**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**


**FORM
      10-Q**





þ
            Quarterly
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the quarterly period ended December 31,
                2006





**OR**





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







**Commission
      File Number 0-25509**





**First
      Federal Bankshares, Inc.**


(Exact
      name of Registrant as specified in its charter)





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





**712-277-0200**


(Registrant's
      telephone number)




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


YES þ NO o


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


Large
                accelerated filero
            Accelerated
                filerþ
            Non-accelerated
                filero




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


YES o NO þ





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




Class
            Outstanding
                at Feb 5, 2007Common
                Stock, $.01 par value
            3,414,771
















FIRST
      FEDERAL BANKSHARES, INC.





INDEX








**PART
                I**.
            FINANCIAL
                INFORMATION
            Page**ITEM
                1**.
            Financial
                Statements of First Federal Bankshares, Inc. and
                Subsidiaries
            1Consolidated
                Statements of Financial Conditionat
                December 31 and June 30, 2006
            1Consolidated
                Statements of Income for the three- and six-monthperiods
              ended
                December 31, 2006, and 2005
            2Consolidated
                Statements of Changes in Stockholders’ Equity for thesix-month
                periods ended December 31, 2006, and 2005
            3Consolidated
                Statements of Comprehensive Income for thethree-
                and six-month periods ended December 31, 2006, and 2005
            4Consolidated
                Statements of Cash Flows for thesix-month
                periods ended December 31, 2006, and 2005
            5Notes
                to Consolidated Financial Statements
            6**ITEM
                2**.
            Management's
                Discussion and Analysis of
            11Financial
                Condition and Results of Operations**ITEM
                3**.
            Quantitative
                and Qualitative Disclosures about Market Risk
            20**ITEM
                4**.
            Controls
                and Procedures
            20**PART
                II**.
            OTHER
                INFORMATION
            21**ITEM
                1**.
            Legal
                Proceedings
            21**ITEM
                1A.**
            Risk
                Factors
            21**ITEM
                2**.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            21**ITEM
                3**.
            Defaults
                upon Senior Securities
            21**ITEM
                4**.
            Submission
                of Matters to a Vote of Security Holders
            22**ITEM
                5**.
            Other
                Information
            22**ITEM
                6**.
            Exhibits
            22Signatures
            23








*Index*





**PART
                  I.     FINANCIAL
                  INFORMATION****ITEM
                  1.     FINANCIAL
                  STATEMENTS****FIRST
                  FEDERAL BANKSHARES, INC. and SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF FINANCIAL CONDITION (Unaudited)**December
                  31,
              
              June
                  30,2006
              
              2006ASSETSCash
                  and due from banks
              
              $
              12,403,243
              
              $
              15,157,203Interest-bearing
                  deposits in other financial institutions
              
              
              6,953,780
              
              
              24,747,546Cash
                  and cash equivalents
              
              
              19,357,023
              
              
              39,904,749Securities
                  available-for-sale, at fair value (amortized costof
                  $63,014,733 and $47,839,382, respectively)
              
              
              62,887,181
              
              
              47,319,732Securities
                  held-to-maturity, at amortized cost (fair valueof
                  $11,935,405 and $12,971,633, respectively)
              
              
              11,899,384
              
              
              13,077,053Non-performing
                  and classified loans held for sale, at lower of cost or fair
                  value
              
              
              10,348,812
              
              
              -Loans
                  receivable
              
              
              441,604,574
              
              
              462,494,813Less
                  allowance for loan losses
              
              
              2,044,108
              
              
              5,465,563Net
                  loans
              
              
              439,560,466
              
              
              457,029,250Office
                  property and equipment, net
              
              
              14,407,875
              
              
              12,545,414Federal
                  Home Loan Bank ("FHLB") stock, at cost
              
              
              4,583,100
              
              
              5,161,600Accrued
                  interest receivable
              
              
              2,701,580
              
              
              2,627,980Goodwill
              
              
              18,417,040
              
              
              18,417,040Other
                  assets
              
              
              16,477,564
              
              
              16,452,441Total
                  assets
              
              $
              600,640,025
              
              $
              612,535,259LIABILITIES
                  AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
              
              $
              447,662,533
              
              $
              446,056,388Advances
                  from FHLB and other borrowings
              
              
              77,888,530
              
              
              92,753,665Advance
                  payments by borrowers for taxes and insurance
              
              
              914,420
              
              
              976,658Accrued
                  interest payable
              
              
              2,524,039
              
              
              2,037,740Accrued
                  expenses and other liabilities
              
              
              1,961,745
              
              
              2,386,914Total
                  liabilities
              
              
              530,951,267
              
              
              544,211,365STOCKHOLDERS'
                  EQUITYCommon
                  stock, $.01 par value, 12,000,000 shares authorized;5,056,603
                  and 5,012,375 shares issued, respectively
              
              
              50,497
              
              
              50,109Additional
                  paid-in capital
              
              
              38,951,330
              
              
              38,293,233Retained
                  earnings, substantially restricted
              
              
              57,714,926
              
              
              57,013,427Treasury
                  stock, at cost, 1,645,855 and 1,632,266 shares,
                  respectively
              
              
              (26,223,623
              )
              
              (25,920,685
              )Accumulated
                  other comprehensive loss
              
              
              (79,552
              )
              
              (325,650
              )Unearned
                  Employee Stock Ownership Plan ("ESOP")
              
              
              (724,820
              )
              
              (786,540
              )Total
                  stockholders' equity
              
              
              69,688,758
              
              
              68,323,894Total
                  liabilities and stockholders' equity
              
              $
              600,640,025
              
              $
              612,535,259See
                  notes to consolidated financial statements.


1
 *Index*




**FIRST
                  FEDERAL BANKSHARES, INC. and SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME (Unaudited)**Three
                  Months
              
              Six
                  MonthsEnded
                  December 31,
              
              Ended
                  December 31,2006
              
              2005
              
              2006
              
              2005Interest
                  income:Loans
                  receivable
              
              $
              7,534,928
              
              $
              7,269,402
              
              $
              15,170,771
              
              $
              14,130,848Investment
                  securities
              
              
              1,004,556
              
              
              683,033
              
              
              1,798,560
              
              
              1,329,151Interest-bearing
                  deposits in other financial institutions
              
              
              109,615
              
              
              18,307
              
              
              243,833
              
              
              94,429Total
                  interest income
              
              
              8,649,099
              
              
              7,970,742
              
              
              17,213,164
              
              
              15,554,428Interest
                  expense:Deposits
              
              
              3,784,219
              
              
              2,511,494
              
              
              7,206,277
              
              
              4,788,957Advances
                  from FHLB and other borrowings
              
              
              1,002,779
              
              
              1,144,104
              
              
              2,039,757
              
              
              2,275,798Total
                  interest expense
              
              
              4,786,998
              
              
              3,655,598
              
              
              9,246,034
              
              
              7,064,755Net
                  interest income
              
              
              3,862,101
              
              
              4,315,144
              
              
              7,967,130
              
              
              8,489,673Provision
                  for losses on loans
              
              
              402,663
              
              
              510,000
              
              
              502,663
              
              
              750,000Net
                  interest income after provision for losses on loans
              
              
              3,459,438
              
              
              3,805,144
              
              
              7,464,467
              
              
              7,739,673Non-interest
                  income:Service
                  charges on deposit accounts
              
              
              814,025
              
              
              782,030
              
              
              1,657,215
              
              
              1,621,811Service
                  charges on loans
              
              
              78,709
              
              
              103,582
              
              
              140,412
              
              
              199,539Gain
                  (loss) on sale of real estate held for development
              
              
              20,000
              
              
              -
              
              
              60,000
              
              
              (241,649
              )Net
                  gain on sale of securities
              
              
              -
              
              
              202,944
              
              
              -
              
              
              202,944Gain
                  on sale of loans
              
              
              160,934
              
              
              164,214
              
              
              345,907
              
              
              397,968Real
                  estate-related activities
              
              
              169,128
              
              
              161,619
              
              
              357,995
              
              
              336,677Other
                  income
              
              
              399,588
              
              
              405,537
              
              
              821,676
              
              
              833,461Total
                  non-interest income
              
              
              1,642,384
              
              
              1,819,926
              
              
              3,383,205
              
              
              3,350,751Non-interest
                  expense:Compensation
                  and benefits
              
              
              2,622,684
              
              
              2,485,576
              
              
              5,209,729
              
              
              4,977,537Office
                  property and equipment
              
              
              692,547
              
              
              707,573
              
              
              1,377,518
              
              
              1,408,833Data
                  processing, ATM and debit card transactioncosts
                  and other item processing expense
              
              
              251,172
              
              
              247,552
              
              
              497,020
              
              
              496,389Professional,
                  insurance and regulatory expense
              
              
              274,719
              
              
              246,132
              
              
              558,981
              
              
              466,079Advertising,
                  donations and public relations
              
              
              220,113
              
              
              167,658
              
              
              388,658
              
              
              381,290Communications,
                  postage and office supplies
              
              
              214,164
              
              
              208,120
              
              
              413,663
              
              
              405,134Other
                  expense
              
              
              316,899
              
              
              197,495
              
              
              535,837
              
              
              421,060Total
                  non-interest expense
              
              
              4,592,298
              
              
              4,260,106
              
              
              8,981,406
              
              
              8,556,322Income
                  before income taxes
              
              
              509,524
              
              
              1,364,964
              
              
              1,866,266
              
              
              2,534,102Income
                  taxes
              
              
              97,000
              
              
              367,000
              
              
              487,000
              
              
              711,000Net
                  income
              
              $
              412,524
              
              $
              997,964
              
              $
              1,379,266
              
              $
              1,823,102Earnings
                  per share:Basic
                  earnings per share
              
              $
              0.12
              
              $
              0.29
              
              $
              0.42
              
              $
              0.53Diluted
                  earnings per share
              
              $
              0.12
              
              $
              0.29
              
              $
              0.41
              
              $
              0.52Dividends
                  declared per share
              
              $
              0.105
              
              $
              0.100
              
              $
              0.205
              
              $
              0.200See
                  notes to consolidated financial statements.




