**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC  20549**





**FORM
      10-Q**






(Mark
                One)T
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d)**
              **OF
                THE SECURITIES EXCHANGE ACT OF
                1934**




For
      the
      quarterly period ended June 30, 2007





OR




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





For
      the
      transition period from _______ to _______





Commission
      file number 0-23325





**Guaranty
      Federal Bancshares, Inc.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            **43-1792717**(State
                or other jurisdiction of
            (IRS
                Employer Identification No.)incorporation
                or organization)**1341
                West Battlefield****Springfield,
                Missouri**
            **65807**(Address
                of principal executive offices)
            (Zip
                Code)





Telephone
      Number:  (417) 520-4333





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 T No
£




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


Large
                accelerated filer £
            Accelerated
                filer o
            Non-accelerated
                filer T




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12-b-2 of the Exchange Act). Yes £ No
T





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





Class
            Outstanding
                as of August 14, 2007Common
                Stock, Par Value $0.10 per share
            2,793,223
                Shares











**GUARANTY
        FEDERAL BANCSHARES, INC.**
   **TABLE
        OF CONTENTS**


**Page****PART
                I. Financial Information**Item
                1.  Financial StatementsConsolidated
                Financial Statements (Unaudited):Statements
                of Financial Condition
            3Statements
                of Income
            4Statements
                of  Stockholders’
                Equity
            5Statements
                of Cash Flows
            7Notes
                to Consolidated Financial Statements
            8Item
                2.  Management’s Discussion and Analysis of Financial Condition
                and Results of Operations
            10Item
                3.  Quantitative and Qualitative Disclosures about Market
                Risk
            15Item
                4.  Control and Procedures
            17**PART
                II. Other Information**Item
                1.  Legal Proceedings
            18Item
                1A.  Risk factors
            18Item
                2.  Unregistered Sales of Equity Securities and Use of
                Proceeds
            18Item
                3.  Defaults Upon Senior Securities
            18Item
                4.  Submission of Matters to a Vote of Security
                Holders
            18Item
                5.  Other Information
            19Item
                6.  Exhibits
            19Signatures


2
 ***Table
            of Contents***




**PART
        I FINANCIAL INFORMATION**
 **Item
        1.Financial Statements**
 
 **GUARANTY
                  FEDERALBANCSHARES, INC.****CONSOLIDATED
                  STATEMENTS OF FINANCIAL CONDITION****JUNE
                  30, 2007 (UNAUDITED) AND DECEMBER 31, 2006****ASSETS**
              
              **6/30/07**
              
              
              **12/31/06**Cash
              
              $
              12,293,315
              
              
              
              10,684,831Interest-bearing
                  deposits in other financial institutions
              
              
              4,045,642
              
              
              
              4,195,770Cash
                  and cash equivalents
              
              
              16,338,957
              
              
              
              14,880,601Available-for-sale
                  securities
              
              
              6,671,182
              
              
              
              7,906,321Held-to-maturity
                  securities
              
              
              702,950
              
              
              
              763,025Stock
                  in Federal Home Loan Bank, at cost
              
              
              3,236,000
              
              
              
              5,382,700Mortgage
                  loans held for sale
              
              
              3,676,992
              
              
              
              3,004,635Loans
                  receivable, net of allowance for loan losses of June 30, 2007 -
                  $5,686,262
                  - December 31, 2006 - $5,783,477
              
              
              468,155,685
              
              
              
              477,264,522Accrued
                  interest receivable:Loans
              
              
              2,496,722
              
              
              
              2,830,811Investments
              
              
              90,372
              
              
              
              79,498Prepaid
                  expenses and other assets
              
              
              2,865,938
              
              
              
              2,955,483Foreclosed
                  assets held for sale
              
              
              1,373,013
              
              
              
              172,637Premises
                  and equipment
              
              
              7,610,031
              
              
              
              7,867,809Income
                  taxes receivable
              
              
              467,228
              
              
              
              774,469Deferred
                  income taxes
              
              
              1,199,330
              
              
              
              962,484$
              514,884,400
              
              
              
              524,844,995**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****LIABILITIES**Deposits
              
              $
              395,563,242
              
              
              
              352,229,636Federal
                  Home Loan Bank advances
              
              
              55,586,000
              
              
              
              108,000,000Securities
                  sold under agreements to repurchase
              
              
              50,878
              
              
              
              1,703,221Subordinated
                  debentures
              
              
              15,465,000
              
              
              
              15,465,000Advances
                  from borrowers for taxes and insurance
              
              
              532,144
              
              
              
              222,869Accrued
                  expenses and other liabilities
              
              
              400,095
              
              
              
              441,890Accrued
                  interest payable
              
              
              1,569,732
              
              
              
              1,414,946Dividend
                  payable
              
              
              467,209
              
              
              
              468,190469,634,300
              
              
              
              479,945,752**COMMITMENTS
                  AND CONTINGENCIES**
              
              
              -
              
              
              
              -**STOCKHOLDERS'
                  EQUITY**Common
                  Stock:$0.10
                  par value; authorized 10,000,000 shares; issued June 30, 2007 -
                  6,717,411
                  shares; December 31, 2006 - 6,653,527 shares
              
              
              671,741
              
              
              
              665,353Additional
                  paid-in capital
              
              
              57,050,859
              
              
              
              55,730,352Unearned
                  ESOP shares
              
              
              (1,230,930
              )
              
              
              (1,344,930
              )Retained
                  earnings, substantially restricted
              
              
              43,414,859
              
              
              
              41,183,006Accumulated
                  other comprehensive incomeUnrealized
                  appreciation on available-for-sale securities, net of income
                  taxes
              
              
              1,139,201
              
              
              
              1,534,548101,045,730
              
              
              
              97,768,329Treasury
                  stock, at cost; June 30, 2007 - 3,862,792 shares; December 31,
                  2006 -
                  3,764,367 shares
              
              
              (55,795,630
              )
              
              
              (52,869,086
              )45,250,100
              
              
              
              44,899,243$
              514,884,400
              
              
              
              524,844,995
 
 See
        Notes
        to Condensed Consolidated Financial Statements
 
 3
 ***Table
            of Contents***
  **GUARANTY
                  FEDERALBANCSHARES, INC.****CONSOLIDATED
                  STATEMENTS OF INCOME****THREE MONTHS
                  AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
                  (UNAUDITED)**Three
                  months ended
              
              
              Six
                  months ended6/30/2007
              
              
              6/30/2006
              
              
              6/30/2007
              
              
              6/30/2006**INTEREST
                  INCOME**Loans
              
              $
              8,913,325
              
              
              
              8,246,924
              
              
              
              18,256,770
              
              
              
              16,131,712Investment
                  securities
              
              
              91,781
              
              
              
              125,310
              
              
              
              189,022
              
              
              
              227,317Other
              
              
              98,039
              
              
              
              14,035
              
              
              
              179,224
              
              
              
              105,1559,103,145
              
              
              
              8,386,269
              
              
              
              18,625,016
              
              
              
              16,464,184**INTEREST
                  EXPENSE**Deposits
              
              
              3,951,753
              
              
              
              2,475,419
              
              
              
              7,457,169
              
              
              
              4,744,711Federal
                  Home Loan Bank advances
              
              
              814,145
              
              
              
              1,363,217
              
              
              
              1,989,338
              
              
              
              2,586,639Other
              
              
              262,498
              
              
              
              286,539
              
              
              
