**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**





(Mark
      One)


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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended September
      30, 2006





OR





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


**THE
      SECURITIES EXCHANGE ACT OF 1934**





For
      the
      transition period from _______ to _______





Commission
      number 0-23325





**Guaranty
      Federal Bancshares, Inc.**


(Exact
      name of registrant as specified in its charter)





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





Telephone
      Number: (417)
      520-4333





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





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


Non-accererated
      filer [X]




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





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





Class
            Outstanding
                as of November 14, 2006Common
                Stock, Par Value $0.10 per share
            2,916,560
                Shares










**GUARANTY
                FEDERAL BANCSHARES, INC.****TABLE
                OF CONTENTS****Page****PART
                I. FINANCIAL INFORMATION**Item
                1. Financial Statements
              Consolidated
                Financial Statements (Unaudited):Statements
                of Financial Condition
            3Statements
                of Income
            
            4Statements
                of Stockholders’ Equity
            5Statements
                of Cash Flows
            
            7Notes
                to Consolidated Financial Statements
            8Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            11Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            17Item
                4. Control and Procedures
            
            19**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            
            20Item
                1A. Risk Factors
            20Item
                2. Unregistered Sales of Equity Securities and Use of Proceeds
            20Item
                3. Defaults Upon Senior Securities
            
            20Item
                4. Submission of Matters to a Vote of Security Holders
            20Item
                5. Other Information
            
            20Item
                6. Exhibits
            
            21Signatures





2


**PART
      I. FINANCIAL INFORMATION**


**Item
      1. Financial Statements**





**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENTS OF FINANCIAL CONDITION****SEPTEMBER
                30, 2006 (UNAUDITED) AND DECEMBER 31, 2005****ASSETS**
            
            **9/30/06**
            
            **12/31/05**Cash
            
            $
            15,070,804
            
            
            17,990,774Interest-bearing
                deposits in other financial institutions
            
            
            4,995,260
            
            
            2,515,704Cash
                and cash equivalents
            
            
            20,066,064
            
            
            20,506,478Available-for-sale
                securities
            
            
            9,331,152
            
            
            6,757,147Held-to-maturity
                securities
            
            
            791,123
            
            
            944,724Stock
                in Federal Home Loan Bank, at cost
            
            
            6,322,700
            
            
            4,978,800Mortgage
                loans held for sale
            
            
            2,489,050
            
            
            2,092,279Loans
                receivable, net of allowance for loan losses ofSeptember
                30, 2006 - $5,618,872 - December 31, 2005 - $5,399,654
            
            
            465,209,114
            
            
            433,435,429Accrued
                interest receivable:Loans
            
            
            2,495,998
            
            
            2,040,872Investments
            
            
            104,265
            
            
            48,255Prepaid
                expenses and other assets
            
            
            1,320,999
            
            
            2,604,425Foreclosed
                assets held for sale
            
            
            502,126
            
            
            26,775Premises
                and equipment
            
            
            8,019,953
            
            
            7,452,798Refundable
                income taxes
            
            
            475,469
            
            
            -Deferred
                income taxes
            
            
            851,194
            
            
            112,686$
            517,979,207
            
            
            481,000,668**LIABILITIES
                AND STOCKHOLDERS' EQUITY****LIABILITIES**Deposits
            
            $
            322,223,850
            
            
            320,058,951Federal
                Home Loan Bank advances
            
            
            124,000,000
            
            
            100,000,000Securities
                sold under agreements to repurchase
            
            
            8,923,196
            
            
            1,594,258Subordinated
                debentures
            
            
            15,465,000
            
            
            15,465,000Advances
                from borrowers for taxes and insurance
            
            
            815,733
            
            
            212,320Accrued
                expenses and other liabilities
            
            
            509,536
            
            
            288,587Accrued
                interest payable
            
            
            1,097,018
            
            
            508,164Dividend
                payable
            
            
            469,062
            
            
            459,074Income
                taxes payable
            
            
            -
            
            
            322,165473,503,395
            
            
            438,908,519**COMMITMENTS
                AND CONTINGENCIES****STOCKHOLDERS'
                EQUITY**Common
                Stock:$0.10
                par value; authorized 10,000,000 shares;issued
                September 30, 2006 - 6,645,225 shares;December
                31, 2005 - 6,571,348 shares
            
            
            664,523
            
            
            657,135Additional
                paid-in capital
            
            
            55,473,760
            
            
            53,778,686Unearned
                ESOP shares
            
            
            (1,401,930
            )
            
            (1,572,930
            )Retained
                earnings, substantially restricted
            
            
            39,912,147
            
            
            36,533,338Accumulated
                other comprehensive incomeUnrealized
                appreciation on available-for-sale securities,net
                of income taxes
            
            
            1,611,096
            
            
            1,971,92596,259,596
            
            
            91,368,154Treasury
                stock, at cost; September 30, 2006 - 3,726,267 shares;December
                31, 2005 - 3,639,301 shares
            
            
            (51,783,784
            )
            
            (49,276,005
            )44,475,812
            
            
            42,092,149$
            517,979,207
            
            
            481,000,668





See Notes
          to Condensed
          Consolidated Financial Statements
 3


**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENTS OF INCOME****THREE
                MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)**Three
                months ended
            
            Nine
                months ended9/30/2006
            
            9/30/2005
            
            9/30/2006
            
            9/30/2005**INTEREST
                INCOME**Loans
            
            $
            8,870,204
            
            
            6,935,225
            
            
            25,001,916
            
            
            19,020,080Investment
                securities
            
            
            112,571
            
            
            109,108
            
            
            339,888
            
            
            307,380Other
            
            
            71,830
            
            
            47,155
            
            
            176,985
            
            
            225,8619,054,605
            
            
            7,091,488
            
            
            25,518,789
            
            
            19,553,321**INTEREST
                EXPENSE**Deposits
            
            
            2,638,877
            
            
            1,904,836
            
            
            7,383,588
            
            
            5,162,510Federal
                Home Loan Bank advances
            
            
            1,610,387
            
            
            1,215,982
            
            
            4,197,026
            
            
            3,188,553Subordinated
                agreements
            
            
            251,057
            
            
            
