UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-Q





[Mark
      One]


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


For
      the
      quarterly period ended December 31, 2005





or





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from ______________ to __________





Commission
      File Number: 0-25509





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






Delaware
            42-1485449(State
                or other jurisdiction of 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, including area
                code)





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








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


x Yes  No 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  o  Accelerated
      filer x  Non-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 x No
o





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 6, 2006(Common
                  Stock, $.01 par value)
              3,409,463








FIRST
      FEDERAL BANKSHARES, INC.





INDEX





**Page****Part
                I**.
            
            Financial
                Information**Item
                1**.
            
            Financial
                Statements of First Federal Bankshares, Inc and
                Subsidiaries
            1Condensed
                Consolidated Balance Sheets at December
                31, 2005 and June 30, 2005
            1Condensed
                Consolidated Statements of Operations for the three- and six-month
                periods
                ended December
                31, 2005 and 2004
            2Condensed
                Consolidated Statements of Changes in Stockholders’
                Equity for the six-month periods ended
                December 31, 2005 and 2004
            3Condensed
                Consolidated Statements of Comprehensive Income
                for the three- and six-month periods ended December
                31, 2005 and 2004
            4Condensed
                Consolidated Statements of Cash Flows for the six-month
                periods ended December 31, 2005 and 2004
            5Notes
                to Condensed Consolidated Financial Statements
            6**Item
                2**.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of Operations
            11**Item
                3**.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            20**Item
                4**.
            
            Controls
                and Procedures
            21**Part
                II**.
            
            Other
                Information
            22**Item
                1**.
            
            Legal
                Proceedings
            22**Item
                2**.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            22**Item
                4**.
            
            Submission
                of Matters to a Vote of Security Holders
            22**Item
                6**.
            
            Exhibits
            23Signatures
            23








PART
      I. FINANCIAL INFORMAION


ITEM
      1. FINANCIAL STATEMENTS


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


December
                  31,
              
              June
                  30,2005
              
              2005AssetsCash
                  and due from banks
              
              $
              12,486,441
              
              $
              15,102,382Interest-bearing
                  deposits in other financial institutions
              
              
              1,355,601
              
              
              16,233,325Cash
                  and cash equivalents
              
              
              13,842,042
              
              
              31,335,707Securities
                  available-for-sale, at fair value (amortized costof
                  $44,336,568 and $49,724,675, respectively)
              
              
              44,144,275
              
              
              49,978,244Securities
                  held-to-maturity, at amortized cost (fair valueof
                  $15,179,335 and $18,611,291, respectively)
              
              
              15,063,090
              
              
              18,196,627Loans
                  receivable
              
              
              465,404,427
              
              
              440,351,738Less
                  allowance for loan losses
              
              
              5,571,830
              
              
              6,717,956Net
                  loans
              
              
              459,832,597
              
              
              433,633,782Office
                  property and equipment, net
              
              
              12,814,863
              
              
              13,108,654Federal
                  Home Loan Bank ("FHLB") stock, at cost
              
              
              5,690,100
              
              
              5,762,400Accrued
                  interest receivable
              
              
              2,537,951
              
              
              2,293,315Goodwill
              
              
              18,417,040
              
              
              18,417,040Other
                  assets (note 5)
              
              
              15,187,123
              
              
              14,087,122Total
                  assets
              
              $
              587,529,081
              
              $
              586,812,891LiabilitiesDeposits
              
              $
              413,341,241
              
              $
              407,562,405Advances
                  from FHLB and other borrowings
              
              
              101,102,578
              
              
              104,564,262Advance
                  payments by borrowers for taxes and insurance
              
              
              964,928
              
              
              953,281Accrued
                  interest payable
              
              
              1,463,645
              
              
              1,311,724Accrued
                  expenses and other liabilities
              
              
              2,286,853
              
              
              2,126,014Total
                  liabilities
              
              
              519,159,245
              
              
              516,517,686Stockholders'
                  equityCommon
                  stock, $.01 par value, 12,000,000 shares authorized;4,996,129
                  and
                  4,977,029 shares issued at December 31, 2005and
                  June 30, 2005, respectively
              
              
              49,961
              
              
              49,770Additional
                  paid-in capital
              
              
              38,035,286
              
              
              37,761,587Retained
                  earnings, substantially restricted
              
              
              56,166,535
              
              
              55,028,733Treasury
                  stock, at cost, 1,587,266 and 1,428,826 shares atDecember
                  31,
                  2005 and June 30, 2005, respectively
              
              
              (24,907,685
              )
              
              (21,747,743
              )Accumulated
                  other comprehensive income (loss)
              
              
              (120,293
              )
              
              158,570Unearned
                  Employee Stock Ownership Plan ("ESOP")
              
              
              (849,320
              )
              
              (913,890
              )Unearned
                  Employee Stock Grants
              
              
              (4,648
              )
              
              (41,822
              )Total
                  stockholders' equity
              
              
              68,369,836
              
              
              70,295,205Total
                  liabilities and stockholders' equity
              
              $
              587,529,081
              
              $
              586,812,891See
                  notes to condensed consolidated financial statements.






1




**FIRST
                  FEDERAL BANKSHARES, INC. and SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                  (Unaudited)**
  Three
                    months
                
                Six
                    monthsended
                    December 31,
                
                ended
                    December 31,2005
                
                2004
                
                2005
                
                2004Interest
                    income:Loans
                    receivable
                
                $
                7,269,402
                
                $
                6,244,213
                
                $
                14,130,848
                
                $
                12,559,883Investment
                    securities
                
                
                723,322
                
                
                788,914
                
                
                1,369,440
                
                
                1,727,284Other
                    interest-earning assets
                
                
                18,307
                
                
                11,205
                
                
                94,429
                
                
                19,878Total
                    interest income
                
                
                8,011,031
                
                
                7,044,332
                
                
                15,594,717
                
                
                14,307,045Interest
                    expense:Deposits
                
                
                2,511,494
                
                
                1,626,124
                
                
                4,788,957
                
                
                3,335,282Advances
                    from
                    FHLB and other borrowings
                
                
                1,144,104
                
                
                1,157,104
                
                
                2,275,798
                
                
                2,334,187Total
                    interest expense
                
                
                3,655,598
                
                
                2,783,228
                
                
                7,064,755
                
                
                5,669,469Net
                    interest income
                
                
                4,355,433
                
                
                4,261,104
                
                
                8,529,962
                
                
                8,637,576Provision
                    for losses on loans
                
                
                510,000
                
                
                105,000
                
                
                750,000
                
                
                865,000Net
                    interest income after provision forlosses on loans
                
                
                3,845,433
                
                
                4,156,104
                
                
                7,779,962
                
                
                7,772,576Noninterest
                    income:Service
                    charges on deposit accounts
                
                
                782,030
                
                
                930,986
                
                
                1,621,811
                
                
                1,931,277Service
                    charges on loans
                
                
                103,582
                
                
                133,685
                
                
                199,539
                
                
                291,081Gain
                    on
                    sale of bank branch offices
                
                
                -
                
                
                -
                
                
                -
                
                
                2,185,284Gain
                    (loss) on sale of real estate held for development
                
                
                -
                
                
                30,000
                
                
                (241,649
                )
                
                30,000Net
                    gain (loss) on sale of securities
                
                
                202,944
                
                
                -
                
                
                202,944
                
                
                (121,209
                )Gain
                    on
                    sale of loans
                
                
                164,214
                
                
                184,299
                
                
                397,968
                
                
                425,060Real
                    estate-related activities
                
                
                161,619
                
                
                157,401
                
                
                336,677
                
                
                343,265Other
                    income
                
                
                365,248
                
                
                425,588
                
                
                793,172
                
                
                808,062Total
                    noninterest income
                
                
                1,779,637
                
                
                1,861,959
                
                
                3,310,462
                
                
                5,892,820Noninterest
                    expense:Compensation
                    and benefits (note 7)
                
