FIRST FEDERAL BANKSHARES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

FORM 10-Q

[Mark One]

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

For the quarterly period ended December 31, 2004

or

|_| 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: 0-25509

First Federal Bankshares, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Delaware 42-1485449
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

329 Pierce Street, Sioux City, Iowa 51101
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

712-277-0200
------------------------------------------------------------
(Registrant's telephone number, including area code)

------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

|X| Yes |_| No

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

|X| Yes |_| No

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

Class Outstanding at February 7, 2005
----- -------------------------------
(Common Stock, $.01 par value) 3,647,041

FIRST FEDERAL BANKSHARES, INC.

INDEX

Page
Part I. Financial Information

Item 1. Financial Statements of First Federal Bankshares, Inc.
and Subsidiaries 1

Condensed Consolidated Balance Sheets at
December 31, 2004 and June 30, 2004 1

Condensed Consolidated Statements of Operations
for the three- and six-month periods ended
December 31, 2004 and 2003 2

Condensed Consolidated Statements of Changes in
Stockholders' Equity for the six-month periods
ended December 31, 2004 and 2003 3

Condensed Consolidated Statements of Comprehensive
Income for the three- and six-month periods ended
December 31, 2004 and 2003 4

Condensed Consolidated Statements of Cash Flows for the
six-month periods ended December 31, 2004 and 2003 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10

Item 3. Quantitative and Qualitative Disclosures About Market Risk 20

Item 4. Controls and Procedures 20

Part II. Other Information 21

Item 1. Legal Proceedings 21

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21

Item 4. Submission of Matters to a Vote of Security Holders 21

Item 6. Exhibits 22

Signatures 23

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FIRST FEDERAL BANKSHARES, INC and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

December 31, June 30,
2004 2004
------------- -------------

Assets
- ------
Cash and due from banks $ 10,052,079 $ 16,574,986
Interest-bearing deposits in other financial institutions 210,033 2,282,875
------------- -------------
Cash and cash equivalents 10,262,112 18,857,861
------------- -------------
Securities available-for-sale, at fair value (amortized cost
of $54,624,263 and $85,217,975, respectively) 54,851,153 84,693,332
Securities held-to-maturity, at amortized cost (fair value
of $20,024,393 and $23,762,072, respectively) 19,384,915 23,185,899

Loans receivable 432,656,348 436,173,780
Less allowance for loan losses 4,924,711 4,316,286
------------- -------------
Net loans 427,731,637 431,857,494
------------- -------------

Office property and equipment, net 12,898,402 13,276,834
Federal Home Loan Bank ("FHLB") stock, at cost 5,957,100 6,096,100
Accrued interest receivable 2,232,250 2,230,053
Goodwill 18,417,040 18,523,607
Other assets (note 5) 19,625,974 16,800,929
------------- -------------
Total assets $ 571,360,583 $ 615,522,109
============= =============

Liabilities
- -----------
Deposits $ 388,058,298 $ 429,208,928
Advances from FHLB and other borrowings 106,892,333 109,886,261
Advance payments by borrowers for taxes and insurance 912,855 1,119,486
Accrued taxes on income 306,383 --
Accrued interest payable 939,403 1,206,994
Accrued expenses and other liabilities 2,351,185 2,642,718
------------- -------------
Total liabilities 499,460,457 544,064,387
------------- -------------

Stockholders' equity
- --------------------
Common stock, $.01 par value, 12,000,000 shares authorized;
4,969,229 and 4,939,262 shares issued at December 31, 2004
and June 30, 2004, respectively 49,692 49,393
Additional paid-in capital 37,580,734 37,086,235
Retained earnings, substantially restricted 54,663,005 52,240,273
Treasury stock, at cost, 1,317,188 and 1,198,990 shares at
December 31, 2004 and June 30, 2004, respectively (19,397,931) (16,519,093)
Accumulated other comprehensive income (loss) 140,890 (329,644)
Unearned Employee Stock Ownership Plan ("ESOP") (979,470) (1,044,710)
Unearned Recognition and Retention Plan ("RRP") (156,794) (24,732)
------------- -------------
Total stockholders' equity 71,900,126 71,457,722
------------- -------------
Total liabilities and stockholders' equity $ 571,360,583 $ 615,522,109
============= =============

See notes to condensed consolidated financial statements.

1

FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three months Six months
ended December 31, ended December 31,
-------------------------- ------------------------------
2004 2003 2004 2003
---------- ----------- ------------ ------------

Interest income:
Loans receivable $6,244,213 $ 6,758,534 $ 12,559,883 $ 13,624,840
Investment securities 788,914 999,894 1,727,284 2,090,660
Other interest-earning assets 11,205 5,726 19,878 10,647
---------- ----------- ------------ ------------
Total interest income 7,044,332 7,764,154 14,307,045 15,726,147
---------- ----------- ------------ ------------

Interest expense:
Deposits 1,626,124 1,963,800 3,335,282 4,036,781
Advances from FHLB and other borrowings 1,157,104 1,263,305 2,334,187 2,545,243
---------- ----------- ------------ ------------
Total interest expense 2,783,228 3,227,105 5,669,469 6,582,024
---------- ----------- ------------ ------------
Net interest income 4,261,104 4,537,049 8,637,576 9,144,123
Provision for losses on loans 105,000 100,000 865,000 625,000
---------- ----------- ------------ ------------
Net interest income after provision for
losses on loans 4,156,104 4,437,049 7,772,576 8,519,123
---------- ----------- ------------ ------------

Noninterest income:
Service charges on deposit accounts 930,986 1,009,427 1,931,277 2,058,761
Service charges on loans 133,685 167,191 291,081 348,733
Gain on sale of branch deposits -- -- 2,185,284 --
Net gain (loss) on sale of securities -- (32,533) (121,209) (64,797)
Gain (loss) on sale of loans 184,299 161,106 425,060 489,110
Real estate-related activities 157,401 326,989 343,265 688,664
Other income 455,588 418,594 838,062 877,702
---------- ----------- ------------ ------------
Total noninterest income 1,861,959 2,050,774 5,892,820 4,398,173
---------- ----------- ------------ ------------

Noninterest expense:
Compensation and benefits (note 7) 2,652,029 2,571,997 5,195,927 4,895,056
Office property and equipment 606,752 629,818 1,237,929 1,235,081
Data processing expense 108,274 102,920 233,530 197,387
Advertising 99,789 87,757 181,123 200,002
Other expense 1,135,322 1,008,356 2,107,264 1,977,511
---------- ----------- ------------ ------------
Total noninterest expense 4,602,166 4,400,848 8,955,773 8,505,037
---------- ----------- ------------ ------------

Income before income taxes 1,415,897 2,086,975 4,709,623 4,412,259
Income taxes 430,000 673,000 1,567,000 1,460,000
---------- ----------- ------------ ------------
Net income $ 985,897 $ 1,413,975 $ 3,142,623 $ 2,952,259
========== =========== ============ ============

Earnings per share: (note 4)
Basic earnings per share $ 0.28 $ 0.39 $ 0.87 $ 0.81
========== =========== ============ ============
Diluted earnings per share $ 0.27 $ 0.38 $ 0.85 $ 0.79
========== =========== ============ ============

Dividends declared per share $ 0.10 $ 0.09 $ 0.20 $ 0.17
========== =========== ============ ============

See notes to condensed consolidated financial statements.