            
            
            765,892Other
            
            
            42,774
            
            
            8,869
            
            
            91,187
            
            
            19,2114,543,095
            
            
            3,129,687
            
            
            12,437,693
            
            
            8,370,274**NET
                INTEREST INCOME**
            
            
            4,511,510
            
            
            3,961,801
            
            
            13,081,096
            
            
            11,183,047**PROVISION
                FOR LOAN LOSSES**
            
            
            150,000
            
            
            240,000
            
            
            600,000
            
            
            705,000**NET
                INTEREST INCOME AFTER****PROVISION
                FOR LOAN LOSSES**
            
            
            4,361,510
            
            
            3,721,801
            
            
            12,481,096
            
            
            10,478,047**NONINTEREST
                INCOME**Service
                charges
            
            
            337,621
            
            
            434,380
            
            
            987,543
            
            
            1,227,851Late
                charges and other fees
            
            
            36,136
            
            
            37,672
            
            
            186,408
            
            
            178,384Gain
                on sale of investment securities
            
            
            176,958
            
            
            180,669
            
            
            551,879
            
            
            563,572Gain
                on sale of loans
            
            
            172,827
            
            
            210,015
            
            
            452,792
            
            
            469,136Income
                (loss) on foreclosed assets
            
            
            (2,062
            )
            
            (502
            )
            
            (2,327
            )
            
            3,688Other
                income
            
            
            199,570
            
            
            95,558
            
            
            525,445
            
            
            240,275921,050
            
            
            957,792
            
            
            2,701,740
            
            
            2,682,906**NONINTEREST
                EXPENSE**Salaries
                and employee benefits
            
            
            1,588,921
            
            
            1,184,666
            
            
            4,515,725
            
            
            3,621,048Occupancy
            
            
            417,946
            
            
            366,371
            
            
            1,105,809
            
            
            1,031,119SAIF
                deposit insurance premiums
            
            
            9,801
            
            
            9,935
            
            
            30,033
            
            
            29,926Data
                processing
            
            
            77,415
            
            
            97,719
            
            
            202,556
            
            
            277,042Advertising
            
            
            101,039
            
            
            59,395
            
            
            303,293
            
            
            109,965Other
                expense
            
            
            435,072
            
            
            439,170
            
            
            1,383,672
            
            
            1,334,2462,630,194
            
            
            2,157,256
            
            
            7,541,088
            
            
            6,403,346**INCOME
                BEFORE INCOME TAXES**
            
            
            2,652,366
            
            
            2,522,337
            
            
            7,641,748
            
            
            6,757,607**PROVISION
                FOR INCOME TAXES**
            
            
            1,028,044
            
            
            935,076
            
            
            2,871,711
            
            
            2,506,857**NET
                INCOME**
            
            $
            1,624,322
            
            
            1,587,261
            
            
            4,770,037
            
            
            4,250,750**BASIC
                EARNINGS PER SHARE**
            
            $
            0.58
            
            
            0.57
            
            
            1.71
            
            
            1.53**DILUTED
                EARNINGS PER SHARE**
            
            $
            0.56
            
            
            0.55
            
            
            1.64
            
            
            1.48





See Notes
          to Condensed
          Consolidated Financial Statements
 4





**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENT OF STOCKHOLDERS' EQUITY****NINE
                MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED)**Common
                Stock
            
            Additional
                Paid-In Capital
            
            Unearned
                ESOP Shares
            
            Treasury
                Stock
            
            Retained
                Earnings
            
            Accumulated
                Other Comprehensive Income
            
            Total**Balance,
                January 1, 2006**
            
            $
            657,135
            
            
            53,778,686
            
            
            (1,572,930
            )
            
            (49,276,005
            )
            
            36,533,338
            
            
            1,971,925
            
            
            42,092,149Comprehensive
                incomeNet
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,770,037
            
            
            -
            
            
            4,770,037Change
                in unrealized appreciationon
                available-for-sale securities, netof
                income taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (360,829
            )
            
            (360,829
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,409,208Dividends
                ($0.495 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,391,228
            )
            
            -
            
            
            (1,391,228
            )Stock
                award plans
            
            
            -
            
            
            355,596
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            355,596Stock
                options exercised
            
            
            7,388
            
            
            1,020,556
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,027,944Release
                of ESOP shares
            
            
            -
            
            
            318,922
            
            
            171,000
            
            
            -
            
            
            -
            
            
            -
            
            
            489,922Treasury
                stock purchased
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,507,779
            )
            
            -
            
            
            -
            
            
            (2,507,779
            )**Balance,
                September 30, 2006**
            
            $
            664,523
            
            
            55,473,760
            
            
            (1,401,930
            )
            
            (51,783,784
            )
            
            39,912,147
            
            
            1,611,096
            
            
            44,475,812




See Notes
          to Condensed
          Consolidated Financial Statements
 5





**GUARANTY
                FEDERAL BANCSHARES, INC.****CONSOLIDATED
                STATEMENT OF STOCKHOLDERS' EQUITY****NINE
                MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)**Common
                Stock
            
            Additional
                Paid-In Capital
            
            Unearned
                ESOP Shares
            
            Treasury
                Stock
            
            Retained
                Earnings
            
            Accumulated
                Other Comprehensive Income
            
            Total**Balance,
                January 1, 2005**
            
            $
            649,386
            
            
            52,384,842
            
            
            (1,800,930
            )
            