                
                2,485,576
                
                
                2,652,029
                
                
                4,977,537
                
                
                5,195,927Office
                    property and equipment
                
                
                707,573
                
                
                606,752
                
                
                1,408,833
                
                
                1,237,929Data
                    processing expense
                
                
                120,208
                
                
                108,274
                
                
                243,213
                
                
                233,530Advertising
                
                
                100,366
                
                
                99,789
                
                
                245,509
                
                
                181,123Other
                    expense
                
                
                846,383
                
                
                1,135,322
                
                
                1,681,230
                
                
                2,107,264Total
                    noninterest expense
                
                
                4,260,106
                
                
                4,602,166
                
                
                8,556,322
                
                
                8,955,773Income
                    before income taxes
                
                
                1,364,964
                
                
                1,415,897
                
                
                2,534,102
                
                
                4,709,623Income
                    taxes
                
                
                367,000
                
                
                430,000
                
                
                711,000
                
                
                1,567,000Net
                    income
                
                $
                997,964
                
                $
                985,897
                
                $
                1,823,102
                
                $
                3,142,623Earnings
                    per share: (note 4)Basic
                    earnings per share
                
                $
                0.29
                
                $
                0.28
                
                $
                0.53
                
                $
                0.87Diluted
                    earnings per share
                
                $
                0.29
                
                $
                0.27
                
                $
                0.52
                
                $
                0.85Dividends
                    declared per share
                
                $
                0.10
                
                $
                0.10
                
                $
                0.20
                
                $
                0.20See
                    notes to condensed consolidated financial statements.





2




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




Six
                  months ended December 31,2005
              
              2004**Capital
                  Stock**Beginning
                  of
                  year balance
              
              $
              49,770
              
              $
              49,393Stock
                  options exercised: 19,100 and 29,967 shares for the sixmonths ended December 31, 2005 and 2004, respectively
              
              
              191
              
              
              299End
                  of period balance
              
              
              49,961
              
              
              49,692**Additional
                  paid-in capital**Beginning
                  of
                  year balance
              
              
              37,761,587
              
              
              37,086,235Stock
                  options exercised
              
              
              212,359
              
              
              277,595Employee
                  stock
                  grants awarded
              
              
              -
              
              
              133,755Stock
                  appreciation of allocated ESOP shares
              
              
              61,340
              
              
              83,149End
                  of period balance
              
              
              38,035,286
              
              
              37,580,734**Retained
                  earnings, substantially restricted**Beginning
                  of year balance
              
              
              55,028,733
              
              
              52,240,273Net
                  earnings
              
              
              1,823,102
              
              
              3,142,623Dividends
                  paid on common stock
              
              
              (685,300
              )
              
              (719,891
              )End
                  of period balance
              
              
              56,166,535
              
              
              54,663,005**Treasury
                  stock, at cost**Beginning
                  of
                  year balance
              
              
              (21,747,743
              )
              
              (16,519,093
              )Employee
                  stock
                  grants awarded (forfeited), net
              
              
              -
              
              
              83,250Treasury
                  stock
                  purchased
              
              
              (3,159,942
              )
              
              (2,962,088
              )End
                  of period balance
              
              
              (24,907,685
              )
              
              (19,397,931
              )**Accumulated
                  other comprehensive income (loss)**Beginning
                  of
                  year balance
              
              
              158,570
              
              
              (329,644
              )Net
                  change in unrealized gains (losses) on securitiesavailable-for-sale, net of tax expense
              
              
              (151,617
              )
              
              394,536Less:
                  reclassification adjustment for net realized gains (losses
                  )included in net income, net of tax expense
              
              
              127,246
              
              
              (75,998
              )End
                  of period balance
              
              
              (120,293
              )
              
              140,890**Unearned
                  ESOP shares**Beginning
                  of
                  year balance
              
              
              (913,890
              )
              
              (1,044,710
              )ESOP
                  shares allocated
              
              
              64,570
              
              
              65,240End
                  of period balance
              
              
              (849,320
              )
              
              (979,470
              )**Unearned
                  employee stock grants**Beginning
                  of
                  year balance
              
              
              (41,822
              )
              
              (24,732
              )Stock
                  grants forfeited (awarded), net
              
              
              -
              
              
              (217,005
              )Amortization
                  of
                  employee stock grants
              
              
              37,174
              
              
              84,943End
                  of period balance
              
              
              (4,648
              )
              
              (156,794
              )**Total
                  stockholders' equity**
              
              $
              68,369,836
              
              $
              71,900,126See
                  notes to condensed consolidated financial statements.






3




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




Three
                  Months Ended
              
              Six
                  months endedDecember
                  31,
              
              December
                  31,2005
              
              2004
              
              2005
              
              2004Net
                  earnings
              
              $
              997,964
              
              $
              985,897
              
              $
              1,823,102
              
              $
              3,142,623Other
                  comprehensive income (loss):Unrealized
                  holding gains (losses) arising duringthe period, net of tax
              
              
              (70,146
              )
              
              (109,728
              )
              
              (151,617
              )
              
              394,536Less:
                  reclassification adjustment for net realized gains(losses) included in net income, net of tax expense
              
              
              127,246
              
              
              -
              
              
              127,246
              
              
              (75,998
              )Other
                  comprehensive income (loss), net of tax
              
              
              (197,392
              )
              
              (109,728
              )
              
              (278,863
              )
              
              470,534Comprehensive
                  income
              
              $
              800,572
              
              $
              876,169
              
              $
              1,544,239
              
              $
              3,613,157






See
      notes
      to condensed consolidated financial statements.


4




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





Six
                  months ended December 31,Cash
                  flows from operating activities:
              
              
              2005
              
              
              2004Net
                  earnings
              
              $
              1,823,102
              
              $
              3,142,623Adjustments
                  to reconcile net earnings to net cash provided by operating
                  activities:Loans
                  originated for sale to investors
              
              
              (28,205,000
              )
              
              (18,465,000
              )Proceeds
                  from
                  sale of loans originated for sale
              
              
              27,456,507
              
              
              17,783,080Provision
                  for
                  losses on loans
              
              
              750,000
              
              
              865,000Depreciation
                  and amortization
              
              
              819,930
              
              
              806,103Net
                  gain on sale of loans
              
              
              (397,968
              )
              
              (425,060
              )Net
                  (gain) loss on sale of securities available-for-sale
              
              
              (202,944
              )
              
              121,209Net
                  gain on sale of bank branch offices
              
              
              -
              
              
              (2,185,284
              )Net
                  loss on sale of real estate held for development
              
              
              241,649
              
              
              -Net
                  loan fees deferred
              
              
              (85,111
              )
              
              (50,989
              )Amortization
                  of
                  premiums and discounts on loans and securities
              
              
              (78,044
              )
              
              143,819(Increase)
                  decrease in accrued interest receivable
              
              
              (244,636
              )
              
              (27,353
              )(Increase)
                  decrease in other assets
              
              
              (1,023,598
              )
              
              (565,238
              )Increase
                  (decrease) in accrued interest payable
              
              
              151,921
              
              
              (142,675
              )Increase
                  (decrease) in accrued expenses and other liabilities
              
              
              (236,558
              )
              
              (259,004
              )Increase
                  (decrease) in accrued taxes on income
              
              
              669,414
              
              
              324,255Net
                  cash provided by operating activities
              
              
              1,438,664
              
              
              1,065,486Cash
                  flows from investing activities:Proceeds
                  from
                  maturities of securities held-to-maturity
              
              
              3,120,521
              
              
              3,782,445Proceeds
                  from
                  sale of securities available-for-sale
              