2
 *Index*




**FIRST
                  FEDERAL BANKSHARES, INC. and SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)**Six
                  monthsended
                  December 31,2006
              
              2005Capital
                  Stock:Beginning
                  of year balance
              
              $
              50,109
              
              $
              49,770Stock
                  options exercised: 40,987 and 19,100 shares, respectively
              
              
              388
              
              
              191Amortization
                  of employee stock grants
              
              
              -
              
              
              97Reclassification
                  due to adoption of SFAS123(R)
              
              
              -
              
              
              (112
              )End
                  of period balance
              
              
              50,497
              
              
              49,946Additional
                  paid-in capital:Beginning
                  of year balance
              
              
              38,293,233
              
              
              37,761,587Stock
                  options exercised
              
              
              540,252
              
              
              189,184Stock
                  compensation expense
              
              
              44,535
              
              
              23,175Employee
                  stock grants awarded
              
              
              (5,742
              )
              
              -Stock
                  appreciation of allocated ESOP shares
              
              
              72,459
              
              
              61,340Amortization
                  of employee stock grants
              
              
              6,593
              
              
              37,077Reclassification
                  due to adoption of SFAS123(R)
              
              
              -
              
              
              (41,710
              )End
                  of period balance
              
              
              38,951,330
              
              
              38,030,653Retained
                  earnings, substantially restricted:Beginning
                  of year balance
              
              
              57,013,427
              
              
              55,028,733Net
                  income
              
              
              1,379,266
              
              
              1,823,102Dividends
                  paid on common stock
              
              
              (677,767
              )
              
              (685,300
              )End
                  of period balance
              
              
              57,714,926
              
              
              56,166,535Treasury
                  stock, at cost:Beginning
                  of year balance
              
              
              (25,920,685
              )
              
              (21,747,743
              )Employee
                  stock grants awarded (forfeited), net
              
              
              5,742
              
              
              -Treasury
                  stock acquired - 14,227 and 158,440 shares, respectively
              
              
              (308,680
              )
              
              (3,159,942
              )End
                  of period balance
              
              
              (26,223,623
              )
              
              (24,907,685
              )Accumulated
                  other comprehensive income (loss):Beginning
                  of year balance
              
              
              (325,650
              )
              
              158,570Net
                  change in unrealized gains (losses) on securitiesavailable-for-sale,
                  net of tax expense
              
              
              246,098
              
              
              (151,617
              )Less:
                  reclassification adjustment for net realized gainsincluded
                  in net income, net of tax expense
              
              
              -
              
              
              127,246End
                  of period balance
              
              
              (79,552
              )
              
              (120,293
              )Unearned
                  ESOP shares:Beginning
                  of year balance
              
              
              (786,540
              )
              
              (913,890
              )ESOP
                  shares allocated
              
              
              61,720
              
              
              64,570End
                  of period balance
              
              
              (724,820
              )
              
              (849,320
              )Unearned
                  employee stock grants:Beginning
                  of year balance
              
              
              -
              
              
              (41,822
              )Reclassification
                  due to adoption of SFAS123(R)
              
              
              -
              
              
              41,822End
                  of period balance
              
              
              -
              
              
              -Total
                  stockholders' equity
              
              $
              69,688,758
              
              $
              68,369,836See
                  notes to consolidated financial statements.






3
 *Index*




**FIRST
                  FEDERAL BANKSHARES, INC. and SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)**Three
                  Months Ended
              
              Six
                  Months EndedDecember
                  31,
              
              December
                  31,2006
              
              2005
              
              2006
              
              2005Net
                  income
              
              $
              412,524
              
              $
              997,964
              
              $
              1,379,266
              
              $
              1,823,102Other
                  comprehensive income (loss):Unrealized
                  holding gains (losses) arising duringthe
                  period, net of tax
              
              
              (2,851
              )
              
              (70,146
              )
              
              246,098
              
              
              (151,617
              )Less:
                  reclassification adjustment for net realized gainsincluded
                  in net income, net of tax expense
              
              
              -
              
              
              127,246
              
              
              -
              
              
              127,246Other
                  comprehensive income (loss), net of tax
              
              
              (2,851
              )
              
              (197,392
              )
              
              246,098
              
              
              (278,863
              )Total
                  comprehensive income
              
              $
              409,673
              
              $
              800,572
              
              $
              1,625,364
              
              $
              1,544,239






See
        notes
        to consolidated financial statements.
  4
 *Index*




**FIRST
                  FEDERAL BANKSHARES, INC. and SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS (Unaudited)**Six
                  Months EndedDecember
                  31,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              1,379,266
              
              $
              1,823,102Adjustments
                  to reconcile net income to net cash:Loans
                  originated for sale to investors
              
              
              (21,963,000
              )
              
              (28,205,000
              )Proceeds
                  from sale of loans originated for sale
              
              
              22,447,213
              
              
              27,456,507Provision
                  for losses on loans
              
              
              502,663
              
              
              750,000Depreciation
                  and amortization
              
              
              588,477
              
              
              656,846Provision
                  for deferred taxes
              
              
              469,000
              
              
              37,000Equity-based
                  compensation
              
              
              185,307
              
              
              186,259Tax
                  benefit resulting from stock options exercised
              
              
              (134,000
              )
              
              (12,000
              )Net
                  gain on sale of loans
              
              
              (345,907
              )
              
              (397,968
              )Net
                  gain on sale of securities available-for-sale
              
              
              -
              
              
              (202,944
              )Net
                  (gain) loss on sale of real estate held for development
              
              
              (60,000
              )
              
              241,649Amortization
                  of premiums and discounts on loans and securities
              
              
              (214,359
              )
              
              (78,044
              )Increase
                  in accrued interest receivable
              
              
              (73,600
              )
              
              (244,636
              )Increase
                  in other assets
              
              
              (37,119
              )
              
              (1,060,598
              )Increase
                  in accrued interest payable
              
              
              486,299
              
              
              151,921Increase
                  (decrease) in accrued expenses and other liabilities
              
              
              66,192
              
              
              (236,558
              )Increase
                  (decrease) in accrued taxes on income
              
              
              (926,082
              )
              
              681,414Net
                  cash provided by operating activities
              
              
              2,370,350
              
              
              1,546,950CASH
                  FLOWS FROM INVESTING ACTIVITIES:Proceeds
                  from maturities of securities held-to-maturity
              
              
              1,169,180
              
              
              3,120,521Proceeds
                  from sale of securities available-for-sale
              
              
              -
              
              
              264,466Purchase
                  of securities available-for-sale
              
              
              (34,292,531
              )
              
              (9,899,914
              )Proceeds
                  from maturities of securities available-for-sale
              
              
              19,170,972
              
              
              15,057,664Redemption
                  of Federal Home Loan Bank Stock, net
              
              
              578,500
              
              
              72,300Loans
                  purchased
              
              
              (8,571,000
              )
              
              (15,296,000
              )Decrease
                  (increase) in loans receivable
              
              
              14,969,543
              
              
              (10,479,594
              )Purchase
                  of office property and equipment
              
              
              (2,400,663
              )
              
              (313,754
              )Proceeds
                  from sale of foreclosed real estate
              
              
              72,255
              
              
              142,098Proceeds
                  from sale of real estate held for development
              
              
              1,207,277
              
              
              487,249Net
                  expenditures on real estate held for development
              
              
              (1,054,574
              )
              
              (868,583
              )Net
                  cash used in investing activities
              
              
              (9,151,041
              )
              
              (17,713,547
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Increase
                  in deposits
              
              
              1,606,145
              
              
              5,778,836Proceeds
                  from FHLB advances and other borrowings
              
              
              3,134,865
              
              
              5,538,316Repayment
                  of FHLB advances and other borrowings
              
              
              (18,000,000
              )
              
              (9,000,000
              )Increase
                  (decrease) in advances from borrowers for taxes and
                  insurance
              
              
              (62,238
              )
              
              11,647Issuance
                  of common stock under stock options exercised
              
              
              406,640
              
              
              177,375Tax
                  benefit resulting from stock options exercised
              
              
              134,000
              
              
              12,000Repurchase
                  of common stock
              
              
              (308,680
              )
              
              (3,159,942
              )Cash
                  dividends paid
              
              
              (677,767
              )
              
              (685,300
              )Net
                  cash used in financing activities
              
              
              (13,767,035
              )
              
              (1,327,068
              )Net
                  decrease in cash and cash equivalents
              
              
              (20,547,726
              )
              
              (17,493,665
              )CASH
                  AND CASH EQUIVALENTSBeginning
                  of year
              
              
              39,904,749
              
              
              31,335,707End
                  of year
              
              $
              19,357,023
              
              $
              13,842,042SUPPLEMENTAL
                  DISCLOSURESCash
                  paid during the period for interest
              
              $
              8,759,735
              
              $
              6,912,834Cash
                  paid during the period for income taxes
              
              $
              864,082
              
              
              ($7,414
              )See
                  notes to consolidated financial statements.




