UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q


(Mark
One)


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


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
quarter ended September 30,
2008





OR





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


THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from _______ to _______





Commission
file number 0-23325





Guaranty
Federal Bancshares, Inc.


(Exact
name of registrant as specified in its charter)





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





Telephone
Number:  (417)
520-4333





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





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





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





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





Class
                
                Outstanding as of November 5,
      2008Common
      Stock, Par Value $0.10 per share
                
                2,702,233
      Shares














GUARANTY
FEDERAL BANCSHARES, INC.








TABLEOF CONTENTS


PagePART
      I. Financial InformationItem
      1.
                                        
                                        Financial StatementsCondensed
      Consolidated Financial Statements (Unaudited):Condensed Statements of Financial
Condition
                                        
                                        3Condensed Statements of Operations
                                        
                                        4Condensed Statements of  Stockholders’
      Equity
                                        
                                        5Condensed Statements of Cash Flows
                                        
                                        7Notes to Condensed Consolidated Financial
      Statements
                                        
                                        8Item
      2.
                                        
                                        Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                        
                                        13Item
      3.
                                        
                                        Quantitative and Qualitative Disclosures about Market
      Risk
                                        
                                        19Item
      4.
                                        
                                        Control and Procedures
                                        
                                        21PART
      II. Other InformationItem
      1.
                                        
                                        Legal Proceedings
                                        
                                        22Item
      1A.
                                        
                                        Risk factorsItem
      2.
                                        
                                        Unregistered Sales of Equity Securities and Use of
      Proceeds
                                        
                                        22Item
      3.
                                        
                                        Defaults Upon Senior Securities
                                        
                                        22Item
      4.
                                        
                                        Submission of Matters to a Vote of Security
      Holders
                                        
                                        22Item
      5.
                                        
                                        Other Information
                                        
                                        22Item
      6.
                                        
                                        Exhibits
                                        
                                        22Signatures





2
 Table of Contents





PART
I


Item1. Financial Statements


GUARANTYFEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


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





ASSETS
                    
                    9/30/08
                    
                    
                    12/31/07Cash
                    
                    $
                    12,089,702
                    
                    
                    $
                    11,135,960Interest-bearing
      deposits in other financial institutions
                    
                    
                    1,068,452
                    
                    
                    
                    910,242Cash
      and cash equivalents
                    
                    
                    13,158,154
                    
                    
                    
                    12,046,202Available-for-sale
      securities
                    
                    
                    64,098,996
                    
                    
                    
                    14,729,938Held-to-maturity
      securities
                    
                    
                    592,812
                    
                    
                    
                    654,775Stock
      in Federal Home Loan Bank, at cost
                    
                    
                    7,683,800
                    
                    
                    
                    4,014,700Mortgage
      loans held for sale
                    
                    
                    545,394
                    
                    
                    
                    2,141,998Loans
      receivable, net of allowance for loan losses of September 30, 2008 -
      $11,506,589 - December 31, 2007 - $5,962,923
                    
                    
                    566,090,092
                    
                    
                    
                    514,100,035Accrued
      interest receivable
                    
                    
                    4,167,532
                    
                    
                    
                    3,323,448Prepaid
      expenses and other assets
                    
                    
                    4,145,133
                    
                    
                    
                    2,841,411Foreclosed
      assets held for sale
                    
                    
                    6,545,058
                    
                    
                    
                    727,422Premises
      and equipment
                    
                    
                    11,098,841
                    
                    
                    
                    9,442,350Income
      taxes receivable
                    
                    
                    317,639
                    
                    
                    
                    -Deferred
      income taxes
                    
                    
                    4,403,386
                    
                    
                    
                    1,755,701$
                    682,846,837
                    
                    
                    $
                    565,777,980LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
                    
                    $
                    436,106,488
                    
                    
                    $
                    418,191,284Federal
      Home Loan Bank advances
                    
                    
                    148,436,000
                    
                    
                    
                    76,086,000Securities
      sold under agreements to repurchase
                    
                    
                    39,750,000
                    
                    
                    
                    9,849,295Subordinated
      debentures
                    
                    
                    15,465,000
                    
                    
                    
                    15,465,000Notes
      payable
                    
                    
                    1,435,190
                    
                    
                    
                    718,190Advances
      from borrowers for taxes and insurance
                    
                    
                    574,505
                    
                    
                    
                    157,811Accrued
      expenses and other liabilities
                    
                    
                    527,452
                    
                    
                    
                    299,005Accrued
      interest payable
                    
                    
                    1,763,757
                    
                    
                    
                    1,793,663Dividend
      payable
                    
                    
                    -
                    
                    
                    
                    469,373Income
      taxes payable
                    
                    
                    -
                    
                    
                    
                    61,699644,058,392
                    
                    
                    
                    523,091,320COMMITMENTS
      AND CONTINGENCIES
                    
                    
                    -
                    
                    
                    
                    -STOCKHOLDERS'
      EQUITYCommon
      Stock: $0.10 par value; authorized 10,000,000 shares; issued September 30,
      2008 -  6,779,800 shares;December 31, 2007 - 6,736,485
      shares
                    
                    
                    677,980
                    
                    
                    
                    673,649Additional
      paid-in capital
                    
                    
                    58,529,241
                    
                    
                    
                    57,571,929Unearned
      ESOP shares
                    
                    
                    (945,930
                    )
                    
                    
                    (1,116,930
                    )Retained
      earnings, substantially restricted
                    
                    
                    42,893,938
                    
                    
                    
                    45,402,449Accumulated
      other comprehensive income (loss)
                    
                    
                    (553,430
                    )
                    
                    
                    503,767100,601,799
                    
                    
                    
                    103,034,864Treasury
      stock, at cost; September 30, 2008 - 4,077,567 shares;December 31,
      2007 - 4,017,166 shares
                    
                    
                    (61,813,354
                    )
                    
                    
                    (60,348,204
                    )38,788,445
                    
                    
                    
                    42,686,660$
                    682,846,837
                    
                    
                    $
                    565,777,980






See Notes
to Condensed Consolidated Financial Statements





3
 Table of Contents





GUARANTYFEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


THREE  MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)





Three months ended
                      
                      
                      Nine months ended9/30/2008
                      
                      
                      9/30/2007
                      
                      
                      9/30/2008
                      
                      
                      9/30/2007INTEREST
      INCOMELoans
                      
                      $
                      8,337,626
                      
                      
                      $
                      9,535,244
                      
                      
                      $
                      24,985,140
                      
                      
                      $
                      27,869,745Investment
      securities
                      
                      
                      863,757
                      
                      
                      
                      119,660
                      
                      
                      
                      2,267,945
                      
                      
                      
                      308,682Other
                      
                      
                      66,416
                      
                      
                      
                      79,049
                      
                      
                      
                      170,951
                      
                      
                      
                      258,2739,267,799
                      
                      
                      
                      9,733,953
                      
                      
                      
                      27,424,036
                      
                      
                      
                      28,436,700INTEREST
      EXPENSEDeposits
                      
                      
                      3,341,155
                      
                      
                      
                      4,179,228
                      
                      
                      
                      10,847,725
                      
                      
                      
                      11,636,397Federal
      Home Loan Bank advances
                      
                      
                      873,536
                      
                      
                      
                      737,296
                      
                      
                      
                      2,368,981
                      
                      
                      
                      2,726,634Other
                      
                      
                      532,512
                      
                      
                      
                      285,221
                      
                      
                      
                      1,543,273
                      
                      
                      
                      813,5974,747,203
                      
                      
                      
                      5,201,745
                      
                      
                      
                      14,759,979
                      
                      
                      
                      15,176,628NET
      INTEREST INCOME
                      
                      
                      4,520,596
                      
                      
                      
