UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q


(Mark
One)


x  QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
quarter ended June 30,
2008





OR





 ̈  TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _______ to _______





Commission
file number 0-23325





Guaranty
Federal Bancshares, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
            43-1792717(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)1341
      West BattlefieldSpringfield,
      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 [X] No [  ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):  Large accelerated filer   ̈  Accelerated
filer   ̈  Non-accelerated
filer   ̈  Smaller
reporting company  x





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





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 6, 2008Common
      Stock, Par Value $0.10 per share
            2,700,233
      Shares












GUARANTY FEDERAL BANCSHARES, INC.





TABLE
      OF CONTENTSPagePART
      I. Financial InformationItem
      1.  Financial StatementsCondensed
      Consolidated Financial Statements (Unaudited):Condensed Statements of Financial
    Condition
            3Condensed Statements of Operations
            4Condensed Statements of  Stockholders’
      Equity
            5Condensed Statements of Cash Flows
            7Notes to Condensed Consolidated Financial
      Statements
            8Item
      2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            12Item
      3.  Quantitative and Qualitative Disclosures about
      Market Risk
            19Item
      4.  Control and Procedures
            21PART
      II. Other InformationItem
      1.  Legal Proceedings
            22Item
      1A.  Risk factors
            22Item
      2.  Unregistered Sales of Equity Securities
      and Use of Proceeds
            22Item
      3.  Defaults Upon Senior
      Securities
            22Item
      4.  Submission of Matters to a Vote of
      Security Holders
            22Item
      5.  Other Information
            23Item
      6.  Exhibits
            23Signatures





2
 Table
of Contents





PART
I


Item 1. Financial Statements





GUARANTY FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007





ASSETS
            
            6/30/08
            
            
            12/31/07Cash
            
            $
            11,257,242
            
            
            $
            11,135,960Interest-bearing
      deposits in other financial institutions
            
            
            6,971,158
            
            
            
            910,242Cash
      and cash equivalents
            
            
            18,228,400
            
            
            
            12,046,202Available-for-sale
      securities
            
            
            63,696,244
            
            
            
            14,729,938Held-to-maturity
      securities
            
            
            609,765
            
            
            
            654,775Stock
      in Federal Home Loan Bank, at cost
            
            
            6,170,800
            
            
            
            4,014,700Mortgage
      loans held for sale
            
            
            772,598
            
            
            
            2,141,998Loans
      receivable, net of allowance for loan losses of June 30, 2008 -
      $10,799,133 - December 31, 2007 - $5,962,923
            
            
            553,094,245
            
            
            
            514,100,035Accrued
      interest receivable:Loans
            
            
            2,587,737
            
            
            
            3,218,845Investments
            
            
            355,422
            
            
            
            104,603Prepaid
      expenses and other assets
            
            
            2,902,552
            
            
            
            2,841,411Foreclosed
      assets held for sale
            
            
            2,577,761
            
            
            
            727,422Premises
      and equipment
            
            
            10,823,618
            
            
            
            9,442,350Income
      taxes receivable
            
            
            499,527
            
            
            
            -Deferred
      income taxes
            
            
            4,885,446
            
            
            
            1,755,701$
            667,204,115
            
            
            $
            565,777,980LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
            
            $
            446,725,947
            
            
            $
            418,191,284Federal
      Home Loan Bank advances
            
            
            123,436,000
            
            
            
            76,086,000Securities
      sold under agreements to repurchase
            
            
            39,750,000
            
            
            
            9,849,295Subordinated
      debentures
            
            
            15,465,000
            
            
            
            15,465,000Notes
      payable
            
            
            1,435,190
            
            
            
            718,190Advances
      from borrowers for taxes and insurance
            
            
            441,221
            
            
            
            157,811Accrued
      expenses and other liabilities
            
            
            537,864
            
            
            
            299,005Accrued
      interest payable
            
            
            1,939,993
            
            
            
            1,793,663Dividend
      payable
            
            
            467,989
            
            
            
            469,373Income
      taxes payable
            
            
            -
            
            
            
            61,699630,199,204
            
            
            
            523,091,320COMMITMENTS
      AND CONTINGENCIES
            
            
            -
            
            
            
            -STOCKHOLDERS'
      EQUITYCommon
      Stock: $0.10 par value; authorized 10,000,000 shares; issued June 30, 2008
      -  6,777,800 shares; December 31, 2007 - 6,736,485
      shares
            
            
            677,780
            
            
            
            673,649Additional
      paid-in capital
            
            
            58,342,449
            
            
            
            57,571,929Unearned
      ESOP shares
            
            
            (1,002,930
            )
            
            
            (1,116,930
            )Retained
      earnings, substantially restricted
            
            
            42,592,014
            
            
            
            45,402,449Accumulated
      other comprehensive income (loss)
            
            
            (1,791,048
            )
            
            
            503,76798,818,265
            
            
            
            103,034,864Treasury
      stock, at cost; June 30, 2008 - 4,077,567 shares; December 31, 2007 -
      4,017,166 shares
            
            
            (61,813,354
            )
            
            
            (60,348,204
            )37,004,911
            
            
            
            42,686,660$
            667,204,115
            
            
            $
            565,777,980










3
 Table of Contents





GUARANTY FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


THREE  MONTHS
AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)





Three months ended
            
            
            Six months ended6/30/2008
            
            
            6/30/2007
            
            
            6/30/2008
            
            
            6/30/2007INTEREST
      INCOMELoans
            
            $
            8,045,298
            
            
            $
            8,946,939
            
            
            $
            16,647,514
            
            
            $
            18,334,501Investment
      securities
            
            
            829,023
            
            
            
            91,781
            
            
            
            1,404,188
            
            
            
            189,022Other
            
            
            50,883
            
            
            
            98,039
            
            
            
            104,535
            
            
            
            179,2248,925,204
            
            
            
            9,136,759
            
            
            
            18,156,237
            
            
            
            18,702,747INTEREST
      EXPENSEDeposits
            
            
            3,520,038
            
            
            
            3,951,753
            
            
            
            7,506,570
            
            
            
            7,457,169Federal
      Home Loan Bank advances
            
            
            762,156
            
            
            
            814,145
            
            
            
            1,495,445
            
            
            
            1,989,338Other
            
            
            529,516
            
            
            
            262,498
            
            
            
            1,010,761
            
            
            
            528,3764,811,710
            
            
            
            5,028,396
            
            
            
            10,012,776
            
            
            
            9,974,883NET
      INTEREST INCOME
            
            
            4,113,494
            
            
            
