10-Q 1 mainbody.htm GUARANTY FEDERAL BANCSHARES, INC MARCH 31, 2006 10-Q Guaranty Federal Bancshares, Inc March 31, 2006 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2006

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission number 0-23325

Guaranty Federal Bancshares, Inc.
(Exact name of registrant as specified in its charter)

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

Telephone Number: (417) 520-4333

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [  ] Accelerated filer [  ]
Non-accererated filer [X]
 
Indicate by check mark whether the registraint is a shell company (as defined in Rule 12-b2 of the Exchange Act. Yes [ ] No [X]

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

Class
Outstanding as of May 12, 2006
Common Stock, Par Value $0.10 per share
2,953,517 Shares

1

 
GUARANTY FEDERAL BANCSHARES, INC.
       
TABLE OF CONTENTS
Item
    
Page
PART I. Financial Information
       
Consolidated Financial Statements (Unaudited):
  
 
3
   
4
 
5
   
7
 
8
       
12
       
18
       
 
19
       
PART II. Other Information
       
 
20
       
20
   
20
       
 
20
       
20
       
 
20
       
 
20
       
     
       
   
       
   

2


PART I

 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
  
MARCH 31, 2006 (UNAUDITED) AND DECEMBER 31, 2005
  
           
ASSETS
  
3/31/06
  
12/31/05
  
Cash
 
$
9,466,952
    
17,990,774
 
Interest-bearing deposits in other financial institutions
   
856,534
   
2,515,704
 
Cash and cash equivalents
   
10,323,486
   
20,506,478
 
Available-for-sale securities
   
9,649,675
   
6,757,147
 
Held-to-maturity securities
   
903,375
   
944,724
 
Stock in Federal Home Loan Bank, at cost
   
5,334,800
   
4,978,800
 
Mortgage loans held for sale
   
2,533,525
   
2,092,279
 
Loans receivable, net of allowance for loan losses of
         
March 31, 2006 - $5,618,742 - December 31, 2005 - $5,399,654
   
438,153,903
   
433,435,429
 
Accrued interest receivable:
         
Loans
   
1,902,126
   
2,040,872
 
Investments
   
103,432
   
48,255
 
Prepaid expenses and other assets
   
2,715,314
   
2,604,425
 
Foreclosed assets held for sale
   
6,500
   
26,775
 
Premises and equipment
   
7,507,183
   
7,452,798
 
Deferred income taxes
   
397,899
   
112,686
 
   
$
479,531,218
    
481,000,668
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
               
LIABILITIES
             
               
Deposits
 
$
312,868,755
    
320,058,951
 
Federal Home Loan Bank advances
   
101,000,000
   
100,000,000
 
Securities sold under agreements to repurchase
   
3,963,106
   
1,594,258
 
Subordinated debentures
   
15,465,000
   
15,465,000
 
Advances from borrowers for taxes and insurance
   
435,034
   
212,320
 
Accrued expenses and other liabilities
   
434,436
   
288,587
 
Accrued interest payable
   
701,133
   
508,164
 
Dividend payable
   
461,745
   
459,074
 
Income taxes payable
   
872,014
   
322,165
 
     
436,201,223
   
438,908,519
 
               
COMMITMENTS AND CONTINGENCIES
    
-
    
-
  
               
STOCKHOLDERS' EQUITY
             
Common Stock:
             
$0.10 par value; authorized 10,000,000 shares;
             
issued March 31, 2006 - 6,624,891 shares;
             
December 31, 2005 - 6,571,348 shares
   
662,489
   
657,135
 
Additional paid-in capital
   
54,889,774
   
53,778,686
 
Unearned ESOP shares
   
(1,515,930
)
  
(1,572,930
)
Retained earnings, substantially restricted
   
37,636,266
   
36,533,338
 
Accumulated other comprehensive income
             
Unrealized appreciation on available-for-sale securities,
             
net of income taxes; March 31, 2006 - $1,338,853;
             