            (45,712,994
            )
            
            32,437,131
            
            
            2,815,828
            
            
            40,773,263Comprehensive
                incomeNet
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,250,750
            
            
            -
            
            
            4,250,750Change
                in unrealized appreciationon
                available-for-sale securities, netof
                income taxes of ($235,200)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,034,421
            )
            
            (1,034,421
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,216,329Dividends
                ($0.48 per share)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,343,689
            )
            
            -
            
            
            (1,343,689
            )Stock
                award plans
            
            
            -
            
            
            22,397
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            22,397Stock
                options exercised
            
            
            7,466
            
            
            986,829
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            994,295Release
                of ESOP shares
            
            
            -
            
            
            236,351
            
            
            171,000
            
            
            -
            
            
            -
            
            
            -
            
            
            407,351Treasury
                stock purchased
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,721,144
            )
            
            -
            
            
            -
            
            
            (2,721,144
            )**Balance,
                September 30, 2005**
            
            $
            656,852
            
            
            53,630,419
            
            
            (1,629,930
            )
            
            (48,434,138
            )
            
            35,344,192
            
            
            1,781,407
            
            
            41,348,802





See Notes
          to Condensed
          Consolidated Financial Statements
 6


**GUARANTY
                FEDERAL BANCSHARES, INC****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****NINE
                MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)****9/30/2006**
            
            **9/30/2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income
            
            $
            4,770,037
            
            
            4,250,750Items
                not requiring (providing) cash:Deferred
                income taxes
            
            
            (526,593
            )
            
            (353,743
            )Depreciation
            
            
            569,646
            
            
            575,243Provision
                for loan losses
            
            
            600,000
            
            
            705,000Gain
                on loans and investment securities
            
            
            (1,004,671
            )
            
            (1,032,708
            )(Gain)
                loss on sale of premises and equipment and other assets
            
            
            (110,766
            )
            
            1,925(Gain)
                loss on sale of foreclosed assets
            
            
            (1,023
            )
            
            (6,003
            )Amortization
                of deferred income, premiums and discounts
            
            
            32,072
            
            
            (101,496
            )Stock
                award plan expense
            
            
            355,596
            
            
            34,879Origination
                of loans held for sale
            
            
            (36,495,543
            )
            
            (33,023,273
            )Proceeds
                from sale of loans held for sale
            
            
            36,551,565
            
            
            33,872,947Release
                of ESOP shares
            
            
            489,922
            
            
            407,351Changes
                in:Accrued
                interest receivable
            
            
            (511,136
            )
            
            (372,663
            )Prepaid
                expenses and other assets
            
            
            1,308,417
            
            
            106,360Accounts
                payable and accrued expenses
            
            
            828,086
            
            
            348,545Income
                taxes payable
            
            
            -
            
            
            226,608Net
                cash provided by operating activities
            
            
            6,855,609
            
            
            5,639,722**CASH
                FLOWS FROM INVESTING ACTIVITIES**Net
                increase in loans
            
            
            (32,912,403
            )
            
            (49,452,917
            )Principal
                payments on held-to-maturity securities
            
            
            158,120
            
            
            210,353Principal
                payments on available-for-sale securities
            
            
            124,756
            
            
            -Proceeds
                from maturities of available-for-sale securities
            
            
            500,000
            
            
            6,000,000Purchase
                of tax credit investments
            
            
            (657,412
            )
            
            -Proceeds
                from sale of originated mortgage servicing rights
            
            
            742,757
            
            
            -Purchase
                of premises and equipment
            
            
            (1,142,298
            )
            
            (794,779
            )Proceeds
                from sale of premises and equipment
            
            
            5,927
            
            
            4,200Purchase
                of available-for-sale securities
            
            
            (3,780,316
            )
            
            (6,444,433
            )Proceeds
                from sale of available-for-sale securities
            
            
            560,690
            
            
            572,383Purchase
                of FHLB stock
            
            
            (1,343,900
            )
            
            (1,078,300
            )Proceeds
                from sale of foreclosed assets
            
            
            27,798
            
            
            337,653Net
                cash used in investing activities
            
            
            (37,716,281
            )
            
            (50,645,840
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Stock
                options exercised
            
            
            1,027,944
            
            
            994,295Cash
                dividends paid
            
            
            (2,197,157
            )
            
            (1,351,151
            )Net
                increase (decrease) in demand deposits,NOW
                accounts and savings accounts
            
            
            (7,137,394
            )
            
            (700,424
            )Net
                increase (decrease) in certificates of deposit and securities soldunder
                agreements to repurchase
            
            
            16,631,231
            
            
            22,229,395Proceeds
                from FHLB advances
            
            
            1,337,414,000
            
            
            897,050,000Repayments
                of FHLB advances
            
            
            (1,313,414,000
            )
            
            (869,050,000
            )Advances
                from borrowers for taxes and insurance
            
            
            603,413
            
            
            667,629Treasury
                stock purchased
            
            
            (2,507,779
            )
            
            (2,721,144
            )Net
                cash provided by financing activities
            
            
            30,420,258
            
            
            47,118,600**INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            (440,414
            )
            
            2,112,482**CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            20,506,478
            
            
            15,896,458**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            $
            20,066,064
            
            
            18,008,940


See Notes
            to Condensed
            Consolidated Financial Statements
 7




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**Note
      1: Basis of Presentation**





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





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





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





**Note
      2: Principles of Consolidation**





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




**Note
      3: Benefit Plans**





Stock
      Award Plans





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





As
      of
      September 30, 2006 all shares in stock award plans have vested. The Bank
      recognized $4,266 and $18,537 and $10,815 and $34,879  of
      expense under these stock award plans in the three month and nine month periods
      ended September 30, 2006 and 2005, respectively.





