**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
      quarterly period ended June
      30, 2006





OR





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


**THE
      SECURITIES EXCHANGE ACT OF 1934**





For
      the
      transition period from _______ to _______





Commission
      number 0-23325





**Guaranty
      Federal Bancshares, Inc.**


(Exact
      name of registrant as specified in its charter)





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





Telephone
      Number: (417)
      520-4333





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes [X] No [ ]





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


Non-accererated
      filer [X]




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12-b2 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 14, 2006Common
                Stock, Par Value $0.10 per share
            2,945,069
                Shares





1







****





**GUARANTY
                FEDERAL BANCSHARES, INC.****TABLE
                OF CONTENTS****Item**
            
            
            **Page****PART
                I. FINANCIAL INFORMATION**1.
                Financial Statements
              Consolidated
                Financial Statements (Unaudited):Statements
                of Financial Condition
            3Statements
                of Income
            
            4Statements
                of Stockholders’ Equity
            5Statements
                of Cash Flows
            
            7Notes
                to Consolidated Financial
                Statements
            82.
                Management’s Discussion and Analysis of Financial Condition
                and Results of Operations
            123.
                Quantitative and Qualitative Disclosures
                about
                Market Risk
            184.
                Control and Procedures
            
            20**PART
                II. OTHER INFORMATION**1.
                Legal Proceedings
            
            211A.
                Risk Factors
            212.
                Unregistered Sales of Equity Securities and Use
                of
                Proceeds
            213.
                Defaults Upon Senior Securities
            
            214.
                Submission of Matters to a Vote of Security
                Holders
            215.
                Other Information
            
            226.
                Exhibits
            
            22Signatures





2


**PART
      I. FINANCIAL INFORMATION**


**Item
      1. Financial Statements**





**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENTS OF FINANCIAL CONDITION****JUNE
                30, 2006 (UNAUDITED) AND DECEMBER 31, 2005****ASSETS**
            
            **6/30/06**
            
            **12/31/05**Cash
            
            $
            16,156,148
            
            
            17,990,774Interest-bearing
                deposits in other financial institutions
            
            
            2,866,366
            
            
            2,515,704Cash
                and cash equivalents
            
            
            19,022,514
            
            
            20,506,478Available-for-sale
                securities
            
            
            9,137,118
            
            
            6,757,147Held-to-maturity
                securities
            
            
            867,224
            
            
            944,724Stock
                in Federal Home Loan Bank, at cost
            
            
            5,738,700
            
            
            4,978,800Mortgage
                loans held for sale
            
            
            2,276,742
            
            
            2,092,279Loans
                receivable, net of allowance for loan losses ofJune
                30, 2006 - $5,600,869 - December 31, 2005 - $5,399,654
            
            
            445,791,619
            
            
            433,435,429Accrued
                interest receivable:Loans
            
            
            2,255,262
            
            
            2,040,872Investments
            
            
            93,167
            
            
            48,255Prepaid
                expenses and other assets
            
            
            1,874,028
            
            
            2,604,425Foreclosed
                assets held for sale
            
            
            507,626
            
            
            26,775Premises
                and equipment
            
            
            7,495,959
            
            
            7,452,798Deferred
                income taxes
            
            
            1,051,655
            
            
            112,686$
            496,111,614
            
            
            481,000,668**LIABILITIES
                AND STOCKHOLDERS' EQUITY****LIABILITIES**Deposits
            
            $
            316,007,688
            
            
            320,058,951Federal
                Home Loan Bank advances
            
            
            116,000,000
            
            
            100,000,000Securities
                sold under agreements to repurchase
            
            
            2,150,065
            
            
            1,594,258Subordinated
                debentures
            
            
            15,465,000
            
            
            15,465,000Advances
                from borrowers for taxes and insurance
            
            
            652,401
            
            
            212,320Accrued
                expenses and other liabilities
            
            
            467,809
            
            
            288,587Accrued
                interest payable
            
            
            857,551
            
            
            508,164Dividend
                payable
            
            
            460,767
            
            
            459,074Income
                taxes payable
            
            
            -
            
            
            322,165452,061,281
            
            
            438,908,519**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS'
                EQUITY**Common
                Stock:$0.10
                par value; authorized 10,000,000 shares;issued
                June 30, 2006 - 6,630,061 shares;December
                31, 2005 - 6,571,348 shares
            
            
            663,006
            
            
            657,135Additional
                paid-in capital
            
            
            55,082,007
            
            
            53,778,686Unearned
                ESOP shares
            
            
            (1,458,930
            )
            
            (1,572,930
            )Retained
                earnings, substantially restricted
            
            
            38,756,891
            
            
            36,533,338Accumulated
                other comprehensive incomeUnrealized
                appreciation on available-for-sale securities,net
                of income taxes; June 30, 2006 - $911,117;December
                31, 2005 - $1,158,114
            
            
            1,400,212
            
            
            1,971,92594,443,186
            
            
            91,368,154Treasury
                stock, at cost; June 30, 2006 - 3,677,842 shares;December
                31, 2005 - 3,639,301 shares
            
            
            (50,392,853
            )
            
            (49,276,005
            )44,050,333
            
            
            42,092,149$
            496,111,614
            
            
            481,000,668





See
            Notes
            to Condensed Consolidated Financial Statements
 3


**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENTS OF INCOME****THREE
                MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)**Three
                months ended
            
            Six
                months ended6/30/2006
            
            6/30/2005
            
            6/30/2006
            
            6/30/2005**INTEREST
                INCOME**Loans
            
            $
            8,246,924
            
            
            6,357,976
            
            
            16,131,712
            
            
            12,084,855Investment
                securities
            
            
            125,310
            
            
            102,481
            
            
            227,317
            
            
            198,272Other
            
            
            14,035
            
            
            100,458
            
            
            105,155
            
            
            178,7068,386,269
            
            
            6,560,914
            
            
            16,464,184
            
            
            12,461,833**INTEREST
                EXPENSE**Deposits
            
            
            2,475,419
            
            
            1,698,567
            
            
            4,744,711
            
            
            3,257,674Federal
                Home Loan Bank advances
            
            
            1,363,217
            
            
            1,078,599
            
            
            2,586,639
            
            
            1,972,571Subordinated
                debentures
            
            
            258,889
            
            
            -
            
            
            514,835
            
            
            -Other
            
            
            27,650
            
            
            6,213
            
            
            48,413
            
            
            10,3424,125,175
            
            
            2,783,379
            
            
            7,894,598
            
            
            5,240,587**NET
                INTEREST INCOME**
            
            
            4,261,094
            
            
            3,777,536
            
            
            8,569,586
            
            
            7,221,246**PROVISION
                FOR LOAN LOSSES**
            
            
            225,000
            
            
            240,000
            
            
            450,000
            
            
            465,000**NET
                INTEREST INCOME AFTER****PROVISION
                FOR LOAN LOSSES**
            
            
            4,036,094
            
            
            3,537,536
            
            
            8,119,586
            
            
            6,756,246**NONINTEREST
                INCOME**Service
                charges
            
            
            337,667
            
            
            412,123
            
            
            649,922
            
            
            793,471Late
                charges and other fees
            
            
            58,791
            
            
            49,237
            
            
            150,272
            
            
            140,712Gain
                on sale of investment securities
            
            
            176,497
            
            
            187,115
            
            
            374,921
            
            
            382,903Gain
                on sale of loans
            
            
            160,392
            
            
            117,173
            
            
            279,965
            
            
            259,121Income
                (loss) on foreclosed assets
            
            
            (333
            )
            