            4,108,363
            
            
            
            8,143,461
            
            
            
            8,727,864PROVISION
      FOR LOAN LOSSES
            
            
            5,684,079
            
            
            
            210,000
            
            
            
            6,504,079
            
            
            
            420,000NET
      INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES
            
            
            (1,570,585
            )
            
            
            3,898,363
            
            
            
            1,639,382
            
            
            
            8,307,864NONINTEREST
      INCOMEService
      charges
            
            
            502,578
            
            
            
            564,594
            
            
            
            961,978
            
            
            
            1,117,076Other
      fees
            
            
            7,811
            
            
            
            36,245
            
            
            
            14,209
            
            
            
            53,081Gain
      (loss) on investment securities
            
            
            (97,788
            )
            
            
            193,355
            
            
            
            (97,788
            )
            
            
            385,971Gain
      on sale of loans
            
            
            257,428
            
            
            
            331,171
            
            
            
            488,505
            
            
            
            623,868Income
      (loss) on foreclosed assets
            
            
            (32,625
            )
            
            
            1,685
            
            
            
            (45,827
            )
            
            
            (610
            )Other
      income
            
            
            183,006
            
            
            
            174,187
            
            
            
            381,184
            
            
            
            343,164820,410
            
            
            
            1,301,237
            
            
            
            1,702,261
            
            
            
            2,522,550NONINTEREST
      EXPENSESalaries
      and employee benefits
            
            
            1,920,095
            
            
            
            1,812,208
            
            
            
            3,811,557
            
            
            
            3,555,092Occupancy
            
            
            407,105
            
            
            
            406,454
            
            
            
            794,693
            
            
            
            818,207FDIC
      deposit insurance premiums
            
            
            62,499
            
            
            
            10,582
            
            
            
            124,998
            
            
            
            20,247Data
      processing
            
            
            92,517
            
            
            
            104,566
            
            
            
            182,333
            
            
            
            202,269Other
      expense
            
            
            730,884
            
            
            
            661,978
            
            
            
            1,400,927
            
            
            
            1,274,5213,213,100
            
            
            
            2,995,788
            
            
            
            6,314,508
            
            
            
            5,870,336INCOME
      (LOSS) BEFORE INCOME TAXES
            
            
            (3,963,275
            )
            
            
            2,203,812
            
            
            
            (2,972,865
            )
            
            
            4,960,078PROVISION
      (CREDIT) FOR INCOME TAXES
            
            
            (1,466,995
            )
            
            
            787,588
            
            
            
            (1,093,443
            )
            
            
            1,790,314NET
      INCOME (LOSS)
            
            $
            (2,496,280
            )
            
            $
            1,416,224
            
            
            $
            (1,879,422
            )
            
            $
            3,169,764BASIC
      EARNINGS (LOSS) PER SHARE
            
            $
            (0.96
            )
            
            $
            0.51
            
            
            $
            (0.72
            )
            
            $
            1.15DILUTED
      EARNINGS (LOSS) PER SHARE
            
            $
            (0.96
            )
            
            $
            0.50
            
            
            $
            (0.72
            )
            
            $
            1.12









4
 Table of Contents





GUARANTY FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


SIX
MONTHS ENDED JUNE 30, 2008 (UNAUDITED)





Common Stock
            
            
            Additional Paid-In Capital
            
            
            Unearned ESOP Shares
            
            
            Treasury Stock
            
            
            Retained Earnings
            
            
            Accumulated Other Comprehensive Income
      (Loss)
            
            
            TotalBalance,
      January 1, 2008
            
            $
            673,649
            
            
            $
            57,571,929
            
            
            $
            (1,116,930
            )
            
            $
            (60,348,204
            )
            
            $
            45,402,449
            
            
            $
            503,767
            
            
            $
            42,686,660Comprehensive
      lossNet
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,879,422
            )
            
            
            -
            
            
            
            (1,879,422
            )Change
      in unrealized appreciation on available-for-sale
      securities and change in fair value ofinterest
      rate swaps, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,294,815
            )
            
            
            (2,294,815
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,174,237
            )Dividends
      ($0.36 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (931,013
            )
            
            
            -
            
            
            
            (931,013
            )Stock
      award plans
            
            
            -
            
            
            
            48,476
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            48,476Stock
      options exercised
            
            
            4,131
            
            
            
            550,280
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            554,411Release
      of ESOP shares
            
            
            -
            
            
            
            171,764
            
            
            
            114,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            285,764Treasury
      stock purchased
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,465,150
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,465,150
            )Balance,
      June 30, 2008
            
            $
            677,780
            
            
            $
            58,342,449
            
            
            $
            (1,002,930
            )
            
            $
            (61,813,354
            )
            
            $
            42,592,014
            
            
            $
            (1,791,048
            )
            
            $
            37,004,911








5
 Table of Contents





GUARANTY
FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


SIX
MONTHS ENDED JUNE 30, 2007 (UNAUDITED)





Common Stock
              
              
              Additional Paid-In Capital
              
              
              Unearned ESOP Shares
              
              
              Treasury Stock
              
              
              Retained Earnings
              
              
              Accumulated Other Comprehensive
      Income
              
              
              TotalBalance,
      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








6
 Table of Contents





GUARANTY FEDERAL  BANCSHARES, INC


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


SIX
MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)





6/30/2008
            
            
            6/30/2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
            
            $
            (1,879,422
            )
            
            $
            3,169,764Items
      not requiring (providing) cash:Deferred
      income taxes
            
            
            (1,781,997
            )
            
            
            (4,658
            )Depreciation
            
            
            432,691
            
            
            
            439,278Provision
      for loan losses
            
            
            6,504,079
            
            
            
            420,000Gain
      on loans and investment securities
            
            
            (390,717
            )
            
            
            (1,009,839
            )Gain
      on sale of foreclosed assets
            
            
            (2,480
            )
            
            
            (13,705
            )Amortization
      of deferred income, premiums and discounts
            
            
            12,565
            
            
            
            (6,431
            )Stock
      award plan expense
            
            
            48,476
            
            
            
            31,235Origination
      of loans held for sale
            
            
            (29,460,245
            )
            
            
            (39,066,809
            )Proceeds
      from sale of loans held for sale
            
            
            31,318,150
            
            
            
            39,018,320Release
      of ESOP shares
            
            
            285,764
            
            
            
            336,452Changes
      in:Accrued
      interest receivable
            
            
            380,289
            
            
            
            323,215Prepaid
      expenses and other assets
            
            
            (61,141
            )
            