5
 *Index*


**FIRST
      FEDERAL BANKSHARES, INC. and SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      consolidated financial statements as of and for the three and six month periods
      ended December 31, 2006, and 2005, have been prepared pursuant to the rules
      and
      regulations of the Securities and Exchange Commission. Certain information
      and
      footnote disclosure normally included in year-end financial statements prepared
      in accordance with accounting principles generally accepted in the United States
      of America have been condensed or omitted pursuant to these rules and
      regulations.





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





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





***Critical
      Judgments and Estimates*** The
      Company describes all of its significant accounting policies in Note 1, of
      the
      Company's Audited Consolidated Financial Statements in its 2006 Annual Report
      to
      Stockholders which is incorporated herein by reference. Particular attention
      should be paid to the Company’s allowance for losses on loans, which requires
      significant management judgments and/or estimates because of the inherent
      uncertainties surrounding this area and/or the subjective nature of the area.
      Information on the impact loss allowances have had on the Company's financial
      condition and results of operations for the three and six month periods ended
      December 31, 2006, and 2005, can be found below, in the sections entitled
      "Results of Operations--Provision for Loan Losses" and “Financial Condition
      -Non-Performing and Classified Assets”.





In
      addition, significant judgments and/or estimates are made in the valuation
      of
      the Company’s goodwill. For a discussion of the judgments and estimates relating
      to goodwill, refer to the appropriate section in Note 1 of the Company’s 2006
      Audited Consolidated Financial Statements.





At
      December 31, 2006, the Company had non-performing and classified loans
      held for sale and those loans are carried at the lower of cost or fair
      value. The Company estimated the fair value of these loans based on a market
      indication of value less selling expenses. These estimates are subject to
      change.





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





**Note
      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.





**Note
      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.





6
 *Index*


**Note
      4.**  **Effect
      of New Accounting Standards**





In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards No. 156, *Accounting
      for Servicing of Financial Assets (as Amended)* (“SFAS
      156”). This Statement amends Statement of Financial Accounting Standards No.
      140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* (“SFAS
      140”), with respect to the accounting for separately recognized servicing assets
      and servicing liabilities. FAS 156 requires the separate accounting for
      servicing assets and servicing liabilities which arise from the sale of
      financial assets; requires all separately recognized servicing assets and
      servicing liabilities to be initially measured at fair value; permits the choice
      of an amortization method or fair value method for subsequent measurements;
      and
      requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities. For the Company, this Statement is effective for fiscal
      2008. The Company is currently evaluating the impact that the adoption of FAS
      156 will have on its financial position, results of operations and cash flows.





FASB
      Interpretation No. 48 *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”) clarifies the accounting for uncertainty in income taxes recognized in
      financial statements in accordance with Statement of Financial Accounting
      Standards No. 109, *Accounting
      for Income Taxes* (“SFAS
      109”). FIN 48 prescribes a recognition threshold and measurement attribute for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, interim period
      accounting, disclosure and transition for tax positions. FIN 48 is effective
      for
      the Company for fiscal 2008. The Company is currently evaluating the impact
      that
      the adoption of FIN 48 will have on its financial position, results of
      operations and cash flows.





Management
      is also currently assessing Emerging Issues Task Force Issue No. 06-04, *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* (“EITF
      06-04”). EITF 06-04 requires a company to recognize the corresponding liability
      and compensation costs for endorsement split- dollar life insurance arrangements
      that provide a benefit to an employee that extends to postretirement periods.
      EITF 06-04 is effective for the Company for fiscal 2008.





In
      September 2006, the FASB issued FAS No. 158 *,
      Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans
      - an amendment of FASB Statements No. 87, 88, 106 and 132 (R).* FAS 158
      requires a company that sponsors a defined benefit postretirement plan (other
      than a multi-employer plan) to fully recognize, as an asset or liability, the
      overfunded or underfunded status of the benefit plan in its balance sheet.
      The
      funded status is measured as the difference between the fair value of the plan’s
      assets and its benefit obligation and is currently reported in the notes to
      the
      financial statements. This provision is effective for the Company for fiscal
      2007. In addition, FAS 158 will require a company to measure its plan assets
      and
      benefit obligations as of its year end balance sheet date. Currently, a company
      is permitted to choose a measurement date up to three months prior to its year
      end to measure plan assets and liabilities. This provision is effective for the
      Company for fiscal 2009. Since the Company participates in a multi-employer
      pension plan, it expects that the adoption of FAS 158 will not have a material
      impact on its financial position, results of operations and cash
      flows.





7
 *Index*


**Note
      5. Earnings Per Share**


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




Three
                  months ended
              
              Six
                  months endedDecember
                  31,
              
              December
                  31,2006
              
              2005
              
              2006
              
              2005Basic
                  earnings per share computation:Net
                  income
              
              $
              412,524
              
              $
              997,964
              
              $
              1,379,266
              
              $
              1,823,102Weighted
                  average common shares outstanding
              
              
              3,318,317
              
              
              3,408,742
              
              
              3,309,482
              
              
              3,427,934Basic
                  earnings per share
              
              $
              0.12
              
              $
              0.29
              
              $
              0.42
              
              $
              0.53Diluted
                  earnings per share computation:Net
                  income
              
              $
              412,524
              
              $
              997,964
              
              $
              1,379,266
              
              $
              1,823,102Weighted
                  average common shares outstanding
              
              
              3,318,317
              
              
              3,408,742
              
              
              3,309,482
              
              
              3,427,934Incremental
                  option and recognition and retention plan sharesusing
                  treasury stock method
              
              
              28,697
              
              
              50,828
              
              
              33,456
              
              
              50,928Diluted
                  shares outstanding
              
              
              3,347,014
              
              
              3,459,570
              
              
              3,342,938
              
              
              3,478,862Diluted
                  earnings per share
              
              $
              0.12
              
              $
              0.29
              
              $
              0.41
              
              $
              0.52




**Note
      6. Dividends**





On
      January 18, 2007 the Company declared a cash dividend on its common stock,
      payable on February 28, 2007 to stockholders of record as of February 14, 2007,
      equal to $0.105 per share.





**Note
      7.**  **Stock-Based
      Compensation**





At
      December 31, 2006, the Company had three stock-based employee compensation
      plans., The Company adopted FASB Statement of Financial Accounting Standards
      No.
      123 (Revised 2004), *Share-Based
      Payment* (“SFAS123(R)”) 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. 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 SFAS 123(R).
      Stock-based compensation expense for the six months ended December 31, 2006
      and
      2005 totaled $44,535 and $23,175, respectively.





A
      summary
      of option activity as of December 31, 2006, and changes since June 30, 2006
      is
      presented below:


Weighted-Weighted-
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              IntrinsicOptions
              
              Shares
              
              Price
              
              Term
                  (years)
              
              ValueOutstanding
                  as of June 30, 2006
              
              
              118,061
              
              $
              14.10Granted
              
              
              25,000
              
              
              21.72Exercised
              
              
              (40,987
              )
              
              11.05Outstanding
                  at December 31, 2006
              
              
              102,073
              
              $
              17.19
              
              
              6.7
              
              $
              489,254Vested,
                  or expected to vest, as ofDecember
                  31, 2006
              
              
              95,745
              
              $
              16.94
              
              
              6.6
              
              $
              484,214Exercisable
                  at December 31, 2006
              
              
              56,873
              
              $
              14.13
              
              
              4.8
              
              $
              453,254




The
      weighted-average fair value of options granted during the six months ended
      December 31, 2006 was $5.59 which was estimated using the Black-Scholes option
      valuation model with the following weighted-average assumptions: expected life
      of 6.28 years, volatility of 23.69%, risk-free interest rate of 4.58% and yield
      rate of 2.15%. No options were granted during the six months ended December
      31,
      2005.


8
 *Index*


The
      total
      intrinsic value of options exercised during the six months ended December 31,
      2006 and 2005, was $434,000 and $197,000, respectively. As of December 31,
      2006,
      there was $212,000 of total unrecognized compensation cost related to non-vested
      share-based compensation arrangements, to be recognized over a weighted-average
      period of 2.95 years.





The
      Company also has a restricted stock plan established in October 1999 (the “RRP”)
      which is described more fully in Note 11 of the Company’s 2006 Annual Report to
      Stockholders. In addition, the Stock Incentive Plan provides for awards of
      restricted stock. A summary of the status of the Company’s non-vested shares of
      restricted stock as of December 31, 2006 and changes during the six months
      ended
      December 31, 2006 is as follows:




Weighted
                AverageGrant-DateNon-vested
                  Shares
              
              Shares
              
              Fair
                  ValueNon-vested
                  at July 1, 2006
              
              
              1,500
              
              $
              12.73Granted
              
              
              6,000
              
              
              21.50Vested
              
              
              (1,100
              )
              
              21.34Non-vested
                  at December 31, 2006
              
              
              6,400
              
              $
              21.02





As
      of
      December 31, 2006 there was $125,000 of total unrecognized compensation cost
      related to non-vested restricted shares. The cost is expected to be recognized
      over a weighted-average period of five years. The total fair value of shares
      vested during the six months ended December 31, 2006 and 2005 was $24,000 and
      $188,000, respectively.





**Note
      8.**  **Operating
      Segments**





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





Selected
      financial information on the Company’s segments is presented below for the three
      and six months ended December 31, 2006, and 2005.




