UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-K [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 [   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________________ to _____________ Commission File Number: 0-30753 FIRST FEDERAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter) DELAWARE
     37-1397683(State or other jurisdiction of
     (I.R.S. Employer Identification No.)incorporation or organization)109 East Depot Street, Colchester, Illinois
     62326(Address of principal executive offices)
     (Zip Code)  Registrants telephone number, including area code: (309) 776-3225 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
(Title of Class) Indicated
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. __X__ Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes _____ No __X__ The aggregate market value of the voting and non-voting  common equity held by  non-affiliates as of the last business
day of the Registrant's most recently completed second quarter fiscal year end was $38,886,303
based upon the closing price of $23.75 per share as quoted on the Nasdaq National Market. The
number of shares outstanding of the registrants common stock as of March 23, 2004
was 1,866,291. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2003
Annual Report to Stockholders and of the Proxy Statement for the 2004 Annual Meeting of
Stockholders are incorporated by reference in Parts II and III, respectively, of this
Form 10-K.     INDEX Part IPageItem  1.
     Business
     3Item  2.
     Properties
     29Item  3.
     Legal Proceedings
     30Item  4.
     Submission of Matters to a Vote of Securities Holders
     30Part IIItem  5.
     Market for Registrant's Common Equity and Related Stockholder Matters
     30Item  6.
     Selected Financial Data
     30Item  7.
     Management's Discussion and Analysis of Financial Condition and Results of Operation
     30Item  7A.
     Quantitative and Qualitative Disclosures About Market Risk
     30Item  8.
     Financial Statements and Supplementary Data
     30Item  9.
     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
     31Item  9A.
     Controls and Procedures
     31Part IIIItem  10.
     Directors and Executive Officers of the Registrant
     31Item  11.
     Executive Compensation
     31Item  12.
     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     32Item  13.
     Certain Relationships and Related Transactions
     32Part IVItem  14.
     Principal Accountant Fees and Services
     32Item  15.
     Exhibits, Financial Statement Schedules, and Reports on Form 8-K
     32              This
report contains certain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather statements
based on First Federal Bancshares, Inc.s current expectations regarding its business
strategies, intended results and future performance. Forward-looking statements are
preceded by terms such as expects, believes,
anticipates, intends and similar expressions. Managements
ability to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate trends, the
general economic climate in the market area in which First Federal Bancshares operates, as
well as nationwide, First Federal Bancshares ability to control costs and expenses,
competitive products and pricing, loan delinquency rates and changes in federal and state
legislation and regulation. These factors should be considered in evaluating the
forward-looking statements and undue reliance should not be placed on such statements.
First Federal Bancshares assumes no obligation to update any forward-looking statements. PART I Item 1.     BUSINESS General First
Federal Bancshares, Inc., (also referred to as the Company or First
Federal Bancshares) was organized as a Delaware business corporation in 2000 to be
the savings and loan holding company for First Federal Bank (also referred to as the
Bank or First Federal) in connection with the conversion of First
Federal from mutual to stock form of ownership. The conversion was completed on September
27, 2000. First Federal Bancshares has no significant assets, other than all of the
outstanding shares of First Federal, and no significant liabilities. Accordingly, the
information set forth in this report, including the consolidated financial statements and
related financial data, relates primarily to First Federal. First
Federal operates as a community-oriented financial institution, specializing in the
acceptance of retail deposits from the general public in the areas surrounding its eight
full-service banking offices and using those funds, together with funds generated from
operations and borrowings, to originate loans. The principal lending activity of First
Federal is the origination of mortgage loans for the purpose of purchasing or refinancing
one- to four-family residential property. First Federal also originates multi-family and
commercial real estate loans, residential construction loans, commercial business loans
and a variety of consumer loans. First Federal originates loans primarily for long-term
investment purposes. First Federal also invests in mortgage-backed securities, securities
issued by the U.S. Government and state and local governments, and other permissible
investments. First Federals revenues are derived principally from the generation of
interest and fees on loans originated and, to a lesser extent, interest and dividends on
investments. First Federals primary sources of funds are deposits, principal and
interest payments on loans and investments and advances from the Federal Home Loan Bank of
Chicago. Market Area First
Federal conducts business from five banking offices in west central Illinois and three
banking offices in northeast Missouri. First Federals primary deposit gathering and
lending area is concentrated in the communities surrounding its eight banking offices and,
to a lesser extent, in the surrounding counties. The
market area served by First Federal is generally rural and has an agriculturally-based
economy. Adams County, Illinois, which is home to the city of Quincy, is a regional
population and employment center for west central Illinois and northeast Missouri. Quincy
has a diverse employment base and serves as a center for education, healthcare and related
services. As of June 30, 2003, First Federal held 5.95% of the deposits in Quincy which
was the 7th largest share of deposits out of 11 institutions in the city.  3   Competition First
Federal faces intense competition for the attraction of deposits and origination of loans
in its market area. Its most direct competition for deposits has historically come from
the several financial institutions operating in First Federals market area and, to a
lesser extent, from other financial service companies, such as brokerage firms, credit
unions and insurance companies. While those entities still provide a significant source of
competition for deposits, First Federal also currently faces significant competition for
deposits from the mutual fund industry as customers seek alternative sources of investment
for their funds. In this regard, First Federal also faces competition for investors
funds from their direct purchase of short-term money market securities and other corporate
and government securities. First Federals competition for loans comes primarily from
financial institutions in its market area, and to a lesser extent from other financial
service providers, such as mortgage companies and mortgage brokers. Additionally,
competition for loans has increased due to the increasing number of non-depository
financial service companies entering the mortgage market, such as insurance companies,
securities companies and specialty finance companies. First Federal expects competition to
increase in the future as a result of legislative, regulatory and technological changes
and the continuing trend of consolidation in the financial services industry.
Technological advances, for example, have lowered barriers to entry, allowed banks to
expand their geographic reach by providing services over the Internet and made it possible
for non-depository institutions to offer products and services that traditionally have
been provided by banks. The Gramm-Leach-Bliley Act, which permits affiliation among banks,
securities firms and insurance companies, also promotes a competitive environment in the
financial services industry. Some of the institutions with which First Federal competes
are significantly larger than First Federal and, therefore, have significantly greater
resources. Competition for deposits and the origination of loans could limit First
Federals growth in the future. Lending Activities General.   First
Federals loan portfolio primarily consists of one- to four-family mortgage
loans. To a lesser degree, First Federals loan portfolio also includes
multi-family and commercial real estate loans, residential construction loans,
commercial business loans and a variety of consumer loans. Most of First
Federals borrowers are located in the counties where its branches are
located and in the surrounding counties. First
Federals loans are subject to federal laws and regulations. Interest rates charged
by First Federal on loans are affected principally by First Federals current
asset/liability strategy, the demand for various types of loans, the supply of money
available for lending purposes and the rates offered by competitors. These factors are, in
turn, affected by general and economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and governmental
budgetary matters.  4   Loan
Portfolio Analysis.   The following table presents the composition of First Federal's loan
portfolio at the dates indicated. First Federal had no concentration of loans exceeding
10% of total loans receivable other than as disclosed below. At December 31,
     AtFebruary 29, 20002003
     2002
     2001
     2000Amount
     Percentof Total
     Amount
     Percentof Total
     Amount
     Percentof Total
     Amount
     Percentof Total
     Amount
     Percentof Total(Dollars in thousands)Real estate loans:One- to four-family
     $82,931
        
     62.41
        %
     $108,816
        
     71.92
        %
     $75,904
        
     66.98
        %
     $81,630
        
     70.32
        %
     $80,383
        
     70.52
        %Multi-family andcommercial
     30,453
        
     22.92
        
     24,281
        
     16.05
        
     19,973
        
     17.62
        
     15,767
        
     13.58
        
     15,580
        
     13.67Construction
     1,579
        
     1.19
        
     1,221
        
     0.81
        
     439
        
     0.39
        
     964
        
     0.83
        
     1,675
        
     1.47Total real estate loans
     114,963
        
     86.52
        
     134,318
        
     88.78
        
     96,316
        
     84.99
        
     98,361
        
     84.73
        
     97,638
        
     85.66Commercial loans
     7,191
        
     5.41
        
     6,136
        
     4.06
        
     5,684
        
     5.02
        
     5,281
        
     4.55
        
     3,885
        
     3.41Consumer and other loans:Automobile
     4,470
        
     3.36
        
     4,342
        
     2.87
        
     5,055
        
     4.46
        
     5,599
        
     4.82
        
     5,874
        
     5.15Home improvement
     1,405
        
     1.06
        
     1,823
        
     1.20
        
     2,270
        
     2.00
        
     2,491
        
     2.15
        
     2,434
        
     2.14Share loans
     1,231
        
     0.93
        
     1,279
        
     0.84
        
     931
        
     0.82
        
     1,004
        
     0.87
        
     783
        
     0.68Other
     3,621
        
     2.72
        
     3,400
        
     2.25
        
     3,068
        
     2.71
        
     3,347
        
     2.88
        
     3,379
        
     2.96Total consumer andother loans
     10,727
        
     8.07
        
     10,844
        
     7.16
        
     11,324
        
     9.99
        
     12,441
        
     10.72
        
     12,470
        
     10.93Total loans
     132,881
        
     100.00
        %
     151,298
        
     100.00
        %
     113,324
        
     100.01
        
     16,083
        
     100.00
        %
     113,993
        
     100.00
        %Less:Unearned discounts
     
        
     
        
     
        
     
        
     
        
     
        
     
        
     
        
     Deferred loan originationfees and discounts
     17
        
     
        