December 31, 2005 - $1,158,114
   
1,720,158
   
1,971,925
 
     
93,392,757
   
91,368,154
 
               
Treasury stock, at cost; March 31, 2006 - 3,666,744 shares;
             
December 31, 2005 - 3,639,301 shares
   
(50,062,762
)
  
(49,276,005
)
     
43,329,995
   
42,092,149
 
   
$
479,531,218
    
481,000,668
 

See Notes to Condensed Consolidated Financial Statements
3


 
  
CONSOLIDATED STATEMENTS OF INCOME
 
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)
 
           
   
3/31/2006 
    
3/31/2005
  
INTEREST INCOME
             
Loans
 
$
7,884,788
    
5,726,879
 
Investment securities
   
102,007
   
95,791
 
Other
   
91,120
   
78,248
 
     
8,077,915
   
5,900,919
 
INTEREST EXPENSE
             
Deposits
   
2,269,292
   
1,559,107
 
Federal Home Loan Bank advances
   
1,223,422
   
893,972
 
Subordinated debentures
   
255,946
   
-
 
Other
   
20,763
   
4,129
 
     
3,769,423
   
2,457,208
 
NET INTEREST INCOME
   
4,308,492
   
3,443,710
 
PROVISION FOR LOAN LOSSES
   
225,000
   
225,000
 
NET INTEREST INCOME AFTER
             
PROVISION FOR LOAN LOSSES
   
4,083,492
   
3,218,710
 
NONINTEREST INCOME
             
Service charges
   
312,255
   
381,348
 
Late charges and other fees
   
91,481
   
91,475
 
Gain on sale of investment securities
   
198,424
   
195,788
 
Gain on sale of loans
   
119,573
   
141,948
 
Income (loss) on foreclosed assets
   
68
   
2,801
 
Other income
   
100,019
   
70,550
 
     
821,820
   
883,910
 
             
NONINTEREST EXPENSE
             
Salaries and employee benefits
   
1,443,090
   
1,272,824
 
Occupancy
   
317,315
   
333,209
 
SAIF deposit insurance premiums
   
10,322
   
9,661
 
Data processing
   
55,137
   
87,912
 
Advertising
   
101,735
   
28,695
 
Other expense
   
439,795
   
448,092
 
     
2,367,394
   
2,180,393
 
INCOME BEFORE INCOME TAXES
   
2,537,918
   
1,922,228
 
PROVISION FOR INCOME TAXES
   
973,593
   
707,454
 
NET INCOME
 
$
1,564,325
    
1,214,774
 
               
BASIC EARNINGS PER SHARE
 
$
0.56
    
0.43
 
DILUTED EARNINGS PER SHARE
 
$
0.54
    
0.41
 

 
 
See Notes to Condensed Consolidated Financial Statements
4

 
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED)
 
           
 
      
 
          
   
Common Stock
 
Additional Paid-In Capital
 
Unearned ESOP Shares
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
 
Balance, January 1, 2006
 
$
657,135
    
53,778,686
   
(1,572,930
)
  
(49,276,005
)
  
36,533,338
   
1,971,925
   
42,092,149
 
Comprehensive income
                                           
Net income
   
-
   
-
   
-
   
-
   
1,564,325
   
-
   
1,564,325
 
Change in unrealized appreciation
                                           
on available-for-sale securities, net
                                           
of income taxes of ($180,739)
   
-
   
-
   
-
   
-
   
-
   
(251,767
)
  
(251,767
)
Total comprehensive income
                                       
1,312,558
 
Dividends ($0.165 per share)
   
-
   
-
   
-
   
-
   
(461,397
)
  
-
   
(461,397
)
Stock award plans
   
-
   
24,878
   
-
   
-
   
-
   
-
   
24,878
 
Stock options exercised
   
5,354
   
980,081
   
-
   
-
   
-
   
-
   
985,435
 
Release of ESOP shares
   
-
   
106,129
   
57,000
   
-
   
-
   
-
   
163,129
 
Treasury stock purchased
   
-
   
-
   
-
   
(786,757
)
  