            1,389
            
            
            (265
            )
            
            4,190Other
                income
            
            
            225,856
            
            
            74,167
            
            
            325,875
            
            
            144,717958,870
            
            
            841,204
            
            
            1,780,690
            
            
            1,725,114**NONINTEREST
                EXPENSE**Salaries
                and employee benefits
            
            
            1,483,714
            
            
            1,163,558
            
            
            2,926,804
            
            
            2,436,382Occupancy
            
            
            370,548
            
            
            331,539
            
            
            687,863
            
            
            664,748SAIF
                deposit insurance premiums
            
            
            9,910
            
            
            10,330
            
            
            20,232
            
            
            19,991Data
                processing
            
            
            70,004
            
            
            91,411
            
            
            125,141
            
            
            179,323Advertising
            
            
            100,519
            
            
            21,875
            
            
            202,254
            
            
            50,570Other
                expense
            
            
            508,805
            
            
            446,984
            
            
            948,600
            
            
            895,0762,543,500
            
            
            2,065,697
            
            
            4,910,894
            
            
            4,246,090**INCOME
                BEFORE INCOME TAXES**
            
            
            2,451,464
            
            
            2,313,042
            
            
            4,989,382
            
            
            4,235,270**PROVISION
                FOR INCOME TAXES**
            
            
            870,074
            
            
            864,327
            
            
            1,843,667
            
            
            1,571,781**NET
                INCOME**
            
            $
            1,581,390
            
            
            1,448,715
            
            
            3,145,715
            
            
            2,663,489**BASIC
                EARNINGS PER SHARE**
            
            $
            0.56
            
            
            0.53
            
            
            1.12
            
            
            0.96**DILUTED
                EARNINGS PER SHARE**
            
            $
            0.54
            
            
            0.50
            
            
            1.08
            
            
            0.91





See
            Notes
            to Condensed Consolidated Financial Statements
 4





**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENT OF STOCKHOLDERS' EQUITY****SIX
                MONTHS ENDED JUNE 30, 2006 (UNAUDITED)**Common
                Stock
            
            Additional
                Paid-In Capital
            
            Unearned
                ESOP Shares
            
            Treasury
                Stock
            
            Retained
                Earnings
            
            Accumulated
                Other Comprehensive Income
            
            Total**Balance,
                January 1, 2006**
            
            $
            657,135
            
            
            53,778,686
            
            
            (1,572,930
            )
            
            (49,276,005
            )
            
            36,533,338
            
            
            1,971,925
            
            
            42,092,149Comprehensive
                incomeNet
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,145,715
            
            
            -
            
            
            3,145,715Change
                in unrealized appreciationon
                available-for-sale securities, netof
                income taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (571,713
            )
            
            (571,713
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,574,002Dividends
                ($0.33 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (922,162
            )
            
            -
            
            
            922,162Stock
                award plans
            
            
            -
            
            
            267,033
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            267,033Stock
                options exercised
            
            
            5,871
            
            
            822,348
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            828,219Release
                of ESOP shares
            
            
            -
            
            
            213,940
            
            
            114,000
            
            
            -
            
            
            -
            
            
            -
            
            
            327,940Treasury
                stock purchased
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,116,848
            )
            
            -
            
            
            -
            
            
            (1,116,848
            )**Balance,
                June 30, 2006**
            
            $
            663,006
            
            
            55,082,007
            
            
            (1,458,930
            )
            
            (50,392,853
            )
            
            38,756,891
            
            
            1,400,212
            
            
            44,050,333











See
            Notes
            to Condensed Consolidated Financial Statements
 5







**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENT OF STOCKHOLDERS' EQUITY****SIX
                MONTHS ENDED JUNE 30, 2005 (UNAUDITED)**Common
                Stock
            
            Additional
                Paid-In Capital
            
            Unearned
                ESOP Shares
            
            Treasury
                Stock
            
            Retained
                Earnings
            
            Accumulated
                Other Comprehensive Income
            
            Total**Balance,
                January 1, 2005**
            
            $
            649,386
            
            
            52,384,842
            
            
            (1,800,930
            )
            
            (45,712,994
            )
            
            32,437,131
            
            
            2,815,828
            
            
            40,773,263Comprehensive
                incomeNet
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,663,489
            
            
            -
            
            
            2,663,489Change
                in unrealized appreciationon
                available-for-sale securities, netof
                income taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (633,946
            )
            
            (633,946
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,029,543Dividends
                ($0.32 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (884,532
            )
            
            -
            
            
            (884,532
            )Stock
                award plans
            
            
            -
            
            
            11,582
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            11,582Stock
                options exercised
            
            
            2,469
            
            
            303,496
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            305,965Release
                of ESOP shares
            
            
            -
            
            
            152,886
            
            
            114,000
            
            
            -
            
            
            -
            
            
            -
            
            
            266,886Treasury
                stock purchased
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,344,116
            )
            
            -
            
            
            -
            
            
            (2,344,116
            )**Balance,
                June 30, 2005**
            
            $
            651,855
            
            
            52,852,806
            
            
            (1,686,930
            )
            
            (48,057,110
            )
            
            34,216,088
            
            
            2,181,882
            
            
            40,158,591














See
            Notes
            to Condensed Consolidated Financial Statements
 6


**GUARANTY
                FEDERAL BANCSHARES, INC****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****SIX
                MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)****6/30/2006**
            
            **6/30/2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income
            
            $
            3,145,715
            
            
            2,663,489Items
                not requiring (providing) cash:Deferred
                income taxes
            
            
            (691,974
            )
            
            (214,649
            )Depreciation
            
            
            325,643
            
            
            393,855Provision
                for loan losses
            
            
            450,000
            
            
            465,000Gain
                on loans and investment securities
            
            
            (654,886
            )
            
            (642,024
            )(Gain)
                loss on sale of premises and equipment
            
            
            (150
            )
            
            1,925Gain on
                sale of foreclosed assets
            
            
            (1,023
            )
            
            (6,003
            )Amortization
                of deferred income, premiums and discounts
            
            
            62,171
            
            
            (13,223
            )Stock
                award plan expense
            
            
            267,033
            
            
            24,064Origination
                of loans held for sale
            
            
            (24,056,667
            )
            
            (18,083,680
            )Proceeds
                from sale of loans held for sale
            
            
            24,152,169
            
            
            18,666,581Release
                of ESOP shares
            
            
            327,940
            
            
            266,886Changes
                in:Accrued
                interest receivable
            
            
            (259,302
            )
            
            (344,960
            )Prepaid
                expenses and other assets
            
            
            730,397
            
            
            267,858Accounts
                payable and accrued expenses
            
            
            530,302
            
            
            156,512Income
                taxes payable
            
            
            (322,165
            )
            
            124,956Net
                cash provided by operating activities
            
            
            4,004,225
            
            
            3,726,587**CASH
                FLOWS FROM INVESTING ACTIVITIES**Net
                increase in loans
            