2

FIRST FEDERAL BANKSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)

Six months ended December 31,
2004 2003
------------------------------

Capital Stock
Beginning of year balance $ 49,393 $ 48,969
Stock options exercised: 29,967 and 22,400 shares for the six
months ended December 31, 2004 and 2003, respectively 299 224
- -------------------------------------------------------------------------------------------------------
End of period balance 49,692 49,193
- -------------------------------------------------------------------------------------------------------

Additional paid-in capital
Beginning of year balance 37,086,235 36,537,133
Stock options exercised 277,595 207,207
RRP awarded (forfeited), net 133,755 (7,000)
Stock appreciation of allocated ESOP shares 83,149 82,096
- -------------------------------------------------------------------------------------------------------
End of period balance 37,580,734 36,819,436
- -------------------------------------------------------------------------------------------------------

Retained earnings, substantially restricted
Beginning of year balance 52,240,273 47,900,781
Net earnings 3,142,623 2,952,259
Dividends paid on common stock (719,891) (620,256)
- -------------------------------------------------------------------------------------------------------
End of period balance 54,663,005 50,232,784
- -------------------------------------------------------------------------------------------------------

Treasury stock, at cost
Beginning of year balance (16,519,093) (14,264,674)
RRP awarded (forfeited), net 83,250 (25,200)
Treasury stock purchased (2,962,088) (1,159,594)
- -------------------------------------------------------------------------------------------------------
End of period balance (19,397,931) (15,449,468)
- -------------------------------------------------------------------------------------------------------

Accumulated other comprehensive income (loss)
Beginning of year balance (329,644) 710,378
Net change in unrealized gains on securities available-for-sale,
net of tax expense 394,536 (511,001)
Less: reclassification adjustment for net realized gains (losses)
included in net income, net of tax expense (75,998) (40,628)
- -------------------------------------------------------------------------------------------------------
End of period balance 140,890 240,005
- -------------------------------------------------------------------------------------------------------

Unearned ESOP shares
Beginning of year balance (1,044,710) (1,185,700)
ESOP shares allocated 65,240 70,260
- -------------------------------------------------------------------------------------------------------
End of period balance (979,470) (1,115,440)
- -------------------------------------------------------------------------------------------------------

Unearned recognition and retention plan shares
Beginning of year balance (24,732) (85,522)
RRP forfeited (awarded), net (217,005) 14,981
Amortization of RRP expense 84,943 29,219
- -------------------------------------------------------------------------------------------------------
End of period balance (156,794) (41,322)
- -------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 71,900,126 $ 70,735,188
=======================================================================================================

See notes to condensed consolidated financial statements.

3

FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended Six months ended
December 31, December 31,
-------------------------- ----------------------------
2004 2003 2004 2003
--------- ----------- ----------- -----------

Net earnings $ 985,897 $ 1,413,975 $ 3,142,623 $ 2,952,259
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during
the period, net of tax (109,728) (66,238) 394,536 (511,001)
Less: reclassification adjustment for net realized
gains (losses) included in net income, net of tax expense -- (20,398) (75,998) (40,628)
--------- ----------- ----------- -----------
Other comprehensive income (loss), net of tax (109,728) (45,840) 470,534 (470,373)
--------- ----------- ----------- -----------

Comprehensive income $ 876,169 $ 1,368,135 $ 3,613,157 $ 2,481,886
========= =========== =========== ===========

See notes to condensed consolidated financial statements.

4

FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six months ended December 31,
Cash flows from operating activities: 2004 2003
------------ ------------

Net earnings $ 3,142,623 $ 2,952,259
Adjustments to reconcile net earnings to net cash provided by operating activities:
Loans originated for sale to investors (18,465,000) (22,484,000)
Proceeds from sale of loans originated for sale 17,783,080 24,309,704
Provision for loan losses 865,000 625,000
Depreciation and amortization 806,103 693,891
Net (gain) on sale of loans (425,060) (489,110)
Net (gain) loss on sale of securities available-for-sale 121,209 64,797
Net (gain) loss on sale of branch deposits (2,185,284) --
Net loan fees deferred (50,989) 94,134
Amortization of premiums and discounts on loans and securities 143,819 152,930
(Increase) decrease in accrued interest receivable (27,353) (44,970)
(Increase) decrease in other assets (2,604,919) (940,576)
Increase (decrease) in accrued interest payable (142,675) (449,605)
Increase (decrease) in accrued expenses and other liabilities (259,004) (391,169)
Increase (decrease) in accrued taxes on income 324,255 (418,541)
------------ ------------
Net cash provided by (used in) operating activities (974,195) 3,674,744
------------ ------------

Cash flows from investing activities:
Proceeds from maturities of securities held-to-maturity 3,782,445 17,405,243
Proceeds from sale of securities available-for-sale 30,226,184 13,585,515
Purchase of securities available-for-sale (5,389,323) (8,209,971)
Proceeds from maturities of securities available-for-sale 5,401,527 10,076,146
Purchase of bank owned life insurance -- (2,555,755)
Redemption (purchase) of Federal Home Loan Bank Stock 139,000 (694,800)
Loans purchased (15,570,000) (20,029,000)
Cash effect of branch office sales (9,753,387) --
(Increase) decrease in loans receivable 2,444,444 (26,609,343)
Purchase of office property and equipment (639,872) (906,195)
Proceeds from sale of foreclosed real estate 263,739 41,526
Proceeds from sale of real estate held for development 662,917 --
Net expenditures on real estate held for development (712,766) (873,739)
------------ ------------
Net cash provided by (used in) investing activities 10,854,908 (18,770,373)
------------ ------------

Cash flows from financing activities:
Decrease in deposits (11,871,891) (8,720,569)
Proceeds from FHLB advances and other borrowings 2,006,144 25,149,860
Repayment of FHLB advances and other borrowings (5,000,000) (9,386,888)
Net decrease in advances from borrowers for taxes and insurance (206,631) (163,835)
Issuance of common stock, net 277,895 207,431
Repurchase of common stock (2,962,088) (1,159,594)
Cash dividends paid (719,891) (620,256)
------------ ------------
Net cash provided by (used in) financing activities (18,476,462) 5,306,149
------------ ------------
Net increase (decrease) in cash and cash equivalents (8,595,749) (9,789,480)
Cash and cash equivalents at beginning of period 18,857,861 34,286,953
------------ ------------
Cash and cash equivalents at end of period $ 10,262,112 $ 24,497,473
============ ============

Supplemental disclosures:
Cash paid during the period for interest $ 5,937,060 $ 7,031,629
============ ============
Cash paid during the period for income taxes $ 1,242,745 $ 1,878,539
============ ============

See notes to condensed consolidated financial statements.

5

FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of presentation
---------------------

The condensed consolidated balance sheet information for June 30, 2004 was
derived from the audited Consolidated Balance Sheets of First Federal
Bankshares, Inc. (the "Company") at June 30, 2004. The condensed consolidated
financial statements as of and for the three months and six months ended
December 31, 2004 and 2003 are unaudited.