Stock
      Option Plans





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








8


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





Number
                of sharesIncentive
                Stock Option
            
            Non-Incentive
                Stock Option
            
            Weighted
                Average Exercise PriceBalance
                outstanding as of December 31, 2005
            
            
            164,785
            
            
            175,091
            
            
            15.65Granted
            
            
            10,000
            
            
            10,000
            
            
            28.06Exercised
            
            
            (24,294
            )
            
            (49,583
            )
            
            13.91Forfeited
            
            
            (5,000
            )
            
            -
            
            
            27.90Balance
                outstanding as of September 30, 2006
            
            
            142,991
            
            
            138,008
            
            
            16.78Options
                exercisable as of September 30, 2006
            
            
            102,993
            
            
            81,508
            
            
            14.04




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




As
      a
      result of adopting SFAS 123R on January 1, 2006, incremental stock-based
      compensation expense recognized was $15,185 and $49,017 during the three months
      and nine months ended September 30, 2006, respectively. As of September 30,
      2006, there was $194,162 of unrecognized compensation expense related to
      nonvested stock options, which will be recognized over the remaining vesting
      period.




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





9


Three
                Months ended
            
            Nine
                Months endedSeptember
                30, 2005
            
            September
                30, 2005Net
                income, as reported
            
            $
            1,587,261
            
            
            4,250,750Less:
                Total stock-based employee compensationcost
                determined under the fair value-basedmethod,
                net of income taxes
            
            
            (9,361
            )
            
            (27,218
            )Pro
                forma net income
            
            $
            1,577,900
            
            
            4,223,502Earnings
                per share:Basic
                - as reported
            
            $
            0.57
            
            
            1.53Basic
                - pro forma
            
            $
            0.57
            
            
            1.52Diluted
                - as reported
            
            $
            0.55
            
            
            1.47Diluted
                - pro forma
            
            $
            0.54
            
            
            1.46





**Note
      4: Earnings Per Share**


For
                three months ended September 30, 2006
            
            For
                nine months ended September 30, 2006Income
                Available to Stockholders
            
            Average
                Shares Outstanding
            
            Per-share
            
            Income
                Available to Stockholders
            
            Average
                Shares Outstanding
            
            Per-shareBasic
                Earnings per Share
            
            $
            1,624,322
            
            
            2,782,887
            
            $
            0.58
            
            $
            4,770,037
            
            
            2,792,040
            
            $
            1.71Effect
                of Dilutive Securities:Stock
                Options
            
            
            
            
            
            111,721
            
            
            
            
            
            
            
            
            109,448Diluted
                Earnings per Share
            
            $
            1,624,322
            
            
            2,894,608
            
            $
            0.56
            
            $
            4,770,037
            
            
            2,901,488
            
            $
            1.64For
                three months ended September 30, 2005
            
            
            For
                nine months ended September 30, 2005Income
                Available to Stockholders
            
            
            
            
            
            Average
                Shares Outstanding
            
            
            Per-share
            
            
            Income
                Available to Stockholders
            
            
            Average
                Shares Outstanding
            
            
            Per-shareBasic
                Earnings per Share
            
            $
            1,587,261
            
            
            2,764,303
            
            $
            0.57
            
            $
            4,250,750
            
            
            2,777,946
            
            $
            1.53Effect
                of Dilutive Securities:Stock
                Options
            
            
            
            
            
            134,696
            
            
            
            
            
            
            
            
            121,263Diluted
                Earnings per Share
            
            $
            1,587,261
            
            
            2,898,999
            
            $
            0.55
            
            $
            4,250,750
            
            
            2,899,209
            
            $
            1.47




10


**Note
      5: Other Comprehensive Income**





9/30/2006
            
            9/30/2005Unrealized
                gains (losses) on
            
            $
            (20,865
            )
            
            (1,078,366
            )available-for-sale
                securitiesLess:
                Reclassification adjustment forrealized
                (gains) losses included in income
            
            
            (551,879
            )
            
            (563,572
            )Other
                comprehensive income (loss),before
                tax effect
            
            
            (572,744
            )
            
            (1,641,938
            )Tax
                expense (benefit)
            
            
            (211,915
            )
            
            (607,517
            )**OTHER
                COMPREHENSIVE INCOME (LOSS)**
            
            $
            (360,829
            )
            
            (1,034,421
            )





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





**General**





The
      primary function of the Company is to monitor its investment in the Bank. As
      a
      result, the results of operations of the Company are derived primarily from
      the
      operations of the Bank. The Bank’s results of operations are primarily dependent
      on net interest margin, which is the difference between interest income on
      interest-earning assets and interest expense on interest-bearing liabilities.
      The Bank’s income is also affected by the level of its noninterest expenses,
      such as employee salaries and benefits, occupancy expenses and other expenses.
      The following discussion reviews the Company’s financial condition as of
      September 30, 2006, and the results of operations for the three months and
      nine
      months ended September 30, 2006 and 2005.





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





**Financial
      Condition**





**Assets**





The
      Company’s total assets increased $36,978,539 (8%) from $481,000,668 as of
      December 31, 2005, to $517,979,207 as of September 30, 2006.





Cash
      and
      cash equivalents decreased $440,414 (2%) from $20,506,478 as of December 31,
      2005, to $20,066,064 as of September 30, 2006. The decrease is primarily due
      to
      a smaller amount of uncollected funds on deposit with a correspondent bank
      as of
      September 30, 2006, compared to December 31, 2005.




Securities
      available-for-sale increased $2,574,005, (38%) from $6,757,147 as of December
      31, 2005, to $9,331,152 as of September 30, 2006. The increase was primarily
      due
      to the purchase of various government agency securities during the period
      totaling approximately $3,500,000. The Bank currently holds 39,600 shares of
      Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of
      $38,784 in the available-for-sale category. As of September 30, 2006, the gross
      unrealized gain on the FHLMC stock was $2,587,884, a decrease from $3,176,010
      as
      of December 31, 2005.