-
   
-
   
(786,757
)
Balance, March 31, 2006
 
$
662,489
    
54,889,774
   
(1,515,930
)
  
(50,062,762
)
  
37,636,266
   
1,720,158
   
43,329,995
 



See Notes to Condensed Consolidated Financial Statements
5
GUARANTY FEDERAL BANCSHARES, INC.
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
 
           
 
      
 
          
   
Common Stock
 
Additional Paid-In Capital
 
Unearned ESOP Shares
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
 
Balance, January 1, 2005
 
$
649,386
    
52,384,842
   
(1,800,930
)
  
(45,712,994
)
  
32,437,131
   
2,815,828
   
40,773,263
 
Comprehensive income
                                            
Net income
   
-
   
-
   
-
   
-
   
1,214,774
   
-
   
1,214,774
 
Change in unrealized appreciation
                                           
on available-for-sale securities, net
                                           
of income taxes of ($314,887)
   
-
   
-
   
-
   
-
   
-
   
(536,159
)
  
(536,159
)
Total comprehensive income
                                       
678,615
 
Dividends ($0.16 per share)
   
-
   
-
   
-
   
-
   
(450,634
)
  
-
   
(450,634
)
Stock award plans
   
-
   
10,053
   
-
   
-
   
-
   
-
   
10,053
 
Stock options exercised
   
1,515
   
171,209
   
-
   
-
   
-
   
-
   
172,724
 
Release of ESOP shares
   
-
   
79,789
   
57,000
   
-
   
-
   
-
   
136,789
 
Treasury stock purchased
   
-
   
-
   
-
   
(1,622,953
)
  
-
   
-
   
(1,622,953
)
Balance, March 31, 2005
 
$
650,901
    
52,645,893
   
(1,743,930
)
  
(47,335,947
)
  
33,201,271
   
2,279,669
   
39,697,857
 

 
 
See Notes to Condensed Consolidated Financial Statements
6


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

 
See Notes to Condensed Consolidated Financial Statements
7
(Unaudited)

Note 1: Basis of Presentation

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

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

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

Note 2: Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Guaranty Federal Bancshares, Inc. (the “Company”), its wholly owned subsidiary, Guaranty Bank (the “Bank”) and the wholly-owned subsidiary of the Bank, Guaranty Financial Services of Springfield, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
 
Note 3: Benefit Plans

Stock Award Plans

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

At the annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders approved the Recognition and Retention Plan (the “RRP”). Following approval of the Plan, the Bank contributed $464,643 to a separate trust to purchase the 75,106 shares of the Company’s common stock in the RRP. As of March 31, 2006 all shares in this plan have vested.

At a special stockholders’ meeting on July 22, 1998, the Company’s stockholders approved the Restricted Stock Plan (the “RSP”). Following approval of the Plan, the Company contributed $2,373,065 to a separate trust to purchase the 173,632 shares in the RSP. As of March 31, 2006 all shares in this plan have vested.

During the year ended June 30, 2000, the directors of the Company established the Stock Compensation Plan (the “2000 SCP”) with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 7,125 shares of the Company’s common stock. Following approval of the Plan, the Company contributed $85,945 to a separate trust to purchase the 7,125 shares in the SCP. As of March 31, 2006 all shares in this plan have vested.
 
8
During the year ended June 30, 2001, the directors of the Company established the Stock Compensation Plan (the “2001 SCP”) with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 10,239 shares of the Company’s common stock. The shares for this plan were taken from forfeited shares in the RSP. As of March 31, 2006 there are 2,047 shares in this plan that are not vested.

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

Stock Option Plans

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

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

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

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

Under the stock option component of the 2001 SCP, the Committee had granted no nonqualified stock options as of December 31, 2003.
 
During the six months ended December 31, 2003, the directors of the Company authorized the issuance of 5,000 stock options as an employment inducement to a new officer of the Bank pursuant to a stock option agreement. Stock options awarded under this agreement are considered non-qualified for federal income tax purposes.
 
