**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**





(Mark
      One)


[X] **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      quarter ended March
      31, 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 registraint 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 May 12, 2006Common
                Stock, Par Value $0.10 per share
            2,953,517
                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
            
            19**PART
                II. Other Information**1.
                Legal Proceedings
            
            201A.
                Risk Factors
            202.
                Unregistered Sales of Equity Securities and Use of
                Proceeds
            203.
                Defaults Upon Senior Securities
            
            204.
                Submission of Matters to a Vote of Security Holders
            205.
                Other Information
            
            206.
                Exhibits
            
            20Signatures





2





**PART
      I**


**Item
      1. Financial Statements**


**GUARANTY
                    FEDERAL BANCSHARES,
                    INC.****CONSOLIDATED
                    STATEMENTS OF FINANCIAL CONDITION****MARCH
                    31, 2006 (UNAUDITED) AND DECEMBER 31, 2005****ASSETS**
                
                **3/31/06**
                
                **12/31/05**Cash
                
                $
                9,466,952
                
                
                17,990,774Interest-bearing
                    deposits in other financial institutions
                
                
                856,534
                
                
                2,515,704Cash
                    and cash equivalents
                
                
                10,323,486
                
                
                20,506,478Available-for-sale
                    securities
                
                
                9,649,675
                
                
                6,757,147Held-to-maturity
                    securities
                
                
                903,375
                
                
                944,724Stock
                    in Federal Home Loan Bank, at cost
                
                
                5,334,800
                
                
                4,978,800Mortgage
                    loans held for sale
                
                
                2,533,525
                
                
                2,092,279Loans
                    receivable, net of allowance for loan losses ofMarch
                    31, 2006 - $5,618,742 - December 31, 2005 - $5,399,654
                
                
                438,153,903
                
                
                433,435,429Accrued
                    interest receivable:Loans
                
                
                1,902,126
                
                
                2,040,872Investments
                
                
                103,432
                
                
                48,255Prepaid
                    expenses and other assets
                
                
                2,715,314
                
                
                2,604,425Foreclosed
                    assets held for sale
                
                
                6,500
                
                
                26,775Premises
                    and equipment
                
                
                7,507,183
                
                
                7,452,798Deferred
                    income taxes
                
                
                397,899
                
                
                112,686$
                479,531,218
                
                
                481,000,668**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****LIABILITIES**Deposits
                
                $
                312,868,755
                
                
                320,058,951Federal
                    Home Loan Bank advances
                
                
                101,000,000
                
                
                100,000,000Securities
                    sold under agreements to repurchase
                
                
                3,963,106
                
                
                1,594,258Subordinated
                    debentures
                
                
                15,465,000
                
                
                15,465,000Advances
                    from borrowers for taxes and insurance
                
                
                435,034
                
                
                212,320Accrued
                    expenses and other liabilities
                
                
                434,436
                
                
                288,587Accrued
                    interest payable
                
                
                701,133
                
                
                508,164Dividend
                    payable
                
                
                461,745
                
                
                459,074Income
                    taxes payable
                
                
                872,014
                
                
                322,165436,201,223
                
                
                438,908,519**COMMITMENTS
                    AND CONTINGENCIES**
                
                
                -
                
                
                -**STOCKHOLDERS'
                    EQUITY**Common
                    Stock:$0.10
                    par value; authorized 10,000,000 shares;issued
                    March 31, 2006 - 6,624,891 shares;December
                    31, 2005 - 6,571,348 shares
                
                
                662,489
                
                
                657,135Additional
                    paid-in capital
                
                
                54,889,774
                
                
                53,778,686Unearned
                    ESOP shares
                
                
                (1,515,930
                )
                
                (1,572,930
                )Retained
                    earnings, substantially restricted
                
                
                37,636,266
                
                
                36,533,338Accumulated
                    other comprehensive incomeUnrealized
                    appreciation on available-for-sale securities,net
                    of income taxes; March 31, 2006 - $1,338,853;December
                    31, 2005 - $1,158,114
                
                
                1,720,158
                
                
                1,971,92593,392,757
                
                
                91,368,154Treasury
                    stock, at cost; March 31, 2006 - 3,666,744 shares;December
                    31, 2005 - 3,639,301 shares
                
                
                (50,062,762
                )
                
                (49,276,005
                )43,329,995
                
                
                42,092,149$
                479,531,218
                
                
                481,000,668


See
              Notes
              to Condensed Consolidated Financial Statements
 3





**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENTS OF INCOME****THREE
                MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)**3/31/2006
            