              
              264,466
              
              
              30,226,184Purchase
                  of
                  securities available-for-sale
              
              
              (9,899,914
              )
              
              (5,389,323
              )Proceeds
                  from
                  maturities of securities available-for-sale
              
              
              15,057,664
              
              
              5,401,527Redemption
                  of
                  Federal Home Loan Bank Stock
              
              
              72,300
              
              
              139,000Loans
                  purchased
              
              
              (15,296,000
              )
              
              (15,570,000
              )Cash
                  effect of bank branch office sales
              
              
              -
              
              
              (9,753,387
              )(Increase)
                  decrease in loans receivable
              
              
              (10,394,483
              )
              
              2,444,444Purchase
                  of
                  office property and equipment
              
              
              (313,754
              )
              
              (639,872
              )Proceeds
                  from
                  sale of foreclosed real estate
              
              
              142,098
              
              
              263,739Proceeds
                  from
                  sale of real estate held for development
              
              
              487,249
              
              
              662,917Net
                  expenditures on real estate held for development
              
              
              (868,583
              )
              
              (712,766
              )Net
                  cash (used in) provided by investing activities
              
              
              (17,628,436
              )
              
              10,854,908Cash
                  flows from financing activities:Increase
                  (decrease) in deposits
              
              
              5,778,836
              
              
              (11,871,891
              )Proceeds
                  from
                  FHLB advances and other borrowings
              
              
              5,538,316
              
              
              2,006,144Repayment
                  of
                  FHLB advances and other borrowings
              
              
              (9,000,000
              )
              
              (5,000,000
              )Net
                  increase (decrease) in advances from borrowers for taxes and
                  insurance
              
              
              11,647
              
              
              (206,631
              )Issuance
                  of
                  common stock, net
              
              
              212,550
              
              
              277,895Repurchase
                  of
                  common stock
              
              
              (3,159,942
              )
              
              (2,962,088
              )Cash
                  dividends paid
              
              
              (685,300
              )
              
              (719,891
              )Net
                  cash used in financing activities
              
              
              (1,303,893
              )
              
              (18,476,462
              )Net
                  decrease in cash and cash equivalents
              
              
              (17,493,665
              )
              
              (6,556,068
              )Cash
                  and cash equivalents at beginning of period
              
              
              31,335,707
              
              
              20,459,727Cash
                  and cash equivalents at end of period
              
              $
              13,842,042
              
              $
              13,903,659Supplemental
                  disclosures:Cash
                  paid during the period for interest
              
              $
              6,912,834
              
              $
              5,937,060Cash
                  (refunded) paid during the period for income taxes
              
              $
              (7,414
              )
              $
              1,242,745See
                  notes to condensed consolidated financial statements.






5


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


**1.** **Basis
      of presentation**





The
      condensed consolidated balance sheet information for June 30, 2005 was derived
      from the audited Consolidated Balance Sheets of First Federal Bankshares, Inc.
      (the “Company”) at June 30, 2005. The condensed consolidated financial
      statements as of and for the three months and six months ended December 31,
      2005
      and 2004 are unaudited.





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





A
      summary
      of significant accounting policies followed by the Company is set forth in
      Note
      1 of the Company's 2005 Annual Report to Stockholders and is incorporated herein
      by reference.





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





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





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


6


In
      order
      to determine its overall adequacy, the allowance for loan losses is reviewed
      by
      management on a monthly basis. This evaluation involves a high degree of
      complexity and requires management to make subjective judgments that often
      require assumptions or estimates about uncertain matters.





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





With
      regard to the Company’s critical accounting policy relating to goodwill,
      goodwill is evaluated by management for impairment at least annually and
      whenever events or changes in circumstances indicate that the carrying amount
      of
      the asset may not be recoverable.





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








**2.** **Organization**





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








**3.** **Use
      of Estimates**





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








7


**4.** **Earnings
      per share**





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





Three
                  months ended
              
              Six
                  months endedDecember
                  31,
              
              December
                  31,2005
              
              2004
              
              2005
              
              2004Basic
                  EPS computation:Net
                  earnings
              
              $
              997,964
              
              $
              985,897
              
              $
              1,823,102
              
              $
              3,142,623Weighted
                  average common shares outstanding
              
              
              3,408,742
              
              
              3,567,109
              
              
              3,427,934
              
              
              3,610,183**Basic
                  EPS**
              
              $
              0.29
              
              $
              0.28
              
              $
              0.53
              
              $
              0.87Diluted
                  EPS computation:Net
                  earnings
              
              $
              997,964
              
              $
              985,897
              
              $
              1,823,102
              
              $
              3,142,623Weighted
                  average common shares outstanding
              
              
              3,408,742
              
              
              3,567,109
              
              
              3,427,934
              
              
              3,610,183Incremental
                  option and RRP shares usingtreasury stock method
              
              
              50,828
              
              
              73,642
              
              
              50,928
              
              
              79,952**Diluted
                  shares outstanding**
              
              
              3,459,570
              
              
              3,640,751
              
              
              3,478,862
              
              
              3,690,135**Diluted
                  EPS**
              
              $
              0.29
              
              $
              0.27
              
              $
              0.52
              
              $
              0.85








8


**5.** **Intangible
      assets**





The
      gross
      carrying amount of intangible assets subject to amortization and the associated
      accumulated amortization at December 31, 2005, is presented in the table below.
      These balances are included in the line item ‘Other assets’ in the Condensed
      Consolidated Balance Sheets. Amortization expense for intangible assets was
      $25,804 and $19,172, respectively, for the three months ended December 31,
      2005
      and 2004; and $52,036 and $37,035, respectively, for the six months ended
      December 31, 2005 and 2004.









December
                  31, 2005Gross
              
              
              
              UnamortizedCarrying
              
              Accumulated
              
              IntangibleAmount
              
              Amortization
              
              AssetsIntangible
                  assets:Core
                  deposit premium
              
              $
              690,140
              
              $
              543,742
              
              $
              146,398Mortgage
                  servicing rights
              
              
              268,379
              
              
              80,505
              
              
              187,874$
              958,519
              
              $
              624,247
              
              $
              334,272


June
                  30, 2005Gross
              
              
              
              UnamortizedCarrying
              
              Accumulated
              
              IntangibleAmount
              
              Amortization
              
              AssetsIntangible
                  assets:Core
                  deposit premium
              
              $
              690,140
              
              $
              521,440
              
              $
              168,700Mortgage
                  servicing rights
              
              
              268,379
              
              
              50,771
              
              
              217,608$
              958,519
              
              $
              572,211
              
              $
              386,308




Projections
      of amortization expense are based on existing asset balances and the existing
      interest rate environment as of December 31, 2005. What the Company actually
      experiences may be significantly different depending upon changes in market
      interest rates and market conditions. The following table shows the estimated
      future amortization expense for amortizing intangible assets for the periods
      indicated:




Core
                  Deposit
              
              MortgagePremium
              
              Servicing
                  Rights
              
              TotalSix
                  months ending June 30, 2006
              
              $
              22,302
              
              $
              35,106
              
              $
              57,408Year
                  ending June 30, 2007
              
              
              44,604
              
              
              50,947
              
              
              95,551Year
                  ending June 30, 2008
              
              
              44,604
              
              
              37,814
              
              
              82,418Year
                  ending June 30, 2009
              
              
              34,888
              
              
              27,213
              
              
              62,101Year
                  ending June 30, 2010
              
              
              -
              
              
              18,828
              
              
              18,828Year
                  ending June 30, 2011
              
              
              -
              
              
              12,432
              
              
              12,432Thereafter
              
              
              -
              
              
              5,534
              
              
              5,534Total
                  estimated amortization expense
              
              $
              146,398
              
              $
              187,874
              
              $
              334,272





9


**6.** **Dividends**





On
      October 27, 2005 the Company declared a cash dividend on its common stock,
      payable on November 30, 2005 to stockholders of record as of November 16, 2005
      equal to $0.10 per share. Excluding dividends on unallocated Employee Stock
      Ownership Plan (“ESOP”) shares, dividends totaling $340,225 were paid to
      stockholders on November 30, 2005.








