**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, 2007





OR





**o
      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 ofincorporation or organization)
            
            (IRS
                Employer Identification No.)**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 o




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 o  Accelerated
      filer o 
Non-accelerated
      filer x




Indicate
      by check mark whether the
      registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
      Yes o  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, 2007Common
                Stock, Par Value $0.10 per share
            2,737,554
                Shares












**GUARANTY
                  FEDERAL BANCSHARES, INC.****TABLE
                  OF CONTENTS****Page****PART
                  I. Financial Information**Item
                  1.  Financial StatementsConsolidated
                  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
              10Item
                  3. Quantitative and Qualitative Disclosures about
                  Market Risk
              17Item
                  4.  Controls 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
              20Signatures




2
 *Table
            of Contents*


**PART
      I  FINANCIAL INFORMATION**


**Item
      1. Financial Statements**




**GUARANTY
                  FEDERAL BANCSHARES, INC.****CONSOLIDATED
                  STATEMENTS OF FINANCIAL CONDITION****SEPTEMBER
                  30, 2007 (UNAUDITED) AND DECEMBER 31, 2006****ASSETS**
              
              **9/30/2007**
              
              
              **12/31/06**Cash
              
              $
              10,743,882
              
              
              
              10,684,831Interest-bearing
                  deposits in other financial institutions
              
              
              408,020
              
              
              
              4,195,770Cash
                  and cash equivalents
              
              
              11,151,902
              
              
              
              14,880,601Available-for-sale
                  securities
              
              
              16,426,812
              
              
              
              7,906,321Held-to-maturity
                  securities
              
              
              678,638
              
              
              
              763,025Stock
                  in Federal Home Loan Bank, at cost
              
              
              3,042,043
              
              
              
              5,382,700Mortgage
                  loans held for sale
              
              
              667,250
              
              
              
              3,004,635Loans
                  receivable, net of allowance for loan losses of September 30, 2007
                  -
                  $5,797,691 - December 31, 2006 - $5,783,477
              
              
              478,542,873
              
              
              
              477,264,522Accrued
                  interest receivable:Loans
              
              
              2,870,145
              
              
              
              2,830,811Investments
              
              
              119,114
              
              
              
              79,498Prepaid
                  expenses and other assets
              
              
              2,742,801
              
              
              
              2,955,483Foreclosed
                  assets held for sale
              
              
              753,094
              
              
              
              172,637Premises
                  and equipment
              
              
              9,633,616
              
              
              
              7,867,809Income
                  taxes receivable
              
              
              -
              
              
              
              774,469Deferred
                  income taxes
              
              
              1,379,887
              
              
              
              962,484$
              528,008,175
              
              
              
              524,844,995**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****LIABILITIES**Deposits
              
              $
              401,559,443
              
              
              
              352,229,636Federal
                  Home Loan Bank advances
              
              
              53,086,000
              
              
              
              108,000,000Securities
                  sold under agreements to repurchase
              
              
              9,861,400
              
              
              
              1,703,221Subordinated
                  debentures
              
              
              15,465,000
              
              
              
              15,465,000Advances
                  from borrowers for taxes and insurance
              
              
              657,104
              
              
              
              222,869Accrued
                  expenses and other liabilities
              
              
              600,415
              
              
              
              441,890Accrued
                  interest payable
              
              
              1,747,135
              
              
              
              1,414,946Dividend
                  payable
              
              
              482,077
              
              
              
              468,190483,458,574
              
              
              
              479,945,752**COMMITMENTS
                  AND CONTINGENCIES**
              
              
              -
              
              
              
              -**STOCKHOLDERS'
                  EQUITY**Common
                  Stock:$0.10
                  par value; authorized 10,000,000 shares; issued September 30, 2007
                  -6,726,485,shares; December 31, 2006 - 6,653,527 shares
              
              
              672,648
              
              
              
              665,353Additional
                  paid-in capital
              
              
              57,371,689
              
              
              
              55,730,352Unearned
                  ESOP shares
              
              
              (1,173,930
              )
              
              
              (1,344,930
              )Retained
                  earnings, substantially restricted
              
              
              44,550,704
              
              
              
              41,183,006Accumulated
                other comprehensiveUnrealized
                  appreciation on available-for-sale securities, net of income
                  taxes
              
              
              966,875
              
              
              
              1,534,548102,387,986
              
              
              
              97,768,329Treasury
                  stock, at cost; September 30, 2007 -  3,931,588 shares; December
                  31, 2006 - 3,764,367 shares
              
              
              (57,838,385
              )
              
              
              (52,869,086
              )44,549,601
              
              
              
              44,899,243$
              528,008,175
              
              
              
              524,844,995




See
      Notes
      to Condensed Consolidated Financial Statements


3
 *Table
          of Contents*




**GUARANTY
                  FEDERAL BANCSHARES, INC.****CONSOLIDATED
                  STATEMENTS OF INCOME****THREE MONTHS
                  AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
                  (UNAUDITED)**Three
                  months ended
              
              
              Nine
                  months ended9/30/2007
              
              
              9/30/2006
              
              
              9/30/2007
              
              
              9/30/2006**INTEREST
                  INCOME**Loans
              
              $
              9,487,166
              
              
              
              8,870,204
              
              
              
              27,743,936
              
              
              
              25,001,916Investment
                  securities
              
              
              119,660
              
              
              