In the opinion of management of the Company these financial statements reflect
all adjustments, consisting only of normal recurring accruals necessary to
present fairly these condensed consolidated financial statements. The results of
operations for the interim periods are not necessarily indicative of results
that may be expected for an entire year. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted.

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

The Company's critical accounting policies relate to the allowance for loan
losses and accounting for goodwill and other intangible assets. With regard to
the Company's critical accounting policy related to the allowance for loan
losses, the Company has established a systematic method of periodically
reviewing the credit quality of the loan portfolio in order to establish an
allowance for losses on loans. The allowance for losses on loans is based on
management's current judgments about the credit quality of individual loans and
segments of the loan portfolio. The allowance for losses on loans is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio, and considers all known internal and external
factors that affect loan collectability as of the reporting date. Such
evaluation, which includes a review of all loans on which full collectability
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, management's knowledge of inherent
risks in the portfolio that are probable and reasonably estimable and other
factors that warrant recognition in providing an appropriate loan loss
allowance. This evaluation involves a high degree of complexity and requires
management to make subjective judgments that often require assumptions or
estimates about uncertain matters.

With regard to the Company's critical accounting policy relating to goodwill and
other intangible assets, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, on July 1,
2001. Prior to the adoption, the excess of cost over fair value of assets
acquired was amortized on a straight-line basis over its estimated useful life
of 25 years. Goodwill is evaluated by management for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable based on facts and circumstances related to the value of net
assets acquired. After the adoption date, Statement 142 requires that intangible
assets with indefinite useful lives no longer be amortized, but instead
evaluated for impairment at least annually in accordance with the provisions of
Statement 142.

A summary of significant accounting policies followed by the Company is set
forth in Note 1 of the Company's 2004 Annual Report to Stockholders and is
incorporated herein by reference. The Company's critical accounting policies and
their application are periodically reviewed by the Audit Committee and the full
Board of Directors.

6

2. Organization
------------

The Company is the holding company for First Federal Bank (the "Bank"). The
Company owns 100% of the Bank's common stock. Currently, the Company engages in
no other significant activities beyond its ownership of the Bank's common stock.

3. Use of Estimates
----------------

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

4. Earnings per share
------------------

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

Three months ended Six months ended
December 31, December 31,
2004 2003 2004 2003
-------------------------------------------------------

Basic EPS computation:
Net earnings $ 985,897 $1,413,975 $3,142,623 $2,952,259

Weighted average common shares outstanding 3,567,109 3,637,478 3,610,183 3,638,798
-------------------------------------------------------

Basic EPS $ 0.28 $ 0.39 $ 0.87 $ 0.81
=======================================================

Diluted EPS computation:
Net earnings $ 985,897 $1,413,975 $3,142,623 $2,952,259
-------------------------------------------------------

Weighted average common shares outstanding 3,567,109 3,637,478 3,610,183 3,638,798
Incremental option and RRP shares using
treasury stock method 73,642 116,069 79,952 115,491
-------------------------------------------------------
Diluted shares outstanding 3,640,751 3,753,547 3,690,135 3,754,289
=======================================================

Diluted EPS $ 0.27 $ 0.38 $ 0.85 $ 0.79
=======================================================

5. Intangible assets
-----------------

The gross carrying amount of intangible assets subject to amortization and the
associated accumulated amortization at December 31, 2004, is presented in the
table below. Intangible assets' balances are included in the line item `Other
assets' in the Condensed Consolidated Balance Sheets. Amortization expense for
intangible assets was $19,172 and $14,640, respectively, for the three months
ended December 31, 2004 and 2003 and $37,035 and $29,280, respectively for the
six months ended December 31, 2004 and 2003.

7

December 31, 2004
---------------------------------------
Gross Unamortized
Carrying Accumulated Intangible
Amount Amortization Assets
---------------------------------------
Intangible assets:
Core deposit premium $690,140 $499,138 $191,002
Mortgage servicing rights 268,379 22,049 246,330
--------------------------------------
$958,519 $521,187 $437,332
======================================

June 30, 2004
---------------------------------------
Gross Unamortized
Carrying Accumulated Intangible
Amount Amortization Assets
---------------------------------------
Intangible assets:
Core deposit premium $690,140 $476,044 $214,096
Mortgage servicing rights 268,379 8,108 260,271
--------------------------------------
$958,519 $484,152 $474,367
======================================

Projections of amortization expense are based on existing asset balances and the
existing interest rate environment as of December 31, 2004. What the Company
actually experiences may be significantly different depending upon changes in
market interest rates and market conditions. The following table shows the
estimated future amortization expense for amortizing intangible assets for the
periods indicated:

Core Mortgage
Deposit Servicing
Premium Rights Total
--------------------------------------

Six months ended June 30, 2005 $ 22,302 $ 20,890 $ 43,192
Year ended June 30, 2006 44,604 40,361 84,965
Year ended June 30, 2007 44,604 35,983 80,587
Year ended June 30, 2008 44,604 30,536 75,140
Year ended June 30, 2009 34,888 25,611 60,499
Year ended June 30, 2010 -- 21,129 21,129
Thereafter -- 71,820 71,820
--------------------------------------
Total estimated amortization expense $191,002 $246,330 $437,332
======================================

6. Dividends
---------

On October 28, 2004 the Company declared a cash dividend on its common stock,
payable on November 30, 2004 to stockholders of record as of November 16, 2004,
equal to $0.10 per share. Excluding dividends on unallocated Employee Stock
Ownership Plan ("ESOP") shares, dividends totaling $356,732 were paid to
stockholders on November 30, 2004.

On January 20, 2005 the Company declared a cash dividend on its common stock,
payable on February 28, 2005 to stockholders of record as of February 14, 2005
equal to $0.10 per share. Excluding dividends on unallocated ESOP shares, the
Company expects to pay dividends totaling approximately $355,000 to stockholders
on February 28, 2005.

8

7. Stock Options
-------------

At December 31, 2004, the Company had two stock-based employee compensation
plans, which are described more fully in Note 11 of the Company's 2004 Annual
Report to Stockholders.

The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for these
plans. Accordingly, no compensation cost has been recognized for its stock
options in the condensed consolidated financial statements. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123, Accounting for
Stock-based Compensation, to stock-based employee compensation.

Three months ended Six months ended
December 31, December 31,
2004 2003 2004 2003
-------------------------------------------------------

Basic EPS computation:
Net earnings $ 985,897 $1,413,975 $3,142,623 $2,952,259
Pro forma 967,269 1,395,278 3,114,841 2,915,179

Basic earnings per share:
Net earnings 0.28 0.39 0.87 0.81
Pro forma 0.27 0.38 0.86 0.80

Diluted earnings per share:
Net earnings 0.27 0.38 0.85 0.79
Pro forma 0.27 0.37 0.84 0.78

The fair value of each option grant has been estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants for the three months and six months ended December 31, 2004 and 2003,
respectively: dividend yield of 2.44% and 3.32%; expected volatility of 24.26%
and 22.96%; risk free interest rate of 4.54% and 6.09%; and expected life of 7.5
years for both of the periods presented.

