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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



Commission file number 0-30753



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FIRST FEDERAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 37-1397683                       
|(State or other jurisdiction of incorporation or organization) |  | (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)



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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 October 29, 2004, the Registrant had outstanding 1,316,886 shares of common stock.



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##### Table of Contents

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 |  | 7   
|                               |  |        | 
|                               |  | Item 3 |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 12  
|                               |  |        | 
|                               |  | Item 4 |  | Controls and Procedures                                                               |  | 13  
|                               | 
|PART II -
Other Information    |  |       
|                               |  |        | 
|                               |  | Item 1 |  | Legal Proceedings                                                                     |  | 14  
|                               |  |        | 
|                               |  | Item 2 |  | Unregistered Sales of Equity 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                                                                     |  | 14  
|                               |  |        | 
|                               |  | Item 6 |  | Exhibits                                                                              |  | 15  
|                               | 
|SIGNATURES                     |  | 16    



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##### Table of Contents

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)



|                                                                                         |  |                    |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                         |  | September 30, 2004 |         |   | December 31, 2003 |  
|ASSETS                                                                                   |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                |  | $                  | 14,068  |   |                   | $ | 29,124  |  
|Time deposits in other financial institutions                                            |  |                    | 295     |   |                   |   | 295     |  
|Securities available-for-sale at fair value                                              |  |                    | 157,213 |   |                   |   | 160,337 |  
|Loans receivable, net                                                                    |  |                    | 135,348 |   |                   |   | 131,935 |  
|Real estate owned                                                                        |  |                    | 78      |   |                   |   | 149     |  
|Premises and equipment, net                                                              |  |                    | 3,497   |   |                   |   | 3,535   |  
|Accrued interest receivable                                                              |  |                    | 1,521   |   |                   |   | 1,489   |  
|Goodwill                                                                                 |  |                    | 1,340   |   |                   |   | 1,340   |  
|Core deposits and other intangibles                                                      |  |                    | 258     |   |                   |   | 288     |  
|Other assets                                                                             |  |                    | 1,143   |   |                   |   | 238     |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|TOTAL ASSETS                                                                             |  | $                  | 314,761 |   |                   | $ | 328,730 |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                     |  |                    |         |   |                   |   |         |  
|LIABILITIES                                                                              |  |                    |         |   |                   |   |         |  
|Deposits                                                                                 |  | $                  | 271,268 |   |                   | $ | 271,850 |  
|Advances from borrowers for taxes and insurance                                          |  |                    | 79      |   |                   |   | 137     |  
|Federal Home Loan Bank advances                                                          |  |                    | 6,450   |   |                   |   | 6,000   |  
|Accrued interest payable                                                                 |  |                    | 557     |   |                   |   | 484     |  
|Other liabilities                                                                        |  |                    | 5,484   |   |                   |   | 8,866   |  
|Subordinated debt                                                                        |  |                    | 7,217   |   |                   |   |        |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                        |  |                    | 291,055 |   |                   |   | 287,337 |  
|                                                                                         |  |                   
|SHAREHOLDERS EQUITY                                                                     |  |                    |         |   |                   |   |         |  
|Preferred 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      |   |                   |   | 22      |  
|Additional paid-in capital                                                               |  |                    | 22,893  |   |                   |   | 22,852  |  
|Unearned ESOP shares                                                                     |  |                    | (1,076  | ) |                   |   | (1,211  | )
|Unearned stock awards                                                                    |  |                    | (542    | ) |                   |   | (745    | )
|Treasury stock (September 30  925,614 shares, December 31  388,313)                    |  |                    | (28,199 | ) |                   |   | (9,902  | )
|Retained earnings                                                                        |  |                    | 31,001  |   |                   |   | 30,180  |  
|Accumulated other comprehensive income (loss)                                            |  |                    | (393    | ) |                   |   | 197     |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|Total shareholders equity                                                               |  |                    | 23,706  |   |                   |   | 41,393  |  
|                                                                                         |  |                    |         |   |                   |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                               |  | $                  | 314,761 |   |                   | $ | 328,730 |  
|                                                                                         |  |                    |         |   |                   |   |         |  



See notes to
consolidated financial statements.



1



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##### Table of Contents

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

(in thousands of dollars, except share data)

(unaudited)



