Exhibit 13




Guaranty Federal
Bancshares, Inc.


2008
Annual Report








Investor
      InformationContents
                      
                      iPresident’s Message
                      
                      1Investor
      Information
                      
                      2         
      Common Stock Prices & Dividends
                      
                      4Selected
      Consolidated Financial and Other Data
                      
                      6Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      
                      21Consolidated Financial Statements
                      
                      51Report of Independent Registered Public Accounting
Firm
                      
                      
                      Directors
      and Officers
                    
                    ANNUAL MEETING OF
      STOCKHOLDERS:
                      The
      Annual Meeting of Stockholders of the Company will be held Wednesday, May
      27, 2009 at 6:00 p.m., local time, at the
      Guaranty Bank Operations Center, 1414 W. Elfindale,
      Springfield, Missouri.
                      
                      ANNUAL REPORT ON FORM
      10-K:
                      Copies
      of the Company’s Annual Report on Form 10-K, including the financial
      statements, filed with the Securities and Exchange Commission are
      available without charge upon written request to:
                      Lorene
      Thomas, Secretary
                      Guaranty
      Federal Bancshares, Inc.,
                      1341
      W. Battlefield St., Springfield, MO 65807-4181
                      
                      TRANSFER
      AGENT:
                      Registrar
      and Transfer Company
                      10
      Commerce Drive
                      Cranford,
      NJ 07016
                      
                      STOCK TRADING
      INFORMATION:
                      Over-the
      Counter Symbol: GFED
                      
                      SPECIAL LEGAL
      COUNSEL:
                      Husch
      Blackwell Sanders LLP
                      901
      St. Louis St., Suite 1900
                      Springfield,
      MO 65806Bank
      History Fact 1:
                      1913
      - St. Louis Savings moves to Springfield, MO and changes its name to
      Guaranty Federal Savings and Loan Association.
                    
                    INDEPENDENT
      REGISTERED PUBLIC ACCOUNTING FIRM:
                      BKD,
      LLP
                      901
      St. Louis St.
                      PO
      Box 1190
                      Springfield,
      MO 65801-1190
                      
                      STOCKHOLDER
      AND FINANCIAL INFORMATION:
                      Carter
      Peters,
                      Executive
      Vice President, Chief Financial Officer
                      417-520-0235


1




Guaranty
Federal Bancshares, Inc.


2008
Annual Report








Common
      Stock Prices
                    &
      DividendsBank
      History Fact 2:
                        
                        1935
      – Converts to a Federal charter and the name is changed to Guaranty
      Federal Savings and Loan Association.
                        
                        
                        Bank
      History Fact 3:
                        1979
      – Guaranty Federal opens first branch office.
                          1987
      – Guaranty Federal opens second branch office.
                        
                        
                        Bank
      History Fact 4:
                        1995
      – Reorganizes and issues stock in connection with formation of MHC. Forms
      federally chartered stock savings bank.
                  
                  The
      common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is
      traded in the over-the-counter market and quoted on the NASDAQ National
      Market under the symbol “GFED”.  As of March 18, 2009, there
      were approximately 1402 stockholders.  At that date the Company
      had 6,779,800 shares of common stock issued and 2,617,140 shares of common
      stock outstanding.
                    
                    During
      the year ended December 31, 2008, the Company paid dividends of (i) $0.18
      per share on April 18, 2008, to stockholders of record as of April 7,
      2008, (ii) $0.18 per share on July 18, 2008 to stockholders of record as
      of July 7, 2008.  The Company did not declare a cash dividend in
      the third and fourth quarters of the year.  During the year
      ended December 31, 2007, the Company paid dividends of (i) $0.17 per share
      on April 13, 2007, to stockholders of record as of April 3, 2007, (ii)
      $0.17 per share on July 13, 2007 to stockholders of record as of July 2,
      2007, and (iii) $0.18 per share on October 15, 2007, to stockholders of
      record as of October 1, 2007, and also declared a cash dividend of $0.18
      per share on December 21, 2007, which was paid on January 18, 2008, to
      stockholders of record on January 4, 2008. Any future dividends, if any,
      will be at the discretion of the Company’s Board of Directors and will
      depend on, among other things, the Company’s results of operations, cash
      requirements and surplus, financial condition and other factors that the
      Company’s Board of Directors may consider relevant.
                    
                    The
      table below reflects the range of common stock high and low closing prices
      per the NASDAQ Stock Market by quarter for the years ended December 31,
      2008 and 2007.





Year ended
                
                
                Year endedDecember 31, 2008
                
                
                December 31, 2007High
                
                
                Low
                
                
                High
                
                
                LowQuarter
      ended:March
      31
                
                $
                28.78
                
                
                
                24.94
                
                
                
                29.85
                
                
                
                28.43June
      30
                
                
                26.43
                
                
                
                20.25
                
                
                
                30.21
                
                
                
                28.75September
      30
                
                
                19.75
                
                
                
                11.40
                
                
                
                30.42
                
                
                
                29.00December
      31
                
                
                11.50
                
                
                
                4.25
                
                
                
                30.25
                
                
                
                27.05


2


Guaranty
Federal Bancshares, Inc.


2008
Annual Report





Bank
      History Fact 5:
                2003
      – The bank applies for State Charter and changes name to Guaranty
      Bank.
              
              Set
      forth below is a stock performance graph comparing the cumulative total
      shareholder return on the Common Stock with (a) the cumulative total
      stockholder return on stocks included in The Nasdaq – Total U.S. Index and
      (b) the cumulative total stockholder return on stocks included in The
      Nasdaq Bank Index.  All three investment comparisons assume the
      investment of $100 as of the close of business on December 31, 2003 and
      the hypothetical value of that investment as of the Company’s fiscal years
      ended December 31, 2004, 2005, 2006, 2007, and 2008, assuming that all
      dividends were reinvested.  The graph reflects the historical
      performance of the Common Stock, and, as a result, may not be indicative
      of possible future performance of the Common Stock.  The data
      used to compile this graph was obtained from NASDAQ.

















Period
      EndingIndex
                              
                              12/31/03
                              
                              
                              12/31/04
                              
                              
                              12/31/05
                              
                              
                              12/31/06
                              
                              
                              12/31/07
                              
                              
                              12/31/08Guaranty
      Federal Bancshares, Inc.
                              
                              
                              100.00
                              
                              
                              
                              129.07
                              
                              
                              
                              153.76
                              
                              
                              
                              161.97
                              
                              
                              
                              165.84
                              
                              
                              
                              31.38NASDAQ
      – Total US
                              
                              
                              100.00
                              
                              
                              
                              109.41
                              
                              
                              
                              112.42
                              
                              
                              
                              122.52
                              
                              
                              
                              131.31
                              
                              
                              
                              64.66NASDAQ
      Bank Index
                              
                              
                              100.00
                              
                              
                              
                              113.91
                              
                              
                              
                              112.12
                              
                              
                              
                              123.79
                              
                              
                              
                              101.31
                              
                              
                              
                              73.89


3




Guaranty
Federal Bancshares, Inc.


Selected
Consolidated Financial and Other Data







The
following tables include certain information concerning the financial position
and results of operations of Guaranty Federal Bancshares, Inc. (including
consolidated data from operations of subsidiaries) as of the dates
indicated.  Dollar amounts are expressed in thousands except per share
data.




Summary
      Balance Sheet
                                        
                                        As
      of December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004ASSETSCash
      and cash equivalents
                                        
                                        $
                                        15,097
                                        
                                        
                                        $
                                        12,046
                                        
                                        
                                        $
                                        14,881
                                        
                                        
                                        $
                                        20,506
                                        
                                        
                                        $
                                        15,896Investment
      securities
                                        
                                        
                                        66,062
                                        
                                        
                                        
                                        15,385
                                        
                                        
                                        
                                        8,669
                                        
                                        
                                        
                                        7,702
                                        
                                        
                                        
                                        21,553Loans
      receivable, net
                                        
                                        
                                        558,327
                                        
                                        
                                        
                                        516,242
                                        
                                        
                                        
                                        480,269
                                        
                                        
                                        
                                        435,528
                                        
                                        
                                        
                                        392,333Accrued
      interest receivable
                                        
                                        
                                        2,632
                                        
                                        
                                        
                                        3,323
                                        
                                        
                                        
                                        2,910
                                        
                                        
                                        
                                        2,089
                                        
                                        
                                        
                                        1,570Prepaids
      and other assets
                                        
                                        
                                        16,573
                                        
                                        
                                        
                                        8,612
                                        
                                        
                                        
                                        10,075
                                        
                                        
                                        
                                        7,696
                                        
                                        
                                        
                                        1,977Foreclosed
      assets
                                        
                                        
                                        5,655
                                        
                                        
                                        
                                        727
                                        
                                        
                                        
                                        173
                                        
                                        
                                        
                                        27
                                        
                                        
                                        
                                        78Premises
      and equipment
                                        
                                        
                                        11,324
                                        
                                        
                                        
                                        9,442
                                        
                                        
                                        
                                        7,868
                                        
                                        
                                        
                                        7,453
                                        
                                        
                                        
                                        7,189$
                                        675,670
                                        
                                        
                                        $
                                        565,778
                                        
                                        
                                        $
                                        524,845
                                        
                                        
                                        $
                                        481,001
                                        
                                        
                                        $
                                        440,596LIABILITIESDeposits
                                        
                                        $
                                        447,079
                                        
                                        
                                        $
                                        418,191
                                        
                                        
                                        $
                                        352,230
                                        
                                        
                                        $
                                        320,059
                                        
                                        
                                        $
                                        296,388Federal
      Home Loan Bank advances
                                        
                                        
                                        132,436
                                        
                                        
                                        
                                        76,086
                                        
                                        
                                        
                                        108,000
                                        
                                        
                                        
                                        100,000
                                        
                                        
                                        
                                        100,000Securities
      sold under agreements to repurchase
                                        
                                        
                                        39,750
                                        
                                        
                                        
                                        9,849
                                        
                                        
                                        
                                        1,703
                                        
                                        
                                        
                                        1,594
                                        
                                        
                                        
                                        1,264Subordinated
      debentures
                                        
                                        
                                        15,465
                                        
                                        
                                        
                                        15,465
                                        
                                        
                                        
                                        15,465
                                        
                                        
                                        
                                        15,465
                                        
                                        
                                        
                                        -Other
      liabilities
                                        
                                        
                                        3,627
                                        
                                        
                                        
                                        3,500
                                        
                                        
                                        
                                        2,548
                                        
                                        
                                        
                                        1,791
                                        
                                        
                                        
                                        2,171638,357
                                        
                                        
                                        
                                        523,091
                                        
                                        
                                        
                                        479,946
                                        
                                        
                                        
                                        438,909
                                        
                                        
                                        
                                        399,823STOCKHOLDERS'
      EQUITY
                                        
                                        
                                        37,313
                                        
                                        
                                        
                                        42,687
                                        
                                        
                                        
                                        44,899
                                        
                                        
                                        
                                        42,092
                                        
                                        
                                        
                                        40,773$
                                        675,670
                                        
                                        
                                        $
                                        565,778
                                        
                                        
                                        $
                                        524,845
                                        
                                        
                                        $
                                        481,001
                                        
                                        
                                        $
                                        440,596Supplemental
      Data
                                        
                                        As
      of December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004Number
      of full-service offices
                                        
                                        
                                        10
                                        
                                        
                                        
                                        8
                                        
                                        
                                        
                                        8
                                        
                                        
                                        
                                        7
                                        
                                        
                                        
                                        9Cash
      dividends per share
                                        
                                        $
                                        0.36
                                        
                                        
                                        $
                                        0.70
                                        
                                        
                                        $
                                        0.67
                                        
                                        
                                        $
                                        0.65
                                        
                                        
                                        $
                                        0.63


4




Guaranty
Federal Bancshares, Inc.


Selected
Consolidated Financial and Other Data




Summary
      Statement of Income
                                      
                                      Years
      ended December 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005
                                      
                                      
                                      2004Interest
      income
                                      
                                      $
                                      36,363
                                      
                                      
                                      $
                                      37,972
                                      
                                      
                                      $
                                      35,204
                                      
                                      
                                      $
                                      27,413
                                      
                                      
                                      $
                                      20,539Interest
      expense
                                      
                                      
                                      19,524
                                      
                                      
                                      
                                      20,519
                                      
                                      
                                      
                                      17,386
                                      
                                      
                                      
                                      11,860
                                      
                                      
                                      
                                      8,446Net
      interest income
                                      
                                      
                                      16,839
                                      
                                      
                                      
                                      17,453
                                      
                                      
                                      
                                      17,818
                                      
                                      
                                      
                                      15,553
                                      
                                      
                                      
                                      12,093Provision
      for loan losses
                                      
                                      
                                      14,744
                                      
                                      
                                      
                                      840
                                      
                                      
                                      
                                      750
                                      
                                      
                                      
                                      945
                                      
                                      
                                      
                                      864Net
      interest income after provision for loan losses
                                      
                                      
                                      2,095
                                      
                                      
                                      
                                      16,613
                                      
                                      
                                      
                                      17,068
                                      
                                      
                                      
                                      14,608
                                      
                                      
                                      
                                      11,229Noninterest
      income
                                      
                                      
                                      2,316
                                      
                                      
                                      
                                      4,729
                                      
                                      
                                      
                                      3,660
                                      
                                      
                                      
                                      3,468
                                      
                                      
                                      
                                      3,616Noninterest
      expense
                                      
                                      
                                      12,760
                                      
                                      
                                      
                                      11,842
                                      
                                      
                                      
                                      10,177
                                      
                                      
                                      
                                      8,670
                                      
                                      
                                      
                                      8,248Income
      (loss) before income taxes
                                      
                                      
                                      (8,349
                                      )
                                      
                                      
                                      9,500
                                      
                                      
                                      
                                      10,551
                                      
                                      
                                      
                                      9,406
                                      
                                      
                                      
                                      6,597Provision
      (credit) for income taxes
                                      
                                      
                                      (2,989
                                      )
                                      
                                      
                                      3,400
                                      
                                      
                                      
                                      4,042
                                      
                                      
                                      
                                      3,507
                                      
                                      
                                      
                                      2,313Net
      income (loss)
                                      
                                      $
                                      (5,360
                                      )
                                      
                                      $
                                      6,100
                                      
                                      
                                      $
                                      6,509
                                      
                                      
                                      $
                                      5,899
                                      
                                      
                                      $
                                      4,284Basic
                                      
                                      $
                                      (2.06
                                      )
                                      
                                      $
                                      2.25
                                      
                                      
                                      $
                                      2.34
                                      
                                      
                                      $
                                      2.12
                                      
                                      
                                      $
                                      1.53Diluted
                                      
                                      $
                                      (2.06
                                      )
                                      
                                      $
                                      2.19
                                      
                                      
                                      $
                                      2.25
                                      
                                      
                                      $
                                      2.03
                                      
                                      
                                      $
                                      1.47


5




Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations






GENERAL





Guaranty
Federal Bancshares, Inc. (the “Company”) is a Delaware corporation organized on
December 30, 1997 for the purpose of becoming the holding company of Guaranty
Federal Savings Bank, a federal savings bank (the “Bank”). The Bank is a
wholly-owned subsidiary of the Company.