            
            3/31/2005**INTEREST
                INCOME**Loans
            
            $
            7,884,788
            
            
            5,726,879Investment
                securities
            
            
            102,007
            
            
            95,791Other
            
            
            91,120
            
            
            78,2488,077,915
            
            
            5,900,919**INTEREST
                EXPENSE**Deposits
            
            
            2,269,292
            
            
            1,559,107Federal
                Home Loan Bank advances
            
            
            1,223,422
            
            
            893,972Subordinated
                debentures
            
            
            255,946
            
            
            -Other
            
            
            20,763
            
            
            4,1293,769,423
            
            
            2,457,208**NET
                INTEREST INCOME**
            
            
            4,308,492
            
            
            3,443,710**PROVISION
                FOR LOAN LOSSES**
            
            
            225,000
            
            
            225,000**NET
                INTEREST INCOME AFTER****PROVISION
                FOR LOAN LOSSES**
            
            
            4,083,492
            
            
            3,218,710**NONINTEREST
                INCOME**Service
                charges
            
            
            312,255
            
            
            381,348Late
                charges and other fees
            
            
            91,481
            
            
            91,475Gain
                on sale of investment securities
            
            
            198,424
            
            
            195,788Gain
                on sale of loans
            
            
            119,573
            
            
            141,948Income
                (loss) on foreclosed assets
            
            
            68
            
            
            2,801Other
                income
            
            
            100,019
            
            
            70,550821,820
            
            
            883,910**NONINTEREST
                EXPENSE**Salaries
                and employee benefits
            
            
            1,443,090
            
            
            1,272,824Occupancy
            
            
            317,315
            
            
            333,209SAIF
                deposit insurance premiums
            
            
            10,322
            
            
            9,661Data
                processing
            
            
            55,137
            
            
            87,912Advertising
            
            
            101,735
            
            
            28,695Other
                expense
            
            
            439,795
            
            
            448,0922,367,394
            
            
            2,180,393**INCOME
                BEFORE INCOME TAXES**
            
            
            2,537,918
            
            
            1,922,228**PROVISION
                FOR INCOME TAXES**
            
            
            973,593
            
            
            707,454**NET
                INCOME**
            
            $
            1,564,325
            
            
            1,214,774**BASIC
                EARNINGS PER SHARE**
            
            $
            0.56
            
            
            0.43**DILUTED
                EARNINGS PER SHARE**
            
            $
            0.54
            
            
            0.41







See
            Notes
            to Condensed Consolidated Financial Statements
 4


**GUARANTY
                  FEDERAL BANCSHARES, INC.****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY****THREE
                  MONTHS ENDED MARCH 31, 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
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,564,325
              
              
              -
              
              
              1,564,325Change
                  in unrealized appreciationon
                  available-for-sale securities, netof
                  income taxes of ($180,739)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (251,767
              )
              
              (251,767
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,312,558Dividends
                  ($0.165 per share)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (461,397
              )
              
              -
              
              
              (461,397
              )Stock
                  award plans
              
              
              -
              
              
              24,878
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              24,878Stock
                  options exercised
              
              
              5,354
              
              
              980,081
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              985,435Release
                  of ESOP shares
              
              
              -
              
              
              106,129
              
              
              57,000
              
              
              -
              
              
              -
              
              
              -
              
              
              163,129Treasury
                  stock purchased
              
              
              -
              
              
              -
              
              
              -
              
              
              (786,757
              )
              
              -
              
              
              -
              
              
              (786,757
              )**Balance,
                  March 31, 2006**
              
              $
              662,489
              
              
              54,889,774
              
              
              (1,515,930
              )
              
              (50,062,762
              )
              
              37,636,266
              
              
              1,720,158
              
              
              43,329,995








See
            Notes
            to Condensed Consolidated Financial Statements
 5


**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENT OF STOCKHOLDERS' EQUITY****THREE
                MONTHS ENDED MARCH 31, 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
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,214,774
            
            
            -
            
            
            1,214,774Change
                in unrealized appreciationon
                available-for-sale securities, netof
                income taxes of ($314,887)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (536,159
            )
            
            (536,159
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            678,615Dividends
                ($0.16 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (450,634
            )
            
            -
            
            
            (450,634
            )Stock
                award plans
            
            
            -
            
            
            10,053
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10,053Stock
                options exercised
            
            
            1,515
            
            
            171,209
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            172,724Release
                of ESOP shares
            