|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|--------------------------------------------------- |  | -------------------------------- | --------- | ---- | ------------------------------- | --------- | ---- |  | ---- | --------- |  | - | ---------
|                                                    |  | Three Months Ended September 30, |           |      | Nine Months Ended September 30,
|                                                    |  | 2004                             |           | 2003 |                                 |           | 2004 |  | 2003
|Interest income                                     |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Loans                                               |  | $                                | 2,092     |      | $                               | 2,273     |      |  | $    | 6,248     |  | $ | 7,214    
|Securities                                          |  |                                  | 1,470     |      |                                 | 1,582     |      |  |      | 4,425     |  |   | 4,265    
|Other interest income                               |  |                                  | 30        |      |                                 | 31        |      |  |      | 120       |  |   | 207      
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Total interest income                               |  |                                  | 3,592     |      |                                 | 3,886     |      |  |      | 10,793    |  |   | 11,686   
|                                                    |  |                                  |           |     
|Interest expense                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Deposits                                            |  |                                  | 1,400     |      |                                 | 1,467     |      |  |      | 4,161     |  |   | 4,950    
|Federal Home Loan Bank advances                     |  |                                  | 40        |      |                                 | 40        |      |  |      | 117       |  |   | 118      
|Subordinated debt                                   |  |                                  | 106       |      |                                 |          |      |  |      | 218       |  |   |         
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Total interest expense                              |  |                                  | 1,546     |      |                                 | 1,507     |      |  |      | 4,496     |  |   | 5,068    
|                                                    |  |                                  |           |     
|Net interest income                                 |  |                                  | 2,046     |      |                                 | 2,379     |      |  |      | 6,297     |  |   | 6,618    
|                                                    |  |                                  |           |     
|Provision for loan losses                           |  |                                  |          |      |                                 | 60        |      |  |      |          |  |   | 60       
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Net interest income after provision for loan losses |  |                                  | 2,046     |      |                                 | 2,319     |      |  |      | 6,297     |  |   | 6,558    
|                                                    |  |                                  |           |     
|Noninterest income                                  |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Service charges and other fee income                |  |                                  | 149       |      |                                 | 111       |      |  |      | 353       |  |   | 317      
|Loan origination and servicing fees                 |  |                                  | 73        |      |                                 | 144       |      |  |      | 189       |  |   | 400      
|Net gain on sale of securities                      |  |                                  | 192       |      |                                 | 238       |      |  |      | 576       |  |   | 550      
|Gain on sale of branch                              |  |                                  |          |      |                                 | 428       |      |  |      |          |  |   | 428      
|Recovery of impairment loss                         |  |                                  |          |      |                                 |          |      |  |      | 25        |  |   | 355      
|Other income                                        |  |                                  | 8         |      |                                 | 32        |      |  |      | 35        |  |   | 87       
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Total noninterest income                            |  |                                  | 422       |      |                                 | 953       |      |  |      | 1,178     |  |   | 2,137    
|                                                    |  |                                  |           |     
|Noninterest expense                                 |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Compensation and benefits                           |  |                                  | 1,019     |      |                                 | 1,039     |      |  |      | 3,221     |  |   | 2,913    
|Occupancy and equipment                             |  |                                  | 147       |      |                                 | 134       |      |  |      | 418       |  |   | 401      
|Data processing                                     |  |                                  | 102       |      |                                 | 222       |      |  |      | 417       |  |   | 574      
|Federal insurance premiums                          |  |                                  | 29        |      |                                 | 33        |      |  |      | 88        |  |   | 99       
|Advertising                                         |  |                                  | 46        |      |                                 | 41        |      |  |      | 121       |  |   | 118      
|Professional fees                                   |  |                                  | 63        |      |                                 | 87        |      |  |      | 241       |  |   | 256      
|Other noninterest expenses                          |  |                                  | 253       |      |                                 | 177       |      |  |      | 691       |  |   | 523      
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Total noninterest expense                           |  |                                  | 1,659     |      |                                 | 1,733     |      |  |      | 5,197     |  |   | 4,884    
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Income before income taxes                          |  |                                  | 809       |      |                                 | 1,539     |      |  |      | 2,278     |  |   | 3,811    
|                                                    |  |                                  |           |     
|Provision for income taxes                          |  |                                  | 349       |      |                                 | 614       |      |  |      | 1,002     |  |   | 1,481    
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Net income                                          |  | $                                | 460       |      | $                               | 925       |      |  | $    | 1,276     |  | $ | 2,330    
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Earnings per share                                  |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          
|Basic                                               |  | $                                | .39       |      | $                               | .52       |      |  | $    | .88       |  | $ | 1.27     
|Diluted                                             |  | $                                | .37       |      | $                               | .48       |      |  | $    | .82       |  | $ | 1.21     
|                                                    |  |                                  |           |     
|Weighted average shares                             |  |                                  | 1,165,612 |      |                                 | 1,790,870 |      |  |      | 1,455,628 |  |   | 1,839,361
|                                                    |  |                                  |           |     
|Comprehensive income (loss)                         |  | $                                | 2,064     |      | $                               | (1,066    | )    |  | $    | 686       |  | $ | 494      
|                                                    |  |                                  |           |      |                                 |           |      |  |      |           |  |   |          



See notes to
consolidated financial statements.



2



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##### Table of Contents

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Shareholders Equity

Nine months ended September 30, 2003 and 2004

(in thousands of dollars, except share data)

(unaudited)