            
            (13,380,969
            )
            
            (30,507,965
            )Principal
                payments on held-to-maturity securities
            
            
            82,020
            
            
            161,048Principal
                payments on available-for-sale securities
            
            
            81,724
            
            
            -Proceeds
                from maturities of available-for-sale securities
            
            
            500,000
            
            
            4,500,000Purchase
                of premises and equipment
            
            
            (373,194
            )
            
            (489,550
            )Proceeds
                from sale of premises and equipment
            
            
            4,540
            
            
            4,200Purchase
                of available-for-sale securities
            
            
            (3,780,316
            )
            
            (4,962,267
            )Proceeds
                from sale of available-for-sale securities
            
            
            380,795
            
            
            388,777Purchase
                of FHLB stock
            
            
            (759,900
            )
            
            (855,800
            )Proceeds
                from sale of foreclosed assets
            
            
            22,298
            
            
            337,653Net
                cash used in investing activities
            
            
            (17,223,002
            )
            
            (31,423,904
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Stock
                options exercised
            
            
            828,219
            
            
            305,964Cash
                dividends paid
            
            
            (921,184
            )
            
            (897,378
            )Net
                increase (decrease) in demand deposits,NOW
                accounts and savings accounts
            
            
            (5,855,752
            )
            
            393,728Net
                increase in certificates of deposit and securities soldunder
                agreements to repurchase
            
            
            2,360,296
            
            
            3,493,595Proceeds
                from FHLB advances
            
            
            792,414,000
            
            
            499,050,000Repayments
                of FHLB advances
            
            
            (776,414,000
            )
            
            (479,050,000
            )Advances
                from borrowers for taxes and insurance
            
            
            440,082
            
            
            485,928Treasury
                stock purchased
            
            
            (1,116,848
            )
            
            (2,344,116
            )Net
                cash provided by financing activities
            
            
            11,734,813
            
            
            21,437,451**DECREASE
                IN CASH AND CASH EQUIVALENTS**
            
            
            (1,483,964
            )
            
            (6,259,596
            )**CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            20,506,478
            
            
            15,896,458**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            $
            19,022,514
            
            
            9,636,862








See
            Notes
            to Condensed Consolidated Financial Statements
 7


**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 period are not necessarily indicative of the
      results to be expected for the full year.





These
      condensed consolidated financial statements should be read in conjunction with
      the consolidated financial statements and notes thereto included in the
      Company’s Form 10-K annual report for 2005 filed with the Securities and
      Exchange Commission. The condensed consolidated statement of financial condition
      of the Company as of December 31, 2005, has been derived from the audited
      consolidated balance sheet of the Company as of that date. Certain information
      and note disclosures normally included in the Company’s annual financial
      statements prepared in accordance with generally accepted accounting principles
      have been condensed or omitted.





**Note
      2: Principles of Consolidation**





The
      accompanying consolidated financial statements include the accounts of Guaranty
      Federal Bancshares, Inc. (the “Company”), its wholly owned subsidiary, Guaranty
      Bank (the “Bank”) and the wholly-owned subsidiary of the Bank, Guaranty
      Financial Services of Springfield, Inc. All significant intercompany
      transactions and balances have been eliminated in consolidation.




**Note
      3: Benefit Plans**





Stock
      Award Plans





The
      Company has established four stock award plans for the benefit of certain
      directors, officers and employees of the Bank and its subsidiary. The plans
      provide a proprietary interest in the Company in a manner designed to encourage
      these individuals to remain with the Bank. A committee of the Bank’s Board of
      Directors administers the plans. The Company accounts for the cost of share
      purchases under the plans as a reduction of stockholders' equity. The awards
      vest at the rate of 20% per year over a five-year period. Compensation expense
      is recognized based on the Company’s stock price on the date the shares are
      awarded to employees.





At
      the
      annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders
      approved the Recognition and Retention Plan (the “RRP”). Following approval of
      the Plan, the Bank contributed $464,643 to a separate trust to purchase the
      75,106 shares of the Company’s common stock in the RRP. As of June 30, 2006 all
      shares in this plan have vested.





At
      a
      special stockholders’ meeting on July 22, 1998, the Company’s stockholders
      approved the Restricted Stock Plan (the “RSP”). Following approval of the Plan,
      the Company contributed $2,373,065 to a separate trust to purchase the 173,632
      shares in the RSP. As of June 30, 2006 all shares in this plan have vested.





During
      the year ended June 30, 2000, the directors of the Company established the
      Stock
      Compensation Plan (the “2000 SCP”) with both a stock award component and a stock
      option component. Under the stock award component of this plan, the Committee
      awarded 7,125 shares of the Company’s common stock. Following approval of the
      Plan, the Company contributed $85,945 to a separate trust to purchase the 7,125
      shares in the SCP. As of June 30, 2006 all shares in this plan have vested.


During
      the year ended June 30, 2001, the directors of the Company established the
      Stock
      Compensation Plan (the “2001 SCP”) with both a stock award component and a stock
      option component. Under the stock award component of this plan, the Committee
      awarded 10,239 shares of the Company’s common stock. The shares for this plan
      were taken from forfeited shares in the RSP. As of June 30, 2006 there are
      2,047
      shares in this plan that are not vested.





The
      Bank
      recognized $6,400 and $14,271 and $8,588 and $24,064 of expense under these
      stock award plans in the three month and six month periods ended June 30, 2006
      and 2005, respectively.





8


Stock
      Option Plans





The
      Company has established four stock option plans for the benefit of certain
      directors, officers and employees of the Bank and its subsidiary. A committee
      of
      the Company’s Board of Directors administers the plans. The stock options under
      these plans may be either incentive stock options or nonqualified stock options.
      Incentive stock options can be granted only to participants who are employees
      of
      the Bank or its subsidiary. The option price must not be less than the market
      value of the Company stock on the date of grant. All options expire no later
      than ten years from the date of grant. The options vest at the rate of 20%
      per
      year over a five-year period.





At
      the
      annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders
      approved the 1994 Stock Option and Incentive Plan for the benefit of certain
      directors, officers and employees of the Bank and its subsidiary. Under this
      Plan, the Committee may grant stock options for up to 187,764 shares of the
      Company’s common stock.





At
      a
      special stockholders’ meeting on July 22, 1998, the Company’s stockholders
      approved the 1998 Stock Option and Incentive Plan. Under this plan, the
      Committee may grant stock options for up to 434,081 shares of the Company’s
      common stock.





Under
      the
      stock option component of the 2000 SCP, the Committee granted nonqualified
      stock
      options for 17,875 shares of the Company’s common stock.





Under
      the
      stock option component of the 2001 SCP, the Committee has granted all stock
      options under the plan.




During
      the six months ended December 31, 2003, the directors of the Company authorized
      the issuance of 5,000 stock options as an employment inducement to a new officer
      of the Bank pursuant to a stock option agreement. Stock options
      awarded under this agreement are considered non-qualified for federal
      income tax purposes.




During
      the year ended December 31, 2004, the directors of the Company authorized the issuance
      of 25,000 stock options as an employment inducement to a new officer of the Bank
      pursuant to a stock
      option agreement .
      Stock
      options awarded under this  agreement are
      considered non-qualified for federal income tax purposes.





