UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington
D.C. 20549


FORM
10-Q/A


(Amendment
No.1)





T
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended December 31,
  2007





OR





£
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934








Commission
File Number 0-25509





First
Federal Bankshares, Inc.


(Exact
name of Registrant as specified in its charter)





Delaware
            
            42-1485449(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      employer identification number)329 Pierce Street,
      Sioux City, Iowa
            
            51101(Address
      of principal executive offices)
            
            (Zip
      Code)





712-277-0200


(Registrant's
telephone number)








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


YES þ    NO
o





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


Large
accelerated filer  oAccelerated filer þNon-accelerated filer
o





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934).


YES o    NO
þ





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


Class
            
            Outstanding at
      February 8, 2008Common
      Stock, $.01 par value
            
            3,303,971













FIRST
FEDERAL BANKSHARES, INC.


INDEX


PagePART I.
            
            FINANCIAL
      INFORMATIONITEM 1.
            
            Financial
      Statements of First Federal Bankshares, Inc. and
    Subsidiaries
            
            1Consolidated
      Statements of Financial Condition at December 31, 2007 and June 30,
      2007Consolidated
      Statements of Operations for the three and six month periods ended
      December 31, 2007 and 2006
            
            2Consolidated
      Statements of Changes in Stockholders’ Equity for the three and six month
      periods ended December 31, 2007 and 2006
            
            3Consolidated
      Statements of Comprehensive Income (Loss) for the three and six month
      periods ended December 31, 2007 and 2006
            
            4Consolidated
      Statements of Cash Flows for the six month periods ended December 31, 2007
      and 2006
            
            5Notes
      to Consolidated Financial Statements
            
            6ITEM 2.
            
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            15ITEM 3.
            
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            28ITEM 4.
            
            Controls
      and Procedures
            
            29PART II.
            
            OTHER
      INFORMATION
            
            29ITEM 1.
            
            Legal
      Proceedings
            
            29ITEM 1A.
            
            Risk
      Factors
            
            30ITEM 2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            30ITEM 3.
            
            Defaults
      upon Senior Securities
            
            30ITEM 4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            30ITEM 5.
            
            Other
      Information
            
            30ITEM 6.
            
            Exhibits
            
            31Signatures
            
            32





Explanatory
Note





This
Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to the Company's Quarterly Report
on Form 10-Q for the period ended December 31, 2007, is being filed
with the U.S. Securities and Exchange Commission to restate the Company’s
Consolidated Financial Statements as of and for the three and six month periods
ended December 31, 2007.  The purpose is to provide corrected
Consolidated Statements of Financial Condition, Consolidated Statements of
Income, Consolidated Statements of Changes in Stockholders' Equity, Consolidated
Statements of Comprehensive Income and Consolidated Statements of Cash Flows.
 The restatement of the Company’s Consolidated Financial Statements in this
Form 10-Q/A restates earnings due to a pricing error and the recognition of
“other than temporary” impairment of one of the Company's trust-preferred pooled
securities. Except as set forth in this Form 10-Q/A, all other Items included in
the Company’s Quarterly Report on Form 10-Q as of and for the three and six
month periods ended December 31, 2007, are unaffected by the changes
described above.  The information in this Form 10-Q/A is stated as of
December 31, 2007, and except as specifically noted herein, does not
reflect any subsequent information or events.














PART
      I.
            FINANCIAL  INFORMATION


ITEM
      1.
            FINANCIAL  STATEMENTS





First
Federal Bankshares, Inc. and Subsidiaries


Consolidated  Statements
of Financial Condition (Unaudited)





December
      31,
            
            
            June
      30,2007
            
            
            2007ASSETS
            
            (as
      restated)Cash
      and due from banks
            
            $
            12,841,798
            
            
            $
            11,613,908Interest-bearing
      deposits in other financial institutions
            
            
            7,938,500
            
            
            
            14,124,559Cash
      and cash equivalents
            
            
            20,780,298
            
            
            
            25,738,467Securities
      available-for-sale (amortized cost $111,046,310 and $122,595,377,
      respectively)
            
            
            107,013,083
            
            
            
            122,309,017Securities
      held-to-maturity (fair value $9,025,175 and $9,472,865,
      respectively)
            
            
            8,960,362
            
            
            
            9,549,072Mortgage
      loans held for sale
            
            
            1,663,489
            
            
            
            2,130,709Loans
      receivable
            
            
            422,315,903
            
            
            
            429,751,342Allowance
      for loan losses
            
            
            (2,056,057
            )
            
            
            (1,797,393
            )Net
      loans
            
            
            420,259,846
            
            
            
            427,953,949Federal
      Home Loan Bank ("FHLB") stock, at cost
            
            
            5,239,500
            
            
            
            3,559,600Office
      property and equipment, net
            
            
            18,478,045
            
            
            
            16,204,913Accrued
      interest receivable
            
            
            3,034,715
            
            
            
            2,939,993Goodwill
            
            
            18,417,040
            
            
            
            18,417,040Foreclosed
      and repossessed assets
            
            
            3,611,144
            
            
            
            2,156,217Other
      assets
            
            
            16,795,474
            
            
            
            14,857,533Total
      assets
            
            $
            624,252,996
            
            
            $
            523,507,493LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDeposit
      liabilities
            
            $
            451,654,705
            
            
            $
            507,865,063Advances
      from FHLB and other borrowings
            
            
            102,658,731
            
            
            
            62,202,229Advance
      payments by borrowers for taxes and insurance
            
            
            888,169
            
            
            
            916,021Accrued
      interest payable
            
            
            2,478,031
            
            
            
            2,690,658Accrued
      expenses and other liabilities
            
            
            1,862,343
            
            
            
            1,887,317Total
      liabilities
            
            
            559,541,979
            
            
            
            575,561,288COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYPreferred
      stock, $.01 par value, authorized 1,000,000 shares; issued
      none
            
            
            -
            
            
            
            -Common
      stock, $.01 par value, authorized 12,000,000 shares; issued 5,067,226
      shares
            
            
            50,624
            
            
            
            50,604Additional
      paid-in capital
            
            
            39,387,859
            
            
            
            39,230,016Retained
      earnings, substantially restricted
            
            
            56,943,384
            
            
            
            58,704,525Treasury
      stock, at cost, 1,764,255 shares and 1,677,255 shares,
      respectively
            
            
            (28,535,663
            )
            
            
            (26,885,723
            )Accumulated
      other comprehensive loss
            
            
            (2,529,227
            )
            
            
            (179,360
            )Unearned
      ESOP
            
            
            (605,960
            )
            
            
            (664,840
            )Total
      stockholders’ equity
            
            
            64,711,017
            
            
            
            70,255,222Total
      liabilities and stockholders’ equity
            
            $
            624,252,996
            
            
            $
            645,816,510








See Notes
to Consolidated Financial Statements.





1





First
Federal Bankshares, Inc. and Subsidiaries


Consolidated
Statements of Operations (Unaudited)





Three
      months ended
            
            
            Six
      months endedDecember
      31,
            
            
            December
      31,2007
            
            
            2006
            
            
            2007
            
            
            2006Interest
      income:
            
            (as
      restated)
            
            
            
            
            
            (as
      restated)Loans
      receivable
            
            $
            7,402,818
            
            
            $
            7,534,928
            
            
            $
            14,833,267
            
            
            $
            15,170,771Investment
      securities
            
            
            1,994,426
            
            
            
            1,004,556
            
            
            
            4,019,237
            
            
            
            1,798,560Deposits
      in other financial institutions
            
            
            7,609
            
            
            
            109,615
            
            
            
            58,049
            
            
            
            243,833Total
      interest income
            
            
            9,404,853
            
            
            
            8,649,099
            
            
            
            18,910,553
            
            
            
            17,213,164Interest
      expense:Deposits
            
            
            3,914,621
            
            
            
            3,784,219
            
            
            
            8,476,884
            
            
            
            7,206,277Advances
      from FHLB and other borrowings
            
            
            1,288,960
            
            
            
            1,002,779
            
            
            
            2,152,937
            
            
            
            2,039,757Total
      interest expense
            
            
            5,203,581
            
            
            
            4,786,998
            
            
            
            10,629,821
            
            
            
            9,246,034Net
      interest income
            
            
            4,201,272
            
            
            
            3,862,101
            
            
            
            8,280,732
            
            
            
            7,967,130Provision
      for loan losses
            
            
            492,389
            
            
            
            402,663
            
            
            
            513,037
            
            
            
            502,663Net
      interest income after provision for loan losses
            
            
            3,708,883
            
            
            
            3,459,438
            
            
            
            7,767,695
            
            
            
            7,464,467Non-interest
      income:Service
      charges on deposit accounts
            
            
            834,553
            
            
            
            857,051
            
            
            
            1,617,851
            
            
            
            1,762,700Fees
      on commercial and consumer loans
            
            
            122,854
            
            
            
            50,763
            
            
            
            220,615
            
            
            
            84,829Gain
      on sale of real estate held for development
            
            
            46,610
            
            
            
            20,000
            
            
            
            46,610
            
            
            
            60,000Other-than-temporary
      impairment of investment securities
            
            
            (3,270,594
            )
            
            
            -
            
            
            
            (3,270,594
            )
            
            
            -Mortgage
      banking revenue
            
            
            176,995
            
            
            
            177,777
            
            
            
            370,871
            
            
            
            377,528Earnings
      from bank owned life insurance
            
            
            138,119
            
            
            
            131,493
            
            
            
            274,674
            
            
            
            263,999Other
      income
            
            
            266,044
            
            
            
            265,989
            
            
            
            562,986
            
            
            
            553,466Total
      non-interest income (loss)
            
            
            (1,685,419
            )
            
            
            1,503,073
            
            
            
            (176,987
            )
            
            
            3,102,522Non-interest
      expense:Personnel
      expense
            
            
            2,824,927
            
            
            
            2,618,066
            
            
            
            5,631,128
            
            
            
            5,138,248Office
      property and equipment
            
            
            700,616
            
            
            
            686,782
            
            
            
            1,401,863
            
            
            
            1,364,812Data
      processing, ATM and debit card transaction costs,and other item processing
      expense
            
            
            416,693
            
            
            
            294,198
            
            
            
            786,702
            
            
            
            602,505Professional,
      insurance and regulatory expense
            
            
            252,170
            
            
            
            274,719
            
            
            
            507,061
            
            
            
            558,789Advertising,
      donations and public relations
            
            
            302,600
            
            
            
            216,644
            
            
            
            766,325
            
            
            
            383,675Communications,
      postage and office supplies
            
            
            224,553
            
            
            
            208,435
            
            
            
            435,313
            
            
            
            402,040Other
      expense
            
            
            226,638
            
            
            
            206,244
            
            
            
            457,436
            
            
            
            372,450Total
      non-interest expense
            
            
            4,948,197
            
            
            
            4,505,088
            
            
            
            9,985,828
            
            
            
            8,822,519Income
      (loss) before income tax expense (benefit)and discontinued
      operations
            
            
            (2,924,733
            )
            
            
            457,423
            
            
            
            (2,395,120
            )
            
            
            1,744,470Income
      tax expense (benefit)
            
            
            (1,172,000
            )
            
            
            77,000
            
            
            
            (1,057,000
            )
            
            
            441,000Income
      (loss) from continuing operations
            
            
            (1,752,733
            )
            
            
            380,423
            
            
            
            (1,338,120
            )
            
            
            1,303,470Income
      from discontinued operations, net of tax of $20,000 and $46,000
      respectively in 2006
            
            
            -
            
            
            
            32,101
            
            
            
            -
            
            
            
            75,796Net
      income (loss)
            
            $
            (1,752,733
            )
            
            $
            412,524
            
            
            $
            (1,338,120
            )
            
            $
            1,379,266Per
      share information:Basic
      earnings (loss) per share from continuing operations
            
            $
            (0.54
            )
            
            $
            0.11
            
            
            $
            (0.41
            )
            
            $
            0.40Basic
      earnings per share from discontinued operations
            
            
            -
            
            
            
            0.01
            
            
            
            -
            
            
            
            0.02Basic
      earnings (loss) per share
            
            $
            (0.54
            )
            
            $
            0.12
            
            
            $
            (0.41
            )
            
            $
            0.42Diluted
      earnings (loss) per share from continuing operations
            
            $
            (0.54
            )
            
            $
            0.11
            
            
            $
            (0.41
            )
            
            $
            0.39Diluted
      earnings per share from discontinued operations
            
            
            -
            
            
            
            0.01
            
            
            
            -
            
            
            
            0.02Diluted
      earnings (loss) per share
            
            $
            (0.54
            )
            
            $
            0.12
            
            
            $
            (0.41
            )
            
            $
            0.41








See Notes
to Consolidated Financial Statements.