8. Effect of New Accounting Standards
----------------------------------

The Accounting Standards Executive Committee has issued Statement of Position
03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
This Statement applies to all loans acquired in a transfer, including those
acquired in the acquisition of a bank or a branch, and provides that such loans
be accounted for at fair value with no allowance for loan losses, or other
valuation allowance, permitted at the time of acquisition. The difference
between cash flows expected at the acquisition date and the investment in the
loan should be recognized as interest income over the life of the loan. If
contractually required payments for principal and interest are more than
expected cash flows, this amount should not be recognized as a yield adjustment,
a loss accrual, or a valuation allowance. For the Company, this Statement is
effective for fiscal year 2006 and, early adoption, although permitted, is not
planned. No material impact is expected on the Company's consolidated financial
statements at the time of adoption.

In March 2004 the Financial Accounting Standards Board ("FASB") reached
consensus on the guidance provided by Emerging Issues Task Force Issue 03-1
("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. The guidance is applicable to debt

9

and equity securities that are within the scope of FASB Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and certain other investments. EITF 03-1 specifies that an
impairment would be considered other-than-temporary unless (a) the investor has
the ability and intent to hold an investment for a reasonable period of time
sufficient for the recovery of the fair value up to (or beyond) the cost of the
investment and (b) evidence indicating the cost of the investment is recoverable
within a reasonable period of time outweighs evidence to the contrary. EITF 03-1
cost method investment and disclosure provisions were effective for reporting
periods ending after June 15, 2004. The measurement and recognition provisions
relating to debt and equity securities have been delayed until the FASB issues
additional guidance. The Company adopted cost method investment and disclosure
provisions of EITF 03-1 on June 30, 2004. The adoption did not have a material
impact on the consolidated financial statements, results of operations or
liquidity of the Company.

The FASB has issued Statement No. 123 (Revised), Share-Based Payment
("FAS123(R)"). This Statement establishes standards for accounting for
transactions in which an entity engages its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments, or that may be settled by the issuance of those
equity instruments. FAS123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. FAS123(R)
replaces existing requirements under FASB Statement No. 123, Accounting for
Stock-Based Compensation and eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock Issued
to Employees. For the Company, the Statement is effective for the quarter
beginning September 1, 2005. The Company is currently assessing the impact that
FAS123(R) will have on its consolidated financial statements at the time of
adoption.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-looking statements
- --------------------------

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for the purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
Company's future activities and operating results include, but are not limited
to, changes in: interest rates, general economic conditions, legislative and
regulatory changes, U.S. monetary and fiscal policies, demand for products and
services, deposit flows, competition and accounting policies, principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.

Overview
- --------

Effective September 20, 2004 the Company sold two branch offices located in
Sheldon, Iowa and Orange City, Iowa to another local financial institution. The
purchaser assumed deposits of $27.1 million and acquired loans totaling $17.0
million in addition to the branch office buildings and certain furniture and
equipment. A pre-tax gain of $2.2 million was recorded as a result of the branch
sale. The branch offices sold are located in relatively rural areas. The
Company's business plan targets expansion in the metro

10

Des Moines market area rather than in rural communities and the Company does not
generally invest in agricultural loans.

Recent increases in the market interest rate environment after five 25 basis
point increases by the Federal Reserve Board since June 2004 contributed to an
increase in the Company's net yield on interest-earning assets to 3.39% for the
three months ended December 31, 2004 from 3.30% for the three months ended
December 31, 2003. In addition, the net yield on interest-earning assets was
3.32% for both the six months ended December 31, 2004 and 2003. However, the
increase in the market interest rate environment also resulted in upward
pressure on the cost of interest-bearing liabilities which increased to 2.43%
for the three months ended December 31, 2004 from 2.33% for the three months
ended December 31, 2003. During the three months ended December 31, 2004, the
Company began to increase rates on certain deposit products and offered
premium-rate certificates of deposit in order to attract and retain retail
accounts.

Financial condition
- -------------------

Total assets decreased by $44.1 million, or 7.2%, to $571.4 million at December
31, 2004 from $615.5 million at June 30, 2004 primarily due to the branch office
sales. Proceeds from maturities and sales of investment securities totaled $39.4
million for the six months ended December 31, 2004 while purchases of investment
securities for the same period totaled $5.4 million. Proceeds of such sales,
payments and maturities were primarily used to fund the assumption of the net
liabilities of the branch offices sold and to fund the additional $11.9 million
decrease in deposits. Loans receivable decreased by $3.5 million, or 0.8%, to
$432.7 million at December 31, 2004 from $436.2 million at June 30, 2004 due to
the $17.1 million in loan balances sold in the branch sale transaction and
payments, offset in part by loan originations.

Deposits decreased by $41.1 million, or 9.6%, to $388.1 million at December 31,
2004 from $429.2 million at June 30, 2004 primarily due to the assumption of
$27.1 million of deposit liabilities as part of the branch sale. Additionally,
the Company is generally not a market rate leader for term deposits. In response
to historically low market interest rates, deposit customers have withdrawn
funds from matured time deposits and transferred those funds to more liquid
accounts. The Company offers premium rates to customers with multiple
relationships in order to retain existing deposits and attract new customers. In
addition, the Company periodically offers premium rates on selected deposit
products in order to generate and retain deposits, to maintain adequate
liquidity and to meet certain asset/liability management objectives.

Total stockholders' equity increased by $442,000, or 0.6%, to $71.9 million at
December 31, 2004 from $71.5 million at June 30, 2004. The change in
stockholders' equity was largely due to earnings of $3.1 million for the six
months ended December 31, 2004 net of stock repurchases, dividend payments and
the equity effect of stock-based benefit programs. Excluding dividends on
unallocated Employee Stock Ownership Plan ("ESOP") shares, dividends declared
during the six months ended December 31, 2004 totaled $720,000. The Company
repurchased 127,448 shares of its common stock during the six months ended
December 31, 2004 at a cost of $3.0 million. A repurchase program announced in
August 2003 provided for the repurchase of up to 377,000 shares, or
approximately 10% of the then outstanding shares, in open market purchases. As
of December 31, 2004 up to 192,000 shares may yet be purchased under this
program. The Company's management believes that stock repurchases are an
appropriate deployment of a portion of the Company's capital that enhances
shareholder value when the Company's common stock is repurchased at an
appropriate price. With capital levels in excess of regulatory requirements, as
demonstrated in the capital table included later in this report, and a basic
core surplus of liquid assets in excess of short term liabilities that totals
$32.2 million, or 5.7%, at December 31, 2004, the Company believes it can
implement these repurchase programs without adversely affecting its capital or
liquidity positions or its ability to pay future dividends. In addition, stock
repurchase programs may reduce price volatility and enhance the liquidity of the
Company's common stock, which is generally

11

advantageous for shareholders. Also contributing to the increase in
stockholders' equity was a change in accumulated other comprehensive income. The
Company reported accumulated other comprehensive income of $141,000 at December
31, 2004 compared to accumulated other comprehensive losses of $330,000 at June
30, 2004 due to increases in the market value of its available-for-sale
securities during the current year period.