Three
                  Months Ended December 31, 2006*(Dollars
                  in Thousands)*
              
              Banking
              
              Other
              
              ConsolidatedInterest
                  income
              
              $
              8,649
              
              
              -
              
              $
              8,649Interest
                  expense
              
              
              4,787
              
              
              -
              
              
              4,787Net
                  interest income
              
              
              3,862
              
              
              -
              
              
              3,862Provision
                  for loan losses
              
              
              403
              
              
              -
              
              
              403Net
                  interest income after provision for loan losses
              
              
              3,459
              
              
              -
              
              
              3,459Non-interest
                  income
              
              
              1,451
              
              $
              191
              
              
              1,642Non-interest
                  expense
              
              
              4,457
              
              
              134
              
              
              4,591Income
                  before income taxes
              
              
              453
              
              
              57
              
              
              510Income
                  taxes
              
              
              74
              
              
              23
              
              
              97Net
                  income
              
              $
              379
              
              $
              34
              
              $
              413Depreciation
                  and amortization
              
              $
              579
              
              $
              9
              
              $
              588


9
 *Index*
   Three
                  Months Ended December 31, 2005*(Dollars
                  in Thousands)*
              
              Banking
              
              Other
              
              ConsolidatedInterest
                  income
              
              $
              7,971
              
              
              -
              
              $
              7,971Interest
                  expense
              
              
              3,656
              
              
              -
              
              
              3,656Net
                  interest income
              
              
              4,315
              
              
              -
              
              
              4,315Provision
                  for loan losses
              
              
              510
              
              
              -
              
              
              510Net
                  interest income after provision for loan losses
              
              
              3,805
              
              
              -
              
              
              3,805Non-interest
                  income
              
              
              1,657
              
              $
              163
              
              
              1,820Non-interest
                  expense
              
              
              4,116
              
              
              144
              
              
              4,260Income
                  before income taxes
              
              
              1,346
              
              
              19
              
              
              1,365Income
                  taxes
              
              
              359
              
              
              8
              
              
              367Net
                  income
              
              $
              987
              
              $
              11
              
              $
              998Depreciation
                  and amortization
              
              $
              652
              
              $
              5
              
              $
              657


Six
                  Months Ended December 31, 2006*(Dollars
                  in Thousands)*
              
              Banking
              
              Other
              
              ConsolidatedInterest
                  income
              
              $
              17,213
              
              
              -
              
              $
              17,213Interest
                  expense
              
              
              9,246
              
              
              -
              
              
              9,246Net
                  interest income
              
              
              7,967
              
              
              -
              
              
              7,967Provision
                  for loan losses
              
              
              503
              
              
              -
              
              
              503Net
                  interest income after provision for loan losses
              
              
              7,464
              
              
              -
              
              
              7,464Non-interest
                  income
              
              
              2,963
              
              $
              420
              
              
              3,383Non-interest
                  expense
              
              
              8,690
              
              
              291
              
              
              8,981Income
                  before income taxes
              
              
              1,737
              
              
              129
              
              
              1,866Income
                  taxes
              
              
              436
              
              
              51
              
              
              487Net
                  income
              
              $
              1,301
              
              $
              78
              
              $
              1,379Depreciation
                  and amortization
              
              $
              574
              
              $
              14
              
              $
              588Total
                  assets
              
              $
              599,389
              
              $
              1,251
              
              $
              600,640


Six
                  Months Ended December 31, 2005*(Dollars
                  in Thousands)*
              
              Banking
              
              Other
              
              ConsolidatedInterest
                  income
              
              $
              15,554
              
              
              -
              
              $
              15,554Interest
                  expense
              
              
              7,065
              
              
              -
              
              
              7,065Net
                  interest income
              
              
              8,489
              
              
              -
              
              
              8,489Provision
                  for loan losses
              
              
              750
              
              
              -
              
              
              750Net
                  interest income after provision for loan losses
              
              
              7,739
              
              
              -
              
              
              7,739Non-interest
                  income
              
              
              3,254
              
              $
              97
              
              
              3,351Non-interest
                  expense
              
              
              8,238
              
              
              318
              
              
              8,556Income
                  (loss) before income taxes
              
              
              2,755
              
              
              (221
              )
              
              2,534Income
                  taxes
              
              
              793
              
              
              (82
              )
              
              711Net
                  income (loss)
              
              $
              1,962
              
              
              ($139
              )
              $
              1,823Depreciation
                  and amortization
              
              $
              646
              
              $
              11
              
              $
              657Total
                  assets
              
              $
              586,413
              
              $
              1,116
              
              $
              587,529


10
 *Index*


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





**Forward-Looking
      Statements**





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





**Results
      of Operations**





***Quarter
      Overview***  The
      Company’s net income for the three months ended December 31, 2006, was $413,000
      or $0.12 per diluted share compared to $998,000 or $0.29 per diluted share
      in
      the same period last year. These amounts represent an annualized return on
      average assets (ROA) of 0.28% and 0.69%, respectively, and an annualized return
      on average equity (ROE) of 2.35% and 5.65%, respectively.





The
      decrease in net income from 2005 to 2006 was due to a $453,000 decrease in
      net
      interest income, a decrease of $178,000 in non-interest income, and a $332,000
      increase in non-interest expense. These developments were partially offset
      by a
      decrease in provision for loan loss of $107.000 and a decrease in income tax
      expense of $270,000.





***Six
      Month Overview*** The
      Company’s net income for the six months ended December 31, 2006, was $1.4
      million or $0.41 per diluted share, compared to $1.8 million or $0.52 per
      diluted share in the same period last year. These
      amounts represent an annualized return on average assets (ROA) of 0.46% and
      0.62%, respectively, and an annualized return on average equity (ROE) of 3.93%
      and 5.12%, respectively.





The
      decrease in net income from 2005 to 2006 was due to a $523,000 decrease in
      net
      interest income, and an increase in non-interest expense of $425,000. These
      developments were partially offset by a decrease in provision for loan loss
      of
      $247,000 and a decrease in income tax expense of $224,000.





The
      following paragraphs discuss the aforementioned changes in more detail along
      with other changes in the components of net interest income during the three
      and
      six month periods ended December 31, 2006.





***Net
      Interest Income*** Net
      interest income for the three months and the six months ended December 31,
      2006,
      totaled $3.9 million and $8.0 million, respectively, compared to $4.3 million
      and $8.5 million, respectively, for the same periods ended December 31, 2005.
      The cost of interest-bearing liabilities continued to increase more rapidly
      than
      yields on interest-earning assets resulting in a decrease of 50 basis points
      in
      the interest rate spread to 2.42% for the three months ended December 31, 2006,
      from 2.92% for the three months ended December 31, 2005. For the six months
      ended December 31, 2006, the interest rate spread declined to 2.54% from 2.88%
      in the same period last year. Offsetting the decrease in the interest rate
      spreads was an increase in the average balance of interest-earning assets.
      The
      average balance of interest-earning assets increased by $14.9 million, or 2.8%,
      and $11.8 million, or 2.2% for the three months and six months ended December
      31, 2006, respectively, as compared to the same periods last year. The principal
      source of this growth occurred in the Company’s investment security portfolio
      and short term investments. This growth was funded by increases in deposit
      liabilities, primarily certificates of deposit.





11
 *Index*


The
      following tables set forth information regarding the average balances and the
      Company’s assets, liabilities and equity, as well as the interest earned or paid
      on the average yield or cost of each. The information is based on daily average
      balances during the three and six month periods ended December 31, 2006, and
      2005.


Three
                  months ended December 31,2006
              
              2005Average
              
              
              
              Average
              
              Average
              
              
              
              Average*(Dollars
                  in thousands)*
              
              Balance
              
              Interest
              
              Yield/Cost
              
              Balance
              
              Interest
              
              Yield/CostInterest-earning
                  assets:Loans
                  receivable (1)
              
              $
              455,018
              
              $
              7,535
              
              
              6.57
              %
              $
              456,958
              
              $
              7,269
              
              
              6.31
              %Investment
                  securities (2)
              
              
              78,212
              
              
              1,004
              
              
              5.37
              %
              
              68,077
              
              
              683
              
              
              4.35
              %Short-term
                  investments and otherinterest-earning
                  assets (3)
              
              
              8,476
              
              
              110
              
              
              5.13
              %
              
              1,789
              
              
              18
              
              
              4.06
              %Total
                  interest-earning assets
              
              
              541,706
              
              
              8,649
              
              
              6.37
              %
              
              526,824
              
              
              7,970
              
              
              6.05
              %Non-interest-earning
                  assets
              
              
              55,184
              
              
              
              
              
              
              
              
              51,976Total
                  assets
              
              $
              596,890
              
              
              
              
              
              
              
              $
              578,800Interest-bearing
                  liabilities:Deposit
                  liabilities
              
              $
              397,549
              
              
              3,784
              
              
              3.78
              %
              $
              360,765
              
              
              2,511
              
              
              2.76
              %Borrowings
              
              
              82,723
              
              
              1,003
              
              
              4.81
              %
              
              102,674
              
              
              1,144
              
              
              4.42
              %Total
                  interest-bearing liabilities
              
              
              480,272
              
              
              4,787
              
              
              3.95
              %
              
              463,439
              
              
              3,655
              
              
              3.13
              %Non-interest-bearing:Deposit
                  liabilities
              
              
              41,423
              
              
              
              
              
              
              