     (53
        )
     
        
     121
        
     
        
     108
        
     
        
     92Allowance for loan losses
     (963
        )
     
        
     (976
        )
     
        
     (534
        )
     
        
     (572
        )
     
        
     (483
        )Total loans, net
     $131,935
        
     
        
     $150,269
        
     
        
     $112,911
        
     
        
     $115,619
        
     
        
     $113,602 5   The
following table presents certain information at December 31, 2003 regarding the dollar
amount of loans maturing in First Federals portfolio based on their contractual
terms to maturity or scheduled amortization, but does not include potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due in one year or less. Loan balances do not include
undisbursed loan proceeds, net deferred loan origination costs and allowance for loan
losses. Construction loans are originated as construction/permanent. Therefore, some
construction loans may have a term of longer then one year. At December 31, 2003One- toFour-Family
     Multi-Family andCommercialReal Estate
     Construction
     Consumer
     Commercial
     TotalLoans(In thousands)Amounts due in:One year or less
     $8,895
        
     $3,909
        
     $1,512
        
     $2,685
        
     $3,464
        
     $20,465More than one year to three years
     14,845
        
     7,515
        
     
        
     3,239
        
     1,559
        
     27,158More than three years to five years
     8,050
        
     7,510
        
     
        
     3,776
        
     1,727
        
     21,063More than five years to 10 years
     4,444
        
     2,960
        
     
        
     947
        
     441
        
     8,792More than 10 years to 20 years
     23,652
        
     4,029
        
     
        
     61
        
     
        
     27,742More than 20 years
     23,045
        
     4,530
        
     67
        
     19
        
     
        
     27,661Total amount due
        
     $82,931
        
     $30,453
        
     $1,579
        
     $10,727
        
     $7,191
        
     $132,881 Scheduled
contractual principal repayments of loans do not reflect the actual life of the loans. The
average life of a loan is substantially less than its contractual term because of
prepayments. In addition, due-on-sale clauses on loans generally give First Federal the
right to declare loans immediately due and payable if, among other things, the borrower
sells the real property with the mortgage and the loan is not repaid. The average life of
a mortgage loan tends to increase, however, when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely, tends to
decrease when rates on existing mortgage loans are substantially higher than current
mortgage loan market rates. The
following table presents the dollar amount of all loans due after December 31, 2004, which
have fixed interest rates and floating or adjustable interest rates. Due After December 31, 2004Fixed
     Adjustable
     Total(In thousands)Real estate loans:One- to four-family
     $25,800
        
     $48,236
        
     $74,036Multi-family and commercial
     18,571
        
     7,973
        
     26,544Construction
     
        
     67
        
     67Total real estate loans
     44,371
        
     56,276
        
     100,647Consumer loans
     8,042
        
     
        
     8,042Commercial loans
     2,814
        
     913
        
     3,727Total loans
     $55,227
        
     $57,189
        
     $112,416 One-
to Four-Family Real Estate Loans.Prior to 2002, First Federals
residential mortgage loans were primarily structured as either one-year adjustable-rate
mortgage loans or five-year balloon loans. In 2002, First Federal discontinued offering
five-year balloon loans and began offering adjustable-rate mortgage loans that adjust
annually after a five-year initial fixed period. During 2003, First Federal expanded its
ARM products by adding adjustable rate mortgage loans that adjust annually after a
three-year and seven-year initial fixed period. The loan  6   fees charged, interest rates and
other provisions of First Federals mortgage loans are determined by First Federal
on the basis of its own pricing criteria and market conditions. First
Federals adjustable-rate mortgage loans are based on an amortization schedule that
ranges from 10 to 30 years. Interest rates and payments on First Federals
adjustable-rate mortgage loans generally are adjusted annually after the initial term
based on the weekly average yield on United States Treasury securities adjusted to a
constant maturity. The maximum amount by which the interest rate may be increased or
decreased on First Federals adjustable-rate mortgage loans is 2% per adjustment
period and the lifetime interest rate cap is generally 5% over the initial interest rate
of the loan. First Federal qualifies the borrower based on the borrowers ability to
repay the loan based on the maximum interest rate at the first adjustment. The terms and
conditions of the adjustable-rate mortgage loans offered by First Federal, including the
index for interest rates, may vary from time to time. First
Federals balloon loans have a five-year term and payments based on an amortization
schedule of up to 30 years. The interest rate on First Federals balloon loans is
fixed for the term of the loan. First Federal typically notifies the borrower in writing
30 days before the end of the loan term of the maturity of the loan and that the loan must
be repaid or the term extended. In most instances, a new rate is negotiated to meet market
conditions and an extension of the loan is executed for another five-year term with an
amortization schedule equal to the original amortization term less the prior balloon
term(s). First Federal generally does not extend the loan if the borrower is delinquent or
has had a poor payment history. First
Federal also offers 15-, 20- and 30-year fixed-rate mortgage loans through the Federal
Home Loan Banks Mortgage Partnership Finance Program (the MPF Program). Through this program, mortgage
loans are funded and owned by the Federal Home Loan Bank of Chicago and serviced by First
Federal. Most
loans originated by First Federal conform to Fannie Mae and Freddie Mac underwriting
standards. However, First Federal also originates residential mortgage loans that are not
originated in accordance with the purchase requirements of Freddie Mac or Fannie Mae.
Although such loans satisfy First Federals underwriting requirements, they are
considered non-conforming because they do not satisfy collateral requirements,
income and debt ratios, acreage limits, insurance requirements or various other
requirements imposed by Freddie Mac and Fannie Mae. Accordingly, First Federals
non-conforming loans could be sold only after incurring certain costs and/or discounting
the purchase price. First Federal, however, currently does not intend to sell its loans.
First Federal has historically found that its origination of non-conforming loans has not
resulted in high amounts of non-performing loans. In addition, First Federal believes that
these loans satisfy a need in First Federals local community. As a result, First
Federal intends to continue to originate non-conforming loans. Adjustable-rate
mortgage loans help reduce First Federals exposure to changes in interest rates. The
retention of balloon loans in First Federals loan portfolio, which through the use
of extension agreements function like adjustable-rate mortgage loans, also helps reduce
First Federals exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due to changed
rates to be paid by the borrower. It is possible that during periods of rising interest
rates the risk of default on adjustable-rate mortgage loans may increase as a result of
repricing and the increased payments required by the borrower. In addition, although
adjustable-rate mortgage loans make First Federals asset base more responsive to
changes in interest rates, the extent of this interest sensitivity is limited by the
annual and lifetime interest rate adjustment limits. Because of these considerations,
First Federal has no assurance that yields on adjustable-rate mortgage loans will be
sufficient to offset increases in First Federals cost of funds during periods of
rising interest rates. First Federal believes these risks, which have not had a material
adverse effect on First Federal to date, are less than the risks associated with holding
fixed-rate loans in its portfolio in a rising interest rate environment. Multi-family
and Commercial Real Estate Loans. Most of the multi-family loans and
commercial real estate loans originated by First Federal are five-year and three-year
balloon loans with payments based on an amortization schedule of up to 20 years.
Generally, the maximum loan-to-value ratio for a multi-family or commercial real estate
loan is 75%. First Federal requires written appraisals prepared by an approved independent
appraiser of all properties located in Quincy, Illinois securing multi-family or
commercial real estate loans in amounts over $50,000 and all properties located in the
remainder of First Federals market area securing multi-family  7   or commercial real estate loans in
amounts over $5,000. At December 31, 2003, First Federals commercial real estate
loans were secured by a variety of properties, including retail and small office
properties, farmland and churches. In
addition, First Federal also purchases participation interests in multi-family and
commercial real estate loans, which are generally adjustable-rate loans indexed to the
prime rate with terms of up to 25 years. Multi-family
and commercial real estate lending affords First Federal an opportunity to receive
interest at rates higher than those generally available from one- to four-family
residential lending. However, loans secured by these properties usually are greater in
amount and are more difficult to evaluate and monitor and, therefore, involve a greater
degree of risk than one- to four-family residential mortgage loans. Because payments on
loans secured by income producing properties are often dependent on the successful
operation and management of the properties, repayment of these loans may be affected by
adverse conditions in the real estate market or the economy. First Federal seeks to
minimize these risks by generally limiting the maximum loan-to-value ratio to 75% for
multi-family and commercial real estate loans and by strictly scrutinizing the financial
condition of the borrower, the cash flow of the project, the quality of the collateral and
the management of the property securing the loan. First Federal also attempts to minimize
credit risk by lending almost solely on local properties to businesses with which First
Federal is familiar. First Federal conducts a visual inspection for possible environmental
compliance concerns and requires an environmental audit with respect to manufacturing
facilities securing any loan over $200,000 and any other property where the inspection
discloses possible problems. First Federal also generally obtains personal loan guarantees
from financially capable parties. Residential
Construction Loans. First Federal originates construction loans to
professional builders and to individuals for the construction and acquisition of personal
residences. Most of First Federals construction loans are made to individuals. First
Federals construction loans generally provide for the payment of interest only
during the construction phase, which is usually six months. In the case of loans to
individuals, at the end of the construction phase, the borrower must refinance into a
current mortgage product. Loans can be made with a maximum loan to value ratio of 80%. Before
making a commitment to fund a construction loan, First Federal requires an appraisal of
the property by a licensed appraiser. First Federal also reviews and inspects each
property before disbursement of funds during the term of the construction loan. Loan
proceeds are disbursed after inspection based on the percentage of completion. Construction
lending generally involves a higher degree of risk than single-family permanent mortgage
lending because of the greater potential for disagreements between borrowers and builders
and the failure of builders to pay subcontractors. Additional risk often exists because of
the inherent difficulty in estimating both a propertys value and the estimated cost
of the property. If the estimate of construction cost proves to be inaccurate, First
Federal may be required to advance funds beyond the amount originally committed to protect
the value of the property. If the estimate of value upon completion proves to be
inaccurate, First Federal may be confronted with a property whose value is insufficient to
assure full repayment. First Federal has attempted to minimize the foregoing risks by,
among other things, limiting its construction lending to residential properties, limiting
loans to builders for speculative construction projects and by having all construction
loans to individuals refinance into permanent mortgage loans at the end of the
construction phase. It is also First Federals general policy to obtain regular
financial statements and tax returns from builders so that it can monitor their financial
strength and ability to repay. Commercial
Business Loans. First Federal offers a variety of commercial lending
products that include term loans for equipment financing, term loans for business
acquisitions, inventory financing and revolving lines of credit. In most cases, fixed-rate
loans have terms up to five years and are fully amortizing. Revolving lines of credit
generally have adjustable rates of interest and are governed by a borrowing base
certificate, payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a daily basis and generally are indexed to the prime
rate as published in The Wall Street Journal. Furthermore, as circumstances
warrant, First Federal may utilize a loan agreement for commercial loans. In
making commercial business loans, First Federal considers a number of factors, including
the financial condition of the borrower, the nature of the borrowers business,
economic conditions affecting the borrower, First Federals market area, the
management experience of the borrower, the debt service capabilities of the borrower, the  8   projected cash flows of the business
and the collateral. Commercial loans generally are secured by a variety of collateral,
including equipment, inventory and accounts receivable, and are supported by personal
guarantees. Unlike
mortgage loans, which generally are made on the basis of the borrowers ability to
make repayment from his or her employment or other income, and which are secured by real
property whose value tends to be more easily ascertainable, commercial loans are larger in
amount and of higher risk and typically are made on the basis of the borrowers
ability to repay the loan from the cash flow of the borrowers business. As a result,
the availability of funds for the repayment of commercial loans may be substantially
dependent on the success of the business itself. Further, any collateral securing such
loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
To manage these risks, First Federal performs a credit analysis for each commercial loan
annually. Consumer
Loans. First Federal offers a variety of consumer loans, including fully
amortized home equity loans and second mortgage loans and automobile loans. First
Federal offers fixed-rate home improvement loans with terms up to eight years. The home
improvement loans are FHA-insured loans in amounts up to $25,000. The loan-to-value ratios
of fixed-rate home improvement loans are generally limited to 80%. First
Federals second mortgage loans are generally either five-year, fixed-rate loans or
five-year balloon loans. First Federals second mortgages are limited to existing
First Federal customers. The underwriting standards employed by First Federal for home
equity loans and second mortgage loans include a determination of the applicants
credit history, an assessment of the applicants ability to meet existing obligations
and payments on the proposed loan and the value of the collateral securing the loan. First
Federal also originates consumer loans secured by automobiles and, occasionally, boats and
other recreational vehicles. First Federal offers fixed-rate automobile loans with terms
of up to 60 months. Loan-to-value ratios and maximum loan terms vary depending on the age
of the vehicle. Other
consumer loans offered by First Federal include loans secured by various personal property
and share loans. Loans secured by personal property generally have a fixed-rate and a
maximum term of five years. Share loans are secured by deposits at First Federal. Consumer
loans entail greater risk than do residential mortgage loans, particularly in the case of
loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In
these cases, any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrowers continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Loans
to One Borrower. The maximum amount that First Federal may lend to one
borrower is limited by regulation. At December 31, 2003, First Federals regulatory
limit on loans to one borrower was $4.2 million. At that date, First Federals
largest amount of loans to one borrower, including the borrowers related interests,
was approximately $2.9 million and consisted of commercial real estate loans and
commercial business loans located in First Federals market area. These loans were
performing according to their original terms at December 31, 2003. Loan
Originations, Purchases and Sales.First Federals lending activities
are conducted by its employees operating through First Federals offices. First
Federal relies on advertising, referrals from realtors and customers, and personal contact
by First Federals staff to generate loan originations. First Federal does not use
loan correspondents or other third-parties to originate loans and, in recent years, has
not been an active purchaser of loans. In the past, First Federal purchased whole loans
and participation interests in commercial and residential mortgage loans through a
mortgage company in Colorado. First Federal has also participated in a small amount of
loans through a group of institutions organized to lend to businesses in the Quincy,
Illinois business district. In addition, First Federal also purchases participation
interests in multi-family and commercial real estate loans, which are generally
adjustable-rate loans indexed to the prime rate with terms of up to 25 years. Except for
loans originated through the Federal Home Loan Banks Mortgage
Partnership Finance Program, First Federal generally retains for its portfolio all of the
loans that it originates.  9   The
following table presents total loans originated, purchased and repaid during the periods
indicated. Year Ended December 31,2003
     2002
     2001(In thousands)Loans at beginning of period
     