            
            -
            
            
            79,789
            
            
            57,000
            
            
            -
            
            
            -
            
            
            -
            
            
            136,789Treasury
                stock purchased
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,622,953
            )
            
            -
            
            
            -
            
            
            (1,622,953
            )**Balance,
                March 31, 2005**
            
            $
            650,901
            
            
            52,645,893
            
            
            (1,743,930
            )
            
            (47,335,947
            )
            
            33,201,271
            
            
            2,279,669
            
            
            39,697,857







See
            Notes
            to Condensed Consolidated Financial Statements
 6





**GUARANTY
                FEDERAL BANCSHARES, INC****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****THREE
                MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)****3/31/2006**
            
            **3/31/2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income
            
            $
            1,564,325
            
            
            1,214,774Items
                not requiring (providing) cash:Deferred
                income taxes
            
            
            (165,001
            )
            
            (119,754
            )Depreciation
            
            
            155,042
            
            
            175,166Provision
                for loan losses
            
            
            225,000
            
            
            225,000Gain
                on loans and investment securities
            
            
            (317,997
            )
            
            (337,736
            )Gain
                on sale of foreclosed assets
            
            
            (1,023
            )
            
            (3,948
            )Gain
                on sale of premises and equipment
            
            
            (90
            )
            
            -Amortization
                of deferred income, premiums and discounts
            
            
            74,555
            
            
            (3,676
            )Stock
                award plan expense
            
            
            24,878
            
            
            6,448Origination
                of loans held for sale
            
            
            (11,064,539
            )
            
            (8,063,961
            )Proceeds
                from sale of loans held for sale
            
            
            10,742,866
            
            
            9,380,402Release
                of ESOP shares
            
            
            163,129
            
            
            136,789Changes
                in:Accrued
                interest receivable
            
            
            83,569
            
            
            (38,337
            )Prepaid
                expenses and other assets
            
            
            (113,560
            )
            
            36,288Accounts
                payable and accrued expenses
            
            
            341,489
            
            
            256,232Income
                taxes payable
            
            
            549,849
            
            
            670,544Net
                cash provided by operating activities
            
            
            2,262,492
            
            
            3,534,231**CASH
                FLOWS FROM INVESTING ACTIVITIES**Net
                increase in loans
            
            
            (5,021,320
            )
            
            (19,017,117
            )Principal
                payments on available-for-sale securities
            
            
            16,107
            
            
            -Principal
                payments on held-to-maturity securities
            
            
            41,405
            
            
            90,450Proceeds
                from maturities of available-for-sale securities
            
            
            500,000
            
            
            2,000,000Purchase
                of premises and equipment
            
            
            (213,877
            )
            
            (123,911
            )Purchase
                of available-for-sale securities
            
            
            (3,780,316
            )
            
            (1,986,588
            )Proceeds
                from sale of available-for-sale securities
            
            
            201,361
            
            
            198,725(Purchase)
                redemption of FHLB stock
            
            
            (356,000
            )
            
            97,900Proceeds
                from sale of foreclosed assets
            
            
            21,298
            
            
            301,298Proceeds
                from sale of premises and equipment
            
            
            4,540
            
            
            -Net
                cash used in investing activities
            
            
            (8,586,802
            )
            
            (18,439,242
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Stock
                options exercised
            
            
            985,435
            
            
            172,724Cash
                dividends paid
            
            
            (458,726
            )
            
            (450,868
            )Net
                increase (decrease) in demand deposits,NOW
                accounts and savings accounts
            
            
            (13,849,478
            )
            
            1,982,900Net
                increase in certificates of deposit and securities soldunder
                agreements to repurchase
            
            
            9,028,130
            
            
            3,301,214Proceeds
                from FHLB advances
            
            
            390,414,000
            
            
            109,700,000Repayments
                of FHLB advances
            
            
            (389,414,000
            )
            
            (105,700,000
            )Advances
                from borrowers for taxes and insurance
            
            
            222,714
            
            
            263,292Treasury
                stock purchased
            
            
            (786,757
            )
            
            (1,622,953
            )Net
                cash provided by (used in) financing activities
            
            
            (3,858,682
            )
            
            7,646,309**DECREASE
                IN CASH AND CASH EQUIVALENTS**
            
            
            (10,182,992
            )
            
            (7,258,703
            )**CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            20,506,478
            
            
            15,896,458**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            $
            10,323,486
            
            
            8,637,755





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 March 31, 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 March 31, 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 March 31, 2006 all shares in this plan have vested.




8


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 March 31, 2006 there are
      2,047 shares in this plan that are not vested.