              528,376
              
              
              
              563,2485,028,396
              
              
              
              4,125,175
              
              
              
              9,974,883
              
              
              
              7,894,598**NET
                  INTEREST INCOME**
              
              
              4,074,749
              
              
              
              4,261,094
              
              
              
              8,650,133
              
              
              
              8,569,586**PROVISION
                  FOR LOAN LOSSES**
              
              
              210,000
              
              
              
              225,000
              
              
              
              420,000
              
              
              
              450,000**NET
                  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES**
              
              
              3,864,749
              
              
              
              4,036,094
              
              
              
              8,230,133
              
              
              
              8,119,586**NONINTEREST
                  INCOME**Service
                  charges
              
              
              564,594
              
              
              
              337,667
              
              
              
              1,117,076
              
              
              
              649,922Late
                  charges and other fees
              
              
              69,859
              
              
              
              58,791
              
              
              
              130,812
              
              
              
              150,272Gain
                  on sale of investment securities
              
              
              193,355
              
              
              
              176,497
              
              
              
              385,971
              
              
              
              374,921Gain
                  on sale of loans
              
              
              331,171
              
              
              
              160,392
              
              
              
              623,868
              
              
              
              279,965Income
                  (loss) on foreclosed assets
              
              
              1,685
              
              
              
              (333
              )
              
              
              (610
              )
              
              
              (265
              )Other
                  income
              
              
              174,187
              
              
              
              225,856
              
              
              
              343,164
              
              
              
              325,8751,334,851
              
              
              
              958,870
              
              
              
              2,600,281
              
              
              
              1,780,690**NONINTEREST
                  EXPENSE**Salaries
                  and employee benefits
              
              
              1,812,208
              
              
              
              1,483,714
              
              
              
              3,555,092
              
              
              
              2,926,804Occupancy
              
              
              406,454
              
              
              
              370,548
              
              
              
              818,207
              
              
              
              687,863SAIF
                  deposit insurance premiums
              
              
              10,582
              
              
              
              9,910
              
              
              
              20,247
              
              
              
              20,232Data
                  processing
              
              
              104,566
              
              
              
              70,004
              
              
              
              202,269
              
              
              
              125,141Advertising
              
              
              99,999
              
              
              
              100,519
              
              
              
              199,998
              
              
              
              202,254Other
                  expense
              
              
              561,979
              
              
              
              508,805
              
              
              
              1,074,523
              
              
              
              948,6002,995,788
              
              
              
              2,543,500
              
              
              
              5,870,336
              
              
              
              4,910,894**INCOME
                  BEFORE INCOME TAXES**
              
              
              2,203,812
              
              
              
              2,451,464
              
              
              
              4,960,078
              
              
              
              4,989,382**PROVISION
                  FOR INCOME TAXES**
              
              
              787,588
              
              
              
              870,074
              
              
              
              1,790,314
              
              
              
              1,843,667**NET
                  INCOME**
              
              $
              1,416,224
              
              
              
              1,581,390
              
              
              
              3,169,764
              
              
              
              3,145,715**BASIC
                  EARNINGS PER SHARE**
              
              $
              0.51
              
              
              
              0.56
              
              
              
              1.15
              
              
              
              1.12**DILUTED
                  EARNINGS PER SHARE**
              
              $
              0.50
              
              
              
              0.54
              
              
              
              1.12
              
              
              
              1.08
 
 See
        Notes
        to Condensed Consolidated Financial Statements
 
 4
 ***Table
            of Contents***
  **GUARANTY
                  FEDERAL BANCSHARES, INC.****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS'
                  EQUITY****SIX
                  MONTHS ENDED JUNE 30, 2007 (UNAUDITED)**CommonStock
              
              
              Additional
                  Paid-In
                  Capital
              
              
              UnearnedESOP
                  Shares
              
              
              Treasury
                  Stock
              
              
              RetainedEarnings
              
              
              Accumulated
                  OtherComprehensive
                  Income
              
              
              Total**Balance,
                  January 1, 2007**
              
              $
              665,353
              
              
              
              55,730,352
              
              
              
              (1,344,930
              )
              
              
              (52,869,086
              )
              
              
              41,183,006
              
              
              
              1,534,548
              
              
              
              44,899,243Comprehensive
                  incomeNet
                  income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,169,764
              
              
              
              -
              
              
              
              3,169,764Change
                  in unrealized appreciation on available-for-sale securities, net
                  of income
                  taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (395,347
              )
              
              
              (395,347
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,774,417Dividends
                  ($0.34 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (937,911
              )
              
              
              -
              
              
              
              (937,911
              )Stock
                  award plans
              
              
              -
              
              
              
              240,722
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              240,722Stock
                  options exercised
              
              
              6,388
              
              
              
              857,333
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              863,721Release
                  of ESOP shares
              
              
              -
              
              
              
              222,452
              
              
              
              114,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              336,452Treasury
                  stock purchased
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,926,544
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,926,544
              )**Balance,
                  June 30, 2007**
              
              $
              671,741
              
              
              
              57,050,859
              
              
              
              (1,230,930
              )
              
              
              (55,795,630
              )
              
              
              43,414,859
              
              
              
              1,139,201
              
              
              
              45,250,100
 
 See
        Notes
        to Condensed Consolidated Financial Statements
 
 5
 ***Table
            of Contents***
  **GUARANTY
                  FEDERAL BANCSHARES, INC.****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY****SIX
                  MONTHS ENDED JUNE 30, 2006 (UNAUDITED)**Common
                  Stock
              
              
              Additional
                  Paid-In Capital
              
              
              Unearned
                  ESOP Shares
              
              
              Treasury
                  Stock
              
              
              Retained
                  Earnings
              
              
              Accumulated
                  Other Comprehensive Income
              
              
              Total**Balance,
                  January 1, 2006**
              
              $
              657,135
              
              
              
              53,778,686
              
              
              
              (1,572,930
              )
              
              
              (49,276,005
              )
              
              
              36,533,338
              
              
              
              1,971,925
              
              
              
              42,092,149Comprehensive
                  incomeNet
                  income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,145,715
              
              
              
              -
              
              
              
              3,145,715Change
                  in unrealized appreciation on available-for-sale securities, net
                  of income
                  taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (571,713
              )
              
              
              (571,713
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,574,002Dividends
                  ($0.33 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (922,162
              )
              
              
              -
              
              
              
              (922,162
              )Stock
                  award plans
              
              
              -
              
              
              
              267,033
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              267,033Stock
                  options exercised
              
              
              5,871
              
              
              
              822,348
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              828,219Release
                  of ESOP shares
              
              
              -
              
              
              
              213,940
              
              
              
              114,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              327,940Treasury
                  stock purchased
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,116,848
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,116,848
              )**Balance,
                  June 30, 2006**
              
              $
              663,006
              
              
              
              55,082,007
              
              
              
              (1,458,930
              )
              
              
              (50,392,853
              )
              
              
              38,756,891
              
              
              
              1,400,212
              
              
              
              44,050,333
 
 See
        Notes
        to Condensed Consolidated Financial Statements
 
 6
 ***Table
            of Contents***
  **GUARANTYFEDERAL BANCSHARES,
                  INC****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****SIX
                  MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)****6/30/2007**
              
              
              **6/30/2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              3,169,764
              
              
              
              3,145,715Items
                  not requiring (providing) cash:Deferred
                  income taxes
              
              
              (4,658
              )
              