|                                                                                                             |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------ | -- | -------------------------- | - | ------ | -------------------- |  | - | -------------------- | - |  | -------------- | ------ | - | ---------------- | - | ------- | --------------------------------------------- |  | - | ----------------------------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                             |  | Common Stock |    | Additional Paid-in Capital |   |        | Unearned ESOP Shares |  |   | Unearned StockAwards |   |  | Treasury Stock |        |   | RetainedEarnings |   |         | Accumulated Other Comprehensive Income (loss) |  |   | Total Stock - holders Equity |  
|Balance at December 31, 2002                                                                                 |  | $            | 22 |                            | $ | 22,629 |                      |  | $ | (1,390               | ) |  | $              | (1,016 | ) |                  | $ | (3,272  | )                                             |  | $ | 28,090                        |   |  | $ | 1,968  |   |  | $ | 47,031  |  
|Purchase of 10,225 shares of treasury stock                                                                  |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   | (7,310  | )                                             |  |   |                              |   |  |   |       |   |  |   | (7,310  | )
|                                                                                                             |  |              |    |                            |   |        |                      | 
|Options exercised (12,176 shares)                                                                            |  |              |    |                            |   | (132   | )                    |  |   |                     |   |  |                |       |   |                  |   | 523     |                                               |  |   |                               |   |  |   |       |   |  |   | 391     |  
|                                                                                                             |  |              |    |                            |   |        |                      | 
|ESOP shares earned                                                                                           |  |              |   |                            |   | 185    |                      |  |   | 135                  |   |  |                |       |   |                  |   |        |                                               |  |   |                              |   |  |   |       |   |  |   | 320     |  
|Stock awards earned                                                                                          |  |              |   |                            |   |       |                      |  |   |                     |   |  |                | 203    |   |                  |   |        |                                               |  |   |                              |   |  |   |       |   |  |   | 203     |  
|                                                                                                             |  |              |    |                            |   |        |                      | 
|Dividends declared ($.19 per share)                                                                          |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   |        |                                               |  |   | (554                          | ) |  |   |       |   |  |   | (554    | )
|Comprehensive income                                                                                         |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   |        |                                               |  |   | 2,330                         |   |  |   |        |   |  |   | 2,330   |  
|Change in fair value of securities classified as available-for-sale, net of reclassification and tax effects |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   |        |                                               |  |   |                              |   |  |   | (1,836 | ) |  |   | (1,836  | )
|                                                                                                             |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   | 494     |  
|                                                                                                             |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|Balance at September 30, 2003                                                                                |  | $            | 22 |                            | $ | 22,682 |                      |  | $ | (1,255               | ) |  | $              | (813   | ) |                  | $ | (10,059 | )                                             |  | $ | 29,866                        |   |  | $ | 132    |   |  | $ | 40,575  |  
|                                                                                                             |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2003                                                                                 |  | $            | 22 |                            | $ | 22,852 |                      |  | $ | (1,211               | ) |  | $              | (745   | ) |                  | $ | (9,902  | )                                             |  | $ | 30,180                        |   |  | $ | 197    |   |  | $ | 41,393  |  
|Purchase of 559,993 shares of treasury stock                                                                 |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   | (18,917 | )                                             |  |   |                              |   |  |   |       |   |  |   | (18,917 | )
|                                                                                                             |  |              |    |                            |   |        |                      | 
|Options exercised (22,692 shares)                                                                            |  |              |   |                            |   | (224   | )                    |  |   |                     |   |  |                |       |   |                  |   | 620     |                                               |  |   |                              |   |  |   |       |   |  |   | 396     |  
|ESOP shares earned                                                                                           |  |              |   |                            |   | 265    |                      |  |   | 135                  |   |  |                |       |   |                  |   |        |                                               |  |   |                              |   |  |   |       |   |  |   | 400     |  
|Stock awards earned                                                                                          |  |              |   |                            |   |       |                      |  |   |                     |   |  |                | 203    |   |                  |   |        |                                               |  |   |                              |   |  |   |       |   |  |   | 203     |  
|Dividends declared ($.33 per share)                                                                          |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   |        |                                               |  |   | (455                          | ) |  |   |       |   |  |   | (455    | )
|Comprehensive income                                                                                         |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   |        |                                               |  |   | 1,276                         |   |  |   |       |   |  |   | 1,276   |  
|Change in fair value of securities classified as available-for-sale, net of reclassification and tax effects |  |              |   |                            |   |       |                      |  |   |                     |   |  |                |       |   |                  |   |        |                                               |  |   |                              |   |  |   | (590   | ) |  |   | (590    | )
|                                                                                                             |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   | 686     |  
|                                                                                                             |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  
|Balance at September 30, 2004                                                                                |  | $            | 22 |                            | $ | 22,893 |                      |  | $ | (1,076               | ) |  | $              | (542   | ) |                  | $ | (28,199 | )                                             |  | $ | 31,001                        |   |  | $ | (393   | ) |  | $ | 23,706  |  
|                                                                                                             |  |              |    |                            |   |        |                      |  |   |                      |   |  |                |        |   |                  |   |         |                                               |  |   |                               |   |  |   |        |   |  |   |         |  



See notes to
consolidated financial statements.



3



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##### Table of Contents

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(in thousands of dollars)

(unaudited)