The
      Bank
      recognized $7,871 and $13,249 of expense under these stock award plans in the
      three month periods ended March 31, 2006 and 2005, respectively.





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 had granted no
      nonqualified stock options as of December 31, 2003.  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 30,000 stock options have been granted under this plan.





9


The
      table
      below summarizes transactions under the Company’s stock option plans for three
      months ended March 31, 2006:




Number
                of sharesIncentive
                Stock Option
            
            Non-Incentive
                Stock Option
            
            Weighted
                Average Exercise PriceBalance
                outstanding as of December 31, 2005
            
            
            179,785
            
            
            160,091
            
            
            15.65Granted
            
            
            10,000
            
            
            -
            
            
            28.12Exercised
            
            
            10,800
            
            
            42,743
            
            
            14.32Forfeited
            
            
            -
            
            
            -
            
            
            -Balance
                outstanding as of March 31, 2006
            
            
            178,985
            
            
            117,348
            
            
            16.32Options
                exercisable as of March 31, 2006
            
            
            129,560
            
            
            93,111
            
            
            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 $17,008 during the first quarter of 2006.
      As
      of March 31, 2006, there was $193,670 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 ended3/31/2006Net
                income, as reported
            
            $
            1,214,774Less:
                Total stock-based employee compensationcost
                determined under the fair value-basedmethod,
                net of income taxes
            
            
            (8,782
            )Pro
                forma net income
            
            $
            1,205,992Earnings
                per share:Basic
                - as reported
            
            $
            0.43Basic
                - pro forma
            
            $
            0.43Diluted
                - as reported
            
            $
            0.42Diluted
                - pro forma
            
            $
            0.41





**Note
      4: Earnings Per Share**


For
                three months ended March 31, 2006Income
              Available
                to Stockholders
            
            Average
                Shares Outstanding
            
            Per-shareBasic
                Earnings per Share
            
            $
            1,564,325
            
            
            2,789,500
            
            $
            0.56Effect
                of Dilutive Securities: Stock Options
            
            
            
            
            
            118,108Diluted
                Earnings per Share
            
            $
            1,564,325
            
            
            2,907,608
            
            $
            0.54For
                three months ended March 31, 2005Income
                Available  to Stockholders
            
            
            Average
                Shares Outstanding
            
            
            Per-shareBasic
                Earnings per Share
            
            $
            1,214,774
            
            
            2,815,482
            
            $
            0.43Effect
                of Dilutive Securities: Stock Options
            
            
            
            
            
            141,054Diluted
                Earnings per Share
            
            $
            1,214,774
            
            
            2,916,177
            
            $
            0.42






11




**Note
      5: Other Comprehensive Income**





3/31/2006
            
            3/31/2005Unrealized
                gains (losses) on
            
            $
            (630,930
            )
            
            (655,258
            )available-for-sale
                securitiesLess:
                Reclassification adjustment forrealized
                (gains) losses included in income
            
            
            (198,424
            )
            
            (195,788
            )Other
                comprehensive income (loss),before
                tax effect
            
            
            (432,506
            )
            
            (851,046
            )Tax
                expense (benefit)
            
            
            (180,739
            )
            
            (314,887
            )**OTHER
                COMPREHENSIVE INCOME (LOSS)**
            
            $
            (251,767
            )
            
            (536,159
            )





**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 March 31, 2006, and the results of operations for the three months ended
      March 31, 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 decreased $1,469,450 from $481,000,668 as of December 31,
      2005, to $479,531,218 as of March 31, 2006.





Cash
      and
      cash equivalents decreased $10,182,992 (50%) from $20,506,478 as of December
      31,
      2005, to $10,323,486 as of March 31, 2006. The decrease is primarily due to
      a
      smaller amount of uncollected funds on deposit with a correspondent bank as
      of
      March 31, 2006, compared to December 31, 2005.




Securities
      available-for-sale increased $2,892,528, (43%) from $6,757,147 as of December
      31, 2005, to $9,649,675 as of March 31, 2006. The increase was primarily due
      to
      the purchase of various government agencies during the period totaling
      approximately $3,500,000. The Bank currently holds 45,600 shares of Federal
      Home
      Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $44,658 in
      the available-for-sale category. As of March 31, 2006, the gross unrealized
      gain
      on the FHLMC stock was $2,781,600, a decrease from $3,176,010 as of December
      31,
      2005.





12


Securities
      held-to-maturity decreased primarily due to principal repayments by $41,349
      (4%)
      from $944,724 as of December 31, 2005, to $903,375 as of March 31,
      2006.