              
              (691,974
              )Depreciation
              
              
              439,278
              
              
              
              325,643Provision
                  for loan losses
              
              
              420,000
              
              
              
              450,000Gain
                  on loans and investment securities
              
              
              (1,009,839
              )
              
              
              (654,886
              )Gain
                  on sale of premises and equipment
              
              
              -
              
              
              
              (150
              )Gain
                  on sale of foreclosed assets
              
              
              (13,705
              )
              
              
              (1,023
              )Amortization
                  of deferred income, premiums and discounts
              
              
              (6,431
              )
              
              
              62,171Stock
                  award plan expense
              
              
              31,235
              
              
              
              46,807Origination
                  of loans held for sale
              
              
              (39,066,809
              )
              
              
              (24,056,667
              )Proceeds
                  from sale of loans held for sale
              
              
              39,018,320
              
              
              
              24,152,169Release
                  of ESOP shares
              
              
              336,452
              
              
              
              327,940Changes
                  in:Accrued
                  interest receivable
              
              
              323,215
              
              
              
              (259,302
              )Prepaid
                  expenses and other assets
              
              
              89,545
              
              
              
              729,419Accounts
                  payable and accrued expenses
              
              
              112,991
              
              
              
              530,302Income
                  taxes payable
              
              
              516,728
              
              
              
              (101,939
              )Net
                  cash provided by operating activities
              
              
              4,356,086
              
              
              
              4,004,225**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Net
                  change in loans
              
              
              6,878,187
              
              
              
              (13,380,969
              )Principal
                  payments on held-to-maturity securities
              
              
              57,443
              
              
              
              82,020Principal
                  payments on available-for-sale securities
              
              
              112,175
              
              
              
              81,724Proceeds
                  from maturities of available-for-sale securities
              
              
              500,000
              
              
              
              500,000Purchase
                  of premises and equipment
              
              
              (181,500
              )
              
              
              (373,194
              )Proceeds
                  from sale of premises and equipment
              
              
              -
              
              
              
              4,540Purchase
                  of available-for-sale securities
              
              
              (500,000
              )
              
              
              (3,780,316
              )Proceeds
                  from sale of available-for-sale securities
              
              
              884,032
              
              
              
              380,795Redemption
                  (purchase) of FHLB stock
              
              
              2,146,700
              
              
              
              (759,900
              )Proceeds
                  from sale of foreclosed assets
              
              
              630,410
              
              
              
              22,298Net
                  cash provided by (used in) investing activities
              
              
              10,527,447
              
              
              
              (17,223,002
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Stock
                  options exercised
              
              
              863,721
              
              
              
              828,219Cash
                  dividends paid
              
              
              (938,892
              )
              
              
              (921,184
              )Net
                  increase (decrease) in demand deposits, NOW accounts and savings
                  accounts
              
              
              19,336,265
              
              
              
              (5,855,752
              )Net
                  increase in certificates of deposit and securities sold under agreements
                  to repurchase
              
              
              22,344,998
              
              
              
              2,360,296Proceeds
                  from FHLB advances
              
              
              796,538,600
              
              
              
              792,414,000Repayments
                  of FHLB advances
              
              
              (848,952,600
              )
              
              
              (776,414,000
              )Advances
                  from borrowers for taxes and insurance
              
              
              309,275
              
              
              
              440,082Treasury
                  stock purchased
              
              
              (2,926,544
              )
              
              
              (1,116,848
              )Net
                  cash provided by (used in) financing activities
              
              
              (13,425,177
              )
              
              
              11,734,813**INCREASE
                  (DECREASE) IN CASH AND CASH EQUIVALENTS**
              
              
              1,458,356
              
              
              
              (1,483,964
              )**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
              
              
              14,880,601
              
              
              
              20,506,478**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              16,338,957
              
              
              
              19,022,514
 
 See
        Notes
        to Condensed Consolidated Financial Statements
 
 7
 ***Table
            of Contents***
  **NOTES
        TO CONDENSEDCONSOLIDATED FINANCIAL
        STATEMENTS**
 **(Unaudited)**
 
 **Note
        1:  Basis of Presentation**
 
 The
        accompanying unaudited interim consolidated financial statements have been
        prepared in accordance with generally accepted accounting principles for
        interim
        financial information and with the instructions to Form 10-Q and Rule 10-01
        of
        Regulation S-X.  Accordingly, they do not include all of the
        information and footnotes required by generally accepted accounting principles
        for complete financial statements.  In the opinion of management, all
        adjustments (consisting only of normal recurring accruals) considered necessary
        for a fair presentation have been included.
 
 The
        results of operations for the period are not necessarily indicative of the
        results to be expected for the full year.
 
 These
        condensed consolidated financial statements should be read in conjunction
        with
        the consolidated financial statements and notes thereto included in the
        Company’s Form 10-K annual report for 2006 filed with the Securities and
        Exchange Commission.  The condensed consolidated statement of
        financial condition of the Company as of December 31, 2006, has been derived
        from the audited consolidated balance sheet of the Company as of that
        date.  Certain information and note disclosures normally included in
        the Company’s annual financial statements prepared in accordance with generally
        accepted accounting principles have been condensed or omitted.
 
 **Note
        2:  Principles of Consolidation**
 
 The
        accompanying consolidated financial statements include the accounts of Guaranty
        Federal Bancshares, Inc. (the “Company”) and its wholly owned subsidiary,
        Guaranty Bank (the “Bank”).  All significant intercompany transactions
        and balances have been eliminated in consolidation.
 
 **Note
        3:  Benefit Plans**
 
 The
        Company has stock-based employee compensation plans, which are described
        fully
        in the Company’s December 31, 2006 Annual Report on Form 10-K.
 
 The
        table
        below summarizes transactions under the Company’s stock option plans for the six
        months ended June 30, 2007:
 
 Number
                  of sharesIncentive
                  Stock Option
              
              
              Non-Incentive
                  Stock Option
              
              
              Weighted
                  Average Exercise PriceBalance
                  outstanding as of January 1, 2007
              
              
              155,491
              
              
              
              115,206
              
              
              
              17.30Granted
              
              
              13,500
              
              
              
              25,000
              
              
              
              29.39Exercised
              
              
              (37,884
              )
              
              
              (26,000
              )
              
              
              13.52Forfeited
              
              
              -
              
              
              
              -
              
              
              
              -Balance
                  outstanding as of June 30, 2007
              
              
              131,107
              
              
              
              114,206
              
              
              
              19.69Options
                  exercisable as of June 30, 2007
              
              
              74,310
              
              
              
              57,206
              
              
              
              15.34
 
 8
 ***Table
            of Contents***
 In
          December, 2004, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS
          123R). SFAS 123R requires companies to recognize the cost of employee services
          received in exchange for awards of equity instruments, such as stock options
          and
          restricted stock, based on the fair value of those awards at the date of
          grant
          and eliminated the choice to account for employee stock options under Accounting
          Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the
          modified prospective method and, as such, results for prior periods have
          not
          been restated. Stock-based compensation expense is recognized for all stock
          options granted or modified after January 1, 2006.  In addition,
          unvested options existing at January 1, 2006, are recognized in expense
          over the
          remaining vesting period.  The fair value of all stock options has
          been estimated using the Black-Scholes option pricing model using various
          assumptions, some of which are highly subjective.
 Stock-based
        compensation expense recognized for the three months ended June 30, 2007
        and
        2006 was $18,116 and $29,939, respectively.  Stock-based compensation
        expense recognized for the six months ended June 30, 2007 and 2006 was $31,235
        and $46,807, respectively.  As of June 30, 2007, there was
        $256,649 of unrecognized compensation expense related to nonvested stock
        options, which will be recognized over the remaining vesting
        period.
 