On
      May
      19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan
      (“2004 SOP”). The purpose of the plan is to attract and retain qualified
      personnel for positions of substantial responsibility. The aggregate number
      of
      shares with respect to options issued under this plan shall not exceed 250,000
      shares. To date 35,000 stock options have been granted under this plan.





9


The
      table
      below summarizes transactions under the Company’s stock option plans for six
      months ended June 30, 2006:





Number
                of sharesIncentive
                Stock Option
            
            Non-Incentive
                Stock Option
            
            Weighted
                Average Exercise PriceBalance
                outstanding as of December 31, 2005
            
            
            164,785
            
            
            175,091
            
            
            15.65Granted
            
            
            10,000
            
            
            10,000
            
            
            28.06Exercised
            
            
            13,470
            
            
            45,243
            
            
            14.11Forfeited
            
            
            5,000
            
            
            -
            
            
            27.90Balance
                outstanding as of June 30, 2006
            
            
            156,315
            
            
            139,848
            
            
            16.60Options
                exercisable as of June 30, 2006
            
            
            111,017
            
            
            69,743
            
            
            13.48




In
      December, 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS
      123R). SFAS 123R requires companies to recognize the cost of employee services
      received in exchange for awards of equity instruments, such as stock options
      and
      restricted stock, based on the fair value of those awards at the date of grant
      and eliminates the choice to account for employee stock options under Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25), which is how the Company previously accounted for its stock options.
      The Company adopted SFAS 123R effective January 1, 2006 using the modified
      prospective method and, as such, results for prior periods have not been
      restated. Stock-based compensation expense will be recognized for all stock
      option granted or modified after January 1, 2006. In addition, unvested options
      existing at January 1, 2006, will be recognized in expense over the remaining
      vesting period. The fair value of all stock options has been estimated using
      the
      Black-Scholes option pricing model using various assumptions, some of which
      are
      highly subjective.




As
      a
      result of adopting SFAS 123R on January 1, 2006, incremental stock-based
      compensation expense recognized was $17,001 and $34,009 during the three months
      and six months ended June 30, 2006, respectively. As of June 30, 2006, there
      was
      $198,969 of unrecognized compensation expense related to nonvested stock
      options, which will be recognized over the remaining vesting period.




10


Prior
      to
      January 1, 2006, no compensation expense was recognized for stock option
      grants, as all such grants had an exercise price equal to the fair market value
      on the date of grant. The following illustrates the effect on net income and
      earnings per share if the Company had applied the fair value method of SFAS
      No. 123, “Accounting for Stock-Based Compensation,” prior to
      January 1, 2006:




Three
                Months ended
            
            Six
                Months endedJune
                30, 2005
            
            June
                30, 2005Net
                income, as reported
            
            $
            1,448,715
            
            
            2,663,489Less:
                Total stock-based employee compensationcost
                determined under the fair value-basedmethod,
                net of income taxes
            
            
            (9,105
            )
            
            (17,887
            )Pro
                forma net income
            
            $
            1,439,610
            
            
            2,645,602Earnings
                per share:Basic
                - as reported
            
            $
            0.53
            
            
            0.96Basic
                - pro forma
            
            $
            0.52
            
            
            0.95Diluted
                - as reported
            
            $
            0.50
            
            
            0.91Diluted
                - pro forma
            
            $
            0.50
            
            
            0.91





**Note
      4: Earnings Per Share**


For
                three months ended June 30, 2006
            
            For
                six months ended June 30, 2006Income
                Available to Stockholders
            
            Average
                Shares Outstanding
            
            Per-share
            
            Income
                Available to Stockholders
            
            Average
                Shares Outstanding
            
            Per-shareBasic
                Earnings per Share
            
            $
            1,581,390
            
            
            2,803,805
            
            $
            0.56
            
            $
            3,145,715
            
            
            2,796,692
            
            $
            1.12Effect
                of Dilutive Securities:Stock
                Options
            
            
            
            
            
            107,218
            
            
            
            
            
            
            
            
            119,763Diluted
                Earnings per Share
            
            $
            1,581,390
            
            
            2,911,023
            
            $
            0.54
            
            $
            3,145,715
            
            
            2,916,455
            
            $
            1.08For
                three months ended June 30, 2005
            
            
            For
                six months ended June 30, 2005Income
                Available to Stockholders
            
            
            
            
            
            Average
                Shares Outstanding
            
            
            Per-share
            
            
            Income
                Available to Stockholders
            
            
            Average
                Shares Outstanding
            
            
            Per-shareBasic
                Earnings per Share
            
            $
            1,448,715
            
            
            2,754,204
            
            $
            0.53
            
            $
            2,663,489
            
            
            2,784,843
            
            $
            0.96Effect
                of Dilutive Securities:Stock
                Options
            
            
            
            
            
            132,784
            
            
            
            
            
            
            
            
            135,007Diluted
                Earnings per Share
            
            $
            1,448,715
            
            
            2,886,988
            
            $
            0.50
            
            $
            2,663,489
            
            
            2,919,850
            
            $
            0.91







11




**Note
      5: Other Comprehensive Income**





6/30/2006
            
            6/30/2005Unrealized
                gains (losses) on
            
            $
            (532,560
            )
            
            (623,360
            )available-for-sale
                securitiesLess:
                Reclassification adjustment forrealized
                (gains) losses included in income
            
            
            (374,921
            )
            
            (382,903
            )Other
                comprehensive income (loss),before
                tax effect
            
            
            (904,481
            )
            
            (1,006,263
            )Tax
                expense (benefit)
            
            
            (335,768
            )
            
            (372,317
            )**OTHER
                COMPREHENSIVE INCOME (LOSS)**
            
            $
            (571,713)
            
            
            (633,946
            )





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





**General**





The
      primary function of the Company has been to monitor its investment in the Bank.
      As a result, the results of operations of the Company are derived primarily
      from
      the 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, 2006, and the results of operations for the three months and six
      months ended June 30, 2006 and 2005.





The
      discussion set forth below, as well as other portions of this Form 10-Q, may
      contain forward-looking comments. Such comments are based upon the information
      currently available to management of the Company and management’s perception
      thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words
      such as “anticipates,” “estimates,” “believes,” “expects,” and similar
      expressions are intended to identify forward-looking statements but are not
      the
      exclusive means of identifying such statements. Such statements are subject
      to
      risks and uncertainties. Actual results of the Company’s operations could
      materially differ from those forward-looking comments. The differences could
      be
      caused by a number of factors or combination of factors including, but not
      limited to: changes in demand for banking services; changes in portfolio
      composition; changes in management strategy; increased competition from both
      bank and non-bank companies; changes in the general level of interest rates;
      and
      other factors set forth in reports and other documents filed by the Company
      with
      the Securities and Exchange Commission from time to time, including the risk
      factors described under Item 1A. of the Company’s Form 10-K for the fiscal year
      ended December 31, 2005.





**Financial
      Condition**





The
      Company’s total assets increased $15,110,946 from $481,000,668 as of December
      31, 2005, to $496,111,614 as of June 30, 2006.





Cash
      and
      cash equivalents decreased $1,483,964 (7%) from $20,506,478 as of December
      31,
      2005, to $19,022,514 as of June 30, 2006. The decrease is primarily due to
      a
      smaller amount of uncollected funds on deposit with a correspondent bank as
      of
      June 30, 2006, compared to December 31, 2005.