            
            89,545Accounts
      payable and accrued expenses
            
            
            385,189
            
            
            
            112,991Income
      taxes payable
            
            
            (561,226
            )
            
            
            516,728Net
      cash provided by operating activities
            
            
            5,229,975
            
            
            
            4,356,086CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      change in loans
            
            
            (47,928,718
            )
            
            
            6,878,187Principal
      payments on held-to-maturity securities
            
            
            45,097
            
            
            
            57,443Principal
      payments on available-for-sale securities
            
            
            1,035,092
            
            
            
            112,175Proceeds
      from maturities of available-for-sale securities
            
            
            1,550,000
            
            
            
            500,000Purchase
      of premises and equipment
            
            
            (1,813,959
            )
            
            
            (181,500
            )Purchase
      of available-for-sale securities
            
            
            (55,304,401
            )
            
            
            (500,000
            )Proceeds
      from sale of available-for-sale securities
            
            
            -
            
            
            
            884,032Redemption
      (purchase) of FHLB stock
            
            
            (2,156,100
            )
            
            
            2,146,700Proceeds
      from sale of foreclosed assets
            
            
            582,570
            
            
            
            630,410Net
      cash provided by (used in) investing activities
            
            
            (103,990,419
            )
            
            
            10,527,447CASH
      FLOWS FROM FINANCING ACTIVITIESStock
      options exercised
            
            
            554,411
            
            
            
            863,721Cash
      dividends paid
            
            
            (932,397
            )
            
            
            (938,892
            )Net
      increase in demand deposits, NOW and savings accounts
            
            
            17,588,346
            
            
            
            19,336,265Net
      increase in certificates of deposit
            
            
            10,946,317
            
            
            
            22,344,998Net
      increase in securities sold under agreements to repurchase
            
            
            29,900,705
            
            
            
            -Proceeds
      from FHLB advances
            
            
            1,086,450,000
            
            
            
            796,538,600Repayments
      of FHLB advances
            
            
            (1,039,100,000
            )
            
            
            (848,952,600
            )Proceeds
      from issuance of notes payable
            
            
            1,064,000
            
            
            
            -Repayments
      of notes payable
            
            
            (347,000
            )
            
            
            -Advances
      from borrowers for taxes and insurance
            
            
            283,410
            
            
            
            309,275Treasury
      stock purchased
            
            
            (1,465,150
            )
            
            
            (2,926,544
            )Net
      cash provided by (used in) financing activities
            
            
            104,942,642
            
            
            
            (13,425,177
            )INCREASE
      IN CASH AND CASH EQUIVALENTS
            
            
            6,182,198
            
            
            
            1,458,356CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            12,046,202
            
            
            
            14,880,601CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            18,228,400
            
            
            $
            16,338,957








7
 Table of Contents





NOTES TO CONDENSED CONSOLIDATED 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 periods 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 2007 filed with the Securities and
Exchange Commission.  The condensed consolidated statement of
financial condition of the Company as of December 31, 2007, has been derived
from the audited consolidated statement of financial condition 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, 2007 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, 2008:





Number of sharesIncentive Stock Option
            
            
            Non-Incentive Stock Option
            
            
            Weighted Average Exercise
    PriceBalance
      outstanding as of January 1, 2008
            
            
            118,033
            
            
            
            114,206
            
            
            $
            20.48Granted
            
            
            27,000
            
            
            
            20,000
            
            
            
            28.74Exercised
            
            
            (26,313
            )
            
            
            (15,002
            )
            
            
            13.42Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      outstanding as of June 30, 2008
            
            
            118,720
            
            
            
            119,204
            
            
            $
            23.33Options
      exercisable as of June 30, 2008
            
            
            43,623
            
            
            
            64,204
            
            
            $
            18.89





Stock-based
compensation expense recognized for the three months ended June 30, 2008 and
2007 was $24,172 and $18,116, respectively.   Stock-based
compensation expense recognized for the six months ended June 30, 2008 and 2007
was $48,476 and $31,235, respectively.  As of June 30, 2008, there was
$269,938 of unrecognized compensation expense related to nonvested stock
options, which will be recognized over the remaining vesting
period.





8
 Table of Contents





Note
4: Earnings Per Share





For three months ended June 30,
      2008
            
            
            For six months ended June 30,
      2008Income Available to
      Stockholders
            
            
            Average Shares Outstanding
            
            
            Per-share
            
            
            Income Available to
      Stockholders
            
            
            Average Shares Outstanding
            
            
            Per-shareBasic
      Earnings per Share
            
            $
            (2,496,280
            )
            
            
            2,599,233
            
            
            $
            (0.96
            )
            
            $
            (1,879,422
            )
            
            
            2,602,257
            
            
            $
            (0.72
            )Effect
      of Dilutive Securities:Stock
      Options
            
            
            
            
            
            
            N/A
            
            
            
            
            
            
            
            
            
            
            
            N/ADiluted
      Earnings per Share
            
            $
            (2,496,280
            )
            
            
            2,599,233
            
            
            $
            (0.96
            )
            
            $
            (1,879,422
            )
            
            
            2,602,257
            
            
            $
            (0.72
            )






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
            
            
            $
            1.12





Due to
the Company’s net loss for the three months and six months ended June 30, 2008,
no potentially dilutive shares were included in the computation of diluted
earnings per share.





Note
5: Other Comprehensive Loss





6/30/2008
            
            
            6/30/2007Unrealized
      losses on available-for-sale securities and change in fair value of
      interest rate swaps
            
            $
            (3,740,351
            )
            
            $
            (241,564
            )Less:
      Reclassification adjustment for  realized losses (gains)
      included in income
            
            
            97,788
            
            
            
            (385,971
            )Other
      comprehensive loss, before tax benefit
            
            
            (3,642,563
            )
            
            
            (627,535
            )Tax
      benefit
            
            
            (1,347,748
            )
            
            
            (232,188
            )Other
      Comprehensive Loss
            
            $
            (2,294,815
            )
            
            $
            (395,347
            )








Note
6: New Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (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 provisions of FASB 157 were effective as of
January 1, 2008.  The adoption of the standard did not have a material
impact on the consolidated financial statements.  In February 2008,
Financial Accounting Standards Board Staff Position No. 157-2, Effective Date of FASB Statement No.
157 was issued that delayed the application of SFAS No. 157 for
non-financial assets and non-financial liabilities, until January 1,
2009.