 **Note
        4: Earnings Per Share**
 
 For
                  three months ended June 30, 2007
              
              
              For
                  six months ended June 30, 2007Income
                  Available to Stockholders
              
              
              Average
                  Shares Outstanding
              
              
              Per-share
              
              
              Income
                  Available to Stockholders
              
              
              Average
                  Shares Outstanding
              
              
              Per-shareBasic
                  Earnings per Share
              
              $
              1,416,224
              
              
              
              2,759,338
              
              
              $
              0.51
              
              
              $
              3,169,764
              
              
              
              2,760,095
              
              
              $
              1.15Effect
                  of Dilutive Securities:Stock
                  Options
              
              
              
              
              
              
              64,921
              
              
              
              
              
              
              
              
              
              
              
              78,410Diluted
                  Earnings per Share
              
              $
              1,416,224
              
              
              
              2,824,259
              
              
              $
              0.50
              
              
              $
              3,169,764
              
              
              
              2,838,505
              
              
              $
              1.12For
                  three months ended June 30, 2006
              
              
              For
                  six months ended June 30, 2006Income
                  Available to Stockholders
              
              
              Average
                  Shares Outstanding
              
              
              Per-share
              
              
              Income
                  Available to Stockholders
              
              
              Average
                  Shares Outstanding
              
              
              Per-shareBasic
                  Earnings per Share
              
              $
              1,581,390
              
              
              
              2,803,805
              
              
              $
              0.56
              
              
              $
              3,145,715
              
              
              
              2,796,692
              
              
              $
              1.12Effect
                  of Dilutive Securities:Stock
                  Options
              
              
              
              
              
              
              107,218
              
              
              
              
              
              
              
              
              
              
              
              119,763Diluted
                  Earnings per Share
              
              $
              1,581,390
              
              
              
              2,911,023
              
              
              $
              0.54
              
              
              $
              3,145,715
              
              
              
              2,916,455
              
              
              $
              1.08
 
 **Note
        5: Other Comprehensive Loss**
 
 Other
        comprehensive loss components and related taxes were as follows for the six
        months ended June 30, 2007 and 2006:
 
 6/30/2007
              
              
              6/30/2006Unrealized
                  losses on available-for-sale securities
              
              $
              (241,564
              )
              
              $
              (532,560
              )Less:
                  Reclassification adjustment for realized gains included in
                  income
              
              
              (385,971
              )
              
              
              (374,921
              )Other
                  comprehensive loss, before tax benefit
              
              
              (627,535
              )
              
              
              (907,481
              )Tax
                  benefit
              
              
              (232,188
              )
              
              
              (335,768
              )**OTHER
                  COMPREHENSIVE LOSS**
              
              $
              (395,347
              )
              
              $
              (571,713
              )
  9
 ***Table
            of Contents***
  **Note
        6: Change in Accounting Principle**
 
 In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48 (FIN 48), *Accounting for Uncertainty in Income Taxes - an
        Interpretation of SFAS No. 109 - Accounting for Income Taxes*. This
        interpretation addresses accounting for tax uncertainties that arise when
        a
        position that an entity takes on its tax return may be different from the
        position that the taxing authority may take, and provides guidance about
        the
        accounting for tax benefits associated with uncertain tax positions,
        classification of a liability recognized for those positions, and interim
        reporting considerations. This Interpretation requires that the Company
        recognize in its financial statements, the impact of a tax position, if that
        position is more likely than not of being sustained on audit. The provisions
        of
        FIN 48 were effective as of January 1, 2007, with any cumulative effect of
        the
        change in accounting principle recorded as an adjustment to retained earnings.
        The adoption of this standard did not have a material impact on the consolidated
        financial condition or results of operations of the Company.  The
        Company’s federal and state income tax returns are open and subject to
        examinations from the 2004 tax year and forward.
 
 **Item
        2.  Management’sDiscussion and Analysis of
        Financial Condition and Results of Operations**
 
 **General**
 
 The
        primary function of the Company has been to monitor its investment in the
        Bank.
        As a result, the results of operations of the Company are derived primarily
        from
        operations of the Bank. The Bank’s results of operations are primarily dependent
        on net interest margin, which is the difference between interest income on
        interest-earning assets and interest expense on interest-bearing
        liabilities.  The Bank’s income is also affected by the level of its
        noninterest expenses, such as employee salaries and benefits, occupancy expenses
        and other expenses.  The following discussion reviews the Company’s
        financial condition as of June 30, 2007, and the results of operations for
        the
        three and six months ended June 30, 2007 and 2006.
 
 The
        discussion set forth below, as well as other portions of this Form 10-Q,
        may
        contain forward-looking comments. Such comments are based upon the information
        currently available to management of the Company and management’s perception
        thereof as of the date of this Form 10-Q.  When used in this Form
        10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and
        similar expressions are intended to identify forward-looking statements but
        are
        not the exclusive means of identifying such statements.  Such
        statements are subject to risks and uncertainties.  Actual results of
        the Company’s operations could materially differ from those forward-looking
        comments.  The differences could be caused by a number of factors or
        combination of factors including, but not limited to: changes in demand for
        banking services; changes in portfolio composition; changes in management
        strategy; increased competition from both bank and non-bank companies; changes
        in the general level of interest rates; and other factors set forth in reports
        and other documents filed by the Company with the Securities and Exchange
        Commission from time to time, including the risk factors described under
        Item
        1A. of the Company’s Form 10-K for the fiscal year ended December 31,
        2006.
 
 **Financial
        Condition**
 
 The
        Company’s total assets decreased $9,960,595 from $524,844,995 as of December 31,
        2006, to $514,884,400 as of June 30, 2007.
 
 Cash
        and
        cash equivalents increased $1,458,356 (10%) from $14,880,601 as of December
        31,
        2006, to $16,338,957 as of June 30, 2007.
 
 Securities
        available-for-sale decreased $1,235,139 (16%) from $7,906,321 as of December
        31,
        2006, to $6,671,182 as of June 30, 2007.  The Bank currently holds
        30,600 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an
        amortized cost of $29,973 in the available-for-sale category.  As of
        June 30, 2007, the gross unrealized gain on the FHLMC stock was $1,827,447,
        a
        decrease from $2,449,293 as of December 31, 2006.  The decrease in
        securities available-for-sale and the gross unrealized gains are primarily
        due
        to the sale of 6,000 shares of the FHLMC stock during the six months ended
        June
        30, 2007.
 
 10
 ***Table
            of Contents***
  Securities
        held-to-maturity decreased primarily due to principal repayments by $60,075
        (8%)
        from $763,025 as of December 31, 2006, to $702,950 as of June 30,
        2007.
 
 From
        December 31, 2006 to June 30, 2007, stock in Federal Home Loan Bank of Des
        Moines (“FHLB”) decreased by $2,146,700 (40%), due to the redemption of such
        stock to continue to maintain a level to meet FHLB advance
        requirements.
 