During the year ended December 31, 2004, the directors of the Company authorized the issuance of 25,000 stock options as an employment inducement to a new officer of the Bank pursuant to a stock option agreement. Stock options awarded under this agreement are considered non-qualified for federal income tax purposes.

On May 19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan (“2004 SOP”). The purpose of the plan is to attract and retain qualified personnel for positions of substantial responsibility. The aggregate number of shares with respect to options issued under this plan shall not exceed 250,000 shares. To date 30,000 stock options have been granted under this plan.

9
The table below summarizes transactions under the Company’s stock option plans for three months ended March 31, 2006:
 
   
Number of shares
      
   
Incentive Stock Option
 
Non-Incentive Stock Option
 
Weighted Average Exercise Price
 
               
Balance outstanding as of December 31, 2005
   
179,785
   
160,091
   
15.65
 
Granted
   
10,000
   
-
   
28.12
 
Exercised
   
10,800
   
42,743
   
14.32
 
Forfeited
   
-
   
-
   
-
 
Balance outstanding as of March 31, 2006
   
178,985
   
117,348
   
16.32
 
Options exercisable as of March 31, 2006
   
129,560
   
93,111
   
13.48
 
 
In December, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), which is how the Company previously accounted for its stock options. The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and, as such, results for prior periods have not been restated. Stock-based compensation expense will be recognized for all stock option granted or modified after January 1, 2006. In addition, unvested options existing at January 1, 2006, will be recognized in expense over the remaining vesting period. The fair value of all stock options has been estimated using the Black-Scholes option pricing model using various assumptions, some of which are highly subjective.
 
As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $17,008 during the first quarter of 2006. As of March 31, 2006, there was $193,670 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period.
 
10
Prior to January 1, 2006, no compensation expense was recognized for stock option grants, as all such grants had an exercise price equal to the fair market value on the date of grant. The following illustrates the effect on net income and earnings per share if the Company had applied the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation,” prior to January 1, 2006:
 
   
Three Months ended
 
   
3/31/2006
  
       
Net income, as reported
  
$
1,214,774
  
Less: Total stock-based employee compensation
        
cost determined under the fair value-based
        
method, net of income taxes
    
(8,782
)
         
Pro forma net income
  
$
1,205,992
  
         
Earnings per share:
        
Basic - as reported
  
$
0.43
  
Basic - pro forma
  
$
0.43
  
Diluted - as reported
  
$
0.42
  
Diluted - pro forma
  
$
0.41
  

Note 4: Earnings Per Share
   
For three months ended March 31, 2006
 
   
Income
Available to Stockholders
 
Average Shares Outstanding
 
Per-share
 
Basic Earnings per Share
 
$
1,564,325
    
2,789,500
 
$
0.56
  
Effect of Dilutive Securities: Stock Options
         
118,108
     
Diluted Earnings per Share
 
$
1,564,325
    
2,907,608
 
$
0.54
  
                     
 
  
For three months ended March 31, 2005  
 
    
Income Available  to Stockholders 
    
Average Shares Outstanding
   
Per-share
 
Basic Earnings per Share
 
$
1,214,774
    
2,815,482
 
$
0.43
  
Effect of Dilutive Securities: Stock Options
         
141,054
     
Diluted Earnings per Share
 
$
1,214,774
    
2,916,177
 
$
0.42
  
 
 
11
 
Note 5: Other Comprehensive Income

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


General

The primary function of the Company has been to monitor its investment in the Bank. As a result, the results of operations of the Company are derived primarily from the operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews the Company’s financial condition as of March 31, 2006, and the results of operations for the three months ended March 31, 2006 and 2005.

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

Financial Condition

The Company’s total assets decreased $1,469,450 from $481,000,668 as of December 31, 2005, to $479,531,218 as of March 31, 2006.

