisition of PFSB in the last quarter of 2002, partially offset by a
decrease in the net interest margin to 2.74%, for the six months ended June 20, 2003 from
2.94% for the same period in 2002. The net interest spread was 2.41% for both six-month
periods. The average yield on interest-earning assets decreased to 5.04% for the six
months ended June 30, 2003 from 5.49% for the same period in 2002, while the average yield
on interest-bearing liabilities decreased to 2.63% for the six months ended June 30, 2003
from 3.08% for the same prior year period. These decreases reflect the overall decrease in
market rates from the prior year. The ratio of average interest-earning assets to average
interest-bearing liabilities was 114.16% compared to 120.84% for the six-month periods
ended June 30, 2003 and June 30, 2002. The provision for loan losses was
zero for the six months ended June 30, 2003 and $7,000 for the same period in 2002. The
decrease in the provision for loan losses can be attributed to the overall stability in
the amount of nonperforming loans during the six month period. Noninterest income was $928,000 for
the six-month period ended June 30, 2003 compared to $209,000 for the same period in 2002.
The increase in noninterest income was primarily a result of a $259,000 increase in net
gains on the sale of securities and a $355,000 recovery from an impairment loss related to
certificates of deposit purchased through a broker who was charged by the SEC with
securities fraud in relationship to these certificates. Services charges increased $37,000
and other fee income increased $43,000. The increases in service charges and fee income
are primarily due to of the acquisition of PFSB resulting in an increase in deposits and
associated fee income. Noninterest expense was $2.9 million
and $2.1 million for the six-months ended June 30, 2003 and 2002. The increase in
noninterest expense primarily reflects increased compensation and benefits expense of
$573,000 associated with an increase in the number of employees as a result of the PFSB
acquisition in November 2002, and an increase in employee benefits including health
insurance premiums and retirement funds. Occupancy and equipment expense, data processing
expense, advertising expense, and professional fees also experienced increases during the
period, primarily due to the acquisition. Other noninterest expense decreased from
$176,000 for the six months ended June 30, 2002 to $90,000 for the same period in 2003 as
a result of decreased loan expenses on portfolio loans because the Federal Home Loan
Banks Mortgage Partnership Finance Program was the major source of lending during
the six-month period. MPF loans originated for the six month period as of June 30, 2002
was $3.3 million compared to $19.4 million for the same period in 2003. 10


The Companys federal income
tax expense increased $255,000 to $867,000 for the six-months ended June 30, 2003
compared to the same period in 2002. Income tax expense was approximately 38% of pretax
income in both periods, respectively. LIQUIDITY The Company must maintain an adequate
level of liquidity to ensure the availability of sufficient funds to fund loan
originations and deposit withdrawals, to satisfy other financial commitments, and to take
advantage of investment opportunities. The Company invests excess funds in overnight
deposits and other short-term interest-bearing assets to provide liquidity to meet these
needs. At June 30, 2003, cash and cash equivalents totaled $35.7 million. At June 30,
2003, the Company had commitments to fund loans of $848,000. At the same time,
certificates of deposit which are scheduled to mature in one year or less totaled $105.3
million. Management believes, based on past experience that a significant portion of those
deposits will remain with the Company. Based on the foregoing, in addition to the
Companys high level of core deposits and capital, the Company considers its
liquidity and capital resources sufficient to meet its outstanding short-term and
long-term needs. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards
Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities
and Equities,both of which generally become effective in the quarter beginning July
1, 2003. Management determined that, upon adopting the new standards, they will not
materially affect the Companys operating results or financial condition because the
Company does not have these instruments or engage in these activities. CAPITAL RESOURCES The Bank is subject to
capital-to-asset requirements in accordance with bank regulations. The following table
summarizes the Banks regulatory capital requirements versus actual capital as of
June 30, 2003: ACTUAL
     REQUIRED
     EXCESSAMOUNT
     %
     AMOUNT
     %
     AMOUNT
     %Core capital
     
     
     $33,529
        
     10.23
        %
     $13,104
        
     4.00
        %
     $20,425
        
     6.24
        %(to adjusted total assets)Risk-based capital
     34,873
        
     22.29
        
     12,516
        
     8.00
        
     22,357
        
     14.29(to risk-weighted assets) SUBSEQUENT EVENTS The Company announced that the Bank,
entered into a definitive agreement for the sale of its Mt. Sterling, Illinois branch
office to Beardstown Savings s.b. as described in Note 6. As a result, the Companys
balance sheet will reflect decreases in cash and cash equivalents, premises and equipment,
and deposits during the third quarter 2003. ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative Aspects of Market
Risk.The Companys most significant form of market risk is interest
rate risk. The principal objectives of the Companys interest rate risk management
are to evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Companys business strategy,
operating environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with the Board of Directors approved guidelines. The
Company has an Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which meets monthly and reports trends and
interest rate risk position to the Board of Directors quarterly. The extent of the
movement of interest rates is uncertainty that could have a negative impact on the
earnings of the Company. 11