              112,571
              
              
              
              308,682
              
              
              
              339,888Other
              
              
              79,049
              
              
              
              71,830
              
              
              
              258,273
              
              
              
              176,9859,685,875
              
              
              
              9,054,605
              
              
              
              28,310,891
              
              
              
              25,518,789**INTEREST
                  EXPENSE**Deposits
              
              
              4,179,228
              
              
              
              2,638,877
              
              
              
              11,636,397
              
              
              
              7,383,588Federal
                  Home Loan Bank advances
              
              
              737,296
              
              
              
              1,610,387
              
              
              
              2,726,634
              
              
              
              4,197,026Subordinated
                  agreements
              
              
              247,992
              
              
              
              251,057
              
              
              
              776,368
              
              
              
              765,892Other
              
              
              37,229
              
              
              
              42,774
              
              
              
              37,229
              
              
              
              91,1875,201,745
              
              
              
              4,543,095
              
              
              
              15,176,628
              
              
              
              12,437,693**NET
                  INTEREST INCOME**
              
              
              4,484,130
              
              
              
              4,511,510
              
              
              
              13,134,263
              
              
              
              13,081,096**PROVISION
                  FOR LOAN LOSSES**
              
              
              210,000
              
              
              
              150,000
              
              
              
              630,000
              
              
              
              600,000**NET
                  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES**
              
              
              4,274,130
              
              
              
              4,361,510
              
              
              
              12,504,263
              
              
              
              12,481,096**NONINTEREST
                  INCOME**Service
                  charges
              
              
              533,718
              
              
              
              337,621
              
              
              
              1,650,794
              
              
              
              987,543Late
                  charges and other fees
              
              
              76,035
              
              
              
              36,136
              
              
              
              206,847
              
              
              
              186,408Gain
                  on sale of investment securities
              
              
              181,632
              
              
              
              176,958
              
              
              
              567,603
              
              
              
              551,879Gain
                  on sale of loans
              
              
              282,357
              
              
              
              172,827
              
              
              
              906,225
              
              
              
              452,792Loss
                  on foreclosed assets
              
              
              (24,826
              )
              
              
              (2,062
              )
              
              
              (25,436
              )
              
              
              (2,327
              )Other
                  income
              
              
              167,989
              
              
              
              199,570
              
              
              
              511,153
              
              
              
              525,4451,216,905
              
              
              
              921,050
              
              
              
              3,817,186
              
              
              
              2,701,740**NONINTEREST
                  EXPENSE**Salaries
                  and employee benefits
              
              
              1,802,147
              
              
              
              1,588,921
              
              
              
              5,357,239
              
              
              
              4,515,725Occupancy
              
              
              400,916
              
              
              
              417,946
              
              
              
              1,219,123
              
              
              
              1,105,809SAIF
                  deposit insurance premiums
              
              
              10,954
              
              
              
              9,801
              
              
              
              31,201
              
              
              
              30,033Data
                  processing
              
              
              96,136
              
              
              
              77,415
              
              
              
              298,405
              
              
              
              202,556Advertising
              
              
              99,999
              
              
              
              101,039
              
              
              
              299,997
              
              
              
              303,293Other
                  expense
              
              
              576,406
              
              
              
              435,072
              
              
              
              1,650,929
              
              
              
              1,383,6722,986,558
              
              
              
              2,630,194
              
              
              
              8,856,894
              
              
              
              7,541,088**INCOME
                  BEFORE INCOME TAXES**
              
              
              2,504,477
              
              
              
              2,652,366
              
              
              
              7,464,555
              
              
              
              7,641,748**PROVISION
                  FOR INCOME TAXES**
              
              
              891,786
              
              
              
              1,028,044
              
              
              
              2,682,100
              
              
              
              2,871,711**NET
                  INCOME**
              
              $
              1,612,691
              
              
              
              1,624,322
              
              
              
              4,782,455
              
              
              
              4,770,037**BASIC
                  EARNINGS PER SHARE**
              
              $
              0.60
              
              
              
              0.58
              
              
              
              1.75
              
              
              
              1.71**DILUTED
                  EARNINGS PER SHARE**
              
              $
              0.59
              
              
              
              0.56
              
              
              
              1.70
              
              
              
              1.64
   See
        Notes
        to Condensed Consolidated Financial Statements


4
 *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
              
              
              Total**Balance,
                  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


5
 *Table
            of Contents*




**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 appreciation on 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


6
 *Table
          of Contents*








**GUARANTY
                  FEDERAL  BANCSHARES,
                  INC****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****NINE
                  MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)****9/30/2007**
              
              
              **9/30/2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              4,782,455
              
              
              
              4,770,037Items
                  not requiring (providing) cash:Deferred
                  income taxes
              
              
              (84,008
              )
              
              
              (526,593
              )Depreciation
              
              
              663,496
              
              
              
              569,646Provision
                  for loan losses
              
              
              630,000
              
              
              
              600,000Gain
                  on loans and investment securities
              
              
              (1,473,828
              )
              
              
              (1,004,671
              )Gain
                  on sale of premises and equipment and other assets
              
              
              -
              
              
              
              (110,766
              )Gain
                  on sale of foreclosed assets
              
              
              (396
              )
              
              
              (1,023
              )Amortization
                  of deferred income, premiums and discounts
              
              
              5,100
              
              
              