9
 Table of Contents





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  This statement permits
companies to choose to measure financial instruments and certain other financial
assets and liabilities at fair value.  SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007, with earlier adoption
permitted.  The provisions of this statement were effective for the
Company as of January 1, 2008.   The Company elected not to
measure any eligible items using the fair value option in accordance with SFAS
No. 159 and therefore, SFAS No. 159 did not have a material impact on the
consolidated financial statements at adoption.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, and Amendment of FASB Statement No.
133.  SFAS 161 amends SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities,” to amend and expand the disclosure
requirements of SFAS 133 to provided greater transparency about (i) how and why
and entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations and cash
flows.  To meet those objectives, SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements.  SFAS 161 is effective for the Company on
January 1, 2009.  The Company is in the process of evaluating the
impact on the Company’s financial position, results of operations or cash
flows.





Note
7: Derivative Financial Instruments





The
Company records all derivative financial instruments at fair value in the
financial statements.  Derivatives are used as a risk management tool
to hedge the exposure to changes in interest rates or other identified market
risks.





When a
derivative is intended to be a qualifying hedged instrument, the Company
prepares written hedge documentation that designates the derivative as 1) a
hedge of fair value of a recognized asset or liability (fair value hedge) or 2)
a hedge of a forecasted transaction, such as, the variability of cash flows to
be received or paid related to a recognized asset or liability (cash flow
hedge).  The written documentation includes identification of, among
other items, the risk management objective, hedging instrument, hedged item, and
methodologies for assessing and measuring hedge effectiveness and
ineffectiveness, along with support for management’s assertion that the hedge
will be highly effective.





In June
2008, the Company entered into three, 2 year interest rate swap agreements
totaling a $90 million notional amount to hedge against interest rate
risk.  As a cash flow hedge, the portion of the change in the fair
value of the derivative that has been deemed highly effective is recognized in
other comprehensive income until the related cash flows from the hedged item are
recognized in earnings.  At June 30, 2008, the Company reported a
$74,330 unrealized loss, net of a $43,654 tax effect, in other comprehensive
loss related to cash flow hedges.  The Company documents, both at
inception and periodically over the life of the hedge, its analysis of actual
and expected hedge effectiveness.  To the extent that the hedge of
future cash flows is deemed ineffective, changes in the fair value of the
derivative are recognized in earnings as a component of other noninterest
expense.  For the quarter ended June 30, 2008, there was no
ineffectiveness attributable to the cash flow hedges.  A summary of
the Company’s derivative financial instruments at June 30, 2008 is shown in the
following table:





Inception
            
            Termination
            
            Derivative
            
            Notional
            
            Rate
            Rate
            
            Estimated
      Fair ValueDate
            
            Date
            
            Type
            
            Amount
            
            Received
            Hedged
            
            at June 30, 20086/3/2008
            
            6/3/2010
            
            Interest
      rate swap
            
            $
            50,000,000
            
            5.91%
      Fixed
            Prime
      Floating
            
            $
            (174,326
            )6/27/2008
            
            6/27/2010
            
            Interest
      rate swap
            
            
            20,000,000
            
            6.70%
      Fixed
            Prime
      Floating + 0.50%
            
            
            24,6196/27/2008
            
            6/27/2010
            
            Interest
      rate swap
            
            
            20,000,000
            
            5.70%
      Fixed
            Prime
      Floating - 0.50%
            
            
            31,723$
            90,000,000
            
            
            
            
            $
            (117,984
            )





10
 Table of Contents





Note
8: Fair Value Disclosures





As
discussed in Note 6, SFAS No. 157 was implemented by the Company effective
January 1, 2008.  SFAS No. 157 establishes a hierarchy that
prioritizes the use of fair value inputs used in valuation methodologies into
the following three levels:





Level
1: Unadjusted quoted prices for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement
date.





Level
2: Significant observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not active; or
other inputs that are observable or can be derived from or corroborated by
observable market data by correlation or other means.





Level 3:
Significant unobservable inputs that reflect the reporting entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.





The
following is a description of the Company’s valuation methodologies used to
measure and disclose the fair values of its financial assets and liabilities on
a recurring or nonrecurring basis:





Available-for-sale
securities:  Securities classified as available for sale are
recorded at fair value on a recurring basis utilizing Level 1 and Level 2
inputs.  For these securities, the Company obtains fair value
measurements from an independent pricing service.  The fair value
measurements consider observable data that may include dealer quotes, benchmark
yields, market spreads, live trading levels, market consensus prepayment speeds,
among other things.





Loans: The Company does
not record loans at fair value on a recurring basis.  However,
nonrecurring fair value adjustments to collateral dependent loans are recorded
to reflect partial write-downs based on the observable market price or current
appraised value of the underlying collateral.





Impaired loans: Impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the
collateral.  Collateral values are estimated using third party
appraisals or internally developed appraisals or discounted cash flow
analysis.





Derivative Financial
Instruments:  Derivatives are recorded at fair value on a
recurring basis utilizing Level 2 inputs.  The Company obtains fair
value measurements from an independent pricing service.  The fair
value measurements consider observable data that may include dealer quotes, live
trading levels, among other things.





11
 Table of Contents





The
following table summarizes financial assets and liabilities measured at fair
value on a recurring basis as of June 30, 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value
(dollar amounts in thousands):





Financial
      Assets:Level 1 inputs
            
            
            Level 2 inputs
            
            
            Level 3 inputs
            
            
            Total fair valueAvailable-for-sale
      securities
            
            $
            1,172
            
            
            $
            62,524
            
            
            $
            -
            
            
            $
            63,696Financial
      Liabilities:Level 1 inputs
            
            
            Level 2 inputs
            
            
            Level 3 inputs
            
            
            Total fair valueInterest
      rate swaps
            
            $
            -
            
            
            $
            118
            
            
            $
            -
            
            
            $
            118





Certain
financial assets are measured at fair value on a nonrecurring basis, that is,
the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).  Financial assets measured at fair
value on a non-recurring basis during the three months ended June 30, 2008, that
were still held on the balance sheet at June 30, 2008, were valued using the
valuation inputs shown below (dollar amounts in thousands):





Level 1 inputs
            
            
            Level 2 inputs
            
            
            Level 3 inputs
            
            
            Total fair valueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            5,130
            
            
            $
            5,130





Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring and non-recurring basis include non-financial long-lived assets, such
as premises and equipment.  As stated above in Note 6, SFAS 157 will
be applicable to these fair value measurements beginning January 1,
2009.





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





General





The
primary function of the Company is to monitor and oversee its investment in
Guaranty Bank (the “Bank”), a wholly-owned subsidiary of the
Company.  The Company engages in few other activities, and the Company
has no significant assets other than 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, 2008, and the results of operations for the
three and six months ended June 30, 2008 and 2007.