 Net
        loans
        receivable decreased by $9,108,837 (2%) from $477,264,522 as of December
        31,
        2006, to $468,155,685 as of June 30, 2007.  Commercial loans decreased
        $3,337,688 (4%) from $82,675,514 as of December 31, 2006, to $79,337,826
        as of
        June 30, 2007 due to unexpected payoffs.  Commercial real estate loans
        increased by $2,863,693 (2%) from $155,800,918 as of December 31, 2006, to
        $158,664,611 as of June 30, 2007. Permanent multi-family loans decreased
        by
        $10,785,626 (21%) due to several unexpected payoffs.  Construction
        loans increased by $6,374,432 (8%) to $90,341,408 as of June 30, 2007, compared
        to $83,966,976 as of December 31, 2006. Loan growth is anticipated in future
        quarters and represents a major part of the Bank’s planned asset growth.
 
 Allowance
        for loan losses decreased $97,215 (2%) from $5,783,477 as of December 31,
        2006
        to $5,686,262 as of June 30, 2007. The allowance decreased due to net loan
        charge-offs of $517,215 exceeding the provision for loan losses of $420,000
        recorded during the period.  Management of the Company decided to
        record a provision for loan losses to partially offset the net charge-offs
        for
        the period and maintain the allowance at a level in accordance with management’s
        methodology.  See discussion under “Results of Operations – Comparison
        of Three and Six Month Periods Ended June 30, 2007 and 2006 – Provision for Loan
        Losses.”   The allowance for loan losses as of June 30, 2007 and
        December 31, 2006 was 1.21% and 1.20% of net loans outstanding,
        respectively.
 
 Deposits
        increased $43,333,606 (12%) from $352,229,636 as of December 31, 2006, to
        $395,563,242 as of June 30, 2007.  For the six months ended June 30,
        2007, checking and savings accounts increased by $19,336,265 and certificates
        of
        deposits increased by $23,997,341.  The increase in checking and
        savings was due to the Bank’s continued emphasis on developing commercial
        checking business.  The increase in certificates of deposit was
        primarily due to the Company’s emphasis on retail customers offset by a decrease
        in brokered deposits.  See also the discussion under “Quantitative and
        Qualitative Disclosure about Market Risk – Asset/Liability
        Management.”
 
 FHLB
        advances decreased by $52,414,000 from $108,000,000 as of December 31, 2006,
        to
        $55,586,000 as of June 30, 2007, due to repayments exceeding new advances.
        This
        was done through the funds generated from deposit growth and the decrease
        in net
        loans receivable.
 
 Stockholders’
        equity (including unrealized appreciation on securities available-for-sale,
        net
        of tax) increased $350,857 (1%) from $44,899,243 as of December 31, 2006,
        to
        $45,250,100 as of June 30, 2007. The Company’s net income during this period was
        $3,169,764 which was partially offset by dividends in the amount
        of  $937,911 which were declared in the six months ended June 30,
        2007.  In addition, the increase in stockholders’ equity was
        further offset as the Company repurchased 98,425 shares of the Company’s
        outstanding stock at an aggregate cost of $2,926,544 (an average cost of
        $29.73
        per share) and a decrease in unrealized appreciation on available for sale
        securities, net of taxes, of $395,347 during this period.  On a per
        share basis, stockholders’ equity increased from $16.30 as of December 31, 2006
        to $16.57 as of June 30, 2007.
 
 **Average
        Balances, Interest and Average Yields**
 
 The
        Company’s profitability is primarily dependent upon net interest income, which
        represents the difference between interest and fees earned on loans and debt
        and
        equity securities, and the cost of deposits and borrowings.  Net
        interest income is dependent on the difference between the average balances
        and
        rates earned on interest-earning assets and the average balances and rates
        paid
        on interest-bearing liabilities.  Non-interest income, non-interest
        expense, and income taxes also impact net income.
 
 11
 ***Table
            of Contents***
  The
        following table sets forth certain information relating to the Company’s average
        consolidated statements of financial condition and reflects the average yield
        on
        assets and average cost of liabilities for the periods
        indicated.  Such yields and costs are derived by dividing income or
        expense annualized by the average balance of assets or liabilities,
        respectively, for the periods shown.  Average balances were derived
        from average daily balances.  The average balance of loans includes
        loans on which the Company has discontinued accruing interest.  The
        yields and costs include fees which are considered adjustments to
        yields.  All dollar amounts are in thousands.
 
 
 Six
                  months ended 6/30/2007
              
              
              Six
                  months ended 6/30/2006Average
                  Balance
              
              
              Interest
              
              
              Yield
                  / Cost
              
              
              Average
                  Balance
              
              
              Interest
              
              
              Yield
                  / Cost**ASSETS**Interest-earning:Loans
              
              $
              471,020
              
              
              
              18,257
              
              
              
              7.75
              %
              
              $
              441,900
              
              
              
              16,132
              
              
              
              7.30
              %Investment
                  securities
              
              
              8,198
              
              
              
              189
              
              
              
              4.61
              %
              
              
              7,145
              
              
              
              227
              
              
              
              6.35
              %Other
                  assets
              
              
              8,356
              
              
              
              179
              
              
              
              4.28
              %
              
              
              9,862
              
              
              
              105
              
              
              
              2.13
              %Total
                  interest-earning
              
              
              487,574
              
              
              
              18,625
              
              
              
              7.64
              %
              
              
              458,907
              
              
              
              16,464
              
              
              
              7.18
              %Noninterest-earning
              
              
              23,643
              
              
              
              
              
              
              
              
              
              
              
              20,784$
              511,217
              
              
              
              
              
              
              
              
              
              
              $
              479,691**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Interest-bearing:Savings
                  accounts
              
              $
              14,386
              
              
              
              177
              
              
              
              2.46
              %
              
              $
              13,974
              
              
              
              144
              
              
              
              2.06
              %Transaction
                  accounts
              
              
              100,004
              
              
              
              1,459
              
              
              
              2.92
              %
              
              
              76,313
              
              
              
              739
              
              
              
              1.94
              %Certificates
                  of deposit
              
              
              232,685
              
              
              
              5,821
              
              
              
              5.00
              %
              
              
              193,592
              
              
              
              3,862
              
              
              
              3.99
              %FHLB
                  advances
              
              
              74,164
              
              
              
              1,989
              
              
              
              5.36
              %
              
              
              105,811
              
              
              
              2,587
              
              
              
              4.89
              %Subordinated
                  debentures
              
              
              15,465
              
              
              
              515
              
              
              
              6.66
              %
              
              
              15,465
              
              
              
              515
              
              
              
              6.66
              %Other
                  borrowed funds
              
              
              1,003
              
              
              
              14
              
              
              
              2.79
              %
              
              
              3,488
              
              
              
              48
              
              
              
              2.75
              %Total
                  interest-bearing
              
              
              437,707
              
              
              
              9,975
              
              
              
              4.56
              %
              
              
              408,643
              
              
              
              7,895
              
              
              
              3.86
              %Noninterest-bearing
              
              
              27,189
              
              
              
              
              
              
              
              
              
              
              
              27,241Total
                  liabilities
              
              
              464,896
              
              
              
              
              
              
              
              
              
              
              
              435,884Stockholders’
                  equity
              
              
              46,321
              
              
              
              
              
              
              
              
              
              
              
              43,807$
              511,217
              
              
              
              
              
              
              
              
              
              
              $
              479,691Net
                  earning balance
              
              $
              49,867
              
              
              
              
              
              
              
              
              
              
              $
              50,264Earning
                  yield less costing rate
              
              
              
              
              
              
              
              
              
              
              3.08
              %
              
              
              
              
              
              
              
              
              
              
              3.32
              %Net
                  interest income, and net yield spread on interest earning
                  assets
              
              
              
              
              
              $
              8,650
              
              
              
              3.55
              %
              
              
              
              
              
              $
              8,569
              
              
              
              3.73
              %Ratio
                  of interest-earning assets to interest-bearing liabilities
              
              
              
              
              
              
              111
              %
              
              
              
              
              
              
              
              
              
              
              112
              %
 
 
 **Results
        of Operations - Comparison of Three and Six Month Periods Ended June
        30,**
 **2007
        and 2006**
 
 Net
        income for the three months and six months ended June 30, 2007 was $1,416,224
        and $3,169,764 as compared to $1,581,390 and $3,145,715 for the three months
        and
        six months ended June 30, 2006, which represents a decrease in earnings of
        $165,166 (10%) for the three month period, and an increase in earnings of
        $24,049 (1%) for the six month period.
 