2





First
Federal Bankshares, Inc. and Subsidiaries


Consolidated
Statements of Stockholders' Equity  (Unaudited)





Six
      MonthsEnded
      December 31,2007
            
            
            2006Capital
      Stock:
            
            (as
      restated)Beginning
      of year balance
            
            $
            50,604
            
            
            $
            50,109Restricted
      stock vested: 2,062 shares
            
            
            20
            
            
            
            -Stock
      options exercised: none and 40,987 shares, respectively
            
            
            -
            
            
            
            388End
      of period balance
            
            
            50,624
            
            
            
            50,497Additional
      paid-in capital:Beginning
      of year balance
            
            
            39,230,016
            
            
            
            38,293,233Stock
      options exercised
            
            
            -
            
            
            
            540,252Stock
      compensation expense
            
            
            90,361
            
            
            
            44,535Employee
      stock grants awarded
            
            
            -
            
            
            
            (5,742
            )Stock
      appreciation of allocated ESOP shares
            
            
            39,830
            
            
            
            72,459Amortization
      of employee stock grants
            
            
            27,652
            
            
            
            6,593End
      of period balance
            
            
            39,387,859
            
            
            
            38,951,330Retained
      earnings, substantially restricted:Beginning
      of year balance
            
            
            58,704,525
            
            
            
            57,013,427Adoption
      of FIN 48
            
            
            180,000
            
            
            
            -Adoption
      of SFAS 156
            
            
            79,374
            
            
            
            -Net
      income (loss)
            
            
            (1,338,120
            )
            
            
            1,379,266Dividends
      paid on common stock: $0.21 and $0.205 per share,
    respectively
            
            
            (682,395
            )
            
            
            (677,767
            )End
      of period balance
            
            
            56,943,384
            
            
            
            57,714,926Treasury
      stock, at cost:Beginning
      of year balance
            
            
            (26,885,723
            )
            
            
            (25,920,685
            )Employee
      stock grants awarded
            
            
            -
            
            
            
            5,742Treasury
      stock acquired: 87,000 and 14,227 shares, respectively
            
            
            (1,649,940
            )
            
            
            (308,680
            )End
      of period balance
            
            
            (28,535,663
            )
            
            
            (26,223,623
            )Accumulated
      other comprehensive (loss):Beginning
      of year balance
            
            
            (179,360
            )
            
            
            (325,650
            )Net
      change in unrealized gains (losses) on securities available-for-sale, net
      of income taxes
            
            
            (4,400,461
            )
            
            
            246,098Less:
      reclassification adjustment for net realized losses included in net
      income, net of income taxes
            
            
            2,050,594
            
            
            
            -End
      of period balance
            
            
            (2,529,227
            )
            
            
            (79,552
            )Unearned
      ESOP shares:Beginning
      of year balance
            
            
            (664,840
            )
            
            
            (786,540
            )ESOP
      shares allocated
            
            
            58,880
            
            
            
            61,720End
      of period balance
            
            
            (605,960
            )
            
            
            (724,820
            )Total
      stockholders' equity
            
            $
            64,711,017
            
            
            $
            69,688,758








See Notes
to Consolidated Financial Statements.





3





First
Federal Bankshares, Inc. and Subsidiaries


Consolidated
Statements of Comprehensive Income (Loss) (Unaudited)




Three
      Months Ended
            
            
            Six
      Months EndedDecember
      31,
            
            
            December
      31,2007
            
            
            2006
            
            
            2007
            
            
            2006(as
      restated)
            
            
            
            
            
            (as
      restated)Net
      income (loss)
            
            $
            (1,752,733
            )
            
            $
            412,524
            
            
            $
            (1,338,120
            )
            
            $
            1,379,266Net
      change in unrealized gains (losses) on securities available-for-sale, net
      of taxes
            
            
            (3,147,575
            )
            
            
            (2,851
            )
            
            
            (4,400,461
            )
            
            
            246,098Less:
      reclassification adjustment for net realized losses included in net
      income, net of taxes
            
            
            2,050,594
            
            
            
            -
            
            
            
            2,050,594
            
            
            
            -Total
      comprehensive income (loss)
            
            $
            (2,849,714
            )
            
            $
            409,673
            
            
            $
            (3,687,987
            )
            
            $
            1,625,364








See Notes
to Consolidated Financial Statements.





4





First Federal Bankshares, Inc. and
      SubsidiariesConsolidated
      Statements of Cash Flows (Unaudited)
            
            Six
      months endedDecember
      31,2007
            
            
            2006Cash
      flows from continuing operating activities:
            
            (as
      restated)Net
      income (loss)
            
            $
            (1,338,120
            )
            
            $
            1,379,266Income
      from discontinued operations
            
            
            -
            
            
            
            (75,796
            )Adjustments
      to reconcile net income (loss) from continuing operations tonet
      cash provided by continuing operating activities:Loans
      originated for sale to investors
            
            
            (33,347,000
            )
            
            
            (21,963,000
            )Proceeds
      from sale of loans originated for sale
            
            
            33,795,337
            
            
            
            22,447,213Provision
      for losses on loans
            
            
            513,037
            
            
            
            502,663Depreciation
      and amortization
            
            
            719,553
            
            
            
            578,302Provision
      for deferred taxes
            
            
            208,000
            
            
            
            469,000Equity-based
      compensation
            
            
            216,743
            
            
            
            185,307Tax
      benefit resulting from stock options exercised
            
            
            -
            
            
            
            (134,000
            )Net
      gain on sale of loans
            
            
            (370,871
            )
            
            
            (345,907
            )Net
      gain on sale of real estate held for development
            
            
            (46,610
            )
            
            
            (60,000
            )Other-than-temporary
      impairment on investment securities
            
            
            3,270,594
            
            
            
            -Amortization
      of premiums and discounts on loans,mortgage-backed securities and
      investment securities
            
            
            (6,702
            )
            
            
            (214,359
            )Increase
      in accrued interest receivable
            
            
            (94,722
            )
            
            
            (73,600
            )Decrease
      (increase) in other assets
            
            
            219,991
            
            
            
            (32,749
            )Increase
      (decrease) in accrued interest payable
            
            
            (212,627
            )
            
            
            486,299Increase
      (decrease) in accrued expenses and other liabilities
            
            
            (24,974
            )
            
            
            85,873Decrease
      in accrued taxes on income
            
            
            (1,269,748
            )
            
            
            (972,082
            )Net
      cash provided by continuing operating activities
            
            
            2,231,881
            
            
            
            2,262,430Cash
      flows from continuing investing activities:Proceeds
      from maturities of securities held-to-maturity
            
            
            581,560
            
            
            
            1,169,180Purchase
      of securities available-for-sale
            
            
            -
            
            
            
            (34,292,531
            )Proceeds
      from maturities of securities available-for-sale
            
            
            8,254,638
            
            
            
            19,170,972Redemption
      (purchase) of FHLB stock
            
            
            (1,679,900
            )
            
            
            578,500Loans
      purchased
            
            
            (5,242,000
            )
            
            
            (8,571,000
            )Decrease
      in loans receivable
            
            
            11,108,283
            
            
            
            14,969,543Purchase
      of office property and equipment
            
            
            (2,829,566
            )
            
            
            (2,399,269
            )Proceeds
      from sale of foreclosed real estate
            
            
            235,154
            
            
            
            72,255Proceeds
      from sale of real estate held for development
            
            
            804,844
            
            
            
            1,207,277Expenditures
      on real estate held for development
            
            
            (309,020
            )
            
            
            (1,054,574
            )Net
      cash provided by (used in) continuing investing activities
            
            
            10,923,993
            
            
            
            (9,149,647
            )Cash
      flows from continuing financing activities:Increase
      (decrease) in deposits
            
            
            (56,210,358
            )
            
            
            1,606,145Proceeds
      from advances from FHLB and other borrowings
            
            
            85,885,467
            
            
            
            3,134,865Repayment
      of advances from FHLB and other borrowings
            
            
            (45,428,965
            )
            
            
            (18,000,000
            )Net
      decrease in advance payments by borrowers for taxes and
      insurance
            
            
            (27,852
            )
            
            
            (62,238
            )Issuance
      of common stock under stock options exercised
            
            
            -
            
            
            
            406,640Tax
      benefit resulting from stock options exercised
            
            
            -
            
            
            
            134,000Repurchase
      of common stock
            
            
            (1,649,940
            )
            
            
            (308,680
            )Cash
      dividends paid
            
            
            (682,395
            )
            
            
            (677,767
            )Net
      cash (used in) continuing financing activities
            
            
            (18,114,043
            )
            
            
            (13,767,035
            )Cash
      flows from discontinued operations:Net
      cash provided by operating activities of discontinued
      operations
            
            
            -
            
            
            
            106,526Net
      cash provided by discontinued operations
            
            
            -
            
            
            
            106,526Net
      decrease in cash and cash equivalents
            
            
            (4,958,169
            )
            
            
            (20,547,726
            )Beginning
      of year
            
            
            25,738,467
            
            
            
            39,904,749End
      of year
            
            $
            20,780,298
            
            
            $
            19,357,023SUPPLEMENTAL
      DISCLOSURESCash
      paid (received) during the period for:Interest
            
            $
            10,842,448
            
            
            $
            8,759,735Income
      taxes
            
            
            4,748
            
            
            
            864,082











5





FIRST
FEDERAL BANKSHARES, INC. and SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
      1.
            Basis
      of presentation





The
consolidated financial statements as of and for the three and six month periods
ended December 31, 2007 and 2006, have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosure normally included in year-end financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to these rules and
regulations.  These consolidated financial statements should be read
in conjunction with the First Federal Bankshares, Inc. (the “Company”) Audited
Consolidated Financial Statements and notes that are included in its Annual
Report for the year ended June 30, 2007, filed on Form 10-K.





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





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





Critical
Judgments and Estimates   The Company describes all of its
significant accounting policies in Note 1 of the Company's Audited Consolidated
Financial Statements in its 2007 Annual Report on Form
10-K.   Particular attention should be paid to the Company’s
allowance for losses on loans, which requires significant management judgments
and/or estimates because of the inherent uncertainties surrounding this area
and/or the subjective nature of the area.  Information on the impact
loss allowances have had on the Company's financial condition and results of
operations for the three  and six month periods ended December 31,
2007 and 2006, can be found below, in the sections entitled  "Results
of Operations – Provision for Losses on Loans" and “Financial Condition –
Non-Performing and Classified Assets”.





Significant
judgments and/or estimates are made in the valuation of the Company’s
goodwill.  For a discussion of the judgments and estimates relating to
goodwill refer to the appropriate section in Note 1 of the Company’s 2007
Audited Consolidated Financial Statements.





Management
also makes judgments and estimates to determine whether the decline in fair
value of available-for-sale securities below their cost is “other than
temporary.”  Declines in fair value of available-for-sale securities
below their cost that are deemed “other than temporary” are reflected in
earnings as realized losses.  In estimating “other than temporary”
impairment losses, management considers a number of factors including (1) the
length of time and extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.





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





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





Note
      2.
            Organization





The
Company is the holding company for Vantus Bank (the “Bank” formerly known as
“First Federal 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.





6





Note
      3.
            Discontinued
      Operations





The
Company sold substantially all the assets of its title search and abstract
continuation business in a cash sale on March 1, 2007.  The results of
operations of this business are shown in the Company’s consolidated statements
of income for the three and six months ended December 31, 2006, as “discontinued
operations.”   The assets of the business sold have not been
presented separately because those amounts are not material.





Note
      4.
            Effect
      of New Accounting Standards





In March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 156, Accounting for Servicing of
Financial Assets (as Amended) (“SFAS 156”).  This Statement
amends Statement of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(“SFAS
140”), with respect to the accounting for separately recognized servicing assets
and servicing liabilities.  SFAS 156 requires the separate accounting
for servicing assets and servicing liabilities which arise from the sale of
financial assets; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value; permits the choice
of an amortization method or fair value method for subsequent measurements; and
requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial position and
additional disclosures for all separately recognized servicing assets and
servicing liabilities.  SFAS 156 was effective July 1, 2007, for the
Company.  The Company has chosen to use the fair value method in
measuring its servicing asset.  As a result of the adoption of SFAS
156, the Company’s stockholders’ equity increased approximately $79,000 net of
income tax on July 1, 2007, as a result of the adjustment of its servicing asset
to fair value.  Subsequent adjustments to fair value are reflected in
income as a component of mortgage banking revenue on the consolidated statements
of income.





FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes(“SFAS 109”).  FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.  FIN 48
also provides guidance on de-recognition, classification, interest and
penalties, interim period accounting, disclosure and transition for tax
positions.  FIN 48 was effective for the Company on July 1,
2007.