In April
1995, Guaranty Federal Savings & Loan Association reorganized from a
federally chartered mutual savings and loan association into a mutual holding
company, Guaranty Federal Bancshares, M. H. C. (the
“MHC”).  Concurrent with the reorganization, the Bank was
chartered.  In December 1997, the Company completed the conversion and
reorganization of the Bank and the former MHC by selling common stock to
depositors of the Bank and a benefit plan of the Bank.  In addition,
all shares of common stock of the Bank held by public stockholders were
exchanged for shares of common stock of the Company.





On June
27, 2003, the Bank converted to a state-chartered trust company with banking
powers in Missouri, and the Company became a one-bank holding
company.  The name of the Bank was changed from Guaranty Federal
Savings Bank to Guaranty Bank.





The
primary activity of the Company is to oversee its investment in the
Bank.  The Company engages in few other activities, and the Company
has no significant assets other than its investment in the Bank.  For
this reason, unless otherwise specified, references to the Company include the
operations of the Bank.  The Company’s principal business consists of
attracting deposits from the general public and using such deposits to originate
multi-family, construction and commercial real estate loans, mortgage loans
secured by one- to four-family residences, and consumer and business
loans.  The Company also uses these funds to purchase mortgage-backed
securities, US government and agency obligations, and other permissible
securities.  When cash outflows exceed inflows, the Company uses
borrowings and brokered deposits as additional financing sources.





The
Company derives revenues principally from interest earned on loans and
investments and, to a lesser extent, from fees charged for
services.  General economic conditions and policies of the financial
institution regulatory agencies, including the Missouri Division of Finance and
the Federal Deposit Insurance Corporation (“FDIC”) significantly influence the
Company’s operations.  Interest rates on competing investments and
general market interest rates influence the Company’s cost of
funds.  Lending activities are affected by the interest rates at which
such financing may be offered.  The Company intends to focus on
commercial, one- to four-family residential and consumer lending throughout
southwestern Missouri.





The
Company has two wholly-owned subsidiaries other than the Bank, its principal
subsidiary: (i) Guaranty Statutory Trust I, a Delaware statutory trust (“Trust
I”); and (ii) Guaranty Statutory Trust II, a Delaware statutory
trust.  These Trusts were formed in December 2005 for the exclusive
purpose of issuing trust preferred securities to acquire junior subordinated
debentures issued by the Company.  The Company’s banking operation
conducted through the Bank is the Company’s only reportable
segment.  See also the discussion contained in the section captioned
“Segment Information” in Note 1 of the Notes to Consolidated Financial
Statements in this report.





The
discussion set forth below, and in any other portion of this report, may contain
forward-looking statements.  Such statements are based upon the
information currently available to management of the Company and management’s
perception thereof as of the date of this report.  When used in this
document, 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 of the Company set forth
in Item 1A. of the Company’s Form 10-K.





6





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








FINANCIAL
CONDITION





From
December 31, 2007 to December 31, 2008, the Company’s total assets increased
$109,892,413 (19%) to $675,670,393, liabilities increased $115,266,171 (22%) to
$638,357,491, and stockholders' equity decreased $5,373,758 (13%) to
$37,312,902.  The ratio of stockholders’ equity to total assets
decreased to 5.5% during this period, compared to 7.5% as of December 31,
2007.





From
December 31, 2007 to December 31, 2008, securities available-for-sale increased
$50,775,401 (345%).  The increase is primarily due to purchases of
$55,463,436, offset by maturities and principal repayments of
$4,572,188.  Approximately $35 million of the purchases were due to a
structured leveraged transaction completed early in fiscal 2008.  The
Company currently owns 26,600 shares of the Federal Home Loan Mortgage
Corporation (“FHLMC”) stock with an amortized cost of $26,057 in the securities
available-for-sale category.  As of December 31, 2008, the gross unrealized
loss on the stock is $6,639, a decrease of $886,844 from the gross unrealized
gain of $880,205 at December 31, 2007.  This decrease is due to a
significant financial downturn in FHLMC resulting in a sharp decline in its
stock price.




From
December 31, 2007 to December 31, 2008, securities held-to-maturity decreased
$98,310 (15%) to $556,465 due to repayments received during the year. Stock of
the Federal Home Loan Bank of Des Moines (“FHLB”) was increased by $2,715,400
(68%) to $6,730,100 due to stock necessary to meet FHLB borrowing
requirements.  The Bank is required to own stock in the FHLB equal to 0.12%
of assets plus 4.45% of advances.





From
December 31, 2007 to December 31, 2008, net loans receivable increased by
$42,293,208 (8%) to $556,393,243.  During this period, permanent loans
secured by both owner and non-owner occupied one to four unit residential real
estate increased $24,735,637 (30%), multi-family permanent loans decreased
$10,190,403 (24%), construction loans decreased $4,651,643 (5%), permanent loans
secured by commercial real estate increased $28,223,452 (16%), commercial loans
increased $14,442,453 (14%), and installment loans increased $447,781
(2%).  During this period the Company continued to increase its
emphasis on commercial lending, while selling the majority of conforming single
family loan production on the secondary market.  Loans sold on the
secondary market are sold servicing released, whereby the third party who
purchases the loan provides the servicing.





From
December 31, 2007 to December 31, 2008, loans past due 90 days or more increased
$812,111 to $7,027,644 (1.26% of net loans) primarily due to the decline in the
economy.  As of December 31, 2008, management identified loans
totaling $39,888,665 as impaired with a related allowance for loan losses of
$9,135,248.    Impaired loans increased by $32,634,331
during 2008, compared to the balance of $7,254,334 at December 31,
2007.  The Bank recognizes interest income on non-accrual loans as
payments are received.





From
December 31, 2007 to December 31, 2008, the allowance for loan losses increased
$10,765,569 to $16,728,492.  In addition to the provision for loan
loss of $14,744,079 recorded by the Company during the year ended December 31,
2008, loan charge-offs exceeded recoveries by $3,978,510 for the twelve months
ended December 31, 2008. The allowance for loan losses as of December 31, 2008
and December 31, 2007 was 2.92% and 1.15% of gross loans outstanding (excluding
mortgage loans held for sale), respectively.  As of December 31, 2008,
the allowance for loan losses was 42% of impaired loans versus 82% as of
December 31, 2007.   Management believes the allowance for loan
losses is at a level to be sufficient in providing for potential loan losses in
the Bank’s existing loan portfolio.





As of
December 31, 2008, foreclosed assets held for sale consisted primarily of real
estate related to single family residences and lots totaling $1.6 million and
one commercial development in Northwest Arkansas that totals $4.0
million.





From
December 31, 2007 to December 31, 2008, premises and equipment increased
$1,881,113 (20%) to $11,323,463 due primarily to building construction and
purchases for two new branches opened in 2008 and the site of a future
operations center to be opened in 2009.





From
December 31, 2007 to December 31, 2008, deposits increased $28,888,185 (7%) to
$447,079,469.  During this period, transaction accounts decreased by
$3,267,786 (2%) to 31% of total deposits and certificates of deposit increased
by $32,155,971 (12%) to $308,574,547.  Included in the certificates of
deposit total is $39,869,000 in deposits placed by brokers, an increase of
$24,995,000 from December 31, 2007.





From
December 31, 2007 to December 31, 2008, the Company’s borrowings from the
Federal Home Loan Bank (“FHLB”) increased $56,350,000 to $132,436,000, primarily
to fund asset growth during the period.





7





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








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





Stockholders’
equity (including unrealized appreciation on securities available-for-sale, net
of tax) decreased $5,373,758 (13%) to $37,312,902 as of December 31,
2008.  The Company incurred a net loss for the year ended December 31,
2008 of $5,359,711.  The Company repurchased 60,401 shares as treasury
stock at a cost of $1,465,150, at an average price of $24.26 per
share.  An increase in unrealized appreciation on securities
available-for-sale and interest rate swaps, net of tax, increased stockholders’
equity by $1,184,091.  Stockholders’ equity also increased as a result
of exercises of stock options to purchase the Company’s Common Stock and the
release of shares of the Company’s Common Stock held by the Bank sponsored
Employee Stock Ownership Plan.  On a per share basis, stockholders’
equity decreased $2.09 from $16.37 as of December 31, 2007 to $14.28 as of
December 31, 2008.







AVERAGE
BALANCES, INTEREST AND AVERAGE YIELDS





The
following table shows the balances as of December 31, 2008 of various categories
of interest-earning assets and interest-bearing liabilities and the
corresponding yields and costs, and, for the periods indicated: (1) the average
balances of various categories of interest-earning assets and interest-bearing
liabilities, (2) the total interest earned or paid thereon, and (3) the
resulting weighted average yields and costs.  In addition, the table
shows the Company’s rate spreads and net yields.  Average balances are
based on daily balances.  Tax-free income is not material;
accordingly, interest income and related average yields have not been calculated
on a tax equivalent basis.  Average loan balances include non-accrual
loans.  Dollar amounts are expressed in thousands.





8





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








As
      of
                
                
                Year
      Ended
                
                
                Year
      Ended
                
                
                Year
      EndedDecember 31, 2008
                
                
                December 31, 2008
                
                
                December 31, 2007
                
                
                December 31, 2006Balance
                
                
                Yield / Cost
                
                
                Average Balance
                
                
                Interest
                
                
                Yield / Cost
                
                
                Average Balance
                
                
                Interest
                
                
                Yield / Cost
                
                
                Average Balance
                
                
                Interest
                
                
                Yield / CostASSETSInterest-earning:Loans
                
                $
                572,055
                
                
                
                5.41
                %
                
                $
                555,828
                
                
                $
                33,019
                
                
                
                5.94
                %
                
                $
                482,806
                
                
                $
                37,114
                
                
                
                7.69
                %
                
                $
                452,348
                
                
                $
                34,500
                
                
                
                7.63
                %Investment
      securities
                
                
                66,061
                
                
                
                5.20
                %
                
                
                58,727
                
                
                
                3,125
                
                
                
                5.32
                %
                
                
                10,688
                
                
                
                537
                
                
                
                5.02
                %
                
                
                7,261
                
                
                
                451
                
                
                
                6.21
                %Other
      assets
                
                
                18,000
                
                
                
                1.19
                %
                
                
                7,869
                
                
                
                219
                
                
                
                2.78
                %
                
                
                7,372
                
                
                
                321
                
                
                
                4.35
                %
                
                
                9,843
                
                
                
                253
                
                
                
                2.57
                %Total
      interest-earning
                
                
                656,116
                
                
                
                5.27
                %
                
                
                622,424
                
                
                
                36,363
                
                
                
                5.84
                %
                
                
                500,866
                
                
                
                37,972
                
                
                
                7.58
                %
                
                
                469,452
                
                
                
                35,204
                
                
                
                7.50
                %Noninterest-earning
                
                
                19,554
                
                
                
                
                
                
                
                24,092
                
                
                
                
                
                
                
                
                
                
                
                18,730
                
                
                
                
                
                
                
                
                
                
                
                20,914$
                675,670
                
                
                
                
                
                
                $
                646,516
                
                
                
                
                
                
                
                
                
                
                $
                519,596
                
                
                
                
                
                
                
                
                
                
                $
                490,366LIABILITIES
      AND STOCKHOLDERS' EQUITYInterest-bearing:Savings
      accounts
                
                $
                12,253
                
                
                
                0.94
                %
                
                $
                12,980
                
                
                $
                143
                
                
                
                1.10
                %
                
                $
                13,474
                
                
                $
                320
                
                
                
                2.37
                %
                
                $
                14,830
                
                
                $
                365
                
                
                
                2.46
                %Transaction
      accounts
                
                
                95,032
                
                
                
                1.52
                %
                
                
                102,341
                
                
                
                1,806
                
                
                
                1.76
                %
                
                
                100,689
                
                
                
                2,940
                
                
                
                2.92
                %
                
                
                78,238
                
                
                
                1,710
                
                
                
                2.19
                %Certificates
      of deposit
                
                
                308,575
                
                
                
                3.88
                %
                
                
                285,845
                
                
                
                12,270
                
                
                
                4.29
                %
                
                
                246,785
                
                
                
                12,600
                
                
                
                5.11
                %
                
                
                195,772
                
                
                
                8,448
                
                
                
                4.32
                %FHLB
      advances
                
                
                132,436
                
                
                
                2.49
                %
                
                
                119,957
                
                
                
                3,238
                
                
                
                2.70
                %
                
                
                65,575
                
                
                
                3,470
                
                
                
                5.29
                %
                
                
                110,810
                
                
                
                5,722
                
                
                
                5.16
                %Subordinated
      debentures
                
                
                15,465
                
                
                
                6.62
                %
                
                
                15,465
                
                
                
                1,024
                
                
                
                6.62
                %
                
                
                15,465
                
                
                
                1,024
                
                
                
                6.62
                %
                
                
                15,465
                
                
                
                1,028
                
                
                
                6.65
                %Other
      borrowed funds
                
                
                41,185
                
                
                
                2.39
                %
                
                
                38,604
                
                
                
                1,043
                
                
                
                2.70
                %
                
                
                3,691
                
                
                
                165
                
                
                
                4.47
                %
                
                
                3,947
                
                
                
                113
                
                
                
                2.86
                %Total
      interest-bearing
                
                
                604,946
                
                
                
                3.11
                %
                
                
                575,192
                
                
                
                19,524
                
                
                
                3.39
                %
                
                
                445,679
                
                
                
                20,519
                
                
                
                4.60
                %
                
                
                419,062
                
                
                
                17,386
                
                
                
                4.15
                %Noninterest-bearing
                
                
                33,411
                
                
                