Cash and cash equivalents decreased $10,182,992 (50%) from $20,506,478 as of December 31, 2005, to $10,323,486 as of March 31, 2006. The decrease is primarily due to a smaller amount of uncollected funds on deposit with a correspondent bank as of March 31, 2006, compared to December 31, 2005.
 
Securities available-for-sale increased $2,892,528, (43%) from $6,757,147 as of December 31, 2005, to $9,649,675 as of March 31, 2006. The increase was primarily due to the purchase of various government agencies during the period totaling approximately $3,500,000. The Bank currently holds 45,600 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $44,658 in the available-for-sale category. As of March 31, 2006, the gross unrealized gain on the FHLMC stock was $2,781,600, a decrease from $3,176,010 as of December 31, 2005.

12
Securities held-to-maturity decreased primarily due to principal repayments by $41,349 (4%) from $944,724 as of December 31, 2005, to $903,375 as of March 31, 2006.

Stock in Federal Home Loan Bank of Des Moines (“FHLB”) increased by $356,000 (7%), due to the purchase of such stock necessary to meet FHLB requirements.
 
    Net loans receivable increased by $4,718,474 (1%) from $433,435,429 as of December 31, 2005, to $438,153,903 as of March 31, 2006. Commercial real estate loans increased by $6,021,436 (12%) from $122,884,052 as of December 31, 2005, to $128,905,488 as of March 31, 2006. The Bank plans to continue its emphasis on commercial lending, while selling the majority of conforming single family loan production on the secondary market. As a result, permanent mortgage loans secured by both owner and non-owner occupied residential real estate decreased by $4,127,035 (4%). Loans held for sale increased $441,246 (21%) to $2,533,525 as of March 31, 2006, compared to $2,092,279 at December 31, 2005. The Bank continued to be active in construction lending. Construction loans increased by $4,926,185 (7%) to $75,316,088 as of March 31, 2006, compared to $70,389,903 as of December 31, 2005. See discussion under “Quantitative and Qualitative Disclosure about Market Risk - Asset/Liability Management.” Loan growth is anticipated to continue and represents a major part of the Bank’s planned asset growth.
 
Allowance for loan losses increased $219,088 (4%) from $5,399,654 as of December 31, 2005 to $5,618,742 as of March 31, 2006. The allowance increased due to the provision for loan losses of $225,000 recorded during this period exceeding net loan charge-offs of $5,912 during this period. Management of the Company decided to increase the allowance for loan losses by this provision charge primarily as a result of the continued growth of the Bank’s loan portfolio, particularly its commercial loan portfolio. See discussion under “Results of Operations - Comparison of Three Month Periods Ended March 31, 2006 and 2005 - Provision for Loan Losses.” The allowance for loan losses as of March 31, 2006 and December 31, 2005 was 1.20% and 1.16%, respectively, of average net loans outstanding. As of March 31, 2006, the allowance for loan losses was 150% of impaired loans compared to 75% as of December 31, 2005.

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

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

FHLB advances increased by $1,000,000 from $100,000,000 as of December 31, 2005, to $101,000,000 as of March 31, 2006, due to new advances exceeding repayments. These funds were primarily used to fund new loans.
 
On December 15, 2005, the Company completed an offering of $15 million of “Trust Preferred Securities” (defined hereinafter). The Company formed two wholly-owned subsidiaries, each a Delaware statutory trust (each a “Trust”, and collectively, the “Trusts”), for the purpose of issuing the $15 million of Trust Preferred Securities. The proceeds of the sale of Trust Preferred Securities, together with the proceeds of the Trusts’ sale of their common securities to the Company for $465,000, were used by each Trust to purchase certain debentures from the Company. The Company issued 30-year junior subordinated deferrable interest debentures to the Trusts in the principal amount of $5,155,000 (“Trust I Debentures”) and $10,310,000 (“Trust II Debentures”, and together with the Trust I Debentures, the “Debentures”) pursuant to the terms of Indentures dated December 15, 2005 by and between the Company and Wilmington Trust Company, as trustee. The Trust I Debentures bear interest at a fixed rate of 6.92%, payable quarterly. The Trust II Debentures bear interest at a fixed rate of 6.47% for 5 years, payable quarterly, after issuance and thereafter at a floating rate equal to the three month LIBOR plus 1.45%. The interest payments by the Company to the Trusts will be used to pay the dividends payable by the Trusts to the holders of the Trust Preferred Securities.