Asset quality
- -------------

Non-performing assets totaled $4.9 million, or 0.86% of total assets, and $5.0
million, or 0.81% of total assets, at December 31, 2004 and June 30, 2004,
respectively. Non-performing loans decreased to $4.0 million at December 31,
2004 from $4.3 million at June 30, 2004. Additionally, net charge-offs decreased
by $121,000, to $257,000 for the six months ended December 31, 2004, from
$378,000 for the six months ended December 31, 2003. However, adversely
classified assets increased to $10.8 million at December 31, 2004 from $7.4
million at June 30, 2004 primarily due to the identification of weaknesses in
the credits of three commercial borrowers for which the reserve analysis
suggested collateral deficiencies. Provision for losses on loans increased by
$240,000, or 38.4%, to $865,000 for the six months ended December 31, 2004 from
$625,000 for the six months ended December 31, 2003 as a result of the risk
assessments performed on assets. The allowance for loan losses increased to $4.9
million, or 1.14% of total loans, at December 31, 2004 from $4.3 million, or
0.99% of total loans, at June 30, 2004.

The allowance for loan losses is increased by the provision for loan losses
charged to operations and reduced by net charge-offs. Management establishes the
allowance for loan losses through a process that begins with estimates of
probable loss inherent in the portfolio based on various statistical analyses.
These analyses consider historical and projected default rates and loss
severities; internal risk ratings; and geographic, industry and other
environmental factors. In establishing the allowance for loan losses, management
also considers the Company's current business strategy and credit processes,
including compliance with established guidelines for credit limits, credit
approvals, loan underwriting criteria and loan workout procedures. The policy of
the Company is to segment the allowance to correspond to the various types of
loans in the loan portfolio according to the underlying collateral, which
corresponds to the respective levels of quantified and inherent risk. The
initial assessment takes into consideration non-performing loans and the
valuation of the collateral supporting each loan. Non-performing loans are
risk-rated generally on a case-by-case basis based on qualitative and
quantitative factors that include, but are not limited to, collateral type and
estimated value, financial statement analysis, specific economic factors, cash
flow analysis, delinquency history and loan workout situations and progress.
Based upon this analysis, a quantified risk factor is assigned to each
non-performing loan. This results in an allocation to the overall allowance for
the corresponding type and severity of each non-performing loan.

Performing loans are also reviewed by collateral type, with similar risk factors
being assigned. These risk factors take into consideration, among other matters,
the borrower's ability to pay and the Company's past loan loss experience with
each type of loan. The assigned risk factors result in allocations to the
allowance corresponding to the risk-rated portfolio of non-performing loans.

In order to determine its overall adequacy, the allowance for loan losses is
reviewed by management on a monthly basis. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary, based on changes in economic and local market conditions beyond
management's control. In addition, various regulatory agencies periodically
review the Company's loan loss allowance as an integral part of the examination
process. Accordingly, the Company may be required to take certain charge-offs
and/or recognize additions to the allowance based on the judgment of regulators
as determined by information provided to them during their examinations.

12

Based on relevant and presently available information, management believes that
the current allowance for loan losses is adequate. Following are tables
presenting (a) a summary of the allowance for loan losses and (b) non-performing
asset balances for or at the periods or dates indicated.

(a) Summary of the allowance for loan losses
----------------------------------------

Three months ended Six months ended
December 31, December 31,
2004 2003 2004 2003
--------------------------------------------------------------

Balance at beginning of period $ 5,022,585 $ 4,908,453 $ 4,316,286 $ 4,615,285
Provision for losses 105,000 100,000 865,000 625,000
Charge-offs (217,602) (159,879) (300,183) (413,413)
Recoveries 14,728 13,957 43,608 35,659
--------------------------------------------------------------
Balance at end of period $ 4,924,711 $ 4,862,531 $ 4,924,711 $ 4,862,531
==============================================================

13

(b) Non-performing assets.
----------------------

December 31, 2004 June 30, 2004
------------------------------------
(Dollars in Thousands)

Loans accounted for on a non-accrual basis:
One-to four family residential $ 313 $ 966
Commercial real estate 1,975 1,645
Commercial business 143 113
Consumer 667 267
------------------------------------
Total 3,098 2,991
------------------------------------

Loans accounted for on an accrual basis (1)(2):
One-to four family residential 822 1,332
Multi-family residential -- --
Commercial real estate -- --
Consumer 55 --
------------------------------------
Total 877 1,332
------------------------------------
Total non-performing loans 3,975 4,323
------------------------------------
Other non-performing assets (3) (4) 938 693
------------------------------------
Total non-performing assets $4,913 $5,016
====================================
Restructured loans not included in
other non-performing categories above $2,018 $3,691
====================================

Non-performing loans as a percentage of total loans 0.92% 0.99%
Non-performing loans as a percentage of total assets 0.70% 0.70%
Total non-performing assets as a percentage of total loans
and other non-performing assets 1.15% 1.16%
Non-performing assets as a percentage of total assets 0.86% 0.81%

- ----------
(1) Includes loans 90 days or more contractually delinquent.

(2) Delinquent FHA/VA guaranteed loans and delinquent loans with past due
interest that, in the opinion of management, is collectible, are not
placed on non-accrual status.

(3) Represents the net book value of real property acquired by the Company
through foreclosure or deed in lieu of foreclosure. Upon acquisition, this
property is carried at the lower of cost or fair market value less
estimated costs of disposition. The total carrying amount was $810,000 and
$542,000, respectively, at December 31 and June 30, 2004.

(4) Includes repossessed automobiles, boats and trailers carried at the lower
of cost or fair market value less estimated costs of disposition. The
total carrying amount was $128,000 and $151,000, respectively, at December
31 and June 30, 2004.

14

Capital
- -------

The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of December
31, 2004 the Bank was in compliance with all regulatory capital requirements.
The Bank's actual and required capital amounts and ratios as of December 31,
2004 were as follows:

To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
Dollars in Thousands

Tangible capital $50,044 9.08% $ 8,266 1.50% $ -- --%
Tier 1 leverage (core) 50,044 9.08 16,532 3.00 27,553 5.00
Tier 1 risk-based capital 50,044 12.00 16,491 4.00 24,736 6.00
Risk-based capital 54,969 13.18 33,375 8.00 41,719 10.00

Liquidity
- ---------

The Company is required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation. Liquid assets include cash, certain time
deposits, banker's acceptances and specified United States government, state or
federal agency obligations. The Company's liquidity position is sufficient to
enable the Company to deploy a portion of such liquidity for stock repurchases.
The Company adjusts its liquid assets in order to meet funding needs for deposit
outflows, payment of real estate taxes from escrowed funds, when applicable,
loan commitments and capital strategies. The Company also adjusts liquidity as
appropriate to meet its asset/liability objectives.

Comparison of the results of operations for the three months ended December 31,
2004 and 2003
- --------------------------------------------------------------------------------

General. Net earnings for the three months ended December 31, 2004 totaled
$986,000, or basic and diluted earnings per share of $0.28 and $0.27,
respectively. Net earnings for the three months ended December 31, 2003 totaled
$1.4 million, or basic and diluted earnings per share of $0.39 and $0.38,
respectively.