                      4,532,208
                      
                      
                      
                      12,664,057
                      
                      
                      
                      13,260,072PROVISION
      FOR LOAN LOSSES
                      
                      
                      1,675,000
                      
                      
                      
                      210,000
                      
                      
                      
                      8,179,079
                      
                      
                      
                      630,000NET
      INTEREST INCOME AFTERPROVISION FOR LOAN
      LOSSES
                      
                      
                      2,845,596
                      
                      
                      
                      4,322,208
                      
                      
                      
                      4,484,978
                      
                      
                      
                      12,630,072NONINTEREST
      INCOMEService
      charges
                      
                      
                      528,609
                      
                      
                      
                      533,718
                      
                      
                      
                      1,490,587
                      
                      
                      
                      1,650,794Other
      fees
                      
                      
                      12,911
                      
                      
                      
                      27,957
                      
                      
                      
                      27,120
                      
                      
                      
                      81,038Gain
      (loss) on investment securities
                      
                      
                      -
                      
                      
                      
                      181,632
                      
                      
                      
                      (97,788
                      )
                      
                      
                      567,603Gain
      on sale of loans
                      
                      
                      207,870
                      
                      
                      
                      282,357
                      
                      
                      
                      696,375
                      
                      
                      
                      906,225Loss
      on foreclosed assets
                      
                      
                      (75,006
                      )
                      
                      
                      (24,826
                      )
                      
                      
                      (120,833
                      )
                      
                      
                      (25,436
                      )Other
      income
                      
                      
                      174,510
                      
                      
                      
                      167,989
                      
                      
                      
                      555,694
                      
                      
                      
                      511,153848,894
                      
                      
                      
                      1,168,827
                      
                      
                      
                      2,551,155
                      
                      
                      
                      3,691,377NONINTEREST
      EXPENSESalaries
      and employee benefits
                      
                      
                      1,853,483
                      
                      
                      
                      1,802,147
                      
                      
                      
                      5,665,040
                      
                      
                      
                      5,357,239Occupancy
                      
                      
                      452,510
                      
                      
                      
                      400,916
                      
                      
                      
                      1,247,203
                      
                      
                      
                      1,219,123FDIC
      deposit insurance premiums
                      
                      
                      82,499
                      
                      
                      
                      10,954
                      
                      
                      
                      207,497
                      
                      
                      
                      31,201Data
      processing
                      
                      
                      95,335
                      
                      
                      
                      96,136
                      
                      
                      
                      277,668
                      
                      
                      
                      298,405Other
      expense
                      
                      
                      683,445
                      
                      
                      
                      676,405
                      
                      
                      
                      2,084,372
                      
                      
                      
                      1,950,9263,167,272
                      
                      
                      
                      2,986,558
                      
                      
                      
                      9,481,780
                      
                      
                      
                      8,856,894INCOME
      (LOSS) BEFORE INCOME TAXES
                      
                      
                      527,218
                      
                      
                      
                      2,504,477
                      
                      
                      
                      (2,445,647
                      )
                      
                      
                      7,464,555PROVISION
      (CREDIT) FOR INCOME TAXES
                      
                      
                      227,759
                      
                      
                      
                      891,786
                      
                      
                      
                      (865,684
                      )
                      
                      
                      2,682,100NET
      INCOME (LOSS)
                      
                      $
                      299,459
                      
                      
                      $
                      1,612,691
                      
                      
                      $
                      (1,579,963
                      )
                      
                      $
                      4,782,455BASIC
      EARNINGS (LOSS) PER SHARE
                      
                      $
                      0.11
                      
                      
                      $
                      0.60
                      
                      
                      $
                      (0.61
                      )
                      
                      $
                      1.75DILUTED
      EARNINGS (LOSS) PER SHARE
                      
                      $
                      0.11
                      
                      
                      $
                      0.59
                      
                      
                      $
                      (0.61
                      )
                      
                      $
                      1.70






See Notes
to Condensed Consolidated Financial Statements


4
 Table of Contents





GUARANTYFEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


NINE
MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)





Common Stock
                
                
                Additional Paid-In Capital
                
                
                Unearned ESOP Shares
                
                
                Treasury Stock
                
                
                Retained Earnings
                
                
                Accumulated Other Comprehensive Income
      (Loss)
                
                
                TotalBalance,
      January 1, 2008
                
                $
                673,649
                
                
                $
                57,571,929
                
                
                $
                (1,116,930
                )
                
                $
                (60,348,204
                )
                
                $
                45,402,449
                
                
                $
                503,767
                
                
                $
                42,686,660Comprehensive
      lossNet
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,579,963
                )
                
                
                -
                
                
                
                (1,579,963
                )Change
      in unrealized appreciation on available-for-sale securities and change in
      fair value of interest rate swaps, net of income taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,057,197
                )
                
                
                (1,057,197
                )Total
      comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,637,160
                )Dividends
      ($0.36 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (931,013
                )
                
                
                -
                
                
                
                (931,013
                )Stock
      award plans
                
                
                -
                
                
                
                187,877
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                187,877Stock
      options exercised
                
                
                4,331
                
                
                
                574,330
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                578,661Release
      of ESOP shares
                
                
                -
                
                
                
                195,105
                
                
                
                171,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                366,105Treasury
      stock purchased
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,465,150
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,465,150
                )Balance,
      September 30, 2008
                
                $
                677,980
                
                
                $
                58,529,241
                
                
                $
                (945,930
                )
                
                $
                (61,813,354
                )
                
                $
                42,893,938
                
                
                $
                (553,430
                )
                
                $
                38,788,445






See Notes
to Condensed Consolidated Financial Statements


5
 Table of Contents





GUARANTY
FEDERAL BANCSHARES, INC.


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


NINE
MONTHS ENDED SEPTEMBER 30, 2007 (UNAUDITED)





Common Stock
                
                
                Additional Paid-In Capital
                
                
                Unearned ESOP Shares
                
                
                Treasury Stock
                
                
                Retained Earnings
                
                
                Accumulated Other Comprehensive
      Income
                
                
                TotalBalance,
      January 1, 2007
                
                $
                665,353
                
                
                $
                55,730,352
                
                
                $
                (1,344,930
                )
                
                $
                (52,869,086
                )
                
                $
                41,183,006
                
                
                $
                1,534,548
                
                
                $
                44,899,243Comprehensive
      incomeNet
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,782,455
                
                
                
                -
                
                
                
                4,782,455Change
      in unrealized appreciation on available-for-sale securities, net of income
      taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (567,673
                )
                
                
                (567,673
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,214,782Dividends
      ($0.52 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,414,757
                )
                
                
                -
                
                
                
                (1,414,757
                )Stock
      award plans
                
                
                -
                
                
                
                327,426
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                327,426Stock
      options exercised
                
                
                7,295
                
                
                
                978,381
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                985,676Release
      of ESOP shares
                
                
                -
                
                
                
                335,530
                
                
                
                171,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                506,530Treasury
      stock purchased
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4,969,299
                )
                
                
                -
                
                
                
                -
                
                
                
                (4,969,299
                )Balance,
      September 30, 2007
                
                $
                672,648
                
                
                $
                57,371,689
                
                
                $
                (1,173,930
                )
                
                $
                (57,838,385
                )
                
                $
                44,550,704
                
                
                $
                966,875
                
                
                $
                44,549,601






See Notes
to Condensed Consolidated Financial Statements


6
 Table of Contents





GUARANTYFEDERAL  BANCSHARES, INC


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)





9/30/2008
                
                
                9/30/2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                (1,579,963
                )
                
                $
                4,782,455Items
      not requiring (providing) cash:Deferred
      income taxes
                
                
                (2,026,792
                )
                