|                                                                                                     |  |                                 |         |   |      |   |          |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                                     |  | Nine Months Ended September 30, |        
|                                                                                                     |  | 2004                            |         |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                 |  |                                 |         |   |      |   |          |  
|Net income                                                                                           |  | $                               | 1,276   |   |      | $ | 2,330    |  
|Adjustments to reconcile net income to net cash provided by operating activities                     |  |                                 |         |   |      |   |          |  
|Depreciation and amortization                                                                        |  |                                 | 195     |   |      |   | 170      |  
|Loss (gain) on sale of real estate owned                                                             |  |                                 | 8       |   |      |   | (5       | )
|Net amortization of premiums and discounts                                                           |  |                                 | 115     |   |      |   | 20       |  
|ESOP compensation expense                                                                            |  |                                 | 400     |   |      |   | 320      |  
|Stock award compensation expense                                                                     |  |                                 | 203     |   |      |   | 203      |  
|Amortization of intangible assets                                                                    |  |                                 | 30      |   |      |   | 30       |  
|Provision for loan losses                                                                            |  |                                 |        |   |      |   | 60       |  
|Dividend reinvestments                                                                               |  |                                 | (767    | ) |      |   | (668     | )
|Federal Home Loan Bank stock dividends                                                               |  |                                 | (66     | ) |      |   | (71      | )
|Net gain on sale of securities                                                                       |  |                                 | (576    | ) |      |   | (550     | )
|Gain on sale of Mt. Sterling branch                                                                  |  |                                 |        |   |      |   | (428     | )
|Net changes in                                                                                       |  |                                 |         |   |      |   |          |  
|Accrued interest receivable and other assets                                                         |  |                                 | (899    | ) |      |   | (334     | )
|Deferred loan costs                                                                                  |  |                                 | 166     |   |      |   | (120     | )
|Accrued interest payable and other liabilities                                                       |  |                                 | 964     |   |      |   | 607      |  
|                                                                                                     |  |                                 |         |   |      |   |          |  
|Net cash from operating activities                                                                   |  |                                 | 1,049   |   |      |   | 1,564    |  
|                                                                                                     |  |                                
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                 |  |                                 |         |   |      |   |          |  
|Purchase of securities available-for-sale                                                            |  |                                 | (58,646 | ) |      |   | (127,224 | )
|Purchase of securities held-to-maturity                                                              |  |                                 |        |   |      |   | (2,000   | )
|Principal paydowns on mortgage-backed securities                                                     |  |                                 | 12,958  |   |      |   | 15,140   |  
|Purchase of Federal Home Loan Bank stock                                                             |  |                                 | (65     | ) |      |   | (175     | )
|Proceeds from maturities of securities                                                               |  |                                 | 8,609   |   |      |   | 37,525   |  
|Proceeds from sale of securities available-for-sale                                                  |  |                                 | 36,699  |   |      |   | 37,922   |  
|Purchase of loans                                                                                    |  |                                 | (2,220  | ) |      |   | (5,083   | )
|Net (increase) decrease in loans receivable                                                          |  |                                 | (1,546  | ) |      |   | 22,155   |  
|Proceeds from sale of real estate owned                                                              |  |                                 | 250     |   |      |   | 417      |  
|Proceeds from sale of Mt. Sterling branch                                                            |  |                                 |        |   |      |   | (6,103   | )
|Purchase of property and equipment                                                                   |  |                                 | (157    | ) |      |   | (404     | )
|                                                                                                     |  |                                 |         |   |      |   |          |  
|Net cash from investing activities                                                                   |  |                                 | (4,118  | ) |      |   | (27,830  | )
|                                                                                                     |  |                                
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                 |  |                                 |         |   |      |   |          |  
|Net increase (decrease) in deposits                                                                  |  |                                 | (582    | ) |      |   | 5,644    |  
|Net change in advances from borrowers for taxes and insurance                                        |  |                                 | (58     | ) |      |   | (116     | )
|Proceeds from Federal Home Loan Bank Advances                                                        |  |                                 | 450     |   |      |   | 4,000    |  
|Proceeds from subordinated debt                                                                      |  |                                 | 7,217   |   |      |   |         |  
|Purchase of treasury stock                                                                           |  |                                 | (18,917 | ) |      |   | (7,310   | )
|Dividends paid                                                                                       |  |                                 | (493    | ) |      |   | (558     | )
|Options exercised                                                                                    |  |                                 | 396     |   |      |   | 391      |  
|                                                                                                     |  |                                 |         |   |      |   |          |  
|Net cash from financing activities                                                                   |  |                                 | (11,987 | ) |      |   | 2,051    |  
|                                                                                                     |  |                                 |         |   |      |   |          |  
|Net change in cash and cash equivalents                                                              |  |                                 | (15,056 | ) |      |   | (24,215  | )
|                                                                                                     |  |                                
|Cash and cash equivalents                                                                            |  |                                 |         |   |      |   |          |  
|Beginning of period                                                                                  |  |                                 | 29,124  |   |      |   | 42,827   |  
|                                                                                                     |  |                                 |         |   |      |   |          |  
|End of period                                                                                        |  | $                               | 14,068  |   |      | $ | 18,612   |  
|                                                                                                     |  |                                 |         |   |      |   |          |  
|Supplemental disclosures of cash flow information                                                    |  |                                 |         |   |      |   |          |  
|Cash paid during the period for                                                                      |  |                                 |         |   |      |   |          |  
|Interest                                                                                             |  | $                               | 4,423   |   |      | $ | 5,196    |  
|Taxes, net of refunds                                                                                |  |                                 | 562     |   |      |   | 1,029    |  
|Transfers to real estate owned                                                                       |  |                                 | 187     |   |      |   | 232      |  
|Transfer of securities to available-for-sale from held-to-maturity on January 24, 2003 at fair value |  |                                 |        |   |      |   | 24,471   |  
|Due to broker                                                                                        |  |                                 | 3,900   |   |      |   | 5,005    |  



See notes to
consolidated financial statements.



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##### Table of Contents

FIRST FEDERAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(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, 2003 consolidated balance sheet presented herein has been derived from the audited consolidated 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, 2004. 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.