     
     $151,298
        
     $113,324
        
     $116,083Originations:Real estate:One- to four-family
     10,103
        
     9,224
        
     8,941Multi-family and commercial
     5,194
        
     1,926
        
     5,011Construction
     1,995
        
     1,211
        
     1,059Total real estate loans
     17,292
        
     12,361
        
     15,011Consumer:Home improvement
     570
        
     670
        
     953Automobile
     3,345
        
     2,296
        
     3,344Other
     3,815
        
     2,911
        
     3,008Total consumer loans
     7,730
        
     5,877
        
     7,305Commercial
     6,284
        
     4,951
        
     4,833Total loans originated
     31,306
        
     23,189
        
     27,149Loans acquired through acquisition of PFSBBancorp - gross
     
        
     47,436
        
     Loans purchased
     7,137
        
     2,584
        
     742Deduct:Principal loan repayments and prepayments
     56,358
        
     34,889
        
     30,223Transfers to REO and repossessed assets
     502
        
     346
        
     427Sub-total
     56,860
        
     35,235
        
     30,650Net loan activity
     (18,417
        )
     37,974
        
     (2,759
        )Loans at end of period
     $132,881
        
     $151,298
        
     $113,324       10   Nonperforming
Assets and Delinquencies.The following table presents information with
respect to First Federals nonperforming assets at the dates indicated. At December 31,
     AtFebruary 29, 20002003
     2002
     2001
     2000(Dollars in thousands)Accruing loans past due 90 days or more:One- to four-family real estate
     $925
        
     $1,709
        
     $738
        
     $806
        
     $875Multi-family and commercial real estate
     24
        
     86
        
     50
        
     87
        
     Consumer
     44
        
     123
        
     83
        
     174
        
     105Commercial
     
        
     
        
     
        
     
        
     Total
     993
        
     1,918
        
     871
        
     1,067
        
     980Non-accruing loans:One- to four-family real estate
     84
        
     
        
     34
        
     23
        
     32Multi-family and commercial real estate
     62
        
     
        
     
        
     
        
     Consumer
     
        
     
        
     
        
     
        
     Commercial
     14
        
     
        
     
        
     
        
     Total
     160
        
     
        
     34
        
     23
        
     32Real estate owned (REO)
     149
        
     
        
     195
        
     
        
     48Other repossessed assets
     
        
     277
        
     20
        
     64
        
     Total nonperforming assets
     $1,302
        
     $2,195
        
     $1,120
        
     $1,154
        
     $1,060Total nonperforming loansas a percentage of total loans
     0.87
        %
     1.27
        %
     0.80
        %
     0.94
        %
     0.89
        %Total nonperforming assetsas a percentage of total assets
     0.40
        %
     0.69
        %
     0.46
        %
     0.49
        %
     0.50
        % Interest
income that would have been recorded for the year ended December 31, 2003 had nonaccruing
loans been current according to their original terms amounted to $59,200. Interest related
to these loans of $7,764 was included in interest income for the year ended December 31,
2003. First
Federal ceases accruing interest on loans when principal or interest payments are
delinquent 90 days or more unless the loan is adequately collateralized and in the process
of collection. Once the accrual of interest on a loan is discontinued, all interest
previously accrued is reversed against current period interest income once management
determines that interest is uncollectible.     11   The
following tables sets forth the delinquencies in First Federals loan portfolio as of
the dates indicated. At December 31,2003
     200260-89 Days
     90 Days or More
     60-89 Days
     90 Days or MoreNumberofLoans
     PrincipalPalance ofLoans
     NumberofLoans
     PrincipalBalance ofLoans
     NumberofLoans
     PrincipalBalance ofLoans
     NumberofLoans
     PrincipalBalance ofLoans(Dollars in thousands)Real estate loans:One- to four-family
     46
        
     $1,410
        
     35
        
     $1,009
        
     46
        
     $1,283
        
     48
        
     $1,709Multi-family and commercial
     3
        
     48
        
     3
        
     86
        
     
        
     
        
     3
        
     86Construction
     
        
     
        
     
        
     
        
     
        
     
        
     
        
     Consumer loans:Home improvement
     5
        
     20
        
     3
        
     20
        
     3
        
     18
        
     7
        
     35Automobile
     2
        
     6
        
     1
        
     14
        
     9
        
     55
        
     7
        
     44Other
     6
        
     48
        
     4
        
     10
        
     5
        
     12
        
     6
        
     44Commercial loans
     
        
     
        
     1
        
     14
        
     
        
     
        
     
        