                
                
                
                
                30,516
                
                
                
                
                
                
                
                
                
                
                
                28,401
                
                
                
                
                
                
                
                
                
                
                
                26,898Total
      liabilities
                
                
                638,357
                
                
                
                
                
                
                
                605,708
                
                
                
                
                
                
                
                
                
                
                
                474,080
                
                
                
                
                
                
                
                
                
                
                
                445,960Stockholders'
      equity
                
                
                37,313
                
                
                
                
                
                
                
                40,808
                
                
                
                
                
                
                
                
                
                
                
                45,516
                
                
                
                
                
                
                
                
                
                
                
                44,406$
                675,670
                
                
                
                
                
                
                $
                646,516
                
                
                
                
                
                
                
                
                
                
                $
                519,596
                
                
                
                
                
                
                
                
                
                
                $
                490,366Net
      earning balance
                
                $
                51,170
                
                
                
                
                
                
                $
                47,232
                
                
                
                
                
                
                
                
                
                
                $
                55,187
                
                
                
                
                
                
                
                
                
                
                $
                50,390Earning
      yield less costing rate
                
                
                
                
                
                
                2.16
                %
                
                
                
                
                
                
                
                
                
                
                2.45
                %
                
                
                
                
                
                
                
                
                
                
                2.98
                %
                
                
                
                
                
                
                
                
                
                
                3.35
                %Net
      interest income, and net yield spread on interest-earning
      assets
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                16,839
                
                
                
                2.71
                %
                
                
                
                
                
                $
                17,453
                
                
                
                3.48
                %
                
                
                
                
                
                $
                17,818
                
                
                
                3.80
                %Ratio
      of interest-earning assets to interest-bearing liabilities
                
                
                108
                %
                
                
                
                
                
                
                108
                %
                
                
                
                
                
                
                
                
                
                
                112
                %
                
                
                
                
                
                
                
                
                
                
                112
                %


9




Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations






The
following table sets forth information regarding changes in interest income and
interest expense for the periods indicated resulting from changes in average
balances and average rates shown in the previous table.  For each
category of interest-earning assets and interest-bearing liabilities information
is provided with respect to changes attributable to:  (i) changes in
balance (change in balance multiplied by the old rate), (ii) changes in interest
rates (change in rate multiplied by the old balance); and (iii) the combined
effect of changes in balance and interest rates (change in balance multiplied by
change in rate). Dollar amounts are expressed in thousands.





Year ended
                
                
                Year endedDecember 31, 2008 versus December 31,
      2007
                
                
                December 31, 2007 versus December 31,
      2006Average Balance
                
                
                Interest Rate
                
                
                Rate & Balance
                
                
                Total
                
                
                Average Balance
                
                
                Interest Rate
                
                
                Rate & Balance
                
                
                TotalInterest
      income:Loans
                
                $
                5,613
                
                
                $
                (8,433
                )
                
                $
                (1,275
                )
                
                $
                (4,095
                )
                
                $
                2,323
                
                
                $
                273
                
                
                $
                18
                
                
                $
                2,614Investment
      securities
                
                
                2,414
                
                
                
                32
                
                
                
                142
                
                
                
                2,588
                
                
                
                213
                
                
                
                (86
                )
                
                
                (41
                )
                
                
                86Other
      assets
                
                
                22
                
                
                
                (116
                )
                
                
                (8
                )
                
                
                (102
                )
                
                
                (64
                )
                
                
                177
                
                
                
                (44
                )
                
                
                69Net
      change in interest income
                
                
                8,049
                
                
                
                (8,517
                )
                
                
                (1,141
                )
                
                
                (1,609
                )
                
                
                2,472
                
                
                
                364
                
                
                
                (67
                )
                
                
                2,769Interest
      expense:Savings
      accounts
                
                
                (12
                )
                
                
                (171
                )
                
                
                6
                
                
                
                (177
                )
                
                
                (33
                )
                
                
                (13
                )
                
                
                1
                
                
                
                (45
                )Transaction
      accounts
                
                
                48
                
                
                
                (1,163
                )
                
                
                (19
                )
                
                
                (1,134
                )
                
                
                491
                
                
                
                574
                
                
                
                165
                
                
                
                1,230Certificates
      of deposit
                
                
                1,994
                
                
                
                (2,006
                )
                
                
                (318
                )
                
                
                (330
                )
                
                
                2,201
                
                
                
                1,548
                
                
                
                403
                
                
                
                4,152FHLB
      advances
                
                
                2,878
                
                
                
                (1,700
                )
                
                
                (1,410
                )
                
                
                (232
                )
                
                
                (2,336
                )
                
                
                142
                
                
                
                (58
                )
                
                
                (2,252
                )Subordinated
      debentures
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4
                )
                
                
                -
                
                
                
                (4
                )Other
      borrowed funds
                
                
                1,561
                
                
                
                (65
                )
                
                
                (618
                )
                
                
                878
                
                
                
                (7
                )
                
                
                62
                
                
                
                (4
                )
                
                
                51Net
      change in interest expense
                
                
                6,469
                
                
                
                (5,105
                )
                
                
                (2,359
                )
                
                
                (995
                )
                
                
                316
                
                
                
                2,309
                
                
                
                507
                
                
                
                3,132Change
      in net interest income
                
                $
                1,580
                
                
                $
                (3,412
                )
                
                $
                1,218
                
                
                $
                (614
                )
                
                $
                2,156
                
                
                $
                (1,945
                )
                
                $
                (574
                )
                
                $
                (363
                )





RESULTS
OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2008 AND DECEMBER 31,
2007




Average for the Year ShownPrime
                    
                    
                    Ten-Year Treasury
                    
                    
                    One-Year TreasuryDecember
      31, 2008
                    
                    
                    5.09
                    %
                    
                    
                    3.66
                    %
                    
                    
                    1.83
                    %December
      31, 2007
                    
                    
                    8.05
                    %
                    
                    
                    4.63
                    %
                    
                    
                    4.53
                    %Change
      in rates
                    
                    
                    -2.96
                    %
                    
                    
                    -0.97
                    %
                    
                    
                    -2.70
                    %




Interest
Rates.  The Bank charges borrowers and pays depositors interest
rates that are largely a function of the general level of interest
rates.  The above table sets forth the weekly average interest rates
for the 52 weeks ending December 31, 2008 and December 31, 2007 as reported by
the Federal Reserve. The Bank typically indexes its adjustable rate commercial
loans to prime and its adjustable rate mortgage loans to the one-year treasury
rate.  The ten-year treasury rate is a proxy for 30-year fixed rate
home mortgage loans.





Rates
were steady for the first eight months of 2007, but due to several economic
factors, the Federal Reserve Open Market Committee (“FOMC”) began decreasing the
discount rate at its September 2007 meeting and continued for each meeting
thereafter in 2007.  The FOMC continued its aggressive easing of rates
in the first quarter of 2008 and then again in the fourth quarter.  As
of year-end 2008 the prime rate was 3.25%.





10





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








Interest
Income.  Total interest income decreased $1,609,148
(4%).  The average balance of interest-earning assets increased
$121,558,000 (24%) while the yield on average interest earning assets decreased
174 basis points to 5.84%.





Interest
on loans decreased $4,094,632 (11%) and the average loan receivable balance
increased $73,022,000 (15%) while the average yield decreased 175 basis points
to 5.94%.





Interest
Expense.  Total interest expense decreased $995,079 (5%) as the
average balance of interest-bearing liabilities increased $129,513,000 (29%)
while the average cost of interest-bearing liabilities decreased 121 basis
points to 3.39%.





Interest
expense on deposits decreased $1,641,062 (10%) as the average balance of
interest bearing deposits increased $40,218,000 (11%) and the average interest
rate paid to depositors decreased 88 basis points to 3.52%.





The
average balance of advances increased $54,382,000 (83%) and the average cost of
those advances decreased 259 basis points to 2.70%.  As a result,
interest expense on these advances decreased $232,062 (7%).  As of
December 31, 2008 FHLB advances were 20% of total assets, compared to 13% of
total assets as of December 31, 2007.





Net Interest
Income.  The Company’s net interest income decreased $614,069
(4%).  During the year ended December 31, 2008, the average balance of
interest-earning assets exceeded the average balance of interest-bearing
liabilities by $47,232,000, resulting in a decrease in the average net earning
balance of $7,955,000 (14%).    In addition, the Company’s
spread between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities decreased by 53 basis points from 2.98% to
2.45%.





Provision for Loan
Losses.  Provisions for loan losses are charged or credited to
earnings to bring the total allowance for loan losses to a level considered
adequate by the Company to provide for potential loan losses in the existing
loan portfolio.  When making its assessment, the Company considers
prior loss experience, volume and type of lending, local banking trends and past
due loans in the Company’s loan portfolio.  In addition, the Company
considers general economic conditions and other factors related to
collectibility of the Company’s loan portfolio.





During
the year ended December 31, 2008, the Company experienced loan charge-offs, in
excess of recoveries, of $3,978,510 and, based on a review as discussed above,
elected to record a provision for loan loss of $14,744,079 to increase the
allowance for loan losses to $16,728,492 as of December 31, 2008.  The
provision for loan losses recorded by the Company during year ended December 31,
2007 was $840,000.  The increase in the provision for loan losses was
due primarily to the significant increase in impaired and nonperforming loans
during 2008.  Management of the Company anticipates the need to
continue increasing the loan loss allowance in the future through charges to
provision for loan losses based on potential increases in problem credits, any
growth in its loan portfolio or other circumstances.





Non-Interest
Income.  Non-interest income decreased $2,412,416
(51%).  The gain on sale of loans of $875,010 for 2008, compared to
$1,177,017 for 2007, was the result of mortgage banking activities related to
the sale of single-family conforming residential loans in the secondary
market.  The Bank attempts to minimize its risk of price changes by
committing to sell loans while the loans are in the origination
process.  The loss on investments for the year ended December 31, 2008
was $563,615, compared to a gain of $618,363 for the year ended December 31,
2007.  The losses in fiscal 2008 were attributable to other-than-temporary
impairment charges on its equity securities associated with companies operating
in the financial sector.  The gains recognized in 2007 were solely due
to the sale of shares in FHLMC stock.  The Company suspended its sale
of its shares in FHLMC stock in the fourth quarter of 2007 due to its
significant financial downturn and a sharp decline in the FHLMC stock price.
Deposit service charges decreased $187,950 (8%) due primarily to declines in
overdraft charges.  Loss on foreclosed assets increased $741,922
(1,770%) primarily due to the difficult market conditions causing sharp declines
in real estate values on foreclosed properties held or sold by the
Company.





Non-Interest
Expense.  Non-interest expense increased $917,659
(8%).  This increase was primarily due to increases in salaries and
employee benefits of $443,036 (6%) and FDIC deposit insurance premiums of
$342,441 (805%).





11





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








The
increase in compensation was due to additions in several staff positions in the
areas of commercial lending, corporate services, human resources and internal
audit with the majority of these new hires beginning in fiscal
2008 or late in fiscal 2007.  The staff increased from 150 full-time
equivalent employees as of December 31, 2007 to 163 full-time equivalent
employees as of December 31, 2008.





Increases
in FDIC premiums were due to insurance assessments that began in
2007.  Because of credits available to the Company for 2007, these
increased costs were not owed by the Company until the first quarter of
2008.





Income
Taxes.  The credit for income taxes is a direct result of the
decrease in the Company’s taxable income for the year ended December 31, 2008 as
compared to the year ended December 31, 2007.





Cash Dividends
Paid.  The Company paid dividends of $0.18 per share on April
18, 2008, to stockholders of record as of April 7, 2008, and $0.18 per share on
July 18, 2008 to stockholders of record as of July 7, 2008.





RESULTS
OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2007 AND DECEMBER 31,
2006




Average for the Year ShownPrime
                      
                      
                      Ten-Year Treasury
                      
                      
                      One-Year TreasuryDecember
      31, 2007
                      
                      
                      8.05
                      %
                      
                      
                      4.63
                      %
                      
                      
                      4.53
                      %December
      31, 2006
                      
                      
                      7.96
                      %
                      
                      
                      4.80
                      %
                      
                      
                      4.94
                      %Change
      in rates
                      
                      
                      0.09
                      %
                      
                      
                      -0.17
                      %
                      
                      
                      -0.41
                      %




Interest
Rates.  The Bank charges borrowers and pays depositors interest
rates that are largely a function of the general level of interest
rates.  The above table sets forth the weekly average interest rates
for the 52 weeks ending December 31, 2007 and December 31, 2006 as reported by
the Federal Reserve. The Bank typically indexes its adjustable rate commercial
loans to prime and its adjustable rate mortgage loans to the one-year treasury
rate.  The ten-year treasury rate is a proxy for 30-year fixed rate
home mortgage loans.





Rates
trended upward during 2006 as the FOMC continued its increase in the discount
rates by 100 basis points from January through June.  As of year-end
2006 the prime rate was 8.25%.  Rates were steady for the first eight
months of 2007, but due to several economic factors, the FOMC began decreasing
the discount rate at its September 2007 meeting and continued for each meeting
thereafter.  As of year-end 2007 the prime rate was
7.25%.





Interest
Income.  Total interest income increased $2,768,092 (8%) as the
average balance of interest-earning assets increased $31,414,000
(7%).  In addition, the yield on average interest earning assets
increased 8 basis points to 7.58%.





Interest
on loans increased $2,613,520 (8%) and the average loan receivable balance
increased $30,458,000 (7%) while the average yield increased 6 basis points to
7.69%.





Interest
Expense.  Total interest expense increased $3,132,710 (18%) as
the average balance of interest-bearing liabilities increased $26,617,000
(6%).  In addition, the average cost of interest-bearing liabilities
increased 45 basis points to 4.60%.





Interest
expense on deposits increased $5,337,591 (51%) as the average balance of
interest bearing deposits increased $72,108,000 (25%) and the average interest
rate paid to depositors increased 76 basis points to 4.40%.





The
Company’s borrowings from the FHLB decreased to $76,086,000, which remains in
compliance with the FHLB limitation of advances to 35% of assets.  The
average balance of advances decreased $45,235,000 (41%) and the average cost of
those advances increased 13 basis points to 5.29%.  As a result,
interest expense on these advances decreased $2,252,422 (39%).  As of
December 31, 2007 FHLB advances were 13% of total assets, compared to 21% of
total assets as of December 31, 2006.