              
              40,999Other
                  liabilities
              
              
              5,433
              
              
              
              
              
              
              
              
              6,285Total
                  liabilities
              
              
              527,128
              
              
              
              
              
              
              
              
              510,723Stockholders’
                  equity
              
              
              69,762
              
              
              
              
              
              
              
              
              68,077Total
                  liabilities andstockholders'
                  equity
              
              $
              596,890
              
              
              
              
              
              
              
              $
              578,800Net
                  interest income (2)
              
              
              
              
              $
              3,862
              
              
              
              
              
              
              
              $
              4,315Interest
                  rate spread (4)
              
              
              
              
              
              
              
              
              2.42
              %
              
              
              
              
              
              
              
              2.92
              %Net
                  yield on averageinterest-earning
                  assets (5)
              
              
              
              
              
              
              
              
              2.89
              %
              
              
              
              
              
              
              
              3.32
              %Ratio
                  of average interest -earning assetsto
                  average interest-bearing liabilities
              
              
              
              
              
              
              
              
              112.79
              %
              
              
              
              
              
              
              
              113.68
              %
  (1)
                Average
                    balances include nonaccrual loans and loans held for sale. Interest
                    income
                    includes loan feeswhich
                    are not material.(2)
                Investment
                    securities income is presented without the benefit of the tax
                    effect of
                    tax exempt income; yields are
                    presented on a tax-effected basis.(3)
                Includes
                    interest-earning deposits in other financial
                    institutions.(4)
                Interest
                    rate spread represents the difference between the average tax-equivalent
                    yield on interest-earning assets and
                    the average cost of interest-bearing
                    liabilities.(5)
                Net
                    yield on average interest-earning assets represents net interest
                    income,
                    tax-effected, as a percentage of  average
                    interest-earning assets.
  12
 *Index*
  Six
                    months ended December 31,2006
                
                2005Average
                
                
                
                Average
                
                Average
                
                
                
                Average*(Dollars
                    in thousands)*
                
                Balance
                
                Interest
                
                Yield/Cost
                
                Balance
                
                Interest
                
                Yield/CostInterest-earning
                    assets:Loans
                    receivable (1)
                
                $
                457,147
                
                $
                15,170
                
                
                6.58
                %
                $
                451,141
                
                $
                14,131
                
                
                6.21
                %Investment
                    securities (2)
                
                
                72,140
                
                
                1,799
                
                
                5.24
                %
                
                70,188
                
                
                1,329
                
                
                4.13
                %Short-term
                    investments and otherinterest-earning
                    assets (3)
                
                
                9,395
                
                
                244
                
                
                5.15
                %
                
                5,551
                
                
                94
                
                
                3.37
                %Total
                    interest-earning assets
                
                
                538,682
                
                
                17,213
                
                
                6.38
                %
                
                526,880
                
                
                15,554
                
                
                5.90
                %Non-interest-earning
                    assets
                
                
                55,362
                
                
                
                
                
                
                
                
                51,988Total
                    assets
                
                $
                594,044
                
                
                
                
                
                
                
                $
                578,868Interest-bearing
                    liabilities:Deposit
                    liabilities
                
                $
                392,063
                
                
                7,206
                
                
                3.65
                %
                $
                360,618
                
                
                4,789
                
                
                2.63
                %Borrowings
                
                
                85,096
                
                
                2,040
                
                
                4.75
                %
                
                102,672
                
                
                2,275
                
                
                4.40
                %Total
                    interest-bearing liabilities
                
                
                477,159
                
                
                9,246
                
                
                3.84
                %
                
                463,290
                
                
                7,064
                
                
                3.02
                %Non-interest-bearing:Deposit
                    liabilities
                
                
                42,276
                
                
                
                
                
                
                
                
                41,226Other
                    liabilities
                
                
                5,058
                
                
                
                
                
                
                
                
                3,691Total
                    liabilities
                
                
                524,493
                
                
                
                
                
                
                
                
                508,207Stockholders’
                    equity
                
                
                69,551
                
                
                
                
                
                
                
                
                70,661Total
                    liabilities andstockholders'
                    equity
                
                $
                594,044
                
                
                
                
                
                
                
                $
                578,868Net
                    interest income (2)
                
                
                
                
                $
                7,967
                
                
                
                
                
                
                
                $
                8,490Interest
                    rate spread (4)
                
                
                
                
                
                
                
                
                2.54
                %
                
                
                
                
                
                
                
                2.88
                %Net
                    yield on averageinterest-earning
                    assets (5)
                
                
                
                
                
                
                
                
                3.00
                %
                
                
                
                
                
                
                
                3.27
                %Ratio
                    of average interest -earning assetsto
                    average interest-bearing liabilities
                
                
                
                
                
                
                
                
                112.89
                %
                
                
                
                
                
                
                
                113.73
                %




(1)
              Average
                  balances include nonaccrual loans and loans held for sale. Interest
                  income
                  includes loan fees which
                  are not material.(2)
              Investment
                  securities income is presented without the benefit of the tax effect
                  of
                  tax exempt income; yields are
                  presented on a tax-effected basis.(3)
              Includes
                  interest-earning deposits in other financial
                  institutions.(4)
              Interest
                  rate spread represents the difference between the average tax-equivalent
                  yield on interest-earning assets and
                  the average cost of interest-bearing
                  liabilities.(5)
              Net
                  yield on average interest-earning assets represents net interest
                  income,
                  tax-effected, as a percentage of  average
                  interest-earning assets.


**Provision
      for Losses on Loans** Provision for losses on loans decreased to $403,000 for the three months ended
      December 31, 2006, from $510,000 for the three months ended December 31, 2005.
      For the six months ended December 31, 2006, the provision for loan losses
      decreased to $503,000 from $750,000 in the prior period. Three significant
      events affected the Bank’s provision for loan losses during the most recent
      periods: (1) the Bank entered into an agreement with a third party to market
      and
      sell $11.6 million of non-performing and classified loans, which represented
      a
      significant portion of the Bank’s non-performing and classified loans and
      resulted in a $1.3 million loss as compared to the loan balances net of
      previously established specific reserves; (2) the Bank recorded a $0.6 million
      loss on the final liquidation of a loan to a construction contractor and
      manufacturer; and (3) the Bank reduced specific and other loans loss allowances
      of $1.5 million as a result of these developments. The Bank’s methodology for
      establishing allowance for loan losses is heavily influenced by the level of
      the
      Bank’s non-performing and classified


13
 *Index*


loans.
      As
      a result of the aforementioned developments, the Bank’s non-performing and
      classified loans declined substantially, which warranted the decline in the
      allowance for loan losses. The allowance for loan losses totaled $2.0 million
      and $5.6 million, respectively, at December 31, 2006, and 2005. The allowances
      for loan losses represent 73.7% and 143.8% of non-performing loans held for
      investment as of the same dates, respectively. The allowance for loan losses
      at
      June 30, 2006, totaled $5.5 million, or 83.5% of non-performing loans. Although
      management believes that the Company’s present level of allowance for loan
      losses is adequate, there can be no assurance that future adjustments to the
      allowance will not be necessary, which could adversely affect the Company’s
      results of operations. For additional discussion, refer to “Financial Condition
      - Loans Held for Sale” and “Financial Condition - Non-performing and Classified
      Assets.”





The
      following table summarizes the activity in the Company’s allowance for loan
      losses for the periods indicated.




Three
                  months ended
              
              Six
                  months endedDecember
                  31,
              
              December
                  31,*(Dollars
                  in Thousands)*
              
              2006
              
              2005
              
              2006
              
              2005Balance
                  at beginning of period
              
              $
              5,482
              
              $
              6,723
              
              $
              5,466
              
              $
              6,718Provision
                  for loan losses (1)
              
              
              403
              
              
              510
              
              
              503
              
              
              750Charge-offs:Single-family
                  mortgage loans
              
              
              -
              
              
              (19
              )
              
              (20
              )
              
              (29
              )Commercial
                  real estate loans
              
              
              -
              
              
              (1
              )
              
              -
              
              
              (42
              )Commercial
                  business loans
              
              
              (2,617
              )
              
              (1,486
              )
              
              (2,617
              )
              
              (1,594
              )Consumer
                  loans
              
              
              (49
              )
              
              (178
              )
              
              (127
              )
              
              (282
              )Total
                  loans charged-off
              
              
              (2,666
              )
              
              (1,684
              )
              
              (2,764
              )
              
              (1,947
              )Loans
                  transferred to held for sale (2)
              
              
              (1,300
              )
              
              -
              
              
              (1,300
              )
              
              -Recoveries
              
              
              125
              
              
              23
              
              
              139
              
              
              51Charge-offs
                  net of recoveries
              
              
              (3,841
              )
              
              (1,661
              )
              
              (3,925
              )
              
              (1,896
              )Balance
                  at end of period
              
              $
              2,044
              
              $
              5,572
              
              $
              2,044
              
              $
              5,572Allowance
                  for loan losses to total loans
              
              
              0.46
              %
              
              1.20
              %
              
              0.46
              %
              
              1.20
              %Allowance
                  for loan losses to non-performing loans (3)
              
              
              73.66
              %
              
              143.76
              %
              
              73.66
              %
              
              143.76
              %Net
                  annualized charge-offs to average loans outstanding
              
              
              3.38
              %
              
              1.45
              %
              
              1.72
              %
              
              0.84
              %


(1)
              Includes
                  a $1.3 million loss on transfer of $11.6 million of non-performing
                  and
                  classified loans to held for sale, and
                  $0.6 million of losses on other commercial business loans. These
                  amounts
                  are net of a $1.5 million reduction
                  in the allowance for loan losses due to the significant decline
                  in
                  non-performing and classified assets
                  resulting from the aforementioned transfer to loans held for
                  sale.(2)
              2006
                  data consists of $2.0 million relating to commercial real estate
                  loans,
                  and $0.1 million relating to single-family
                  mortgage loans, offset by $0.8 million in commercial business loans.(3)
              The
                  2006 non-performing loan amount does not include $8.0 million in
                  non-performing loans held for sale. If
                  non-performing loans held for sale are included, the ratio of the
                  allowance for loan losses to non-performing loans
                  is 18.97%.