Interest Income. Interest income decreased by $720,000, or 9.3%, to $7.0 million
for the three months ended December 31, 2004 from $7.8 million for the three
months ended December 31, 2003 due to a decrease in both the average balance of
interest-earning assets and the average yield on interest-earning assets. The
average balance of interest-earning assets decreased by $47.0 million, or 8.4%,
to $510.9 million for the three months ended December 31, 2004 from $557.9
million for the three months ended December 31, 2003 due to decreases in the
average balance of loans and investment securities. In addition, the average
yield on interest-earning assets decreased by 9 basis points to 5.52% for the
three months ended December 31, 2004 from 5.61% for the three months ended
December 31, 2003.

Interest income on loans decreased by $514,000, or 7.6%, to $6.2 million for the
three months ended December 31, 2004 from $6.8 million for the three months
ended December 31, 2003. The decrease in interest income on loans was primarily
due to a decrease in the average balance of loans. The average balance of loans
decreased by $28.8 million, or 6.3%, to $425.7 million for the three months
ended December 31, 2004 from $454.5 million or the three months ended December
31, 2003 partly due to the branch office sale in which loans totaling $17.0
million were sold. The average yield on loans decreased by 13 basis points to
5.82% for the three months ended December 31, 2004 from 5.95% for the three
months ended December 31, 2003.

15

Interest income on investment securities decreased by $211,000, or 21.1%, to
$789,000 for the three months ended December 31, 2004 from $1.0 million for the
three months ended December 31, 2003. The decrease in interest income on
investment securities was primarily due to a decrease in the average balance of
such securities. The average balance of investment securities decreased by $17.6
million, or 17.5%, to $82.6 million for the three months ended December 31, 2004
from $100.2 million for the three months ended December 31, 2003 as the Company
funded the decrease in deposit liabilities with maturities, sales and principal
payments from its investment securities portfolio. The average tax-equivalent
yield on investment securities decreased to 4.11% for the three months ended
December 31, 2004 from 4.25% for the three months ended December 31, 2003 as
securities with periodic rate reset features re-priced at lower rates during the
current-year period due to the extended historically low market interest rate
environment.

Interest Expense. Interest expense decreased by $444,000, or 13.8%, to $2.8
million for the three months ended December 31, 2004 from $3.2 million for the
three months ended December 31, 2003 primarily due to a decrease in the average
balance of interest-bearing liabilities. The average balance of interest-bearing
liabilities decreased by $63.8 million, or 12.3%, to $453.7 million for the
three months ended December 31, 2004 from $517.5 million for the three months
ended December 31, 2003 primarily due to a decrease in the average balance of
interest-bearing deposits.

Interest on deposits decreased by $338,000, or 17.2%, to $1.6 million for the
three months ended December 31, 2004 from $2.0 million for the three months
ended December 31, 2003 primarily due to a decrease in the average balance of
such deposits. The average balance of interest-bearing deposits decreased by
$53.8 million, or 13.4%, to $348.1 million for the three months ended December
31, 2004 from $401.9 million for the three months ended December 31, 2003 partly
due to the branch office sale in which deposits totaling $27.1 million were
assumed. A significant portion of the decrease in the average balance of
interest-bearing deposits was due to a decrease in the average balance of
generally higher-rate fixed-term time deposits which decreased by $41.5 million
for the three months ended December 31, 2004 when compared to the three months
ended December 31, 2003 as customers sought higher returns in the historically
low market interest rate environment or withdrew funds from matured deposits and
transferred those funds to more liquid accounts. The Company is generally not a
market rate leader for fixed-term deposits and chose not to aggressively compete
for these higher-cost deposit balances. The average cost of deposits decreased
by 10 basis points to 1.85% for the three months ended December 31, 2004 from
1.95% for the three months ended December 31, 2003. Due to recent increases in
the market interest rate environment, the average cost of deposits for the three
months ended December 31, 2004 increased from that of the immediately preceding
quarter as the Company increased rates on certain deposit products in order to
offer more competitive rates in the increasing market interest rate environment.

Interest on FHLB advances and other borrowings totaled $1.2 million and $1.3
million, respectively, for the three months ended December 31, 2004 and 2003
primarily due to a decrease in the average balance of borrowings. The average
balance of borrowings decreased by $10.0 million, or 8.6%, to $105.6 million for
the three months ended December 31, 2004 from $115.6 million for the three
months ended December 31, 2003. The average cost of borrowings was 4.35% and
4.37%, respectively, for the three months ended December 31, 2004 and 2003.

Net Interest Income. Net interest income before provision for losses on loans
decreased by $276,000, or 6.1%, to $4.3 million for the three months ended
December 31, 2004 from $4.5 million for the three months ended December 31, 2003
primarily due to the decrease in the average balance of interest-earning assets
that was partly offset by decreases in the average balance of interest-bearing
liabilities. The Company's average net yield on interest-earning assets
increased by 9 basis points to 3.39% for the three months ended December 31,
2004 from 3.30% for the three months ended December 31, 2003 as the

16

relationship of interest-earning assets to interest-bearing liabilities
increased to 112.6% for the three months ended December 31, 2004 from 107.8% for
the three months ended December 31, 2003.

Provision for Losses on Loans. Provision for losses on loans totaled $105,000
for the three months ended December 31, 2004 and $100,000 for the three months
ended December 31, 2003. During the three months ended December 31, 2004 and
2003 the Company recorded net charge-offs totaling $203,000 and $146,000,
respectively. For more information on asset quality see "Asset Quality" in
Management's Discussion and Analysis of Financial Condition.

Noninterest Income. Noninterest income decreased by $189,000, or 9.2%, to $1.9
million for the three months ended December 31, 2004 from $2.1 million for the
three months ended December 31, 2003. The decrease in noninterest income was
primarily due to decreases in service charge income and income from real
estate-related activities. Service charges on deposit accounts decreased by
$78,000, or 7.8%, to $931,000 for the three months ended December 31, 2004 from
$1.0 million for the three months ended December 31, 2003 primarily due to a
reduction in the number of transaction accounts subject to such service charges.
Approximately 2,500 transaction accounts were sold in the September 2004 sale of
two branch offices. Service charges on loans decreased by $33,000, or 20.0%, to
$134,000 for the three months ended December 31, 2004 from $167,000 for the
three months ended December 31, 2003 due to a slowdown in mortgage originations
and refinances after an extended period of historically low interest rates. The
slowdown in mortgage activity also impacted the Company's income from real
estate-related activities such as abstracting and escrow services. Income from
real estate-related activities decreased by $170,000, or 51.9%, to $157,000 for
the three months ended December 31, 2004 from $327,000 for the three months
ended December 31, 2003. Partially offsetting the decreases in service charges
and real estate-related income was a $30,000 gain on sale of real estate held
for development for the three months ended December 31, 2004. No gains on the
sale of real estate held for development were recorded for the three months
ended December 31, 2003. In addition, no losses on the sale of securities were
recorded for the three months ended December 31, 2004 as compared to a loss of
$33,000 for the three months ended December 31, 2003.

Noninterest expense. Noninterest expense increased by $201,000, or 4.6%, to $4.6
million for the three months ended December 31, 2004 from $4.4 million for the
three months ended December 31, 2003. The increase in noninterest expense was
partly due to an increase of $80,000, or 3.1%, in compensation and benefits
expense to $2.7 million for the three months ended December 31, 2004 from $2.6
million for the three months ended December 31, 2003. The increase in
compensation and benefits expense was largely due to annual salary increases and
to an increase in the employer-paid portion of group health insurance premiums.
Additionally, other noninterest expense increased by $127,000, or 12.6%, to $1.1
million for the three months ended December 31, 2004 from $1.0 million for the
three months ended December 31, 2003. The increase in other noninterest expense
was due to consulting expense totaling $31,000 for the implementation of
consumer origination software and for a compensation and benefits review and
analysis. In addition, the Company recorded a charge of $68,000 for a credit
life insurance settlement.