As a
result of the implementation of FIN 48 on July 1, 2007, the Company recognized
an $180,000 decrease to reserves for uncertain tax positions, resulting in a
liability for unrecognized tax benefits of $127,000 at July 1,
2007.  The Company has included in the liability for unrecognized tax
benefits approximately $26,000 for the payment of interest and penalties at
December 31, 2007.  This adjustment was accounted for as an adjustment
to the beginning balance of retained earnings.  There have been no
significant changes to this amount during the quarter ended December 31, 2007
and the Company does not expect that there will be any significant increase or
decrease in fiscal year 2008.





In
September 2006, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements(“EITF 06-04).  In March 2007, the EITF reached a
final conclusion on Issue 06−10, Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements.  The consensus stipulates
that an agreement by an employer to share a portion of the proceeds of a life
insurance policy with an employee during the postretirement period is a
postretirement benefit arrangement required to be accounted for.  The
consensus concludes that the purchase of a split-dollar life insurance policy
does not constitute a settlement and, therefore, a liability for the
postretirement obligation must be recognized. EITF 06-04 is effective for annual
reporting periods beginning after December 15, 2007, with earlier adoption
permitted.  The Company plans to adopt EITF 06-04 on July 1,
2008.  EITF 06-04 allows the Company to record the initial recognition
of the liability through stockholders’ equity.  Upon the adoption of
EITF 06-04 management estimates the Company’s stockholders’ equity will decrease
approximately $459,000 after income tax.  Ongoing expenses will be
recognized through the current year income.  Management estimates the
first year’s expense to be approximately $20,000 after income taxes and decrease
earnings per share by less than $0.01.





7





In
September 2006, the FASB issued Statement No. 157, (“SFAS 157”), Fair Value
Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements.  It clarifies that fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts.  This Statement does not require any new fair value
measurements, but rather, it provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value.  This Statement is effective for fiscal years beginning after
November 15, 2007, with earlier adoption permitted.  At this time, the
Company does not expect that the adoption of this Statement will have a material
impact on its financial position, results of operations, and cash
flows.





In
February 2007, the FASB issued Statement No. 159, (“SFAS 159”) The Fair Value Option for Financial
Assets and Financial Liabilities – Including an  amendment of FASB
Statement No. 115.  This Statement provides entities with an
option to report selected financial assets at fair value.  The
objective of the Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in earnings caused by
measuring related assets and liabilities differently without having to apply the
complex provisions of hedge accounting.  SFAS 159 is effective as of
the beginning of an entity’s first fiscal year beginning after November 15,
2007.  Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007 provided the entity also elects
to apply the provisions of SFAS 157.  At this time, the Company does
not expect that the adoption of this Statement will have a material impact on
its financial position, results of operations, and cash flows.





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





Note
      5.
            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.





8




Three
      Months Ended
              
              
              Six
      Months EndedDecember
      31,
              
              
              December
      31,2007
              
              
              2006
              
              
              2007
              
              
              2006Basic
      earnings (loss) per share computation:Income
      (loss) from continuing operations
              
              $
              (1,752,733
              )
              
              $
              380,423
              
              
              $
              (1,338,120
              )
              
              $
              1,303,470Income
      from discontinued operations
              
              
              -
              
              
              
              32,101
              
              
              
              -
              
              
              
              75,796Net
      income (loss)
              
              $
              (1,752,733
              )
              
              $
              412,524
              
              
              $
              (1,338,120
              )
              
              $
              1,379,266Weighted
      average common shares outstanding
              
              
              3,236,718
              
              
              
              3,318,317
              
              
              
              3,248,309
              
              
              
              3,309,482Basic
      earnings (loss) per share from continuing operations
              
              $
              (0.54
              )
              
              $
              0.11
              
              
              $
              (0.41
              )
              
              $
              0.40Basic
      earnings per share from discontinued operations
              
              
              -
              
              
              
              0.01
              
              
              
              -
              
              
              
              0.02Basic
      earnings (loss) per share
              
              $
              (0.54
              )
              
              $
              0.12
              
              
              $
              (0.41
              )
              
              $
              0.42Diluted
      earnings (loss) per share computation:Income
      (loss) from continuing operations
              
              $
              (1,752,733
              )
              
              $
              380,423
              
              
              $
              (1,338,120
              )
              
              $
              1,303,470Income
      from discontinued operations
              
              
              -
              
              
              
              32,101
              
              
              
              -
              
              
              
              75,796Net
      income (loss)
              
              $
              (1,752,733
              )
              
              $
              412,524
              
              
              $
              (1,338,120
              )
              
              $
              1,379,266Weighted
      average common shares outstanding
              
              
              3,236,718
              
              
              
              3,318,317
              
              
              
              3,248,309
              
              
              
              3,309,482Incremental
      option and recognition and retention plan sharesusing
      treasury stock method
              
              
              -
              
              
              
              28,697
              
              
              
              -
              
              
              
              33,456Diluted
      shares outstanding
              
              
              3,236,718
              
              
              
              3,347,014
              
              
              
              3,248,309
              
              
              
              3,342,938Diluted
      earnings (loss) per share from continuing operations
              
              $
              (0.54
              )
              
              $
              0.11
              
              
              $
              (0.41
              )
              
              $
              0.39Diluted
      earnings per share from discontinued operations
              
              
              -
              
              
              
              0.01
              
              
              
              -
              
              
              
              0.02Diluted
      earnings (loss) per share
              
              $
              (0.54
              )
              
              $
              0.12
              
              
              $
              (0.41
              )
              
              $
              0.41Anti-dilutive
      options not included in diluted shares outstanding
              
              
              142,007
              
              
              
              27,833
              
              
              
              139,751
              
              
              
              24,191




Note
      6.
            Dividends





On
January 17, 2008, the Company declared a cash dividend on its common stock,
payable on February 29, 2008, to stockholders of record as of February 15, 2008,
equal to $0.105 per share.





Note
      7.
            Operating
      Segments





An
operating segment is generally defined as a component of a business for which
discrete financial information is available and the operating results of which
are regularly reviewed by the chief operating decision-maker. The Company’s
primary business segment is banking.  The banking segment generates
revenue through interest and fees on loans, service charges on deposit accounts,
and interest on investment securities.  The banking segment includes
the Bank and the Company and related elimination entries between the two; since
the Company’s primary activity is its ownership of the common stock of the
Bank.  The “other” segment includes the Company’s real estate
development subsidiary.  ‘Discontinued operations’ is related to a
wholly-owned subsidiary of the Bank that operated a title search and abstract
continuation business in Iowa.  The Company sold substantially all the
assets of this subsidiary in March of 2007.





Selected
financial information on the Company’s segments is presented below for the three
and six months ended December 31, 2007 and 2006.





9




Three
      Months Ended December 31, 2007(Dollars
      in Thousands)
            
            Banking
            
            
            Other
            
            
            ConsolidatedInterest
      income
            
            $
            9,405
            
            
            
            -
            
            
            $
            9,405Interest
      expense
            
            
            5,204
            
            
            
            -
            
            
            
            5,204Net
      interest income
            
            
            4,201
            
            
            
            -
            
            
            
            4,201Provision
      for loan losses
            
            
            492
            
            
            
            -
            
            
            
            492Net
      interest income after provision for loan losses
            
            
            3,709
            
            
            
            -
            
            
            
            3,709Non-interest
      income (loss)
            
            
            (1,732
            )
            
            $
            46
            
            
            
            (1,686
            )Non-interest
      expense
            
            
            4,942
            
            
            
            6
            
            
            
            4,948Income
      (loss) before income tax (benefit)
            
            
            (2,965
            )
            
            
            40
            
            
            
            (2,925
            )Income
      tax (benefit)
            
            
            (1,187
            )
            
            
            15
            
            
            
            (1,172
            )Net
      income (loss)
            
            $
            (1,778
            )
            
            $
            25
            
            
            $
            (1,753
            )Depreciation
      and amortization
            
            $
            507
            
            
            
            -
            
            
            $
            507Three
      Months Ended December 31, 2006(Dollars
      in Thousands)
            
            Banking
            
            
            Other
            
            
            ConsolidatedInterest
      income
            
            $
            8,649
            
            
            
            -
            
            
            $
            8,649Interest
      expense
            
            
            4,787
            
            
            
            -
            
            
            
            4,787Net
      interest income
            
            
            3,862
            
            
            
            -
            
            
            
            3,862Provision
      for loan losses
            
            
            403
            
            
            
            -
            
            
            
            403Net
      interest income after provision for loan losses
            
            
            3,459
            
            
            
            -
            
            
            
            3,459Non-interest
      income
            
            
            1,483
            
            
            $
            20
            
            
            
            1,503Non-interest
      expense
            
            
            4,489
            
            
            
            15
            
            
            
            4,504Income
      before income taxes and discontinued operations
            
            
            453
            
            
            
            5
            
            
            
            458Income
      taxes
            
            
            74
            
            
            
            3
            
            
            
            77Income
      from continuing operations
            
            
            379
            
            
            
            2
            
            
            
            381Income
      from discontinued operations, net of tax
            
            
            -
            
            
            
            32
            
            
            
            32Net
      income
            
            $
            379
            
            
            $
            34
            
            
            $
            413Depreciation
      and amortization
            
            $
            273
            
            
            
            -
            
            
            $
            273




10




Six
      Months Ended December 31, 2007(Dollars
      in Thousands)
            
            Banking
            
            
            Other
            
            
            ConsolidatedInterest
      income
            
            $
            18,911
            
            
            
            -
            
            
            $
            18,911Interest
      expense
            
            
            10,630
            
            
            
            -
            
            
            
            10,630Net
      interest income
            
            
            8,281
            
            
            
            -
            
            
            
            8,281Provision
      for loan losses
            
            
            513
            
            
            
            -
            
            
            
            513Net
      interest income after provision for loan losses
            
            
            7,768
            
            
            
            -
            
            
            
            7,768Non-interest
      income (loss)
            
            
            (227
            )
            
            $
            50
            
            
            
            (177
            )Non-interest
      expense
            
            
            9,974
            
            
            
            12
            
            
            
            9,986Income
      (loss) before income tax (benefit)
            
            
            (2,433
            )
            
            
            38
            
            
            
            (2,395
            )Income
      tax (benefit)
            
            
            (1,071
            )
            
            
            14
            
            
            
            (1,057
            )Net
      income (loss)
            
            $
            (1,362
            )
            
            $
            24
            
            
            $
            (1,338
            )Depreciation
      and amortization
            
            $
            720
            
            
            
            -
            
            
            $
            720Total
      assets
            
            $
            624,248
            
            
            $
            5
            
            
            $
            624,253Six
      Months Ended December 31, 2006(Dollars
      in Thousands)
            
            Banking
            
            
            Other
            
            
            ConsolidatedInterest
      income
            
            $
            17,213
            
            
            
            -
            
            
            $
            17,213Interest
      expense
            
            
            9,246
            
            
            
            -
            
            
            
            9,246Net
      interest income
            
            
            7,967
            
            
            
            -
            
            
            
            7,967Provision
      for loan losses
            
            
            503
            
            
            
            -
            
            
            
            503Net
      interest income after provision for loan losses
            
            
            7,464
            
            
            
            -
            
            
            
            7,464Non-interest
      income
            
            
            3,043
            
            
            $
            60
            
            
            
            3,103Non-interest
      expense
            
            
            8,774
            
            
            
            49
            
            
            
            8,823Income
      before income taxes and discontinued operations
            
            
            1,733
            
            
            
            11
            
            
            
            1,744Income
      taxes
            
            
            436
            
            
            
            5
            
            
            
            441Income
      from continuing operations
            
            
            1,297
            
            
            
            6
            
            
            
            1,303Income
      from discontinued operations, net of tax
            
            
            -
            
            
            
            76
            
            
            
            76Net
      income
            
            $
            1,297
            
            
            $
            82
            
            
            $
            1,379Depreciation
      and amortization
            
            $
            578
            
            
            
            -
            
            
            $
            578Total
      assets
            
            $
            599,710
            
            
            $
            930
            
            
            $
            600,640




Note
      8.
            Stock-Based
      Compensation





The
Company uses the Black-Scholes option pricing model to estimate the fair value
of share-based payment awards. Weighted-average assumptions used for stock
appreciation rights (SAR) granted during the six months ended December 31, 2007
under the 2006 Stock-Based Incentive Plan were: dividend yield of 3.12%;
expected volatility of 22.0%; risk-free interest rate of 3.46%; expected life of
5.0 years; and weighted-average grant date fair value of $2.309.