***Non-interest
      Income*** Non-interest
      income decreased to $1.6 million for the three months ended December 31, 2006,
      from $1.8 million during the same period in 2005. Non-interest income for the
      six months ended December 31, 2006, and 2005 totaled $3.4 million in each
      period. The following paragraphs discuss the principal components of
      non-interest income and the primary reasons for the changes from 2005 to
      2006.




**Service
      Charges on Deposit Accounts** Service
      charges on deposits increased $32,000 or 4% for the three month period ended
      December 31, 2006, as compared to the same period in the previous year. For
      the
      six months ended December 31, 2006, service charges on deposit accounts
      increased $35,000 or 2% as compared to the same period last year. These
      increases were due primary to increases in overdraft fees.





**Service
      Charges on Loans** Service
      charges on loans decreased $25,000 or 24% for the three month period ended
      December 31, 2006, as compared to the same period in the previous year. For
      the
      six months ended December 31, 2006, service charges on loans decreased $59,000
      or 30% as compared to the same period last year. The


14
 *Index*


decline
      in service charges is primarily due to the decline in the amount of prepayment
      penalties collected in commercial loans and service fees related to the
      Company’s residential and consumer loan portfolios.





**Gain
      (Loss) on Sale of Real Estate Held for Investment** The
      gain
      on sale of real estate held for investment for the three months ended December
      31, 2006, and 2005, was $20,000 and zero, respectively. The gain on sale for
      real estate held for investment for the six months ended December 31, 2006,
      was
      $60,000 compared to a loss of $242,000 for the same period the previous year.
      The gains in recognized in the three months and six months of 2006 were due
      to
      gains related to the Company’s real estate development subsidiary. During the
      same period of the prior year the Company’s real estate development subsidiary
      completed a previous development project and recorded a loss of $242,000.





**Net
      Gain on the Sale of Securities** The gain
      on the sale of securities for the three and six months ended December 31, 2006,
      was zero compared to $203,000 during the same periods in 2005. The gains
      recognized in the prior period were due to the sale of another financial
      institution’s stock that was held at the holding company.





**Gain
      on Sale of Loans** Gain
      on
      sale of loans decreased by $3,000 or 2% and $52,000 or 13% during the three
      and
      six month periods ended December 31, 2006, respectively, compared to the same
      periods in the previous year. The decrease in the gain on sale of loans is
      attributed to the decrease in fixed rate mortgage origination volumes. Volumes
      have been declining as the mortgage refinance business slowed due to higher
      interest rates.





**Real
      Estate Related Activities** This
      income is primarily due to the Company’s title and abstract continuation
      businesses in northwest Iowa. Income from these activities increased $8,000
      or
      5% for the three months ended December 31, 2006, compared to the three months
      ended December 31, 2005. For the six months ended December 31, 2006, income
      from
      real estate related activities increased $21,000 or 6.3% compared to the six
      months ended December 31, 2005.





**Other
      Income** Other
      income represents income primarily from the sale of fixed annuities and mutual
      funds, as well as income for the Company’s escrow subsidiary. Other income
      decreased $6,000 or 1% and by $12,000 or 1% during the three and six month
      periods ended December 31, 2006, respectively, as compared to the same periods
      in the previous year. The decrease in each period is primarily due to decreases
      in the Company’s fixed annuity and mutual fund sales.


****


***Non-Interest
      Expense*** Non-interest
      expense for the three months ended December 31, 2006, and 2005, was $4.6 million
      and $4.3 million, respectively. Non-interest expense for the six months ended
      December 31, 2006, and 2005 was $9.0 million and $8.6 million, respectively.
      The
      following paragraphs discuss the principal components of non-interest expense
      and the primary reasons for the changes from 2005 to 2006.





**Compensation
      and Benefits** Compensation and employee benefits increased $0.1 million to $2.6 million or
      6%
      during the three months ended December 31, 2006, as compared to the same period
      in the previous year. For the six months ended December 31, 2006, compensation
      and employee benefits increased $0.2 million or 5% compared to the six months
      ended December 31, 2005. Increases in compensation and employee benefits for
      both time frames can be primarily attributed to normal annual merit
      increases.





**Office
      Property and Equipment** Office
      property and equipment expense decreased $15,000 or 2% and by $31,000 or 2%
      during the three and six months ended December 31, 2006, respectively, compared
      to the same periods in the previous year. The decline in office property and
      equipment expense is primarily due to decreasing costs associated with the
      depreciation of fixed assets.




**Data
      Processing** Data
      processing expenses remained relatively flat increasing only $4,000 or 2% for
      the three months ended December 31, 2006, compared to the same period last
      year,
      and increasing less than $1,000 for the six months ended December 31, 2006,
      compared to the six months ended December 31, 2006.





**Professional,
      Insurance, and Regulatory** Professional,
      insurance and regulatory expense increased from $246,000 to $274,000 for the
      three months ended December 31, 2006, and 2005, respectively. This expense
      also
      increased from $446,000 to $559,000 for the six months ended December 31, 2006,
      and 2005, respectively. The


15
 *Index*


increase
      in expense is primarily attributed to costs associated with outsourcing the
      Bank’s loan review function and increased legal fees.





**Advertising,
      Donations and Public Relations** Expenses
      related to advertising, donations and public relations, increased $52,000 or
      31%
      and $7,000 or 2% during the three and six months ended December 31, 2006,
      respectively, as compared to the same periods in the previous year. These
      increases are primarily due to new deposit and branch marketing campaigns
      intended to increase retail deposits.





**Communication,
      Postage and Office Supplies** Communications,
      postage, and office supplies expense increased by $6,000 or 3% and $9,000 or
      2%
      during the three and six months ended December 31, 2006, respectively, as
      compared to the same periods in the previous year. These increases were
      primarily due to increases in postal and shipping rates.





**Other
      Non-Interest Expense** Other
      non-interest expense increased by $119,000 or 60% and by $115,000 or 27% for
      the
      three and six month period ended December 31, 2006, respectively, as compared
      to
      the same periods in the previous year. **** These
      increases were primarily due to the increases in recruiting fees for new
      employees and expenses related to the non-compete agreement entered into between
      the Company and a former employee.





***Income
      tax expense*** Income
      tax expense for the three months ended December 31, 2006, and 2005, was $97,000
      and $367,000, respectively, or 19.0% and 26.9% of pre-tax income, respectively.
      Income tax expense for the six months ended December 31, 2006, and 2005 was
      $487,000 and $711,000, respectively, or 26.1% and 28.1% of pretax income,
      respectively. The effective tax rate in both periods decreased primarily due
      to
      tax exempt income becoming a larger percentage of pretax income.





**Financial
      Condition**





***Overview*** Total
      assets decreased by $11.9 million or 1.9%, to $600.6 million at December 31,
      2006, from $612.5 million at June 30, 2006, primarily due to a decrease in
      the
      Bank’s loans receivable and cash and cash equivalents. These developments were
      partially offset by an increase in securities available-for-sale.





***Interest-Bearing
      Deposits with Banks*** Interest-bearing deposits with banks, which consist primarily of overnight
      investments at the Federal Home Loan Bank (“FHLB”), decreased by $17.7 million
      to $7.0 million at December 31, 2006, from $24.7 million at June 30, 2006.
      These
      deposit funds were used to pay down FHLB advances as they matured or were
      reinvested in other investment securities as described in the next paragraph.





***Securities
      Available-for-Sale and Held-for-Investment*** Total
      securities increased by $14.4 million to $74.8 million at December 31, 2006,
      from $60.4 million at June 30, 2006, as funds from interest-bearing deposits
      were reinvested in securities. During this period the Corporation purchased
      short- and medium-term fixed collateralized mortgage obligations (“CMOs”). In
      addition, the Corporations also purchased collateralized debt obligations
      (“CDO”) backed by bank and insurance trust preferred notes.





***Non-Performing
      and Classified***  ***Loans
      Held for Sale*** During
      the three months ended December 31, 2006, the Company transferred $11.6 million
      of nonperforming and classified loans to held for sale status and recognized
      a
      $1.3 million loss on these loans. Management believes the future sale of these
      loans to be a positive development for the Company. The sale of these loans
      will
      remove an uncertainty relating to the potential loss on these credits in the
      future, it will eliminate a significant distraction to the Company’s loan
      officers and senior management and it will lower the level of non-performing
      and
      classified loans to a level that is more comparable with the banking industry.
      The sale is also expected to increase the Company’s profitability. Management
      expects that returning the sale proceeds to earning assets could add no less
      than $0.07 to earnings per share on an annual basis.





The
      Company expects to complete the sale of these loans during the third fiscal
      quarter ending March 31, 2007. However there can be no assurances that the
      Company will be able to consummate the sale or that there will not be an
      additional loss on the ultimate sale of these loans.