Net earnings and income tax expense. Net earnings before income taxes decreased
by $671,000, or 32.2%, to $1.4 million for the three months ended December 31,
2004 from $2.1 million for the three months ended December 31, 2003. Income tax
expense totaled $430,000, or an effective tax rate of 30.4%, and $673,000, or an
effective tax rate of 32.3%, respectively, for the three months ended December
31, 2004 and 2003. The effective tax rate decreased for the three months ended
December 31, 2004 largely because tax-exempt income comprised a larger
percentage of pre-tax income for that period than for the three months ended
December 31, 2003.

Comparison of the results of operations for the six months ended December 31,
2004 and 2003
- --------------------------------------------------------------------------------

General. Net earnings for the six months ended December 31, 2004 totaled $3.1
million, or basic and diluted earnings per share of $0.87 and $0.85,
respectively. Net earnings for the six months ended

17

December 31, 2003 totaled $3.0 million, or basic and diluted earnings per share
of $0.81 and $0.79, respectively.

Interest Income. Interest income decreased by $1.4 million, or 9.0%, to $14.3
million for the six months ended December 31, 2004 from $15.7 million for the
six months ended December 31, 2003 due to a decrease in both the average balance
of interest-earning assets and the average yield on interest-earning assets. The
average balance of interest-earning assets decreased by $29.7 million, or 5.3%,
to $528.5 million for the six months ended December 31, 2004 from $558.2 million
for the six months ended December 31, 2003 primarily due to a decrease in the
average balance of loans and investment securities. In addition, the average
yield on interest-earning assets decreased by 26 basis points to 5.42% for the
six months ended December 31, 2004 from 5.68% for the six months ended December
31, 2003 as increases in the market interest rate environment since June 2004,
after an extended period of historically low market interest rates, had not yet
made an impact on the average yields of the Company's loan and investment
securities portfolios.

Interest income on loans decreased by $1.1 million, or 7.8%, to $12.6 million
for the six months ended December 31, 2004 from $13.6 million for the six months
ended December 31, 2003. The decrease in interest income on loans was primarily
due to a decrease in the average balance of loans. The average balance of loans
decreased by $15.0 million, or 3.4%, to $428.8 million for the six months ended
December 31, 2004 from $443.8 million or the six months ended December 31, 2003
primarily due to the branch office sale in which loans totaling $17.0 million
were sold. The average yield on loans decreased by 33 basis points to 5.81% for
the six months ended December 31, 2004 from 6.14% for the six months ended
December 31, 2003.

Interest income on investment securities decreased by $363,000, or 17.4%, to
$1.7 million for the six months ended December 31, 2004 from $2.1 million for
the six months ended December 31, 2003. The decrease in interest income on
investment securities was primarily due to a decrease in the average balance of
such securities. The average balance of investment securities decreased by $14.3
million, or 12.9%, to $96.9 million for the six months ended December 31, 2004
from $111.2 million for the six months ended December 31, 2003 as the Company
funded the decrease in deposit liabilities with maturities, sales and principal
payments from its investment securities portfolio. In addition, the average
tax-equivalent yield on investment securities was 19 basis points lower at 3.80%
for the six months ended December 31, 2004 as compared to 3.99% for the six
months ended December 31, 2003 as securities with periodic rate reset features
re-priced at lower rates during the current-year period due to the extended
historically low market interest rate environment.

Interest Expense. Interest expense decreased by $913,000, or 13.9%, to $5.7
million for the six months ended December 31, 2004 from $6.6 million for the six
months ended December 31, 2003 primarily due to a decrease in the average
balance of interest-bearing liabilities. The average balance of interest-bearing
liabilities decreased by $53.4 million, or 10.2%, to $472.4 million for the six
months ended December 31, 2004 from $525.8 million for the six months ended
December 31, 2003.

Interest on deposits decreased by $701,000, or 17.4%, to $3.3 million for the
six months ended December 31, 2004 from $4.0 million for the six months ended
December 31, 2003 primarily due to a decrease in the average balance of such
deposits. The average balance of interest-bearing deposits decreased by $41.4
million, or 10.2%, to $364.4 million for the six months ended December 31, 2004
from $405.8 million for the six months ended December 31, 2003 partly due to the
branch office sale in which deposits totaling $27.1 million were assumed. A
significant portion of the decrease in the average balance of interest-bearing
deposits was due to a decrease in the average balance of generally higher-rate
fixed-term time deposits which decreased by $29.6 million for the six months
ended December 31, 2004 when compared to the six months ended December 31, 2003
as customers sought higher returns in the historically low market interest rate
environment or withdrew funds from matured deposits and transferred those funds
to more liquid accounts. The Company is generally not a market rate leader for

18

fixed-term deposits and chose not to aggressively compete for the higher-cost
deposit balances. The average cost of deposits decreased by 17 basis points to
1.82% for the six months ended December 31, 2004 from 1.99% for the six months
ended December 31, 2003. The average cost of fixed-rate fixed-term deposits,
which comprise over half of the Company's deposit balances, decreased to 2.74%
for the six months ended December 31, 2004 from 3.11% for the six months ended
December 31, 2003 as new deposits added during the extended low market interest
rate environment carried rates lower than the average rate of that deposit type.

Interest on FHLB advances and other borrowings decreased by $211,000, or 8.3%,
to $2.3 million for the six months ended December 31, 2004 from $2.5 million for
the six months ended December 31, 2003 primarily due to a decrease in the
average balance of borrowings. The average balance of borrowings decreased by
$12.0 million, or 10.0%, to $108.0 million for the six months ended December 31,
2004 from $120.0 million for the six months ended December 31, 2003. The average
cost of borrowings was 4.29% and 4.24%, respectively, for the six months ended
December 31, 2004 and 2003.

Net Interest Income. Net interest income before provision for losses on loans
decreased by $507,000, or 5.5%, to $8.6 million for the six months ended
December 31, 2004 from $9.1 million for the six months ended December 31, 2003
primarily due to the decrease in the average balance of interest-earning assets
that was partly offset by decreases in the average balances of interest-bearing
liabilities. The Company's average net yield on interest-earning assets was
3.32% for each of the six months ended December 31, 2004 and 2003.

Provision for Losses on Loans. Provision for losses on loans totaled $865,000
for the six months ended December 31, 2004 and $625,000 for the six months ended
December 31, 2003. During the six months ended December 31, 2004 and 2003 the
Company recorded net charge-offs totaling $257,000 and $378,000, respectively.
For more information on asset quality see "Asset Quality" in Management's
Discussion and Analysis of Financial Condition.