A summary
of SAR activity as of December 31, 2007, and changes since June 30, 2007 is
presented below:





Weighted-Weighted-
            
            
            AverageAverage
            
            
            Remaining
            
            
            AggregateExercise
            
            
            Contractual
            
            
            IntrinsicNumber
            
            
            Price
            
            
            Term
      (years)
            
            
            ValueOutstanding
      SARs as of June 30, 2007
            
            
            59,246
            
            
            $
            19.10Granted
            
            
            34,585
            
            
            
            13.45Outstanding
      at December 31, 2007
            
            
            93,831
            
            
            $
            17.02
            
            
            
            9.6
            
            
            $
            20,751Exercisable
      at December 31, 2007
            
            
            3,333
            
            
            $
            22.04
            
            
            
            8.8
            
            
            
            -




11





No stock
options were granted during the six months ended December 31, 2007.  A
summary of option activity for the six months ended December 31, 2007 is
presented below:





Weighted-Weighted-
            
            
            AverageAverage
            
            
            Remaining
            
            
            AggregateExercise
            
            
            Contractual
            
            
            IntrinsicNumber
            
            
            Price
            
            
            Term
      (years)
            
            
            ValueOutstanding
      options as of June 30, 2007
            
            
            81,000
            
            
            $
            17.49Forfeited
            
            
            (2,750
            )
            
            
            23.46Outstanding
      at December 31, 2007
            
            
            78,250
            
            
            $
            17.28
            
            
            
            5.8
            
            
            $
            96,189Exercisable
      at December 31, 2007
            
            
            57,450
            
            
            $
            15.79
            
            
            
            4.9
            
            
            $
            96,189




Share-based
compensation expense for the six months ended December 31, 2007 and 2006 totaled
$90,000 and $45,000, respectively. As of December 31, 2007, there was $353,000
of total unrecognized compensation cost related to non-vested share-based
compensation arrangements, to be recognized over a weighted-average period of
1.5 years.





A summary
of the status of the Company’s non-vested shares of restricted stock as of
December 31, 2007, and changes during the six months ended December 31, 2007, is
as follows:





Weighted-AverageGrant-DateNumber
            
            
            Fair
      ValueNon-vested
      restricted shares
            
            
            6,400
            
            
            $
            21.02Vested
            
            
            (1,600
            )
            
            
            19.58Non-vested
      at December 31, 2007
            
            
            4,800
            
            
            $
            21.50





Restricted
stock expense for the six months ended December 31, 2007 and 2006 was $28,000
and $7,000, respectively.  As of December 31, 2007, there was $67,000
of total unrecognized compensation cost related to non-vested restricted
shares.  The cost is expected to be recognized over a weighted-average
period of 4.0 years.  The total fair value of shares vested during the
six months ended December 31, 2007 was $25,000.





12




Note
      9.
            Restatement
      of Financial Information





On
February 19, 2008, the Audit Committee of the Board of Directors of the Company,
upon the recommendation of the Company’s management, concluded that the
Company’s Consolidated Statements of Financial Condition, Consolidated
Statements of Changes in Stockholders’ Equity, and Consolidated Statements of
Comprehensive Income as of December 31, 2007, previously issued on Form 10-Q
should no longer be relied upon and would require restatement. The Company
issued Form 8-K on February 25, 2008, announcing these
decisions.   The restatement was necessitated by an error in
determining the fair value of one of the Company’s trust-preferred pooled
securities. The error was due to inaccurate pricing information from the third
party entities that provide this information to the
Company.    At the time of the decision, the Board of
Directors and management concluded that the restated fair value of this
security, which was significantly lower than the security’s carrying value, did
not constitute an “other than temporary” impairment of the
security.





The
company subsequently entered into discussions with the staff of the Securities
and Exchange Commission regarding the impairment of this security.  As
a result of these discussions, on May 13, 2008, the Audit Committee, upon the
recommendation of management, concluded that the impairment of the security as
of December 31, 2007, was “other than temporary” due to the severity and
duration of the decline in the security’s fair value.   As such,
the Audit Committee and management of the Company concluded that, in addition to
the financial statements mentioned in the previous paragraph, the Company’s
Consolidated Statements of Income and Consolidated Statements of Cash Flows for
the three- and six-month periods ended December 31, 2007, should also no longer
be relied upon.    The Company has restated these
statements, as well as the statements described in the previous paragraph, as
part of this Form 10-Q/A.




The
following table contains a summary of each of the line items in the Consolidated
Financial Statements included herein that were impacted by this
restatement.




13




December
      31, 2007
            
            
            
            
            
            December
      31, 2007Consolidated  Statements
      of Financial Condition:
            
            (as
      reported)
            
            
            Adjustments
            
            
            (as
      restated)Securities
      available-for-sale
            
            $
            109,738,083
            
            
            $
            (2,725,000
            )
            
            $
            107,013,083Other
      assets (deferred taxes)
            
            
            15,799,474
            
            
            
            996,000
            
            
            
            16,795,474Retained
      earnings, substantially restricted
            
            
            59,013,978
            
            
            
            (2,070,594
            )
            
            
            56,943,384Accumulated
      other comprehensive income (loss)
            
            
            (2,870,821
            )
            
            
            341,594
            
            
            
            (2,529,227
            )Three
      months ended
            
            
            
            
            
            
            Three
      months endedDecember
      31, 2007
            
            
            
            
            
            
            December
      31, 2007Consolidated  Statements
      of Operations:
            
            (as
      reported)
            
            
            Adjustments
            
            
            (as
      restated)Other-than-temporary
      impairment of investment securities
            
            
            -
            
            
            $
            (3,270,594
            )
            
            $
            (3,270,594
            )Net
      income (loss)
            
            $
            317,861
            
            
            
            (2,070,594
            )
            
            
            (1,752,733
            )Income
      tax expense (benefit)
            
            
            28,000
            
            
            
            (1,200,000
            )
            
            
            (1,172,000
            )Basic
      earnings (loss) per share from continuing operations
            
            $
            0.10
            
            
            $
            (0.64
            )
            
            $
            (0.54
            )Diluted
      earnings (loss) per share from continuing operations
            
            $
            0.10
            
            
            $
            (0.64
            )
            
            $
            (0.54
            )Six
      months ended
            
            
            
            
            
            
            Six
      months endedDecember
      31, 2007
            
            
            
            
            
            
            December
      31, 2007Consolidated  Statements
      of Operations:
            
            (as
      reported)
            
            
            Adjustments
            
            
            (as
      restated)Other-than-temporary
      impairment of investment securities
            
            
            -
            
            
            $
            (3,270,594
            )
            
            $
            (3,270,594
            )Net
      income (loss)
            
            $
            732,474
            
            
            
            (2,070,594
            )
            
            
            (1,338,120
            )Income
      tax expense (benefit)
            
            
            143,000
            
            
            
            (1,200,000
            )
            
            
            (1,057,000
            )Basic
      earnings (loss) per share from continuing operations
            
            $
            0.23
            
            
            $
            (0.64
            )
            
            $
            (0.41
            )Diluted
      earnings (loss) per share from continuing operations
            
            $
            0.22
            
            
            $
            (0.63
            )
            
            $
            (0.41
            )Six
      months ended
            
            
            
            
            
            
            Six
      months endedDecember
      31, 2007
            
            
            
            
            
            
            December
      31, 2007Consolidated  Statements
      of Stockholders' Equity:
            
            (as
      reported)
            
            
            Adjustments
            
            
            (as
      restated)Net
      income (loss)
            
            $
            732,474
            
            
            $
            (2,070,594
            )
            
            $
            (1,338,120
            )Net
      change in unrealized gains (losses) on securitiesavailable-for-sale, net of income taxes
            
            
            (2,691,461
            )
            
            
            (1,709,000
            )
            
            
            (4,400,461
            )Less:
      reclassification adjustment for net realized lossesIncluded
      in net income, net of income taxes
            
            
            -
            
            
            
            2,050,594
            
            
            
            2,050,594Total
      stockholders' equity
            
            
            66,440,017
            
            
            
            (1,729,000
            )
            
            
            64,711,017Three
      months ended
            
            
            
            
            
            
            Three
      months endedDecember
      31, 2007
            
            
            
            
            
            
            December
      31, 2007Consolidated  Statements
      of Comprehensive Income (Loss):
            
            (as
      reported)
            
            
            Adjustments
            
            
            (as
      restated)Net
      income (loss)
            
            $
            317,861
            
            
            $
            (2,070,594
            )
            
            $
            (1,752,733
            )Net
      change in unrealized gains (losses) on securitiesavailable-for-sale, net of income
taxes
            
            
            (1,438,575
            )
            
            
            (1,709,000
            )
            
            
            (3,147,575
            )Less:
      reclassification adjustment for net realized lossesIncluded in net
      income, net of income taxes
            
            
            -
            
            
            
            2,050,594
            
            
            
            2,050,594Total
      comprehensive income (loss)
            
            
            (1,120,714
            )
            
            
            (1,729,000
            )
            
            
            (2,849,714
            )Six
      months ended
            
            
            
            
            
            
            Six
      months endedDecember
      31, 2007
            
            
            
            
            
            
            December
      31, 2007Consolidated  Statements
      of Comprehensive Income (Loss):
            
            (as
      reported)
            
            
            Adjustments
            
            
            (as
      restated)Net
      income (loss)
            
            $
            732,474
            
            
            $
            (2,070,594
            )
            
            $
            (1,338,120
            )Net
      change in unrealized gains (losses) on securities available-for-sale, net
      of income taxes
            
            
            (2,691,461
            )
            
            
            (1,709,000
            )
            
            
            (4,400,461
            )Less:
      reclassification adjustment for net realized lossesIncluded in net
      inocme, net of income taxes
            
            
            -
            
            
            
            2,050,594
            
            
            
            2,050,594Total
      comprehensive income (loss)
            
            
            (1,958,987
            )
            
            
            (1,729,000
            )
            
            
            (3,687,987
            )





14





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





Forward-Looking
Statements





This
report may contain certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), that involve substantial risks and
uncertainties.  When used in this report, or in the documents
incorporated by reference herein, the words “anticipate”, “believe”, “estimate”,
“expect”, “intend”, “may”, and similar expressions identify such forward-looking
statements.  Actual results, performance or achievements could differ
materially from those contemplated, expressed or implied by the forward-looking
statements contained herein.  These forward-looking statements are
based largely on the expectations of the Company’s management and are subject to
a number of risks and uncertainties, including but not limited to economic,
competitive, regulatory, and other factors affecting the Company’s operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report filed by the Company with the
Securities and Exchange Commission (“SEC”).  Many of these factors are
beyond the Company’s control.





Restatement
of Previously Reported Financial Information





On May
13, 2008, the Audit Committee of the Board of Directors of the Company, upon the
recommendation of the Company’s management, concluded that the Company’s
Consolidated Statements of Financial Condition, Consolidated Statements of
Income, Consolidated Statements of Cash Flows, Consolidated Statements of
Changes in Stockholders’ Equity, and Consolidated Statements of Comprehensive
Income at and for the three and six month periods ended December 31, 2007,
previously issued on Form 10-Q should no longer be relied upon. The Company has
restated each of these statements as of December 31, 2007, and has filed such
statements as part of this amended Form 10-Q.




The
restatement was necessitated by an error in determining the fair value of one of
the Company’s trust-preferred pooled securities. The error was due to inaccurate
pricing information from the third party entities that provide this information
to the Company.   The restated fair value of the security was
substantially lower than its carrying value as of December 31,
2007.  As such, the Company concluded that the impairment of the
security was “other than temporary” due to the severity and duration of the
decline in fair value.





As
restated, the fair value of the Company’s securities available for sale as of
December 31, 2007, declined by $2.7 million, and the Company’s stockholders’
equity declined by $1.7 million.  The Company’s net income declined by
$2.1 million for the three and six month periods ended December 31,
2007.  In addition, the Company’s deferred income taxes receivable
increased by $1.0 million, which is included as a component of other assets in
the Company’s Consolidated Statements of Financial Condition.  For
additional discussion, refer to Note 9 of the Company’s Consolidated Financial
Statements included herein, as well as “Financial Condition – Stockholders’
Equity” and “Financial Condition – Securities Available-for-Sale and
Held-for-Investment”, below.





The Audit
Committee of the Board of Directors of he Company discussed this matter with the
Company’s independent accountants prior to the issuance of this amended Form
10-Q.





Results
of Operations





Quarter
Overview   The Company’s net loss for the three months
ended December 31, 2007, was $1.7 million or $0.54 per diluted share compared to
net income of $413,000 or $0.12 per diluted share in the same period last
year.