13
The Debentures mature on February 23, 2036. Subject to prior approval by the Federal Reserve Board, the Debentures and the Trust Preferred Securities are each callable by the Company or the Trusts, respectively and as applicable, at its option after five years from issuance, and sooner in the case of a special redemption at a special redemption price ranging up to 103.2% of the principal amount thereof, and upon the occurrence of certain events, such as a change in the regulatory capital treatment of the Trust Preferred Securities, either Trust being deemed an investment company or the occurrence of certain adverse tax events. In addition, the Company and the Trusts may defer interest and dividend payments, respectively, for up to five consecutive years without resulting in a default. An event of default may occur if the Company declares bankruptcy, fails to make the required payments within 30 days or breaches certain covenants within the Debentures. The Debentures are subordinated to the prior payment of any other indebtedness of the Company.

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

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

Advances from borrowers for taxes and insurance increased $222,714 (105%) from $212,320 as of December 31, 2005, to $435,034 as of March 31, 2006 due to the timing of payment of real estate taxes.
 
Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $1,237,846 (3%) from $42,092,149 as of December 31, 2005, to $43,329,995 as of March 31, 2006. This increase was due to several factors. The Company’s net income during this period was $1,564,325 which was partially offset by dividends in the amount of $461,397 which were declared on March 16, 2006 and paid on April 14, 2006, to stockholders’ of record as of March 30, 2006. In addition, the increase in stockholders’ equity was further offset as the Company repurchased 27,443 shares of treasury stock at an aggregate cost of $786,757 (an average cost of $28.66 per share) and a decrease in unrealized appreciation on available for sale securities, net of taxes, of $251,757 during this period. As of March 31, 2006, 11,100 shares of the Company’s common stock remain to be repurchased under the repurchase plan announced by the Company on November 22, 2002. On a per share basis, stockholders’ equity increased from $15.17 as of December 31, 2005 to $15.44 as of March 31, 2006.
 
14
Average Balances, Interest and Average Yields

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

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

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

15
Results of Operations - Comparison of Three Month Periods Ended March 31,
2006 and 2005

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

Interest Income

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

Interest Expense

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

Net Interest Income

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

Provision for Loan Losses

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

Noninterest Income

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

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

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

Other income increased $29,469 (42%) for the three months ended March 31, 2006 when compared to the same period in 2005. This increase was primarily due to an increase in the amount of ATM fees collected during the three months ended March 31, 2006, compared to the same period in 2005.
 
16
Noninterest Expense

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

Salaries and employee benefits increased $170,266 (13%) for the three months ended March 31, 2006 when compared to the same period in 2005. This increase was due to several factors, including additions in executive and staff positions, pay increases to existing employees and increases in employee benefit costs during the three month period ended March 31, 2006 when compared to the same period in 2005.

Advertising expense increased $73,040 (255%) for the three months ended March 31, 2006 when compared to the same period in 2005. This increase was primarily due to the Bank’s decision to increase its exposure through the use of several different advertising mediums.

Data processing expense decreased $32,775 (37%) for the three months ended March 31, 2006 when compared to the same period in 2005. This decrease was primarily due to the Bank’s decision to terminate its relationship with a third-party vendor that provided data processing services during 2005.
 
Provision for Income Taxes
 
There was an increase of $266,139 (38%) in the provision for income taxes for the three months ended March 31, 2006 as compared to the same period in 2005. This increase was due to the increase of $615,690 in before tax income for the three months ended March 31, 2006, compared to the same period in 2005.
 