Stock
      in
      Federal Home Loan Bank of Des Moines (“FHLB”) increased by $356,000 (7%), due to
      the purchase of such stock necessary to meet FHLB requirements. 
 Net
        loans
        receivable increased by $4,718,474 (1%) from $433,435,429 as of December
        31,
        2005, to $438,153,903 as of March 31, 2006. Commercial real estate loans
        increased by $6,021,436 (12%) from $122,884,052 as of December 31, 2005,
        to
        $128,905,488 as of March 31, 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 $4,127,035 (4%). Loans held for sale increased $441,246 (21%) to $2,533,525
        as of March 31, 2006, compared to $2,092,279 at December 31, 2005. The Bank
        continued to be active in construction lending. Construction loans increased
        by
        $4,926,185 (7%) to $75,316,088 as of March 31, 2006, compared to $70,389,903
        as
        of December 31, 2005.  See
        discussion under “Quantitative and Qualitative Disclosure about Market Risk -
        Asset/Liability Management.” Loan
        growth is anticipated to continue and represents a major part of the Bank’s
        planned asset growth.


Allowance
      for loan losses increased $219,088 (4%) from $5,399,654 as of December 31,
      2005
      to $5,618,742 as of March 31, 2006. The allowance increased due to the provision
      for loan losses of $225,000 recorded during this period exceeding net loan
      charge-offs of $5,912 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 Periods Ended March 31, 2006 and
      2005
      - Provision for Loan Losses.” The
      allowance for loan losses as of March 31, 2006 and December 31, 2005 was 1.20%
      and 1.16%, respectively, of average net loans outstanding. As of March 31,
      2006,
      the allowance for loan losses was 150% of impaired loans compared to 75% as
      of
      December 31, 2005.





Premises
      and equipment increased $54,385 (1%) from $7,452,798, as of December 31, 2005
      to
      $7,507,183 as of March 31, 2006, due to purchases of equipment less depreciation
      recognized on these assets.





Deposits
      decreased $7,190,196 (2%) from $320,058,951 as of December 31, 2005, to
      $312,868,755 as of March 31, 2006. For the three months ended March 31, 2006,
      checking and savings accounts decreased by $13,849,479 (11%) and certificates
      of
      deposits increased by $6,659,282 (4%). The decrease in checking and savings
      was
      primarily due to activity in one commercial account. As of December 31, 2005
      this account had a balance in excess of $10,000,000; as of March 31, 2006 the
      account balance had decreased to approximately $1,300,000. Due to the nature
      of
      the account holder’s business, there are large fluctuations in this account
      balance. 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 $15,971,220 (13%) during
      the
      period. During the same period brokered certificates of deposit decreased
      $8,918,759 (15%). See also the discussion under “Quantitative
      and Qualitative Disclosure about Market Risk - Asset/Liability
      Management.”





FHLB
      advances increased by $1,000,000 from $100,000,000 as of December 31, 2005,
      to
      $101,000,000 as of March 31, 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.





13


The
      Debentures mature on February 23, 2036. Subject to prior approval by the Federal
      Reserve Board, the Debentures and the Trust Preferred Securities are each
      callable by the Company or the Trusts, respectively and as applicable, at its
      option after five years from issuance, and sooner in the case of a special
      redemption at a special redemption price ranging up to 103.2% of the principal
      amount thereof, and upon the occurrence of certain events, such as a change
      in
      the regulatory capital treatment of the Trust Preferred Securities, either
      Trust
      being deemed an investment company or the occurrence of certain adverse tax
      events. In addition, the Company and the Trusts may defer interest and dividend
      payments, respectively, for up to five consecutive years without resulting
      in a
      default. An event of default may occur if the Company declares bankruptcy,
      fails
      to make the required payments within 30 days or breaches certain covenants
      within the Debentures. The Debentures are subordinated to the prior payment
      of
      any other indebtedness of the Company.





Pursuant
      to two guarantee agreements by and between the Company and Wilmington Trust
      Company, the Company issued a limited, irrevocable guarantee of the obligations
      of each Trust under the Trust Preferred Securities whereby the Company has
      guaranteed any and all payment obligations of the Trusts related to the Trust
      Preferred Securities including distributions on, and the liquidation or
      redemption price of, the Trust Preferred Securities to the extent each Trust
      does not have funds available.





As
      a part
      of management’s review of available funding, management continually evaluates
      the cost of FHLB advances 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 $222,714 (105%) from $212,320
      as of December 31, 2005, to $435,034 as of March 31, 2006 due to the timing
      of
      payment of real estate taxes.