The
decrease in net income for the three months ended December 31, 2007, as compared
to the three months ended December 31, 2006, was due to a $3.2 million decrease
in non-interest income, a $443,000 increase in non-interest expense and a
$90,000 increase in provision for loan losses.  In addition,
discontinued operations contributed $32,000 for the three months ended December
31, 2006.  These developments were offset by a $339,000 increase in
net interest income, and a $1.2 million decrease in income tax
expense.





15





Six Month
OverviewThe Company’s net loss for the six months ended
December 31, 2007, was $1.3 million or $0.41 per diluted share, compared to net
income of $1.4 million or $0.41 per diluted share in the same period last
year.




The
decrease in net income for the six months ended December 31, 2007 as compared to
the same period a year ago was due to a $3.3 million decrease in non-interest
income, a $1.2 million increase in non-interest expense, and an $11,000 increase
in provision for loan losses.    In addition, discontinued
operations contributed $76,000 for the six months ended December 31,
2006.  These developments were partially offset by an increase in net
interest income of $313,000 and a $1.5 million decrease in income tax
expense.





The
following paragraphs discuss the aforementioned changes in more detail along
with other changes in the components of net income during the three and six
month periods ended December 31, 2007.





Net Interest
Income  Net interest income for the three months and the six
months ended December 31, 2007, totaled $4.2 million and $8.3 million,
respectively, compared to $3.9 million and $8.0 million, respectively, for the
same periods ended December 31, 2006.  The Company’s net interest
margin increased 13 basis points to 3.02% for the three months ended December
31, 2007, from 2.89% during the same period in the previous year.  The
increase in net interest margin was due to asset yields rising faster than the
cost of the Company’s interest-bearing liabilities.  Asset yields
increased 29 basis points due primarily to increases in yields on the Company’s
investment and loan portfolios.  The Company’s interest-bearing
liabilities only increased eight basis points during the same time
period.  In addition, average earning assets for the three months
ended December 31, 2007, increased $21.4 million compared to the same period
last year.   The asset growth occurred in the Company’s
investment security portfolio and was offset by decreases in the Company’s loan
portfolio.  During the previous fiscal year the Bank purchased $50
million of floating-rate, trust-preferred securities funded with short-term
borrowings.  This transaction has a current after-tax annualized ROA
in excess of 1.75%.





The
improvement in the Company’s net interest margin in the most recent quarter
represents the third straight increase on a quarter-to-quarter
basis.  This improvement is due principally to a declining interest
rate environment.  Also contributing was management’s decision to
price certain deposit products less aggressively relative to its
competitors.  Management expects the Company’s net interest margin to
continue to improve modestly in the near-term in light of continued declines in
market interest rates subsequent to December 31, 2007.  However, there
can be no assurances.





For the
six months ended December 31, 2007, the Company’s net interest margin declined
slightly from 3.00% to 2.96%.  The decline in margin was offset by an
increase in average earning assets.  Average earning assets as of
December 31, 2007, increased $26.8 million to $565.5 million as compared to the
same period last year.





The
following tables set forth information regarding the average balances of the
Company’s assets, liabilities, and equity, as well as the average yield on
assets and average cost of liabilities for the periods indicated.  The
information is based on daily average balances during the three and six month
periods ended December 31, 2007 and 2006.





16




Three
      months ended December 31,2007
            
            
            2006Average
            
            
            
            
            
            Average
            
            
            Average
            
            
            
            
            
            Average(Dollars
      in thousands)
            
            Balance
            
            
            Interest
            
            
            Yield/Cost
            
            
            Balance
            
            
            Interest
            
            
            Yield/CostInterest-earning
      assets:Loans
      receivable (1)
            
            $
            434,846
            
            
            $
            7,403
            
            
            
            6.75
            %
            
            $
            455,018
            
            
            $
            7,535
            
            
            
            6.57
            %Investment
      securities (2)
            
            
            127,477
            
            
            
            1,994
            
            
            
            6.35
            %
            
            
            78,212
            
            
            
            1,004
            
            
            
            5.37
            %Deposits
      in other financial institutions
            
            
            745
            
            
            
            8
            
            
            
            4.05
            %
            
            
            8,476
            
            
            
            110
            
            
            
            5.13
            %Total
      interest-earning assets
            
            
            563,068
            
            
            
            9,405
            
            
            
            6.66
            %
            
            
            541,706
            
            
            
            8,649
            
            
            
            6.37
            %Non-interest-earning
      assets
            
            
            64,322
            
            
            
            
            
            
            
            
            
            
            
            55,184Total
      assets
            
            $
            627,390
            
            
            
            
            
            
            
            
            
            
            $
            596,890Interest-bearing
      liabilities:Deposit
      liabilities
            
            $
            411,313
            
            
            
            3,915
            
            
            
            3.78
            %
            
            $
            397,549
            
            
            
            3,784
            
            
            
            3.78
            %Borrowings
            
            
            100,438
            
            
            
            1,289
            
            
            
            5.09
            %
            
            
            82,723
            
            
            
            1,003
            
            
            
            4.81
            %Total
      interest-bearing liabilities
            
            
            511,751
            
            
            
            5,204
            
            
            
            4.03
            %
            
            
            480,272
            
            
            
            4,787
            
            
            
            3.95
            %Non-interest-bearing:Deposit
      liabilities
            
            
            42,958
            
            
            
            
            
            
            
            
            
            
            
            41,423Other
      liabilities
            
            
            5,268
            
            
            
            
            
            
            
            
            
            
            
            5,433Total
      liabilities
            
            
            559,977
            
            
            
            
            
            
            
            
            
            
            
            527,128Stockholders’
      equity
            
            
            67,413
            
            
            
            
            
            
            
            
            
            
            
            69,762Total
      liabilities and stockholders' equity
            
            $
            627,390
            
            
            
            
            
            
            
            
            
            
            $
            596,890Net
      interest income
            
            
            
            
            
            $
            4,201
            
            
            
            
            
            
            
            
            
            
            $
            3,862Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            2.63
            %
            
            
            
            
            
            
            
            
            
            
            2.42
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            3.02
            %
            
            
            
            
            
            
            
            
            
            
            2.89
            %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            110.03
            %
            
            
            
            
            
            
            
            
            
            
            112.79
            %





(1)
            Average
      balances include nonaccrual loans and loans held for
      sale.  Interest income includes amortization of deferred loan
      fees, which is not material.


(2)
            Investment
      securities income is presented without the benefit of the tax effect of
      tax exempt income; yields are presented on a tax-effected
      basis.


(3)
            Net
      interest margin represents net interest income, tax-effected, as a
      percentage of average earning
assets.





17




Six
      months ended December 31,2007
            
            
            2006Average
            
            
            
            
            
            Average
            
            
            Average
            
            
            
            
            
            Average(Dollars
      in thousands)
            
            Balance
            
            
            Interest
            
            
            Yield/Cost
            
            
            Balance
            
            
            Interest
            
            
            Yield/CostInterest-earning
      assets:Loans
      receivable (1)
            
            $
            433,268
            
            
            $
            14,834
            
            
            
            6.79
            %
            
            $
            457,147
            
            
            $
            15,170
            
            
            
            6.58
            %Investment
      securities (2)
            
            
            129,913
            
            
            
            4,019
            
            
            
            6.28
            %
            
            
            72,140
            
            
            
            1,799
            
            
            
            5.24
            %Deposits
      in other financial institutions
            
            
            2,326
            
            
            
            58
            
            
            
            4.95
            %
            
            
            9,395
            
            
            
            244
            
            
            
            5.15
            %Total
      interest-earning assets
            
            
            565,507
            
            
            
            18,911
            
            
            
            6.66
            %
            
            
            538,682
            
            
            
            17,213
            
            
            
            6.38
            %Non-interest-earning
      assets
            
            
            63,303
            
            
            
            
            
            
            
            
            
            
            
            55,362Total
      assets
            
            $
            628,810
            
            
            
            
            
            
            
            
            
            
            $
            594,044Interest-bearing
      liabilities:Deposit
      liabilities
            
            $
            430,716
            
            
            
            8,477
            
            
            
            3.90
            %
            
            $
            392,063
            
            
            
            7,206
            
            
            
            3.65
            %Borrowings
            
            
            83,126
            
            
            
            2,153
            
            
            
            5.14
            %
            
            
            85,096
            
            
            
            2,040
            
            
            
            4.75
            %Total
      interest-bearing liabilities
            
            
            513,842
            
            
            
            10,630
            
            
            
            4.10
            %
            
            
            477,159
            
            
            
            9,246
            
            
            
            3.84
            %Non-interest-bearing:Deposit
      liabilities
            
            
            42,680
            
            
            
            
            
            
            
            
            
            
            
            42,276Other
      liabilities
            
            
            5,383
            
            
            
            
            
            
            
            
            
            
            
            5,058Total
      liabilities
            
            
            561,905
            
            
            
            
            
            
            
            
            
            
            
            524,493Stockholders’
      equity
            
            
            66,905
            
            
            
            
            
            
            
            
            
            
            
            69,551Total
      liabilities and stockholders' equity
            
            $
            628,810
            
            
            
            
            
            
            
            
            
            
            $
            594,044Net
      interest income
            
            
            
            
            
            $
            8,281
            
            
            
            
            
            
            
            
            
            
            $
            7,967Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            2.56
            %
            
            
            
            
            
            
            
            
            
            
            2.54
            %Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            2.96
            %
            
            
            
            
            
            
            
            
            
            
            3.00
            %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            110.05
            %
            
            
            
            
            
            
            
            
            
            
            112.89
            %





(1)
            Average
      balances include nonaccrual loans and loans held for
      sale.  Interest income includes amortization of deferred loan
      fees, which is not material.


(2)
            Investment
      securities income is presented without the benefit of the tax effect of
      tax exempt income; yields are presented on a tax-effected
      basis.


(3)
            Net
      interest margin represents net interest income, tax-effected, as a
      percentage of average earning
assets.




Provision for
Losses on LoansProvision for losses on
loans increased to $492,000 for the three months ended December 31, 2007, from
$403,000 for the three months ended December 31, 2006.  For the six
months ended December 31, 2007, the provision for loan losses increased to
$513,000 from $503,000 during the same time period last year.  The
increase was primarily attributed to the partial charge-off of two commercial
real estate loan relationships during the period and the establishment of a
specific loss allowance on a commercial loan to a concrete pumping
company.  The loan loss provision in the same quarter of the previous
year was related to the Company’s reclassification of $10.3 million of
non-performing and classified loans to held for sale.  These loans
were subsequently sold in 2007.





The
Company’s allowance for loan losses totaled $2.1 million as of December 31,
2007, compared to $1.8 million as of June 30, 2007.  The Company’s
allowance for loan losses was 68.8% and 144.7% of non-performing loans as of
December 31, 2007, and June 30, 2007, respectively.  Although the
Company’s allowance for loan loss has increased in absolute dollars during the
six months ended December 31, 2007, it has decreased relative to its
non-performing loans.  Management believes the allowance for loan loss
is adequate.  The impact of an increase in non-performing loans was
partially offset by a decrease in the Bank’s long-term historical loan loss
experience.  This experience is a key driver in the calculation of the
Company’s allowance for loan loss.





Non-performing
loans and adversely classified assets have increased in recent months consistent
with well-publicized difficulties in the overall markets for commercial and
residential real estate.  Although management believes that the
Company’s present level of allowance for loan losses is adequate, there can be
no assurance that future





18





adjustments
to the allowance will not be necessary, which could adversely affect the
Company’s results of operations.  For additional discussion, refer to
“Financial Condition – Non-Performing and Adversely Classified
Assets.”





The
following table summarizes the activity in the Company’s allowance for loan
losses for the three and six months ended December 31, 2007 and
2006.