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



Note 2  Subordinated Debt and
Trust Preferred Securities



On March 25, 2004, FFBI Capital Trust I (the
Trust), a Delaware statutory trust sponsored by the Company, issued $7.0 million in the form of fixed/floating rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the
Companys $217,000 capital contribution for the Trusts common securities, were used to acquire $7.2 million aggregate principal amount of the Companys fixed/floating rate junior subordinated deferrable interest debentures due 2034
(the Debentures), which constitute the sole asset of the Trust. Prior to April 7, 2009 the interest rate on the Debentures and the capital securities is fixed at a rate of 5.838% and on or after April 7, 2009 the interest rate on the
Debentures is variable and adjustable quarterly at 2.80% over the three-month LIBOR.The stated maturity of the Debentures is April 6, 2034. In addition, the Debentures are subject to redemption at par at the option of the Company, subject to
prior regulatory approval, in whole or in part on any interest payment date on or after April 7, 2009.



Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the trust is not consolidated with the Company. Accordingly, the Company does not report the securities issued by the trust as
liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the trust, as these are no longer eliminated in consolidation.



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##### Table of Contents

Note 3 Tender Offer



On April 16, 2004, the Company commenced a self-tender offer for up to 560,000 shares of its common stock. On May 28, 2004, the Company purchased 559,993 of its common
shares at $33.50 per share pursuant to its self tender offer, which expired May 21, 2004. The tender offer was in the form of a modified Dutch auction tender. Under this procedure, shareholders were given the opportunity to sell part or
all of their shares to the Company at a price of not less than $31.00 per share and not more than $34.00 per share. Upon the expiration of the offer, the Company selected the lowest purchase price that allowed it to buy 560,000 shares. All shares
purchased in this offering received the same price. According to the final report from the depositary for the offer, the number of shares that were properly tendered and not withdrawn prior to the expiration of the offer exceeded the number of
shares that the Company had offered to purchase. Therefore, the Company purchased, in most cases, 66.41% of the shares tendered by each of its stockholders.



The aggregate cost of the purchase totaled $18.9 million, including fees and expenses of approximately $157,000. The tender offer was financed with proceeds of the trust
preferred securities issued by the Company in a pooled offering, cash on hand and a $6.0 million capital distribution from First Federal Bank.



Note 4  Earnings Per Share



For purposes of per share calculations, the Company had 1,316,886 and 1,722,273 shares of common stock outstanding at September 30, 2004 and 2003 respectively. Basic
earnings per share for the three months and nine months ended September 30, 2004 and 2003 were computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share for the three months and nine months
ended September 30, 2004 and 2003 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 September 30, |       | For the nine months Ended September 30,
|                                           |  | 2004                                     |       | 2003                                    |   | 2004  |  | 2003
|                                           |  | (in thousands, except per share data)   
|Basic                                      |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|Net income                                 |  | $                                        | 460   |                                         | $ | 925   |  | $    | 1,276 |  | $ | 2,330
|                                           |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|Weighted average common shares outstanding |  |                                          | 1,166 |                                         |   | 1,791 |  |      | 1,456 |  |   | 1,839
|                                           |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|Basic earnings per common share            |  | $                                        | .39   |                                         | $ | .52   |  | $    | .88   |  | $ | 1.27 
|                                           |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|                                           |  |                                          |       |                                        
|Diluted                                    |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|Net income                                 |  | $                                        | 460   |                                         | $ | 925   |  | $    | 1,276 |  | $ | 2,330
|                                           |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|Weighted average common shares outstanding |  |                                          | 1,166 |                                         |   | 1,791 |  |      | 1,456 |  |   | 1,839
|Dilutive effect of stock options           |  |                                          | 68    |                                         |   | 102   |  |      | 93    |  |   | 75   
|Dilutive effect of stock awards            |  |                                          | 9     |                                         |   | 16    |  |      | 13    |  |   | 14   
|                                           |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|Diluted average common shares              |  |                                          | 1,243 |                                         |   | 1,909 |  |      | 1,562 |  |   | 1,928
|                                           |  |                                          |       |                                         |   |       |  |      |       |  |   |      
|Diluted earnings per common share          |  | $                                        | .37   |                                         | $ | .48   |  | $    | .82   |  | $ | 1.21 
|                                           |  |                                          |       |                                         |   |       |  |      |       |  |   |      



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##### Table of Contents

Note 5  Stock-Based Compensation



The Company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its stock option plan.
Accordingly, no compensation expense has been recognized at the date of grant. Had compensation expense 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.