Securities
      available-for-sale increased $2,379,971, (35%) from $6,757,147 as of December
      31, 2005, to $9,137,118 as of June 30, 2006. The increase was primarily due
      to
      the purchase of various government agency securities during the period totaling
      approximately $3,500,000. The Bank currently holds 42,600 shares of Federal
      Home
      Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $41,721 in
      the available-for-sale category. As of June 30, 2006, the gross unrealized
      gain
      on the FHLMC stock was $2,386,905, a decrease from $3,176,010 as of December
      31,
      2005.





12


Securities
      held-to-maturity decreased primarily due to principal repayments by $77,500
      (8%)
      from $944,724 as of December 31, 2005, to $867,224 as of June 30,
      2006.





Stock
      in
      Federal Home Loan Bank of Des Moines (“FHLB”) increased by $759,900 (15%), due
      to the purchase of such stock necessary to meet FHLB requirements.


Net
        loans
        receivable increased by $12,356,190 (3%) from $433,435,429 as of December
        31,
        2005, to $445,791,619 as of June 30, 2006. Commercial real estate loans
        increased by $13,759,533 (11%) from $122,884,052 as of December 31, 2005,
        to
        $136,643,585 as of June 30, 2006. The Bank plans to continue its emphasis
        on
        commercial lending, while selling the majority of conforming single family
        loan
        production on the secondary market. As a result, permanent mortgage loans
        secured by both owner and non-owner occupied residential real estate decreased
        by $9,798,329 (10%). Loans held for sale increased $184,463 (9%) to $2,276,742
        as of June 30, 2006, compared to $2,092,279 at December 31, 2005. The Bank
        also
        continued to be active in construction lending. Construction loans increased
        by
        $11,465,614 (16%) to $81,855,517 as of June 30, 2006, compared to $70,389,903
        as
        of December 31, 2005. Loan
        growth is anticipated to continue and represents a major part of the Bank’s
        planned asset growth. See
        also
        discussion under “Quantitative and Qualitative Disclosure about Market Risk -
        Asset/Liability Management.”


Allowance
      for loan losses increased $201,215 (4%) from $5,399,654 as of December 31,
      2005
      to $5,600,869 as of June 30, 2006. The allowance increased due to the provision
      for loan losses of $450,000 recorded during this period exceeding net loan
      charge-offs of $248,785 during this period. Management of the Company decided
      to
      increase the allowance for loan losses by this provision charge primarily as
      a
      result of the continued growth of the Bank’s loan portfolio, particularly its
      commercial loan portfolio. See discussion under “Results
      of Operations - Comparison of Three Month and Six Months Periods Ended June
      30,
      2006 and 2005 - Provision for Loan Losses.” The
      allowance for loan losses as of June 30, 2006 and December 31, 2005 was 1.27%
      and 1.29%, respectively, of average net loans outstanding. As of June 30, 2006,
      the allowance for loan losses was 157% of impaired loans compared to 75% as
      of
      December 31, 2005.





Premises
      and equipment increased $43,161 (1%) from $7,452,798, as of December 31, 2005
      to
      $7,495,959 as of June 30, 2006, due to purchases of equipment less depreciation
      recognized on these assets.





Deposits
      decreased $4,051,263 (1%) from $320,058,951 as of December 31, 2005, to
      $316,007,688 as of June 30, 2006. For the six months ended June 30, 2006,
      checking and savings accounts decreased by $5,855,752 (5%) and certificates
      of
      deposits increased by $1,804,489 (1%). The decrease in checking and savings
      was
      primarily due to activity in commercial demand accounts. Due to the nature
      of
      the commercial account holders business, there are large fluctuations in account
      balances. The increase in certificates of deposit was primarily due to the
      Company’s decision to increase rates paid on retail certificates of deposit. As
      a result retail certificates of deposits increased $21,823,257 (17%) during
      the
      period. During the same period brokered certificates of deposit decreased
      $20,018,769 (35%). See also the discussion under “Quantitative
      and Qualitative Disclosure about Market Risk - Asset/Liability
      Management.”





FHLB
      advances increased by $16,000,000 from $100,000,000 as of December 31, 2005,
      to
      $116,000,000 as of June 30, 2006, due
      to
      new advances exceeding repayments. These funds were primarily used to fund
      new
      loans.




On
      December 15, 2005, the Company completed an offering of $15 million of “Trust
      Preferred Securities” (defined hereinafter). The Company formed two wholly-owned
      subsidiaries, each a Delaware statutory trust (each a “Trust”, and collectively,
      the “Trusts”), for the purpose of issuing the $15 million of Trust Preferred
      Securities. The proceeds of the sale of Trust
      Preferred Securities ,
      together with the proceeds of the Trusts’ sale of their common securities to the
      Company for $465,000, were used by each Trust to purchase certain debentures
      from the Company. The Company issued 30-year junior subordinated deferrable
      interest debentures to the Trusts in the principal amount of $5,155,000 (“Trust
      I Debentures”) and $10,310,000 (“Trust II Debentures”, and together with the
      Trust I Debentures, the “Debentures”) pursuant to the terms of Indentures dated
      December 15, 2005 by and between the Company and Wilmington Trust Company,
      as
      trustee. The Trust I Debentures bear interest at a fixed rate of 6.92%, payable
      quarterly. The Trust II Debentures bear interest at a fixed rate of 6.47% for
      5
      years, payable quarterly, after issuance and thereafter at a floating rate
      equal
      to the three month LIBOR plus 1.45%. The interest payments by the Company to
      the
      Trusts will be used to pay the dividends payable by the Trusts to the holders
      of
      the Trust Preferred Securities. The Company has not issued additional debentures
      since December 15, 2005.





13


As
      a part
      of management’s review of available funding, management continually evaluates
      the cost of FHLB advances, the cost of issuing junior subordinated debentures
      and the cost of the national brokered certificate of deposit market versus
      retail certificates of deposit in the local market. The aggregate of brokered
      certificates of deposit include both the cost of the interest paid to the
      depositor and the fee paid to the broker. At times, the all-inclusive cost
      of
      brokered certificates of deposit is less than the marginal cost of increasing
      local retail certificate of deposits. Management believes a combination of
      these
      sources of funds will provide the lowest cost long-term funding.





Advances
      from borrowers for taxes and insurance increased $440,081 (207%) from $212,320
      as of December 31, 2005, to $652,401 as of June 30, 2006 which was due to the
      timing of collection and payment of real estate taxes.




Stockholders’
      equity (including unrealized appreciation on securities available-for-sale,
      net
      of tax) increased $1,958,184 (3%) from $42,092,149 as of December 31, 2005,
      to
      $44,050,333 as of June 30, 2006. This increase was due to several
      factors.The
      Company’snet
      incomeduring
      this periodwas$3,145,715 which was partially offset by dividends in the amount of $461,397
      which were declared on March 16, 2006 and paid on April 14, 2006, to
      stockholders’ of record as of March 30, 2006 and $467,809 which were declared on
      June 23, 2006 and paid on July 14, 2006, to stockholders’ of record as of July
      3, 2006. In addition,the
      increase in stockholders’ equity was further offset asthe
      Company repurchased 38,541 shares of treasury stock at an aggregate cost of
      $1,116,848 (an average cost of $28.98 per share) and a decrease in unrealized
      appreciation on available for sale securities, net of taxes, of $571,713 during
      this period. As of June 30, 2006, 2 shares of the Company’s common stock remain
      to be repurchased under the repurchase plan announced by the Company on November
      22, 2002. On a per share basis, stockholders’ equity increased from $15.17 as of
      December 31, 2005 to $15.70 as of June 30, 2006.