              32,072Stock
                  award plan expense
              
              
              50,840
              
              
              
              49,017Origination
                  of loans held for sale
              
              
              (54,656,645
              )
              
              
              (36,495,543
              )Proceeds
                  from sale of loans held for sale
              
              
              57,900,255
              
              
              
              36,551,565Release
                  of ESOP shares
              
              
              506,530
              
              
              
              489,922Changes
                  in:Accrued
                  interest receivable
              
              
              (78,950
              )
              
              
              (511,136
              )Prepaid
                  expenses and other assets
              
              
              212,682
              
              
              
              502,488Accounts
                  payable and accrued expenses
              
              
              336,860
              
              
              
              828,086Income
                  taxes payable
              
              
              1,204,909
              
              
              
              306,579Net
                  cash provided by operating activities
              
              
              9,999,300
              
              
              
              6,049,680**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Net
                  increase in loans
              
              
              (3,846,875
              )
              
              
              (32,912,403
              )Principal
                  payments on held-to-maturity securities
              
              
              82,999
              
              
              
              158,120Principal
                  payments on available-for-sale securities
              
              
              211,085
              
              
              
              124,756Proceeds
                  from maturities of available-for-sale securities
              
              
              500,000
              
              
              
              500,000Purchase
                  of premises and equipment
              
              
              (2,429,303
              )
              
              
              (1,142,298
              )Purchase
                  of tax credit investments
              
              
              -
              
              
              
              (657,412
              )Proceeds
                  from sale of originated mortgage servicing rights
              
              
              -
              
              
              
              742,757Proceeds
                  from sale of premises and equipment
              
              
              -
              
              
              
              5,927Purchase
                  of available-for-sale securities
              
              
              (10,630,694
              )
              
              
              (3,780,316
              )Proceeds
                  from sale of available-for-sale securities
              
              
              1,068,601
              
              
              
              560,690Redemption
                  (purchase) of FHLB stock
              
              
              2,340,657
              
              
              
              (1,343,900
              )Proceeds
                  from sale of foreclosed assets
              
              
              1,351,803
              
              
              
              27,798Net
                  cash used in investing activities
              
              
              (11,351,727
              )
              
              
              (37,716,281
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Stock
                  options exercised
              
              
              985,676
              
              
              
              1,027,944Cash
                  dividends paid
              
              
              (1,400,870
              )
              
              
              (1,391,228
              )Net
                  increase (decrease) in demand deposits, NOW accounts and savings
                  accounts
              
              
              8,510,522
              
              
              
              (7,137,394
              )Net
                  increase in certificates of deposit and securities sold under agreements
                  to repurchase
              
              
              48,977,464
              
              
              
              16,631,231Proceeds
                  from FHLB advances
              
              
              1,266,588,600
              
              
              
              1,337,414,000Repayments
                  of FHLB advances
              
              
              (1,321,502,600
              )
              
              
              (1,313,414,000
              )Advances
                  from borrowers for taxes and insurance
              
              
              434,235
              
              
              
              603,413Treasury
                  stock purchased
              
              
              (4,969,299
              )
              
              
              (2,507,779
              )Net
                  cash provided by (used in) financing activities
              
              
              (2,376,272
              )
              
              
              31,226,187**DECREASE
                  IN CASH AND CASH EQUIVALENTS**
              
              
              (3,728,699
              )
              
              
              (440,414
              )**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
              
              
              14,880,601
              
              
              
              20,506,478**CASH
                  AND CASH EQUIVALENTS, END OF PERIOD**
              
              $
              11,151,902
              
              
              
              20,066,064






See
      Notes
      to Condensed Consolidated Financial Statements


7
 *Table
          of Contents*




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**


**(Unaudited)**





**Note
      1:  Basis of Presentation**





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





The
      results of operations for the
      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 2006 filed with the Securities and Exchange Commission.  The
      condensed consolidated statement of financial condition of the Company as of
      December 31, 2006, 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, 2006 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,
      2007:




Number
                  of sharesIncentive
                  Stock Option
              
              
              Non-Incentive
                  Stock Option
              
              
              Weighted
                  Average Exercise PriceBalance
                  outstanding as of January 1, 2007
              
              
              155,491
              
              
              
              115,206
              
              
              
              17.30Granted
              
              
              13,500
              
              
              
              25,000
              
              
              
              29.39Exercised
              
              
              (46,958
              )
              
              
              (26,000
              )
              
              
              13.51Forfeited
              
              
              -
              
              
              
              -
              
              
              
              -Balance
                  outstanding as of September 30, 2007
              
              
              122,033
              
              
              
              114,206
              
              
              
              19.93Options
                  exercisable as of September 30, 2007
              
              
              68,036
              
              
              
              67,206
              
              
              
              15.75




8
 *Table
          of Contents*




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 eliminated the choice to account for employee stock options under Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25). 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 is recognized for all stock
      options granted or modified after January 1, 2006.  In addition,
      unvested options existing at January 1, 2006, are 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.




Stock-based
      compensation expense recognized for the three months ended September 30, 2007
      and 2006 was $19,605 and $15,185, respectively.  Stock-based
      compensation expense recognized for the nine months ended September 30, 2007
      and
      2006 was $50,840 and $49,017, respectively.  As of September 30,
      2007, there was $237,044 of unrecognized compensation expense related to
      nonvested stock options, which will be recognized over the remaining vesting
      period.