**7.** **Stock
      Options**





At
      December 31, 2005, the Company had two stock-based employee compensation plans,
      which are described more fully in Note 11 of the Company’s 2005 Annual Report to
      Stockholders. The Company adopted Statement No. 123 (Revised 2004), *Share-Based
      Payment* (“SFAS123(R)”) which replaces SFAS No. 123, *Accounting
      for Stock-Based Compensation* and
      supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* effective July 1, 2005. SFAS123(R) requires all share-based payments to
      employees, including grants of employee stock options, to be recognized in
      the
      financial statements based on their fair values. The pro forma disclosures
      previously permitted under SFAS No. 123 are no longer an alternative to
      financial statement recognition. Upon adoption, the Company used the prospective
      transition method. The prospective method requires that compensation expense
      be
      recorded for all non-vested stock options beginning with the first quarter
      after
      adoption of SFAS123(R). Stock-based compensation expense for the three months
      and six months ended December 31, 2005 totaled $4,531 and $23,175,
      respectively.





Previously,
      the Company applied Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations in accounting for these plans. Accordingly, prior to
      July 1, 2005 no compensation cost had been recognized for its stock options
      in
      the condensed consolidated financial statements. Set forth below is a
      reconciliation of net income and earnings per share information for the three
      months and six months ended December 31, 2004, as if the Company had applied
      the
      fair value recognition provisions of SFAS 123, *Accounting
      for Stock-based Compensation* ,
      to
      stock-based employee compensation for that period.




Three
                  months
              
              Six
                  monthsended
                  December 31, 2004Net
                  income, as reported
              
              $
              985,897
              
              $
              3,142,623Deduct:
                  Total stock-based compensation expense determinedunder
                  the fair value method for all awards, net of tax effects
              
              
              (18,628
              )
              
              (27,782
              )Pro
                  forma net income
              
              $
              967,269
              
              $
              3,114,841Pro
                  forma basic earnings per share
              
              $
              0.27
              
              $
              0.86Pro
                  forma diluted earnings per share
              
              $
              0.27
              
              $
              0.84





The
      fair
      value of each outstanding option has been estimated using the Black-Scholes
      option-pricing model with the following weighted-average assumptions used for
      the interim periods ended December 31, 2005 and 2004, respectively: dividend
      yield of 2.22% and 2.44%; expected volatility of 24.54% and 24.26%; risk free
      interest rate of 4.20% and 4.54%; and expected life of 7.5 years for all periods
      presented.


10








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





**Forward-looking
      statements**





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





**Overview**





Increases
      in market interest rates as the Federal Reserve Board continued its “measured
      pace” of interest rate increases resulted in increases in the yield on
      interest-earning assets and, more significantly, in the cost of interest-bearing
      liabilities. The Company’s net yield on interest-earning assets decreased by 4
      basis points to 3.35% for the three months ended December 31, 2005 from 3.39%
      for the three months ended December 31, 2004 and also decreased by 3 basis
      points to 3.29% for the six months ended December 31, 2005 from 3.32% for the
      six months ended December 31, 2004.





Noninterest
      income decreased by $2.6 million for the six months ended December 31, 2005
      as
      compared to the six months ended December 31, 2004 primarily due to a branch
      sale transaction in the prior-year period. In September 2004 the Company sold
      two branch offices located in Sheldon, Iowa and Orange City, Iowa to another
      local financial institution. The purchaser assumed deposits of $27.1 million
      and
      acquired loans totaling $17.0 million in addition to the branch office buildings
      and certain furniture and equipment. A pre-tax gain of $2.2 million was recorded
      as a result of the branch sale . Net
      of  tax
      effect, the gain on the branch office sale was $1.4 million, or basic and
      diluted earnings per share of $0.38 and $0.37, respectively.





Noninterest
      expense decreased by $400,000, or 4.5%, for the six months ended December 31,
      2005 as compared to the six months ended December 31, 2004 primarily due to
      decreases in compensation and benefits expense and other general and
      administrative expenses. The decrease in compensation and benefits expense
      was
      due to a decrease in full-time-equivalent employees partly due to the branch
      office sales in the prior-year period.




11


**Financial
      condition**





Total
      assets increased to $587.5 million at December 31, 2005 from $586.8 million
      at
      June 30, 2005. Net loans increased by $26.2 million, or 6.0%, to $459.8 million
      at December 31, 2005 from $433.6 million at June 30, 2005. Decreases in cash
      and
      cash equivalents and investment securities that totaled $17.5 million and $9.0
      million, respectively, provided funding for the increase in net loans. The
      increase in net loans was primarily due to an increase of $38.0 million in
      the
      balances of multi-family and commercial real estate loans and commercial
      business loans, partially offset by decreases of $5.2 million and $7.4 million,
      respectively, in the balances of residential loans and consumer loans. See
      “Asset quality” for an analysis of the loan portfolio by loan type.





Deposits
      increased by $5.7 million, or 1.4%, to $413.3 million at December 31, 2005
      from
      $407.6 million at June 30, 2005 primarily due to an increase of $6.4 million
      in
      the balance of time deposits. During the six months ended December 31, 2005,
      the
      Company increased rates on certain deposit products and offered premium-rate
      certificates of deposit in order to attract and retain deposit relationships
      in
      the generally higher market interest rate environment.





Total
      stockholders’ equity decreased by $1.9 million, or 2.7%, to $68.4 million at
      December 31, 2005 from $70.3 million at June 30, 2005. The decrease in
      stockholders’ equity was primarily due to repurchases of common stock under the
      Company’s buyback program that totaled $3.2 million during the six months ended
      December 31, 2005. On December 12, 2005 the Company announced that it had
      completed its current stock repurchase program pursuant to which 377,000 shares
      of its common stock had been repurchased at an average price of $21.63. In
      addition, the Board of Directors authorized a new stock repurchase program
      pursuant to which the Company intends to repurchase up to 10% of its issued
      and
      outstanding shares, or up to 346,000 shares. The Company’s management believes
      that stock repurchases are an appropriate deployment of a portion of the
      Company’s capital that enhances shareholder value when the Company’s common
      stock is repurchased at an appropriate price. In addition, stock repurchase
      programs may reduce price volatility in the Company’s common stock by
      alleviating short-term supply and demand imbalances. Partly offsetting the
      decrease in stockholders’ equity due to stock repurchases were earnings of $1.8
      million for the six months ended December 31, 2005. Excluding dividends on
      unallocated Employee Stock Ownership Plan (“ESOP”) shares, dividends declared
      and paid during the six months ended December 31, 2005 totaled $685,300.





**Asset** **quality**


Non-performing
      assets increased to $4.2 million, or 0.71% of total assets from $1.8 million,
      or
      0.30% of total assets, at June 30, 2005. The increase in non-performing assets
      was primarily due to an increase in non-performing loans. During the six months
      ended December 31, 2005, the Company placed the previously classified loans
      of
      two commercial borrowers, with loan balances totaling $4.3 million, on
      non-accrual status and subsequently charged-off $1.4 million of those balances.
      Classified assets decreased by $1.5 million, or 14.3%, to $8.9 million at
      December 31, 2005 from $10.4 million at June 30, 2005. The allowance for loan
      losses decreased by $1.1 million, or 17.1%, to $5.6 million, or 1.2% of total
      loans, at December 31, 2005 from $6.7 million, or 1.5% of total loans, at June
      30, 2005.