12





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








Net Interest
Income.  The Company’s net interest income decreased $364,618
(2%).  During the year ended December 31, 2007, the average balance of
interest-earning assets exceeded the average balance of interest-bearing
liabilities by $55,187,000, resulting in an increase in the average net earning
balance of $4,797,000 (10%).    In addition, the Company’s
spread between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities decreased by 37 basis points from 3.35% to
2.98%.





Provision for Loan
Losses.  Provisions for loan losses are charged or credited to
earnings to bring the total allowance for loan losses to a level considered
adequate by the Company to provide for potential loan losses in the existing
loan portfolio.  When making its assessment, the Company considers
prior loss experience, volume and type of lending, local banking trends and past
due loans in the Company’s loan portfolio.  In addition, the Company
considers general economic conditions and other factors related to
collectability of the Company’s loan portfolio.





During
the year ended December 31, 2007, the Company experienced loan charge-offs, in
excess of recoveries, of $660,554 and, based on a review as discussed above,
elected to record a provision for loan loss of $840,000 to increase the
allowance for loan losses to $5,962,923 as of December 31, 2007.  The
provision for loan losses recorded by the Company during year ended December 31,
2006 was $750,000.  Management of the Company anticipates the need to
continue increasing the loan loss allowance in the future through charges to
provision for loan losses based on the anticipated growth in its loan
portfolio.





Non-Interest
Income.  Non-interest income increased $1,068,849
(29%).  The gain on sale of loans of $1,177,017 for 2007, compared to
$692,276 for 2006, was the result of mortgage banking activities related to the
sale of single-family conforming residential loans in the secondary
market.  The Bank attempts to minimize its risk of price changes by
committing to sell loans while the loans are in the origination
process.  The gain on sale of investments for the year ended December
31, 2007 was $618,363, compared to $750,869 for the year ended December 31,
2006.  These gains were attributed to the sale of 10,000 shares of FHLMC
stock in 2007 and the sale of 12,000 shares in 2006.  Deposit service
charges increased $813,917 (58%) due to increases in insufficient funds and
overdraft charges primarily due to the Bank’s overdraft privilege program that
was implemented in the fourth quarter of 2006.





Non-Interest
Expense.  Non-interest expense increased $1,665,457
(16%).  This increase was primarily due to increases in salaries and
employee benefits of $962,487 (16%), occupancy expense of $93,633 (6%), data
processing of $111,490 (40%) and other expense of $498,249 (27%).





The
increase in compensation was due to several factors, including additions in
executive and staff positions, pay increases to existing employees, increases in
employee benefit costs and an increase in the number of
employees.  The staff increased from 146 full-time equivalent
employees as of December 31, 2006 to 150 full-time equivalent employees as of
December 31, 2007.





The
increases in occupancy and data processing expenses were primarily due to
increased depreciation as well as maintenance expenses relating to the Bank’s
conversion to a new core processing system in the first half of
2006.





Increases
in other expenses are comprised of increased expenses related to audit and
compliance costs for the Sarbanes-Oxley Act of 2002, fees paid to a third party
vendor related to the Bank’s overdraft privilege program, increased amortization
on low income housing tax credits and an increase in ATM expense.  The
Bank converted to a new ATM network provider in September 2006.  The
expense is now 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.





Income
Taxes.  The decrease in income tax expense is a direct result
of the decrease in the Company’s taxable income for the year ended December 31,
2007 as compared to the year ended December 31, 2006.





Cash Dividends
Paid.  The Company paid dividends of $0.17 per share on April
13, 2007, to stockholders of record as of April 3, 2007, and $0.17 per share on
July 13, 2007 to stockholders of record as of July 2, 2007, and $0.18 per share
on October 15, 2007, to stockholders of record as of October 1,
2007.  The Company declared a cash dividend of $0.18 per share on
December 21, 2007, which was paid on January 18, 2008, to stockholders of record
on January 4, 2008.





13





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








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, it offers deposit rates and loan rates that 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.  This matching is
especially difficult because the residential mortgage loans that comprise a
significant portion of the Bank’s assets give the borrower the right to prepay
at any time.  These borrowers act in their economic self-interest and
refinance higher rate loans when rates are low.  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.





The Bank
has continued to emphasize the origination of short-term commercial real estate,
construction, commercial business, home equity, consumer and adjustable-rate,
one- to four-family residential loans while originating fixed-rate, one- to
four-family residential loans primarily for immediate resale in the secondary
market.





The Bank
is also managing interest rate risk by the origination of construction
loans.  As of December 31, 2008, such loans constitute 15% of the
Bank’s loan 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, 2008 and 2007,
the Bank’s savings accounts, checking accounts, and money market deposit
accounts totaled $138,504,922 or 31% of its total deposits and $141,772,711 or
34% of total deposits, respectively.  The weighted average rate paid
on these accounts decreased 98 basis points from 2.11% on December 31, 2007 to
1.13% on December 31, 2008 due to the overall decline in market interest
rates.  The Bank believes, based on historical experience, that a
substantial portion of such accounts represents non-interest rate sensitive core
deposits.





INTEREST
RATE SENSITIVITY ANALYSIS





The
following table sets forth as of December 31, 2008, management’s estimates of
the projected changes in net portfolio value (“NPV”) in the event of 100 and 200
basis point (“bp”) instantaneous and permanent increases and 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+200
                          
                          
                          
                          50,312
                          
                          
                          
                          2,707
                          
                          
                          
                          6
                          %
                          
                          
                          7.37
                          %
                          
                          
                          0.50
                          %+100
                          
                          
                          
                          49,229
                          
                          
                          
                          1,624
                          
                          
                          
                          3
                          %
                          
                          
                          7.16
                          %
                          
                          
                          0.28
                          %NC
                          
                          
                          
                          47,605
                          
                          
                          
                          -
                          
                          
                          
                          0
                          %
                          
                          
                          6.88
                          %
                          
                          
                          0.00
                          %-100
                          
                          
                          
                          47,348
                          
                          
                          
                          (257
                          )
                          
                          
                          -1
                          %
                          
                          
                          6.79
                          %
                          
                          
                          -0.09
                          %-200
                          
                          
                          
                          46,926
                          
                          
                          
                          (679
                          )
                          
                          
                          -1
                          %
                          
                          
                          6.70
                          %
                          
                          
                          -0.18
                          %





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.





14





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








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,
which represent the Bank’s
primary loan product, 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 loan portfolio could decrease in future periods due to refinancing
activity if market interest rates remain constant or decrease 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 is responsible for reviewing the Bank’s asset and
liability policies. The Bank’s management is responsible for administering the
policies and determinations of the Board of Directors with respect to the Bank’s
asset and liability goals and strategies.  Management expects that the
Bank’s asset and liability policies and strategies will continue as described
above so long as competitive and regulatory conditions in the financial
institution industry and market interest rates continue as they have in recent
years.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
refers to the ability to manage future cash flows to meet the needs of
depositors and borrowers and fund operations.  Maintaining appropriate
levels of liquidity allows the Company to have sufficient funds available for
customer demand for loans, withdrawal of deposit balances and maturities of
deposits and other liabilities.  The Company’s primary sources of
liquidity include cash and cash equivalents, customer deposits and FHLB
borrowings.  The Company also has established borrowing lines
available from the Federal Reserve Bank which is considered a secondary source
of funds.





The
Company’s most liquid assets are cash and cash equivalents, which are cash on
hand, amounts due from financial institutions, and certificates of deposit with
other financial institutions that have an original maturity of three months or
less.  The levels of such assets are dependent on the Bank’s
operating, financing, and
investment activities at any given time.  The Company’s cash and cash
equivalents totaled $15,097,015 as of December 31, 2008 and $12,046,202 as of
December 31, 2007, representing an increase of $3,050,813.  The
variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows, which are subject to, and influenced
by, many factors.





In
addition to the capital necessary to meet the Company’s conditional commitments
discussed under the caption “Off-Balance Sheet Arrangements” below, the Bank
also has $226,400,597 in certificates of deposit that are scheduled to mature in
one year or less.  Management anticipates that the majority of these
certificates will renew in the normal course of operations. Based on existing
collateral as well as the FHLB’s limitation of advances to 35% of assets, the
Bank has the ability to borrow an additional $37,372,000 from the FHLB, as of
December 31, 2008.  Based on existing collateral, the Bank has the
ability to borrow $30,634,000 from the Federal Reserve Bank as of December 31,
2008.  The Bank plans to maintain its FHLB and Federal Reserve Bank
borrowings to a level that will provide a borrowing capacity sufficient to
provide for contingencies.





The
Company’s Tier 1 capital position of $50,619,000 is 7.5% of average assets as of
December 31, 2008.  The Company has an excess of $23,656,000,
$27,922,000, and $12,444,000 of required regulatory levels of tangible, core,
and risk-based capital, respectively.  In addition, under current
regulatory guidelines, the Bank is classified as well
capitalized.  See also additional information provided under the
caption “Regulatory Matters” in Note 1 of the Notes to Consolidated Financial
Statements.





During
the year ended December 31, 2008, the Company purchased 60,401 shares of common
stock at an average price of $24.26 to place in the treasury
account.  During the year ended December 31, 2007, the Company
purchased 252,799 shares of common stock at an average price of $29.59 to place
in the treasury account.  The Company intends to monitor the common
stock price and, with regulatory approval, may from time to time initiate
further stock repurchases in order to improve the Company’s long-term earnings
per share while at the same time maintaining an adequate level of stockholders’
equity.  The Company has a repurchase plan which was announced on
August 20, 2007, and as of December 31, 2008, a total of 200,277 shares of the
Company’s common stock may be purchased under this plan.





15





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








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





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





Secondly,
the Troubled Asset Relief Program (“TARP”) was enacted under EESA.  As
part of TARP, the United States Department of the Treasury (the "Treasury")
established the Capital Purchase Program (“CPP”) to provide up to $250 billion
of funding to eligible financial institutions through the purchase of debt or
equity securities from participating institutions.





On
January 30, 2009, as part of the CPP, the Company entered into a Securities
Purchase Agreement - Standard Terms (the "SPA") with the Treasury pursuant to
which the Company sold to the Treasury 17,000 shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, (the "Series A Preferred Stock") and issued
a ten year warrant (the "Warrant") to purchase 459,459 shares of the Company's
common stock (the "Common Stock") for $5.55 per share (the "Warrant Shares") for
a total purchase price of $17.0 million (the
"Transaction").   The Company concluded that the additional
capital would increase its ability to provide appropriate lending to consumers
and businesses and would enhance the Company’s financial
flexibility.





The
Series A Preferred Stock will qualify as Tier 1 capital and will be entitled to
cumulative preferred dividends at a rate of 5% per year for the first five
years, payable quarterly, and 9% thereafter. The Series A Preferred Stock has a
liquidation preference of $1,000 per share, plus accrued and unpaid
dividends.  The failure by the Company to pay a total of six quarterly
dividends, whether or not consecutive, gives the holders of the Series A
Preferred Stock the right to elect two directors to the Company's Board of
Directors.





During
the first three years after the Transaction, the Company may not redeem the
Series A Preferred Stock except in conjunction with a "qualified equity
offering" meeting certain requirements. After three years, the Company may
redeem the Series A Preferred Stock for $1,000 per share, plus accrued and
unpaid dividends, in whole or in part, subject to regulatory
approval.





The
Warrant is exercisable immediately upon issuance and expires in ten years. The
Warrant has anti-dilution protections and certain other protections for the
holder, as well as potential registration rights upon written request from the
Treasury.  The Treasury has agreed not to exercise voting rights with
respect to the Warrant Shares that it may acquire upon exercise of the Warrant.
The number of Warrant Shares may be reduced by up to one-half if the Company
completes an equity offering satisfying certain requirements
by December 31, 2009. If the Series A Preferred Stock is redeemed in whole, the
Company has the right to purchase any shares of the Common Stock held by the
Treasury at their fair market value at that time.





The
holder has certain registration rights to facilitate a sale of the Series A
Preferred Stock upon written request to the Company.  Neither the
Series A Preferred Stock, the Warrant nor the Warrant Shares will be subject to
any contractual restrictions on transfer, except that Treasury may only transfer
or exercise an aggregate of one-half of the Warrant Shares prior to the earlier
of the redemption of 100% of the shares of Series A Preferred Stock and December
31, 2009.





In
conformity with requirements of the SPA and Section 111(b) of EESA, the Company
and its subsidiary, Guaranty Bank, and each of its senior executive officers
agreed to limit certain compensation, bonus, incentive and other benefits plans,
arrangements, and policies with respect to the senior executive officers during
the period that the Treasury owns any equity securities acquired in connection
with the Transaction.  These limitations generally apply to the Chief
Executive Officer, Chief Financial Officer and the three next most highly
compensated senior executive officers. The applicable senior executive officers
have entered into letter agreements with the Company consenting to the foregoing
and have executed a waiver voluntarily waiving any claim against the Treasury or
the Company for any changes to such senior executive officer's compensation or
benefits that are required to comply with Section 111(b) of EESA.





16





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








The bank
regulatory agencies, the Treasury and the Office of Special Inspector General,
also created by EESA, have issued guidance and requests to the financial
institutions that participated in the TARP CPP to document their plans and use
of TARP CPP funds and their plans for addressing the executive compensation
requirements associated with the TARP CPP. The Company has received and has
responded to that request.





The
Company's anticipated use of TARP funds is to protect against additional credit
loss exposure if the economic conditions continue to worsen, to reduce
concentration exposure to commercial real estate, to allow for loans to be made
prudently and responsibly to creditworthy borrowers and to maintain a strong
capital position to bolster the Bank’s ability withstand uncertain market
conditions.




Since
receipt of the funds on January 30, 2009, the Company's actual utilization of
the funds has been the following:




·
            The
      Company utilized $1.4 million to pay off existing debt with a
      correspondent bank and injected $12 million of capital funds into the
      Bank.




·
            During
      February 2009, the Bank closed 61 mortgage loans totaling
      $7,970,178.  The Bank continues to meet the credits needs of the
      community.




·
            During
      February 2009, the Bank provided 117 new commercial and business loans
      totaling $16,468,415.  In addition, due to the increased capital
      we were able to continue to provide credit to the business community by
      renewing 28 loans totaling $15,745,241.  We remain dedicated to
      working with existing borrowers through these difficult economic
      times.