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, in general or local economic conditions,
in the real estate market, and in federal and state regulations and legislation
governing the operations of the Company or the Bank; 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,
2007.





12
 Table of Contents





Financial
Condition





The
Company’s total assets increased $101,426,135 (18%) from $565,777,980 as of
December 31, 2007, to $667,204,115 as of June 30, 2008.





Cash and
cash equivalents increased $6,182,198 (51%) from $12,046,202 as of December 31,
2007, to $18,228,400 as of June 30, 2008.





Securities
available-for-sale increased $48,966,306 (332%) from $14,729,938 as of December
31, 2007, to $63,696,244 as of June 30, 2008. The increase is primarily due to
purchases of $55,304,401 offset by maturities and principal repayments of
$2,585,092.  Approximately $35 million of the purchases were due to a
structured leveraged transaction completed during the period.  The
Bank currently holds 26,600 shares of Federal Home Loan Mortgage Corporation
(“FHLMC”) stock with an amortized cost of $26,057 in the available-for-sale
category.  As of June 30, 2008, the gross unrealized gain on the FHLMC
stock was $410,183, a decrease from $880,205 as of December 31,
2007.





Securities
held-to-maturity decreased primarily due to principal repayments by $45,010 (7%)
from $654,775 as of December 31, 2007, to $609,765 as of June 30,
2008.





Stock in
Federal Home Loan Bank of Des Moines (“FHLB”) increased by $2,156,100 (54%), due
to purchases of such stock to continue to maintain a level to meet FHLB advance
requirements.





Net loans
receivable increased by $38,994,210 (8%) from $514,100,035 as of December 31,
2007, to $553,094,245 as of June 30, 2008.  Commercial real estate
loans increased by $38,534,536 (22%) from $175,995,074 as of December 31, 2007,
to $214,529,610 as of June 30, 2008.  Commercial loans increased
$7,119,969 (7%) from $104,025,575 as of December 31, 2007, to $111,145,544 as of
June 30, 2008.  Permanent multi-family loans decreased by $8,955,093
(21%) from $41,947,555 as of December 31, 2007, to $32,992,462 as of June 30,
2008.  Construction loans decreased by $11,128,477 (12%) to
$78,595,743 as of June 30, 2008 compared to $89,724,220 as of December 31, 2007.
Loan growth is anticipated in future quarters and represents a major part of the
Bank’s planned asset growth.





Allowance
for loan losses increased $4,836,210 (81%) from $5,962,923 as of December 31,
2007 to $10,799,133 as of June 30, 2008. The allowance increased due to the
provision for loan losses of $6,504,079 exceeding net loan charge-offs of
$1,667,869 recorded during the period.  During the six month period,
management charged-off $1.2 million relating to two specific loans that had been
identified and classified as impaired at December 31, 2007.  Due to
loan growth, the charge-offs noted and increasing concerns about declining real
estate values and the difficult market conditions created by the softening
economy, management decided to record a provision for loan losses for the period
in order to maintain the allowance at a level in accordance with management’s
internal review and methodology.  A significant portion of additional
reserves were made on a few problem loans already identified by management in
previous quarters.  Due to the concerns discussed above, and as a
result of continuing analysis, including new information obtained after the
quarter, the reserves are warranted.  See discussion under “Results of
Operations – Comparison of Three and Six Month Periods Ended June 30, 2008 and
2007 – Provision for Loan Losses.”   The allowance for loan
losses, as a percentage of net loans outstanding, as of June 30, 2008 and
December 31, 2007 was 1.95% and 1.16%, respectively.  The allowance
for loan losses, as a percentage of nonperforming loans outstanding, as of June
30, 2008 and December 31, 2007 was 149.9% and 82.2%,
respectively.  Management believes the allowance for loan losses is at
a level to be sufficient in providing for potential loan losses in the Bank’s
existing loan portfolio at June 30, 2008.





Deposits
increased $28,534,663 (7%) from $418,191,284 as of December 31, 2007, to
$446,725,947 as of June 30, 2008.  For the six months ended June 30,
2008, checking and savings accounts increased by $17,588,346 and certificates of
deposits increased by $10,946,317.  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.”





13
 Table of Contents





FHLB
advances increased by $47,350,000 from $76,086,000 as of December 31, 2007, to
$123,436,000 as of June 30, 2008 primarily to fund asset growth during the
period.





Securities
sold under agreements to repurchase increased $29,900,705 (304%) from $9,849,295
as of December 31, 2007, to $39,750,000 as of June 30, 2008, due to the
structured leveraged transaction completed during the period.





Stockholders’
equity (including unrealized depreciation on securities available-for-sale, net
of tax) decreased $5,681,749 from $42,686,660 as of December 31, 2007, to
$37,004,911 as of June 30, 2008. The Company’s net loss during this period was
$1,879,422.  The Company also declared two quarterly dividends
totaling $931,013 during the period.  Unrealized depreciation on
securities available-for-sale and changes in fair value of interest rate swaps,
net of tax, increased $2,294,815 during the period due primarily to increased
volatility in the investment portfolio.  In
addition, stockholders’ equity further declined as the Company repurchased
60,401 shares of treasury stock at an aggregate cost of $1,465,150 (an average
cost of $24.25 per share).  On a per share basis, stockholders’ equity
decreased from $16.37 as of December 31, 2007 to $14.23 as of June 30,
2008.





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.





The
following tables 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.





14
 Table of Contents




Three months ended
6/30/2008
            
            
            Three months ended
6/30/2007Average Balance
            
            
            Interest
            
            
            Yield / Cost
            
            
            Average Balance
            
            
            Interest
            
            
            Yield / CostASSETSInterest-earning:Loans
            
            $
            552,631
            
            
            $
            8,045
            
            
            
            5.82
            %
            
            $
            469,774
            
            
            $
            8,947
            
            
            
            7.62
            %Investment
      securities
            
            
            63,007
            
            
            
            829
            
            
            
            5.26
            %
            
            
            7,916
            
            
            
            92
            
            
            
            4.65
            %Other
      assets
            
            
            7,765
            
            
            
            51
            
            
            
            2.63
            %
            
            
            7,744
            
            
            
            98
            
            
            
            5.06
            %Total
      interest-earning
            
            
            623,403
            
            
            
            8,925
            
            
            
            5.73
            %
            
            
            485,434
            
            
            
            9,137
            
            
            
            7.53
            %Noninterest-earning
            
            
            21,961
            
            
            
            
            