Nonperforming Assets

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios. The Bank’s allowance for loan losses as of March 31, 2006, was $5,618,742 or 1.2% of average net loans receivable. Total assets classified as substandard, doubtful or loss as of March 31, 2006, were $6,645,178 or 1.4% of total assets. Management considered nonperforming and total classified assets in evaluating the adequacy of the Bank’s allowance for loan losses.

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

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


17
Liquidity and Capital Resources

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

The Bank uses its liquidity resources principally to satisfy its ongoing commitments which include funding loan commitments, funding maturing certificates of deposit as well as deposit withdrawals, maintaining liquidity, purchasing investments, and meeting operating expenses. As of March 31, 2006, the Bank had approximately $2,780,000 in commitments to originate mortgage and commercial loans. These commitments will be funded through existing cash balances, cash flow from operations and, if required, FHLB advances. Management believes that anticipated cash flows and deposit growth will be adequate to meet the Bank’s liquidity needs.


Asset/Liability Management

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

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

The Bank is also managing interest rate risk by the origination of construction loans. As of March 31, 2006, such loans represented 17% of the net loans receivable and continue to account for a larger portion of the Bank’s existing portfolio. In general, these loans have higher yields, shorter maturities and greater interest rate sensitivity than other real estate loans.

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. As of December 31, 2005, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $130,252,633 or 41% of its total deposits. As of March 31, 2006, these accounts totaled $116,403,154 or 37% of the Bank’s total deposits. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.

18
Interest Rate Sensitivity Analysis

The following table sets forth as of March 31, 2006 management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100, 200, and 300 basis point (“bp”) instantaneous and permanent increases and 100, 200 and 300 basis point instantaneous and permanent decreases in market interest rates. Dollar amounts are expressed in thousands.

 
Estimated Net Portfolio Value
 
NPV as % of PV of Assets
 
in Rates
 
$ Amount
 
$ Change
 
% Change
 
NPV Ratio
 
Change
 
+300
  
$
43,691
  
$
608
    
1
%
  
9.32
%
  
0.32
%
+200
    
44,189
   
1,106
   
3
%
  
9.35
%
  
0.35
%
+100
    
44,095
   
1,012
   
2
%
  
9.33
%
  
0.33
%
NC
    
43,083
   
-
   
-
   
9.00
%
  
-
 
-100
    
41,122
   
(1,961
)
  
-5
%
  
8.55
%
  
-0.45
%
-200
    
38,411
   
(4,672
)
  
-11
%
  
7.95
%
  
-1.05
%
-300
    
31,819
   
(11,264
)
  
-26
%
  
6.55
%
  
-2.45
%

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

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

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

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

19
PART II

None.

        None


The following table summarizes the repurchase activity of the Company’s common stock during the Company’s first quarter ended March 31, 2006.

ISSUER PURCHASES OF EQUITY SECURITIES

Period
  
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share
  
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
  
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
  
January 1, 2006 to January 31, 2006
    
3,881
   
28.23
   
3,881
   
34,662
 
February 1, 2006 to February 28, 2006
    
9,340
   
28.35
   
9,340
   
25,322
 
March 1, 2006 to March 31, 2006
    
14,222
   
28.99
   
14,222
   
11,100
 
Total
    
27,443
   
0.26
   
27,443
     


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

Not applicable.

None.

None.

 
11. Statement re computation of per share earnings (set forth in “Note 4: Earnings Per Share” of the Notes to Condensed Consolidated Financial Statements (unaudited))
31(i).1 Certification of the Principal Executive Officer pursuant to Rule 13a -14(a) of the Exchange Act
31(i).2 Certification of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the Exchange Act
32.1  CEO certification pursuant to Rule 13a - 14(b) and 18 U.S.C. Section 1350, as adopted pursuant to   Section 906 of the Sarbanes-Oxley Act of 2002
32.2  CFO certification pursuant to Rule 13a - 14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
20

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

 

Signature and Title Date

/s/ Shaun A. Burke     May 12, 2006  
Shaun A. Burke
President and Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)



/s/ Bruce Winston   May 12, 2006  
Bruce Winston  
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

21