     Total
     62
        
     $1,532
        
     47
        
     $1,153
        
     63
        
     $1,368
        
     71
        
     $1,918Delinquent loans to total loans
     
        
     1.15
        %
     
        
     0.87
        %
     
        
     0.90
        %
     
        
     1.27
        %  At December 31, 200160-89 Days
     90 Days or MoreNumberofLoans
     PrincipalBalance ofLoans
     NumberofLoans
     PrincipalBalance ofLoans(Dollars in thousands)Real estate loans:One- to four-family
     27
        
     $926
        
     28
        
     $772Multi-family and commercial
     3
        
     56
        
     2
        
     50Construction
     
        
     
        
     
        
     Consumer loans:Home improvement
     4
        
     22
        
     1
        
     13Automobile
     5
        
     42
        
     9
        
     49Other
     3
        
     16
        
     4
        
     21Commercial loans
     
        
     
        
     
        
     Total
     42
        
     $1,062
        
     44
        
     $905Delinquent loans to total loans
     
        
     0.94
        %
     
        
     0.80
        % Real
Estate Owned. Real estate acquired by First Federal as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until
sold. When property is acquired it is recorded at the lower of its cost, which is the
unpaid principal balance of the loan plus foreclosure costs, or fair market value at the
date of foreclosure, establishing a new cost basis. Holding costs and declines in fair
value after acquisition of the property result in charges to expense. At December 31,
2003, First Federal had real estate owned in the amount of $149,000, consisting of single
family homes. Asset
Classification. Federal banking regulators have adopted various
regulations and practices regarding problem assets of savings institutions. Under such
regulations, examiners have authority to identify problem assets during examinations and,
if appropriate, require them to be classified. There
are three classifications for problem assets: substandard, doubtful and loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the deficiencies are
not corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified as loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not warranted. If an
asset or portion thereof is classified as loss, the insured institution establishes
specific  12   allowances for loan losses for the
full amount of the portion of the asset classified as loss. All or a portion of general
loan loss allowances established to cover probable losses related to assets classified
substandard or doubtful can be included in determining an institutions regulatory
capital, while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned categories but
possess weaknesses are designated special mention. First Federal monitors
special mention assets. The
following table presents classified assets at December 31, 2003. Loss
     Doubtful
     Substandard
     Special MentionPrincipalBalance
     NumberofLoans
     PrincipalBalance
     NumberofLoans
     PrincipalBalance
     NumberofLoans
     PrincipalBalance
     NumberofLoans(Dollars in thousands)Real estate loans:One- to four-family
     $19
        
     1
        
     $
        
     
        
     $377
        
     13
        
     $214
        
     8Multi-family and commercial
     
        
     
        
     
        
     
        
     62
        
     1
        
     22
        
     1Construction
     
        
     
        
     
        
     
        
     
        
     
        
     
        
     Consumer loans:Home improvement
     
        
     
        
     
        
     
        
     20
        
     3
        
     
        
     Automobile
     
        
     
        
     
        
     
        
     14
        
     1
        
     
        
     Share loans
     
        
     
        
     
        
     
        
     
        
     
        
     
        
     Other
     
        
     
        
     
        
     
        
     6
        
     3
        
     
        
     Commercial loans
     
        
     
        
     
        
     
        
     
        
     
        
     
        
     Total
     $19
        
     1
        
     $
        
     
        
     $479
        
     21
        
     $236
        
     9 Allowance
for Loan Losses. In originating loans, First Federal recognizes that
losses will be experienced on loans and that the risk of loss will vary with, among other
things, the type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. First Federal maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance for loan losses represents
managements estimate of probable incurred losses based on information available as
of the date of the financial statements. The allowance for loan losses is based on
managements evaluation of the collectibility of the loan portfolio, including past
loan loss experience, known and inherent risks in the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values, and
economic conditions. The
loan portfolio and other credit exposures are regularly reviewed by management to evaluate
the adequacy of the allowance for loan losses. The methodology for assessing the
appropriateness of the allowance includes comparison to actual losses, peer group
comparisons, industry data and economic conditions. In addition, the regulatory agencies,
as an integral part of their examination process, periodically review First Federals
allowance for loan losses. Such agencies may require First Federal to make additional
provisions for estimated losses based upon judgments different from those of management. In
connection with assessing the allowance, loss factors are applied to various pools of
outstanding loans. First Federal segregates the loan portfolio according to risk
characteristics (i.e., mortgage loans, business, consumer). Loss factors are
derived using First Federals historical loss experience and may be adjusted for
significant factors that, in managements judgment, affect the collectibility of the
portfolio as of the evaluation date. Large dollar commercial real estate and commercial
business loans are individually evaluated for impairment and specific reserves are
allocated as needed. In
addition, management assesses the allowance using factors that cannot be associated with
specific credit or loan categories. These factors include managements subjective
evaluation of local and national economic and business conditions, portfolio concentration
and changes in the character and size of the loan portfolio. The allowance methodology
reflects managements objective that the overall allowance appropriately reflects a
margin for the imprecision necessarily inherent in estimates of expected credit losses.  13   At
December 31, 2003, First Federals allowance for loan losses represented 0.72% of
total loans and 83.52% of nonperforming loans. Although management believes that it uses
the best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of operations
could be adversely affected if circumstances differ substantially from the assumptions
used in making the determinations. Furthermore, while First Federal believes it has
established its existing allowance for loan losses in conformity with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing First
Federals loan portfolio, will not request First Federal to increase its allowance
for loan losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect First Federals financial
condition and results of operations. The
following table presents an analysis of First Federals allowance for loan losses. Year EndedDecember 31,
     Ten MonthsEndedDecember 31,2000
     YearEndedFebruary 29,20002003
     2002
     2001(Dollars in thousands)Allowance for loan losses,beginning of period
     $976
        
     $534
        
     $572
        
     $483
        
     $457Charged-off loans:One- to four-family real estate
     (74
        )
     
        
     
        
     
        
     Multi-family and commercial
     (2
        )
     
        
     
        
     
        
     Consumer
     (113
        )
     (25
        )
     (178
        )
     
        
     (93
        )Total charged-off loans
     (189
        )
     (25
        )
     (178
        )
     
        
     (93
        )Recoveries on loans previously charged off:One- to four-family real estate
     5
        
     
        
     
        
     
        
     Multi-family and commercial
     
        
     
        
     
        
     15
        
     Consumer
     81
        
     88
        
     37
        
     3
        
     Total recoveries
     86
        
     88
        
     37
        
     18
        
     Net recoveries (charge-offs)
     (103
        )
     63
        
     (141
        )
     18
        
     (93
        )Allowance acquired
     
        
     372
        
     
        
     
        
     Provision for loan losses
     90
        
     7
        
     103
        
     71
        
     119Allowance for loan losses, end of period
     $963
        
     $976
        
     $534
        
     $572
        
     $483Allowance for loan losses to total loans
     0.72
        %
     0.65
        %
     0.47
        %
     0.49
        %
     0.42
        %Allowance for loan losses to nonperforming loansand troubled debt restructurings
     83.52
        
     50.89
        
     59.01
        
     52.48
        
     47.73Recoveries to charge-offs
     45.50
        
     352.0
        0
     20.79
        
     
        
     Net charge-offs to average loans outstanding
     0.07
        
     0.06
        
     0.12
        
     
        
     0.09 14   The following
table presents the approximate allocation of the allowance for loan losses by loan
category at the dates indicated. Management believes that the allowance can be allocated
by category only on an approximate basis. The allocation of the allowance to each category
is not indicative of future losses and does not restrict the use of any of the allowance
to absorb losses in any category. At December 31,2003
     2002
     2001Amount
     % ofAllowancein EachCategoryto TotalAllowance
     Percentof Loansin EachCategoryto TotalLoans
     Amount
     % ofAllowancein EachCategoryto TotalAllowance
     Percentof Loansin EachCategoryto TotalLoans
     Amount
     % ofAllowancein EachCategoryto TotalAllowance
     Percentof Loansin EachCategoryto TotalLoans(Dollars in thousands)Real estate
     
     
     $621
        
     64.49
        %
     86.52
        %
     $571
        
     58.51
        %
     88.78
        %
     $220
        
     41.20
        %
     84.99
        %Consumer
     76
        
     7.89
        
     8.07
        
     85
        
     8.71
        
     7.16
        
     88
        
     16.48
        
     9.99Commercial
     86
        
     8.93
        
     5.41
        
     196
        
     20.08
        
     4.06
        
     99
        
     11.98
        
     5.02Unallocated
     180
        
     18.69
        
     
        
     124
        
     12.70
        
     
        
     127
        
     30.34
        
     Total allowancefor loan losses
     $963
        
     100.00
        %
     
        
     $976
        
     100.00
        %
     
        
     $534
        
     100.00
        %   At December 31,2000
     At February 29, 2000Amount
     % ofAllowancein EachCategoryto TotalAllowance
     Percentof Loansin EachCategoryto TotalLoans
     Amount
     % ofAllowancein EachCategoryto TotalAllowance
     Percentof Loansin EachCategoryto TotalLoans(Dollars in thousands)Real estate
     
     
     $195
        
     34.09
        %
     84.73
        %
     $198
        
     40.99
        %
     85.66
        %Consumer
     156
        
     27.27
        
     10.72
        
     163
        
     33.75
        
     10.93Commercial
     99
        
     17.31
        
     4.55
        
     73
        
     15.11
        
     3.41Unallocated
     122
        
     21.33
        
     
        