Stockholders’
      equity (including unrealized appreciation on securities available-for-sale,
      net
      of tax) increased $1,237,846 (3%) from $42,092,149 as of December 31, 2005,
      to
      $43,329,995 as of March 31, 2006. This increase was due to several
      factors .  T he
      Company ’s net
      income during
      this period was $1,564,325 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. In addition,  the
      increase in stockholders’ equity was further offset as the
      Company repurchased 27,443 shares of treasury stock at an aggregate cost of
      $786,757 (an average cost of $28.66 per share) and a decrease in unrealized
      appreciation on available for sale securities, net of taxes, of $251,757 during
      this period. As of March 31, 2006, 11,100 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 $15.44 as of March 31, 2006.




14


**Average
      Balances, Interest and Average Yields**





The
      Company’s profitability is primarily dependent upon net interest income, which
      represents the difference between interest and fees earned on loans and debt
      and
      equity securities, and the cost of deposits and borrowings. Net interest income
      is dependent on the difference between the average balances and rates earned
      on
      interest-earning assets and the average balances and rates paid on
      interest-bearing liabilities. Non-interest income, non-interest expense, and
      income taxes also impact net income.





The
      following 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.





Three
                Months ended 3/31/2006
            
            Three
                Months ended 3/31/2005Average
                Balance
            
            Interest
            
            Yield
                / Cost
            
            Average
                Balance
            
            Interest
            
            Yield
                / Cost**ASSETS**Interest-earning:Loans
            
            $
            439,153
            
            
            7,885
            
            
            7.18
            %
            $
            396,194
            
            
            5,727
            
            
            5.78
            %Investment
                securities
            
            
            6,615
            
            
            102
            
            
            6.17
            %
            
            9,915
            
            
            96
            
            
            3.87
            %Other
                assets
            
            
            10,126
            
            
            91
            
            
            3.60
            %
            
            11,837
            
            
            78
            
            
            2.64
            %Total
                interest-earning
            
            
            455,894
            
            
            8,078
            
            
            7.09
            %
            
            417,946
            
            
            5,901
            
            
            5.65
            %Noninterest-earning
            
            
            21,217
            
            
            
            
            
            
            
            
            20,456$
            477,111
            
            
            
            
            
            
            
            $
            438,402**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Interest-bearing:Savings
                accounts
            
            $
            13,958
            
            
            64
            
            
            1.83
            %
            $
            15,179
            
            
            42
            
            
            1.11
            %Transaction
                accounts
            
            
            76,139
            
            
            351
            
            
            1.84
            %
            
            87,203
            
            
            290
            
            
            1.33
            %Certificates
                of deposit
            
            
            192,408
            
            
            1,855
            
            
            3.86
            %
            
            171,560
            
            
            1,227
            
            
            2.86
            %FHLB
                Advances
            
            
            104,776
            
            
            1,223
            
            
            4.67
            %
            
            96,992
            
            
            894
            
            
            3.69
            %Subordinated
                debentures
            
            
            15,465
            
            
            256
            
            
            6.62
            %
            
            -
            
            
            -
            
            
            0.00
            %Other
                borrowed funds
            
            
            3,638
            
            
            21
            
            
            2.31
            %
            
            1,038
            
            
            4
            
            
            1.54
            %Total
                interest-bearing
            
            
            406,384
            
            
            3,770
            
            
            3.71
            %
            
            371,972
            
            
            2,457
            
            
            2.64
            %Noninterest-bearing
            
            
            27,458
            
            
            
            
            
            
            
            
            25,636Total
                liabilities
            
            
            433,842
            
            
            
            
            
            
            
            
            397,608Stockholders’
                equity
            
            
            43,269
            
            
            
            
            
            
            
            
            40,794$
            477,111
            
            
            
            
            
            
            
            $
            438,402Net
                earning balance
            
            $
            49,510
            
            
            
            
            
            
            
            $
            45,974Earning
                yield less costing rate
            
            
            
            
            
            
            
            
            3.38
            %
            
            
            
            
            
            
            
            3.01
            %Net
                interest income, and net yield spreadon
                interest earning assets
            
            
            
            
            $
            4,308
            
            
            3.78
            %
            
            
            
            $
            3,444
            
            
            3.30
            %Ratio
                of interest-earning assets tointerest-bearing
                liabilities
            
            
            
            
            
            112
            %
            
            
            
            
            
            
            
            112
            %





15


**Results
      of Operations - Comparison of Three Month Periods Ended March 31,**


**2006
      and 2005**





Net
      income for the three months ended March 31, 2006 was $1,564,325 as compared
      to
      $1,214,774 for the three months ended March 31, 2005, which represents an
      increase in earnings of $349,551 (29%) for the three month period ended March
      31, 2006.