                
                (84,008
                )Depreciation
                
                
                677,993
                
                
                
                663,496Provision
      for loan losses
                
                
                8,179,079
                
                
                
                630,000Gain
      on loans and investment securities
                
                
                (598,587
                )
                
                
                (1,473,828
                )Loss
      (gain) on sale of foreclosed assets
                
                
                26,826
                
                
                
                (396
                )Amortization
      of deferred income, premiums and discounts
                
                
                10,114
                
                
                
                5,100Stock
      award plan expense
                
                
                72,211
                
                
                
                50,840Origination
      of loans held for sale
                
                
                (40,497,385
                )
                
                
                (54,656,645
                )Proceeds
      from sale of loans held for sale
                
                
                42,790,364
                
                
                
                57,900,255Release
      of ESOP shares
                
                
                366,105
                
                
                
                506,530Changes
      in:Accrued
      interest receivable
                
                
                (844,084
                )
                
                
                (78,950
                )Prepaid
      expenses and other assets
                
                
                (689,431
                )
                
                
                212,682Accounts
      payable and accrued expenses
                
                
                198,541
                
                
                
                336,860Income
      taxes payable
                
                
                (263,672
                )
                
                
                1,204,909Net
      cash provided by operating activities
                
                
                5,821,319
                
                
                
                9,999,300CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      change in loans
                
                
                (67,319,462
                )
                
                
                (3,846,875
                )Principal
      payments on held-to-maturity securities
                
                
                62,113
                
                
                
                82,999Principal
      payments on available-for-sale securities
                
                
                1,763,996
                
                
                
                211,085Proceeds
      from maturities of available-for-sale securities
                
                
                1,850,000
                
                
                
                500,000Purchase
      of premises and equipment
                
                
                (2,334,484
                )
                
                
                (2,429,303
                )Purchase
      of available-for-sale securities
                
                
                (55,383,487
                )
                
                
                (10,630,694
                )Proceeds
      from sale of available-for-sale securities
                
                
                -
                
                
                
                1,068,601Redemption
      (purchase) of FHLB stock
                
                
                (3,669,100
                )
                
                
                2,340,657Proceeds
      from sale of foreclosed assets
                
                
                1,305,864
                
                
                
                1,351,803Net
      cash used in investing activities
                
                
                (123,724,560
                )
                
                
                (11,351,727
                )CASH
      FLOWS FROM FINANCING ACTIVITIESStock
      options exercised
                
                
                578,661
                
                
                
                985,676Cash
      dividends paid
                
                
                (1,397,921
                )
                
                
                (1,400,870
                )Net
      increase in demand deposits, NOW and savings accounts
                
                
                4,214,518
                
                
                
                8,510,522Net
      increase in certificates of deposit
                
                
                13,700,686
                
                
                
                48,977,464Net
      increase in securities sold under agreements to repurchase
                
                
                29,900,705
                
                
                
                -Proceeds
      from FHLB advances
                
                
                1,884,050,075
                
                
                
                1,266,588,600Repayments
      of FHLB advances
                
                
                (1,811,700,075
                )
                
                
                (1,321,502,600
                )Proceeds
      from issuance of notes payable
                
                
                1,064,000
                
                
                
                -Repayments
      of notes payable
                
                
                (347,000
                )
                
                
                -Advances
      from borrowers for taxes and insurance
                
                
                416,694
                
                
                
                434,235Treasury
      stock purchased
                
                
                (1,465,150
                )
                
                
                (4,969,299
                )Net
      cash provided by (used in) financing activities
                
                
                119,015,193
                
                
                
                (2,376,272
                )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                1,111,952
                
                
                
                (3,728,699
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                12,046,202
                
                
                
                14,880,601CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                13,158,154
                
                
                $
                11,151,902





7
 Table of Contents





NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
1:  Basis of Presentation





The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.  In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included.





The
results of operations for the periods are not necessarily indicative of the
results to be expected for the full year.





These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company’s Form 10-K annual report for 2007 filed with the Securities and
Exchange Commission.  The condensed consolidated statement of
financial condition of the Company as of December 31, 2007, has been derived
from the audited consolidated statement of financial condition of the Company as
of that date.  Certain information and note disclosures normally
included in the Company’s annual financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted.





Note
2:  Principles of Consolidation





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





Note
3:  Benefit Plans





The
Company has stock-based employee compensation plans, which are described fully
in the Company’s December 31, 2007 Annual Report on Form 10-K.





The table
below summarizes transactions under the Company’s stock option plans for the
nine months ended September 30, 2008:





Number of sharesIncentive Stock Option
                  
                  
                  Non-Incentive Stock Option
                  
                  
                  Weighted Average Exercise
    PriceBalance
      outstanding as of January 1, 2008
                  
                  
                  118,033
                  
                  
                  
                  114,206
                  
                  
                  $
                  20.48Granted
                  
                  
                  33,000
                  
                  
                  
                  20,000
                  
                  
                  
                  27.07Exercised
                  
                  
                  (28,313
                  )
                  
                  
                  (15,002
                  )
                  
                  
                  13.36Forfeited
                  
                  
                  (15,470
                  )
                  
                  
                  (2,500
                  )
                  
                  
                  21.17Balance
      outstanding as of September 30, 2008
                  
                  
                  107,250
                  
                  
                  
                  116,704
                  
                  
                  $
                  23.36Options
      exercisable as of September 30, 2008
                  
                  
                  33,950
                  
                  
                  
                  74,204
                  
                  
                  $
                  19.18




Stock-based
compensation expense recognized for the three months ended September 30, 2008
and 2007 was $23,735 and $19,605, respectively.   Stock-based
compensation expense recognized for the nine months ended September 30, 2008 and
2007 was $72,211 and $50,840, respectively.  As of September 30, 2008,
there was $252,203 of unrecognized compensation expense related to nonvested
stock options, which will be recognized over the remaining vesting
period.





8
 Table of Contents





Note
4: Earnings Per Share





For three months ended September 30,
      2008
                            
                            
                            For nine months ended September 30,
      2008Income Available to
      Stockholders
                            
                            
                            Average Shares Outstanding
                            
                            
                            Per-share
                            
                            
                            Income Available to
      Stockholders
                            
                            
                            Average Shares Outstanding
                            
                            
                            Per-shareBasic
      Earnings per Share
                            
                            $
                            299,459
                            
                            
                            
                            2,603,686
                            
                            
                            $
                            0.11
                            
                            
                            $
                            (1,579,963
                            )
                            
                            
                            2,602,706
                            
                            
                            $
                            (0.61
                            )Effect
      of Dilutive Securities:Stock
      Options
                            
                            
                            
                            
                            
                            
                            2,789
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            N/ADiluted
      Earnings per Share
                            
                            $
                            299,459
                            
                            
                            
                            2,606,475
                            
                            
                            $
                            0.11
                            
                            
                            $
                            (1,579,963
                            )
                            
                            
                            2,602,706
                            
                            
                            $
                            (0.61
                            )For three months ended September 30,
      2007
                            
                            
                            For nine months ended September 30,
      2007Income Available to
      Stockholders
                            
                            
                            Average Shares Outstanding
                            
                            
                            Per-share
                            
                            
                            Income Available to
      Stockholders
                            
                            
                            Average Shares Outstanding
                            
                            
                            Per-shareBasic
      Earnings per Share
                            
                            $
                            1,612,691
                            
                            
                            
                            2,694,772
                            
                            
                            $
                            0.60
                            
                            
                            $
                            4,782,455
                            
                            
                            
                            2,738,082
                            
                            
                            $
                            1.75Effect
      of Dilutive Securities:Stock
      Options
                            
                            
                            
                            
                            
                            
                            58,094
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            78,967Diluted
      Earnings per Share
                            
                            $
                            1,612,691
                            
                            
                            
                            2,752,866
                            
                            
                            $
                            0.59
                            
                            
                            $
                            4,782,455
                            
                            
                            
                            2,817,049
                            
                            
                            $
                            1.70





Options
to purchase 206,500 shares of common stock were outstanding during the three
months ended September 30, 2008, but were not included in the computation of
diluted earnings per share because the options’ exercise price was greater than
the average market price of the common shares.  Due to the Company’s
net loss for the nine months ended September 30, 2008, no potentially dilutive
shares were included in the computation of diluted earnings per
share.  All outstanding options to purchase common stock were included
in the computation of diluted earnings per share for the three and nine months
ended September 30, 2007.