11


Securities
      held-to-maturity decreased primarily due to principal repayments of such
      securities by $153,601 (16%) from $944,724 as of December 31, 2005, to $791,123
      as of September 30, 2006.





Stock
      in
      Federal Home Loan Bank of Des Moines (“FHLB”) increased $1,343,900 (27%) from
      $4,978,800 as of December 31, 2005 to $6,322,700 as of September 30, 2006,
      due
      to the purchase of additional stock necessary to meet FHLB requirements. The
      Bank is required to own FHLB stock in an amount equal to the sum of 0.12% of
      assets and 4.45% of advances.




Net
        loans receivable increased
        $31,773,685 (7%) from $433,435,429 as of December 31, 2005, to $465,209,114
        as
        of September 30, 2006. Commercial real estate loans increased $42,601,580
        (35%)
        from $122,884,052 as of December 31, 2005, to $165,485,632 as of September
        30,
        2006. The Bank plans to continue its emphasis on commercial lending, while
        selling the majority of conforming single family loan production on the
        secondary market. As a result, permanent mortgage loans secured by both owner
        and non-owner occupied residential real estate decreased by $17,794,656 (18%).
        Loans held for sale which consists primarily of permanent residential mortgage
        loans increased $396,771 (19%) to $2,489,050 as of September 30, 2006, compared
        to $2,092,279 at December 31, 2005. The Bank also continued to be active
        in
        construction lending. Construction loans increased by $9,205,325 (13%) to
        $79,595,228 as of September 30, 2006, compared to $70,389,903 as of December
        31,
        2005. Loan growth is anticipated to continue and represents a major part
        of the
        Bank’s planned asset growth. See also discussion under “Quantitative and
        Qualitative Disclosure about Market Risk - Asset/Liability Management.”


Allowance
      for loan losses increased $219,218 (4%) from $5,399,654 as of December 31,
      2005
      to $5,618,872 as of September 30, 2006. The allowance increased primarily due
      to
      the provision for loan losses of $600,000 recorded during this period exceeding
      net loan charge-offs of $380,782 during this period. Management of the Company
      decided to increase the allowance for loan losses by this provision charge
      primarily as a result of the continued growth of the Bank’s loan portfolio,
      particularly its commercial loan portfolio. See discussion under “Results
      of Operations - Comparison of Three Month and Nine Months Periods Ended
      September 30, 2006 and 2005 - Provision for Loan Losses.” The
      allowance for loan losses as of September 30, 2006 and December 31, 2005 was
      1.26% and 1.29%, respectively, of average net loans outstanding. As of September
      30, 2006, the allowance for loan losses was 45% of impaired loans compared
      to
      75% as of December 31, 2005.





Premises
      and equipment increased $567,155 (8%) from $7,452,798, as of December 31, 2005
      to $8,019,953 as of September 30, 2006, due to purchases of equipment less
      the
      depreciation recognized on these assets during the nine month period ended
      September 30, 2006.





**Liabilities**





Deposits
      increased $2,164,899 (1%) from $320,058,951 as of December 31, 2005, to
      $322,223,850 as of September 30, 2006. For the nine months ended September
      30,
      2006, checking and savings accounts decreased $7,137,394 (6%) and certificates
      of deposits increased $9,302,293 (5%). The decrease in checking and savings
      was
      primarily due to activity in commercial demand accounts. Due to the nature
      of
      the businesses of these commercial account holders, there are large fluctuations
      in account balances. The increase in certificates of deposit was primarily
      due
      to the Company’s decision to increase rates paid on retail certificates of
      deposit. As a result retail certificates of deposits increased $30,048,007
      (23%)
      during the period. During the same period brokered certificates of deposit
      decreased $20,745,715 (36%). See also the discussion under “Quantitative
      and Qualitative Disclosure about Market Risk - Asset/Liability
      Management.”





FHLB
      advances increased $24,000,000 (24%), from $100,000,000 as of December 31,
      2005,
      to $124,000,000 as of September 30, 2006, due
      to
      new advances exceeding repayments. These funds were primarily used to fund
      new
      loans.




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





12


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





Advances
      from borrowers for taxes and insurance increased $603,413 (284%) from $212,320
      as of December 31, 2005, to $815,733 as of September 30, 2006 which was due
      to
      the timing of collection and payment of real estate taxes.





**Stockholders’
      Equity**




Stockholders’
      equity (including unrealized appreciation on securities available-for-sale,
      net
      of tax) increased $2,383,663 (6%) from $42,092,149 as of December 31, 2005,
      to
      $44,475,812 as of September 30, 2006. This increase was due to several
      factors. The Company’s net income during this period was $4,770,037 which
      was partially offset by dividends in the amount of $461,397 which were declared
      on March 16, 2006 and paid on April 14, 2006, to stockholders’ of record as of
      March 30, 2006 and $467,809 which were declared on June 23, 2006 and paid on
      July 14, 2006, to stockholders’ of record as of July 3, 2006 and $469,062 where
      were delared on September 22, 2006, to stockholders’ of record October 2, 2006,
      and paid on October 16, 2006. In addition, the increase in stockholders’
equity was further offset as the Company repurchased 87,066 shares of treasury
      stock at an aggregate cost of $2,507,779 (an average cost of $28.80 per share)
      and a decrease in unrealized appreciation on available for sale securities,
      net
      of taxes, of $360,829 during this period. As of September 30, 2006, 201,477
      shares of the Company’s common stock remain to be repurchased under the
      repurchase plan announced by the Company on July 25, 2006. On a per share basis,
      stockholders’ equity increased from $15.17 as of December 31, 2005 to $16.01 as
      of September 30, 2006.