            
            
            
            
            
            
            23,983$
            645,364
            
            
            
            
            
            
            
            
            
            
            $
            509,417LIABILITIES
      AND STOCKHOLDERS’ EQUITYInterest-bearing:Savings
      accounts
            
            $
            13,347
            
            
            
            31
            
            
            
            0.93
            %
            
            $
            13,968
            
            
            
            82
            
            
            
            2.35
            %Transaction
      accounts
            
            
            102,899
            
            
            
            392
            
            
            
            1.52
            %
            
            
            106,965
            
            
            
            806
            
            
            
            3.01
            %Certificates
      of deposit
            
            
            284,129
            
            
            
            3,107
            
            
            
            4.37
            %
            
            
            239,866
            
            
            
            3,064
            
            
            
            5.11
            %FHLB
      advances
            
            
            116,738
            
            
            
            762
            
            
            
            2.61
            %
            
            
            60,028
            
            
            
            814
            
            
            
            5.42
            %Securities
      sold under agreements to repurchase
            
            
            39,750
            
            
            
            250
            
            
            
            2.52
            %
            
            
            541
            
            
            
            4
            
            
            
            2.96
            %Subordinated
      debentures
            
            
            15,465
            
            
            
            256
            
            
            
            6.62
            %
            
            
            15,465
            
            
            
            258
            
            
            
            6.67
            %Other
      borrowed funds
            
            
            1,462
            
            
            
            14
            
            
            
            3.83
            %
            
            
            -
            
            
            
            -
            
            
            
            0.00
            %Total
      interest-bearing
            
            
            573,790
            
            
            
            4,812
            
            
            
            3.35
            %
            
            
            436,833
            
            
            
            5,028
            
            
            
            4.60
            %Noninterest-bearing
            
            
            28,730
            
            
            
            
            
            
            
            
            
            
            
            26,140Total
      liabilities
            
            
            602,520
            
            
            
            
            
            
            
            
            
            
            
            462,973Stockholders’
      equity
            
            
            42,844
            
            
            
            
            
            
            
            
            
            
            
            46,444$
            645,364
            
            
            
            
            
            
            
            
            
            
            $
            509,417Net
      earning balance
            
            $
            49,613
            
            
            
            
            
            
            
            
            
            
            $
            48,601Earning
      yield less costing rate
            
            
            
            
            
            
            
            
            
            
            2.37
            %
            
            
            
            
            
            
            
            
            
            
            2.92
            %Net
      interest income, and net yield spread on interest earning
      assets
            
            
            
            
            
            $
            4,113
            
            
            
            2.64
            %
            
            
            
            
            
            $
            4,109
            
            
            
            3.39
            %Ratio
      of interest-earning assets to interest-bearing liabilities
            
            
            
            
            
            
            109
            %
            
            
            
            
            
            
            
            
            
            
            111
            %





15
 Table of Contents




Six months ended 6/30/2008
            
            
            Six months ended 6/30/2007Average Balance
            
            
            Interest
            
            
            Yield / Cost
            
            
            Average Balance
            
            
            Interest
            
            
            Yield / CostASSETSInterest-earning:Loans
            
            $
            536,597
            
            
            $
            16,648
            
            
            
            6.21
            %
            
            $
            471,020
            
            
            $
            18,335
            
            
            
            7.79
            %Investment
      securities
            
            
            53,540
            
            
            
            1,404
            
            
            
            5.24
            %
            
            
            8,198
            
            
            
            189
            
            
            
            4.61
            %Other
      assets
            
            
            7,024
            
            
            
            104
            
            
            
            2.96
            %
            
            
            8,356
            
            
            
            179
            
            
            
            4.28
            %Total
      interest-earning
            
            
            597,161
            
            
            
            18,156
            
            
            
            6.08
            %
            
            
            487,574
            
            
            
            18,703
            
            
            
            7.67
            %Noninterest-earning
            
            
            20,952
            
            
            
            
            
            
            
            
            
            
            
            23,643$
            618,113
            
            
            
            
            
            
            
            
            
            
            $
            511,217LIABILITIES
      AND STOCKHOLDERS’ EQUITYInterest-bearing:Savings
      accounts
            
            $
            12,994
            
            
            
            82
            
            
            
            1.26
            %
            
            $
            14,386
            
            
            
            177
            
            
            
            2.46
            %Transaction
      accounts
            
            
            101,003
            
            
            
            954
            
            
            
            1.89
            %
            
            
            100,004
            
            
            
            1,459
            
            
            
            2.92
            %Certificates
      of deposit
            
            
            280,463
            
            
            
            6,471
            
            
            
            4.61
            %
            
            
            232,685
            
            
            
            5,821
            
            
            
            5.00
            %FHLB
      advances
            
            
            101,109
            
            
            
            1,495
            
            
            
            2.96
            %
            
            
            74,164
            
            
            
            1,989
            
            
            
            5.36
            %Securities
      sold under agreements to repurchase
            
            
            34,805
            
            
            
            475
            
            
            
            2.73
            %
            
            
            1,003
            
            
            
            14
            
            
            
            2.79
            %Subordinated
      debentures
            
            
            15,465
            
            
            
            512
            
            
            
            6.62
            %
            
            
            15,465
            
            
            
            515
            
            
            
            6.66
            %Other
      borrowed funds
            
            
            1,191
            
            
            
            24
            
            
            
            4.03
            %
            
            
            -
            
            
            
            -
            
            
            
            0.00
            %Total
      interest-bearing
            
            
            547,030
            
            
            
            10,013
            
            
            
            3.66
            %
            
            
            437,707
            
            
            
            9,975
            
            
            
            4.56
            %Noninterest-bearing
            
            
            28,056
            
            
            
            
            
            
            
            
            
            
            
            27,189Total
      liabilities
            
            
            575,086
            
            
            
            
            
            
            
            
            
            
            
            464,896Stockholders’
      equity
            
            
            43,027
            
            
            
            
            
            
            
            
            
            
            
            46,321$
            618,113
            
            
            
            
            
            
            
            
            
            
            $
            511,217Net
      earning balance
            
            $
            50,131
            
            
            
            
            
            
            
            
            
            
            $
            49,867Earning
      yield less costing rate
            
            
            
            
            
            
            
            
            
            
            2.42
            %
            
            
            
            
            
            
            
            
            
            
            3.08
            %Net
      interest income, and net yield spread on interest earning
      assets
            
            
            
            
            
            $
            8,143
            
            
            
            2.73
            %
            
            
            
            
            
            $
            8,728
            
            
            
            3.58
            %Ratio
      of interest-earning assets to interest-bearing liabilities
            
            
            
            
            
            
            109
            %
            
            
            
            
            
            
            
            
            
            
            111
            %





Results
of Operations - Comparison of Three and Six Month Periods Ended June 30, 2008
and 2007





Net loss
for the three months and six months ended June 30, 2008 was ($2,496,280) and
($1,879,422) as compared to net income of $1,416,224 and $3,169,764 for the
three months and six months ended June 30, 2007, which represents a decrease in
earnings of $3,912,504 (276%) for the three month period, and a decrease in
earnings of $5,049,186 (159%) for the six month period.