**Interest
      Income**





Total
      interest income for the three months ended March 31, 2006, increased $2,176,996
      (37%) as compared to the three months ended March 31, 2005. For the three month
      period ended March 31, 2006 compared to the same period in 2005, the average
      yield on interest earning assets increased 144 basis points to 7.09%, and the
      average balance of interest earnings assets increased approximately
      $37,948,000.





**Interest
      Expense**





Total
      interest expense for the three months ended March 31, 2006, increased $1,312,215
      (53%) when compared to the three months ended March 31, 2005. There was $255,946
      interest on subordinated debentures during the three month period ended March
      31, 2006. There was no expense for subordinated debentures during the three
      month period ended March 31, 2005. For the three month period ended March 31,
      2006, the average cost of interest bearing liabilities increased 107 basis
      points to 3.71%, and the average balance of interest bearing liabilities
      increased approximately $34,412,000 when compared to the same period in 2005.





**Net
      Interest Income**





Net
      interest income for the three months ended March 31, 2006, increased $864,782
      (25%) when compared to the same period in 2005. The average balance of interest
      earning assets increased by approximately $3,536,000 more than the average
      balance in interest bearing liabilities increased when comparing the three
      month
      period ended March 31, 2006 to the same period in 2005. In addition, for the
      three month period ended March 31, 2006, the earning yield minus the costing
      rate spread increased 37 basis points to 3.38% when compared to the same period
      in 2005.





**Provision
      for Loan Losses**





Based
      primarily on the continued growth of the commercial loan portfolio, management
      decided to increase the allowance for loan losses through a provision for loan
      loss of $225,000 for the three months ended March 31, 2006, compared to $225,000
      for the same period in 2005. The Bank will continue to monitor its allowance
      for
      loan losses and make future additions based on economic and regulatory
      conditions. Management of the Company anticipates the need to continue
      increasing the allowance for loan losses through charges to the provision for
      loan losses as anticipated growth in the Bank’s loan portfolio increases or
      other circumstances warrant. Although the Bank maintains its allowance for
      loan
      losses at a level which it considers to be sufficient to provide for potential
      loan losses in its existing loan portfolio, there can be no assurance that
      future loan losses will not exceed internal estimates. In addition, the amount
      of the allowance for loan losses is subject to review by regulatory agencies
      which can order the establishment of additional loan loss provisions.





**Noninterest
      Income**





Noninterest
      income decreased $62,090 (7%) for the three months ended March 31, 2006 when
      compared to the three months ended March 31, 2005. The decrease for the three
      months ended March 31, 2005 was primarily due to decreases in service charges
      on
      checking accounts and gain on sale of loans, which were partially offset by
      increases in other income as discussed below.





Service
      charges on transaction accounts decreased by $69,093 (18%) during the three
      months ended March 31, 2006 when compared to the same period in 2005. This
      is a
      result in a decrease in the amount of “non-sufficient funds” and overdraft fees
      collected during this three month period when compared to the same period in
      2005, a result of fewer “non-sufficient funds” checks presented per account
      during this period.





Gain
      on
      sale of loans decreased $22,375 (16%) for the three months ended March 31,
      2006
      when compared to the same periods in 2005, which was a result of a decrease
      in
      the amount of the spread on loans sold on the secondary market during the three
      months ended March 31, 2006, compared to the same period in 2005.





Other
      income increased $29,469 (42%) for the three months ended March 31, 2006 when
      compared to the same period in 2005. This increase was primarily due to an
      increase in the amount of ATM fees collected during the three months ended
      March
      31, 2006, compared to the same period in 2005.




16


**Noninterest
      Expense**





Noninterest
      expense increased $187,001 (9%) for the three months ended March 31, 2006 when
      compared to the three months ended March 31, 2005. The increase for the three
      months ended March 31, 2006 was primarily due to increases in salaries and
      employee benefits and advertising, which were partially offset by decreases
      in
      occupancy expense and data processing as discussed below.





Salaries
      and employee benefits increased $170,266 (13%) for the three months ended March
      31, 2006 when compared to the same period 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 period ended March 31, 2006 when compared to the same period
      in
      2005.