**Note
      4: Earnings Per Share**




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
              
              
              $
              1.70For
                  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
              
              
              $
              1.64




**Note
      5: Other Comprehensive Loss**




Other
      comprehensive loss components and
      related taxes were as follows for the nine months ended September 30, 2007
      and
      2006:


9
 *Table
          of Contents*




9/30/2007
              
              
              9/30/2006Unrealized
                  losses on available-for-sale securities
              
              $
              (333,465
              )
              
              
              (20,865
              )Less:
                  Reclassification adjustment for realized gains included in
                  income
              
              
              (567,603
              )
              
              
              (551,879
              )Other
                  comprehensive loss, before tax benefit
              
              
              (901,068
              )
              
              
              (572,744
              )Tax
                  benefit
              
              
              (333,395
              )
              
              
              (211,915
              )**OTHER
                  COMPREHENSIVE LOSS**
              
              $
              (567,673
              )
              
              
              (360,829
              )





**Note
      6: Change in Accounting Principle**





In
      July 2006, the Financial Accounting
      Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48),
*Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS
      No.
      109 - Accounting for Income Taxes*. This interpretation addresses accounting
      for tax uncertainties that arise when a position that an entity takes on its
      tax
      return may be different from the position that the taxing authority may take,
      and provides guidance about the accounting for tax benefits associated with
      uncertain tax positions, classification of a liability recognized for those
      positions, and interim reporting considerations. This Interpretation requires
      that the Company recognize in its financial statements, the impact of a tax
      position, if that position is more likely than not of being sustained on audit.
      The provisions of FIN 48 were effective as of January 1, 2007, with any
      cumulative effect of the change in accounting principle recorded as an
      adjustment to retained earnings. The adoption of this standard did not have
      a
      material impact on the consolidated financial condition or results of operations
      of the Company.  The Company’s federal and state income tax returns
      are open and subject to examinations from the 2004 tax year and
      forward.





**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 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, 2007,
      and the results of operations for the three and nine months ended September
      30,
      2007 and 2006.





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, 2006.


10
 *Table
          of Contents*




**Financial
      Condition**





The
      Company’s total assets increased
      $3,163,180 from $524,844,995 as of December 31, 2006, to $528,008,175 as of
      September 30, 2007.





Cash
      and cash equivalents decreased
      $3,728,699 (25%) from $14,880,601 as of December 31, 2006, to $11,151,902 as
      of
      September 30, 2007.





Securities
      available-for-sale increased
      $8,520,491 (108%) from $7,906,321 as of December 31, 2006, to $16,426,812 as
      of
      September 30, 2007.  The Bank currently holds 27,600 shares of Federal
      Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $27,036
      in the available-for-sale category.  As of September 30, 2007, the
      gross unrealized gain on the FHLMC stock was $1,601,640, a decrease from
      $2,449,293 as of December 31, 2006 which was due to the sale of 9,000 shares
      of
      stock during the nine month period and a decrease in the stock price from $67.90
      per share at December 31, 2006 to $59.01 per share at September 30,
      2007.  The increase in securities available-for-sale is primarily due
      to purchases of $10,630,694 offset by the sale of 9,000 shares of the FHLMC
      stock during the nine months ended September 30, 2007.





Securities
      held-to-maturity decreased
      primarily due to principal repayments by $84,387 (11%) from $763,025 as of
      December 31, 2006, to $678,638 as of September 30, 2007.





From
      December 31, 2006 to September 30,
      2007, stock in Federal Home Loan Bank of Des Moines (“FHLB”) decreased by
      $2,340,657 (43%), due to the redemption of such stock to continue to maintain
      a
      level to meet FHLB advance requirements.





Net
      loans
      receivable increased by $1,278,351 (0.3%) from $477,264,522 as of December
      31,
      2006, to $478,542,873 as of September 30, 2007.  Commercial loans
      increased $5,417,842 (7%) from $82,675,514 as of December 31, 2006, to
      $88,093,356 as of September 30, 2007.  Commercial real estate loans
      increased by $7,801,311 (5%) from $155,800,918 as of December 31, 2006, to
      $163,602,229 as of September 30, 2007. Permanent multi-family loans
      decreased by $14,802,277 (29%) due to several unexpected
      payoffs.  Construction loans increased by $4,989,271 (6%) to
      $88,956,247 as of September 30, 2007, compared to $83,966,976 as of December
      31,
      2006. Loan growth is anticipated in future quarters and represents a major
      part
      of the Bank’s planned asset growth.





Allowance
      for loan losses increased
      $14,214 (0.2%) from $5,783,477 as of December 31, 2006 to $5,797,691 as of
      September 30, 2007. The allowance increased due to the provision for loan losses
      of $630,000 exceeding net loan charge-offs of $615,786 during the
      period.  Management of the Company decided to record a provision for
      loan losses to partially offset the net charge-offs for the period and maintain
      the allowance at a level in accordance with management’s
      methodology.  See discussion under “Results of Operations – Comparison
      of Three and Nine Month Periods Ended September 30, 2007 and 2006 – Provision
      for Loan Losses.”   The allowance for loan losses as of September
      30, 2007 and December 31, 2006 was 1.21% and 1.20% of net loans outstanding,
      respectively.