The
      allowance for loan losses is increased by the provision for loan losses charged
      to operations and reduced by net charge-offs. See *Note
      1. Basis of Presentation* in the
      Notes to Condensed Consolidated Financial Statements for further discussion
      regarding the Company’s critical policies related to the allowance for loan
      losses.





12


Based
      on
      relevant and presently available information, management believes that the
      current allowance for loan losses is adequate. Following are tables presenting


(a)
      an
      analysis of the loan portfolio; (b) a summary of the allowance for loan losses;
      and (c) non-performing asset balances.




(a)Analysis
                  of the loan portfolio by loan type on the dates
                  indicated


December
                  31, 2005
              
              June
                  30, 2005Amount
              
              %
              
              Amount
              
              %*(Dollars
                  in Thousands)*One-
                  to
                  four-family residential (1)
              
              $
              139,013
              
              
              30.23
              %
              $
              144,238
              
              
              33.26
              %Multi-family
                  residential (1)
              
              
              52,481
              
              
              11.41
              %
              
              46,070
              
              
              10.62
              %Commercial
                  real
                  estate (1)
              
              
              156,482
              
              
              34.03
              %
              
              133,626
              
              
              30.82
              %Commercial
                  business loans
              
              
              46,243
              
              
              10.06
              %
              
              37,485
              
              
              8.64
              %Home
                  equity & second mortgage loans
              
              
              32,518
              
              
              7.07
              %
              
              32,134
              
              
              7.41
              %Other
                  non-mortgage loans (2)
              
              
              38,857
              
              
              8.45
              %
              
              46,649
              
              
              10.76
              %Total
                  loans
              
              $
              465,594
              
              
              101.25
              %
              $
              440,202
              
              
              101.51
              %Less:Allowance
                  for
                  loan losses
              
              
              5,572
              
              
              1.21
              %
              
              6,718
              
              
              1.55
              %Unearned
                  income
                  net of unamortized premium
              
              
              189
              
              
              0.04
              %
              
              (150
              )
              
              -0.04
              %Total
                  loans, net
              
              $
              459,833
              
              
              100.00
              %
              $
              433,634
              
              
              100.00
              %


(1)
         Includes construction loans.
 (2) 
        Includes other secured and unsecured non-mortgage loans to consumers.




(b)Summary
        of the allowance for loan
        losses
  For
                  the three months ended
              
              For
                  the six months endedDecember
                  31,
              
              December
                  31,2005
              
              2004
              
              2005
              
              2004Balance
                  at beginning of period
              
              $
              6,723,332
              
              $
              5,022,585
              
              $
              6,717,956
              
              $
              4,316,286Provision
                  for
                  loan losses
              
              
              510,000
              
              
              105,000
              
              
              750,000
              
              
              865,000Charge-offs
              
              
              (1,683,970
              )
              
              (217,602
              )
              
              (1,947,005
              )
              
              (300,183
              )Recoveries
              
              
              22,468
              
              
              14,728
              
              
              50,879
              
              
              43,608Balance
                  at end of period
              
              $
              5,571,830
              
              $
              4,924,711
              
              $
              5,571,830
              
              $
              4,924,711





13




(c)
        Non-performing assets
   December
                  31, 2005
              
              June
                  30, 2005Loans
                  accounted for on a non-accrual basis:
              
              *(Dollars
                  in Thousands**)*One-
                  to
                  four-family residential
              
              $
              297
              
              $
              496Commercial
                  real
                  estate
              
              
              280
              
              
              143Commercial
                  business
              
              
              2,548
              
              
              227Consumer
              
              
              245
              
              
              301Total
              
              
              3,370
              
              
              1,167Loans
                  accounted for on an accrual basis (1)(2):One-
                  to
                  four-family residential
              
              
              252
              
              
              468Multi-family
                  residential
              
              
              254
              
              
              -Total
              
              
              506
              
              
              468Total
                  non-performing loans
              
              
              3,876
              
              
              1,635Other
                  non-performing assets (3) (4)
              
              
              295
              
              
              142Total
                  non-performing assets
              
              $
              4,171
              
              $
              1,777Restructured
                  loans not included inother non-performing categories above
              
              $
              3,463
              
              $
              7,517Non-performing
                  loans as a percentage of total loans
              
              
              0.83
              %
              
              0.37
              %Non-performing
                  assets as a percentage of total assets
              
              
              0.71
              %
              
              0.30
              %





(1)
              Includes
                  loans 90 days or more contractually delinquent.(2)
              Delinquent
                  FHA/VA guaranteed loans and delinquent loans with past due interest
                  that,
                  in the opinion of management,
                  is collectible, are not placed on non-accrual
                  status.(3)
              Represents
                  the net book value of real property acquired by the Company through
                  foreclosure or deed in lieu
                  of foreclosure. Upon acquisition, this property is carried at the
                  lower of
                  cost or fair market value less
                  estimated costs of disposition. The total carrying amount was $189,000
                  and
                  $69,000, respectively, at
                  December 31 and June 30, 2005.(4)
              Includes
                  repossessed automobiles, boats and trailers carried at the lower
                  of cost
                  or fair market value less estimated
                  disposal costs. The total carrying amount was $106,000 and $73,000,
                  respectively, at December
                  31 and June 30, 2005.


14


**Capital**




The
      Office of Thrift Supervision (the “OTS”) requires that the Bank meet minimum
      tangible, leverage (core) and risk-based capital requirements. As of December
      31, 2005, the Bank was in compliance with all regulatory capital requirements.
      The Bank's actual and required capital amounts and ratios as of December 31,
      2005 and June 30, 2005 were as follows:







December
                  31, 2005To
                  Be WellCapitalized
                  UnderFor
                  Capital
              
              Prompt
                  CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio*Dollars
                  in Thousands*Tangible
                  capital
              
              $
              47,617
              
              
              8.39
              %
              $
              8,514
              
              
              1.50
              %
              $
              -
              
              
              -
              %Tier
                  1 leverage (core)
              
              
              47,617
              
              
              8.39
              
              
              22,703
              
              
              4.00
              
              
              28,379
              
              
              5.00Tier
                  1 risk-based capital
              
              
              47,617
              
              
              10.60
              
              
              17,973
              
              
              4.00
              
              
              26,959
              
              
              6.00Risk-based
                  capital
              
              
              53,189
              
              
              11.84
              
              
              35,945
              
              
              8.00
              
              
              44,932
              
              
              10.00




June
                  30, 2005To
                  Be WellCapitalized
                  UnderFor
                  Capital
              
              Prompt
                  CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio*Dollars
                  in Thousands*Tangible
                  capital
              
              $
              47,468
              
              
              8.38
              %
              $
              8,501
              
              
              1.50
              %
              $
              -
              
              
              -
              %Tier
                  1 leverage (core)
              
              
              47,468
              
              
              8.38
              
              
              22,670
              
              
              4.00
              
              
              28,338
              
              
              5.00Tier
                  1 risk-based capital
              
              
              47,468
              
              
              10.98
              
              
              17,289
              
              
              4.00
              
              
              25,934
              
              
              6.00Risk-based
                  capital
              
              
              52,887
              
              
              12.24
              
              
              34,579
              
              
              8.00
              
              
              43,223
              
              
              10.00


**Liquidity**





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





**Comparison
      of the results of operations for the three months ended December 31, 2005 and
      2004**





**General** **.** Net
      earnings for the three months ended December 31, 2005 totaled $998,000, or
      basic
      and diluted earnings per share of $0.29 each. Net earnings for the three months
      ended December 31, 2004 totaled $986,000, or basic and diluted earnings per
      share of $0.28 and $0.27, respectively.