·
            The
      Bank continues to provide support to existing customers with projects to
      support community development and employment. The increase in capital
      provides additional support for our current unfunded commitments totaling
      $83.8 million.




·
            The
      Bank has reduced its exposure to commercial real estate concentration from
      518 percent of risk- based capital to 428
  percent.




·
            Management
      has committed to purchase $3 million in low income housing investments
      throughout southwestern Missouri.




·
            Improvement
      of the Bank’s reliance on non-core funding sources as evidenced by the Net
      Non Core Funding Dependence Ratio that declined from 39.9% at December 31,
      2008 to 28.3% as of February 28, 2009 with the TARP capital injection and
      core deposit initiatives.




The
Company's anticipated use of unspent TARP funds is for the continued support of
estimated losses that arise in the loan portfolio as borrowers continue to
suffer through economic vagaries, to assist in reducing the Bank's exposure to
commercial real estate related credits, to meet credit needs of credit worthy
borrowers in the community and support local projects with existing customers,
to assist the Bank in working with existing borrowers to avoid preventable
foreclosures and mitigate other potential mortgage-related losses and to remain
less reliant on non-core funding sources to support the Bank's long term
assets.





On
October 14, 2008, the Temporary Liquidity Guarantee Program was enacted by the
FDIC.  The program provides for the guarantee of newly-issued senior
unsecured debt of financial institutions and bank holding companies and provides
full deposit insurance coverage for all non-interest bearing deposit
accounts.  The additional insurance coverage is assessed a cost of 10
basis points on each dollar of non-interest bearing account for those banks
choosing to participate.  The Company has chosen to participate in
this program.





OFF-BALANCE
SHEET ARRANGEMENTS




Various
commitments and contingent liabilities arise in the normal course of business,
which are not required to be recorded on the balance sheet.  The most
significant of these are loan commitments, lines of credit and standby letters
of credit.  Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract.  As of December 31, 2008 and 2007, the Bank had outstanding
commitments to originate loans of approximately $5,001,000 and $3,490,000,
respectively.  Lines of credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract.  As of December 31, 2008 and 2007, unused lines of credit to
borrowers aggregated approximately $49,253,000 and $63,403,000 for commercial
lines and $20,829,000 and $21,957,000 for open-end consumer
lines.  Since a portion of the loan commitment and line of credit may
expire without being drawn upon, the total unused commitments and lines do not
necessarily represent future cash requirements.





17





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








Standby
letters of credit are irrevocable conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.  The credit
risk involved in issuing standby letters of credit is essentially the same as
that involved in extending loans to customers.  The Bank had total
outstanding standby letters of credit amounting to $15,059,000 and $12,464,000
as of December 31, 2008 and 2007, respectively.  The commitments
extend over varying periods of time with the majority being disbursed within a
thirty-day period.





In
connection with the Company’s issuance of the Trust Securities and 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 Securities whereby
the Company has guaranteed any and all payment obligations of the Trusts related
to the Trust Securities including distributions
on, and the liquidation or redemption price of, the Trust Securities to the
extent each Trust does not have funds available.





AGGREGATE
CONTRACTUAL OBLIGATIONS





The
following table summarizes the Company’s fixed and determinable contractual
obligations by payment date as of December 31, 2008.  Dollar amounts
are expressed in thousands.





Payments Due By PeriodOne
      Year
                
                
                One
      to
                
                
                Three
      to
                
                
                More
      thanContractual
    Obligations
                
                Total
                
                
                or less
                
                
                Three Years
                
                
                Five Years
                
                
                Five YearsDeposits
      without stated maturity
                
                $
                138,505
                
                
                
                138,505
                
                
                
                -
                
                
                
                -
                
                
                
                -Time
      and brokered certificates of deposit
                
                
                308,574
                
                
                
                226,401
                
                
                
                68,291
                
                
                
                12,668
                
                
                
                1,214Other
      borrowings
                
                
                41,185
                
                
                
                1,435
                
                
                
                -
                
                
                
                -
                
                
                
                39,750Federal
      Home Loan Bank advances
                
                
                132,436
                
                
                
                21,386
                
                
                
                43,000
                
                
                
                15,700
                
                
                
                52,350Subordinated
      debentures
                
                
                15,465
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                15,465Operating
      leases
                
                
                451
                
                
                
                102
                
                
                
                144
                
                
                
                89
                
                
                
                117Purchase
      obligations
                
                
                681
                
                
                
                681
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      long term obligations
                
                
                144,905
                
                
                
                144,905
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                782,202
                
                
                
                533,414
                
                
                
                111,435
                
                
                
                28,457
                
                
                
                108,896





IMPACT OF
INFLATION AND CHANGING PRICES





The
Company prepared the consolidated financial statements and related data
presented herein in accordance with accounting principles generally accepted in
the United States of America which require the measurement of financial position
and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to
inflation.





Unlike
most companies, the assets and liabilities of a financial institution are
primarily monetary in nature.  As a result, interest rates have a more
significant impact on a financial institution’s performance than the effects of
general levels of inflation.  Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation.  In the current
interest rate environment, liquidity and the maturity structure of the Bank’s
assets and liabilities are critical to the maintenance of acceptable performance
levels.





18





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








CRITICAL
ACCOUNTING POLICIES







Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based upon the Company’s consolidated financial statements and the notes
thereto, which have been prepared in accordance with accounting principles
generally accepted in the United States of America.  The preparation
of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported periods.
On an on-going basis, management evaluates its estimates and
judgments.





Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources.  There can be no assurance that actual results will not
differ from those estimates.  If actual results are different than
management’s judgements and estimates, the Company’s financial results could
change, and such change could be material to the Company.





Material
estimates and judgments that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses.  In
connection with the determination of the allowance for loan losses, management
obtains independent appraisals for significant properties.




The
Company has identified the accounting policies for the allowance for loan losses
and related significant estimates and judgments as critical to its business
operations and the understanding of its results of operations.  For a
detailed discussion on the application of these significant estimates and
judgments and our accounting policies, also see Note 1 of the notes to
consolidated financial statements in this report.





IMPACT OF
NEW ACCOUNTING PRONOUNCEMENTS





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




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





19





Guaranty
Federal Bancshares, Inc.


Management’s
Discussion and Analysis of Financial Condition And Results of
Operations








In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133.  SFAS 161 amends SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities,” to amend and expand the disclosure
requirements of SFAS 133 to provide greater transparency about (i) how and why
and entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items
affect an entity’s financial position, results of operations and cash
flows.  To meet those objectives, SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative agreements.  SFAS 161 was effective for the Company on
January 1, 2009 and did not have a material impact on the consolidated financial
statements at adoption.








SUMMARY
OF UNAUDITED QUARTERLY OPERATING RESULTS


Year Ended December 31, 2008, Quarter
      endedMar-08
                      
                      
                      Jun-08
                      
                      
                      Sep-08
                      
                      
                      Dec-08Interest
      income
                      
                      $
                      9,231,033
                      
                      
                      $
                      8,925,204
                      
                      
                      $
                      9,267,799
                      
                      
                      $
                      8,939,356Interest
      expense
                      
                      
                      5,201,066
                      
                      
                      
                      4,811,710
                      
                      
                      
                      4,747,203
                      
                      
                      
                      4,764,245Net
      interest income
                      
                      
                      4,029,967
                      
                      
                      
                      4,113,494
                      
                      
                      
                      4,520,596
                      
                      
                      
                      4,175,111Provision
      for loan losses
                      
                      
                      820,000
                      
                      
                      
                      5,684,079
                      
                      
                      
                      1,675,000
                      
                      
                      
                      6,565,000Gain
      (loss) on loans and investment securities
                      
                      
                      231,077
                      
                      
                      
                      159,640
                      
                      
                      
                      207,870
                      
                      
                      
                      (287,192
                      )Other
      noninterest income, net
                      
                      
                      650,774
                      
                      
                      
                      660,770
                      
                      
                      
                      641,024
                      
                      
                      
                      52,188Noninterest
      expense
                      
                      
                      3,101,408
                      
                      
                      
                      3,213,100
                      
                      
                      
                      3,167,272
                      
                      
                      
                      3,278,030Income
      (loss) before income taxes
                      
                      
                      990,410
                      
                      
                      
                      (3,963,275
                      )
                      
                      
                      527,218
                      
                      
                      
                      (5,902,923
                      )Provision
      (credit) for income taxes
                      
                      
                      373,552
                      
                      
                      
                      (1,466,995
                      )
                      
                      
                      227,759
                      
                      
                      
                      (2,123,175
                      )Net
      income (loss)
                      
                      $
                      616,858
                      
                      
                      $
                      (2,496,280
                      )
                      
                      $
                      299,459
                      
                      
                      $
                      (3,779,748
                      )Basic
      earnings (loss) per share
                      
                      $
                      0.24
                      
                      
                      $
                      (0.96
                      )
                      
                      $
                      0.11
                      
                      
                      $
                      (1.45
                      )Diluted
      earnings (loss) per share
                      
                      $
                      0.23
                      
                      
                      $
                      (0.96
                      )
                      
                      $
                      0.11
                      
                      
                      $
                      (1.45
                      )Year Ended December 31, 2007, Quarter
      endedMar-07
                      
                      
                      Jun-07
                      
                      
                      Sep-07
                      
                      
                      Dec-07Interest
      income
                      
                      $
                      9,521,871
                      
                      
                      $
                      9,103,145
                      
                      
                      $
                      9,685,875
                      
                      
                      $
                      9,661,649Interest
      expense
                      
                      
                      4,946,487
                      
                      
                      
                      5,028,396
                      
                      
                      
                      5,201,745
                      
                      
                      
                      5,342,675Net
      interest income
                      
                      
                      4,575,384
                      
                      
                      
                      4,074,749
                      
                      
                      
                      4,484,130
                      
                      
                      
                      4,318,974Provision
      for loan losses
                      
                      
                      210,000
                      
                      
                      
                      210,000
                      
                      
                      
                      210,000
                      
                      
                      
                      210,000Gain
      on sale of loans and investment securities
                      
                      
                      485,313
                      
                      
                      
                      524,526
                      
                      
                      
                      463,989
                      
                      
                      
                      321,552Other
      noninterest income, net
                      
                      
                      780,117
                      
                      
                      
                      810,325
                      
                      
                      
                      752,916
                      
                      
                      
                      589,829Noninterest
      expense
                      
                      
                      2,874,548
                      
                      
                      
                      2,995,788
                      
                      
                      
                      2,986,558
                      
                      
                      
                      2,985,257Income
      before income taxes
                      
                      
                      2,756,266
                      
                      
                      
                      2,203,812
                      
                      
                      
                      2,504,477
                      
                      
                      
                      2,035,098Provision
      for income taxes
                      
                      
                      1,002,726
                      
                      
                      
                      787,588
                      
                      
                      
                      891,786
                      
                      
                      
                      717,671Net
      income
                      
                      $
                      1,753,540
                      
                      
                      $
                      1,416,224
                      
                      
                      $
                      1,612,691
                      
                      
                      $
                      1,317,427Basic
      earnings per share
                      
                      $
                      0.63
                      
                      
                      $
                      0.51
                      
                      
                      $
                      0.60
                      
                      
                      $
                      0.50Diluted
      earnings per share
                      
                      $
                      0.62
                      
                      
                      $
                      0.50
                      
                      
                      $
                      0.59
                      
                      
                      $
                      0.49


20




Guaranty
Federal Bancshares, Inc.


Consolidated
Balance Sheets


December
31, 2008 and 2007






December
      31,
                
                
                December
      31,2008
                
                
                2007ASSETSCash
      and due from banks
                
                $
                3,826,567
                
                
                $
                11,135,960Interest-bearing
      deposits in other financial institutions
                
                
                11,270,448
                
                
                
                910,242Cash
      and cash equivalents
                
                
                15,097,015
                
                
                
                12,046,202Available-for-sale
      securities
                
                
                65,505,339
                
                
                
                14,729,938Held-to-maturity
      securities
                
                
                556,465
                
                
                
                654,775Stock
      in Federal Home Loan Bank, at cost
                
                
                6,730,100
                
                
                
                4,014,700Mortgage
      loans held for sale
                
                
                1,933,798
                
                
                
                2,141,998Loans
      receivable, net of allowance for loan losses of December 31, 2008 and 2007
      - $16,728,492 and $5,962,923, respectively
                
                
                556,393,243
                
                
                
                514,100,035Accrued
      interest receivable:Loans
                
                
                2,310,062
                
                
                
                3,218,845Investments
                
                
                322,388
                
                
                
                104,603Prepaid
      expenses and other assets
                
                
                4,065,359
                
                
                
                2,841,411Foreclosed
      assets held for sale
                
                
                5,655,257
                
                
                
                727,422Premises
      and equipment
                
                
                11,323,463
                
                
                
                9,442,350Income
      taxes receivable
                
                
                9,091
                
                
                
                -Deferred
      income taxes
                
                
                5,768,813
                
                
                
                1,755,701$
                675,670,393
                
                
                $
                565,777,980LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
                
                $
                447,079,469
                
                
                $
                418,191,284Federal
      Home Loan Bank advances
                
                
                132,436,000
                
                
                
                76,086,000Securities
      sold under agreements to repurchase
                
                
                39,750,000
                
                
                
                9,849,295Subordinated
      debentures
                
                
                15,465,000
                
                
                
                15,465,000Notes
      payable
                
                
                1,435,190
                
                
                
                718,190Advances
      from borrowers for taxes and insurance
                
                
                166,327
                
                
                
                157,811Accrued
      expenses and other liabilities
                
                
                448,226
                
                
                
                299,005Accrued
      interest payable
                
                
                1,577,279
                
                
                
                1,793,663Dividend
      payable
                
                
                -
                
                
                
                469,373Income
      taxes payable
                
                
                -
                
                
                
                61,699638,357,491
                
                
                
                523,091,320COMMITMENTS
      AND CONTINGENCIES
                
                
                -
                
                
                
                -STOCKHOLDERS'
      EQUITYCommon
      Stock:$0.10
      par value; authorized 10,000,000 shares; issued December 31, 2008 and 2007
      - 6,779,800 and 6,736,485 shares, respectively
                
                
                677,980
                
                
                
                673,649Additional
      paid-in capital
                
                
                58,535,159
                
                
                
                57,571,929Unearned
      ESOP shares
                
                
                (888,930
                )
                
                
                (1,116,930
                )Retained
      earnings, substantially restricted
                
                
                39,114,189
                
                
                