Premises
      and equipment increased
      $1,765,807 (22%) from $7,867,809 as of December 31, 2006 to $9,633,616 as of
      September 30, 2007 due primarily to two land purchases for future branch and
      operations sites.





Deposits
      increased $49,329,807 (14%)
      from $352,229,636 as of December 31, 2006, to $401,559,443 as of September
      30,
      2007.  For the nine months ended September 30, 2007, checking and
      savings accounts increased by $8,510,522 and certificates of deposits increased
      by $40,819,285.  The increase in checking and savings was due to the
      Bank’s continued emphasis on developing commercial checking
      business.  The increase in certificates of deposit was primarily due
      to the Company’s emphasis on retail customers offset by a decrease in brokered
      deposits.  See also the discussion under “Quantitative and Qualitative
      Disclosure about Market Risk – Asset/Liability Management.”


11
 *Table
          of Contents*




FHLB
      advances decreased by $54,914,000
      (51%) from $108,000,000 as of December 31, 2006, to $53,086,000 as of September
      30, 2007, due to repayments exceeding new advances. The Company was able to
      make
      such repayments through the funds generated from deposit growth.





Securities
      sold under agreements to
      repurchase increased $8,158,179 (479%) from $1,703,221 as of December 31, 2006,
      to $9,861,400 as of September 30, 2007, due to a floating rate leveraged
      transaction completed during the quarter.





Stockholders’
equity
      (including
      unrealized appreciation on securities available-for-sale, net of tax) decreased
      $349,642 (1%) from $44,899,243 as of December 31, 2006, to $44,549,601 as of
      September 30, 2007. The Company’s net income during this period was $4,782,455
      which was partially offset by dividends in the amount of  $1,414,757
      which were declared in the nine month period ended September 30,
      2007.  In addition, the increase in stockholders’ equity was
      further offset as the Company repurchased 167,221 shares of the Company’s
      outstanding stock at an aggregate cost of $4,969,299 (an average cost of $29.71
      per share) and a decrease in unrealized appreciation on available for sale
      securities, net of taxes, of $567,673 during this period.  On a per
      share basis, stockholders’ equity increased from $16.30 as of December 31, 2006
      to $16.64 as of September 30, 2007.





**Average
      Balances, Interest and Average Yields**





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





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


12
 *Table
          of Contents*




Three
                  months ended 9/30/2007
              
              
              Three
                  months ended 9/30/2006Average
                  Balance
              
              
              Interest
              
              
              Yield
                  / Cost
              
              
              Average
                  Balance
              
              
              Interest
              
              
              Yield
                  / Cost**ASSETS**Interest-earning:Loans
              
              $
              475,697
              
              
              
              9,487
              
              
              
              7.98
              %
              
              $
              452,860
              
              
              
              8,870
              
              
              
              7.83
              %Investment
                  securities
              
              
              9,223
              
              
              
              120
              
              
              
              5.20
              %
              
              
              7,537
              
              
              
              113
              
              
              
              6.00
              %Other
                  assets
              
              
              7,542
              
              
              
              79
              
              
              
              4.19
              %
              
              
              9,786
              
              
              
              72
              
              
              
              2.94
              %Total
                  interest-earning
              
              
              492,462
              
              
              
              9,686
              
              
              
              7.87
              %
              
              
              470,183
              
              
              
              9,055
              
              
              
              7.70
              %Noninterest-earning
              
              
              24,187
              
              
              
              
              
              
              
              
              
              
              
              21,330$
              516,649
              
              
              
              
              
              
              
              
              
              
              $
              491,513**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Interest-bearing:Savings
                  accounts
              
              $
              12,760
              
              
              
              73
              
              
              
              2.29
              %
              
              $
              16,105
              
              
              
              115
              
              
              
              2.86
              %Transaction
                  accounts
              
              
              103,252
              
              
              
              776
              
              
              
              3.01
              %
              
              
              76,225
              
              
              
              430
              
              
              
              2.26
              %Certificates
                  of deposit
              
              
              254,800
              
              
              
              3,330
              
              
              
              5.23
              %
              
              
              188,441
              
              
              
              2,094
              
              
              
              4.44
              %FHLB
                  Advances
              
              
              54,753
              
              
              
              738
              
              
              
              5.39
              %
              
              
              119,109
              
              
              
              1,610
              
              
              
              5.41
              %Subordinated
                  agreements
              
              
              15,465
              
              
              
              261
              
              
              
              6.75
              %
              
              
              15,465
              
              
              
              251
              
              
              
              6.49
              %Other
                  borrowed funds
              
              
              2,003
              
              
              
              24
              
              
              
              4.79
              %
              
              
              5,811
              
              
              
              43
              
              
              
              2.96
              %Total
                  interest-bearing
              
              
              443,033
              
              
              
              5,202
              
              
              
              4.70
              %
              
              
              421,156
              
              
              
              4,543
              
              
              
              4.31
              %Noninterest-bearing
              
              
              28,437
              
              
              
              
              
              
              
              
              
              
              
              25,823Total
                  liabilities
              
              
              471,470
              
              
              
              
              
              
              
              
              
              
              
              446,979Stockholders’
                  equity
              
              
              45,179
              
              
              
              
              
              
              
              
              
              
              
              44,534$
              516,649
              
              
              
              
              
              
              
              
              
              
              $
              491,513Net
                  earning balance
              
              $
              49,429
              
              
              
              
              
              
              
              
              