     49
        
     10.15
        
     Total allowancefor loan losses
     $572
        
     100.00
        %
     
        
     $483
        
     100.00
        %  15   Investment Activities Under
federal law, First Federal has authority to invest in various types of liquid assets,
including U.S. Government obligations, securities of various federal agencies and of state
and municipal governments, deposits at the Federal Home Loan Bank of Chicago and
certificates of deposit of federally insured institutions. Within certain regulatory
limits, First Federal also may invest a portion of its assets in corporate securities,
including non-mortgage, asset-backed instruments. Savings institutions like First Federal
are also required to maintain an investment in Federal Home Loan Bank of Chicago stock. First
Federals Board of Directors has the overall responsibility for First Federals
investment portfolio, including approval of First Federals investment policy and
appointment of First Federals Investment Committee. The Board of Directors reviews,
updates and approves First Federals investment policy at least quarterly. The Board
of Directors also reviews on at least a quarterly basis an investment activities reporting
package prepared by the Investment Committee, which provides portfolio activity, risk
levels and compliance with risk limits. The Investment Committee is responsible for
approving major policies for conducting investment activities, including the establishment
of risk limits and also ensures that management has the requisite skills to manage the
risks associated with approved investment activities. First Federals Chief Executive
Officer is authorized to make investment decisions consistent with First Federals
investment policy and the recommendations of First Federals Investment Committee and
is primarily responsible for daily investment activities. The Investment Committee
generally meets monthly with the Chief Executive Officer in order to review and determine
investment strategies and transactions. First
Federals investment policy is designed to complement First Federals lending
activities, provide an alternative source of income through interest and dividends,
diversify First Federals assets and improve liquidity. Investment decisions are made
in accordance with First Federals investment policy and are based upon the quality
of a particular investment, its inherent risks, the composition of the balance sheet,
market expectations, First Federals liquidity, income and collateral needs and how
the investment fits within First Federals interest rate risk strategy. The
primary objective of the investment portfolio is to maintain an adequate source of
liquidity sufficient to meet regulatory and operating requirements, and to safeguard
against deposit outflows, reduced loan amortization and increased loan demand. The
investment portfolio primarily includes debt issues and mortgage-backed securities. All of
First Federals mortgage-backed securities are issued or guaranteed by agencies of
the U.S. Government. Accordingly, they carry lower credit risk than mortgage-backed
securities of a private issuer. However, mortgage-backed securities still carry market
risk, insofar as increases in market interest rates may cause a decrease in market value,
and prepayment risk, which is risk that the securities will be repaid before maturity and
that First Federal will have to reinvest the funds at a lower interest rate. First
Federals investment portfolio grew in 2001, 2002 and 2003 due to the low interest
rate environment. This low interest rate environment led to a higher demand for long-term,
fixed-rate loans, and caused borrowers to refinance adjustable-rate mortgage loans. First
Federal began offering fixed-rate loans in 2000 but still experienced numerous pay-offs
due to extreme competition for these loans both locally and nationally. During 2003, First
Federal originated $18.7 million of loans funded through the MPF Program. As market conditions permit, First Federal intends to use
funds from the sale and maturity of securities to make new loans or retire debt. Generally
accepted accounting principles require that securities be categorized as either held
to maturity, trading securities or available for sale, based
on managements intent as to the ultimate disposition of each security. Debt
securities may be classified as held to maturity and reported in financial
statements at amortized cost only if the reporting entity has the positive intent and
ability to hold those securities to maturity. Securities that might be sold in response to
changes in market interest rates, changes in the securitys prepayment risk,
increases in loan demand, or other similar factors cannot be classified as held to
maturity. Debt and equity securities held for current resale are classified as
trading securities. These securities are reported at fair value, and  16   unrealized gains and losses
on the securities would be included in earnings. First Federal does not
currently use or maintain a trading account. In 2003, First Federal reclassified
all debt and equity securities classified as either held to maturity
or trading securities as available for sale. Prior to
2003, debt and equity securities not classified as either held to
maturity or trading securities are classified as
available for sale. These securities are reported at fair value, and
unrealized gains and losses on the securities are excluded from earnings and
reported, net of deferred taxes, as a separate component of equity. At
December 31, 2003, First Federal did not own any securities, other than disclosed in the
following table, that had an aggregate book value in excess of 10% of First Federals
retained earnings at that date.                17   The
following table presents the amortized cost and fair value of First Federals
securities, by type of security, at the dates indicated. At December 31,2003
     2002
     2001AmortizedCost
     FairValue
     AmortizedCost
     FairValue
     AmortizedCost
     FairValue(In thousands)Securities:Debt securities held-to-maturity:Obligations of U.S. government agencies
     
        
     
        
     $9,690
        
     $9,772
        
     $
        
     $Other securities
     
        
     
        
     14,568
        
     14,764
        
     9,431
        
     9,402Total
     
        
     
        
     24,258
        
     24,536
        
     9,431
        
     9,402Debt securities available-for-sale:Obligations of U.S. Treasury and U.S.government agencies
     36,570
        
     36,021
        
     20,990
        
     21,519
        
     9,114
        
     9,068Other securities
     29,288
        
     29,630
        
     17,198
        
     17,432
        
     23,443
        
     23,406Total
     65,858
        
     65,651
        
     38,188
        
     38,951
        
     32,557
        
     32,474Equity securities available-for-sale:FHLB stock
     1,388
        
     1,388
        
     1,119
        
     1,119
        
     1,010
        
     1,010FHLMC stock
     57
        
     1,019
        
     41
        
     1,051
        
     31
        
     1,730U.S. government mortgage securities fund
     17,860
        
     17,632
        
     17,187
        
     17,236
        
     16,368
        
     16,090Adjustable rate mortgage securities fund
     9,096
        
     9,079
        
     8,900
        
     8,946
        
     8,630
        
     8,667ULTRA Fund
     1,002
        
     1,003
        
     
        
     
        
     
        
     Total equity securities available-for-sale
     29,403
        
     30,121
        
     27,247
        
     28,352
        
     26,039
        
     27,497Total debt and equity securities
     95,261
        
     95,772
        
     89,693
        
     91,839
        
     68,027
        
     69,373Mortgage-related securities:Mortgage-related securities held-to-maturity:FHLMC
     
        
     
        
     141
        
     154
        
     388
        
     411FNMA
     
        
     
        
     68
        
     70
        
     209
        
     212GNMA
     
        
     
        
     4
        
     4
        
     8
        
     8Total mortgage-related securitiesheld-to-maturity
     
        
     
        
     213
        
     228
        
     605
        
     631Mortgage-related securities available-for-sale:FHLMC
     20,360
        
     20,452
        
     12,700
        
     13,238
        
     16,869
        
     16,757FNMA
     34,060
        
     33,744
        
     9,594
        
     10,368
        
     19,598
        
     19,439GNMA
     8,342
        
     8,360
        
     620
        
     653
        
     908
        
     939Private CMO
     1,992
        
     2,009
        
     
        
     
        
     
        
     Total mortgage-related securitiesavailable-for-sale
     64,754
        
     64,565
        
     22,914
        
     24,259
        
     37,375
        
     37,135Total mortgage-related securities
     64,754
        
     64,565
        
     23,127
        
     24,487
        
     37,980
        
     37,766Net unrealized gains onavailable-for-sale securities
     322
        
     
        
     3,213
        
     
        
     1,135
        
     Total securities
     $160,337
        
     $160,337
        
     $116,033
        
     $116,326
        
     $107,142
        
     $107,139  18   The
table below sets forth certain information regarding the carrying value, weighted average
yields and contractual maturities of First Federal's debt securities and mortgage-related
securities as of December 31, 2003. At December 31, 2003One Year or Less
     More Than OneYearto Five Years
     More Than FiveYearsto Ten Years
     More Than Ten Years
     TotalCarrying Value
     Weighted Average Yield
     Carrying Value
     Weighted Average Yield
     Carrying Value
     Weighted Average Yield
     Carrying Value
     Weighted Average Yield
     Carrying Value
     Weighted Average Yield(Dollars in thousands)Available-for-sale securities:Debt securities:Municipals securities(1)
     $187
        
     7.38
        %
     $1,167
        
     7.01
        %
     $3,737
        
     6.42
        %
     $1,759
        
     6.61
        %
     $6,850
        
     6.60
        %Obligations of U.S.Government agencies
     
        
     
        
     10,889
        
     3.76
        
     25,132
        
     4.55
        
     
        
     
        
     36,021
        
     4.31Asset-backed securities
     
        
     
        
     
        
     
        
     3,963
        
     1.54
        
     3,095
        
     1.36
        
     7,058
        
     1.46Corporate bond
     8,058
        
     2.95
        
     3,696
        
     3.70
        
     
        
     
        
     3,968
        
     4.20
        
     15,722
        
     3.44Private CMO
     
        
     
        
     
        
     
        
     
        
     
        
     2,009
        
     3.57
        
     2,009
        
     3.57Mortgage-related securities
     1,575
        
     1.37
        
     4,395
        
     3.45
        
     16,860
        
     3.75
        
     39,726
        
     4.50
        
     62,556
        
     4.15Total securities at fair value
     $9,820
        
     2.78
        %
     $20,147
        
     3.87
        %
     $49,692
        
     4.18
        %
     $50,557
        
     4.18
        %
     $130,216
        
     4.03
        % _________________ (1)