 12
 ***Table
            of Contents***
  **Interest
        Income**
 
 Total
        interest income for the three months and six months ended June 30, 2007,
        increased $716,876 (9%) and $2,160,832 (13%), respectively, as compared to
        the
        three months and six months ended June 30, 2006.  For the three month
        and six month periods ended June 30, 2007 compared to the same periods in
        2006,
        the average yield on interest earning assets increased 24 basis points to
        7.50%
        and increased 46 basis points to 7.64%, respectively, while the average balance
        of interest earning assets increased approximately $23,549,000 and $28,667,000,
        respectively.  In April 2007, the Company placed one large commercial
        loan into non-accrual status that reduced interest income $447,112 for both
        the
        three months and six months ended June 30, 2007.
 
 **Interest
        Expense**
 
 Total
        interest expense for the three months and six months ended June 30, 2007,
        increased $903,221 (22%) and $2,080,285 (26%), respectively, when compared
        to
        the three months and six months ended June 30, 2006.  For the three
        month and six month periods ended June 30, 2007 compared to the same periods
        in
        2006, the average cost of interest bearing liabilities increased 59 basis
        points
        to 4.60% and 70 basis points to 4.56%, respectively, while the average balance
        of interest bearing liabilities increased approximately $25,328,000 and
        $29,064,000, respectively, when compared to the same periods in
        2006.
 
 **Net
        Interest Income**
 
 Net
        interest income for the three months and six months ended June 30, 2007,
        decreased $186,345 (4%) and increased $80,547 (1%), respectively when compared
        to the same periods in 2006.
 
 **Provision
        for Loan Losses**
 
 Based
        on
        its internal analysis and methodology, management recorded a provision for
        loan
        loss of $210,000 and $420,000 for the three months and six months ended June
        30,
        2007, respectively, compared to $225,000 and $450,000 for the same periods
        in
        2006.  The Bank will continue to monitor its allowance for loan losses
        and make future additions based on economic and regulatory
        conditions.  Management of the Company anticipates the need to
        continue increasing the allowance for loan losses through charges to the
        provision for loan losses as anticipated growth in the Bank’s loan portfolio
        increases or other circumstances warrant.  Although the Bank maintains
        its allowance for loan losses at a level which it considers to be sufficient
        to
        provide for potential loan losses in its existing loan portfolio, there can
        be
        no assurance that future loan losses will not exceed internal
        estimates.  In addition, the amount of the allowance for loan losses
        is subject to review by regulatory agencies which can order the establishment
        of
        additional loan loss provisions.
 
 **Noninterest
        Income**
 
 Noninterest
        income increased $375,981 (39%) and $819,591 (46%) for the three months and
        six
        months ended June 30, 2007, respectively, when compared to the three months
        and
        six months ended June 30, 2006.
 
 Service
        charges on transaction accounts increased by $226,927 (67%) and $467,154
        (72%)
        for the three months and six months ended June 30, 2007, respectively, when
        compared to the same periods in 2006.  This is a result of an increase
        in the amount of insufficient funds and overdraft charges during these periods
        when compared to the same period in 2006.  This is primarily due to
        the Bank’s overdraft privilege program that was implemented in the fourth
        quarter of 2006.
 
 Gain
        on
        sale of loans increased $170,779 (106%) and $343,903 (123%) for the three
        months
        and six months ended June 30, 2007, respectively, when compared to the same
        periods in 2006, which was a result of an increase in the volume and yield
        of
        mortgage loans sold on the secondary market during the three months and six
        months ended June 30, 2007, compared to the same periods in 2006.
 
 13
 ***Table
            of Contents***
  **Noninterest
        Expense**
 
 Noninterest
        expense increased $452,288 (18%) and $959,442 (20%) for the three months
        and six
        months ended June 30, 2007, respectively, when compared to the three months
        and
        six months ended June 30, 2006.
 
 Salaries
        and employee benefits increased $328,494 (22%) and $628,288 (21%) for the
        three
        months and six months ended June 30, 2007 when compared to the same period
        in
        2006.  This increase was due to several factors, including additions
        in executive and staff positions, pay increases to existing employees and
        increases in employee benefit costs during the three month and six month
        periods
        ended June 30, 2007 when compared to the same periods in 2006.
 
 Occupancy
        expense increased $35,906 (10%) and $130,344 (19%), respectively, and data
        processing expense increased $34,562 (49%) and $77,128 (62%), respectively,
        for
        the three months and six months ended June 30, 2007 when compared to the
        same
        periods in 2006.  These increases were primarily due to increased
        depreciation and maintenance expenses relating to the Bank’s conversion to a new
        core processing system in 2006.
 
 Other
        expense increased $53,174 (10%) and $125,923 (13%) for the three months and
        six
        months ended June 30, 2007, respectively, when compared to the same periods
        in
        2006.  This increase was primarily due to an increase in the amount of
        ATM expenses during these periods.  The Bank converted to a new ATM
        network provider in September 2006.   The expense is recorded at
        gross, rather than net of income earned as was previously done prior to the
        conversion.  Currently, the associated income related to ATM services
        is recorded in noninterest income.
 
 **Provision
        for Income Taxes**
 
 There
        was
        a decrease of $82,486 (9%) and $53,353 (3%) in the provision for income taxes
        for the three months and six months ended June 30, 2007, respectively, when
        compared to the same periods in 2006 due to a decrease in taxable income
        for the
        three months and six months ended June 30, 2007, compared to the same periods
        in
        2006.
 
 **Nonperforming
        Assets**
 
 The
        allowance for loan losses is calculated based upon an evaluation of pertinent
        factors underlying the various types and quality of the Bank’s existing loan
        portfolio.  When making such evaluation, management considers such
        factors as the repayment status of its loans, the estimated net realizable
        value
        of the underlying collateral, borrowers’ intent (to the extent known by the
        Bank) and ability to repay the loan, local economic conditions and the Bank’s
        historical loss ratios.  The Bank’s allowance for loan losses as of
        June 30, 2007, was $5,686,262 or 1.21% of net loans receivable.  Total
        loans classified as substandard, doubtful or loss as of June 30, 2007, were
        $17,821,713 or 3.46% of total assets.  Management also considered
        nonperforming and total classified loans in evaluating the adequacy of the
        Bank’s allowance for loan losses.
 