Note
5: Other Comprehensive Loss





9/30/2008
                  
                  
                  9/30/2007Unrealized
      losses on available-for-sale securities and change in fair value of
      interest rate swaps
                  
                  $
                  (1,775,878
                  )
                  
                  $
                  (333,465
                  )Less:
      Reclassification adjustment for realized losses (gains) included in
      income
                  
                  
                  97,788
                  
                  
                  
                  (567,603
                  )Other
      comprehensive loss, before tax benefit
                  
                  
                  (1,678,090
                  )
                  
                  
                  (901,068
                  )Tax
      benefit
                  
                  
                  (620,893
                  )
                  
                  
                  (333,395
                  )Other
      Comprehensive Loss
                  
                  $
                  (1,057,197
                  )
                  
                  $
                  (567,673
                  )








Note
6: New Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosure related to the use of fair value measures in financial statements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements, and does not expand the use of fair value
measures in financial statements, but standardizes its definition and guidance
in generally accepted accounting principles. SFAS No. 157 emphasizes that
fair value is a market-based measurement based on an exchange transaction
between market participants in which an entity sells an asset or transfers a
liability. SFAS No. 157 also establishes a fair value hierarchy from observable
market data as the highest level to fair value based on an entity's own fair
value assumptions as the lowest level. The provisions of FASB 157 were effective
as of January 1, 2008.  The adoption of the standard did not have a
material impact on the consolidated financial statements.  In February
2008, Financial Accounting Standards Board Staff Position No. 157-2, Effective Date of FASB Statement No.
157 was issued that delayed the application of SFAS No. 157 for
non-financial assets and non-financial liabilities, until January 1,
2009.





9
 Table of Contents





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





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





Note
7: Derivative Financial Instruments





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





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





In June
2008, the Company entered into three, 2 year interest rate swap agreements
totaling a $90 million notional amount to hedge against interest rate risk on
variable rate loans.  As a cash flow hedge, the portion of the change
in the fair value of the derivative that has been deemed highly effective is
recognized in other comprehensive income until the related cash flows from the
hedged item are recognized in earnings.  At September 30, 2008, the
Company reported a $387,003 unrealized gain, net of a $227,288 tax effect, in
other comprehensive income related to cash flow hedges.  The Company
documents, both at inception and periodically over the life of the hedge, its
analysis of actual and expected hedge effectiveness.  To the extent
that the hedge of future cash flows is deemed ineffective, changes in the fair
value of the derivative are recognized in earnings as a component of other
noninterest expense.  For the quarter ended September 30, 2008, there
was no ineffectiveness attributable to the cash flow hedges.  A
summary of the Company’s derivative financial instruments at September 30, 2008
is shown in the following table:





10
 Table of Contents








Inception
                  Termination
                  Derivative
                  
                  Notional
                  
                  Rate
                  Rate
                  
                  Estimated
      Fair ValueDate
                  Date
                  Type
                  
                  Amount
                  
                  Received
                  Hedged
                  
                  at September 30, 20086/3/2008
                  6/3/2010
                  Interest
      rate swap
                  
                  $
                  50,000,000
                  
                  5.91%
      Fixed
                  Prime
      Floating
                  
                  $
                  237,2356/27/2008
                  6/27/2010
                  Interest
      rate swap
                  
                  
                  20,000,000
                  
                  6.70%
      Fixed
                  Prime
      Floating + 0.50%
                  
                  
                  184,9816/27/2008
                  6/27/2010
                  Interest
      rate swap
                  
                  
                  20,000,000
                  
                  5.70%
      Fixed
                  Prime
      Floating - 0.50%
                  
                  
                  192,075$
                  90,000,000
                  
                  
                  
                  
                  $
                  614,291





Note
8: Fair Value Disclosures





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





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





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





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





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





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





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





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





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





11
 Table of Contents





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





Financial
      Assets:Level 1 inputs
                
                
                Level 2 inputs
                
                
                Level 3 inputs
                
                
                Total fair valueAvailable-for-sale
      securities
                
                $
                654
                
                
                $
                63,445
                
                
                $
                -
                
                
                $
                64,099Interest
      rate swaps
                
                $
                -
                
                
                $
                614
                
                
                $
                -
                
                
                $
                614





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





Level 1 inputs
                
                
                Level 2 inputs
                
                
                Level 3 inputs
                
                
                Total fair valueImpaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                8,825
                
                
                $
                8,825





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





Note
9: Subsequent Events





In order
to address the weakened economy, and specifically the banking sector, and also
to help consumers maintain confidence in the banking system, the Emergency
Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3,
2008.





First,
the first initiative under EESA was to temporarily raise the basic limit on
federal deposit insurance coverage from $100,000 to $250,000 per
depositor.  The legislation provides that the basic deposit insurance
limit will return to $100,000 after December 31, 2009.





Secondly,
the Troubled Asset Relief Program (“TARP”) was enacted as part of the
EESA.  Under this program, the U.S. Treasury announced on October 24,
2008 its plans to direct $250 billion into preferred stock investments of
financial institutions.  The primary terms of the preferred stock are
as follows:


·
            Pay
      5% dividends on the Treasury’s preferred stock for the first five years
      and 9% dividends thereafter;


·
            Cannot
      increase common stock dividends for three years without the consent of the
      Treasury;


·
            Cannot
      redeem the preferred stock for three years unless from an approved equity
      offering;


·
            Must
      receive Treasury’s consent to repurchase Company shares of common
      stock;


·
            Treasury
      receives warrants allowing Treasury to buy common stock equal to 15% of
      the Treasury’s total investment in the financial institution;
      and


·
            Restricts
      executive compensation and tax
deductibility.





The
minimum and maximum investment in the program for each financial institution is
an amount equal to 1% of risk-weighted assets and the lesser of $25 billion or
3% of its risk-weighted assets, respectively.  As of September 30,
2008, the maximum investment by the Treasury would be approximately $17
million.  An application to participate in the TARP capital purchase
plan must be received by an institution’s primary federal regulator by November
14, 2008.  The Company has filed an application to participate in the
program, and if approved, would then have the ability to decide whether or not
to participate.





12
 Table of Contents





On
October 14, 2008, the Temporary Liquidity Guarantee Program was enacted by the
FDIC.  The program provides for the guarantee of newly-issued senior
unsecured debt of financial institutions and bank holding companies and provides
full deposit insurance coverage for all non-interest bearing deposit
accounts.  The additional insurance coverage is automatically
available with no additional cost initially, but will be assessed a cost of 10
basis points on each dollar of non-interest bearing account subsequently, unless
the Company elects to opt-out of the program by the established deadline of
December 5, 2008.  The Company expects that it will continue to
participate in this program after the initial period.





On
November 7, 2008, the Company elected to terminate the three interest rate swap
agreements with a total notional value of $90 million.  At
termination, the swaps had a market value of $1.7 million.  The gain
is being accreted into interest income over the remaining twenty month term in
accordance with the stated maturity date of the original
agreements.