**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, junior subordinate debentures
      and
      other 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 table sets forth certain information relating to the Company’s average
      consolidated statements of financial condition and reflects the average yield
      on
      assets and average cost of liabilities for the periods indicated. Such yields
      and costs are derived by dividing income or expense annualized by the average
      balance of assets or liabilities, respectively, for the periods shown. Average
      balances were derived from average daily balances. The average balance of loans
      includes loans on which the Company has discontinued accruing interest. The
      yields and costs include fees which are considered adjustments to yields. All
      dollar amounts are in thousands.





14







Six
                months ended 6/30/2006
            
            Six
                months ended 6/30/2005Average
                Balance
            
            Interest
            
            Yield
                / Cost
            
            Average
                Balance
            
            Interest
            
            Yield
                / Cost**ASSETS**Interest-earning:Loans
            
            $
            441,900
            
            
            16,132
            
            
            7.30
            %
            $
            405,957
            
            
            12,085
            
            
            5.95
            %Investment
                securities
            
            
            7,145
            
            
            227
            
            
            6.35
            %
            
            9,876
            
            
            198
            
            
            4.01
            %Other
                assets
            
            
            9,862
            
            
            105
            
            
            2.13
            %
            
            12,219
            
            
            179
            
            
            2.93
            %Total
                interest-earning
            
            
            458,907
            
            
            16,464
            
            
            7.18
            %
            
            428,052
            
            
            12,462
            
            
            5.82
            %Noninterest-earning
            
            
            20,784
            
            
            
            
            
            
            
            
            19,483$
            479,691
            
            
            
            
            
            
            
            $
            447,535**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Interest-bearing:Savings
                accounts
            
            $
            13,974
            
            
            144
            
            
            2.06
            %
            $
            15,291
            
            
            91
            
            
            1.19
            %Transaction
                accounts
            
            
            76,313
            
            
            739
            
            
            1.94
            %
            
            87,470
            
            
            623
            
            
            1.42
            %Certificates
                of deposit
            
            
            193,592
            
            
            3,862
            
            
            3.99
            %
            
            171,507
            
            
            2,543
            
            
            2.97
            %FHLB
                advances
            
            
            105,811
            
            
            2,587
            
            
            4.89
            %
            
            105,242
            
            
            1,973
            
            
            3.75
            %Subordinated
                debentures
            
            
            15,465
            
            
            515
            
            
            6.66
            %
            
            -
            
            
            -
            
            
            0.00
            %Other
                borrowed funds
            
            
            3,488
            
            
            48
            
            
            2.75
            %
            
            1,090
            
            
            10
            
            
            1.83
            %Total
                interest-bearing
            
            
            408,643
            
            
            7,895
            
            
            3.86
            %
            
            380,600
            
            
            5,240
            
            
            2.75
            %Noninterest-bearing
            
            
            27,241
            
            
            
            
            
            
            
            
            26,413Total
                liabilities
            
            
            435,884
            
            
            
            
            
            
            
            
            407,013Stockholders’
                equity
            
            
            43,807
            
            
            
            
            
            
            
            
            40,522$
            479,691
            
            
            
            
            
            
            
            $
            447,535Net
                earning balance
            
            $
            50,264
            
            
            
            
            
            
            
            $
            47,452Earning
                yield less costing rate
            
            
            
            
            
            
            
            
            3.32
            %
            
            
            
            
            
            
            
            3.07
            %Net
                interest income, and net yield spreadon
                interest earning assets
            
            
            
            
            $
            8,569
            
            
            3.73
            %
            
            
            
            $
            7,222
            
            
            3.37
            %Ratio
                of interest-earning assets tointerest-bearing
                liabilities
            
            
            
            
            
            112
            %
            
            
            
            
            
            
            
            112
            %





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


**2006
      and 2005**





Net
      income for the three months and six months ended June 30, 2006 was $1,581,390
      and $3,145,715, respectively, as compared to $1,448,715 and $2,663,489,
      respectively, for the three months and six months ended June 30, 2005, which
      represents an increase in earnings of $132,675 (9%) for the three month period,
      and an increase in earnings of $482,226 (18%) for the six month
      period.


**Interest
      Income**





Total
      interest income for the three months and six months ended June 30, 2006,
      increased $1,825,355


(28%)
      and
      $4,002,351 (32%), respectively, as compared to the three months and six months
      ended June 30, 2005. For the three month and six month periods ended June 30,
      2006 compared to the same periods in 2005, the average yield on interest earning
      assets increased 127 basis points to 7.26% and increased 136 basis points to
      7.18%, respectively, while the average balance of interest earning assets
      increased $23,834,000 and $30,855,000, respectively.





15


**Interest
      Expense**





Total
      interest expense for the three months and six months ended June 30, 2006,
      increased $1,341,796 (48%) and $2,654,011 (51%), respectively, when compared
      to
      the three months and six months ended June 30, 2005. For the three month and
      six
      month periods ended June 30, 2006 compared to the same periods in 2005, the
      average cost of interest bearing liabilities increased 115 basis points to
      4.01%
      and 111 basis points to 3.86%, respectively, while the average balance increased
      $22,372,000 and $28,043,000, respectively. The increase in interest expense
      is
      attributed, in part, to the issuance by the Company of $15,465,000 of 30-year
      junior subordinated debentures on December 15, 2005, as explained
      previously.





**Net
      Interest Income**





As
      a
      result of the interest income and interest expense for the three months and
      six
      months ended June 30, 2006 as discussed above, net interest income for the
      three
      months and six months ended June 30, 2006 increased $483,558 (13%) and
      $1,348,340 (19%), respectively, when compared to the same periods in 2005.





**Provision
      for Loan Losses**





Based
      primarily on the continued growth of the commercial loan portfolio, management
      decided to record a provision for loan losses of $225,000 and $450,000 for
      the
      three months and six months ended June 30, 2006, respectively, compared to
      $240,000 and $465,000 for the same periods in 2005. The Bank will continue
      to
      monitor its allowance for loan losses and make future additions based on
      economic and regulatory conditions. Although the Bank maintains its allowance
      for loan losses at a level which it considers to be sufficient to provide for
      potential losses, there can be no assurance that future loan losses will not
      exceed internal estimates. In addition, the amount of the allowance for loan
      losses is subject to review by regulatory agencies which can order the
      establishment of additional loan loss provisions.





**Noninterest
      Income**





Noninterest
      income increased $117,666 (14%) and $55,576 (3%) for the three months and six
      months ended June 30, 2006, respectively, when compared to the three months
      and
      six months ended June 30, 2005. The increases for the three months and six
      months ended June 30, 2006, were primarily due to increases in gain on sale
      of
      loans, late charges and other income, which were partially offset by decreases
      in service charges and gain on sale of investments as discussed below.