**Average
      Balances, Interest and Average Yields**





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





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








13





Nine
                months ended 9/30/2006
            
            Nine
                months ended 9/30/2005Average
                Balance
            
            Interest
            
            Yield
                / Cost
            
            Average
                Balance
            
            Interest
            
            Yield
                / Cost**ASSETS**Interest-earning:Loans
            
            $
            445,594
            
            
            25,002
            
            
            7.48
            %
            $
            413,648
            
            
            19,020
            
            
            6.13
            %Investment
                securities
            
            
            7,277
            
            
            340
            
            
            6.23
            %
            
            9,963
            
            
            307
            
            
            4.11
            %Other
                assets
            
            
            9,836
            
            
            177
            
            
            2.40
            %
            
            12,189
            
            
            226
            
            
            2.47
            %Total
                interest-earning
            
            
            462,707
            
            
            25,519
            
            
            7.35
            %
            
            435,800
            
            
            19,553
            
            
            5.98
            %Noninterest-earning
            
            
            20,968
            
            
            
            
            
            
            
            
            19,329$
            483,675
            
            
            
            
            
            
            
            $
            455,129**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Interest-bearing:Savings
                accounts
            
            $
            14,692
            
            
            259
            
            
            2.35
            %
            $
            15,117
            
            
            141
            
            
            1.25
            %Transaction
                accounts
            
            
            76,283
            
            
            1,169
            
            
            2.04
            %
            
            86,668
            
            
            966
            
            
            1.49
            %Certificates
                of deposit
            
            
            191,856
            
            
            5,956
            
            
            4.14
            %
            
            174,199
            
            
            4,055
            
            
            3.10
            %FHLB
                Advances
            
            
            110,293
            
            
            4,197
            
            
            5.07
            %
            
            109,576
            
            
            3,189
            
            
            3.88
            %Subordinated
                agreements
            
            
            15,465
            
            
            766
            
            
            6.60
            %
            
            -
            
            
            -
            
            
            0.00
            %Other
                borrowed funds
            
            
            4,271
            
            
            91
            
            
            2.84
            %
            
            1,239
            
            
            19
            
            
            2.04
            %Total
                interest-bearing
            
            
            412,860
            
            
            12,438
            
            
            4.02
            %
            
            386,799
            
            
            8,370
            
            
            2.89
            %Noninterest-bearing
            
            
            26,763
            
            
            
            
            
            
            
            
            27,568Total
                liabilities
            
            
            439,623
            
            
            
            
            
            
            
            
            414,367Stockholders’
                equity
            
            
            44,052
            
            
            
            
            
            
            
            
            40,762$
            483,675
            
            
            
            
            
            
            
            $
            455,129Net
                earning balance
            
            $
            49,847
            
            
            
            
            
            
            
            $
            49,001Earning
                yield less costing rate
            
            
            
            
            
            
            
            
            3.34
            %
            
            
            
            
            
            
            
            3.09
            %Net
                interest income, and net yield spreadon
                interest earning assets
            
            
            
            
            $
            13,081
            
            
            3.77
            %
            
            
            
            $
            11,183
            
            
            3.42
            %Ratio
                of interest-earning assets tointerest-bearing
                liabilities
            
            
            
            
            
            112
            %
            
            
            
            
            
            
            
            113
            %





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


**2006
      and 2005**





Net
      income for the three months and nine months ended September 30, 2006 was
      $1,624,322 and $4,770,037, respectively, as compared to $1,587,261 and
      $4,250,750, respectively, for the three months and nine months ended September
      30, 2005, which represents an increase in earnings of $37,061 (2%) for the
      three
      month period, and an increase in earnings of $519,287 (12%) for the nine month
      period.





**Interest
      Income**





Total
      interest income for the three months and nine months ended September 30, 2006,
      increased


$1,963,117
      (28%) and $5,965,468 (31%), respectively, as compared to the three months and
      nine months ended September 30, 2005. For the three month and nine month periods
      ended September 30, 2006 compared to the same periods in 2005, the average
      yield
      on interest earning assets increased 140 basis points to 7.70% and increased
      137
      basis points to 7.35%, respectively, while the average balance of interest
      earning assets increased $20,281,000 and $26,907,000, respectively.





14


**Interest
      Expense**





Total
      interest expense for the three months and nine months ended September 30, 2006,
      increased $1,413,408 (45%) and $4,067,419 (49%), respectively, when compared
      to
      the three months and nine months ended September 30, 2005. For the three month
      and nine month periods ended September 30, 2006 compared to the same periods
      in
      2005, the average cost of interest bearing liabilities increased 117 basis
      points to 4.31% and 113 basis points to 4.02%, respectively, while the average
      balance increased $22,163,000 and $26,061,000, respectively. The increase in
      interest expense is attributed, in part, to the issuance by the Company of
      $15,465,000 of 30-year junior subordinated debentures on December 15, 2005,
      as
      explained previously.





**Net
      Interest Income**





As
      a
      result of the interest income and interest expense for the three months and
      nine
      months ended September 30, 2006 as discussed above, net interest income for
      the
      three months and nine months ended September 30, 2006 increased $549,709 (14%)
      and $1,898,049 (17%), respectively, when compared to the same periods in 2005.





**Provision
      for Loan Losses**





Based
      primarily on the continued growth of the commercial loan portfolio and increases
      in non-performing loans during the period, management decided to record a
      provision for loan losses of $150,000 and $600,000 for the three months and
      nine
      months ended September 30, 2006, respectively, compared to $240,000 and $705,000
      for the same periods in 2005. The Bank will continue to monitor its allowance
      for loan losses and make future additions based on economic and regulatory
      conditions. Although the Bank maintains its allowance for loan losses at a
      level
      which it considers to be sufficient to provide for potential losses, there
      can
      be no assurance that future loan losses will not exceed internal estimates.
      In
      addition, the amount of the allowance for loan losses is subject to review
      by
      regulatory agencies which can order the establishment of additional loan loss
      provisions. See also the discussion under “Nonperforming assets”.