Item2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations





General





The
primary function of the Company is to monitor and oversee its investment in
Guaranty Bank (the “Bank”), a wholly-owned subsidiary of the
Company.  The Company engages in few other activities, and the Company
has no significant assets other than its investment in the Bank.  As a
result, the results of operations of the Company are derived primarily from
operations of the Bank. The Bank’s results of operations are primarily dependent
on net interest margin, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing
liabilities.  The Bank’s income is also affected by the level of its
noninterest expenses, such as employee salaries and benefits, occupancy expenses
and other expenses.  The following discussion reviews the Company’s
financial condition as of September 30, 2008, and the results of operations for
the three and nine months ended September 30, 2008 and 2007.





The
discussion set forth below, as well as other portions of this Form 10-Q, may
contain forward-looking comments. Such comments are based upon the information
currently available to management of the Company and management’s perception
thereof as of the date of this Form 10-Q.  When used in this Form
10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.  Such
statements are subject to risks and uncertainties.  Actual results of
the Company’s operations could materially differ from those forward-looking
comments.  The differences could be caused by a number of factors or
combination of factors including, but not limited to: changes in demand for
banking services; changes in portfolio composition; changes in management
strategy; increased competition from both bank and non-bank companies; changes
in the general level of interest rates, in general or local economic conditions,
in the real estate market, and in federal and state regulations and legislation
governing the operations of the Company or the Bank; and other factors set forth
in reports and other documents filed by the Company with the Securities and
Exchange Commission from time to time, including the risk factors described
under Item 1A. of the Company’s Form 10-K for the fiscal year ended December 31,
2007.





Financial
Condition





The
Company’s total assets increased $117,068,857 (21%) from $565,777,980 as of
December 31, 2007, to $682,846,837 as of September 30, 2008.





Cash and
cash equivalents increased $1,111,952 (9%) from $12,046,202 as of December 31,
2007, to $13,158,154 as of September 30, 2008.





Securities
available-for-sale increased $49,369,058 (335%) from $14,729,938 as of December
31, 2007, to $64,098,996 as of September 30, 2008. The increase is primarily due
to purchases of $55,383,487 offset by maturities and principal repayments of
$3,613,996.  Approximately $35 million of the purchases were due to a
structured leveraged transaction completed during the period.  The
Bank currently holds 26,600 shares of Federal Home Loan Mortgage Corporation
(“FHLMC”) stock with an amortized cost of $26,057 in the available-for-sale
category.  As of September 30, 2008, the gross unrealized gain on the
FHLMC stock was $19,429, a decrease from $880,205 as of December 31,
2007.





13
 Table of Contents





Securities
held-to-maturity decreased primarily due to principal repayments by $61,963 (9%)
from $654,775 as of December 31, 2007, to $592,812 as of September 30,
2008.





Stock in
Federal Home Loan Bank of Des Moines (“FHLB”) increased by $3,669,100 (91%), due
to purchases of such stock to continue to maintain a level to meet FHLB advance
requirements.





Net loans
receivable increased by $51,990,057 (10%) from $514,100,035 as of December 31,
2007, to $566,090,092 as of September 30, 2008.  Commercial real
estate loans increased by $28,144,104 (16%) from $175,995,074 as of December 31,
2007, to $204,139,178 as of September 30, 2008.  Commercial loans
increased $17,263,279 (17%) from $104,025,575 as of December 31, 2007, to
$121,288,854 as of September 30, 2008.  Permanent multi-family loans
decreased by $9,531,940 (23%) from $41,947,555 as of December 31, 2007, to
$32,415,615 as of September 30, 2008.  Construction loans decreased by
$75,395 (0%) to $89,648,825 as of September 30, 2008 compared to $89,724,220 as
of December 31, 2007.





Allowance
for loan losses increased $5,543,666 (93%) from $5,962,923 as of December 31,
2007 to $11,506,589 as of September 30, 2008. The allowance increased due to the
provision for loan losses of $8,179,079 exceeding net loan charge-offs of
$2,635,413 recorded during the period.  During the nine month period,
management charged-off $1.9 million relating to two specific loans that had been
identified and classified as impaired at December 31, 2007.  Due to
loan growth, the charge-offs and increasing concerns about declining real estate
values and the difficult market conditions created by the softening economy,
management decided to record a provision for loan losses for this period in
order to maintain the allowance at a level in accordance with management’s
internal review and methodology.  A significant portion of additional
reserves were made on a few problem loans already identified by management in
previous quarters.  Due to the concerns discussed above, and as a
result of continuing analysis, including new information obtained during the
quarter, the reserves are warranted.  See discussion under “Results of
Operations – Comparison of Three and Nine Month Periods Ended September 30, 2008
and 2007 – Provision for Loan Losses.”   The allowance for loan
losses, as a percentage of net loans outstanding, as of September 30, 2008 and
December 31, 2007 was 2.03% and 1.16%, respectively.  The allowance
for loan losses, as a percentage of nonperforming loans outstanding, as of
September 30, 2008 and December 31, 2007 was 106.0% and 82.2%,
respectively.  Management believes the allowance for loan losses is at
a level to be sufficient in providing for potential loan losses in the Bank’s
existing loan portfolio at September 30, 2008.





Deposits
increased $17,915,204 (4%) from $418,191,284 as of December 31, 2007, to
$436,106,488 as of September 30, 2008.  For the nine months ended
September 30, 2008, checking and savings accounts increased by $4,214,518 and
certificates of deposit increased by $13,700,686.  The increase in
checking and savings was due to the Bank’s continued emphasis on developing
commercial checking business.  The increase in certificates of deposit
was primarily due to the Company’s emphasis on increasing retail
customers.  See also the discussion under “Quantitative and
Qualitative Disclosure about Market Risk – Asset/Liability
Management.”





FHLB
advances increased by $72,350,000 from $76,086,000 as of December 31, 2007, to
$148,436,000 as of September 30, 2008 primarily to fund asset growth during the
period.





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





Stockholders’
equity (including unrealized depreciation on securities available-for-sale, net
of tax) decreased $3,898,215 from $42,686,660 as of December 31, 2007, to
$38,788,445 as of September 30, 2008. The Company’s net loss during this period
was $1,579,963.  The Company also declared two quarterly dividends
totaling $931,013 during the period.  Unrealized depreciation on
securities available-for-sale and changes in fair value of interest rate swaps,
net of tax, increased $1,057,197 during the period due primarily to increased
volatility in the investment portfolio.  In
addition, stockholders’ equity further declined as the Company repurchased
60,401 shares of treasury stock at an aggregate cost of $1,465,150 (an average
cost of $24.25 per share).  On a per share basis, stockholders’ equity
decreased from $16.37 as of December 31, 2007 to $14.87 as of September 30,
2008.