Gain
      on
      sale of loans increased $43,219 (37%) and $20,844 (8%) for the three months
      and
      six months ended June 30, 2006, respectively, when compared to the same periods
      in 2005, which was a result of an increase in


mortgages
      loans sold on the secondary market.





Late
      charges and other fees increased $9,554 (19%) and $9,560 (7%) for the three
      months and six months ended June 30, 2006, respectively, when compared to the
      same periods in 2005. These increases were primarily due to more prepayment
      penalties paid on loans in the three month and six month periods ended June
      30,
      2006, compared to the same periods in 2005.





Other
      income increased $151,689 (205%) and $181,158 (125%) for the three months and
      six months ended June 30, 2006, respectively when compared to the same periods
      in 2005. This increase was primarily due to profit on the sale on mortgage
      servicing rights that occurred during the three months and six months ended
      June
      30, 2006. During these periods the bank recorded $118,971 profit from the sale
      of mortgage servicing rights. In addition, there was increase in the amount
      of
      ATM fees collected during the three months and six months ended June 30, 2006,
      compared to the same period in 2005.




Service
      charges on transaction accounts decreased by $74,456 (18%) and $143,549 (18%)
      during the three months and six months ended June 30, 2006, respectively, when
      compared to the same periods in 2005. This is a result of a decrease in the
      amount of “non-sufficient funds” and overdraft fees collected during this three
      month and six month period when compared to the same period in 2005. This
      decrease is a result of fewer “non-sufficient funds” checks presented per
      account during the three month and six month period ended June 30, 2006,
      compared to the same periods in 2005.




16




**Noninterest
      Expense**





Noninterest
      expense increased $477,803 (23%) and $664,804 (16%) for the three months and
      six
      months ended June 30, 2006, respectively when compared to the three months
      and
      six months ended June 30, 2005. The increases for the three months and six
      months ended June 30, 2006 were primarily due to increases in salaries and
      employee benefits and advertising, which were partially offset by decreases
      in
      data processing as discussed below.





Salaries
      and employee benefits increased $320,156 (28%) and $490,422 (20%) for the three
      months and six months ended June 30, 2006, respectively when compared to the
      same periods in 2005. This increase was due to several factors, including
      additions in executive and staff positions, pay increases to existing employees
      and increases in employee benefit costs during the three month and six month
      periods ended June 30, 2006 when compared to the same periods in
      2005.





Advertising
      expense increased $78,644 (360%) and $151,684 (300%) for the three months and
      six months ended June 30, 2006, respectively when compared to the same periodsin
      2005. This increase was primarily due to the Bank’s decision to increase its
      exposure through the use of several different advertising mediums.





Data
      processing expense decreased $21,407 (23%) and $54,182 (30%) for the three
      months and six months ended June 30, 2006 when compared to the same periods
      in
      2005. This decrease was primarily due to the Bank’s decision to terminate its
      relationship with a third-party vendor that provided data processing services
      during the three month and six month periods ended June 30, 2006.





**Provision
      for Income Taxes**





There
      was
      an increase of $5,747 (1%) and $271,886 (17%) in the provision for income taxes
      for the three months and six months ended June 30, 2006, respectively, as
      compared to the same periods in 2005. These increases were due to an increase
      in
      before tax income of $138,422 and $754,112 for the three months and six months
      ended June 30, 2006, respectively, compared to the same periods in
      2005.





**Nonperforming
      Assets**





The
      allowance for loan losses is calculated based upon an evaluation of pertinent
      factors underlying the various types and quality of the Bank’s existing loan
      portfolio. When making such evaluation, management considers such factors as
      the
      repayment status of its loans, the estimated net realizable value of the
      underlying collateral, borrowers’ intent (to the extent known by the Bank) and
      ability to repay the loan, local economic conditions and the Bank’s historical
      loss ratios. The Bank’s allowance for loan losses as of June 30, 2006, was
      $5,600,869 or 1.27% of average net loans receivable. Total assets classified
      as
      substandard, doubtful or loss as of June 30, 2006, were $8,870,846 or 1.8%
      of
      total assets. Management considered nonperforming and total classified assets
      in
      evaluating the adequacy of the Bank’s allowance for loan losses.





17


The
      ratio
      of nonperforming assets to total assets is another useful tool in evaluating
      exposure to credit risk. Nonperforming assets of the Bank include nonperforming
      loans (nonaccruing loans) and assets which have been acquired as a result of
      foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in
      thousands.







6/30/2006
            
            12/31/2005
            
            12/31/2004Nonperforming
                loans
            
            $
            3,099
            
            
            721
            
            
            1,007Real
                estate acquired in settlement of loans
            
            
            508
            
            
            27
            
            
            78Total
                nonperforming assets
            
            $
            3,607
            
            
            748
            
            
            1,085Total
                nonperforming assets as a percentage of total assets
            
            
            0.73
            %
            
            0.17
            %
            
            0.25
            %Allowance
                for loan losses
            
            $
            5,601
            
            
            5,400
            
            
            4,537Allowance
                for loan losses as a percentage of average net loans
            
            
            1.27
            %
            
            1.29
            %
            
            1.16
            %





The
      increase in nonperforming from December 31, 2005 to June 30, 2006 was primarily
      due to one borrower who has a total of seventeen loans that were placed on
      non-accrual status during this period. The total amount outstanding is
      approximately $2.3 million. These loans are secured by  six patio homes and
      nine building lots, along with two unsecured loans. The Bank feels that the
      established allowance on this credit is adequate at this time. During this
      period the bank also acquired three properties through foreclosure with an
      estimated fair value of $502,000.





**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, issuances of junior subordinated debentures 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. As of June 30, 2006, the Bank had approximately
      $2,738,000 in commitments to originate mortgage and commercial loans. These
      commitments will be funded through existing cash balances, cash flow from
      operations and, if required, FHLB advances. Management believes that anticipated
      cash flows and deposit growth will be adequate to meet the Bank’s liquidity
      needs.





**Item
      3.Quantitative and Qualitative Disclosures about
      Market Risk**





**Asset/Liability
      Management**





The
      goal
      of the Bank’s asset/liability policy is to manage interest rate risk so as to
      maximize net interest income over time in changing interest rate environments.
      Management monitors the Bank’s net interest spreads (the difference between
      yields received on assets and paid on liabilities) and, although constrained
      by
      market conditions, economic conditions, and prudent underwriting standards,
      the
      Bank offers deposit rates and loan rates designed to maximize net interest
      income. Management also attempts to fund the Bank’s assets with liabilities of a
      comparable duration to minimize the impact of changing interest rates on the
      Bank’s net interest income. Since the relative spread between financial assets
      and liabilities is constantly changing, the Bank’s current net interest income
      may not be an indication of future net interest income.





As
      a part
      of its asset and liability management strategy and throughout the past several
      years, the Bank has continued to emphasize the origination of adjustable-rate,
      one- to four-family residential loans and adjustable-rate or relatively
      short-term commercial real estate, commercial business and consumer loans,
      while
      originating fixed-rate, one- to four-family residential loans primarily for
      immediate resale in the secondary market on either a service-retained basis
      or
      service-released basis. This allows the Bank to serve the customer’s needs and
      retain a banking relationship with respect to such fixed-rate residential loans,
      while limiting its exposure to the risk associated with carrying a long-term
      fixed-rate loan in its loan portfolio.