**Interest
      Income** .
      Interest income increased by $967,000, or 13.7%, to $8.0 million for the three
      months ended December 31, 2005 from $7.0 million for the three months ended
      December 31, 2004 primarily due to an increase in the average yield on
      interest-earning assets. The average yield on interest-earning assets increased
      by 56 basis points to 6.08% for the three months ended December 31, 2005 from
      5.52% for the three months ended December 31, 2004 due to increases in overall
      market interest rates resulting from the series of interest rate increases
      to
      short-term rates implemented by the Federal Reserve Board


15


since
      June 2004. Also contributing to the increase in interest income was an increase
      in the average balance of interest-earning assets. The average balance of
      interest-earning assets increased by $16.1 million, or 3.2%, to $527.0 million
      for the three months ended December 31, 2005 from $510.9 million for the three
      months ended December 31, 2004.





The
      increase in interest income was primarily due to an increase in interest income
      on loans. Interest income on loans increased by $1.1 million, or 16.4%, to
      $7.3
      million for the three months ended December 31, 2005 from $6.2 million for
      the
      three months ended December 31, 2004. The increase in interest income on loans
      was primarily due to an increase in the average yield on loans. The average
      yield on loans increased by 49 basis points to 6.31% for the three months ended
      December 31, 2005 from 5.82% for the three months ended December 31, 2004
      primarily due to new loan production and the repricing of adjustable rate loans,
      particularly commercial loans tied to current rate indices, in the higher market
      interest rate environment in 2005 as compared to 2004. In addition, the average
      balance of loans increased by $31.4 million, or 7.4%, to $457.1 million for
      the
      three months ended December 31, 2005 from $425.7 million for the three months
      ended December 31, 2004.





Partially
      offsetting the increase in interest income on loans was a decrease in interest
      income on investment securities. Interest income on investment securities
      decreased by $66,000, or 8.3%, to $723,000 for the three months ended December
      31, 2005 from $789,000 for the three months ended December 31, 2004. The
      decrease in interest income on investment securities was primarily due to a
      decrease in the average balance of such securities. The average balance of
      investment securities decreased by $14.5 million, or 17.6%, to $68.1 million
      for
      the three months ended December 31, 2005 from $82.6 million for the three months
      ended December 31, 2004 as the Company funded the increase in loans receivable
      with maturities and principal payments from its investment securities portfolio.
      The average tax-equivalent yield on investment securities increased by 47 basis
      points to 4.58% for the three months ended December 31, 2005 from 4.11% for
      the
      three months ended December 31, 2004 in the generally higher interest rate
      environment during 2005 as compared to 2004.





**Interest
      Expense** .
      Interest expense increased by $872,000, or 31.3%, to $3.7 million for the three
      months ended December 31, 2005 from $2.8 million for the three months ended
      December 31, 2004 primarily due to an increase in the cost of interest-bearing
      deposits due to increases in market interest rates as the Federal Reserve
      continued its “measured pace” of short-term interest rate increases.





Interest
      on deposits increased by $885,000, or 54.5%, to $2.5 million for the three
      months ended December 31, 2005 from $1.6 million for the three months ended
      December 31, 2004 primarily due to an increase in the cost of deposits. The
      average cost of deposits increased by 91 basis points to 2.76% for the three
      months ended December 31, 2005 from 1.85% for the three months ended December
      31, 2004 as the Company increased rates on certain deposit products and offered
      premium-rate certificates of deposit in order to attract and retain deposits
      in
      the increasing market interest rate environment.


The
      average balance of interest-bearing deposits increased by $12.7 million, or
      3.6%, to $360.8 million for the three months ended December 31, 2005 from $348.1
      million for the three months ended December 31, 2004 primarily due to increases
      in the balance of time certificates of deposit.





Interest
      on FHLB advances and other borrowings totaled $1.1 million and $1.2 million,
      respectively, for the three months ended December 31, 2005 and 2004 primarily
      due to a decrease in the average balance of borrowings. The average balance
      of
      borrowings decreased by $3.0 million, or 2.8%, to $102.6 million for the three
      months ended December 31, 2005 from $105.6 million for the three months ended
      December 31, 2004. The average cost of borrowings increased to 4.42% for the
      three months ended December 31, 2005 from 4.35% for the three months ended
      December 31, 2004.





16


**Net
      Interest Income** .
      Net
      interest income before provision for losses on loans increased by $94,000,
      or
      2.2%, to $4.4 million for the three months ended December 31, 2005 from $4.3
      million for the three months ended December 31, 2004. The increase in net
      interest income was primarily due to an increase in the average balance of
      interest-earning assets. The average balance of interest-earning assets
      increased by $16.1 million for the three months ended December 31, 2005 while
      the average balance of interest-bearing liabilities increased by only $9.7
      million. Partly offsetting the increase in net interest income due to the
      increase in the average balance of interest-earning assets was a decrease in
      the
      net yield on interest-earning assets. The Company’s average net yield on
      interest-earning assets decreased by 4 basis points to 3.35% for the three
      months ended December 31, 2005 from 3.39% for the three months ended December
      31, 2004 as the cost of interest-bearing liabilities increased more rapidly
      than
      the yield on interest-earning assets.





**Provision
      for Losses on Loans** .
      Provision for losses on loans increased to $510,000 for the three months ended
      December 31, 2005 from $105,000 for the three months ended December 31, 2004
      partially due to management’s periodic evaluation of the estimated net
      realizable value or fair value of underlying collateral on certain classified
      loans as of December 31, 2005. In addition, an increase of $14.6 million in
      outstanding loan balances at December 31, 2005 as compared to September 30,
      2005
      resulted in additional loss allowances for non-classified loans under the
      Company’s periodic method of establishing and evaluating its loan loss
      allowances. For more information on asset quality see “Asset quality” in
      Management’s Discussion and Analysis of Financial Condition.




**Noninterest
      Income** .
      Noninterest income decreased by $82,000, or 4.4%, to $1.8 million for the three
      months ended December 31, 2005 from $1.9 million for the three months ended
      December 31, 2004. Service charges on deposit accounts and loans decreased
      by
      $149,000 and $30,000, respectively, and income from the sale of non-insured
      products decreased by $72,000 for the three months ended December 31, 2005
      as
      compared to the three months ended December 31, 2004. These decreases were
      partly offset by a gain on the sale of securities for the three months ended
      December 31, 2005 that totaled $203,000. The decrease in service charges on
      deposit accounts was primarily due to a decrease in transaction accounts subject
      to such service charges that resulted partly from bank branch office sales
      that
      occurred in September 2004. The branch office sales are discussed further in
      the
      comparison of the results of operations for the six months ended December 31,
      2005 and 2004.





**Noninterest
      expense** .
      Noninterest expense decreased by $342,000, or 7.4%, to $4.3 million for the
      three months ended December 31, 2005 from $4.6 million for the three months
      ended December 31, 2004. Compensation and benefits expense decreased by
      $166,000, or 6.3%, as the number of full-time-equivalent employees decreased
      by
      10, or 5.0%, to 189 at December 31, 2005 from 199 at December 31, 2004. Other
      general and administrative expenses decreased by $289,000, or 25.5%, for the
      three months ended December 31, 2005 as compared to the prior-year period as
      the
      Company implemented cost control measures in line with its business plan
      objectives. In addition, other noninterest expense for the prior-year period
      ended December 31, 2004 was higher due to a loss on real estate owned totaling
      $94,000 and a charge of $68,000 for a credit life insurance settlement. The
      decreases in other general and administrative expenses were partially offset
      by
      increases in office property and equipment expense and data processing expense.
      Office property and equipment expense increased by $101,000, or 16.6%, for
      the
      three months ended December 31, 2005 as compared to the three months ended
      December 31, 2004 largely due to the addition of a new branch office in March
      2005 and to an increase in software expense for automation initiatives. Data
      processing expense increased by $12,000, or 11.0%, for the three months ended
      December 31, 2005 as compared to the three months ended December 31, 2004
      primarily due to increases in software amortization expense in the current
      fiscal year period.