14
 Table of Contents





Average
Balances, Interest and Average Yields





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





The
following tables set forth certain information relating to the Company’s average
consolidated statements of financial condition and reflect 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
9/30/2008
                
                
                Three months ended
9/30/2007Average Balance
                
                
                Interest
                
                
                Yield / Cost
                
                
                Average Balance
                
                
                Interest
                
                
                Yield / CostASSETSInterest-earning:Loans
                
                $
                571,616
                
                
                $
                8,338
                
                
                
                5.83
                %
                
                $
                475,697
                
                
                $
                9,535
                
                
                
                8.02
                %Investment
      securities
                
                
                63,729
                
                
                
                864
                
                
                
                5.42
                %
                
                
                9,223
                
                
                
                120
                
                
                
                5.20
                %Other
      assets
                
                
                8,105
                
                
                
                66
                
                
                
                3.26
                %
                
                
                7,542
                
                
                
                79
                
                
                
                4.19
                %Total
      interest-earning
                
                
                643,450
                
                
                
                9,268
                
                
                
                5.76
                %
                
                
                492,462
                
                
                
                9,734
                
                
                
                7.91
                %Noninterest-earning
                
                
                26,666
                
                
                
                
                
                
                
                
                
                
                
                24,187$
                670,116
                
                
                
                
                
                
                
                
                
                
                $
                516,649LIABILITIES
      AND STOCKHOLDERS’ EQUITYInterest-bearing:Savings
      accounts
                
                $
                13,288
                
                
                
                31
                
                
                
                0.93
                %
                
                $
                12,760
                
                
                
                73
                
                
                
                2.29
                %Transaction
      accounts
                
                
                111,178
                
                
                
                480
                
                
                
                1.73
                %
                
                
                103,252
                
                
                
                776
                
                
                
                3.01
                %Certificates
      of deposit
                
                
                280,324
                
                
                
                2,829
                
                
                
                4.04
                %
                
                
                254,800
                
                
                
                3,330
                
                
                
                5.23
                %FHLB
      advances
                
                
                139,220
                
                
                
                876
                
                
                
                2.52
                %
                
                
                54,753
                
                
                
                738
                
                
                
                5.39
                %Securities
      sold under agreements to repurchase
                
                
                39,750
                
                
                
                260
                
                
                
                2.62
                %
                
                
                -
                
                
                
                -
                
                
                
                0.00
                %Subordinated
      debentures
                
                
                15,465
                
                
                
                256
                
                
                
                6.62
                %
                
                
                15,465
                
                
                
                261
                
                
                
                6.75
                %Other
      borrowed funds
                
                
                1,435
                
                
                
                15
                
                
                
                4.18
                %
                
                
                2,003
                
                
                
                24
                
                
                
                0.00
                %Total
      interest-bearing
                
                
                600,660
                
                
                
                4,747
                
                
                
                3.16
                %
                
                
                443,033
                
                
                
                5,202
                
                
                
                4.70
                %Noninterest-bearing
                
                
                31,091
                
                
                
                
                
                
                
                
                
                
                
                28,437Total
      liabilities
                
                
                631,751
                
                
                
                
                
                
                
                
                
                
                
                471,470Stockholders’
      equity
                
                
                38,365
                
                
                
                
                
                
                
                
                
                
                
                45,179$
                670,116
                
                
                
                
                
                
                
                
                
                
                $
                516,649Net
      earning balance
                
                $
                42,790
                
                
                
                
                
                
                
                
                
                
                $
                49,429Earning
      yield less costing rate
                
                
                
                
                
                
                
                
                
                
                2.60
                %
                
                
                
                
                
                
                
                
                
                
                3.21
                %Net
      interest income, and net yield spread on interest earning
      assets
                
                
                
                
                
                $
                4,521
                
                
                
                2.81
                %
                
                
                
                
                
                $
                4,532
                
                
                
                3.68
                %Ratio
      of interest-earning assets to interest-bearing liabilities
                
                
                
                
                
                
                107
                %
                
                
                
                
                
                
                
                
                
                
                111
                %





15
 Table of Contents




Nine months ended 9/30/2008
                
                
                Nine months ended 9/30/2007Average Balance
                
                
                Interest
                
                
                Yield / Cost
                
                
                Average Balance
                
                
                Interest
                
                
                Yield / CostASSETSInterest-earning:Loans
                
                $
                548,355
                
                
                $
                24,985
                
                
                
                6.08
                %
                
                $
                473,148
                
                
                $
                27,870
                
                
                
                7.85
                %Investment
      securities
                
                
                56,959
                
                
                
                2,268
                
                
                
                5.31
                %
                
                
                8,543
                
                
                
                309
                
                
                
                4.82
                %Other
      assets
                
                
                7,388
                
                
                
                171
                
                
                
                3.09
                %
                
                
                8,079
                
                
                
                258
                
                
                
                4.26
                %Total
      interest-earning
                
                
                612,702
                
                
                
                27,424
                
                
                
                5.97
                %
                
                
                489,770
                
                
                
                28,437
                
                
                
                7.74
                %Noninterest-earning
                
                
                22,872
                
                
                
                
                
                
                
                
                
                
                
                23,942$
                635,574
                
                
                
                
                
                
                
                
                
                
                $
                513,712LIABILITIES
      AND STOCKHOLDERS’ EQUITYInterest-bearing:Savings
      accounts
                
                $
                13,093
                
                
                
                113
                
                
                
                1.15
                %
                
                $
                13,836
                
                
                
                250
                
                
                
                2.41
                %Transaction
      accounts
                
                
                104,420
                
                
                
                1,434
                
                
                
                1.83
                %
                
                
                101,124
                
                
                
                2,235
                
                
                
                2.95
                %Certificates
      of deposit
                
                
                280,416
                
                
                
                9,300
                
                
                
                4.42
                %
                
                
                240,164
                
                
                
                9,151
                
                
                
                5.08
                %FHLB
      advances
                
                
                113,114
                
                
                
                2,371
                
                
                
                2.79
                %
                
                
                67,571
                
                
                
                2,727
                
                
                
                5.38
                %Securities
      sold under agreements to repurchase
                
                
                36,465
                
                
                
                735
                
                
                
                2.69
                %
                
                
                -
                
                
                
                -
                
                
                
                0.00
                %Subordinated
      debentures
                
                
                15,465
                
                
                
                768
                
                
                
                6.62
                %
                
                
                15,465
                
                
                
                776
                
                
                
                6.69
                %Other
      borrowed funds
                
                
                1,273
                
                
                
                39
                
                
                
                4.08
                %
                
                
                1,338
                
                
                
                38
                
                
                
                3.79
                %Total
      interest-bearing
                
                
                564,246
                
                
                
                14,760
                
                
                
                3.49
                %
                
                
                439,498
                
                
                
                15,177
                
                
                
                4.60
                %Noninterest-bearing
                
                
                29,867
                
                
                
                
                
                
                
                
                
                
                
                28,277Total
      liabilities
                
                
                594,113
                
                
                
                
                
                
                
                
                
                
                
                467,775Stockholders’
      equity
                
                
                41,461
                
                
                
                
                
                
                
                
                
                
                
                45,937$
                635,574
                
                
                
                
                
                
                
                
                
                
                $
                513,712Net
      earning balance
                
                $
                48,456
                
                
                
                
                
                
                
                
                
                
                $
                50,272Earning
      yield less costing rate
                
                
                
                
                
                
                
                
                
                
                2.48
                %
                
                
                
                
                
                
                
                
                
                
                3.14
                %Net
      interest income, and net yield spread on interest earning
      assets
                
                
                
                
                
                $
                12,664
                
                
                
                2.76
                %
                
                
                
                
                
                $
                13,260
                
                
                
                3.61
                %Ratio
      of interest-earning assets to interest-bearing liabilities
                
                
                
                
                
                
                109
                %
                
                
                
                
                
                
                
                
                
                
                111
                %





Results
of Operations - Comparison of Three and Nine Month Periods Ended September 30, 2008
and 2007





Net
income (loss) for the three months and nine months ended September 30, 2008 was
$299,459 and ($1,579,963) as compared to net income of $1,612,691 and $4,782,455
for the three months and nine months ended September 30, 2007, which represents
a decrease in earnings of $1,313,232 (81%) for the three month period, and a
decrease in earnings of $6,362,418 (133%) for the nine month
period.





Interest
Income





Total
interest income for the three months and nine months ended September 30, 2008,
decreased $466,154 (5%) and $1,012,664 (4%), respectively, as compared to the
three months and nine months ended September 30, 2007.  For the three
month and nine month periods ended September 30, 2008 compared to the same
periods in 2007, the average yield on interest earning assets decreased 215
basis points to 5.76% and decreased 177 basis points to 5.97%, respectively,
while the average balance of interest earning assets increased approximately
$150,988,000 and $122,932,000, respectively.  The Company’s decline in
the average yield on interest earning assets was due to the Federal Reserve’s
significant interest rate cuts of 3.25% from September 2007 through April
2008.  This affected the Company’s yield on loans which are tied to
the prime rate.