Weighted
average yield for municipal securities is presented on a tax equivalent basis
based on an assumed tax rate of 34%.  Deposit Activities and Other Sources
of Funds General. Deposits
are the major external source of funds for First Federals lending and
other investment activities. In addition, First Federal also generates funds
internally from loan principal repayments and prepayments and maturing
securities. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. First
Federal may use borrowings from the Federal Home Loan Bank of Chicago to
compensate for reductions in the availability of funds from other sources.
Presently, First Federal has no other borrowing arrangements aside from the
Federal Home Loan Bank of Chicago. Deposit
Accounts. Nearly all of First Federals depositors reside in
Illinois, Missouri, or Iowa. First Federal offers a wide variety of deposit accounts with
a range of interest rates and terms. First Federals deposit accounts consist of a
variety of savings accounts, checking and NOW accounts, certificates of deposit,
individual retirement accounts and money market accounts. The maturities of First Federals
certificate of deposit accounts range from 91 days to five years. Deposit account
terms vary with the principal differences being the minimum balance deposit, early
withdrawal penalties, limits on the number of transactions and the interest rate. First
Federal reviews its deposit mix and pricing weekly. First
Federal believes it is competitive in the interest rates it offers on its deposit
products. First Federal determines the rates paid based on a number of factors, including
rates paid by competitors, First Federals need for funds and cost of funds,
borrowing costs and movements of market interest rates. First Federal utilizes brokers to
obtain deposits and at December 31, 2003 had $100,000 in brokered deposits.  19   The
following table indicates the amount of First Federals jumbo certificates of
deposits by time remaining until maturity as of December 31, 2003. Jumbo certificates of
deposits have principal balances of $100,000 or more. Maturity Period
     Amount
     WeightedAverageRate(Dollars in thousands)Three months or less
     
     
     $5,286
        
     2.29
        %Over three through six months
     6,111
        
     2.23Over six through 12 months
     8,017
        
     2.45Over 12 months
     13,508
        
     3.51Total
     $32,922
        
     2.82 The
following table presents the deposit activity of First Federal for the periods indicated. Year Ended December 31,2003
     2002
     2001(In thousands)Beginning balance
     
     
     $263,834
        
     $192,784
        
     $184,878Increase (decrease) before interest credited
     2,364
        
     1,058
        
     (149
        )Assumption of deposits at fair value
     
        
     64,796
        
     Interest credited
     5,652
        
     5,196
        
     8,055Net increase
     8,016
        
     71,050
        
     7,906Ending balance
     $271,850
        
     $263,834
        
     $192,784                20   The
following table sets forth the balances and changes in dollar amounts in the various
accounts offered by First Federal between the dates indicated. Year Ended December 31,2003
     2002
     2001Amount
     Percentof Total
     Increase/(Decrease)
     Amount
     Percentof Total
     Increase/(Decrease)
     Amount
     Percentof Total
     Increase/(Decrease)(Dollars in thousands)Savings accounts
     
     
     $33,910
        
     12.47
        %
     $2,055
        
     $31,855
        
     12.07
        %
     $12,607
        
     $19,248
        
     9.98
        %
     $1,609Money market deposits
     19,826
        
     7.29
        
     (2,777
        )
     22,603
        
     8.57
        
     764
        
     21,839
        
     11.33
        
     416NOW accounts
     23,635
        
     8.70
        
     110
        
     23,525
        
     8.92
        
     6,338
        
     17,187
        
     8.92
        
     (69
        )Certificates maturing:Within 1 year
     112,262
        
     41.29
        
     (7,504
        )
     119,766
        
     45.40
        
     33,165
        
     86,601
        
     44.92
        
     (26,929
        )After 1 year, but within 2 years
     44,531
        
     16.38
        
     14,160
        
     30,371
        
     11.50
        
     (915
        )
     31,286
        
     16.23
        
     22,340After 2 years, but within 5 years
     33,674
        
     12.39
        
     1,682
        
     31,992
        
     12.13
        
     18,525
        
     13,467
        
     6.98
        
     10,026Total certificates
     190,467
        
     70.06
        
     8,338
        
     182,129
        
     69.03
        
     50,775
        
     131,354
        
     68.13
        
     5,437Noninterest-bearing deposits
     4,012
        
     1.48
        
     290
        
     3,722
        
     1.41
        
     566
        
     3,156
        
     1.64
        
     513Total
     $271,850
        
     100.00
        %
     $8,016
        
     $263,834
        
     100.00
        %
     $71,050
        
     $192,784
        
     100.00
        %
     $7,906 21  Borrowings.   First
Federal has the ability to use advances from the Federal Home Loan Bank of
Chicago to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The Federal Home Loan Bank of Chicago functions as a
central reserve bank providing credit for savings banks and certain other member
financial institutions. As a member of the Federal Home Loan Bank of Chicago,
First Federal is required to own capital stock in the Federal Home Loan Bank of
Chicago and is authorized to apply for advances on the security of the capital
stock and certain of its mortgage loans and other assets, principally securities
that are obligations of, or guaranteed by, the U.S. Government or its agencies,
provided certain creditworthiness standards have been met. Advances are made
under several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. At
December 31, 2003, First Federal had the ability to borrow a total of
approximately $27.8 million from the Federal Home Loan Bank of Chicago. The
following tables presents certain information regarding First Federals use of
Federal Home Loan Bank of Chicago advances during the periods indicated. Year Ended December 31,2003
     2002
     2001(Dollars in thousands)FHLB advances and other borrowings:Average balance outstanding
     $4,888
        
     $3,934
        
     $2,362Maximum amount outstanding at any month-endduring the period
     8,000
        
     4,000
        
     4,000Balance outstanding at end of period
     6,000
        
     4,000
        
     4,000Weighted average interest rate during the period
     3.42
        %
     3.91
        %
     5.38
        %Weighted average interest rate at end of period
     2.52
        