 The
        ratio
        of nonperforming assets to total assets is another useful tool in evaluating
        exposure to credit risk.  Nonperforming assets of the Bank include
        nonperforming loans (nonaccruing loans) and assets which have been acquired
        as a
        result of foreclosure or deed-in-lieu of foreclosure.  All dollar
        amounts are in thousands.
 
 14
 ***Table
            of Contents***
  6/30/2007
              
              
              12/31/2006
              
              
              12/31/2005Nonperforming
                  loans
              
              $
              7,301
              
              
              
              2,748
              
              
              
              721Real
                  estate acquired in settlement of loans
              
              
              1,373
              
              
              
              173
              
              
              
              27Total
                  nonperforming assets
              
              $
              8,674
              
              
              
              2,921
              
              
              
              748Total
                  nonperforming assets as a percentage of total assets
              
              
              1.68
              %
              
              
              0.56
              %
              
              
              0.16
              %Allowance
                  for loan losses
              
              $
              5,686
              
              
              
              5,783
              
              
              
              5,400Allowance
                  for loan losses as a percentage of net loans
              
              
              1.21
              %
              
              
              1.20
              %
              
              
              1.25
              %
 
 The
        primary increase in nonperforming assets at June 30, 2007 compared to December
        31, 2006 was one large loan secured by commercial real estate that was placed
        into nonaccrual status in April 2007.
 
 **Liquidity
        and Capital Resources**
 
 The
        Bank’s primary sources of funds are deposits, principal and interest payments
        on
        loans and mortgage-backed securities, proceeds from maturing investment
        securities and extensions of credit from FHLB.  While scheduled loan
        and security repayments and the maturity of short-term investments are somewhat
        predictable sources of funding, deposit flows are influenced by many factors,
        which make their cash flows difficult to anticipate.
 
 The
        Bank
        uses its liquidity resources principally to satisfy its ongoing commitments
        which include funding loan commitments, funding maturing certificates of
        deposit
        as well as deposit withdrawals, maintaining liquidity, purchasing investments,
        and meeting operating expenses.  Management believes that anticipated
        cash flows and deposit growth will be adequate to meet the Bank’s liquidity
        needs.
 
 **Item
        3.  Quantitative and Qualitative Disclosures about
        Market Risk**
 
 **Asset/Liability
        Management**
 
 The
        goal
        of the Bank’s asset/liability policy is to manage interest rate risk, which is
        the Bank’s primary market risk, so as to maximize net interest income over time
        in changing interest rate environments.  Management monitors the
        Bank’s net interest spreads (the difference between yields received on assets
        and paid on liabilities) and, although constrained by market conditions,
        economic conditions, and prudent underwriting standards, the Bank offers
        deposit
        rates and loan rates designed to maximize net interest
        income.  Management also attempts to fund the Bank’s assets with
        liabilities of a comparable duration to minimize the impact of changing interest
        rates on the Bank’s net interest income.  Since the relative spread
        between financial assets and liabilities is constantly changing, the Bank’s
        current net interest income may not be an indication of future net interest
        income.
 
 As
        a part
        of its asset and liability management strategy and throughout the past several
        years, the Bank has continued to emphasize the origination of adjustable-rate,
        one- to four-family residential loans and adjustable-rate or relatively
        short-term commercial real estate, commercial business and consumer loans,
        while
        originating fixed-rate, one- to four-family residential loans primarily for
        immediate resale in the secondary market on either a service-retained basis
        or
        service-released basis. This allows the Bank to serve the customer’s needs and
        retain a banking relationship with respect to such fixed-rate residential
        loans,
        while limiting its exposure to the risk associated with  carrying a
        long-term fixed-rate loan in its loan portfolio.
 
 The
        Bank
        constantly monitors its deposits in an effort to decrease their interest
        rate
        sensitivity.  Rates of interest paid on deposits at the Bank are
        priced competitively in order to meet the Bank’s asset/liability management
        objectives and spread requirements.
 
 **Interest
        Rate Sensitivity Analysis**
 
 The
        following table sets forth as of June 30, 2007 management’s estimates of the
        projected changes in net portfolio value (“NPV”) in the event of 100, 200, and
        300 basis point (“bp”) instantaneous and permanent increases and 100, 200 and
        300 basis point instantaneous and permanent decreases in market interest
        rates.  Dollar amounts are expressed in thousands.
 
 15
 ***Table
            of Contents***
  BP
                    Change
                
                
                Estimated
                    Net Portfolio Value
                
                
                NPV
                    as % of PV of Assetsin
                    Rates
                
                
                $
                    Amount
                
                
                $
                      Change
                
                
                %
                    Change
                
                
                NPV
                    Ratio
                
                
                Change+300
                
                
                $
                45,030
                
                
                $
                1,330
                
                
                
                3
                %
                
                
                8.96
                %
                
                
                0.42
                %+200
                
                
                
                45,314
                
                
                
                1,614
                
                
                
                4
                %
                
                
                8.95
                %
                
                
                0.41
                %+100
                
                
                
                44,952
                
                
                
                1,252
                
                
                
                3
                %
                
                
                8.83
                %
                
                
                0.29
                %NC
                
                
                
                43,700
                
                
                
                -
                
                
                
                -
                
                
                
                8.54
                %
                
                
                --100
                
                
                
                41,779
                
                
                
                (1,921
                )
                
                
                -4
                %
                
                
                8.13
                %
                
                
                -0.41
                %-200
                
                
                
                39,318
                
                
                
                (4,382
                )
                
                
                -10
                %
                
                
                7.62
                %
                
                
                -0.92
                %-300
                
                
                
                36,318
                
                
                
                (7,382
                )
                
                
                -17
                %
                
                
                7.01
                %
                
                
                -1.53
                %
  Computations
        of prospective effects of hypothetical interest rate changes are based on
        an
        internally generated model using actual maturity and repricing schedules
        for the
        Bank’s loans and deposits, and are based on numerous assumptions, including
        relative levels of market interest rates, loan repayments and deposit run-offs,
        and should not be relied upon as indicative of actual
        results.  Further, the computations do not contemplate any actions the
        Bank may undertake in response to changes in interest rates.
 
 Management
        cannot predict future interest rates or their effect on the Bank’s NPV in the
        future.  Certain shortcomings are inherent in the method of analysis
        presented in the computation of NPV.  For example, although certain
        assets and liabilities may have similar maturities or periods to repricing,
        they
        may react in differing degrees to changes in market interest
        rates.  Additionally, certain assets, such as adjustable-rate loans,
        have an initial fixed rate period typically from one to five years, and over
        the
        remaining life of the asset changes in the interest rate are
        restricted.  In addition, the proportion of adjustable-rate loans in
        the Bank’s portfolio could decrease in future periods due to refinancing
        activity if market interest rates remain steady in the
        future.  Further, in the event of a change in interest rates,
        prepayment and early withdrawal levels could deviate significantly from those
        assumed in the table.  Finally, the ability of many borrowers to
        service their adjustable-rate debt may decrease in the event of an interest
        rate
        increase.
 
 The
        Bank’s Board of Directors (the “Board”) is responsible for reviewing the Bank’s
        asset and liability policies.  The Board meets quarterly to review
        interest rate risk and trends, as well as liquidity and capital ratios and
        requirements.  The Bank’s management is responsible for administering
        the policies and determinations of the Board with respect to the Bank’s asset
        and liability goals and strategies.
 