|                               |  |                                          |     |                                         |   |      |  |      |       |  |   |      
|------------------------------ |  | ---------------------------------------- | --- | --------------------------------------- | - | ---- |  | ---- | ----- |  | - | -----
|                               |  | For the three months Ended September 30, |     | For the nine months Ended September 30,
|                               |  | 2004                                     |     | 2003                                    |   | 2004 |  | 2003
|                               |  | (in thousands, except per share data)   
|                               |  |                                          |     |                                        
|Net income as reported         |  | $                                        | 460 |                                         | $ | 925  |  | $    | 1,276 |  | $ | 2,330
|Pro forma net income           |  |                                          | 437 |                                         |   | 902  |  |      | 1,208 |  |   | 2,262
|Earnings per share as reported |  |                                          |     |                                         |   |      |  |      |       |  |   |      
|Basic                          |  |                                          | .39 |                                         |   | .52  |  |      | .88   |  |   | 1.27 
|Diluted                        |  |                                          | .37 |                                         |   | .48  |  |      | .82   |  |   | 1.21 
|Pro forma earnings per share   |  |                                          |     |                                         |   |      |  |      |       |  |   |      
|Basic                          |  |                                          | .37 |                                         |   | .50  |  |      | .83   |  |   | 1.23 
|Diluted                        |  |                                          | .35 |                                         |   | .47  |  |      | .77   |  |   | 1.17 



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.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 Litigation 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;



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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 September 30, 2004 to its
financial condition at December 31, 2003 and the results of its operations for the three-month and nine-month periods ended September 30, 2004 to the same periods in 2003. This discussion should be read in conjunction with the interim consolidated
financial statements and footnotes included herein.



FINANCIAL CONDITION



Total assets were $314.8 million at September 30, 2004 and $328.7 million at
December 31, 2003. During the nine months ended September 30, 2004, cash and cash equivalents decreased $15.1 million to $14.1 million and securities available-for-sale decreased $3.1 million to $157.2 million. The decreases in cash and cash
equivalents and securities available-for-sale were primarily due to completion of the Companys tender offer in May 2004. Loans increased $3.4 million as a result of a shift away from loan originations through the Federal Home Loan Bank
Mortgage Partnership Finance Program loans and toward adjustable rate portfolio loans.



The allowance for loan losses was $933,000 at September 30, 2004 and $963,000 at December 31, 2003. There were no impaired loans at either date. The allowance for loan losses represented .69% of total loans and 59.59% of nonperforming loans
at September 30, 2004 compared to .72% of total loans and 83.52% of nonperforming loans at December 31, 2003. Nonperforming assets totaled $1.6 million and $1.4 million at September 30, 2004 and December 31, 2003, respectively. The ratio of
non-performing assets to total assets at September 30, 2004 was .52% compared to .42% at December 31, 2003.



Total liabilities at September 30, 2004 were $291.1 million compared to $287.3 million at December 31, 2003, an increase of $3.7 million. The increase in total liabilities primarily reflects the addition of $7.2
million of subordinated debt in connection with the issuance of trust preferred securities, offset by a decrease in other liabilities of $3.4 million primarily due to the payment and settlement of amounts due to broker for the purchase of securities
available-for-sale.



Shareholders equity at September 30, 2004 was $23.7
million compared to $41.4 million at December 31, 2003, a decrease of $17.7 million. The decrease in equity primarily reflects the repurchase of 559,993 shares of common stock totaling $18.9 million through the tender offer previously discussed and
a decrease in the fair value of securities available-for-sale, net of tax of $590,000, offset by net income of $1.3 million.



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003



Net income decreased $465,000 to $460,000 for the quarter ended September 30, 2004 compared to the same period in 2003. The decrease in net
income was primarily a result of a decrease in noninterest income associated with gains on sales of securities and the gain on the sale of the branch office located in Mt. Sterling, Illinois recognized in the prior period. In addition, net interest
income decreased and was partially offset by a slight decrease in noninterest expense and a decrease in the provision for income taxes.



Net interest income was $2.0 million for the quarter ended September 30, 2004 compared to $2.4 million for the same prior year period. The decrease in net interest income
was primarily a result of the tender offer completed on May 28, 2004, which decreased interest-earning assets approximately $11.6 million, and the trust preferred offering completed on March 25, 2004, which increased interest-bearing liabilities
approximately $7.2 million. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 106.20% from 115.06% for the three-month periods, respectively. The net interest spread and the net interest margin
decreased to 2.58% and 2.71%, respectively, for the quarter ended September 30, 2004



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##### Table of Contents

from 2.73% and 3.02%, respectively, for the same period in 2003. The decrease in the spread and margin was due largely to
the decrease in volume of interest-earning assets and the increase in volume of interest-bearing liabilities. The average yield on interest-earning assets decreased to 4.76% for the quarter ended September 30, 2004 from 4.93% for the same quarter in
2003, while the average yield on interest-bearing liabilities decreased to 2.18% for the quarter ended September 30, 2004 from 2.20% for the same period in 2003.



The provision for loan losses was zero for the quarter ended September 30, 2004 compared to $60,000 for the same prior year period.
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 September 30, 2004, 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 September 30, 2004 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 $422,000 for the three-month
period ended September 30, 2004 compared to $953,000 for the same period in 2003. The decrease in noninterest income was primarily a result of a $428,000 decrease in gain on the sale of a branch office located in Mt. Sterling, Illinois, a $71,000
decrease in loan origination and servicing fees due to decreased loan originations through the Federal Home Loan Bank Mortgage Partnership Finance program, a $46,000 decrease in net gains on the sale of securities, and a $24,000 decrease in other
income due to the reclassification of fee income on savings accounts, offset by an increase of $38,000 in service charges and other fee income due to the reclassification of fee income on savings accounts and the implementation of an overdraft
protection program.