16
 *Index*


***Loans
      Receivable*** Loans
      receivable decreased by $20.9 million, or 4.5%, to $441.6 million at December
      31, 2006, from $462.5 million at June 30, 2006. The decrease is due, in part
      to
      the aforementioned potential sale of nonperforming and classified loans. The
      following table sets forth information regarding the Company’s loan portfolio,
      by type of loan on the dates indicated.




December
                  31, 2006
              
              June
                  30, 2006*(Dollars
                  in Thousands)*
              
              Amount
              
              %
              
              Amount
              
              %One-
                  to four-family residential (1)
              
              $
              129,805
              
              
              29.54
              
              $
              133,630
              
              
              29.25Multi-family
                  residential (1)
              
              
              46,523
              
              
              10.58
              
              
              51,984
              
              
              11.37Non-residential
                  real estate (1)
              
              
              152,107
              
              
              34.60
              
              
              157,099
              
              
              34.38Commercial
                  business loans
              
              
              52,395
              
              
              11.92
              
              
              54,586
              
              
              11.94Home
                  equity and second mortgage loans
              
              
              28,832
              
              
              6.56
              
              
              29,850
              
              
              6.53Other
                  non-mortgage loans (2)
              
              
              32,271
              
              
              7.34
              
              
              35,724
              
              
              7.81Loans
                  in process, unearned discounts and premiums,and
                  net deferred loan fees and costs
              
              
              (329
              )
              
              (0.07
              )
              
              (378
              )
              
              (0.08
              )Subtotal
              
              
              441,604
              
              
              100.47
              
              
              462,495
              
              
              101.20Allowance
                  for loan losses
              
              
              2,044
              
              
              0.47
              
              
              5,466
              
              
              1.20Total
                  loans, net
              
              $
              439,560
              
              
              100.00
              
              $
              457,029
              
              
              100.00


(1)
              Includes
                  construction loans.(2)
              Includes
                  other secured non-mortgage loans, secured and unsecured personal
                  loans and
                  loans on deposits.


***FHLB
      Stock*** The
      Company’s FHLB stock decreased from $5.2 million at June 30, 2006, to $4.6
      million at December 31, 2006. The decrease was a direct result of the Company
      having less FHLB advances which reduces the level of FHLB stock required to
      be
      held.





***Deposit
      Liabilities*** Deposit
      liabilities increased by $1.6 million, to $447.7 million at December 31, 2006,
      from $446.1 million at June 30, 2006. The increase in deposits is primarily
      due
      to increases in retail certificates of deposit. The following table sets forth
      information regarding the Company’s deposit portfolio on the dates indicated.


December
                  31, 2006
              
              June
                  30, 2006*(Dollars
                  in Thousands)*
              
              Amount
              
              %
              
              Amount
              
              %Noninterest-bearing
                  checking
              
              $
              43,725
              
              
              9.77
              
              $
              46,890
              
              
              10.51Interest-bearing
                  checking accounts
              
              
              76,567
              
              
              17.10
              
              
              67,411
              
              
              15.11Money
                  market accounts
              
              
              58,110
              
              
              12.98
              
              
              72,964
              
              
              16.36Savings
                  accounts
              
              
              24,946
              
              
              5.57
              
              
              27,856
              
              
              6.24Certificates
                  of deposit
              
              
              244,315
              
              
              54.58
              
              
              230,935
              
              
              51.78Total
                  deposits
              
              $
              447,663
              
              
              100.00
              
              $
              446,056
              
              
              100.00





***FHLB
      Advances and Other Borrowings*** The
      Company’s FHLB advances and other borrowings decreased by $14.9 million, or
      16.1%, to $77.9 million at December 31, 2006, from $92.8 million at June 30,
      2006. During the six months ended December 31, 2006, the Company did not incur
      any new borrowings from the FHLB and cash flows were used to repay maturing
      FHLB
      advances.





***Stockholders’
      Equity*** Total
      stockholders’ equity increased by $1.4 million, or 2.1%, to $69.7 million at
      December 31, 2006, from $68.3 million at June 30, 2006. The increase in
      stockholders’ equity was primarily due to net income of $1.4 million for the six
      months ended December 31, 2006, and increases in additional paid in capital
      from
      equity based benefits offset by dividends paid.





17
 *Index*


***Non-Performing
      and Classified Assets*** At
      December 31, 2006, non-performing loans consist of $8.0 million of
      non-performing loans held for sale and $3.3 million of non-performing loans
      held
      for investment, as compared to $6.5 million as of June 30, 2006. Non-performing
      loans held for investment as a percentage of total loans held for investment
      decreased from 1.41% at June 30, 2006, to 0.63% in December 31, 2006. During
      the
      three months ended December 31, 2006, a $1.8 million loan classified as
“Substandard” was placed on non-accrual. Further discussion of this borrower is
      made later in this section. The following table sets forth information regarding
      non-accrual loans and other non-performing assets at the dates
      indicated.




*(Dollars
                  in Thousands)*
              December
                  31, 2006
              June
                  30, 2006Loans
                  held for investment accounted for on a non-accrual basis:Single-family
                  mortgage loans
              
              $
              555
              
              $
              1,104Commercial
                  real estate loans
              
              
              1,750
              
              
              346Commercial
                  business loans
              
              
              220
              
              
              4,835Consumer
                  loans
              
              
              250
              
              
              258Total
                  non-performing loans held for investment (1)
              
              
              2,775
              
              
              6,543Other
                  non-performing assets (2)
              
              
              504
              
              
              73Total
                  non-performing assets (1)
              
              $
              3,279
              
              $
              6,616Restructured
                  loans not included inother
                  non-performing categories above
              
              $
              908
              
              $
              2,126Non-performing
                  loans to total loans receivable (1)
              
              
              0.63
              %
              
              1.41
              %Non-performing
                  assets to total assets (1)
              
              
              0.55
              %
              
              1.08
              %


(1)
              2006
                  data does not include $8.0 million in non-performing loans held
                  for sale.
                  Including non-performing loans
                  held for sale for 2006, the ratio of non-performing loans to total
                  loans
                  receivable would be 2.44% and
                  the ratio of non-performing assets to total assets would be
                  1.88%.(2)
              Includes
                  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. Also includes repossessed automobiles,
                  boats and trailers carried
                  at the lower of cost or fair market value less estimated cost-to-sell.


As
      of
      December 31, 2006, the Company’s classified assets totaled $13.1 million or
      2.18% of total assets. Contingent on the aforementioned loan sale, the Company’s
      classified assets will decline to $3.8 million, or 0.63%, of total assets as
      of
      December 31, 2006, compared to $7.6 million, or 1.24%, as of June 30,
      2006.





The
      Company is closely monitoring two classified loans totaling $2.2 million that
      are included in the $3.8 million of classified assets. These two loans are
      classified “Substandard” as of that date. The following paragraphs contain a
      brief discussion of each relationship.





In
      2005,
      the bank purchased a $1.75 million participation in a $19.30 million loan for
      construction of a senior housing facility in Brooklyn Park, Minnesota. At the
      time of closing a significant portion of the units in the project were pre-sold
      with valid purchase agreements and escrowed deposits. The loan was paying as
      agreed until December of 2006. At that time the borrower started accepting
      requests for cancellation of the original purchase agreements based on
      accusations of fraud on the part of an unrelated third party responsible for
      marketing the project. As a result, the bank group was forced to commence
      foreclosure proceedings against the borrower. Management believes this loan
      is
      adequately secured and no loss is expected at this time. However, there can
      be
      no assurances.





In
      2002,
      the bank purchased a $0.5 million participation of a $3.2 million loan to a
      private golf and social club. The loan was paying as agreed until December
      2006.
      At that time the borrower notified the bank group of a significant operating
      shortfall. As of December 31, 2006, the bank group has not met with the borrower
      to determine an appropriate course of action. Management believes this loan
      is
      adequately secured by the underlying collateral, which consists primarily of
      real estate and to a lesser degree accounts receivable and equipment. No loss
      is
      expected at this time. However, there can be no assurances.