16
 Table of Contents





Interest
Expense





Total
interest expense for the three months and nine months ended September 30, 2008,
decreased $454,542 (9%) and decreased $416,649 (3%), respectively, when compared
to the three months and nine months ended September 30, 2007.  For the
three month and nine month periods ended September 30, 2008 compared to the same
periods in 2007, the average cost of interest bearing liabilities decreased 154
basis points to 3.16% and 111 basis points to 3.49%, respectively, while the
average balance of interest bearing liabilities increased approximately
$157,627,000 and $124,748,000, respectively, when compared to the same periods
in 2007.





Net Interest
Income





Net
interest income for the three months and nine months ended September 30, 2008,
decreased $11,612 (0%) and $596,015 (4%), respectively when compared to the same
periods in 2007.  This decrease was primarily due to the significant
rate cuts by the Federal Reserve as described above.





Provision for Loan
Losses





Based on
its internal analysis and methodology, management recorded a provision for loan
losses of $1,675,000 and $8,179,079 for the three months and nine months ended
September 30, 2008, respectively, compared to $210,000 and $630,000 for the same
periods in 2007.  Due to loan growth, the charge-offs noted and
increasing concerns about declining real estate values and the difficult market
conditions created by the softening economy, management decided to record a
provision for loan losses for the period in order to maintain the allowance at a
level in accordance with management’s internal review and methodology. A
significant portion of additional reserves were made on a few problem loans
already identified by management in previous quarters.  Due to the
concerns discussed above, and as a result of continuing analysis, including new
information obtained during the quarter, the reserves are
warranted.  The Bank will continue to closely monitor asset quality,
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 $319,933 (27%) and $1,140,222 (31%) for the three months and
nine months ended September 30, 2008, respectively, when compared to the three
months and nine months ended September 30, 2007.





Gains on
sales of investment securities decreased $181,632 (100%) and $665,391 (117%) for
the three months and nine months ended September 30, 2008 when compared to the
same periods in 2007.  These declines were due to the Bank’s
suspension of selling shares of its Freddie Mac (FRE) equity investment, due to
the significant financial downturn in FRE and a sharp decline in its stock
price.  Also, the Company recognized specific losses during the nine
month period totaling $97,788 on equity securities associated with companies
operating in the financial services sector.  Service charges on
transaction accounts decreased by $5,109 (1%) and $160,207 (10%) for the three
months and nine months ended September 30, 2008 when compared to the same period
in 2007, primarily due to declines in overdraft charges.  Gain on sale
of loans decreased $74,487 (26%) and $209,850 (23%) for the three months and
nine months ended September 30, 2008 when compared to the same period in
2007.





Noninterest
Expense





Noninterest
expense increased $180,714 (6%) and $624,886 (7%) for the three months and nine
months ended September 30, 2008 when compared to the same periods in
2007.





17
 Table of Contents





Salaries
and employee benefits increased $51,336 (3%) and $307,801 (6%) for the three
months and nine months ended September 30, 2008 when compared to the same period
in 2007.  This increase was primarily due to additions in several
staff positions in the areas of commercial lending, corporate services, human
resources, marketing and internal audit throughout fiscal year
2007.





Federal
Deposit Insurance Corporation (“FDIC”) deposit insurance premiums increased
$71,545 (653%) and $176,296 (565%) for the three months and nine months ended
September 30, 2008 when compared to the same periods in 2007.  This
was due to an increase in FDIC insurance premium assessments in
2007.  Because of credits available to the Company for 2007, these
increased costs were not owed by the Company until the first quarter of
2008.





Provision for Income
Taxes





The
Company recorded a provision (credit) for income taxes of $227,759 and
($865,684) for the three and nine months ended September 30, 2008, respectively,
due to the pre-tax income (loss) recognized for those periods.  This
compares to a provision for income taxes of $891,786 and $2,682,100 for the
three and nine months ended September 30, 2007, respectively.





Nonperforming
Assets





The
allowance for loan losses is calculated based upon an evaluation of pertinent
factors underlying the various types and quality of the Bank’s existing loan
portfolio.  When making such evaluation, management considers such
factors as the repayment status of its loans, the estimated net realizable value
of the underlying collateral, borrowers’ intent (to the extent known by the
Bank) and ability to repay the loan, local economic conditions and the Bank’s
historical loss ratios.  The allowance for loan losses, as a
percentage of nonperforming loans outstanding, as of September 30, 2008 and
December 31, 2007 was 106.0% and 82.2%, respectively.  Total loans
classified as substandard, doubtful or loss as of September 30, 2008, were $42.5
million or 6.22% of total assets as compared to $17.8 million, or 3.41% of total
assets at December 31, 2007.  Management considered impaired and total
classified loans in evaluating the adequacy of the Bank’s allowance for loan
losses.





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








9/30/2008
                
                
                12/31/2007
                
                
                12/31/2006Nonperforming
      loans
                
                $
                10,852
                
                
                $
                7,254
                
                
                $
                2,748Real
      estate acquired in settlement of loans
                
                
                6,545
                
                
                
                727
                
                
                
                173Total
      nonperforming assets
                
                $
                17,397
                
                
                $
                7,981
                
                
                $
                2,921Total
      nonperforming assets as a percentage of total assets
                
                
                2.55
                %
                
                
                1.41
                %
                
                
                0.56
                %Allowance
      for loan losses
                
                $
                11,507
                
                
                $
                5,963
                
                
                $
                5,783Allowance
      for loan losses as a percentage of net loans
                
                
                2.03
                %
                
                
                1.16
                %
                
                
                1.20
                %Allowance
      for loan losses as a percentage of nonperforming loans
                
                
                106.04
                %
                
                
                82.20
                %
                
                
                210.44
                %








Liquidity
and Capital Resources





The
Bank’s primary sources of funds are deposits, principal and interest payments on
loans and mortgage-backed securities, proceeds from maturing investment
securities and extensions of credit from the FHLB and the Federal Reserve
Bank.  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.





18
 Table of Contents





The Bank
uses its liquidity resources principally to satisfy its ongoing commitments
which include funding loan commitments, funding maturing certificates of deposit
as well as deposit withdrawals, maintaining liquidity, purchasing investments,
and meeting operating expenses.  Management believes that anticipated
cash flows and deposit growth will be adequate to meet the Bank’s liquidity
needs.





In order
to address the weakened economy, and specifically the banking sector, and also
to help consumers maintain confidence in the banking system, the Emergency
Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3,
2008.





First,
the first initiative under EESA was to temporarily raise the basic limit on
federal deposit insurance coverage from $100,000 to $250,000 per
depositor.  The legislation provides that the basic deposit insurance
limit will return to $100,000 after December 31, 2009.





Secondly,
the Troubled Asset Relief Program (“TARP”) was enacted as part of the
EESA.  Under this program, the U.S. Treasury announced on October 24,
2008 its plans to direct $250 billion into preferred stock investments of
financial institutions.  The primary terms of the preferred stock are
as follows:


·
            Pay
      5% dividends on the Treasury’s preferred stock for the first five years
      and 9% dividends thereafter;


·
            Cannot
      increase common stock dividends for three years without the consent of the
      Treasury;


·
            Cannot
      redeem the preferred stock for three years unless from an approved equity
      offering;


·
            Must
      receive Treasury’s consent to repurchase Company shares of common
      stock;


·
            Treasury
      receives warrants allowing Treasury to buy common stock equal to 15% of
      the Treasury’s total investment in the financial institution;
      and


·
            Restricts
      executive compensation and tax
deductibility.