**Noninterest
      Income**





Noninterest
      income changed only marginally for the three months and nine months ended
      September 30, 2006, respectively, when compared to the three months and nine
      months ended September 30, 2005.





Service
      charges on transaction accounts decreased by $96,759 (22%) and $240,308 (20%)
      during the three months and nine months ended September 30, 2006, respectively,
      when compared to the same periods in 2005. This is a result of a decrease in
      the
      amount of “non-sufficient funds” and overdraft fees collected during this three
      month and nine month period when compared to the same period in 2005. This
      decrease is a result of fewer “non-sufficient funds” checks being presented per
      account during the three month and nine month period ended September 30, 2006,
      compared to the same periods in 2005.





Gain
      on
      sale of loans decreased $37,188 (18%) and $16,344 (3%) for the three months
      and
      nine months ended September 30, 2006, respectively, when compared to the same
      periods in 2005, which was a result of a decrease in mortgage loans sold on
      the
      secondary market, due to higher interest rate and less demand during these
      periods.





Other
      income increased $104,012 (109%) and $285,170 (119%) for the three months and
      nine months ended September 30, 2006, respectively when compared to the same
      periods in 2005. This increase was primarily due to profit on the sale of
      mortgage servicing rights that occurred during the three months and nine months
      ended September 30, 2006. During these periods the Bank recorded $110,336 profit
      from the sale of mortgage servicing rights. In addition, there was increase
      in
      the amount of ATM fees collected during the three months and nine months ended
      September 30, 2006, compared to the same period in 2005.





15


**Noninterest
      Expense**





Noninterest
      expense increased $472,939 (22%) and $1,137,743 (18%) for the three months
      and
      nine months ended September 30, 2006, respectively when compared to the three
      months and nine months ended September 30, 2005. The increases for the three
      months and six months ended June 30, 2006 were primarily due to increases in
      salaries and employee benefits and advertising, which were partially offset
      by
      decreases in data processing as discussed below.





Salaries
      and employee benefits increased $404,255 (34%) and $894,677 (25%) for the three
      months and nine months ended September 30, 2006, respectively when compared
      to
      the same periods in 2005. This increase was due to several factors, including
      additions in executive and staff positions, pay increases to existing employees
      and increases in employee benefit costs during the three month and nine month
      periods ended September 30, 2006 when compared to the same periods in
      2005.





Advertising
      expense increased $41,644 (70%) and $193,328 (176%) for the three months and
      nine months ended September 30, 2006, respectively when compared to the same
      periods in 2005. This increase was primarily due to the Bank’s decision to
      increase its exposure through the use of several different advertising
      mediums.





Data
      processing expense decreased $20,304 (21%) and $74,486 (27%) for the three
      months and nine months ended September 30, 2006 when compared to the same
      periods in 2005. This decrease was primarily due to the Bank’s decision to
      terminate its relationship with a third-party vendor that provided data
      processing services during the three month and nine month periods ended
      September 30, 2006.





**Provision
      for Income Taxes**





There
      was
      an increase of $92,968 (10%) and $364,854 (15%) in the provision for income
      taxes for the three months and six months ended September 30, 2006,
      respectively, as compared to the same periods in 2005. These increases were
      due
      to an increases in before tax income of $130,029 (5%) and $884,141 (13%) for
      the
      three months and nine months ended September 30, 2006, respectively, compared
      to
      the same periods in 2005.





**Nonperforming
      Assets**





The
      allowance for loan losses is calculated based upon an evaluation of pertinent
      factors underlying the various types and quality of the Bank’s existing loan
      portfolio. When making such evaluation, management considers such factors as
      the
      repayment status of its loans, the estimated net realizable value of the
      underlying collateral, borrowers’ intent (to the extent known by the Bank) and
      ability to repay the loan, local economic conditions and the Bank’s historical
      loss ratios. The Bank’s allowance for loan losses as of September 30, 2006, was
      $5,618,872 or 1.27% of average net loans receivable. Total assets classified
      as
      substandard, doubtful or loss as of September 30, 2006, were $6,642,987 or
      1.3%
      of total assets. Management considered nonperforming and total classified assets
      in evaluating the adequacy of the Bank’s allowance for loan losses.




16


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





9/30/2006
            
            12/31/2005
            
            12/31/2004Nonperforming
                loans
            
            $
            3,099
            
            
            721
            
            
            1,007Real
                estate acquired in settlement of loans
            
            
            508
            
            
            27
            
            
            78Total
                nonperforming assets
            
            $
            3,607
            
            
            748
            
            
            1,085Total
                nonperforming assets as a percentage of total assets
            
            
            0.70
            %
            
            0.17
            %
            
            0.25
            %Allowance
                for loan losses
            
            $
            5,619
            
            
            5,400
            
            
            4,537Allowance
                for loan losses as a percentage of average net loans
            
            
            1.27
            %
            
            1.29
            %
            
            1.16
            %





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





**Liquidity
      and Capital Resources**





The
      Bank’s primary sources of funds are deposits, principal and interest payments on
      loans and mortgage-backed securities, proceeds from maturing investment
      securities, issuances of junior subordinated debentures and extensions of credit
      from FHLB. While scheduled loan and security repayments and the maturity of
      short-term investments are somewhat predictable sources of funding, deposit
      flows are influenced by many factors, which make their cash flows difficult
      to
      anticipate.