17


**Net
      income and income tax expense** .
      Income
      before income taxes totaled $1.4 million for each of the three months ended
      December 31, 2005 and 2004. Income tax expense totaled $367,000, or an effective
      tax rate of 26.9%, and $430,000, or an effective tax rate of 30.4%,
      respectively, for the three months ended December 31, 2005 and 2004. The
      effective tax rate decreased for the current-year period primarily because
      tax-exempt income comprised a larger percentage of pre-tax income for the three
      months ended December 31, 2005 than for the three months ended December 31,
      2004. The increase in tax-exempt income was due to an increase in the balance
      of
      tax-exempt loans and the resulting increase in tax-exempt interest income during
      the current-year period.





**Comparison
      of the results of operations for the six months ended December 31, 2005 and
      2004**





**General** **.** Net
      earnings for the six months ended December 31, 2005 totaled $1.8 million, or
      basic and diluted earnings per share of $0.53 and $0.52, respectively. Net
      earnings for the six months ended December 31, 2004 totaled $3.1 million, or
      basic and diluted earnings per share of $0.87 and $0.85, respectively. During
      the prior-year period a gain of $1.4 million, net of tax effect, or basic and
      diluted earnings per share of $0.38 and $0.37, respectively, from the sale
      of
      two bank branch offices favorably impacted the Company’s net earnings.





**Interest
      Income** .
      Interest income increased by $1.3 million, or 9.0%, to $15.6 million for the
      six
      months ended December 31, 2005 from $14.3 million for the six months ended
      December 31, 2004 primarily due to an increase in the average yield on
      interest-earning assets. The average yield on interest-earning assets increased
      by 50 basis points to 5.92% for the six months ended December 31, 2005 from
      5.52% for the six months ended December 31, 2004 due to increases in market
      interest rates resulting from the series of short-term interest rate increases
      implemented by the Federal Reserve Board since June 2004. Also contributing
      to
      the increase in interest income was a change in the mix of interest-earning
      assets. During the six months ended December 31, 2005, the average balance
      of
      loans increased to 85.6% of average interest-earning assets from 81.2% of
      average interest-earning assets for the six months ended December 31, 2004.
      Conversely, the average balance of investment securities and other short-term
      investments decreased to 14.4% of average interest-earning assets for the six
      months ended December 31, 2005 from 18.8% of average interest-earning assets
      for
      the six months ended December 31, 2004. The generally higher yields on loans
      as
      compared to yields on investment securities and other short-term investments
      resulted in an increase in the weighted average yield on total interest-earning
      assets for the current-year period.





The
      increase in interest income was primarily due to an increase in interest income
      on loans. Interest income on loans increased by $1.5 million, or 12.5%, to
      $14.1
      million for the six months ended December 31, 2005 from $12.6 million for the
      six months ended December 31, 2004. The increase in interest income on loans
      was
      due to an increase in the average yield on loans and also to an increase in
      the
      average balance of loans. The average yield on loans increased by 40 basis
      points to 6.21% for the six months ended December 31, 2005 from 5.81% for the
      six months ended December 31, 2004 primarily due to commercial real estate
      and
      commercial business loan production and the repricing of adjustable rate loans,
      particularly commercial loans tied to current rate indices, in the higher market
      interest rate environment in 2005 as compared to 2004. The average balance
      of
      loans increased by $22.3 million, or 5.2%, to $451.1 million for the six months
      ended December 31, 2005 from $428.8 million for the six months ended December
      31, 2004.





Partially
      offsetting the increase in interest income on loans was a decrease in interest
      income on investment securities. Interest income on investment securities
      decreased by $358,000, or 20.7%, to $1.4 million for the six months ended
      December 31, 2005 from $1.7 million for the six months ended December 31, 2004.
      The decrease in interest income on investment securities was primarily due
      to a
      decrease in the average balance of such securities. The average balance of
      investment securities decreased by $26.7 million, or 27.5%, to $70.2 million
      for
      the six months ended December 31, 2005 from


18


$96.9
      million for the six months ended December 31, 2004 as the Company funded the
      increase in loans receivable with maturities and principal payments from its
      investment securities portfolio. The average tax-equivalent yield on investment
      securities increased by 44 basis points to 4.24% for the six months ended
      December 31, 2005 from 3.80% for the six months ended December 31, 2004 in
      the
      generally higher interest rate environment during 2005 as compared to 2004.





**Interest
      Expense** .
      Interest expense increased by $1.4 million, or 24.6%, to $7.1 million for the
      six months ended December 31, 2005 from $5.7 million for the six months ended
      December 31, 2004 primarily due to an increase in the cost of interest-bearing
      deposits due to increases in market interest rates as the Federal Reserve
      continued its “measured pace” of short-term interest rate increases.





Interest
      on deposits increased by $1.5 million, or 43.6%, to $4.8 million for the six
      months ended December 31, 2005 from $3.3 million for the six months ended
      December 31, 2004 primarily due to an increase in the cost of deposits. The
      average cost of deposits increased by 81 basis points to 2.63% for the six
      months ended December 31, 2005 from 1.82% for the six months ended December
      31,
      2004 as the Company increased rates on certain deposit products and offered
      premium-rate certificates of deposit in order to attract and retain deposits
      in
      the increasing market interest rate environment.





Interest
      on FHLB advances and other borrowings totaled $2.3 million for each of the
      six
      months ended December 31, 2005 and 2004. The average balance of borrowings
      decreased by $5.3 million, or 4.9%, to $102.7 million for the six months ended
      December 31, 2005 from $108.0 million for the six months ended December 31,
      2004
      while the average cost of borrowings increased to 4.40% for the six months
      ended
      December 31, 2005 from 4.29% for the six months ended December 31,
      2004.





**Net
      Interest Income** .
      Net
      interest income before provision for losses on loans decreased by $108,000,
      or
      1.3%, to $8.5 million for the six months ended December 31, 2005 from $8.6
      million for the six months ended December 31, 2004. The decrease in net interest
      income was primarily due to a decrease in the interest rate spread as the cost
      of interest-bearing liabilities increased more rapidly than the yield on
      interest-earning assets. The cost of interest-bearing liabilities increased
      by
      64 basis points to 3.02% for the six months ended December 31, 2005 from 2.38%
      for the six months ended December 31, 2004 while the yield on interest-earning
      assets increased by 50 basis points to 5.92% for the six months ended December
      31, 2005 from 5.42% for the six months ended December 31, 2004. In addition,
      the
      Company’s average net yield on interest-earning assets decreased by 3 basis
      points to 3.29% for the six months ended December 31, 2005 from 3.32% for the
      six months ended December 31, 2004 as the cost of interest-bearing liabilities
      increased more rapidly than the yield on interest-earning assets.





**Provision
      for Losses on Loans** .
      Provision for losses on loans decreased by $115,000, or 13.3%, to $750,000
      for
      the six months ended December 31, 2005 from $865,000 for the six months ended
      December 31, 2004. For more information on asset quality see “Asset quality” in
      Management’s Discussion and Analysis of Financial Condition.