Advertising
      expense increased $73,040 (255%) for the three months ended March 31, 2006
      when
      compared to the same period in 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 $32,775 (37%) for the three months ended March
      31,
      2006 when compared to the same period 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 2005.




**Provision
      for Income Taxes**




There
      was
      an increase of $266,139 (38%) in the provision for income taxes for the three
      months ended March 31, 2006 as compared to the same period in 2005 **.** This
      increase was due to the increase of $615,690 in before tax income for the three
      months ended March 31, 2006, compared to the same period 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 March 31, 2006, was
      $5,618,742 or 1.2% of average net loans receivable. Total assets classified
      as
      substandard, doubtful or loss as of March 31, 2006, were $6,645,178 or 1.4%
      of
      total assets. Management considered nonperforming and total classified assets
      in
      evaluating the adequacy of the Bank’s allowance for loan losses.





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





3/31/2006
            
            12/31/2005
            
            12/31/2004Nonperforming
                loans
            
            $
            2,815
            
            
            721
            
            
            1,007Real
                estate acquired in settlement of loans
            
            
            6
            
            
            27
            
            
            78Total
                nonperforming assets
            
            $
            2,821
            
            
            748
            
            
            1,085Total
                nonperforming assets as a percentage of total assets
            
            
            0.59
            %
            
            0.17
            %
            
            0.25
            %Allowance
                for loan losses
            
            $
            5,619
            
            
            5,400
            
            
            4,537Allowance
                for loan losses as a percentage of average net loans
            
            
            1.28
            %
            
            1.29
            %
            
            1.16
            %








17


**Liquidity
      and Capital Resources**





The
      Bank’s primary sources of funds are deposits, principal and interest payments on
      loans and mortgage-backed securities, proceeds from maturing investment
      securities, and issuance 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 March 31, 2006, the Bank had approximately
      $2,780,000 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.





The
      Bank
      is also managing interest rate risk by the origination of construction loans.
      As
      of March 31, 2006, such loans represented 17% 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 March 31, 2006, these accounts totaled $116,403,154
      or 37% 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.





18


**Interest
      Rate Sensitivity Analysis**





The
      following table sets forth as of March 31, 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
            
            $
            43,691
            
            $
            608
            
            
            1
            %
            
            9.32
            %
            
            0.32
            %+200
            
            
            44,189
            
            
            1,106
            
            
            3
            %
            
            9.35
            %
            
            0.35
            %+100
            
            
            44,095
            
            
            1,012
            
            
            2
            %
            
            9.33
            %
            
            0.33
            %NC
            
            
            43,083
            
            
            -
            
            
            -
            
            
            9.00
            %
            
            --100
            
            
            41,122
            
            
            (1,961
            )
            
            -5
            %
            
            8.55
            %
            
            -0.45
            %-200
            
            
            38,411
            
            
            (4,672
            )
            
            -11
            %
            
            7.95
            %
            
            -1.05
            %-300
            
            
            31,819
            
            
            (11,264
            )
            
            -26
            %
            
            6.55
            %
            
            -2.45
            %





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.





**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 theSecurities
      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
      March 31, 2006.




(b)
      There
      have been no changes
      in the Company’s internal control
      over financial reporting during the quarter ended March 31, 2006 that have
      materially affected, or are reasonably likely to materially affect, the
      Company ’s internal
      control over financial reporting .





19


**PART
      II**





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


None.





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


None





**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 first quarter ended March 31, 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
                ProgramsJanuary
                1, 2006 to January 31, 2006
            
            
            3,881
            
            
            28.23
            
            
            3,881
            
            
            34,662February
                1, 2006 to February 28, 2006
            
            
            9,340
            
            
            28.35
            
            
            9,340
            
            
            25,322March
                1, 2006 to March 31, 2006
            
            
            14,222
            
            
            28.99
            
            
            14,222
            
            
            11,100Total
            
            
            27,443
            
            
            0.26
            
            
            27,443








(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**


None.





**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, as adopted pursuant to  Section
      906 of the Sarbanes-Oxley Act of 2002


32.2  CFO
      certification pursuant to Rule
      13a
      - 14(b) and 18
      U.S.C.
      Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002





20


**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  May
      12, 2006


Shaun
      A.
      Burke


President
      and Chief Executive Officer


(Principal
      Executive Officer and Duly Authorized Officer)











/s/
      Bruce Winston  May
      12, 2006


Bruce
      Winston


Senior
      Vice President and Chief Financial Officer


(Principal
      Financial and Accounting Officer)





21