Interest
Income





Total
interest income for the three months and six months ended June 30, 2008,
decreased $211,555 (2%) and $546,510 (3%), respectively, as compared to the
three months and six months ended June 30, 2007.  For the three month
and six month periods ended June 30, 2008 compared to the same periods in 2007,
the average yield on interest earning assets decreased 180 basis points to 5.73%
and decreased 159 basis points to 6.08%, respectively, while the average balance
of interest earning assets increased approximately $137,969,000 and
$109,587,000, respectively.  The Company’s decline in the average
yield on interest earning assets was due to the Federal Reserve’s significant
interest rate cuts of 3.25% since September 2007.  This affected the
Company’s yield on loans which are tied to the prime rate.





16
 Table of Contents





Interest
Expense





Total
interest expense for the three months and six months ended June 30, 2008,
decreased $216,686 (4%) and increased $37,893 (0%), respectively, when compared
to the three months and six months ended June 30, 2007.  For the three
month and six month periods ended June 30, 2008 compared to the same periods in
2007, the average cost of interest bearing liabilities decreased 125 basis
points to 3.35% and 90 basis points to 3.66%, respectively, while the average
balance of interest bearing liabilities increased approximately $136,957,000 and
$109,323,000, respectively, when compared to the same periods in
2007.





Net Interest
Income





Net
interest income for the three months and six months ended June 30, 2008,
increased $5,131 (0%) and decreased $584,403 (7%), respectively when compared to
the same periods in 2007.  This decrease was primarily due to the
significant rate cuts by the Federal Reserve as described above.





Provision for Loan
Losses





Based on
its internal analysis and methodology, management recorded a provision for loan
losses of $5,684,079 and $6,504,079 for the three months and six months ended
June 30, 2008, respectively, compared to $210,000 and $420,000 for the same
periods in 2007.  Due to loan growth, the charge-offs noted and
increasing concerns about declining real estate values and the difficult market
conditions created by the softening economy, management decided to record a
provision for loan losses for the period in order to maintain the allowance at a
level in accordance with management’s internal review and methodology. A
significant portion of additional reserves were made on a few problem loans
already identified by management in previous quarters.  Due to the
concerns discussed above, and as a result of continuing analysis, including new
information obtained after the quarter, the reserves are
warranted.  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 decreased $480,827 (37%) and $820,289 (33%) for the three months and six
months ended June 30, 2008, respectively, when compared to the three months and
six months ended June 30, 2007.





Gains on
sales of investment securities decreased $291,143 (151%) and $483,759 (125%) for
the three months and six months ended June 30, 2008 when compared to the same
periods in 2007.  These declines were due to the Bank’s suspension of
selling shares of its Freddie Mac (FRE) equity investment, due to the
significant financial downturn in FRE and a sharp decline in its stock
price.  Also, the Company recognized specific losses totaling $97,788
on equity securities associated with companies operating in the financial
services sector.  Service charges on transaction accounts decreased by
$62,016 (11%) and $155,098 (14%) for the three months and six months ended June
30, 2008 when compared to the same period in 2007, primarily due to declines in
overdraft charges.  Gain on sale of loans decreased $73,743 (22%) and
$135,363 (22%) for the three months and six months ended June 30, 2008 when
compared to the same period in 2007.





Noninterest
Expense





Noninterest
expense increased $217,312 (7%) and $444,172 (8%) for the three months and six
months ended June 30, 2008 when compared to the same periods in
2007.





17
 Table of Contents





Salaries
and employee benefits increased $107,887 (6%) and $256,465 (7%) for the three
months and six months ended June 30, 2008 when compared to the same period in
2007.  This increase was primarily due to additions in several staff
positions in the areas of commercial lending, corporate services, human
resources, marketing and internal audit throughout fiscal year
2007.





Federal
Deposit Insurance Corporation (“FDIC”) deposit insurance premiums increased
$51,917 (491%) and $104,751 (517%) for the three months and six months ended
June 30, 2008 when compared to the same periods in 2007.  This was due
to an increase in FDIC insurance premium assessments in 2007.  Because
of credits available to the Company for 2007, these increased costs were not
owed by the Company until the first quarter of 2008.





Provision for Income
Taxes





The
Company recorded a credit for income taxes of $1,466,995 and $1,093,443 for the
three and six months ended June 30, 2008, respectively, due to the pre-tax loss
recognized for those periods.  This compares to a provision for income
taxes of $787,588 and $1,790,314 for the three and six months ended June 30,
2007, respectively.





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 allowance for loan losses, as a
percentage of nonperforming loans outstanding, as of June 30, 2008 and December
31, 2007 was 149.9% and 82.2%, respectively.  Total loans classified
as substandard, doubtful or loss as of June 30, 2008, were $40.9 million or
6.13% of total assets as compared to $17.8 million, or 3.41% of total assets at
December 31, 2007.  Management considered impaired 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
impaired loans and assets which have been acquired as a result of foreclosure or
deed-in-lieu of foreclosure.  All dollar amounts are in
thousands.








6/30/2008
            
            
            12/31/2007
            
            
            12/31/2006Nonperforming
      loans
            
            $
            7,202
            
            
            $
            7,254
            
            
            $
            2,748Real
      estate acquired in settlement of loans
            
            
            2,578
            
            
            
            727
            
            
            
            173Total
      nonperforming assets
            
            $
            9,780
            
            
            $
            7,981
            
            
            $
            2,921Total
      nonperforming assets as a percentage of total assets
            
            
            1.47
            %
            
            
            1.41
            %
            
            
            0.56
            %Allowance
      for loan losses
            
            $
            10,799
            
            
            $
            5,963
            
            
            $
            5,783Allowance
      for loan losses as a percentage of net loans
            
            
            1.95
            %
            
            
            1.16
            %
            
            
            1.20
            %Allowance
      for loan losses as a percentage of nonperforming loans
            
            
            149.94
            %
            
            
            82.20
            %
            
            
            210.44
            %




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.