**Noninterest
      Income** .
      Noninterest income decreased by $2.6 million, or 43.8%, to $3.3 million for
      the
      six months ended December 31, 2005 from $5.9 million for the six months ended
      December 31, 2004. The decrease in noninterest income was primarily due to
      the
      prior-year pre-tax gain of $2.2 million on the sale of two northwest Iowa branch
      offices that was completed in September 2004. The purchaser assumed deposits
      of
      $27.1 million and acquired loans totaling $17.0 million in addition to the
      buildings and certain equipment. Net of  tax
      effect, the gain on the branch office sale was $1.4 million, or basic and
      diluted earnings per share of $0.38 and $0.37, respectively.  Service
      charges on deposit accounts decreased by $309,000 for the six months ended
      December 31, 2005 as compared to the six months ended December 31, 2004 largely
      due to the Company’s decreased number of deposit accounts after the branch
      office sale. Service charges on loans decreased by $92,000 for the six months
      ended December 31, 2005 as compared to the six months ended December 31, 2004
      primarily due to a decrease in prepayment penalty fees as


19


refinancing
      activity slowed due to the increase in market interest rates. Non-interest
      income also decreased due to a loss on real estate development. During the
      six
      months ended December 31, 2005 the Company’s real estate development subsidiary
      completed a development project and recorded a loss of $242,000 for the
      six-month period while a gain of $30,000 on sale of real estate held for
      development was recorded for the prior-year period. Partly offsetting the
      decreases in noninterest income was a gain on the sale of securities for the
      six
      months ended December 31, 2005 that totaled $203,000 as compared to a loss
      on
      the sale of investment securities of $121,000 for the six months ended December
      31, 2004.





**Noninterest
      expense** .
      Noninterest expense decreased by $399,000, or 4.5%, to $8.6 million for the
      six
      months ended December 31, 2005 from $9.0 million for the six months ended
      December 31, 2004. Compensation and benefits expense decreased by $218,000,
      or
      4.2%, as the number of full-time-equivalent employees decreased by 10, or 5.0%,
      to 189 at December 31, 2005 from 199 at December 31, 2004. Other noninterest
      expenses decreased by $426,000, or 20.2%, for the six months ended December
      31,
      2005 as compared to the prior-year period as the Company implemented cost
      control measures in line with its business plan objectives. Consulting expenses
      decreased by $103,000 for the six months ended December 31, 2005 as compared
      to
      the six months ended December 31, 2004 primarily due to a $70,000 decrease
      in
      fees to a third-party vendor for support services related to retail deposit
      account programs. The contract with this vendor expired in November 2004 and
      was
      not renewed. In addition, other noninterest expense for the prior-year period
      ended December 31, 2004 was higher due to a loss on real estate owned totaling
      $94,000 and a charge of $68,000 for a credit life insurance settlement. Other
      decreases in other noninterest expenses included decreases in fraud losses
      and
      repossession and collection expenses for the six months ended December 31,
      2005
      as compared to the same period in 2004. The decreases in noninterest expenses
      were partially offset by increases in office property and equipment expense
      and
      advertising expense. Office property and equipment expense increased by
      $171,000, or 13.8%, for the six months ended December 31, 2005 as compared
      to
      the six months ended December 31, 2004 largely due to the addition of a new
      branch office in March 2005 and to an increase in software expense for
      automation initiatives. Advertising expense increased by $64,000, or 35.6%,
      for
      the six months ended December 31, 2005 as compared to the same period of the
      prior year as the Company aggressively promoted its retail and
      commercial-relationship products.





**Net
      income and income tax expense** .
      Income
      before income taxes decreased by $2.2 million to $2.5 million for the six months
      ended December 31, 2005 from $4.7 million for the six months ended December
      31,
      2004 primarily due to the decrease in noninterest income between the two periods
      as a result of the bank branch office sales previously mentioned in the
      discussion of noninterest income. Income tax expense totaled $711,000, or an
      effective tax rate of 28.1%, and $1.6 million, or an effective tax rate of
      33.3%, respectively, for the six months ended December 31, 2005 and 2004. The
      effective tax rate decreased for the current-year period primarily because
      tax-exempt income comprised a larger percentage of pre-tax income for the six
      months ended December 31, 2005 than for the six months ended December 31, 2004.
      The increase in tax-exempt income was due to an increase in the balance of
      tax-exempt loans and the resulting increase in tax-exempt interest income during
      the current-year period.








**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-


20


balance-sheet
      contract. The present value of expected net cash flows from existing assets
      minus the present value of expected net cash flows from existing liabilities
      plus or minus the present value of expected net cash flows from existing
      off-balance-sheet contracts results in a net portfolio value (“NPV”) estimate.
      An analysis of the changes in NPV in the event of hypothetical changes in
      interest rates is presented in the Form 10-K filed by the Company for the fiscal
      year ended June 30, 2005. The Company’s NPV ratio after a 200 basis point
      rate-shock was 8.86% and 8.94%, respectively, at June 30, 2005 and September
      30,
      2005, as measured by the Model. As of both dates, the Company’s interest rate
      risk, as measured by the Model, was within the Company’s Asset Liability Policy
      guidelines and the OTS “level of risk” was reported as “minimal”. Management
      does not believe that the Company’s primary market risk exposures and how those
      exposures were managed during the three months ended December 31, 2005 have
      changed significantly when compared to the immediately preceding quarter ended
      September 30, 2005. However, the Company’s primary market risk exposure has not
      yet been quantified at December 31, 2005, 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 second
      fiscal quarter ended December 31, 2005 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 Company’s second fiscal quarter that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting.














21


**PART
      II. OTHER INFORMATION**





**Item
      1.Legal Proceedings**




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




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




There
      were no sales of unregistered securities during the three months ended December
      31, 2005.





The
      following table presents a summary of the Company’s share repurchases during the
      quarter ended December 31, 2005.




Period
              Total
                  Number
                of
                  Shares
                Purchased
                  (1)
              Average
                Price
                  Paid
                Per
                  Share
              Total
                  Number of
                Shares
                  Purchased
                as
                  Part of Publicly
                Announced
                Program
                  (2)
              Maximum
                Number
                  of Shares
                that
                  May Yet be
                Purchased
                  Under
                the
                  Program (2)October
                  1 through October 31, 2005
              none
              -
              none
              81,000November
                  1 through November 30, 2005
              81,227
              $19.89
              81,000
              noneDecember
                  1 through December 31, 2005
              75,505
              $20.02
              75,505
              270,495




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





The
      Company convened its 2005 Annual Meeting of Stockholders on October 27, 2005.
      At
      the meeting, the stockholders of the Company considered and voted on the
      following proposals:





Ballot
      No. 1. The
      election of Arlene T. Curry, Gary L. Evans and Allen J. Johnson, each to serve
      as a director for a term of three years and until his or her successor has
      been
      elected and qualified.





The
      results of Ballot No. 1 were as follows:




**For**
                **Withheld**Arlene
                    T. Curry
                2,797,409
                163,851Gary
                    L.
                    Evans
                2,797,318
                163,942Allen
                    J. Johnson
                2,800,527
                160,733


Ballot
      No. 2. The
      ratification of the appointment of McGladrey & Pullen, LLP as the
      independent registered public accounting firm of the Company for the fiscal
      year
      ending June 30, 2006.





The
      results of Ballot No. 2 were as follows:




**For**
                **Against**
                **Abstain**Number
                    of Votes
                2,789,672
                161,939
                9,649****Percentage
                    of
                    total sharesvoted
                    at the Annual Meeting
                94.2%
                5.5%
                0.3%


22




**Item
      6.Exhibits**


(a) Exhibits





Exhibit
      10     First
      Amendment to the First Federal Bankshares, Inc. Amended and Restated 1999 Stock
      Option Plan





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










**SIGNATURES**





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








FIRST
                  FEDERAL BANKSHARES, INC.DATE:
                  February 8, 2006
              BY:
              /s/
                  Michael W. DoslandMichael
                  W. DoslandPresident
                  and Chief Executive OfficerDATE:
                  February 8, 2006
              BY:
              /s/
                  Katherine A. BousquetKatherine
                  A. BousquetVice
                  President, Treasurer andInterim
                  Chief Financial Officer





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