18





The
      Bank is
      also managing interest rate risk by the origination of construction loans.
      As of
      June 30, 2006, such loans represented 18% of the net loans receivable and
      continue to account for a larger portion of the Bank’s existing portfolio. In
      general, these loans have higher yields, shorter maturities and greater interest
      rate sensitivity than other real estate loans.





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. As of December 31, 2005, the Bank’s savings accounts,
      checking accounts, and money market deposit accounts totaled $130,252,633 or
      41%
      of its total deposits. As of June 30, 2006, these accounts totaled $124,396,881
      or 39% of the Bank’s total deposits. 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, 2006 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
            
            $
            37,686
            
            $
            (3,476
            )
            
            -8
            %
            
            7.90
            %
            
            -0.49
            %+200
            
            
            39,655
            
            
            (1,507
            )
            
            -4
            %
            
            8.23
            %
            
            -0.16
            %+100
            
            
            40,898
            
            
            (264
            )
            
            -1
            %
            
            8.40
            %
            
            0.02
            %NC
            
            
            41,162
            
            
            -
            
            
            -
            
            
            8.39
            %
            
            --100
            
            
            40,132
            
            
            (1,030
            )
            
            -3
            %
            
            8.12
            %
            
            -0.26
            %-200
            
            
            38,226
            
            
            (2,936
            )
            
            -7
            %
            
            7.69
            %
            
            -0.70
            %-300
            
            
            35,386
            
            
            (5,776
            )
            
            -14
            %
            
            7.08
            %
            
            -1.31
            %





Computations
      of prospective effects of hypothetical interest rate changes are based on an
      internally generated model using actual maturity and repricing schedules for
      the
      Bank’s loans and deposits, and are based on numerous assumptions, including
      relative levels of market interest rates, loan repayments and deposit run-offs,
      and should not be relied upon as indicative of actual results. Further, the
      computations do not contemplate any actions the Bank may undertake in response
      to changes in interest rates.





Management
      cannot predict future interest rates or their effect on the Bank’s NPV in the
      future. Certain shortcomings are inherent in the method of analysis presented
      in
      the computation of NPV. For example, although certain assets and liabilities
      may
      have similar maturities or periods to repricing, they may react in differing
      degrees to changes in market interest rates. Additionally, certain assets,
      such
      as adjustable-rate loans, have an initial fixed rate period typically from
      one
      to five years, and over the remaining life of the asset changes in the interest
      rate are restricted. In addition, the proportion of adjustable-rate loans in
      the
      Bank’s portfolio could decrease in future periods due to refinancing activity if
      market interest rates remain steady in the future. Further, in the event of
      a
      change in interest rates, prepayment and early withdrawal levels could deviate
      significantly from those assumed in the table. Finally, the ability of many
      borrowers to service their adjustable-rate debt may decrease in the event of
      an
      interest rate increase.





The
      Bank’s Board of Directors (the “Board”) is responsible for reviewing the Bank’s
      asset and liability policies. The Board meets quarterly to review interest
      rate
      risk and trends, as well as liquidity and capital ratios and requirements.
      The
      Bank’s management is responsible for administering the policies and
      determinations of the Board with respect to the Bank’s asset and liability goals
      and strategies.





19








**Item
      4.Controls and Procedures**




(a)
      The
      Company maintains disclosure controls and procedures (as
      defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange
      Act”) ) that
      are
      designed to ensure that information required to be disclosed in the Company’s
      Exchange Act reports is recorded, processed, summarized and reported within
      the
      time periods specified in the Securities
      and Exchange Commission 's
      rules
      and forms, and that such information is accumulated and communicated to the
      Company’s management, including its Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure.




The
      Company conducted an evaluation, under the supervision and with the
      participation of the Company’s management, including the Company’s Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of the
      Company’s disclosure controls and procedures. Based on the foregoing, the
      Company’s Chief Executive Officer and Chief Financial Officer concluded that the
      Company’s disclosure controls and procedures were effective  as
      of
      June 30, 2006.




(b)
      There
      have been no changes
      in the Company’s internal control
      over financial reporting during the quarter ended June 30, 2006 that have
      materially affected, or are reasonably likely to materially affect, the
      Company ’s internal
      control over financial reporting .







20







**PART
      II OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**


Not
      applicable





**Item
      1A.**  **Risk
      Factors**


**** Not
      applicable





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





The
      following table summarizes the repurchase activity of the Company’s common stock
      during the Company’s second quarter ended June 30, 2006.





**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, 2006 to April 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              11,100May
                  1, 2006 to May 31, 2006
              
              
              11,098
              
              
              29.74
              
              
              11,098
              
              
              2June
                  1, 2006 to June 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              2Total
              
              
              11,098
              
              
              29.74
              
              
              11,098


(1)
            The
                Company has a repurchase plan which was announced on November 22,
                2002.
                This plan authorizes the purchase by the Company of 300,000 shares
                of the
                Company’s common stock. There is no expiration date for this plan. There
                are no other repurchase plans in effect at this
                time.





**Item
      3.**  **Defaults
      Upon Senior Securities**


Not
      applicable.





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





The
      annual meeting of stockholders of the Company was held on May 24, 2006. At
      the
      meeting the stockholders elected Shaun A. Burke, Kurt D. Hellweg and James
      R.
      Batten to three-year terms as directors of the Company, while Jack L. Barham,
      Wayne V. Barnes, Gregory V. Ostergren , James L. Sivils, III, Don M. Gibson,
      and
      Tim Rosenbury, 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, 2006.





21


**Director
                Election:**Nominee
            
            Votes
                For
            
            Votes
                WithheldShaun
                A. Burke
            
            
            2,345,251
            
            
            60,620Kurt
                D. Hellweg
            
            
            2,353,102
            
            
            52,769James
                R. Batten
            
            
            2,353,427
            
            
            52,444**Auditor
                Ratification:**Votes
                for
            
            
            2,385,982Votes
                against
            
            
            19,060Abstentions
            
            
            829




**Item
      5.**  **Other
      Information**


None.





**Item
      6.**  **Exhibits**


11.
      Statement
      re computation of per share earnings (set forth in “Note 4: Earnings Per Share”
of


the
      Notes to
      Condensed Consolidated Financial Statements (unaudited))


31(i).1
      Certification of the Principal Executive Officer pursuant to Rule
      13a
      -14(a) of the Exchange Act


31(i).2
      Certification of the Principal Financial Officer pursuant to Rule
      13a
      - 14(a) of the Exchange Act


32.1  CEO
      certification pursuant to Rule
      13a
      - 14(b) and 18
      U.S.C.
      Section 1350


32.2  CFO
      certification pursuant to Rule
      13a
      - 14(b) and 18
      U.S.C.
      Section 1350




22





**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, 2006


Shaun
      A.
      Burke


President
      and Chief Executive Officer


(Principal
      Executive Officer and Duly Authorized Officer)











/s/
      Bruce Winston  August
      14, 2006


Bruce
      Winston


Senior
      Vice President and Chief Financial Officer


(Principal
      Financial and Accounting Officer)








23