              
              $
              49,027Earning
                  yield less costing rate
              
              
              
              
              
              
              
              
              
              
              3.17
              %
              
              
              
              
              
              
              
              
              
              
              3.39
              %Net
                  interest income, and net yield spreadon interest earning
                  assets
              
              
              
              
              
              $
              4,484
              
              
              
              3.64
              %
              
              
              
              
              
              $
              4,512
              
              
              
              3.84
              %Ratio
                  of interest-earning assets to interest-bearing liabilities
              
              
              
              
              
              
              111
              %
              
              
              
              
              
              
              
              
              
              
              112
              %


13
 *Table
          of Contents*




Nine
                  months ended 9/30/2007
              
              
              Nine
                  months ended 9/30/2006Average
                  Balance
              
              
              Interest
              
              
              Yield
                  / Cost
              
              
              Average
                  Balance
              
              
              Interest
              
              
              Yield
                  / Cost**ASSETS**Interest-earning:Loans
              
              $
              473,148
              
              
              
              27,744
              
              
              
              7.82
              %
              
              $
              445,594
              
              
              
              25,002
              
              
              
              7.48
              %Investment
                  securities
              
              
              8,543
              
              
              
              309
              
              
              
              4.82
              %
              
              
              7,277
              
              
              
              340
              
              
              
              6.23
              %Other
                  assets
              
              
              8,079
              
              
              
              258
              
              
              
              4.26
              %
              
              
              9,836
              
              
              
              177
              
              
              
              2.40
              %Total
                  interest-earning
              
              
              489,770
              
              
              
              28,311
              
              
              
              7.71
              %
              
              
              462,707
              
              
              
              25,519
              
              
              
              7.35
              %Noninterest-earning
              
              
              23,942
              
              
              
              
              
              
              
              
              
              
              
              20,968$
              513,712
              
              
              
              
              
              
              
              
              
              
              $
              483,675**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Interest-bearing:Savings
                  accounts
              
              $
              13,836
              
              
              
              250
              
              
              
              2.41
              %
              
              $
              14,692
              
              
              
              259
              
              
              
              2.35
              %Transaction
                  accounts
              
              
              101,124
              
              
              
              2,235
              
              
              
              2.95
              %
              
              
              76,283
              
              
              
              1,169
              
              
              
              2.04
              %Certificates
                  of deposit
              
              
              240,164
              
              
              
              9,151
              
              
              
              5.08
              %
              
              
              191,856
              
              
              
              5,956
              
              
              
              4.14
              %FHLB
                  Advances
              
              
              67,571
              
              
              
              2,727
              
              
              
              5.38
              %
              
              
              110,293
              
              
              
              4,197
              
              
              
              5.07
              %Subordinated
                  agreements
              
              
              15,465
              
              
              
              776
              
              
              
              6.69
              %
              
              
              15,465
              
              
              
              766
              
              
              
              6.60
              %Other
                  borrowed funds
              
              
              1,338
              
              
              
              38
              
              
              
              3.79
              %
              
              
              4,271
              
              
              
              91
              
              
              
              2.84
              %Total
                  interest-bearing
              
              
              439,498
              
              
              
              15,177
              
              
              
              4.60
              %
              
              
              412,860
              
              
              
              12,438
              
              
              
              4.02
              %Noninterest-bearing
              
              
              28,277
              
              
              
              
              
              
              
              
              
              
              
              26,763Total
                  liabilities
              
              
              467,775
              
              
              
              
              
              
              
              
              
              
              
              439,623Stockholders’
                  equity
              
              
              45,937
              
              
              
              
              
              
              
              
              
              
              
              44,052$
              513,712
              
              
              
              
              
              
              
              
              
              
              $
              483,675Net
                  earning balance
              
              $
              50,272
              
              
              
              
              
              
              
              
              
              
              $
              49,847Earning
                  yield less costing rate
              
              
              
              
              
              
              
              
              
              
              3.10
              %
              
              
              
              
              
              
              
              
              
              
              3.34
              %Net
                  interest income, and net yield spreadon interest earning
                  assets
              
              
              
              
              
              $
              13,134
              
              
              
              3.58
              %
              
              
              
              
              
              $
              13,081
              
              
              
              3.77
              %Ratio
                  of interest-earning assets to interest-bearing liabilities
              
              
              
              
              
              
              111
              %
              
              
              
              
              
              
              
              
              
              
              112
              %




**Results
      of Operations - Comparison of Three and Nine Month Periods Ended September
      30,** **2007
      and 2006**





Net
      income for the three months and
      nine months ended September 30, 2007 was $1,612,691 and $4,782,455 as compared
      to $1,624,322 and $4,770,037 for the three months and nine months ended
      September 30, 2006, which represents a decrease in earnings of $11,631 (1%)
      for
      the three month period, and an increase in earnings of $12,418 (1%) for the
      nine
      month period.




**Interest
      Income**





Total
      interest income for the three months and nine months ended September 30, 2007,
      increased $631,270 (7%) and $2,792,102 (11%), respectively, as compared to
      the
      three months and nine months ended September 30, 2006.  For the three
      month and nine month periods ended September 30, 2007 compared to the same
      periods in 2006, the average yield on interest earning assets increased 17
      basis
      points to 7.87% and 36 basis points to 7.71%, respectively, and the average
      balance of interest earning assets increased approximately $22,279,000 and
      $27,063,000, respectively.