Noninterest expense was $1.7 million for both quarters
ended September 30, 2004 and 2003. Compensation and benefits expense decreased $20,000 compared to the same quarter in 2003. During September 2003, the Company experienced an additional $72,000 in compensation expense as a result of employee stock
option exercises. Data processing expense decreased $120,000 due to a change in data processing firms and professional fees decreased $24,000, offset by increases in other noninterest expenses of $76,000 primarily associated with the sale of real
estate owned and increased loan origination expenses on portfolio loans, and an increase of $13,000 in occupancy and equipment expense.



The Companys federal income tax expense decreased $265,000 to $349,000 for the quarter ended September 30, 2004 compared to $614,000 during the same period in 2003.
Income tax expense was approximately 43% and 40% of pretax income in September 2004 and 2003, respectively. The increase in the effective tax rate is a result of the net losses incurred at the holding company throughout 2004 for which a valuation
allowance has been established.



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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003



Net income decreased $1.1 million to $1.3 million for the nine months ended September 30,
2004 compared to $2.3 million for the nine-month period ended September 30, 2003. The decrease in net income was primarily a result of a decrease in noninterest income associated with the gain on the sale of the Mt. Sterling, Illinois branch office
in 2003, the recovery of impairment losses recognized in 2003, and a slight decrease in net interest income. The Company also experienced an increase in noninterest expense, offset by a decrease in the income tax provision.



Net interest income was $6.3 million for the nine months ended September 30, 2004 compared to
$6.6 million for the same period in 2003. The decrease in net interest income was primarily a result of the tender offer completed on May 28, 2004, which decreased interest-earning assets approximately $11.6 million, and the trust preferred offering
completed on March 25, 2004, which increased interest-bearing liabilities approximately $7.2 million. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 108.64% from 114.44% for the nine-month periods,
respectively. The net interest margin decreased to 2.70% for the nine months ended September 30, 2004 from 2.83% for the same previous year period, while the net interest spread slightly increased to 2.53% for the nine-months ended September 30,
2004 from 2.52%.



The provision for loan losses was zero for the nine-months
ended September 30, 2004 compared to $60,000 for the same prior year period. Management considered the allowance for loan losses to be adequate during both periods due to relatively stable delinquency trends.



Noninterest income was $1.2 million for the nine-month period ended September 30, 2004
compared to $2.1 million for the same period in 2003. The decrease in noninterest income was primarily a result of a $428,000 decrease in the gain on the sale of a branch office located in Mt. Sterling, Illinois, a decrease of $330,000 in the
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, a decrease of $211,000 in loan origination and servicing fees due
to decreased loan originations through the Federal Home Loan Bank Mortgage Partnership Finance program, and a decrease of $52,000 in other income due to the reclassification of fee income on savings accounts, offset by an increase of $36,000 in
service charges and other fee income due to the reclassification of fee income on savings accounts and the implementation of an overdraft protection program, and an increase of $26,000 in net gains on the sale of securities.



Noninterest expense was $5.2 million and $4.9 million for the nine-months ended September 30,
2004 and 2003 respectively. The increase in noninterest expense primarily reflects increased compensation and benefits expense of $308,000 associated with an increase in employee benefits including health insurance premiums and retirement funds, and
an increase of $168,000 in other noninterest expenses due to increased loan origination expenses on portfolio loans of approximately $141,000 and an increase in consulting fees of approximately $28,000. Occupancy and equipment expense and
advertising expense also experienced slight increases during the period, offset by a decrease of $157,000 in data processing due to a change in data processing firms, and slight decreases in federal insurance premiums and professional fees.



The Companys federal income tax expense decreased $479,000 to $1.0
million for the nine-months ended September 30, 2004 compared to $1.5 million for the same period in 2003. Income tax expense was approximately 44% of pretax income in 2004 compared to 39% of pretax income in 2003. The increase in the effective tax
rate is a result of the net losses incurred at the holding company throughout 2004 for which a valuation allowance has been established.



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 September 30, 2004, cash and



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cash equivalents totaled $14.1 million. At September 30, 2004, the Company had commitments to fund loans of $1.1 million.
At the same time, certificates of deposit which are scheduled to mature in one year or less totaled $104.5 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.



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 September 30, 2004:



|                                            |  |        |        |   |          |   |        |        |        |  |      |        |  |   |        |  |      |  
|------------------------------------------- |  | ------ | ------ | - | -------- | - | ------ | ------ | ------ |  | ---- | ------ |  | - | ------ |  | ---- | -
|                                            |  | ACTUAL |        |   | REQUIRED |   |        | EXCESS |       
|                                            |  | AMOUNT |        | % |          |   | AMOUNT |        | %      |  |      | AMOUNT |  | % |       
|Core capital(to adjusted total assets)      |  | $      | 23,829 |   | 7.68     | % |        | $      | 12,418 |  | 4.00 | %      |  | $ | 11,411 |  | 3.68 | %
|Tangible capital(to adjusted total assets)  |  |        | 23,829 |   | 7.68     |   |        |        | 4,657  |  | 1.50 |        |  |   | 19,172 |  | 6.18 |  
|Risk-based capital(to risk-weighted assets) |  |        | 24,730 |   | 16.96    |   |        |        | 11,666 |  | 8.00 |        |  |   | 13,064 |  | 8.96 |  



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SUBSEQUENT EVENT



During the quarter ended December 31, 2001, the Company recorded an impairment loss of $596,000 related to certificates of deposit purchased through a broker who was
charged by the SEC with securities fraud in relation to these certificates of deposit. During October 2004, the Company received a check in the amount of $29,800 in relation to the distribution of receivership assets from the securities fraud. As a
result, the Companys income statement will reflect an increase in other income for the fourth quarter of 2004. During October 2004, the Company also received a letter indicating that a fifth distribution of receivership of assets is in
progress. The Company expects to recover an additional $29,800 through this fifth distribution however, due to the uncertainty of the distribution, no additional amounts have been recorded in income.