Three
      months ended
            
            
            Six
      months endedDecember
      31
            
            
            December
      31(Dollars
      in Thousands)
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006Balance
      at beginning of period
            
            $
            1,743
            
            
            $
            5,482
            
            
            $
            1,797
            
            
            $
            5,466Provision
      for loan losses
            
            
            492
            
            
            
            403
            
            
            
            513
            
            
            
            503Charge-offs:Commercial
      real estate loans
            
            
            (182
            )
            
            
            -
            
            
            
            (182
            )
            
            
            (20
            )Commercial
      business loans
            
            
            (15
            )
            
            
            (2,617
            )
            
            
            (71
            )
            
            
            (2,617
            )Consumer
      loans
            
            
            (33
            )
            
            
            (49
            )
            
            
            (79
            )
            
            
            (127
            )Total
      loans charged-off
            
            
            (230
            )
            
            
            (2,666
            )
            
            
            (332
            )
            
            
            (2,764
            )Loans
      transferred to held for sale
            
            
            -
            
            
            
            (1,300
            )
            
            
            -
            
            
            
            (1,300
            )Recoveries
            
            
            51
            
            
            
            125
            
            
            
            78
            
            
            
            139Charge-offs,
      net of recoveries
            
            
            (179
            )
            
            
            (3,841
            )
            
            
            (254
            )
            
            
            (3,925
            )Balance
      at end of period
            
            $
            2,056
            
            
            $
            2,044
            
            
            $
            2,056
            
            
            $
            2,044Allowance
      for loan losses to total loans
            
            
            0.47
            %
            
            
            0.46
            %
            
            
            0.47
            %
            
            
            0.46
            %Allowance
      for loan losses to non-performing loans
            
            
            68.81
            %
            
            
            73.66
            %
            
            
            68.81
            %
            
            
            73.66
            %Net
      annualized charge-offs to average loans outstanding
            
            
            0.16
            %
            
            
            3.38
            %
            
            
            0.12
            %
            
            
            1.72
            %




Non-Interest
Income (Loss)  For the three months ended December 31, 2007
the Company recorded non-interest loss of $1.7 million compared to non-interest
income of $1.5 million during the same period in 2006.  For the six
months ended December 31, 2007, the Company recorded non-interest loss of
$200,000 compared to non-interest income of $3.1 for the six months ended
December 31, 2006.  The following paragraphs discuss the principal
components of non-interest income and the primary reasons for the changes from
2006 to 2007.





Service Charges on Deposit
Accounts Service charges on deposits decreased $22,000 to
$835,000 for the three month period ended December 31, 2007, as compared to the
same period in the previous year.  For the six months ended December
31, 2007, service charges on deposit accounts totaled $1.6 million as compared
to $1.8 million for the six months ended December 31, 2006.   The
decline in both periods was primarily due the elimination of fees on internet
banking services and lower income from overdraft fees as a result of the
implementation of an overdraft protection product.  These changes were
driven by competitive forces in the Company’s market places.





Service Charges on Commercial and
Consumer Loan   Service charges on commercial and consumer
loans increased $72,000 to $123,000 for the three month period ended December 31
2007, as compared to the same period in the previous year.  For the
six months ended December 31, 2007, service charges on loans increased $136,000
to $220,000.  The increase was primarily due to the collection of
prepayment penalties on commercial and commercial real estate loans during the
current period.  The collection of prepayment penalties increased due
to the general decline in market interest rates during the period and a
corresponding increase in refinancing activity in the commercial real estate
portfolio.





Gain on Sale of Real Estate Held for
DevelopmentThe gain on sale of real estate held for
development for the three months ended December 31, 2007 and 2006, was $47,000
and $20,000, respectively.  For the six months ended December 31, 2007
and 2006, gain on the sale of real estate held for development totaled $47,000
and $60,000, respectively.  The gains recognized in both periods were
due to sales from a condominium development project in the Company’s real estate
development subsidiary.  This project is now completed.  The
Company does not intend to undertake any further real estate development
projects.





19





Other-than-Temporary Impairment on
Investment Securities   In December 2007, the Company
recognized a $3.3 million write-down related to one of its trust preferred
securities.  During the most recent quarter, the security was
downgraded to triple-C by one rating agency.  As a result, the market
price of this security declined significantly.  Although management
believes it is possible all principal and interest will be received, the market
value decline was severe enough and was of sufficient duration to warrant the
recognition of the security as “other than temporarily” impaired.  For
further discussion, please refer to “Financial Condition – Securities
Available-for-Sale and Held-to-Maturity” and “ Financial Condition –
Stockholders’ Equity.”





Mortgage Banking
Revenue   Mortgage banking revenue consists of gain on
sale of residential loans, loan origination and closing fees, and mortgage
servicing income.  Mortgage banking revenue declined $1,000 from
$178,000 for the three months ended December 31, 2006, to $177,000 for the three
months ended December 31, 2007.  For the six months ended December 31,
2007, mortgage banking revenue decreased $7,000 to $371,000 from $378,000 during
the same period last year.  The decrease was due to a decline in the
market value of the Company’s mortgage servicing portfolio.  This
decline was offset by an increase in fixed rate mortgage origination volumes due
to the overall decline in market interest rates.





Earnings from bank owned life
insurance   Earnings from bank owned life insurance
increased $7,000 to $138,000 for the three months ended December 31,
2007.  For the six months ended December 31, 2007, earnings for bank
owned life insurance increased $11,000 to $275,000 from $264,000 during the same
period last year.  The change was attributed to an increase in the
investment yield of the underlying insurance policies.





Other
IncomeOther income for the three months ended December
31, 2007 and 2006, was $266,000 in both periods.  For the six months
ended December 31, 2007, other income totaled $563,000 as compared to $553,000
for the six months ended December 31, 2006.  The change was primarily
due to an increase in sales of fixed annuities and mutual funds.





Non-Interest
Expense  Non-interest expense for the three months ended
December 31, 2007, was $5.0 million compared to $4.5 million for the three
months ended December 31, 2006.  For the six months
ended      December 31, 2007, non-interest expense
totaled $10.0 million compared to $8.9 million for the same period a year
ago.   The following paragraphs discuss the principal components
of non-interest expense and the primary reasons for the changes from 2006 to
2007.





Personnel
Expense    Compensation and employee benefits was
$2.8 million for the three months ended December 31, 2007, compared to $2.6
million for the three months ended December 31, 2006.  The increase in
expense was due to annual merit increases and an increase in the number of
full-time equivalent employees.  The number of full-time equivalent
employees was 196 as of December 31, 2007, compared to 177 at the same time last
year.  The number of employees increased during the year due to the
opening of a new banking center in the Des Moines market as well as the hiring
of certain key employees over the last twelve months.





Office Property and
Equipment   Office property and equipment expense
increased $14,000 or 2.0% during the three months ended December 31, 2007,
compared to the same period in the previous year.  For the six months
ended December 31, 2007, office property and equipment expense increased $37,000
to $1.4 million as compared to the same time period one year
ago.  Depreciation expense increased as compared to the prior year due
to the aforementioned opening of a new banking center in the Des Moines
area.  In addition, building lease and property tax expenses increased
from the prior year as a result of general inflationary increases.





Data Processing, ATM and Debit Card
Transaction Costs, and Other Item Processing
ExpenseThis expense category increased from
$294,000 for the three months ended December 31, 2006, to $417,000 for the three
months ended December 31, 2007.  For the six months ended December 31,
2007, this expense increased to $787,000 from $603,000.  The increase
was partially due to costs associated with the purchase of new debit card stock
in association with the Bank’s name change.  In addition, the Company
has been successful in increasing the number of individuals using online banking
and bill pay as well as cell phone banking.  As a result, processing
costs through these channels have increased.





Professional, Insurance, and
RegulatoryProfessional, insurance and regulatory
expense for the three months ended December 31, 2007, decreased to $252,000 from
$275,000 for the same period a year ago.  For the





20





six
months ended December 31, 2007, professional, insurance, and regulatory expense
decreased $52,000 or 9.3% to $507,000 as compared to the six months ended
December 31, 2006.  The Company incurred consulting and legal costs
last year related to the implementation of the Company’s long-term incentive
plan and cash incentive plan.





Advertising, Donations, and Public
RelationsExpenses related to advertising, donations,
and public relations increased from $217,000 for the three months ended December
31, 2006, to $303,000 for the three months ended December 31,
2007.  For the six months ended December 31, 2007, expenses related to
advertising, donations and public relations totaled $766,000 as compared to
$384,000 for the six months ended December 31, 2006.  The increase in
both periods was due to non-recurring costs related to the Bank’s name change
and brand image.  Management anticipates the cost level of this line
item to return to more historical levels in the third and fourth quarters of
fiscal year 2008.





Communication, Postage, and Office
SuppliesCommunications, postage, and office supplies
expense increased by $16,000 from $208,000 for the three months ended December
31, 2006, to $225,000 for the three months ended December 31,
2007.  For the six months ended December 31, 2007, communication
postage and office supply expense increased $33,000 to $435,000 as compared to
last year.   These increases were due to printing and postage
related to the Bank’s name change and the opening of the aforementioned Des
Moines banking center.





Other Non-Interest
ExpenseOther non-interest expense increased from
$206,000 for the three months ended December 31, 2006, to $227,000 for the three
months ended December 31, 2007.  For the six months ended December 31,
2007, other expense increased to $457,000 compared to $372,000 for the six
months ended December 31 2006.  This increase was due to costs
incurred by the Company to dispose of foreclosed property and the recognition of
allowances for debit card fraud and checking account overdraft
losses.





Income Tax
ExpenseIncome tax benefit for the six months ended
December 31, 2007, was $1.1 million compared to an expense of $441,000 for the
six months ended December 31, 2006.  Income tax benefit for the three
months ended December 31, 2007, was $1.2 million compared to an expense of
$77,000 for the same period a year ago.





Financial
Condition





Overview
Total assets decreased by $21.5 million or 3.3%, to $624.3 million at December
31, 2007, from $645.8 million at June 30, 2007.  The maturity of
investment securities and declines in interest bearing deposits at other
financial institutions were primarily used to fund a decrease in deposit
liabilities and maturities of FHLB advances.  The following paragraphs
discuss the aforementioned changes in more detail along with other changes in
the components of the assets and liabilities for the period ended December 31,
2007.





Interest-Bearing
Deposits with Banks Interest-bearing deposits with banks, which consist
primarily of overnight investments at the FHLB, decreased by $6.2 million to
$7.9 million December 31, 2007.  These balances were used to fund the
aforementioned decreases in the Company’s deposit liabilities.





Securities
Available-for-Sale and Held-for-InvestmentTotal
securities decreased by $15.9 million to $116.0 million at December 31, 2007,
from $131.9 million at June 30, 2007.  The decrease was primarily due
to the maturity of commercial paper and principal payments from the Company’s
mortgage backed security (“MBS”) portfolio.  These funds were also
used to fund the aforementioned decline of deposit liabilities and maturities of
FHLB advances.  In addition, during the most recent quarter the
Company recognized a $3.3 million write-down related to one of its trust
preferred securities.  The security was downgraded to triple-C by one
rating agency.  As a result, the market price of this security
declined significantly.  Although management believes it is possible
all principal and interest will be received, the market value decline was severe
enough and was of sufficient duration to warrant the recognition of the security
as “other than temporarily” impaired.





Federal
law and regulation generally permit the Company's federal savings
association subsidiary to invest up to 35% of its assets in commercial
paper and corporate debt securities. Notwithstanding this investment limit,
guidance issued by the Office of Thrift Supervision
("OTS") imposes lower limits on such investments, absent OTS
approval.  The Company was recently advised by the
OTS that the aggregate amount of the Company's portfolio of
trust-preferred pooled securities ($61.9 million carrying value at December
31, 2007) exceeds OTS regulatory guidelines. The





21





Company
is currently in discussions with the OTS about the size of this portfolio
and, in response to an OTS request, expects to file with them by May
15, 2008, a plan to come into compliance with such regulatory
guidelines and the timeframe for doing so.  It should be noted, the
OTS granted the Company an extension to May 15th for the submission of this plan
from the original deadline that was reported in Form 8-K filed on February 25,
2008.   As part of such plan, the Company intends to seek OTS
approval to allow the Company to retain such securities, notwithstanding the
regulatory guidelines. There can be no assurance that the Company will obtain
the approval. Any future directive by the OTS to sell such securities could
result in the securities being classified as “other than temporarily impaired”
due to a lack of positive intent and ability by the Company to hold these
securities to maturity and/or forecasted recovery.  Regardless of the
OTS’s decision, continued deterioration in the performance and/or fair value of
these securities could result in the securities being classified as “other than
temporarily impaired” or “permanently impaired” in a future reporting
period.  Such classification, regardless of reason, could have a
material adverse effect on the Company's future earnings and stockholders'
equity.





Please
refer to “Financial Condition – Stockholders’ Equity,” below, for additional
discussion relating to the Company’s TPS portfolio.





Loans
Receivable  Loans receivable decreased by $7.4 million, to
$422.3 million as of December 31, 2007, from $429.8 million at June 30,
2007.  Repayments from the one-to-four family residential and
commercial real estate portfolios were offset by an increase in commercial
business loans and home equity and second mortgage loans.  The
following table sets forth information regarding the Company’s loan portfolio,
by type of loan, on the dates indicated.