     3.86
        
     4.36 Subsidiary Activities First
Federal Bancshares sole subsidiary is First Federal Bank. First Federal has one
subsidiary, P S A Service Corporation which was acquired in connection with
the acquisition of PFSB Bancorp, Inc. In 1981, Palmyra Savings formed P S A Service
Corporation as a wholly owned subsidiary to sell mortgage life insurance to Palmyra
Savings borrowers. P S A Service Corporation also offers safe deposit
box services in First Federals Canton and Kahoka branch offices. Under Office of
Thrift Supervision regulations, First Federal generally may invest up to 3% of its assets
in service corporations, provided that at least one-half of investment in excess of 1% is
used primarily for community, inner-city and community development projects. Personnel As
of December 31, 2003, First Federal had 75 full-time employees and 16 part-time employees,
none of whom is represented by a collective bargaining unit. First Federal believes its
relationship with its employees is good. REGULATION AND SUPERVISION General As
a savings and loan holding company, First Federal Bancshares is required by federal law to
report to, and otherwise comply with, the rules and regulations of the Office of Thrift
Supervision. First Federal is subject to extensive regulation, examination and supervision
by the Office of Thrift Supervision, as its primary federal regulator, and the Federal
Deposit Insurance Corporation, as the deposit insurer. First Federal is a member of the
Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings
Association Insurance Fund managed by the Federal Deposit Insurance Corporation. First
Federal must file reports with the Office of 22   Thrift Supervision and the Federal
Deposit Insurance Corporation concerning its activities and financial condition
in addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other savings
institutions. The Office of Thrift Supervision and/or the Federal Deposit
Insurance Corporation conduct periodic examinations to test First Federals
safety and soundness and compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation or the Congress, could have a material
adverse impact on the Company, First Federal and their operations. Certain of
the regulatory requirements applicable to First Federal and to First Federal
Bancshares are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth below does not purport to be a complete
description of such statutes and regulations and their effects on First Federal
and First Federal Bancshares. Holding Company Regulation First
Federal Bancshares is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as First Federal Bancshares was not generally restricted
as to the types of business activities in which it may engage, provided that
First Federal continued to be a qualified thrift lender. See Federal
Savings Institution Regulation  Qualified Thrift Lender Test.
The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control
of a savings institution after May 4, 1999 unless it engages only in the
financial activities permitted for financial holding companies under the law or
for multiple savings and loan holding companies as described below. Further, the
Gramm-Leach-Bliley Act specifies that existing savings and loan holding
companies may only engage in such activities. The Gramm-Leach- Bliley Act,
however, grandfathered the unrestricted authority for activities with respect to
unitary savings and loan holding companies existing prior to May 4, 1999,
so long as the holding companys savings institution subsidiary continues
to comply with the QTL Test. First Federal Bancshares does not qualify for the
grandfather and is limited to such activities. Upon any non-supervisory
acquisition by First Federal Bancshares of another savings institution or
savings bank that meets the qualified thrift lender test and is deemed to be a
savings institution by the Office of Thrift Supervision, First Federal
Bancshares would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would generally be
limited to activities permissible for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, subject to the prior
approval of the Office of Thrift Supervision, and certain activities authorized
by Office of Thrift Supervision regulation. However, the Office of Thrift
Supervision has issued an interpretation concluding that the multiple savings
and loan holding companies may also engage in activities permitted for financial
holding companies. A
savings and loan holding company is prohibited from, directly or indirectly,
acquiring more than 5% of the voting stock of another savings institution or
savings and loan holding company without prior written approval of the Office of
Thrift Supervision and from acquiring or retaining control of a depository
institution that is not insured by the Federal Deposit Insurance Corporation. In
evaluating applications by holding companies to acquire savings institutions,
the Office of Thrift Supervision considers the financial and managerial
resources and future prospects of First Federal Bancshares and institution
involved, the effect of the acquisition on the risk to the deposit insurance
funds, the convenience and needs of the community and competitive factors. The
Office of Thrift Supervision may not approve any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions. 23  Although
savings and loan holding companies are not currently subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations do prescribe such restrictions on
subsidiary savings institutions as described below. First Federal must notify
the Office of Thrift Supervision 30 days before declaring any dividend to First
Federal Bancshares. In addition, the financial impact of a holding company on
its subsidiary institution is a matter that is evaluated by the Office of Thrift
Supervision and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution. Acquisition
of First Federal Bancshares.   Under the Federal Change
in Bank Control Act, a notice must be submitted to the Office of Thrift
Supervision if any person (including a company), or group acting in concert,
seeks to acquire control of a savings and loan holding company. A
change of control may occur, and prior notice is required, unless the
acquisition of 10% or more of First Federal Bancshares outstanding voting
stock, unless the Office of Thrift Supervision has found that the acquisition
will not result in a change of control of First Federal Bancshares. Under the
Change in Bank Control Act, the Office of Thrift Supervision has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that acquires control
would then be subject to regulation as a savings and loan holding company. Federal Savings Institution Regulation Business
Activities.   The activities of federal savings
associations are governed by federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, certain lending authority for federal
associations, e.g., commercial, non-residential real property loans and
consumer loans, is limited to a specified percentage of the institutions
capital or assets. Capital
Requirements.   The Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio
(3% for institutions receiving the highest rating on the CAMELS examination
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest CAMELS rating), and, together with the risk-based capital standard
itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift
Supervision regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank. The
risk-based capital standard for savings institutions requires the maintenance of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight factor
of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation
based on the risks believed inherent in the type of asset. Core (Tier 1) capital
is defined as common stockholders equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus, and
minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital. The Office of Thrift Supervision also has authority to
establish individual minimum capital requirements in appropriate cases upon a
determination that an institutions capital level is or may become
inadequate in light of the particular circumstances. At December 31, 2003, First
Federal met each of its capital requirements. 24   Prompt
Corrective Regulatory Action.   The Office of Thrift
Supervision is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institutions degree of undercapitalization. Generally, a savings
institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than
4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
undercapitalized. A savings institution that has a total risk-based
capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be significantly
undercapitalized and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be critically
undercapitalized. Subject to a narrow exception, the Office of Thrift
Supervision is required to appoint a receiver or conservator within specific
timeframes for an institution that is critically undercapitalized.
The regulation also provides that a capital restoration plan must be filed with
the Office of Thrift Supervision within 45 days of the date a savings
institution receives notice that it is undercapitalized,
significantly undercapitalized or critically
undercapitalized. Compliance with the plan must be guaranteed by any
parent holding company. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors. Insurance
of Deposit Accounts. First Federal is a member of the Savings Association
Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based
assessment system by which institutions are assigned to one of three categories based on
their capitalization and one of three subcategories based on examination ratings and other
supervisory information. An institutions assessment rate depends upon the categories
to which it is assigned. Assessment rates for Savings Association Insurance Fund member
institutions are determined semiannually by the Federal Deposit Insurance Corporation and
currently range from zero basis points for the healthiest institutions to 27 basis points
of assessable deposits for the riskiest. The Federal Deposit Insurance Corporation has
authority to increase insurance assessments. A significant increase in Savings Association
Insurance Fund insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of First Federal. Management cannot predict what
insurance assessment rates will be in the future. In
addition to the assessment for deposit insurance, institutions are required to make
payments on bonds issued in the late 1980s by the Financing Corporation (FICO)
to recapitalize the predecessor to the Savings Association Insurance Fund. During fiscal
2003, FICO payments for Savings Association Insurance Fund members approximated 1.60 basis
points of assessable deposits. Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the Federal Deposit Insurance Corporation or the
Office of Thrift Supervision. The management of First Federal does not know of any
practice, condition or violation that might lead to termination of deposit insurance. Loans
to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national banks. A
savings institution may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may
be lent, equal to 10% of unimpaired capital and surplus, if secured by specified
readily-marketable collateral. Qualified
Thrift Lender Test. Federal law requires savings institutions to
meet a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a domestic building and loan
association under the Internal Revenue Code or maintain at least 65% of
its portfolio assets (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain
qualified thrift investments (primarily residential mortgages and
related 25  investments, including certain
mortgage-backed securities and, to a certain extent, education loans, credit card loans
and small business loans) in at least 9 months out of each 12 month period. A
savings institution that fails the qualified thrift lender test is subject to
certain operating restrictions and may be required to convert to a bank charter.
As of December 31, 2003, First Federal met the qualified thrift lender
test. Limitation
on Capital Distributions.   Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. Under the
regulations, an application to and the prior approval of the Office of Thrift
Supervision is required prior to any capital distribution if the institution
does not meet the criteria for expedited treatment of applications
under Office of Thrift Supervision regulations (i.e., generally,
examination and Community Reinvestment Act ratings in the two top categories),
the total capital distributions for the calendar year exceed net income for that
year plus the amount of retained net income for the preceding two years, the
institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement
with Office of Thrift Supervision. If an application is not required, the
institution must still provide prior notice to Office of Thrift Supervision of
the capital distribution if, like First Federal, it is a subsidiary of a holding
company. In the event First Federals capital fell below its regulatory
requirements or the Office of Thrift Supervision notified it that it was in need
of increased supervision, First Federals ability to make capital
distributions could be restricted. In addition, the Office of Thrift Supervision
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the Office of Thrift Supervision
determines that such distribution would constitute an unsafe or unsound
practice. Transactions
with Related Parties.   First Federals authority to engage in
transactions with affiliates (e.g., any company that controls or is
under common control with an institution, including First Federal Bancshares and its
non-savings institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institutions capital and surplus.
Certain transactions with affiliates are required to be secured by collateral in an amount
and of a type described in federal law. The purchase of low quality assets from affiliates
is generally prohibited. The transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those prevailing at
the time for comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in activities
that are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary. The
Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive
officers and directors. However, that act contains a specific exception for loans by First
Federal to its executive officers and directors in compliance with federal banking
laws. Under such laws First Federals authority to extend credit to executive
officers, directors and 10% shareholders (insiders), as well as entities such
persons control, is limited. The law limits both the individual and aggregate amount of
loans First Federal may make to insiders based, in part, on First Federals capital
position and requires certain board approval procedures to be followed. Such loans are
required to be made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is an exception
for loans made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over other
employees. Enforcement.   The
Office of Thrift Supervision has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range 26  of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The Federal
Deposit Insurance Corporation has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action to be taken with respect to a
particular savings institution. If action is not taken by the Director, the Federal
Deposit Insurance Corporation has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain violations. Standards
for Safety and Soundness.   The federal banking agencies
have adopted Interagency Guidelines prescribing Standards for Safety and
Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before capital becomes
impaired. If the Office of Thrift Supervision determines that a savings institution fails
to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may
require the institution to submit an acceptable plan to achieve compliance with the
standard. Federal Home Loan Bank System First
Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility
primarily for member institutions. First Federal, as a member of the Federal Home Loan
Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan
Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. First
Federal was in compliance with this requirement with an investment in Federal Home Loan
Bank stock at December 31, 2003 of $3.88 million. The
Federal Home Loan Banks are required to provide funds for the resolution of insolvent
thrifts in the late 1980s and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to
their members and could also result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, First Federals net interest income would
likely also be reduced. Federal Reserve System The
Federal Reserve Board regulations require savings institutions to maintain non-interest
earning reserves against their transaction accounts (primarily negotiable order of
withdrawal and regular checking accounts). The regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is
assessed on net transaction accounts up to and including $45.4 million; a 10% reserve
ratio is applied above $45.4 million. The first $6.6 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. These amounts are adjusted annually. First Federal complies with the
foregoing requirements. FEDERAL AND STATE TAXATION Federal Income Taxation General.   First
Federal Bancshares and First Federal Bank report their income on a calendar year
basis using the accrual method of accounting. The federal income tax laws apply
to First Federal Bancshares and First Federal Bank in the same manner as to
other corporations with some exceptions, including particularly First Federal
Banks reserve for bad debts discussed below. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to First Federal Bank or
First Federal Bancshares. First Federal Banks federal income tax returns
have been either audited or closed under the statute of limitations through tax
year 1997. For its 2003 tax year, First Federals maximum federal income
tax rate was 34%. 27  Bad
Debt Reserves.   For fiscal years beginning before
December 31, 1995, thrift institutions that qualified under certain
definitional tests and other conditions of the Internal Revenue Code were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans, generally
secured by interests in real property improved or to be improved, under the
percentage of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method. Federal
legislation enacted in 1996 repealed the reserve method of accounting for bad debts and
the percentage of taxable income method for tax years beginning after 1995 and require
savings institutions to recapture or take into income certain portions of their
accumulated bad debt reserves. Approximately $2.3 million of First Federal Banks
accumulated bad debt reserves would not be recaptured into taxable income unless First
Federal Bank makes a non-dividend distribution to First Federal Bancshares as
described below. Distributions.   If
First Federal Bank makes non-dividend distributions to First Federal
Bancshares, they will be considered to have been made from First Federal
Banks unrecaptured tax bad debt reserves, including the balance of its
reserves as of February 28, 1988, to the extent of the non-dividend
distributions, and then from First Federal Banks supplemental
reserve for losses on loans, to the extent of those reserves, and an amount
based on the amount distributed, but not more than the amount of those reserves,
will be included in First Federal Banks taxable income. Non-dividend
distributions include distributions in excess of First Federal Banks
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of First Federal Banks current
or accumulated earnings and profits will not be so included in taxable income. The
amount of additional taxable income triggered by a non-dividend is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the distribution.
Therefore, if First Federal Bank makes a non-dividend distribution to First Federal
Bancshares, approximately one and one-half times the amount of the distribution not in
excess of the amount of the reserves would be includable in income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. First Federal Bank does not
intend to pay dividends that would result in a recapture of any portion of its bad debt
reserves. State Taxation Illinois
State Taxation.   First Federal Bancshares and First
Federal Bank are required to file Illinois income tax returns and pay tax at an
effective tax rate of 7.3% of Illinois taxable income apportioned to Illinois.
For these purposes, Illinois taxable income generally means federal taxable
income subject to certain modifications, the primary one of which is the
exclusion of interest income on United States obligations. Delaware
State Taxation.   As a Delaware holding company not
earning income in Delaware, First Federal Bancshares is exempt from Delaware
corporate income tax, but is required to file an annual report with and pay an
annual franchise tax to the State of Delaware. Missouri
State Taxation.   First Federal Bancshares and First
Federal Bank are required to file Missouri income tax returns and pay tax at an
effective tax rate of 7% of taxable income apportioned to Missouri. For these
purposes, Missouri taxable income generally means federal taxable income subject
to certain modifications for Missouri purposes, primarily the exclusion of
interest income on United States Obligations. 28  EXECUTIVE OFFICERS OF THE REGISTRANT The
following sets forth certain information regarding the executive officers and key
employees of the Company and First Federal who are not also directors. The following
individuals are elected annually and hold office until their successors have been elected
and qualified or until they are removed or replaced. Ages are as of March 1, 2004. Peggy
L. Higgins has served as Assistant Treasurer of the Company and Treasurer
of First Federal since 2000. Ms. Higgins has also served as Senior Vice President of First
Federal since 1998. Prior to becoming Senior Vice President, Ms. Higgins served as a
Vice President. She has been affiliated with First Federal since 1976. Age 50. Cathy
D. Pendell has served as Treasurer of the Company since 2000 and Chief
Financial Officer and Senior Vice President of First Federal since 2002 and 1998,
respectively. She has been affiliated with First Federal since 1976. Ms. Pendell is a
certified public accountant. Age 44. Millie
R. Shields has served as Senior Vice President of First Federal since 1998
and as Secretary of the Company and First Federal since March 1, 2004. Prior to becoming
Senior Vice President, Ms. Shields served as a Vice President. She has been
affiliated with First Federal since 1978. Age 44. Mark
A. Tyrpin joined First Federal in September 1999 as Vice President and
head of the commercial loan department. From 1990 until joining First Federal,
Mr. Tyrpin was with Bank of America (formerly, NationsBank), most recently with the
title of Vice President/Commercial Loan Manager. Age 38. ITEM 2.   PROPERTIES Properties First
Federal currently conducts its business through its main office located in Colchester,
Illinois, and seven other full-service banking offices, all of which it owns. Location
     YearAcquired
     Net Book Valueof Property AtDecember 31, 2003(In thousands)109 East Depot StreetColchester, Illinois 62326
     1940
     $50,7182001 Maine StreetQuincy, Illinois 62301
     1977
     244,140101 North 36th StreetQuincy, Illinois 62301
     1988
     1,241,368430 West Jackson StreetMacomb, Illinois 61455
     1984
     378,771190 East Hurst StreetBushnell, Illinois 61422
     1989
     131,615 29  Location
     YearAcquired
     Net Book Valueof Property AtDecember 31, 2003(In thousands)123 West Lafayette StreetPalmyra, Missouri 63461
     2002
     282,626600 Washington StreetCanton, Missouri 63435
     2002
     254,894180 S. Johnson Street
     2002
     431,073Kahoka, Missouri 63445 ITEM 3.   LEGAL PROCEEDINGS First
Federal Bancshares is not a party to any pending legal proceedings. Periodically, there
have been various claims and lawsuits involving First Federal Bank, such as claims to
enforce liens, condemnation proceedings on properties in which First Federal Bank holds
security interests, claims involving the making and servicing of real property loans and
other issues incident to First Federal Banks business. First Federal Bank is not a
party to any pending legal proceedings that it believes would have a material adverse
effect on the financial condition, operations or cash flows of First Federal Bank. ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The
information regarding the market for First Federal Bancshares common
equity and related stockholder matters is incorporated herein by reference to
First Federal Bancshares 2004 Annual Report to Stockholders at
Investor and Corporate Information. ITEM 6.   SELECTED FINANCIAL DATA The
information required by this item is incorporated herein by reference to the
Section captioned Selected Consolidated Financial Information in the
2004 Annual Report to Stockholders. ITEM 7.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The
information regarding managements discussion and analysis of financial condition and
results of operation is incorporated herein by reference to First Federal Bancshares
2004 Annual Report to Stockholders at Managements Discussion and Analysis of
Financial Condition and Results of Operations. ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The
information required by this item is incorporated herein by reference to the Section
captioned Managements Discussion and Analysis of Financial Condition and
Results of Operations in the 2004 Annual Report to Stockholders. ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The
information regarding financial statements is incorporated herein by reference to First
Federal Bancshares 2004 Annual Report to Stockholders in the Consolidated Financial
Statements and the Notes thereto. 30  ITEM 9.   CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A.   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. PART III ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The
information relating to the directors and officers of First Federal Bancshares and
information regarding compliance with Section 16(a) of the Exchange Act is incorporated
herein by reference to First Federal Bancshares Proxy Statement for the 2004 Annual
Meeting of Stockholders and to Part I, Item 1, Description of Business 
Executive Officers of the Registrant. First
Federal Bancshares has adopted a Code of Ethics and Business Conduct. See the Exhibits to
this Annual Report on Form 10-K. ITEM 11.   EXECUTIVE COMPENSATION The
information regarding executive compensation is incorporated herein by reference to First
Federal Bancshares Proxy Statement for the 2004 Annual Meeting of Stockholders.           31  ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDERS MATTERS The
information relating to security ownership of certain beneficial owners and management is
incorporated herein by reference to First Federal Bancshares Proxy Statement for the
2004 Annual Meeting of Stockholders. Equity Compensation Plan Information as of December 31, 2003 Plan category
     Number of securitiesto be issued uponexerciseof outstanding options,warrants and rights(a)
     Weighted-averageexercise price ofoutstanding options,warrants and rights(b)
     Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a))(c)Equity compensation
     