The
minimum and maximum investment in the program for each financial institution is
an amount equal to 1% of risk-weighted assets and the lesser of $25 billion or
3% of its risk-weighted assets, respectively.  As of September 30,
2008, the maximum investment by the Treasury would be approximately $17
million.  An application to participate in the TARP capital purchase
plan must be received by an institution’s primary federal regulator by November
14, 2008.  The Company has filed an application to participate in the
program, and if approved, would then have the ability to decide whether or not
to participate.





On
October 14, 2008, the Temporary Liquidity Guarantee Program was enacted by the
FDIC.  The program provides for the guarantee of newly-issued senior
unsecured debt of financial institutions and bank holding companies and provides
full deposit insurance coverage for all non-interest bearing deposit
accounts.  The additional insurance coverage is automatically
available with no additional cost initially, but will be assessed a cost of 10
basis points on each dollar of non-interest bearing account subsequently, unless
the Company elects to opt-out of the program by the established deadline of
December 5, 2008.  The Company expects that it will continue to
participate in this program after the initial period.





Item3.
              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.





19
 Table of Contents





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





The Bank
constantly monitors its deposits in an effort to decrease their interest rate
sensitivity.  Rates of interest paid on deposits at the Bank are
priced competitively in order to meet the Bank’s asset/liability management
objectives and spread requirements.  The Bank believes, based on
historical experience, that a substantial portion of such accounts represents
non-interest rate sensitive core deposits.





Interest Rate Sensitivity
Analysis





The
following table sets forth as of September 30, 2008 management’s estimates of
the projected changes in net portfolio value (“NPV”) in the event of 100, 200,
and 300 basis point (“bp”) instantaneous and permanent increases and 100, 200
and 300 basis point instantaneous and permanent decreases in market interest
rates.  Dollar amounts are expressed in thousands.





BP
      Change
                      
                      
                      Estimated Net Portfolio
    Value
                      
                      
                      NPV as % of PV of Assetsin Rates
                      
                      
                      $ Amount
                      
                      
                      $ Change
                      
                      
                      % Change
                      
                      
                      NPV Ratio
                      
                      
                      Change+300
                      
                      
                      $
                      31,256
                      
                      
                      $
                      (3,116
                      )
                      
                      
                      -9
                      %
                      
                      
                      4.73
                      %
                      
                      
                      -0.35
                      %+200
                      
                      
                      
                      32,635
                      
                      
                      
                      (1,737
                      )
                      
                      
                      -5
                      %
                      
                      
                      4.90
                      %
                      
                      
                      -0.18
                      %+100
                      
                      
                      
                      33,624
                      
                      
                      
                      (748
                      )
                      
                      
                      -2
                      %
                      
                      
                      5.00
                      %
                      
                      
                      -0.07
                      %NC
                      
                      
                      
                      34,372
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5.08
                      %
                      
                      
                      --100
                      
                      
                      
                      35,014
                      
                      
                      
                      642
                      
                      
                      
                      2
                      %
                      
                      
                      5.13
                      %
                      
                      
                      0.06
                      %-200
                      
                      
                      
                      36,259
                      
                      
                      
                      1,887
                      
                      
                      
                      5
                      %
                      
                      
                      5.27
                      %
                      
                      
                      0.19
                      %-300
                      
                      
                      
                      39,796
                      
                      
                      
                      5,424
                      
                      
                      
                      16
                      %
                      
                      
                      5.73
                      %
                      
                      
                      0.66
                      %








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.





20
 Table of Contents





Derivative Financial
Instruments





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





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





In June
2008, the Company entered into three, 2 year interest rate swap agreements
totaling a $90 million notional amount to hedge against interest rate risk on
variable rate loans.  As a cash flow hedge, the portion of the change
in the fair value of the derivative that has been deemed highly effective is
recognized in other comprehensive income until the related cash flows from the
hedged item are recognized in earnings.  At September 30, 2008, the
Company reported a $387,003 unrealized gain, net of a $227,288 tax effect, in
other comprehensive income related to cash flow hedges.  The Company
documents, both at inception and periodically over the life of the hedge, its
analysis of actual and expected hedge effectiveness.  To the extent
that the hedge of future cash flows is deemed ineffective, changes in the fair
value of the derivative are recognized in earnings as a component of other
noninterest expense.  For the quarter ended September 30, 2008, there
was no ineffectiveness attributable to the cash flow hedges.  A
summary of the Company’s derivative financial instruments at September 30, 2008
is shown in the following table:





Inception
                            
                            Termination
                            
                            Derivative
                            
                            Notional
                            
                            Rate
                            
                            Rate
                            
                            Estimated
      Fair ValueDate
                            
                            Date
                            
                            Type
                            
                            Amount
                            
                            Received
                            
                            Hedged
                            
                            at September 30, 20086/3/2008
                            
                            6/3/2010
                            
                            Interest
      rate swap
                            
                            $
                            50,000,000
                            
                            5.91%
      Fixed
                            
                            Prime
      Floating
                            
                            $
                            237,2356/27/2008
                            
                            6/27/2010
                            
                            Interest
      rate swap
                            
                            
                            20,000,000
                            
                            6.70%
      Fixed
                            
                            Prime
      Floating + 0.50%
                            
                            
                            184,9816/27/2008
                            
                            6/27/2010
                            
                            Interest
      rate swap
                            
                            
                            20,000,000
                            
                            5.70%
      Fixed
                            
                            Prime
      Floating - 0.50%
                            
                            
                            192,075$
                            90,000,000
                            
                            
                            
                            
                            
                            $
                            614,291





On
November 7, 2008, the Company elected to terminate the three interest rate swap
agreements with a total notional value of $90 million.  At
termination, the swaps had a market value of $1.7 million.  The gain
is being accreted into interest income over the remaining twenty month term in
accordance with the stated maturity date of the original
agreements.





Item4.
            Controls
      and Procedures





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





The
Company conducted an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company’s disclosure controls and procedures.   Based on this
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of September 30, 2008.





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





21
 Table of Contents





PART
II





Item1.
            Legal
      Proceedings


None.





Item1A.
            Risk
      Factors


Not
applicable.





Item2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds





The
Company has a repurchase plan which was announced on August 20,
2007.  This plan authorizes the purchase by the Company of up to
350,000 shares of the Company’s common stock.  There is no expiration
date for this plan.  There are no other repurchase plans in effect at
this time. The Company had no repurchase activity of the Company’s common stock
during the third quarter ended September 30, 2008.





Item3.
            Defaults
      Upon Senior Securities


Not
applicable.





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


Not
applicable.





Item5.
            Other
      Information


None.





Item6.
            Exhibits




11.
                      
                      Statement
      re: computation of per share earnings (set forth in “Note 4: Earnings Per
      Share” of the Notes to Condensed Consolidated Financial Statements
      (unaudited))31(i).1
                      
                      Certification
      of the Principal Executive Officer pursuant to Rule 13a -14(a) of the
      Exchange Act31(i).2
                      
                      Certification
      of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the
      Exchange Act32.1
                      
                      CEO
      certification pursuant to 18 U.S.C. Section 135032.2
                      
                      CFO
      certification pursuant to 18 U.S.C. Section
1350


22
 Table of Contents





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





Guaranty
      Federal Bancshares, Inc.Signature
      and Title
                  
                  Date/s/ Shaun A. Burke
                  
                  November 14, 2008Shaun
      A. BurkePresident
      and Chief Executive Officer(Principal
      Executive Officer and Duly Authorized Officer)/s/ Carter Peters
                  
                  November 14, 2008Carter
      PetersExecutive
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting Officer)