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.



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



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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 June 30, 2004, 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 Septembers net portfolio value to be similar to that of June 30, 2004 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 Assets |         
|                                                      | Amount |                        | $ Change |  |                                       | % Change |  |     | NPV Ratio |  |       | Basis Point Change | 
|                                                      |        | (Dollars in thousands) |          |  |                                       |          |  |     |          
|300                                                   |        | $                      | 19,611   |  | (14,299                               | )        |  | (42 | )%        |  | 6.68  | %                  |  | (415 | )bp
|200                                                   |        |                        | 25,179   |  | (8,730                                | )        |  | (26 | )         |  | 8.37  |                    |  | (246 | )bp
|100                                                   |        |                        | 30,061   |  | (3,848                                | )        |  | (11 | )         |  | 9.78  |                    |  | (105 | )bp
|Static                                                |        |                        | 33,909   |  |                                      |          |  |    |           |  | 10.83 |                    |  |     |    
|(100)                                                 |        |                        | 36,698   |  | 2,788                                 |          |  | 8   |           |  | 11.55 |                    |  | 72   | 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.



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



The
Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act
with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.



There has been no change in the Companys internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 that
occurred during the Companys last fiscal quarter that has materially affected or is reasonably likely to materially affect, the companys internal control over financial reporting.



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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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|---- | ---------------------------------------------------------------



None



ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



None



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.



On August 3, 2004, 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:
|Dr. Stephan L. Roth   |  | 1,140,656            |  | 5,644                    
|                      |  |                      |  |                          
|Richard D. Stephens   |  | 1,141,531            |  | 4,769                    
|                      |  |                      |  |                          



The Directors whose
terms continued and the years their terms expire are as follows: Franklin M. Hartzell (2005), Murrel Hollis (2005), Eldon Mette (2005), B. Bradford Billings (2006), Gerald L. Prunty (2006), and James J. Stebor (2006).



|                                                                                  |  |                     |  |                         |  |                          
|--------------------------------------------------------------------------------- |  | ------------------- |  | ----------------------- |  | -------------------------
|                                                                                  |  | Number of Votes For |  | Number of Votes Against |  | Number of Votes Abstained
|Ratification of Crowe Chizek and Company LLC as the Companys Independent Auditor |  | 1,136,516           |  | 5,215                   |  | 4,569                    



ITEM 5. OTHER INFORMATION.



None



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ITEM 6. EXHIBITS



|     |  |                                                                                                  
|---- |  | -------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation of First Federal Bancshares, Inc. (1)                               
|     | 
|3.2  |  | Bylaws of First Federal Bancshares, Inc. (2)                                                     
|     | 
|4.0  |  | Specimen Stock Certificate of First Federal Bancshares, Inc. (1)                                 
|     | 
|10.1 |  | Employment Agreement between First Federal Bancshares, Inc. and James J. Stebor (3)              
|     | 
|10.2 |  | Employment Agreement between First Federal Bank and James J. Stebor (3)                          
|     | 
|10.3 |  | First Federal Bank Supplemental Executive Retirement Plan (3)                                    
|     | 
|10.4 |  | First Federal Bank Employee Severance Compensation Plan (3)                                      
|     | 
|10.5 |  | First Federal Bancshares, Inc. 2001 Stock-Based Incentive Plan (4)                               
|     | 
|10.6 |  | Non-Competition and Consulting Agreement by and between First Federal Bank and Eldon R. Mette (5)
|     | 
|10.7 |  | PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan (6)                                           
|     | 
|31.1 |  | Rule 13a  14(a)/15d  14(a) Certification of the Chief Executive Officer.                       
|     | 
|31.2 |  | Rule 13a  14(a)/15d  14(a) Certification of the Chief Financial Officer.                       
|     | 
|32.1 |  | Section 1350 Certification of the Chief Executive Officer.                                       
|     | 
|32.2 |  | Section 1350 Certification of the Chief Financial Officer.                                       

---

|(1) | Incorporated herein by reference from the Exhibits to Form SB-2, Registration Statement and amendments thereto, initially filed on May 5, 2000, Registration No. 333-36368.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-KSB, filed on March 28, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on November 14, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on August 13, 2001.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-K, filed on April 11, 2003.
|--- | --------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to PFSB Bancorp, Inc.s Registration Statement on Form S-8 (SEC No. 333-35020) filed on April 18, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



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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: November 15, 2004 |  | /s/ James J. Stebor                  
|                        |  | James J. Stebor                      
|                        |  | President and Chief Executive Officer
|                        | 
|Date: November 15, 2004 |  | /s/ Cathy D. Pendell                 
|                        |  | Cathy D. Pendell                     
|                        |  | Treasurer                            



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