14
 *Table
          of Contents*




**Interest
      Expense**





Total
      interest expense for the three
      months and nine months ended September 30, 2007, increased $658,650 (14%) and
      $2,738,935 (22%), respectively, when compared to the three months and nine
      months ended September 30, 2006.  For the three month and nine month
      periods ended September 30, 2007 compared to the same periods in 2006, the
      average cost of interest bearing liabilities increased 39 basis points to 4.70%
      and 58 basis points to 4.60%, respectively, and the average balance of interest
      bearing liabilities increased approximately $21,877,000 and $26,638,000,
      respectively, when compared to the same periods in 2006.





**Net
      Interest Income**





Net
      interest income for the three
      months and nine months ended September 30, 2007, decreased $27,380 (1%) and
      increased $53,167 (0.4%), respectively when compared to the same periods in
      2006.





**Provision
      for Loan Losses**





Based
      on its internal analysis and
      methodology, management recorded a provision for loan loss of $210,000 and
      $630,000 for the three months and nine months ended September 30, 2007,
      respectively, compared to $150,000 and $600,000 for the same periods in
      2006.  The Bank will continue to monitor its allowance for loan losses
      and make future additions based on economic and regulatory
      conditions.  Management of the Company anticipates the need to
      continue increasing the allowance for loan losses through charges to the
      provision for loan losses as anticipated growth in the Bank’s loan portfolio
      increases or other circumstances warrant.  Although the Bank maintains
      its allowance for loan losses at a level which it considers to be sufficient
      to
      provide for potential loan losses in its existing loan portfolio, there can
      be
      no assurance that future loan losses will not exceed internal
      estimates.  In addition, the amount of the allowance for loan losses
      is subject to review by regulatory agencies which can order the establishment
      of
      additional loan loss provisions.





**Noninterest
      Income**





Noninterest
      income increased $295,855
      (32%) and $1,115,446 (41%) for the three months and nine months ended September
      30, 2007, respectively, when compared to the three months and nine months ended
      September 30, 2006.





Service
      charges on transaction accounts
      increased by $196,097 (58%) and $663,251 (67%) for the three months and nine
      months ended September 30, 2007, respectively, when compared to the same periods
      in 2006.  This is a result of an increase in the amount of
      insufficient funds and overdraft charges during these periods when compared
      to
      the same period in 2006.  This is primarily due to the Bank’s
      overdraft privilege program that was implemented in the fourth quarter of
      2006.





Gain
      on sale of loans increased
      $109,530 (63%) and $453,433 (100%) for the three months and nine months ended
      September 30, 2007, respectively, when compared to the same periods in 2006,
      which was a result of an increase in the volume and yield of mortgage loans
      sold
      on the secondary market during the three months and nine months ended September
      30, 2007, compared to the same periods in 2006.





**Noninterest
      Expense**





Noninterest
      expense increased $356,364
      (14%) and $1,315,806 (17%) for the three months and nine months ended September
      30, 2007, respectively, when compared to the three months and nine months ended
      September 30, 2006.





Salaries
      and employee benefits
      increased $213,226 (13%) and $841,514 (19%) for the three months and nine months
      ended September 30, 2007 when compared to the same period in
      2006.  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, 2007 when compared to the same periods in
      2006.


15
 *Table
          of Contents*




Occupancy
      expense decreased $17,030
      (4%) and increased $113,314 (10%), respectively, and data processing expense
      increased $18,721 (24%) and $95,849 (47%), respectively, for the three months
      and nine months ended September 30, 2007 when compared to the same periods
      in
      2006.  These increases were primarily due to increased depreciation
      and maintenance expenses relating to the Bank’s conversion to a new core
      processing system in 1st quarter
      2006.





Other
      expense increased $141,334 (32%)
      and $267,257 (19%) for the three months and nine months ended September 30,
      2007, respectively, when compared to the same periods in 2006.  This
      increase was primarily due to an increase in the amount of ATM expenses during
      these periods.  The Bank converted to a new ATM network provider in
      September 2006.   The expense is recorded at gross, rather than
      net of income earned as was previously done prior to the
      conversion.  Currently, the associated income related to ATM services
      is recorded in noninterest income.





**Provision
      for Income Taxes**





There
      was a decrease of $136,258 (13%)
      and $189,611 (7%) in the provision for income taxes for the three months and
      nine months ended September 30, 2007, respectively, when compared to the same
      periods in 2006 due to a decrease in taxable income and the purchase of certain
      tax credit investments for the three months and nine months ended September
      30,
      2007, compared to the same periods in 2006.





**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,
      2007, was $5,797,691 or 1.21% of net loans receivable.  Total loans
      classified as substandard, doubtful or loss as of September 30, 2007, were
      $17,424,064 or 3.30% of total assets.  Management also considered
      nonperforming 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 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.