                45,402,449Accumulated
      other comprehensive incomeUnrealized
      appreciation on available-for-sale securities and effect of interest rate
      swaps, net of income taxes; December 31, 2008 and 2007 - $991,281 and
      $295,863, respectively
                
                
                1,687,858
                
                
                
                503,76799,126,256
                
                
                
                103,034,864Treasury
      stock, at cost;December
      31, 2008 and 2007 - 4,077,567 and 4,017,166 shares,
      respectively
                
                
                (61,813,354
                )
                
                
                (60,348,204
                )37,312,902
                
                
                
                42,686,660$
                675,670,393
                
                
                $
                565,777,980






See Notes to Consolidated Financial
Statements


21
  Guaranty
Federal Bancshares, Inc.


Consolidated
Statements of Operations


Years  Ended
December 31, 2008, 2007 and 2006






2008
                
                
                2007
                
                
                2006INTEREST
      INCOMELoans
                
                $
                33,019,217
                
                
                $
                37,113,849
                
                
                $
                34,500,329Investment
      securities
                
                
                3,124,862
                
                
                
                537,176
                
                
                
                450,919Other
                
                
                219,313
                
                
                
                321,515
                
                
                
                253,20036,363,392
                
                
                
                37,972,540
                
                
                
                35,204,448INTEREST
      EXPENSEDeposits
                
                
                14,219,732
                
                
                
                15,860,794
                
                
                
                10,523,203Federal
      Home Loan Bank advances
                
                
                3,237,489
                
                
                
                3,469,551
                
                
                
                5,721,973Subordinated
      debentures
                
                
                1,023,783
                
                
                
                1,023,783
                
                
                
                1,027,526Other
                
                
                1,043,220
                
                
                
                165,175
                
                
                
                113,89119,524,224
                
                
                
                20,519,303
                
                
                
                17,386,593NET
      INTEREST INCOME
                
                
                16,839,168
                
                
                
                17,453,237
                
                
                
                17,817,855PROVISION
      FOR LOAN LOSSES
                
                
                14,744,079
                
                
                
                840,000
                
                
                
                750,000NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                
                
                2,095,089
                
                
                
                16,613,237
                
                
                
                17,067,855NONINTEREST
      INCOMEService
      charges
                
                
                2,027,691
                
                
                
                2,215,641
                
                
                
                1,401,724Other
      fees
                
                
                40,129
                
                
                
                90,360
                
                
                
                96,209Gain
      (loss) on investment securities
                
                
                (563,615
                )
                
                
                618,363
                
                
                
                750,869Gain
      on sale of loans
                
                
                875,010
                
                
                
                1,177,017
                
                
                
                692,276Loss
      on foreclosed assets
                
                
                (783,831
                )
                
                
                (41,909
                )
                
                
                (46,833
                )Other
      income
                
                
                720,767
                
                
                
                669,095
                
                
                
                765,4732,316,151
                
                
                
                4,728,567
                
                
                
                3,659,718NONINTEREST
      EXPENSESalaries
      and employee benefits
                
                
                7,517,285
                
                
                
                7,074,249
                
                
                
                6,111,762Occupancy
                
                
                1,682,277
                
                
                
                1,614,403
                
                
                
                1,520,770FDIC
      deposit insurance premiums
                
                
                384,996
                
                
                
                42,555
                
                
                
                39,661Data
      processing
                
                
                374,123
                
                
                
                391,679
                
                
                
                280,189Advertising
                
                
                399,996
                
                
                
                399,996
                
                
                
                403,292Other
      expense
                
                
                2,401,133
                
                
                
                2,319,269
                
                
                
                1,821,02012,759,810
                
                
                
                11,842,151
                
                
                
                10,176,694INCOME
      (LOSS) BEFORE INCOME TAXES
                
                
                (8,348,570
                )
                
                
                9,499,653
                
                
                
                10,550,879PROVISION
      (CREDIT) FOR INCOME TAXES
                
                
                (2,988,859
                )
                
                
                3,399,771
                
                
                
                4,041,795NET
      INCOME (LOSS)
                
                $
                (5,359,711
                )
                
                $
                6,099,882
                
                
                $
                6,509,084BASIC
      EARNINGS (LOSS) PER SHARE
                
                $
                (2.06
                )
                
                $
                2.25
                
                
                $
                2.34DILUTED
      EARNINGS (LOSS) PER SHARE
                
                $
                (2.06
                )
                
                $
                2.19
                
                
                $
                2.25




See Notes to Consolidated Financial
Statements





22





Guaranty
Federal Bancshares, Inc.


Consolidated
Statements of Cash Flows


Years
Ended December 31, 2008, 2007 and 2006








2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                
                $
                (5,359,711
                )
                
                $
                6,099,882
                
                
                $
                6,509,084Items
      not requiring (providing) cash:Deferred
      income taxes
                
                
                (4,143,816
                )
                
                
                (187,839
                )
                
                
                (592,927
                )Depreciation
                
                
                934,941
                
                
                
                902,322
                
                
                
                814,150Provision
      for loan losses
                
                
                14,744,079
                
                
                
                840,000
                
                
                
                750,000Gain
      on sale of loans and investment securities
                
                
                (777,222
                )
                
                
                (1,795,380
                )
                
                
                (1,443,145
                )Other
      than temporary impairment on investment securities
                
                
                465,827
                
                
                
                -
                
                
                
                -Gain
      on sale of equipment and other assets
                
                
                -
                
                
                
                -
                
                
                
                (89,911
                )Loss
      (gain) on sale of foreclosed assets
                
                
                627,888
                
                
                
                (4,621
                )
                
                
                46,833Accretion
      of gain on termination of interest rate swaps
                
                
                (169,582
                )
                
                
                -
                
                
                
                -Amortization
      of deferred income,premiums and discounts, net
                
                
                (47,702
                )
                
                
                108,733
                
                
                
                24,106Stock
      award plans
                
                
                92,846
                
                
                
                71,325
                
                
                
                83,192Origination
      of loans held for sale
                
                
                (51,082,040
                )
                
                
                (71,861,627
                )
                
                
                (51,685,484
                )Proceeds
      from sale of loans held for sale
                
                
                52,165,250
                
                
                
                73,901,281
                
                
                
                51,465,404Release
      of ESOP shares
                
                
                408,388
                
                
                
                672,765
                
                
                
                651,958Changes
      in:Accrued
      interest receivable
                
                
                690,998
                
                
                
                (413,139
                )
                
                
                (821,182
                )Prepaid
      expenses and other assets
                
                
                372,439
                
                
                
                114,073
                
                
                
                400,043Accrued
      expenses and other liabilities
                
                
                (67,163
                )
                
                
                235,832
                
                
                
                1,060,085Income
      taxes payable
                
                
                (519,838
                )
                
                
                1,051,189
                
                
                
                (790,942
                )Net
      cash provided by operating activities
                
                
                8,335,582
                
                
                
                9,734,796
                
                
                
                6,381,264CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      increase in loans
                
                
                (64,369,071
                )
                
                
                (39,788,084
                )
                
                
                (45,195,742
                )Principal
      payments on held-to-maturity securities
                
                
                98,467
                
                
                
                108,250
                
                
                
                186,219Principal
      payments on available-for-sale securities
                
                
                2,373,721
                
                
                
                376,625
                
                
                
                175,145Purchase
      of available-for-sale securities
                
                
                (55,463,436
                )
                
                
                (11,926,192
                )
                
                
                (3,780,315
                )Purchase
      of premises and equipment
                
                
                (2,816,054
                )
                
                
                (2,476,863
                )
                
                
                (719,094
                )Purchase
      of tax credit investments
                
                
                (1,596,387
                )
                
                
                -
                
                
                
                (2,195,334
                )Proceeds
      from sale of originated mortgage servicing rights
                
                
                -
                
                
                
                -
                
                
                
                1,023,608Proceeds
      from sale of premises and equipment
                
                
                -
                
                
                
                -
                
                
                
                470Proceeds
      from sales of available-for-sale securities
                
                
                -
                
                
                
                1,128,153
                
                
                
                762,617Proceeds
      from maturities of available-for-sale securities
                
                
                2,100,000
                
                
                
                2,580,000
                
                
                
                1,750,000Proceeds
      from termination of interest rate swaps
                
                
                1,695,836
                
                
                
                -
                
                
                
                -(Purchase)
      redemption of FHLB stock
                
                
                (2,715,400
                )
                
                
                1,368,000
                
                
                
                (403,900
                )Proceeds
      from sale of foreclosed assets
                
                
                1,827,560
                
                
                
                1,453,674
                
                
                
                395,327Net
      cash used in investing activities
                
                
                (118,864,764
                )
                
                
                (47,176,437
                )
                
                
                (48,000,999
                )







See Notes to Consolidated
Financial Statements




23





Guaranty
Federal Bancshares, Inc.


Consolidated
Statements of Cash Flows (continued)


Years
Ended December 31, 2008, 2007 and 2006








2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM FINANCING ACTIVITIESStock
      options exercised
                
                $
                578,661
                
                
                $
                1,118,762
                
                
                $
                1,147,042Cash
      dividends paid
                
                
                (1,397,922
                )
                
                
                (1,879,256
                )
                
                
                (1,850,300
                )Net
      increase (decrease) in demand deposits,NOW accounts and savings
      accounts
                
                
                (3,267,786
                )
                
                
                12,779,497
                
                
                
                (1,259,419
                )Net
      increase in certificates of deposit
                
                
                32,155,971
                
                
                
                53,182,151
                
                
                
                33,430,104Net
      increase in securities sold under agreements to repurchase
                
                
                29,900,705
                
                
                
                8,146,074
                
                
                
                108,963Proceeds
      from FHLB advances
                
                
                2,243,650,075
                
                
                
                1,855,538,600
                
                
                
                1,901,242,000Repayments
      of FHLB advances
                
                
                (2,187,300,075
                )
                
                
                (1,887,452,600
                )
                
                
                (1,893,242,000
                )Proceeds
      from issuance of notes payable
                
                
                1,064,000
                
                
                
                2,468,000
                
                
                
                -Repayments
      of notes payable
                
                
                (347,000
                )
                
                
                (1,749,810
                )
                
                
                -Advances
      from borrowers for taxes and insurance
                
                
                8,516
                
                
                
                (65,058
                )
                
                
                10,549Treasury
      stock purchased
                
                
                (1,465,150
                )
                
                
                (7,479,118
                )
                
                
                (3,593,081
                )Net
      cash provided by financing activities
                
                
                113,579,995
                
                
                
                34,607,242
                
                
                
                35,993,858INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                3,050,813
                
                
                
                (2,834,399
                )
                
                
                (5,625,877
                )CASH
      AND CASH EQUIVALENTS,BEGINNING OF YEAR
                
                
                12,046,202
                
                
                
                14,880,601
                
                
                
                20,506,478CASH
      AND CASH EQUIVALENTS,END OF YEAR
                
                $
                15,097,015
                
                
                $
                12,046,202
                
                
                $
                14,880,601Supplemental
      Cash Flows InformationReal
      estate acquired in settlement of loans
                
                $
                7,383,283
                
                
                $
                2,003,838
                
                
                $
                588,022Interest
      paid
                
                $
                19,740,608
                
                
                $
                20,140,586
                
                
                $
                16,479,811Income
      taxes paid
                
                $
                1,525,017
                
                
                $
                2,563,603
                
                
                $
                4,041,795Dividend
      declared and unpaid
                
                $
                -
                
                
                $
                469,373
                
                
                $
                468,190






See Notes to Consolidated Financial
Statements


24





Guaranty
Federal Bancshares, Inc.


Consolidated
Statements of Stockholders’ Equity


Years
Ended December 31, 2008, 2007 and 2006








Common Stock
                
                
                Additional Paid-In Capital
                
                
                Unearned ESOP Shares
                
                
                Treasury Stock
                
                
                Retained Earnings
                
                
                Accumulated Other Comprehensive
      Income
                
                
                TotalBalance,
      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
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,509,084
                
                
                
                -
                
                
                
                6,509,084Change
      in unrealized appreciation on available-for-sale securitites, net of
      income taxes of ($256,871)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (437,377
                )
                
                
                (437,377
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,071,707Dividends
      ($0.67 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,859,416
                )
                
                
                -
                
                
                
                (1,859,416
                )Stock
      award plans
                
                
                -
                
                
                
                388,884
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                388,884Stock
      options exercised
                
                
                8,218
                
                
                
                1,138,824
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,147,042Release
      of ESOP shares
                
                
                -
                
                
                
                423,958
                
                
                
                228,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                651,958Treasury
      stock purchased
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,593,081
                )
                
                
                -
                
                
                
                -
                
                
                
                (3,593,081
                )Balance,
      December 31, 2006
                
                
                665,353
                
                
                
                55,730,352
                
                
                
                (1,344,930
                )
                
                
                (52,869,086
                )
                
                
                41,183,006
                
                
                
                1,534,548
                
                
                
                44,899,243Comprehensive
      incomeNet
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,099,882
                
                
                
                -
                
                
                
                6,099,882Change
      in unrealized appreciation on available-for-sale securities, net of income
      taxes of ($605,380)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,030,781
                )
                
                
                (1,030,781
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,069,101Dividends
      ($0.70 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,880,439
                )
                
                
                -
                
                
                
                (1,880,439
                )Stock
      award plans
                
                
                -
                
                
                
                286,346
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                286,346Stock
      options exercised
                
                
                8,296
                
                
                
                1,110,466
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,118,762Release
      of ESOP shares
                
                
                -
                
                
                
                444,765
                
                
                
                228,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                672,765Treasury
      stock purchased
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (7,479,118
                )
                
                
                -
                
                
                
                -
                
                
                
                (7,479,118
                )Balance,
      December 31, 2007
                
                
                673,649
                
                
                
                57,571,929
                
                
                
                (1,116,930
                )
                
                
                (60,348,204
                )
                
                
                45,402,449
                
                
                
                503,767
                
                
                
                42,686,660Comprehensive
      income (loss)Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (5,359,711
                )
                
                
                -
                
                
                
                (5,359,711
                )Change
      in unrealized appreciation on available-for-sale securities and interest
      rate swaps, net of income taxes of $695,418
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,184,091
                
                
                
                1,184,091Total
      comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,175,620
                )Dividends
      ($0.36 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (928,549
                )
                
                
                -
                
                
                
                (928,549
                )Stock
      award plans
                
                
                -
                
                
                
                208,512
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                208,512Stock
      options exercised
                
                
                4,331
                
                
                
                574,330
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                578,661Release
      of ESOP shares
                
                
                -
                
                
                
                180,388
                
                
                
                228,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                408,388Treasury
      stock purchased
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,465,150
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,465,150
                )Balance,
      December 31, 2008
                
                $
                677,980
                
                
                $
                58,535,159
                
                
                $
                (888,930
                )
                
                $
                (61,813,354
                )
                
                $
                39,114,189
                
                
                $
                1,687,858
                
                
                $
                37,312,902






See Notes to Consolidated
Financial Statements




25





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








NOTE
1:                      NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANTACCOUNTING
POLICIES





Organization


In April
1995, Guaranty Federal Savings & Loan Association reorganized from a
federally chartered mutual savings and loan association into a mutual holding
company, Guaranty Federal Bancshares, M. H. C. (the
"MHC").  Concurrent with the reorganization, Guaranty Federal Savings
Bank (the "Bank"), a stock savings bank was chartered.  The Bank
issued 3,125,000 shares of common stock in connection with the reorganization,
the majority of which were owned by the MHC.