18
 *Index*


**Liquidity
      and Capital**




The
      Bank
      is required to maintain specified amounts of capital pursuant to regulations
      promulgated by the Office of Thrift Supervision (“OTS”) and the Federal Deposit
      Insurance Corporation (“FDIC”). The Bank's objective is to maintain its
      regulatory capital in an amount sufficient to be classified in the highest
      regulatory capital category (i.e., as a "well-capitalized" institution). At
      December 31, 2006, the Bank's regulatory capital exceeded all regulatory minimum
      requirements, as well as the amount required to be classified as a
      "well-capitalized" institution. The Bank's actual and required capital amounts
      and ratios as of December 31, 2006, and June 30, 2006, were as
      follows:





December
                  31, 2006To
                  Be WellCapitalized
                  UnderFor
                  Capital
              
              Prompt
                  CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio*Dollars
                  in Thousands*Tangible
                  capital
              
              $
              47,116
              
              
              8.11
              %
              $
              8,714
              
              
              1.50
              %
              
              -
              
              
              -Tier
                  1 leverage (core)
              
              
              47,116
              
              
              8.11
              
              
              23,238
              
              
              4.00
              
              $
              29,048
              
              
              5.00
              %Tier
                  1 risk-based capital
              
              
              47,116
              
              
              10.35
              
              
              18,217
              
              
              4.00
              
              
              27,325
              
              
              6.00Risk-based
                  capital
              
              
              48,968
              
              
              10.75
              
              
              36,433
              
              
              8.00
              
              
              45,542
              
              
              10.00


June
                  30, 2006To
                  Be WellCapitalized
                  UnderFor
                  Capital
              
              Prompt
                  CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio*Dollars
                  in Thousands*Tangible
                  capital
              
              $
              45,386
              
              
              7.66
              %
              $
              8,891
              
              
              1.50
              %
              
              -
              
              
              -Tier
                  1 leverage (core)
              
              
              45,386
              
              
              7.66
              
              
              23,709
              
              
              4.00
              
              $
              29,636
              
              
              5.00
              %Tier
                  1 risk-based capital
              
              
              45,386
              
              
              10.04
              
              
              18,080
              
              
              4.00
              
              
              27,121
              
              
              6.00Risk-based
                  capital
              
              
              48,972
              
              
              10.83
              
              
              36,161
              
              
              8.00
              
              
              45,201
              
              
              10.00


The
      Company is also required by OTS regulation to maintain sufficient liquidity
      to
      assure its safe and sound operation. The Company's primary sources of liquidity
      are deposits obtained through its branch office network, borrowings from the
      FHLB and other sources, amortization, maturity, and prepayment of outstanding
      loans and investments, and sales of loans and other assets. During the six
      months ended December 31, 2006, and 2005, the Company used these sources of
      funds to fund loan commitments, purchase loans, and cover maturing liabilities
      and deposit withdrawals. The Company had a total of $76.7 million of loan
      commitments outstanding as of December 31, 2006. In addition, at December 31,
      2006, the Company had $196.7 million in certificates of deposits, $20.5 million
      in FHLB advances and $6.9 million in other borrowings that were scheduled to
      mature within one year.





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





During
      the current fiscal year, management entered into an agreement with another
      financial institution to provide a $5.0 million line of credit to the Company.
      The line of credit has a one-year term and is priced at 175 basis points over
      the three month LIBOR rate. As of December 31, 2006, there was no outstanding
      balance on this line of credit.


19
 *Index*


The
      following table presents, as of December 31, 2006, the expected future payments
      of the Bank’s contractual obligations.


Payments
                  Due in:*(In
                  thousands)*
              
              Less
                  than One
                Year
              
              One
                  Year to
                Less
                  Than
                Three
                  Years
              
              Three
                  Years to
                Less
                  Than
                Five
                  Years
              
              Five
                  Years or
                Greater
              
              TotalFHLB
                  advances
              
              $
              20,500
              
              $
              42,500
              
              $
              8,000
              
              
              -
              
              $
              71,000Other
                  borrowings (1)
              
              
              6,889
              
              
              -
              
              
              -
              
              
              -
              
              
              6,889Operating
                  lease
              
              
              126
              
              
              271
              
              
              315
              
              $
              629
              
              
              1,341Off-balance-sheet
                  (2)
              
              
              76,717
              
              
              -
              
              
              -
              
              
              -
              
              
              76,717Total
              
              $
              104,232
              
              $
              42,771
              
              $
              8,315
              
              $
              629
              
              $
              155,947


(1)
              Includes
                  securities sold under repurchase agreements.(2)
              Includes
                  commitments to extend credit, net of commitments to sell
                  loans.


**Off-Balance
      Sheet Arrangements**





In
      addition to the normal course of operations, the Company engages in a variety
      of
      financial transactions that, in accordance with generally accepted accounting
      principles are not recorded in our financial statements. These transactions
      involve, to varying degrees, elements of credit, interest rate and liquidity
      risk. Such transactions are used primarily to manage customers’ requests for
      funding and take the form of loan commitments, lines of credit and letters
      of
      credit. For the six months ended December 31, 2006, the Company engaged in
      no
      off-balance sheet transactions reasonably likely to have a material effect
      on
      our financial condition, results of operations or cash flows.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





Market
      risk is the risk of loss arising from adverse changes in market prices and
      interest rates. The Company’s market risk is primarily comprised of interest
      rate risk resulting from its core banking activities of lending and deposit
      taking. Interest rate risk is the risk that changes in market interest rates
      might adversely affect the Company’s net interest income or the economic value
      of its portfolio of assets, liabilities and off-balance-sheet contracts.
      Management continually develops and applies strategies to mitigate this risk.
      The Company primarily relies on the OTS Net Portfolio Value Model (the “Model”)
      to measure its susceptibility to interest rate changes. For various assumed
      hypothetical changes in market interest rates, the Model estimates the current
      economic value of each type of asset, liability and off-balance-sheet contract.
      The present value of expected net cash flows from existing assets minus the
      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, 2006. The Company’s NPV ratio after a 200 basis point rate-shock was 8.92%
      at September 30, 2006, compared to 8.91% at June 30, 2006, as measured by the
      Model. As of that date, the Company’s interest rate risk, as measured by the
      Model, was within the Company’s Asset Liability Policy guidelines and the OTS
“level of risk” was reported as “minimal”. Management does not believe that the
      Company’s primary market risk exposures and how those exposures were managed
      during the three months ended December 31, 2006, have changed significantly
      when
      compared to the immediately preceding quarter ended September 30, 2006. However,
      the Company’s primary market risk exposure has not yet been quantified at
      December 31, 2006, 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


20
 *Index*


the
      Company files or submits under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms.





Under
      the
      supervision and with the participation of the Company’s management, including
      its Chief Executive Officer and Chief Financial Officer, the Company also
      conducted an evaluation of the Company’s internal control over financial
      reporting to determine whether any changes occurred during the Company’s fiscal
      quarter ended December 31, 2006, 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 first fiscal
      quarter that have materially affected, or are reasonably likely to materially
      affect, the Company’s internal control over financial reporting.





**PART
      II.** **OTHER
      INFORMATION**





**ITEM
      1. Legal Proceedings**





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




**ITEM
      1A. Risk Factors**





There
      have been no material changes to the risk factors disclosed in the Company’s
      2006 Annual Report on Form 10-K.




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





There
      were no sales of unregistered securities during the six months ended December
      31, 2006.





The
      following table presents a summary of the Company’s share repurchases during the
      quarter ended December 31, 2006.




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, 2006
              
              
              none
              
              
              -
              
              
              none
              
              
              225,495November
                  1 through November 30, 2006
              
              
              14,227
              
              $
              21.70
              
              
              14,000
              
              
              211,495December
                  1 through December 31, 2006
              
              
              none
              
              
              -
              
              
              none
              
              
              211,495


(1)
              Includes
                  shares withheld to satisfy tax liability on vesting of restricted
                  stock
                  under the 1999 Recognition and
                  Retention
                    Plan: 227 shares in November 2006.(2)
              On
                  December 12, 2005 the Company announced that its Board of Directors
                  authorized a 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 program expires on November 22, 2007, pursuant
                      to a one-year
                      extension approved by the
                      Board
                        of Directors on October 26,
                        2006.




**ITEM
      3. Default upon Senior Securities**




None.





21
 *Index*


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





The
      Company convened its 2006 Annual Meeting of Stockholders on October 26, 2006.
      At
      the meeting, the Stockholders of the Company considered and voted on the
      following proposals:





Ballot
      No. 1 .
      The
      election of Jon G. Cleghorn, Michael W. Dosland and David M. Roederer, each
      to
      serve as a director for a term of three years and until his successor had been
      elected and qualified.




Percentage
                  oftotal
                  Voted SharesDirector
              For
              Withheld
              Voted
                  in FavorJon
                  G. Cleghorn
              3,028,221
              72,456
              97.7%Michael
                  W. Dosland
              3,037,883
              62,794
              98.0%David
                  M. Roederer
              3,036,721
              63,956
              97.9%





Ballot
      No. 2 .
      The
      approval of the Company’s 2006 Stock-Based Incentive Plan.




BrokerFor
              Against
              Abstain
              Non-VotesNumber
                  of Votes
              1,871,803
              551,383
              98,285
              579,206%
                  of Total Shares Voted
              77.3%
              22.7%





Ballot
      No. 3 .
      The
      ratification of McGladrey & Pullen, LLP as the independent registered public
      accounting firm of the Company for the fiscal year ending June 30,
      2007.




For
              Against
              AbstainNumber
                  of Votes
              3,051,856
              6,888
              41,933%
                  of Total Shares Voted
              99.8%
              0.2%





**ITEM
      5. Other Information**




(a)
      Not
      applicable.


(b)
      Not
      applicable.





**ITEM
      6. Exhibits**




Exhibit
                  10.1
              Change
                  in Control Agreement - Amy M. Anderson-ValiExhibit
                  10.2
              Change
                  in Control Agreement - Bernard J. SchneidermanExhibit
                  10.3
              Change
                  in Control Agreement - Michael S. ModerskiExhibit
                  10.4
              Change
                  in Control Agreement - Peggy E. SmithExhibit
                  10.5
              Change
                  in Control Agreement - Scott S. SehnertExhibit
                  31.1
              Certification
                  of Chief Executive Officer Pursuant to Section 302Exhibit
                  31.2
              Certification
                  of Chief Financial Officer Pursuant to Section 302Exhibit
                  32
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of
                  2002





22
 *Index*


**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 9, 2007
            BY:
            /s/
                Michael W. DoslandMichael
                W. DoslandPresident
                and Chief Executive OfficerDATE:
                February 9, 2007
            BY:
            /s/
                Michael S. ModerskiMichael
                S. ModerskiSenior
                Vice President, Chief Financial Officerand
                Treasurer


23