9/30/2007
              
              
              12/31/2006
              
              
              12/31/2005Nonperforming
                  loans
              
              $
              6,504
              
              
              
              2,748
              
              
              
              721Real
                  estate acquired in settlement of loans
              
              
              753
              
              
              
              173
              
              
              
              27Total
                  nonperforming assets
              
              $
              7,257
              
              
              
              2,921
              
              
              
              748Total
                  nonperforming assets as a percentage of total assets
              
              
              1.37
              %
              
              
              0.56
              %
              
              
              0.17
              %Allowance
                  for loan losses
              
              $
              5,798
              
              
              
              5,783
              
              
              
              5,400Allowance
                  for loan losses as a percentage of average net loans
              
              
              1.21
              %
              
              
              1.20
              %
              
              
              1.25
              %




The
      primary increase in nonperforming assets at September 30, 2007 compared to
      December 31, 2006 was one large loan secured by commercial real estate that
      was
      placed into nonaccrual status in April 2007.  Currently, management
      believes that this one loan is adequately collateralized and reserved for at
      September 30, 2007.


16
 *Table
          of Contents*




**Liquidity
      and Capital Resources**





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





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





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





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





The
      Bank 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.





**Interest
      Rate Sensitivity Analysis**





The
      following table sets forth as of
      September 30, 2007 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
              
              
              $
              45,924
              
              
              $
              2,994
              
              
              
              7
              %
              
              
              8.89
              %
              
              
              0.72
              %+200
              
              
              
              45,694
              
              
              
              2,764
              
              
              
              6
              %
              
              
              8.79
              %
              
              
              0.62
              %+100
              
              
              
              44,575
              
              
              
              1,645
              
              
              
              4
              %
              
              
              8.53
              %
              
              
              0.36
              %NC
              
              
              
              42,930
              
              
              
              -
              
              
              
              -
              
              
              
              8.17
              %
              
              
              --100
              
              
              
              41,024
              
              
              
              (1,906
              )
              
              
              -4
              %
              
              
              7.76
              %
              
              
              -0.41
              %-200
              
              
              
              38,432
              
              
              
              (4,498
              )
              
              
              -10
              %
              
              
              7.23
              %
              
              
              -0.94
              %-300
              
              
              
              35,388
              
              
              
              (7,542
              )
              
              
              -18
              %
              
              
              6.61
              %
              
              
              -1.55
              %


17
 *Table
          of Contents*




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.





**Impact
      of New Accounting Pronouncements**





In
      September 2006, the 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 Statement is to be effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, with early adoption permitted. The Company is evaluating this Statement
      to
      determine the impact, if any, on certain of its financial assets and
      liabilities.





In
      February 2007, the FASB issued SFAS
      No. 159,*The Fair Value Option for Financial Assets and Financial
      Liabilities*. SFAS No. 159 provides companies with the option to report
      selected financial assets and liabilities at fair value. Under the option,
      any
      changes in fair value would be included in earnings. This Statement seeks to
      reduce both complexity in accounting and volatility in earnings caused by
      differences in the existing accounting rules. Existing accounting principles
      use
      different measurement attributes for different assets and liabilities, which
      can
      lead to earnings volatility. This Statement helps to mitigate this type of
      accounting-induced volatility by enabling companies to achieve a more consistent
      accounting for changes in the fair value of related assets and liabilities
      without having to apply complex hedge accounting provisions. Under this
      Statement, entities may measure at fair value financial assets and liabilities
      selected on a contract-by-contract basis. They would be required to display
      those values separately from those measured under different attributes on the
      face of the statement of financial condition. Furthermore, companies must
      provide additional information that would help investors and other users of
      financial statements to more easily understand the effect on earnings. SFAS
      No.
      159 is effective for fiscal years beginning after November 15, 2007, with
      earlier application permitted if the Company made this election during its
      first
      quarter of fiscal year 2007. If the Company adopted SFAS No. 159 early, it
      must
      also adopt SFAS No. 157 simultaneously. The Company did not elect to adopt
      this
      Statement early and is currently evaluating the provisions of the Statement
      to
      determine the impact, if any, on certain of its financial assets and
      liabilities.


18
 *Table
          of Contents*




**Item
      4. Controls and Procedures**





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





The
      Company conducted an evaluation,
      under the supervision and with the participation of the Company’s management,
      including the Company’s Chief Executive Officer and Chief Financial Officer, of
      the effectiveness of the Company’s disclosure controls and
      procedures.   Based on 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,
      2007.





(b)  There
      has been no change in the Company’s internal control over financial reporting
      during the quarter ended September 30, 2007 that has materially affected, or
      is
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.


19
 *Table
            of Contents*




**PART
      II  OTHER INFORMATION**





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


None.





**Item1A.**
            **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, 2007.





**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, 2007 to July 31, 2007
              10,496
              29.86
              10,496
              54,556August
                  1, 2007 to August 31, 2007
              52,200
              29.62
              52,200
              352,356September
                  1, 2007 to September 30, 2007
              6,100
              30.03
              6,100
              346,256Total
              68,796
              29.69
              68,796


(1)
            The
                Company has a repurchase plan which was announced on August 20,
                2007.  This plan authorizes the purchase by the Company of up to
                350,000 shares of the Company’s common stock.  There is no
                expiration date for this plan.  There are no other repurchase
                plans in effect at this time.





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


Not
      applicable.





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


Not
      applicable.





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


None.





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




10.20
            Written
              Description of 2007 Executive Incentive Compensation Annual Plan -
              President and Chief Executive Officer 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
 *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, 2007Shaun
                A. BurkePresident
                and Chief Executive Officer(Principal
                Executive Officer and Duly Authorized Officer)/s/
                Carter Peters
            
            
            November
                14, 2007Carter
                PetersExecutive
                Vice President and Chief Financial Officer(Principal
                Financial and Accounting Officer)






21