The
      Bank
      uses its liquidity resources principally to satisfy its ongoing commitments
      which include funding loan commitments, funding maturing certificates of deposit
      as well as deposit withdrawals, maintaining liquidity, purchasing investments,
      and meeting operating expenses. As of September 30, 2006, the Bank had
      approximately $2,940,000 in commitments to originate mortgage and commercial
      loans. These commitments will be funded through existing cash balances, cash
      flow from operations and, if required, FHLB advances. Management believes that
      anticipated cash flows and deposit growth will be adequate to meet the Bank’s
      liquidity needs.





During
      the three months ended September 30, 2006, the Company procured a revolving
      line
      of credit with U. S. Bancorp in the amount of $2,500,000, with an initial
      maturity of 364 days. To date there have been no funds drawn against this line.
      The purpose of the line of credit is to provide an additional liquidity source
      for the Company.





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





**Asset/Liability
      Management**





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





17


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





The
      Bank
      is also managing interest rate risk by the origination of construction loans.
      As
      of September 30, 2006, such loans represented 17% of the net loans receivable
      and continue to account for a larger portion of the Bank’s existing portfolio.
      In general, these loans have higher yields, shorter maturities and greater
      interest rate sensitivity than other real estate loans.





The
      Bank
      constantly monitors its deposits in an effort to decrease their interest rate
      sensitivity. Rates of interest paid on deposits at the Bank are priced
      competitively in order to meet the Bank’s asset/liability management objectives
      and spread requirements. As of December 31, 2005, the Bank’s savings accounts,
      checking accounts, and money market deposit accounts totaled $130,252,633 or
      41%
      of its total deposits. As of September 30, 2006, these accounts totaled
      $123,115,239 or 38% of the Bank’s total deposits. The Bank believes, based on
      historical experience, that a substantial portion of such accounts represents
      non-interest rate sensitive core deposits.





**Interest
      Rate Sensitivity Analysis**





The
      following table sets forth as of September 30, 2006 management’s estimates of
      the projected changes in net portfolio value (“NPV”) in the event of 100, 200,
      and 300 basis point (“bp”) instantaneous and permanent increases and 100, 200
      and 300 basis point instantaneous and permanent decreases in market interest
      rates. Dollar amounts are expressed in thousands.





BP
                Change
            
            Estimated
                Net Portfolio Value
            
            NPV
                as % of PV of Assetsin
                Rates
            
            $
                Amount
            
            $
                Change
            
            %
                Change
            
            NPV
                Ratio
            
            Change+300
            
            $
            38,872
            
            $
            (3,092
            )
            
            -7
            %
            
            7.45
            %
            
            -0.73
            %+200
            
            
            40,664
            
            
            (1,300
            )
            
            -3
            %
            
            7.84
            %
            
            -0.34
            %+100
            
            
            41,826
            
            
            (138
            )
            
            0
            %
            
            8.10
            %
            
            -0.07
            %NC
            
            
            41,964
            
            
            -
            
            
            -
            
            
            8.18
            %
            
            --100
            
            
            41,136
            
            
            (828
            )
            
            -2
            %
            
            8.07
            %
            
            -0.10
            %-200
            
            
            39,716
            
            
            (2,248
            )
            
            -5
            %
            
            7.86
            %
            
            -0.31
            %-300
            
            
            37,727
            
            
            (4,237
            )
            
            -10
            %
            
            7.54
            %
            
            -0.64
            %





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.





18


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





**Item
      4. Controls and Procedures**




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




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




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






19


**PART
      II. OTHER INFORMATION**





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


Not
      applicable





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


**** Not
      applicable





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





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





**ISSUER
      PURCHASES OF EQUITY SECURITIES**





Period
            
            (a)
                Total Number of Shares Purchased
            
            (b)
                Average Price Paid per Share
            
            (c)
                Total Number of Shares Purchased as Part of Publicly Announced Plans
                or
                Programs (1)
            
            (d)
                Maximum Number of Shares that May Yet Be Purchased Under the Plans
                or
                ProgramsJuly
                1, 2006 to July 31, 2006
            
            
            8,400
            
            
            27.52
            
            
            8,400
            
            
            241,602August
                1, 2006 to August 31, 2006
            
            
            35,100
            
            
            28.94
            
            
            35,100
            
            
            206,502September
                1, 2006 to September 30, 2006
            
            
            5,025
            
            
            28.66
            
            
            5,025
            
            
            201,477Total
            
            
            48,525
            
            
            28.94
            
            
            48,525








(1)
            The
                Company has a repurchase plan which was announced by the Company
                on July
                25, 2006. This plan authorizes the purchase by the Company of up
                to
                250,000 shares of the Company’s common stock. There is no expiration date
                for this plan. There are no other repurchase plans in effect at this
                time.
                During the period ended September 30, 2006, the remaining shares
                under the
                repurchases plan which was announced by the Company on November 22,
                2006
                were repurchased by the Company, and such repurchases are reflected
                in
                this table.





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


Not
      applicable.





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


Not
      applicable.




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


None.





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


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


the
      Notes to
      Condensed Consolidated Financial Statements (unaudited))


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


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


32.1  CEO
      certification pursuant to 18
      U.S.C.
      Section 1350


32.2  CFO
      certification pursuant to 18
      U.S.C.
      Section 1350




20


**SIGNATURES**





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




Guaranty
      Federal Bancshares, Inc.





**Signature
      and Title**  **Date**





/s/
      Shaun A. Burke  November
      14, 2006


Shaun
      A.
      Burke


President
      and Chief Executive Officer


(Principal
      Executive Officer and Duly Authorized Officer)











/s/
      Bruce Winston  November
      14, 2006


Bruce
      Winston


Senior
      Vice President and Chief Financial Officer


(Principal
      Financial and Accounting Officer)





21