     
     223,851(1)
        
     $  14.16
        
     12,701plans approved bysecurity holdersEquity compensation
     
        
     
        
     plans not approved bysecurity holdersTotal
     223,851
        
     $  14.16
        
     12,701 (1)    Includes
32,125 options that were assumed in connection with the acquisition of PFSB
Bancorp, Inc., which have a weighted average exercise price of $8.52. ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The
information relating to certain relationships and related transactions is
incorporated herein by reference to First Federal Bancshares Proxy
Statement for the 2004 Annual Meeting of Stockholders. PART IV ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND EXPENSES The
information relating to the principal accountant fees and expenses is incorporated herein
by reference to First Federal Bancshares Proxy Statement for the 2004 Annual Meeting
of Stockholders. ITEM 15.   EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K. (a)

(1)   The
following are filed as a part of this report by means of incorporation to First
Federal Bancshares 2003 Annual Report to Stockholders:  

Report of
Independent Auditors  32   

Consolidated
Statements of Financial Condition as of December 31, 2003 and 2002  

Consolidated
Statements of Income for the Years Ended December 31, 2003, 2002 and 2001  

Consolidated
Statements of Changes in Shareholders Equity for the Years Ended
December 31, 2003, 2002 and 2001  

Consolidated
Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and
2001  

Notes
to Consolidated Financial Statements  (2)

All financial statement schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.  (3)

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)13.0

Portions
of the Annual Report to Stockholders14.1

Code
of Ethics and Business Conduct (7)21.0

List
of Subsidiaries23.0

Consent
of Crowe Chizek and Company LLC31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.0

Section 1350 Certification of Chief Executive Officer and 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.  33   (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. (7)

Incorporated herein by reference from the Current Report on Form 8-K, as
amended, filed on October 17, 2003.  (b)

Reports
on Form 8-K  The Company
filed a Current Report on Form 8-K on October 17, 2003, as amended on
October 17, 2003, announcing that the Board of Directors had approved new
Corporate Governance Guidelines and a Code of Ethics and Business Conduct,
copies of which were included as exhibits to Form 8-K.  The Company
furnished a Current Report on Form 8-K on October 29, 2003 announcing
its financial results for the quarter ended September 30, 2003. The press
release was included as an exhibit to Form 8-K.                 34  SIGNATURES In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized. FIRST FEDERAL BANCSHARES, INC.Date:March 30, 2004
     By:
     
     /s/   James J. SteborJames J. SteborPresident, Chief Executive Officer   and Director  In
accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated. Name
     Title
     Date/s/   James J. Stebor
     
     President, Chief Executive
     
     March 30, 2004Officer and DirectorJames J. Stebor
     (principal executive officer)/s/   Cathy D. Pendell
     
     Treasurer
     
     March 30, 2004(principal financial andCathy D. Pendell
     accounting officer)/s/   Franklin M. Hartzell
     
     Director
     
     March 30, 2004Franklin M. Hartzell/s/   Stephan L. Roth
     
     Director
     
     March 30, 2004Stephan L. Roth/s/   Richard D. Stephens
     
     Director
     
     March 30, 2004Richard D. Stephens/s/   Murrel Hollis
     
     Director
     
     March 30, 2004Murrel Hollis/s/   Gerald L. Prunty
     
     Director
     
     March 30, 2004Gerald L. Prunty/s/   B. Bradford Billings
     
     Director
     
     March 30, 2004B. Bradford Billings/s/   Eldon R. Mette
     
     Director
     
     March 30, 2004Eldon R. Mette