18
 Table of Contents





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 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 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.  The Bank believes, based on
historical experience, that a substantial portion of such accounts represents
non-interest rate sensitive core deposits.





Interest Rate Sensitivity
Analysis





The following table sets forth as of
June 30, 2008 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.





BP
      Change
            
            Estimated Net Portfolio
    Value
            
            
            NPV as % of PV of Assetsin Rates
            
            $ Amount
            
            
            $ Change
            
            
            % Change
            
            
            NPV Ratio
            
            
            Change+300
            
            $
            49,330
            
            
            $
            11,666
            
            
            
            31
            %
            
            
            7.52
            %
            
            
            1.92
            %+200
            
            
            46,358
            
            
            
            8,694
            
            
            
            23
            %
            
            
            7.01
            %
            
            
            1.40
            %+100
            
            
            42,443
            
            
            
            4,779
            
            
            
            13
            %
            
            
            6.36
            %
            
            
            0.76
            %NC
            
            
            37,664
            
            
            
            -
            
            
            
            -
            
            
            
            5.60
            %
            
            
            --100
            
            
            32,185
            
            
            
            (5,479
            )
            
            
            -15
            %
            
            
            4.75
            %
            
            
            -0.85
            %-200
            
            
            28,390
            
            
            
            (9,274
            )
            
            
            -25
            %
            
            
            4.16
            %
            
            
            -1.45
            %-300
            
            
            31,824
            
            
            
            (5,840
            )
            
            
            -16
            %
            
            
            4.62
            %
            
            
            -0.99
            %








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.





19
 Table of Contents





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.





Derivative Financial
Instruments





The
Company records all derivative financial instruments at fair value in the
financial statements.  Derivatives are used as a risk management tool
to hedge the exposure to changes in interest rates or other identified market
risks.





When a
derivative is intended to be a qualifying hedged instrument, the Company
prepares written hedge documentation that designates the derivative as 1) a
hedge of fair value of a recognized asset or liability (fair value hedge) or 2)
a hedge of a forecasted transaction, such as, the variability of cash flows to
be received or paid related to a recognized asset or liability (cash flow
hedge).  The written documentation includes identification of, among
other items, the risk management objective, hedging instrument, hedged item, and
methodologies for assessing and measuring hedge effectiveness and
ineffectiveness, along with support for management’s assertion that the hedge
will be highly effective.





In June
2008, the Company entered into three, 2 year interest rate swap agreements
totaling a $90 million notional amount to hedge against interest rate
risk.  As a cash flow hedge, the portion of the change in the fair
value of the derivative that has been deemed highly effective is recognized in
other comprehensive income until the related cash flows from the hedged item are
recognized in earnings.  At June 30, 2008, the Company reported a
$74,330 unrealized loss, net of a $43,654 tax effect, in other comprehensive
loss related to cash flow hedges.  The Company documents, both at
inception and periodically over the life of the hedge, its analysis of actual
and expected hedge effectiveness.  To the extent that the hedge of
future cash flows is deemed ineffective, changes in the fair value of the
derivative are recognized in earnings as a component of other noninterest
expense.  For the quarter ended June 30, 2008, there was no
ineffectiveness attributable to the cash flow hedges.  A summary of
the Company’s derivative financial instruments at June 30, 2008 is shown in the
following table:





Inception
            
            Termination
            
            Derivative
            
            Notional
            
            Rate
            Rate
            
            Estimated
      Fair ValueDate
            
            Date
            
            Type
            
            Amount
            
            Received
            Hedged
            
            at June 30, 20086/3/2008
            
            6/3/2010
            
            Interest
      rate swap
            
            $
            50,000,000
            
            5.91%
      Fixed
            Prime
      Floating
            
            $
            (174,326
            )6/27/2008
            
            6/27/2010
            
            Interest
      rate swap
            
            
            20,000,000
            
            6.70%
      Fixed
            Prime
      Floating + 0.50%
            
            
            24,6196/27/2008
            
            6/27/2010
            
            Interest
      rate swap
            
            
            20,000,000
            
            5.70%
      Fixed
            Prime
      Floating - 0.50%
            
            
            31,723$
            90,000,000
            
            
            
            
            $
            (117,984
            )





20
 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 this
evaluation, 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, 2008.





(b)  There
have been no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





21
 Table of Contents





PART
II





Item1.
            Legal
      Proceedings


None.





Item
      1A.
            Risk
      Factors


Not applicable.





Item2.
            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, 2008.





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, 2008 to April 30, 2008
            
            
            5,703
            
            
            
            25.09
            
            
            
            5,703
            
            
            
            235,461May
      1, 2008 to May 31, 2008
            
            
            6,033
            
            
            
            23.66
            
            
            
            6,033
            
            
            
            229,428June
      1, 2008 to June 30, 2008
            
            
            29,151
            
            
            
            22.93
            
            
            
            29,151
            
            
            
            200,277Total
            
            
            40,887
            
            
            
            23.34
            
            
            
            40,887








(1)
            The
      Company has a repurchase plan which was announced on August 20,
      2007.  This plan authorizes the purchase by the Company of up to
      350,000 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.





Item4.
            Submission
      of Matters to a Vote of Common Security
Holders





The
annual meeting of stockholders of the Company was held on May 28,
2008.  At the meeting the stockholders elected Gregory V. Ostergren
and James L. Sivils, III to three-year terms as directors of the Company, while
Don M. Gibson, Jack L. Barham, Shaun A. Burke, Kurt Hellweg, Tim Rosenbury,
James R. Batten and John Griesemer 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, 2008.





Director
      Election:Nominee
            
            Votes For
            
            
            Votes WithheldGregory
      V. Ostergren
            
            
            2,147,396
            
            
            
            182,338James
      L. Sivils, III
            
            
            2,147,371
            
            
            
            182,363Auditor
      Ratification:Votes
      for
            
            
            2,308,166Votes
      against
            
            
            18,383Abstentions
            
            
            3,185





22
 Table of Contents





Item 5.
            Other
      Information


None.





Item6.
            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 Act31(i).2
            
            Certification
      of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the
      Exchange Act32.1
            
            CEO
      certification pursuant to 18 U.S.C. Section 135032.2
            
            CFO
      certification pursuant to 18 U.S.C. Section
1350





23
 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,
      2008Shaun
      A. BurkePresident
      and Chief Executive Officer(Principal
      Executive Officer and Duly Authorized Officer)/s/ Carter Peters
            
            August 14,
      2008Carter
      PetersExecutive
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting Officer)






24