Noninterest Income. Noninterest income increased by $1.5 million, or 34.0%, to
$5.9 million for the six months ended December 31, 2004 from $4.4 million for
the six months ended December 31, 2003. The increase in noninterest income was
primarily due to a pre-tax gain of $2.2 million on the sale of two northwest
Iowa branch offices to a local financial institution that was completed on
September 20, 2004. The purchaser assumed deposit liabilities of $27.1 million
and acquired loans totaling $17.0 million in addition to the buildings and
certain equipment. Partly offsetting the gain on the sale of branches were
decreases in other types of noninterest income. Service charge income on deposit
accounts decreased by $127,000 for the six months ended December 31, 2004 as
compared to the six months ended December 31, 2003 largely due to a reduction in
the number of transaction accounts subject to such service charges.
Approximately 2,500 transaction accounts were sold in the September 2004 sale of
two branch offices. Gain on sale of loans and services charges on loans
decreased by $64,000 and $58,000, respectively, for the six months ended
December 31, 2004 as compared to the six months ended December 31, 2003 due to a
slowdown in mortgage originations and refinances. Mortgage loan originations
decreased by $32.6 million, or 57.0%, to $24.6 million for the six months ended
December 31, 2004 from $57.2 million for the six months ended December 31, 2003.
Additionally, mortgage refinances as a percent of originations decreased to
33.7% for the six months ended December 31, 2004 from 61.8% for the six months
ended December 31, 2003. This slowdown in mortgage activity also impacted the
Company's income from other real estate-related activities such as abstracting
and escrow services. Income from real estate-related activities decreased by
$346,000, or 50.2%, to $343,000 for the six months ended December 31, 2004 from
$689,000 for the six months ended December 31, 2003. The Company recorded a loss
on sale of securities of $121,000 for the six months ended December 31, 2004
compared to a loss on sale of securities of $65,000 for the six months ended
December 31, 2003.

19

Noninterest expense. Noninterest expense increased by $451,000, or 5.3%, to $9.0
million for the six months ended December 31, 2004 from $8.5 million for the six
months ended December 31, 2003. The increase in noninterest expense was
primarily due to an increase of $301,000, or 6.2%, in compensation and benefits
expenses to $5.2 million for the six months ended December 31, 2004 from $4.9
million for the six months ended December 31, 2003. The increase in compensation
and benefits expense was partly due to increases in the Company's pension plan
funding requirements and the cost of the employer-paid portion of group
insurance premiums. In addition, the slowdown in mortgage origination activity
in the current-year period resulted in a decrease of $244,000 in contra-expense
for payroll-related direct origination costs that was partially offset by a
$60,000 decrease in commissions paid to originators for the six months ended
December 31, 2004 as compared to the six months ended December 31, 2003.

Net earnings and income tax expense. Net earnings before income taxes increased
by $297,000, or 6.7%, to $4.7 million for the six months ended December 31, 2004
from $4.4 million for the six months ended December 31, 2003 primarily due to
the gain on the sale of branch offices net of the decreases in net interest
income and noninterest income and the increase in noninterest expense. Income
tax expense totaled $1.6 million, or an effective tax rate of 33.3%, and $1.5
million , or an effective tax rate of 33.1%, respectively, for the six months
ended December 31, 2004 and 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices
and interest rates. The Company's market risk is primarily comprised of interest
rate risk resulting from its core banking activities of lending and deposit
taking. Interest rate risk is the risk that changes in market interest rates
might adversely affect the Company's net interest income or the economic value
of its portfolio of assets, liabilities and off-balance-sheet contracts.
Management continually develops and applies strategies to mitigate this risk.
The Company primarily relies on the OTS Net Portfolio Value Model (the "Model")
to measure its susceptibility to interest rate changes. For various assumed
hypothetical changes in market interest rates, the Model estimates the current
economic value of each type of asset, liability and off-balance-sheet contract.
The present value of expected net cash flows from existing assets minus the
present value of expected net cash flows from existing liabilities plus or minus
the present value of expected net cash flows from existing off-balance-sheet
contracts results in a net portfolio value ("NPV") estimate. An analysis of the
changes in NPV in the event of hypothetical changes in interest rates is
presented in the Form 10-K filed by the Company for the fiscal year ended June
30, 2004. The Company's NPV ratio after a 200 basis point rate-shock was 7.96%
and 8.92%, respectively, at June 30, 2004 and September 30, 2004, as measured by
the Model. As of both dates, the Company's interest rate risk, as measured by
the Model, was within the Company's Asset Liability Policy guidelines and the
OTS "level of risk" was reported as "minimal". Management does not believe that
the Company's primary market risk exposures and how those exposures were managed
during the three months ended December 31, 2004 have changed significantly when
compared to the immediately preceding quarter ended September 30, 2004. However,
the Company's primary market risk exposure has not yet been quantified at
December 31, 2004, and the complexity of the Model makes it difficult to
accurately predict results.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e)under the
Exchange Act) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.

20

There has been no change in the Company's internal control over financial
reporting in connection with the quarterly evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
- -------------------------

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- -------------------------------------------------------------------

There were no sales of unregistered securities during the three months
ended December 31, 2004.

The following table presents a summary of the Company's share repurchases
during the quarter ended December 31, 2004 under a share repurchase plan
announced in August 2003 authorizing the repurchase of up to 377,000 shares (10%
of the then-issued and outstanding shares of common stock).

- -----------------------------------------------------------------------------------------------------------------------
Total Number of Maximum
Shares Purchased Number of Shares
Total Number Average as Part of Publicly that May Yet be
of Shares Price Paid Announced Purchased Under
Period Purchased (1) Per Share Program the Program
- -----------------------------------------------------------------------------------------------------------------------

October 1 through October 31, 2004 2,221 $23.00 none 244,500
November 1 through November 30, 2004 30,227 $23.45 30,000 214,500
December 1 through December 31, 2004 22,500 $23.65 22,500 192,000
- -----------------------------------------------------------------------------------------------------------------------

(1) Includes shares withheld to satisfy tax liability on vesting of restricted
stock under the 1999 Recognition and Retention Plan: 2,221 shares in
October 2004 and 227 shares in November 2004.

Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------

The Company convened its 2004 Annual Meeting of Stockholders on October
28, 2004. At the meeting, the stockholders of the Company considered and voted
on the following proposals:

Ballot No. 1. The election of Barry Backhaus and David S. Clay, each to serve as
directors for a term of three years and until his successor has been elected and
qualified.

The results of Ballot No. 1 were as follows:

For Withheld
--- --------
Barry Backhaus 3,092,207 35,572
David S. Clay 3,102,938 24,841

21

Ballot No. 2. The ratification of the appointment of McGladrey & Pullen, LLP as
auditors for the Company for the fiscal year ending June 30, 2005.

The results of Ballot No. 2 were as follows:

For Against Abstain
--- ------- -------
Number of Votes 3,092,235 13,932 21,612
Percentage of total shares
voted at the Annual Meeting 99.6% 0.4% --

Item 6. Exhibits
- ----------------

(a) Exhibits

Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302

Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302

Exhibit 32 Statement Pursuant to Section 906

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SIGNATURES

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

FIRST FEDERAL BANKSHARES, INC.

DATE: February 8, 2005 BY: _______________________
Barry E. Backhaus
President and Chief Executive Officer

DATE: February 8, 2005 BY: _________________________
Katherine A. Bousquet
Vice President, Treasurer and
Interim Chief Financial Officer

23