December
      31, 2007
            
            
            June
      30, 2007(Dollars
      in Thousands)
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %First
      mortgage loans:Secured
      by one to four family residences (1)
            
            $
            119,425
            
            
            
            28.4
            
            
            $
            124,229
            
            
            
            29.0Secured
      by multi-family and non-residential properties (2)
            
            
            184,851
            
            
            
            44.0
            
            
            
            197,952
            
            
            
            46.2Commercial
      business loans
            
            
            60,200
            
            
            
            14.3
            
            
            
            50,439
            
            
            
            11.8Home
      equity and second mortgage loans
            
            
            28,922
            
            
            
            6.9
            
            
            
            28,594
            
            
            
            6.7Other
      non-mortgage loans (3)
            
            
            29,319
            
            
            
            7.0
            
            
            
            28,996
            
            
            
            6.8Loans
      in process, unearned discounts, premiums and net deferred loan fees and
      costs
            
            
            (401
            )
            
            
            (0.1
            )
            
            
            (459
            )
            
            
            (0.1
            )Subtotal
            
            
            422,316
            
            
            
            100.5
            
            
            
            429,751
            
            
            
            100.4Allowance
      for  loan losses
            
            
            (2,056
            )
            
            
            (0.5
            )
            
            
            (1,797
            )
            
            
            (0.4
            )Total
      loans receivable
            
            $
            420,260
            
            
            
            100.0
            
            
            $
            427,954
            
            
            
            100.0





(1)
              Includes
      construction loans of $7.1 million and $6.4 million,
      respectively.


(2)
              Includes
      construction loans of $24.9 million and $18.7 million,
      respectively.


(3)
              Includes
      other secured and unsecured personal
loans.




Office property
and equipment  Office property and equipment increased $2.3
million from $16.2 million at June 30, 2007, to $18.5 million at December 31,
2007.  The increase was due to construction costs associated with a
new banking office in the Ankeny, Iowa.  The Company expects the
banking center to open in the spring of 2008.  The Company continues
to search for additional locations for full-service offices in the fast growing
Des Moines metro area.





FHLB
Stock   The Company’s FHLB stock increased from $3.6
million at June 30, 2007, to $5.2 million at December 31, 2007.  The
increase was a direct result of the increase in FHLB advances, which increases
the level of FHLB stock required to be held.





Deposit
Liabilities   Deposit liabilities decreased by $56.2
million, to $451.7 million at December 31, 2007, from $507.9 million at June 30,
2007.  The decrease in deposits was partially due to the replacement
of matured brokered certificates of deposits with lower cost FHLB advances of
similar term.  The following table sets forth information regarding
the Company’s deposit portfolio on the dates indicated.





22




December
      31, 2007
            
            
            June
      30, 2007(Dollars
      in Thousands)
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %Non-interest-bearing
      checking
            
            $
            45,254
            
            
            
            10.02
            
            
            $
            45,200
            
            
            
            8.90Interest-bearing
      checking accounts
            
            
            88,302
            
            
            
            19.55
            
            
            
            91,723
            
            
            
            18.06Money
      market accounts
            
            
            52,838
            
            
            
            11.70
            
            
            
            55,848
            
            
            
            11.00Savings
      accounts
            
            
            22,380
            
            
            
            4.96
            
            
            
            25,931
            
            
            
            5.10Certificates
      of deposit
            
            
            242,881
            
            
            
            53.77
            
            
            
            289,163
            
            
            
            56.94Total
      deposits
            
            $
            451,655
            
            
            
            100.00
            
            
            $
            507,865
            
            
            
            100.00




FHLB Advances and
Other BorrowingsThe Company’s FHLB advances and other
borrowings increased by $40.5 million, to $102.7 million at December 31, 2007,
from $62.2 million at June 30, 2007.  The increase was due to the
aforementioned replacement of brokered certificates of deposit with FHLB
advances.





Stockholders’
Equity  Total stockholders’ equity decreased by $5.6 million
from $70.3 million at June 30, 2007, to $64.7 million at December 31,
2007.  This decrease was due in part to $1.3 million net loss during
the six months ended December 31, 2007, as well as $2.4 million increase in
accumulated other comprehensive loss during the period.  This increase
was caused by a decline in the fair value of the Company’s TPS
portfolio.  In recent months, well-publicized volatility in world
credit markets has resulted in significant fluctuations in the value of the
Company’s TPSs.  In the opinion of management this volatility is
principally due to market perceptions of credit risk and only secondarily to
actual deterioration in the underlying credit quality or performance of the
community banks, thrifts, insurance companies, and, to a much lesser degree,
REITs that secure the Company’s TPSs.





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





Refer to
“Financial Condition–Securities Available-for-Sale and Held-for-Investment,”
above, for additional discussion relating to the Company’s TPS
portfolio.





Stockholders’
equity also declined due to the Company’s repurchase of 87,000 treasury shares
during the six months ended December 31, 2007, at an average price of
$18.96.





Non-Performing
and Adversely Classified AssetsNon-performing assets
increased to $6.6 million on December 31, 2007, from $3.4 million as of June 30,
2007.  As a result, non-performing assets as a percentage of total
assets increased from 0.19% at June 30, 2007, to 1.05% as of December 31,
2007.  The following table sets forth information regarding
non-accrual loans and other non-performing assets at the dates
indicated.





23




(Dollars
      in Thousands)
            
            December
      31, 2007
            
            
            June
      30, 2007Loans
      accounted for on a non-accrual basis:Single-family
      mortgage loans
            
            $
            213
            
            
            $
            405Commercial
      real estate loans
            
            
            1,236
            
            
            
            732Commercial
      business loans
            
            
            1,378
            
            
            
            -Consumer
      loans
            
            
            161
            
            
            
            105Total
      non-performing loans
            
            
            2,988
            
            
            
            1,242Foreclosed
      and repossessed assets
            
            
            3,611
            
            
            
            2,156Total
      non-performing assets
            
            $
            6,599
            
            
            $
            3,398Restructured
      loans not included in other non-performing categories
above
            
            $
            3,710
            
            
            $
            2,827Non-performing
      loans as a percentage of total loans
            
            
            0.70
            %
            
            
            0.29
            %Non-performing
      assets as a percentage of total assets
            
            
            1.06
            %
            
            
            0.19
            %





As of
December 31, 2007, the Company’s adversely classified assets totaled $8.5
million (which includes most non-performing loans in the above table) or 1.36%
of total assets compared to $4.9 million or 0.76% as
of       June 30, 2007.  Adversely
classified assets include loans rated “Substandard”, “Doubtful”, or “Loss”, as
well as foreclosed and repossessed assets.  Although the Company’s
adversely classified assets has increased in recent periods, management believes
the allowance for loan loss is adequate.  The impact of an increase in
adversely classified assets was partially offset by a decrease in historical
loan loss experience which is also a key driver in the calculation of the
Company’s allowance for loan loss as previously described.





The
Company is closely monitoring five loan relationships and two foreclosed assets
totaling $7.2 million that are included in the $8.5 million of adversely
classified assets.  The following paragraphs contain a brief
discussion of each of these items.





In
January of 2006 the Bank purchased $1.4 million participation of a $5.3 million
loan to a concrete pumping business in Colorado.  In November 2006,
the Bank was notified that the borrower was having cash flow problems stemming
from the slow down in residential construction and a slower than expected ramp
up of business in a new market.  In June of 2007, the business hired a
consultant to determine the capability of the company to service its
debt.  The consultant’s findings determined that a restructure is
necessary.  The loan is not anticipated to be restructured until later
in 2008.  However, management analyzed loan proposals made by the bank
group as well as the borrower’s financial statements to determine the amount of
debt this company could reasonably service.  As a result, an $180,000
specific allowance was recorded in the second quarter of fiscal year
2008.  In addition, since this loan is primarily secured by equipment,
management continues to classify this loan as “Doubtful” in order to properly
reflect the risk in the calculation of the Company’s allowance for loan
loss.  This loan is also accounted for on a non-accrual
basis.  Management anticipates no additional loss on this loan at this
time.  However, there can be no assurances.





In 1999
and 2000 the Bank originated loans to an educational toy retailer in Sioux
City.  The current balance of these loans totaled $0.5 million at
December 31, 2007.  The borrower has experienced several years of
operating losses and cash flow from that business is not sufficient to service
the debt.  Despite the lack of cash flow, the loan is current due to
the guarantor injecting cash into the business.  Management believes
this loan is adequately secured by the underlying collateral which consists of
real estate and to a lesser degree inventory and equipment.  This loan
remains on accrual, but has been classified as “Substandard”.  No loss
is expected at this time. However, there can be no assurances.





In 1999
and subsequent years the Bank originated loans to a restaurant in Sioux
City.  The current balance of these loans totaled $0.6 million at
December 31, 2007.  The borrower has experienced several years of
operating losses and cash flow from the business is not sufficient to service
the debt.  Despite the lack of cash flow, the loan is current due to
the guarantor injecting cash into the business.  This loan remains on
accrual, but has been classified as “Substandard”.  Management
believes the value of the collateral securing this loan is insufficient to repay
the loan should the borrower default.  Should the Company be forced to
foreclose, management anticipates that a loss could exceed
$100,000.  However, management does not believe a loss is probable at
this time, although there can be no assurances.





24





In 2004
the Bank originated loans to a small manufacturer in Des Moines.  The
current balance of these loans total $0.6 million at December 31,
2007.  The loans are current and remain on
accrual.  However, the owners of the company do not have the ability
to inject additional capital in the business.  Capital injections are
needed to improve the company’s overall cash flow.  Management has
classified this loan as “Substandard”.  Management believes the value
of the collateral securing this loan is sufficient to repay the loan if
foreclosure is necessary.  No loss is expected at this time. However,
there can be no assurances.





In
December of 2006 the Bank originated a loan to a real estate developer in Des
Moines.  The purpose of the loan was to purchase and develop lots and
single-family residences.  The current balance of this loan is $0.8
million.  It is delinquent as of December 31,
2007.  Management is currently negotiating with the borrowers to bring
the loan current.  However, if the borrower cannot bring the loan
current, foreclosure proceedings will commence.  Management has
classified this loan as “Substandard” and has placed it on
non-accrual.  Management does not anticipate a loss on this loan at
this time.  However, there can be no assurances.





In 2005
the Bank purchased a $1.8 million participation in a $19.3 million loan for a
senior housing facility in Brooklyn Park, Minnesota.  The borrower
subsequently defaulted on the loan and the collateral was transferred to
foreclosed assets in the fourth quarter of the previous fiscal
year.  An offer to purchase the property for $21.0 million has been
accepted by the bank group but is contingent on bank group financing not to
exceed $17.0 million.  In addition, it is anticipated that the
purchaser will invest an additional $3.0 million of cash into this project for
improvements.   The transaction is anticipated to close by the
fourth quarter of fiscal year 2008.  Management expects no loss at
this time.  However, there can be no assurances.





In the
current quarter the Company foreclosed on $1.5 million of singe-family
residences and lot loans to two real estate developers in Des
Moines.  Upon foreclosure a charge-off of $182,000 was
recorded.  The single family residences are in various stages of
construction.  Management does not believe a material loss on the
ultimate disposition of these properties is probable at this
time.  However, there can be no assurances.





In
addition to the aforementioned adversely classified assets, the Company is also
closely monitoring four loan relationships rated “Special
Mention”.  The total of these relationships is $11.4
million.  The following paragraphs contain a brief discussion of each
of these relationships.





In 2005,
the Bank originated a loan to an investor group for the purchase and renovation
of an existing office building into condominiums in Des Moines.  The
current balance of this loan is $6.9 million.  Condominium sales have
been slow and the project has not met its sales targets.  As a result,
capital injections by the investor group are needed to improve cash flow,
service the debt, and complete the renovation.  Management has
classified this loan “Special Mention”.  Management fully expects that
the necessary capital injections will be made by the investor
group.  Management does not expect a loss at this
time.  However, there can be no assurances.





In 2006,
the Bank originated a loan to an investment group for the purpose of acquiring
and constructing an office building near the Jordan Creek Mall area in Des
Moines.  The current balance of this loan is $2.4
million.  One of the guarantors, the primary developer, has
experienced financial difficulties.  As a result, construction of the
office building was delayed and the loan became past due.  Management
has classified this loan as “Special Mention”.  Subsequently, the
other guarantors of the project brought the loan current and are currently
looking for another developer for the project.  Should the Company be
forced to foreclose, management anticipates that a loss could exceed
$500,000.  However, management does not believe a loss is probable at
this time, although there can be no assurances.





In 2002,
the Bank purchased a $0.4 million participation of a $3.2 million loan to a
private golf and social club.  The loan was paying as agreed until
December 2006.  At that time the borrower notified the bank group of a
significant operating shortfall.  During the most recent quarter a
group of investors brought the loan current and are currently in negotiations to
purchase the assets of the club.  As a result, of these actions, the
loan was upgraded from “Substandard” to “Special Mention” in the most recent
quarter.  Although the loan has been upgraded it continues to be
accounted for on a non-accrual basis.  Management believes this loan
is adequately secured by the underlying collateral, which consists primarily of
real estate and to a lesser degree accounts receivable and
equipment.  No loss is expected at this time.  However,
there can be no assurances.