The Company has used the following
strategies to manage interest rate risk: (1) emphasizing the origination of
adjustable-rate and balloon loans and not originating long-term, fixed-rate loans for
retention in its portfolio; (2) emphasizing shorter term consumer loans; (3) introducing
floating-rate commercial business loans tied to the prime rate; (4) maintaining a high
quality securities portfolio that provides adequate liquidity and flexibility to take
advantage of opportunities that may arise from fluctuations in market interest rates, the
overall maturity of which is monitored in relation to the repricing of its loan portfolio;
and (5) using Federal Home Loan Bank advances to better structure maturities of its
interest rate sensitive liabilities. The Company currently does not participate in hedging
programs, interest rate swaps or other activities involving the use of off-balance sheet
derivative financial instruments. Quantitative Aspects of Market
Risk. The Company primarily utilizes an interest sensitivity analysis
prepared by the Office of Thrift Supervision to review the level of interest rate risk of
the Bank. This analysis measures interest rate risk by computing changes in the net
portfolio value of the Banks cash flows from assets, liabilities and off-balance
sheet items in the event of a range of assumed changes in market interest rates. Net
portfolio value represents the market value of portfolio equity and is equal to the market
value of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive
instruments in the event of a sudden and sustained 100 to 300 basis point increase or
decrease in market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. The following table, which is
based on information provided to the Bank by the Office of Thrift Supervision, presents
the change in the Banks net portfolio value at March 31, 2003, the latest date for
which information is available, that would occur upon an immediate change in interest
rates based on Office of Thrift Supervision assumptions, but without giving effect to any
steps that management might take to counteract that change. The Company expects
Junes net portfolio value to be similar to that of March 31, 2003 as shown below.
All model outputs associated with the 300 and 200 bp scenarios are not
applicable because of the abnormally low prevailing interest rate environment. Change in
Interest Rates
in Basis Points(Rate Shock)
     Net Portfolio Value
     NPV as % of
Portfolio Value of AssetsAmount
     $ Change
     % Change
     NPVRatio
     Basis PointChange(Dollars in thousands)300
        
     $36,509
        
     (10,848
        )
     (23
        )%
     11.86
        %
     (276) b
        p200
        
     40,139
        
     (7,218
        )
     (15
        )
     12.82
        
     (180) b
        p100
        
     43,707
        
     (3,650
        )
     (8
        )
     13.72
        
     (89) bpStatic
        
     47,357
        
     
        
     
        
     14.62
        
     (100
        )
     49,205
        
     1,848
        
     4
        
     15.02
        
     40 bp(200
        )
     N/A
        
     N/A
        
     N/A
        
     N/A
        
     N/A(300
        )
     N/A
        
     N/A
        
     N/A
        
     N/A
        
     N/A The Office of Thrift Supervision uses
certain assumptions in assessing the interest rate risk of savings associations. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the
market values of certain assets under differing interest rate scenarios, among others. 12


As with any method of measuring
interest rate risk, certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees to changes
in market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgage loans, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, if interest rates
change, expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table. ITEM 4: CONTROLS AND
PROCEDURES (a)
               
               Evaluation of disclosure controls and procedures. The Company maintains
               controls and procedures designed to ensure that information required to be
               disclosed in the reports that the Company files or submits under the Securities
               Exchange Act of 1934 is recorded, processed, summarized and reported within the
               time period specified in the rules and forms of the Securities and Exchange
               Commission. Based upon their evaluation of those controls and procedures
               performed within 90 days of the filing date of this report, the chief executive
               officer and the chief financial officer of the Company concluded that the
               Companys disclosure controls and procedures were effective.  (b)
               
               Changes in internal controls. The Company made no significant changes in
               its internal controls or in other factors that could significantly affect these
               controls subsequent to the date of the evaluation of those controls by the chief
               executive officer and chief financial officer.      13


PART II  
OTHER INFORMATION ITEM 1.  LEGAL PROCEEDINGS. Periodically,
there have been various claims and lawsuits involving the Company, such as claims to
enforce liens, condemnation proceedings on properties in which the Company holds security
interest, claims involving the making and servicing of real property loans and other
issues incident to the Companys business. In the opinion of management, after
consultation with the Companys legal counsel, no significant loss is expected from
any of such pending claims or lawsuits. The Company is not a party to any material pending
legal proceedings.  ITEM 2.  CHANGES IN SECURITIES. None  ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES. None  ITEM 4.  SUBMISSION OF MATTERS TO A
VOTE OF SECURITIES HOLDERS. On
May 27, 2003, the Company held its annual meeting of stockholders for the purpose of the
election of two directors to three-year terms and the ratification of Crowe Chizek and
Company LLC as the Companys independent auditors. The number of votes cast at the
meeting as to each matter to be acted upon was as follows:  Election of Directors
     
     
     Number of Votes For:
     
     
     Number of Votes Withheld:B. Bradford Billings
     1,875,986
     10,366Gerald L. Prunty
     1,875,986
     10,366James J. Stebor
     1,875,986
     10,366 The Directors whose terms continued and the years their terms expire are as
follows: Dr. Stephan L. Roth (2004) and Richard D. Stephens (2004), Franklin M.
Hartzell (2005), Murrel Hollis (2005) and Eldon Mette (2005).  Number of
Votes For
     Number of
Votes Against
     Number of
Votes AbstainedRatification of Crowe Chizek andCompany LLC as the Company'sIndependent Auditors
     1,848,579
        
     37,298
        
     475 14


ITEM 5.  OTHER INFORMATION. None  ITEM 6.  EXHIBITS AND REPORTS ON
FORM 8-K. (a)
Exhibits  31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.  31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.  32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (b)
         Reports on Form 8-K  The
Company filed a Current Report on Form 8-K on May 6, 2003 announcing its financial results
for the quarter ended March 31, 2003. The press release was included as an exhibit to the
Form 8-K.      15


SIGNATURES

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

|                      | FIRST FEDERAL BANCSHARES, INC.                                           
|--------------------- | -------------------------------------------------------------------------
|Date: August 14, 2003 | /s/ James J. Stebor
James J. Stebor
President and Chief Executive Officer
|Date: August 14, 2003 | /s/ Cathy D. Pendell
Cathy D. Pendell
Treasurer                          

16

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