 **Impact
        of New Accounting Pronouncements**
 
 In
        September 2006, the FASB issued SFAS No. 157, *Fair Value
        Measurements*. This Statement defines fair value, establishes a framework
        for measuring fair value in generally accepted accounting principles and
        expands
        disclosure related to the use of fair value measures in financial statements.
        This Statement applies under other accounting pronouncements that require
        or
        permit fair value measurements, and does not expand the use of fair value
        measures in financial statements, but standardizes its definition and guidance
        in generally accepted accounting principles. SFAS No. 157 emphasizes that
        fair value is a market-based measurement based on an exchange transaction
        between market participants in which an entity sells an asset or transfers
        a
        liability. SFAS No. 157 also establishes a fair value hierarchy from observable
        market data as the highest level to fair value based on an entity's own fair
        value assumptions as the lowest level. The Statement is to be effective for
        financial statements issued for fiscal years beginning after November 15,
        2007, with early adoption permitted. The Company is evaluating this Statement
        to
        determine the impact, if any, on certain of its financial assets and
        liabilities.
 
 In
        February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for
        Financial Assets and Financial Liabilities*. SFAS No. 159 provides companies
        with the option to report selected financial assets and liabilities at fair
        value. Under the option, any changes in fair value would be included in
        earnings. This Statement seeks to reduce both complexity in accounting and
        volatility in earnings caused by differences in the existing accounting rules.
        Existing accounting principles use different measurement attributes for
        different assets and liabilities, which can lead to earnings volatility.
        This
        Statement helps to mitigate this type of accounting-induced volatility by
        enabling companies to achieve a more consistent accounting for changes in
        the
        fair value of related assets and liabilities without having to apply complex
        hedge accounting provisions. Under this Statement, entities may measure at
        fair
        value financial assets and liabilities selected on a contract-by-contract
        basis.
        They would be required to display those values separately from those measured
        under different attributes on the face of the statement of financial condition.
        Furthermore, companies must provide additional information that would help
        investors and other users of financial statements to more easily understand
        the
        effect on earnings. SFAS No. 159 is effective for fiscal years beginning
        after
        November 15, 2007, with earlier application permitted if the Company makes
        this
        election during its first quarter of fiscal year 2007. If the Company adopts
        SFAS No. 159 early, it must also adopt SFAS No. 157 simultaneously. The Company
        did not elect to adopt this Statement early and is currently evaluating the
        provisions of the Statement to determine the impact, if any, on certain of
        its
        financial assets and liabilities.
 
 16
 ***Table
            of Contents***
  **Item
        4. Controls and Procedures**
 
 (a)  The
        Company maintains disclosure controls and procedures (as defined in Rule
        13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are
        designed to ensure that information required to be disclosed in the Company’s
        Exchange Act reports is recorded, processed, summarized and reported within
        the
        time periods specified in the Securities and Exchange Commission's rules
        and
        forms, and that such information is accumulated and communicated to the
        Company’s management, including its Chief Executive Officer and Chief Financial
        Officer, as appropriate, to allow timely decisions regarding required
        disclosure.
 
 The
        Company conducted an evaluation, under the supervision and with the
        participation of the Company’s management, including the Company’s Chief
        Executive Officer and Chief Financial Officer, of the effectiveness of the
        Company’s disclosure controls and procedures.   Based on the
        foregoing, the Company’s Chief Executive Officer and Chief Financial Officer
        concluded that the Company’s disclosure controls and procedures were effective
        as of June 30, 2007.
 
 (b)  There
        has been no change in the Company’s internal control over financial reporting
        during the quarter ended June 30, 2007 that has materially affected, or is
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.
 
 17
 ***Table
            of Contents***
  **PART
        II  OTHER INFORMATION**
 
 **Item
        1.                 Legal
        Proceedings**
 None.
 
 **Item
        1A.Risk
        Factors**
 Not
        applicable.
 
 **Item
        2.                 Unregistered
        Sales of Equity Securities and Use of Proceeds**
 
 The
        following table summarizes the repurchase activity of the Company’s common stock
        during the Company’s second quarter ended June 30, 2007.
 
 **ISSUER
        PURCHASES OF EQUITY SECURITIES**
 
 Period
              (a)
                  Total Number of Shares Purchased
              (b)
                  Average Price Paid per Share
              (c)
                  Total Number of Shares Purchased as Part of Publicly Announced
                  Plans or
                  Programs (1)
              (d)
                  Maximum Number of Shares that May Yet Be Purchased Under the Plans
                  or
                  ProgramsApril
                  1, 2007 to April 30, 2007
              16,062
              29.35
              16,062
              113,806May
                  1, 2007 to May 31, 2007
              17,241
              30.02
              17,241
              96,565June
                  1, 2007 to June 30, 2007
              31,513
              30.22
              31,513
              65,052Total
              64,816
              29.95
              64,816
  (1)
              The
                  Company has a repurchase plan which was announced on July 25,
                  2006.  This plan authorizes the purchase by the Company of up to
                  250,000 shares of the Company’s common stock.  There is no
                  expiration date for this plan.  There are no other repurchase
                  plans in effect at this time.
 
 **Item
        3.                 Defaults
        Upon Senior Securities**
 Not
        applicable.
 
 **Item
        4.                Submission
        of Matters to a Vote of Common Security Holders**
 
 The
        annual meeting of stockholders of the Company was held on May 23,
        2007.  At the meeting the stockholders elected Jack L. Barham, Don M.
        Gibson and Tim Rosenbury to three-year terms as directors of the Company,
        while
        Shaun A. Burke, Wayne V. Barnes, Gregory V. Ostergren , Kurt Hellweg, James
        L.
        Sivils, III, and James R. Batten continue to serve as directors.  Also
        at that meeting, BKD, LLP was ratified as the Company’s independent registered
        public accounting firm for the fiscal year ending December 31,
        2007.
 
 **Director
                  Election:**Nominee
              Votes
                  For
              Votes
                  WithheldJack
                  L. Barham
              2,341,829
              147,637Don
                  M. Gibson
              2,396,082
              93,384Tim
                  Rosenbury
              2,396,082
              93,384
 
 18
 ***Table
            of Contents***
  **Auditor
                  Ratification:**Votes
                  for
              
              2,484,214Votes
                  against
              
              2,625Abstentions
              
              2,627
  **Item
        5.                Other
        Information**
 None.
 
 **Item
        6.                 Exhibits**
 
 11.
              Statement
                  re computation of per share earnings (set forth in “Note 4: Earnings Per
                  Share” of the Notes to Condensed Consolidated Financial Statements
                  (unaudited))
 31(i).1
              Certification
                  of the Principal Executive Officer pursuant to Rule 13a -14(a)
                  of the
                  Exchange Act
 31(i).2
              Certification
                  of the Principal Financial Officer pursuant to Rule 13a - 14(a)
                  of the
                  Exchange Act
 32.1
              CEO
                  certification pursuant to 18 U.S.C. Section
                  1350
 32.2
              CFO
                  certification pursuant to 18 U.S.C. Section
                  1350
 
 19
 ***Table
            of Contents***
  **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
 
 Guaranty
                  Federal Bancshares, Inc.**Signature
                  and Title**
              **Date**/s/
                  Shaun A. Burke
              
              August
                  14, 2007Shaun
                  A. BurkePresident
                  and Chief Executive Officer(Principal
                  Executive Officer and Duly Authorized Officer)/s/
                  Carter Peters
              
              August
                  14, 2007Carter
                  PetersExecutive
                  Vice President and Chief Financial Officer(Principal
                  Financial and Accounting Officer)
   20