25





In 2004,
the Bank purchased a $1.7 million participation of a $5.6 million tax increment
financing note on a condominium project near Minneapolis,
Minnesota.  In June of 2007, the Bank was informed that the tax
increment collections on the project were significantly below what was
expected.  As a result, current cash flows are not sufficient to
service the debt.  Since this loan is secured by real estate tax
receipts the bank group has agreed to accept a lower
payment.  However, as property taxes increase, the bank group expects
the excess cash flow to be sufficient to service the
debt.    As a result of the current cash shortfall, a
$150,000 specific allowance was recorded in accordance to generally accepted
accounting principles.  The specific allowance represents the present
value of the current estimated cash flows compared to the expected cash flows of
the project.  Management expects the specific allowance will decline
over time as property taxes increase and as cash flows improve on this project.
As a result, of these actions, the loan was upgraded from “Substandard” to
“Special Mention” in the most recent quarter.  Management believes the
value of the collateral securing this loan is sufficient to repay the loan if
foreclosure is necessary.  No loss is expected at this time. However,
there can be no assurances.





26





Liquidity
and Capital





The Bank
is required to maintain specified amounts of capital pursuant to regulations
promulgated by the Office of Thrift Supervision (“OTS”) and the Federal Deposit
Insurance Corporation (“FDIC”).  The Bank's objective is to maintain
its regulatory capital in an amount sufficient to be classified in the highest
regulatory capital category (i.e., as a "well-capitalized"
institution).  At December 31, 2007, the Bank's regulatory capital
exceeded all regulatory minimum requirements, as well as the amount required to
be classified as a "well-capitalized" institution.  The Bank's actual
and required capital amounts and ratios as of December 31, 2007, and June 30,
2007, were as follows:





December
      31, 2007To
      Be WellCapitalized
      UnderFor
      Capital
            
            
            Prompt
      CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioDollars
      in ThousandsTangible
      capital
            
            $
            46,159
            
            
            
            7.57
            %
            
            $
            9,143
            
            
            
            1.50
            %
            
            
            -
            
            
            
            -Tier
      1 leverage (core)
            
            
            46,159
            
            
            
            7.57
            
            
            
            24,382
            
            
            
            4.00
            
            
            $
            30,477
            
            
            
            5.00
            %Tier
      1 risk-based capital
            
            
            46,159
            
            
            
            9.82
            
            
            
            18,802
            
            
            
            4.00
            
            
            
            28,204
            
            
            
            6.00Risk-based
      capital
            
            
            47,733
            
            
            
            10.15
            
            
            
            37,605
            
            
            
            8.00
            
            
            
            47,006
            
            
            
            10.00June
      30, 2007To
      Be WellCapitalized
      UnderFor
      Capital
            
            
            Prompt
      CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioDollars
      in ThousandsTangible
      capital
            
            $
            49,018
            
            
            
            7.83
            %
            
            $
            9,395
            
            
            
            1.50
            %
            
            
            -
            
            
            
            -Tier
      1 leverage (core)
            
            
            49,018
            
            
            
            7.83
            
            
            
            25,054
            
            
            
            4.00
            
            
            $
            31,317
            
            
            
            5.00
            %Tier
      1 risk-based capital
            
            
            49,018
            
            
            
            10.17
            
            
            
            19,280
            
            
            
            4.00
            
            
            
            28,920
            
            
            
            6.00Risk-based
      capital
            
            
            50,620
            
            
            
            10.50
            
            
            
            38,559
            
            
            
            8.00
            
            
            
            48,199
            
            
            
            10.00




The
Company is also required by OTS regulation to maintain sufficient liquidity to
assure its safe and sound operation.  The Company's primary sources of
liquidity are deposits obtained through its branch office network, borrowings
from the FHLB and other sources, amortization, maturity, and prepayment of
outstanding loans and investments, and sales of loans and other
assets.  During the six months ended December 31, 2007, the Company
used these sources of funds to fund loan commitments, purchase loans, and cover
maturing liabilities and deposit withdrawals.  The Company had a total
of $65.4 million of loan commitments outstanding as of December 31,
2007.   In addition, at December 31, 2007 the Company had $185.5
million in certificates of deposits, $77.0 million in FHLB advances, and $8.9
million in other borrowings that were scheduled to mature within one
year.





Management
believes that the Company has adequate resources to fund all of these
obligations as well as the loan commitments it makes in the normal course of its
business.  The Company also believes it can adjust the rates it offers
on certificates of deposit and other customer deposits to retain these deposits
in changing interest rate environments.  Management is not aware of
any known trends, events or uncertainties that will have or are reasonably
likely to have a material effect on the Company’s or the Bank’s liquidity,
capital or operations, nor is management aware of any current recommendations by
regulatory authorities which, if implemented would have a material effect on the
Company’s or the Bank’s liquidity, capital or operations.





The
Company also has a $5.0 million line of credit with another financial
institution to provide liquidity at the holding company.  The line of
credit has a one-year term and is priced at 175 basis points over the three
month LIBOR





27





rate.  The
purpose of this line of credit is to provide cash for stock buybacks or to
provide the holding company the ability to inject capital into the
Bank.  As of December 31, 2007, there was no outstanding balance on
this line of credit.  In addition, the Bank entered into agreements
with three financial institutions to provide federal funds lines of credit in
the amount of $5.0 million per financial institution.  As of December
31, 2007, there were no outstanding balances on any of the lines of
credit.





On
October 25, 2007, the Board of Directors authorized an extension of the
Company’s stock repurchase plan.  In November of 2005, the Board of
Directors initially authorized the repurchase of 346,000 shares, or
approximately 10% of the Company’s then outstanding shares of
stock.  The extension is for one year, expiring on October 25,
2008.





In
January 2008, the FHLB informed the Company that its borrowing limit at the FHLB
was reduced from 35% of total assets to 25% of total assets (or approximately
from $219.0 million to $156.0 million).  The Bank currently has $90.8
million in borrowings with the FHLB.  As a result, this development is
not expected to have a near-term impact on the Bank’s operations.  In
any event, the Bank has access to adequate levels of alternative borrowing
sources such as the aforementioned fed funds lines, as well as repurchase
agreements and brokered certificates of deposit.  The FHLB’s decision
affected other financial institutions as well as the Company and was based on
the FHLB’s analysis of non-performing assets and earnings trends in recent
periods.  Management expects that its borrowing limit at the FHLB will
be restored as asset quality and earnings improve, although there can be no
assurances.





The
following table presents, as of December 31, 2007, the expected future payments
of the Bank’s contractual obligations.





Payments
      Due in:(In thousands)
            
            Less
      than One Year
            
            
            One
      Year to Less Than Three Years
            
            
            Three
      Years to Less Than Five Years
            
            
            Five
      Years or Greater
            
            
            TotalFHLB
      advances
            
            $
            77,000
            
            
            $
            12,500
            
            
            
            -
            
            
            $
            1,250
            
            
            $
            90,750Other
      borrowings (1)
            
            
            8,909
            
            
            
            -
            
            
            
            -
            
            
            
            3,000
            
            
            
            11,909Operating
      lease
            
            
            139
            
            
            
            308
            
            
            $
            365
            
            
            
            493
            
            
            
            1,305Data
      processing
            
            
            509
            
            
            
            462
            
            
            
            106
            
            
            
            -
            
            
            
            1,077Off-balance-sheet
      (2)
            
            
            65,420
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            65,420Total
            
            $
            151,977
            
            
            $
            13,270
            
            
            $
            471
            
            
            $
            4,743
            
            
            $
            170,461





(1)
              Includes
      securities sold under repurchase
agreements.


(2)
              Includes
      commitments to extend credit, net of commitments to sell
      loans.




Off-Balance
Sheet Arrangements





In
addition to the normal course of operations, the Company engages in a variety of
financial transactions that, in accordance with accounting principles generally
accepted in the United States of America are not recorded in our financial
statements.  These transactions involve, to varying degrees, elements
of credit, interest rate and liquidity risk.  Such transactions are
used primarily to manage customers’ requests for funding and take the form of
loan commitments, lines of credit and letters of credit.  For the
three months ended December 31, 2007, the Company engaged in no off-balance
sheet transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





28





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, 2007.  The Company’s NPV ratio after a 200 basis point
rate-shock was 9.37% at September 30, 2007, compared to 9.16% at June 30, 2007,
and 8.92% at September 30, 2006, as measured by the Model.  As of that
date, 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, 2007, have changed significantly when compared
to the immediately preceding quarter ended September 30,
2007.  However, the Company’s primary market risk exposure has not yet
been quantified at December 31, 2007, 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.  Any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives.  Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this report, the Company’s disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.





Under the
supervision and with the participation of the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, the Company also
conducted an evaluation of the Company’s internal control over financial
reporting to determine whether any changes occurred during the Company’s fiscal
quarter ended December 31, 2007, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.  Based on such evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this report, there have been no significant changes in the Company’s
internal control over financial reporting that occurred during the period that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.





On
February 19, 2008, the Audit Committee of the Board of Directors of the Company
(the “Committee”) and management met to discuss the error in the Company’s
previously filed Form 10-Q (refer to “Restatement of Previously Reported
Financial Information” under Item 2, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included
herein).   Management described to the Committee its usual and
customary practice of receiving security ratings information and market price
indications from third party sources after the close of each reporting
period.   Management noted that these sources did not indicate
that the security in question had been downgraded as of the reporting
date.  Management also noted that none of the market price indications
received from third-party brokers on the security in question indicated that a
downgrade had occurred.  Indeed, when presented with the knowledge of
the downgrade after it was discovered by management, the brokers substantially
lowered the price indications they had previously provided to the
Company.  In light of these facts, the Committee concluded that the
Company’s internal controls were functioning as intended and that a material
weakness did not exist.     Further, the Committee
concluded that given the facts, circumstances, and timing of the Company’s
discovery of the error, a material weakness did not exist in the Company’s
disclosure controls.





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.




29




ITEM
1A. Risk Factors





There
have been no material changes to the risk factors disclosed in the Company’s
2007 Annual Report on Form 10-K.





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





There
were no sales of unregistered securities during the six months ended December
31, 2007.





The
Company did not repurchase any shares during the quarter ended December 31,
2007.





On
October 25, 2007, the Board of Directors authorized an extension of the
Company’s stock repurchase plan.  In November of 2005, the Board of
Directors initially authorized the repurchase of 346,000 shares, or
approximately 10% of the Company’s then outstanding shares of
stock.  The extension is for one year, expiring on October 25,
2008.




ITEM
3.  Default upon Senior Securities





None.





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





The
Company convened its 2007 Annual Meeting of Stockholders on October 25,
2007.  At the meeting, the Stockholders of the Company considered and
voted on the following proposals:





Ballot No.
1.  The election of Barry Backhaus, Ronald A. Jorgensen, and
Charles D. Terlouw, each to serve as a director for a term of three years and
until his successor had been elected and qualified.





Percentage
      oftotal
      Voted SharesDirector
            
            For
            
            
            Withheld
            
            
            Voted
      in FavorBarry
      E. Backhaus
            
            
            2,418,564
            
            
            
            367,215
            
            
            
            86.8
            %Ronald
      A. Jorgensen
            
            
            2,449,476
            
            
            
            336,303
            
            
            
            87.9
            %Charles
      D. Terlouw
            
            
            2,456,176
            
            
            
            329,603
            
            
            
            88.2
            %








Ballot No.
2.  The ratification of McGladrey & Pullen, LLP as the
independent registered public accounting firm of the Company for the fiscal year
ending June 30, 2008.





For
            
            
            Against
            
            
            AbstainNumber
      of Votes
            
            
            2,752,012
            
            
            
            19,952
            
            
            
            13,815%
      of Total Shares Voted
            
            
            99.3
            %
            
            
            0.7
            %








ITEM
5.  Other Information





(a) Not
applicable.


(b) Not
applicable.





30





ITEM
6.  Exhibits





Exhibit
      31.1
            Certification
      of Chief Executive Officer Pursuant to Section
  302


Exhibit
      31.2
            Certification
      of Chief Financial Officer Pursuant to Section
  302


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





31





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:  May
      16,2008
            
            BY:
            /s/ Michael W.
      DoslandMichael
      W. DoslandPresident
      and Chief Executive OfficerDATE:  May
      16, 2008
            
            BY:
            /s/ Michael S.
      ModerskiMichael
      S. ModerskiSenior
      Vice President, Chief Financial Officer and
  Treasurer






32