On
December 30, 1997, the MHC converted to Guaranty Federal Bancshares, Inc. (the
“Company”), a Delaware-chartered stock corporation.  In connection
with the conversion and reorganization, the shares of the Bank held by the
mutual holding company were extinguished along with the mutual holding company
and the shares of the Bank held by the public were exchanged for 1,880,710
shares of the Company.  Additional shares of the Company were sold to
certain depositors of the Bank and to the trust of the employee stock ownership
plan of the Bank as of December 30, 1997.





On June
27, 2003, the Bank converted to a state-chartered trust company with banking
powers, and the Company became a one-bank holding company.  The name
of the Bank was changed from Guaranty Federal Savings Bank to Guaranty
Bank.





Nature of
Operations


The
Company operates as a one-bank holding company. The Bank is primarily engaged in
providing a full range of banking and mortgage services to individual and
corporate customers in southwest Missouri.  The Bank is subject to
competition from other financial institutions.  The Company and the
Bank are also subject to the regulation of certain federal and state agencies
and receive periodic examinations by those regulatory authorities.





Principles of
Consolidation


The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, the Bank.  All significant intercompany
profits, transactions and balances have been eliminated in
consolidation.





Use of
Estimates


The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.





Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.  In connection with the determination of the
allowance for loan losses and the valuation of foreclosed assets held for sale,
management obtains independent appraisals for significant
properties.





Securities


Available-for-sale
securities, which include any security for which the Company or the Bank has no
immediate plan to sell but which may be sold in the future, are carried at fair
value.  Unrealized gains and losses are recorded, net of related
income tax effects, in other comprehensive income.





Held-to-maturity
securities, which include any security for which the Company or the Bank has the
positive intent and ability to hold until maturity, are carried at historical
cost adjusted for amortization of premiums and accretion of
discounts.





26





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








Amortization
of premiums and accretion of discounts are recorded as interest income from
securities.  Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific identification method.





Mortgage Loans Held for
Sale


Mortgage
loans held for sale are carried at the lower of cost or fair value, determined
using an aggregate basis.  Write-downs to fair value are recognized as
a charge to earnings at the time a decline in value occurs.  Forward
commitments to sell mortgage loans are sometimes acquired to reduce market risk
on mortgage loans in the process of origination and mortgage loans held for
sale.  Gains and losses resulting from sales of mortgage loans are
recognized when the respective loans are sold to investors.  Gains and
losses are determined by the difference between the selling price plus the value
of retained servicing rights, if any, and the carrying amount of the loans sold,
net of discounts collected or paid and considering a normal servicing
rate.  Fees received from borrowers to guarantee the funding of
mortgage loans held for sale and fees paid to investors to ensure the ultimate
sale of such mortgage loans are recognized as income or expense when the loans
are sold or when it becomes evident that the commitment will not be
used.





Loans


Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-offs are reported at their outstanding principal balances
adjusted for any charge-offs, the allowance for loan losses, any deferred fees
or costs on originated loans and unamortized premiums or discounts on purchased
loans.  Interest income is reported on the interest method, and
includes amortization of net deferred loan fees and costs over the loan
term.  Generally, loans are placed on non-accrual status at ninety
days past due and interest is considered a loss, unless the loan is well-secured
and in the process of collection.





Loan
Servicing


The cost
of originated mortgage-servicing rights is amortized over the shorter of the
actual or contractual loan life.  Impairment of mortgage-servicing
rights is assessed based on the fair value of those rights.  Fair
values are estimated by discounting expected cash flows.  For purposes
of measuring impairment, the rights are stratified based on the loan type,
remaining term to maturity and interest rate.  The key assumptions
used in the valuation include discount rates, prepayment speeds and servicing
costs.  The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceeds their fair
value.  During 2006, the Company sold its mortgage servicing rights to
a third party.





Allowance for Loan
Losses


The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income.  Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.  Subsequent
recoveries, if any, are credited to the allowance.





The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic
conditions.  This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.





A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s obtainable market price or the
fair value of the collateral if the loan is collateral dependent.




27





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements







Foreclosed Assets Held for
Sale


Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis.  Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying
amount or fair value less estimated cost to sell.  Revenue and
expenses from operations and changes in the valuation allowance are included in
net expenses from foreclosed assets.




Premises and
Equipment


Depreciable
assets are stated at cost less accumulated depreciation.  Depreciation
is charged to expense using the straight-line and accelerated methods over the
estimated useful lives of the assets.




Income
Taxes


Deferred
tax liabilities and assets are recognized for the tax effects of differences
between the financial statement and tax bases of assets and
liabilities.  A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will not be
realized.




Cash
Equivalents


The
Company considers all highly liquid interest-bearing deposits in other financial
institutions with an initial maturity of three months or less to be cash
equivalents.  At December 31, 2008 and 2007, nearly all of the
interest-bearing deposits were uninsured, with nearly all of these balances held
at the Federal Reserve Bank or the Federal Home Loan Bank of Des
Moines.




Restriction on Cash and Due
From Bank


The
Company is required to maintain reserve funds in cash and/or on deposit with
Federal Reserve Bank.  The reserve required on December 31, 2008 and
2007, was $3,662,000 and $2,878,000, respectively.





Regulatory
Matters


The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies.  Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct and
material effect on the Company's financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices.  The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.




Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below).  Management believes, as of December 31, 2008 and 2007,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject.




As of
December 31, 2008, the most recent notification from the Missouri Division of
Finance and the Federal Deposit Insurance Corporation categorized the Bank as
well capitalized under the regulatory framework for prompt corrective
action.  To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the following table.  There are no conditions or events since
that notification that management believes have changed the Company’s or the
Bank’s category.




28





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements







The
Company’s and the Bank's actual capital amounts and ratios are also presented in
the table.  No amount was deducted from capital for interest-rate
risk.  Dollar amounts are expressed in thousands.




To
      Be Well CapitalizedFor
      Capital
                      
                      
                      Under
      Prompt CorrectiveActual
                      
                      
                      Adequacy Purposes
                      
                      
                      Action ProvisionsAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioAs
      of December 31, 2008Tier
      1 (core) capital, and ratio to adjusted total assets
    Company
                      
                      $
                      50,619
                      
                      
                      
                      7.5
                      %
                      
                      $
                      26,963
                      
                      
                      
                      4.0
                      %
                      
                      
                      n/a
                      
                      
                      
                      n/aBank
                      
                      $
                      49,833
                      
                      
                      
                      7.4
                      %
                      
                      $
                      26,914
                      
                      
                      
                      4.0
                      %
                      
                      $
                      33,642
                      
                      
                      
                      5.0
                      %Tier
      1 (core) capital, and ratio to risk-weighted assets
Company
                      
                      $
                      50,619
                      
                      
                      
                      8.9
                      %
                      
                      $
                      22,697
                      
                      
                      
                      4.0
                      %
                      
                      
                      n/a
                      
                      
                      
                      n/aBank
                      
                      $
                      49,833
                      
                      
                      
                      8.8
                      %
                      
                      $
                      22,697
                      
                      
                      
                      4.0
                      %
                      
                      $
                      34,046
                      
                      
                      
                      6.0
                      %Total
      risk-based capital, and ratio to risk-weighted assets
    Company
                      
                      $
                      57,838
                      
                      
                      
                      10.2
                      %
                      
                      $
                      45,394
                      
                      
                      
                      8.0
                      %
                      
                      
                      n/a
                      
                      
                      
                      n/aBank
                      
                      $
                      57,045
                      
                      
                      
                      10.1
                      %
                      
                      $
                      45,394
                      
                      
                      
                      8.0
                      %
                      
                      $
                      56,743
                      
                      
                      
                      10.0
                      %








To
      Be Well CapitalizedFor
      Capital
                
                
                Under
      Prompt CorrectiveActual
                
                
                Adequacy Purposes
                
                
                Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioAs
      of December 31, 2007Tier
      1 (core) capital, and ratio to adjusted total assets
    Company
                
                $
                56,244
                
                
                
                10.8
                %
                
                $
                20,784
                
                
                
                4.0
                %
                
                
                n/a
                
                
                
                n/aBank
                
                $
                56,152
                
                
                
                10.5
                %
                
                $
                21,432
                
                
                
                4.0
                %
                
                $
                26,790
                
                
                
                5.0
                %Tier
      1 (core) capital, and ratio to risk-weighted assets
Company
                
                $
                56,244
                
                
                
                11.0
                %
                
                $
                20,459
                
                
                
                4.0
                %
                
                
                n/a
                
                
                
                n/aBank
                
                $
                56,152
                
                
                
                11.0
                %
                
                $
                20,437
                
                
                
                4.0
                %
                
                $
                30,656
                
                
                
                6.0
                %Total
      risk-based capital, and ratio to risk-weighted assets
    Company
                
                $
                63,515
                
                
                
                12.4
                %
                
                $
                40,918
                
                
                
                8.0
                %
                
                
                n/a
                
                
                
                n/aBank
                
                $
                62,511
                
                
                
                12.2
                %
                
                $
                40,874
                
                
                
                8.0
                %
                
                $
                51,093
                
                
                
                10.0
                %




29





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The
amount of dividends that the Bank may pay is subject to various regulatory
limitations.  As of December 31, 2008 and 2007 the Bank exceeded its
minimum capital requirements.  The Bank may not pay dividends which
would reduce capital below the minimum requirements shown above.





Earnings Per
Share


The
computation for earnings per share for the years ended December 31, 2008, 2007
and 2006 is as follows:





Year
      Ended
                
                
                Year
      Ended
                
                
                Year
      EndedDecember 31, 2008
                
                
                December 31, 2007
                
                
                December 31, 2006Net
      income (loss)
                
                $
                (5,359,711
                )
                
                $
                6,099,882
                
                
                $
                6,509,084Average
      common shares outstanding
                
                
                2,604,440
                
                
                
                2,713,384
                
                
                
                2,786,823Effect
      of stock options outstanding
                
                
                -
                
                
                
                77,998
                
                
                
                109,200Average
      diluted shares outstanding
                
                
                2,604,440
                
                
                
                2,791,382
                
                
                
                2,896,023Earnings
      (loss) per share - basic
                
                $
                (2.06
                )
                
                $
                2.25
                
                
                $
                2.34Earnings
      (loss) per share - diluted
                
                $
                (2.06
                )
                
                $
                2.19
                
                
                $
                2.25





Due to
the Company’s net loss for the year ended December 31, 2008, no potentially
dilutive shares were included in the computation of diluted earnings per
share.





Segment
Information


The
principal business of the Company is overseeing the business of the
Bank.  The Company has no significant assets other than its investment
in the Bank. The banking operation is the Company’s only reportable
segment.  The banking segment is principally engaged in the business
of originating mortgage loans secured by one-to-four family residences,
multi-family, construction, commercial and consumer loans.  These
loans are funded primarily through the attraction of deposits from the general
public, borrowings from the Federal Home Loan Bank and brokered deposits.
Selected information is not presented separately for the Company’s reportable
segment, as there is no material difference between that information and the
corresponding information in the consolidated financial statements.





30





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








NOTE
2:                      SECURITIES





The
amortized cost and approximate fair values of securities classified as
available-for-sale are as follows:





Amortized Cost
                    
                    Gross Unrealized Gains
                    
                    Gross Unrealized (Losses)
                    
                    Approximate Fair ValueAs
      of December 31, 2008Equity
      Securities:FHLMC
      stock
                    
                    $
                    26,057
                    
                    
                    $
                    -
                    
                    
                    $
                    (6,639
                    )
                    
                    $
                    19,418Other
                    
                    
                    572,087
                    
                    
                    
                    4,157
                    
                    
                    
                    (34,611
                    )
                    
                    
                    541,633Debt
      Securities:U.
      S. government agencies
                    
                    
                    2,450,000
                    
                    
                    
                    24,130
                    
                    
                    
                    -
                    
                    
                    
                    2,474,130Mortgage-backed
      securities
                    
                    
                    61,304,310
                    
                    
                    
                    1,173,274
                    
                    
                    
                    (7,426
                    )
                    
                    
                    62,470,158$
                    64,352,454
                    
                    
                    $
                    1,201,561
                    
                    
                    $
                    (48,676
                    )
                    
                    $
                    65,505,339Amortized Cost
                    
                    Gross Unrealized Gains
                    
                    Gross Unrealized (Losses)
                    
                    Approximate Fair ValueAs
      of December 31, 2007Equity
      Securities:FHLMC
      stock
                    
                    $
                    26,057
                    
                    
                    $
                    880,205
                    
                    
                    $
                    -
                    
                    
                    $
                    906,262Other
                    
                    
                    718,190
                    
                    
                    
                    -
                    
                    
                    
                    (59,390
                    )
                    
                    
                    658,800Debt
      Securities:U.
      S. government agencies
                    
                    
                    1,800,034
                    
                    
                    
                    4,049
                    
                    
                    
                    -
                    
                    
                    
                    1,804,083Mortgage-backed
      securities
                    
                    
                    11,386,025
                    
                    
                    
                    84,390
                    
                    
                    
                    (109,622
                    )
                    
                    
                    11,360,793$
                    13,930,306
                    
                    
                    $
                    968,644
                    
                    
                    $
                    (169,012
                    )
                    
                    $
                    14,729,938





Maturities
of available-for-sale debt securities as of December 31, 2008:





Amortized Cost
                  
                  
                  Approximate Fair ValueAfter
      ten years
                  
                  $
                  2,450,000
                  
                  
                  $
                  2,474,130Mortgage-backed
      securities not due on a  single maturity date
                  
                  
                  61,304,310
                  
                  
                  
                  62,470,158$
                  63,754,310
                  
                  
                  $
                  64,944,288




31





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The
amortized cost and approximate fair values of securities classified as held to
maturity are as follows:





Amortized Cost
                      
                      
                      Gross Unrealized Gains
                      
                      
                      Gross Unrealized (Losses)
                      
                      
                      Approximate Fair ValueAs
      of December 31, 2008Debt
      Securities:U.
      S. government agencies
                      
                      $
                      135,538
                      
                      
                      $
                      -
                      
                      
                      $
                      (3,236
                      )
                      
                      $
                      132,302Mortgage-backed
      securities
                      
                      
                      420,927
                      
                      
                      
                      24,565
                      
                      
                      
                      (1,395
                      )
                      
                      
                      444,097$
                      556,465
                      
                      
                      $
                      24,565
                      
                      
                      $
                      (4,631
                      )
                      
                      $
                      576,399Amortized Cost
                      
                      
                      Gross Unrealized Gains
                      
                      
                      Gross Unrealized (Losses)
                      
                      
                      Approximate Fair ValueAs
      of December 31, 2007Debt
      Securities:U.
      S. government agencies
                      
                      $
                      148,529
                      
                      
                      $
                      -
                      
                      
                      $
                      (2,000
                      )
                      
                      $
                      146,529Mortgage-backed
      securities
                      
                      
                      506,246
                      
                      
                      
                      32,397
                      
                      
                      
                      -
                      
                      
                      
                      538,643$
                      654,775
                      
                      
                      $
                      32,397
                      
                      
                      $
                      (2,000
                      )
                      
                      $
                      685,172





Maturities
of held-to-maturity securities as of December 31, 2008:





Amortized Cost
                  
                  
                  Approximate Fair ValueAfter
      ten years
                  
                  $
                  135,538
                  
                  
                  $
                  132,302Mortgage-backed
      securities not due on a single maturity date
                  
                  
                  420,927
                  
                  
                  
                  444,097$
                  556,465
                  
                  
                  $
                  576,399





The book
value of securities pledged as collateral, to secure public deposits and for
other purposes, amounted to $54,504,638 and $12,661,393 as of December 31, 2008
and 2007, respectively.  The approximate fair value of pledged
securities amounted to $55,417,307 and $12,659,842 as of December 31, 2008 and
2007, respectively.





Gross
gains of $0, $618,363 and $750,869 and gross losses of $563,615, $0 and $0
resulting from sale of available-for-sale securities and other than temporary
impairment write-downs were realized for the years ended December 31, 2008, 2007
and 2006 respectively.  The tax effect of these net gains (losses) was
($208,538), $228,794 and $277,822 in 2008, 2007 and 2006,
respectively.





The
Company evaluates all securities quarterly to determine if any unrealized losses
are deemed to be other than temporary. In completing these evaluations the
Company follows the requirements of paragraph 16 of SFAS No. 115, Staff
Accounting Bulletin 59 and FASB Staff Position No. 115-1. Certain
investment securities are valued less than their historical cost. These declines
are primarily the result of the rate for these investments yielding less than
current market rates. Based on evaluation of available evidence, management
believes the declines in fair value for these securities are temporary. It is
management’s intent to hold these securities to maturity. Should the impairment
of any of these securities become other than temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in net income in
the period the other-than-temporary impairment is identified.





32





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








During
the fourth quarter of 2008, the Company determined that one investment security
in the other equity securities category had become other than temporarily
impaired. As a result of this impairment, the Company charged down the security
to its current market value. The total of this charge-down was $465,827 for
2008. No other securities were written down for other-than-temporary impairment
in 2008, 2007 and 2006.





Certain
other investments in debt and equity securities are reported in the financial
statements at an amount less than their historical cost.  Total fair
value of these investments at December 31, 2008 and 2007, was $1,629,386 and
$4,013,643, respectively, which is approximately 3% and 26% of the Company’s
investment portfolio.  These declines primarily resulted from changes
in market interest rates and failure of certain investments to meet projected
earnings targets.





The
following table shows gross unrealized losses and fair value, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position at December 31, 2008 and 2007.





December
      31, 2008Less
      than 12 Months
                        
                        
                        12
      Months or More
                        
                        
                        TotalDescription of Securities
                        
                        Fair Value
                        
                        
                        Unrealized Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized LossesEquity
      Securities
                        
                        $
                        56,342
                        
                        
                        $
                        (41,250
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        56,342
                        
                        
                        $
                        (41,250
                        )U.
      S. Government Agencies
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        132,302
                        
                        
                        
                        (3,236
                        )
                        
                        
                        132,302
                        
                        
                        
                        (3,236
                        )Mortgage-backed
      securities
                        
                        
                        1,440,742
                        
                        
                        
                        (8,821
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,440,742
                        
                        
                        
                        (8,821
                        )$
                        1,497,084
                        
                        
                        $
                        (50,071
                        )
                        
                        $
                        132,302
                        
                        
                        $
                        (3,236
                        )
                        
                        $
                        1,629,386
                        
                        
                        $
                        (53,307
                        )December
      31, 2007Less
      than 12 Months
                        
                        
                        12
      Months or More
                        
                        
                        TotalDescription of Securities
                        
                        Fair Value
                        
                        
                        Unrealized Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized Losses
                        
                        
                        Fair Value
                        
                        
                        Unrealized LossesEquity
      Securities
                        
                        $
                        658,800
                        
                        
                        $
                        (59,390
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        658,800
                        
                        
                        $
                        (59,390
                        )U.
      S. Government Agencies
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        146,529
                        
                        
                        
                        (2,000
                        )
                        
                        
                        146,529
                        
                        
                        
                        (2,000
                        )Mortgage-backed
      securities
                        
                        
                        3,208,314
                        
                        
                        
                        (109,622
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,208,314
                        
                        
                        
                        (109,622
                        )$
                        3,867,114
                        
                        
                        $
                        (169,012
                        )
                        
                        $
                        146,529
                        
                        
                        $
                        (2,000
                        )
                        
                        $
                        4,013,643
                        
                        
                        $
                        (171,012
                        )




33





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








NOTE
3:                      LOANS
AND ALLOWANCE FOR LOAN LOSSES





Categories
of loans at December 31, 2008 and 2007 include:





2008
                            
                            
                            2007Real
      estate - residential mortgage:One
      to four family units
                            
                            $
                            107,753,766
                            
                            
                            $
                            83,018,129Multi-family
                            
                            
                            31,757,153
                            
                            
                            
                            41,947,555Real
      estate - construction
                            
                            
                            85,072,577
                            
                            
                            
                            89,724,220Real
      estate - commercial
                            
                            
                            204,218,526
                            
                            
                            
                            175,995,074Commercial
      loans
                            
                            
                            118,468,028
                            
                            
                            
                            104,025,575Installment
      loans
                            
                            
                            26,024,283
                            
                            
                            
                            25,576,502Total
      loans
                            
                            
                            573,294,333
                            
                            
                            
                            520,287,055Less:Allowance
      for loan losses
                            
                            
                            (16,728,492
                            )
                            
                            
                            (5,962,923
                            )Deferred
      loan fees/costs, net
                            
                            
                            (172,598
                            )
                            
                            
                            (224,097
                            )Net
      loans
                            
                            $
                            556,393,243
                            
                            
                            $
                            514,100,035




Impaired
loans totaled $39,888,665 and $7,254,334 as of December 31, 2008 and 2007,
respectively with a related allowance for loan losses of $9,135,248 and
$415,000, respectively.  As of December 31, 2008 and 2007,
respectively, impaired loans of $5,407,045 and $991,398 had no related allowance
for loan losses.





Interest
of $960,075, $166,013 and $275,143 was recognized on average impaired loans of
$22,220,454, $5,136,396 and $3,250,403 for the years ended December 31, 2008,
2007 and 2006, respectively.  Interest of $144,615, $165,148 and
$272,600, was recognized on impaired loans on a cash basis during the years
ended December 31, 2008, 2007 and 2006, respectively.





At
December 31, 2008 and 2007 there were $442,850 and $103,270 in accruing loans
delinquent 90 days or more, respectively. Non-accruing loans at December 31,
2008 and 2007 were $20,694,465 and $7,254,334, respectively.





Activity
in the allowance for loan losses was as follows:





Years
      endedDecember
      31,2008
                
                
                2007
                
                
                2006Balance,
      beginning of year
                
                $
                5,962,923
                
                
                $
                5,783,477
                
                
                $
                5,399,654Provision
      charged to expense
                
                
                14,744,079
                
                
                
                840,000
                
                
                
                750,000Losses
      charged off, net of recoveries of $135,274, $70,990 and $280,854 for the
      years ended December 31, 2008, 2007 and 2006 respectively
                
                
                (3,978,510
                )
                
                
                (660,554
                )
                
                
                (366,177
                )Balance,
      end of year
                
                $
                16,728,492
                
                
                $
                5,962,923
                
                
                $
                5,783,477




34





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The
weighted average interest rate on loans as of December 31, 2008 and 2007 was
5.41% and 7.23%, respectively.





The Bank
serviced mortgage loans for others amounting to $488,626 and $613,633 as of
December 31, 2008 and 2007, respectively. The Bank serviced commercial loans for
others amounting to $22,914,384 and $20,724,871 as of December 31, 2008 and
2007, respectively.





NOTE
4:                  
    PREMISES AND EQUIPMENT





Major
classifications of premises and equipment, stated at cost, are as
follows:





December
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007Land
                  
                  $
                  2,250,789
                  
                  
                  $
                  1,250,789Buildings
      and improvements
                  
                  
                  10,742,945
                  
                  
                  
                  9,534,883Automobile
                  
                  
                  16,479
                  
                  
                  
                  16,479Furniture,
      fixtures and equipment
                  
                  
                  6,850,726
                  
                  
                  
                  6,251,839Leasehold
      improvements
                  
                  
                  271,799
                  
                  
                  
                  271,79920,132,738
                  
                  
                  
                  17,325,789Less
      accumulated depreciation
                  
                  
                  (8,809,275
                  )
                  
                  
                  (7,883,439
                  )Net
      premises and equipment
                  
                  $
                  11,323,463
                  
                  
                  $
                  9,442,350





Depreciation
expense was $934,941, $902,322 and $814,150 for the years ended December 31,
2008, 2007, and 2006, respectively.





NOTE
5:                      OTHER
COMPREHENSIVE INCOME (LOSS)





Other
comprehensive income (loss) components and related taxes were as
follows:





Year
      endedDecember
      31,2008
                    
                    
                    2007
                    
                    
                    2006Unrealized
      gains (losses) on available-for-sale securities
                    
                    $
                    (210,360
                    )
                    
                    $
                    (1,017,798
                    )
                    
                    $
                    56,621Unrealized
      gains on interest rate swaps
                    
                    
                    1,695,836
                    
                    
                    
                    -
                    
                    
                    
                    -Accretion
      of gains on interest rate swaps
                    
                    
                    (169,582
                    )
                    
                    
                    -
                    
                    
                    
                    -Less:
      Reclassification adjustment for realized (gains) losses and write-downs
      included in income
                    
                    
                    563,615
                    
                    
                    
                    (618,363
                    )
                    
                    
                    (750,869
                    )Other
      comprehensive income (loss) before tax effect
                    
                    
                    1,879,509
                    
                    
                    
                    (1,636,161
                    )
                    
                    
                    (694,248
                    )Tax
      expense (benefit)
                    
                    
                    695,418
                    
                    
                    
                    (605,380
                    )
                    
                    
                    (256,871
                    )Other
      comprehensive income (loss)
                    
                    $
                    1,184,091
                    
                    
                    $
                    (1,030,781
                    )
                    
                    $
                    (437,377
                    )




35





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The
components of accumulated other comprehensive income, included in stockholders’
equity, are as follows:





2008
                  
                  
                  2007Unrealized
      gain on available-for-sale securities
                  
                  $
                  1,152,885
                  
                  
                  $
                  799,630Unrealized
      gain on interest rate swaps
                  
                  
                  1,526,254
                  
                  
                  
                  -2,679,139
                  
                  
                  
                  799,630Tax
      effect
                  
                  
                  991,281
                  
                  
                  
                  295,863Net
      of tax amount
                  
                  $
                  1,687,858
                  
                  
                  $
                  503,767





NOTE
6:                      DEPOSITS





December 31, 2008
                                        
                                        
                                        December 31, 2007Weighted Average Rate
                                        
                                        
                                        Balance
                                        
                                        
                                        Percentage of Deposits
                                        
                                        
                                        Weighted Average Rate
                                        
                                        
                                        Balance
                                        
                                        
                                        Percentage of DepositsDemand
                                        
                                        
                                        0.00
                                        %
                                        
                                        $
                                        31,219,635
                                        
                                        
                                        
                                        7.0
                                        %
                                        
                                        
                                        0.00
                                        %
                                        
                                        $
                                        28,520,385
                                        
                                        
                                        
                                        6.8
                                        %NOW
                                        
                                        
                                        1.13
                                        %
                                        
                                        
                                        42,949,458
                                        
                                        
                                        
                                        9.6
                                        %
                                        
                                        
                                        1.35
                                        %
                                        
                                        
                                        36,511,976
                                        
                                        
                                        
                                        8.7
                                        %Money
      market
                                        
                                        
                                        1.85
                                        %
                                        
                                        
                                        52,082,723
                                        
                                        
                                        
                                        11.7
                                        %
                                        
                                        
                                        3.48
                                        %
                                        
                                        
                                        64,319,237
                                        
                                        
                                        
                                        15.4
                                        %Savings
                                        
                                        
                                        0.94
                                        %
                                        
                                        
                                        12,253,106
                                        
                                        
                                        
                                        2.7
                                        %
                                        
                                        
                                        2.11
                                        %
                                        
                                        
                                        12,421,113
                                        
                                        
                                        
                                        3.0
                                        %1.13
                                        %
                                        
                                        
                                        138,504,922
                                        
                                        
                                        
                                        31.0
                                        %
                                        
                                        
                                        2.11
                                        %
                                        
                                        
                                        141,772,711
                                        
                                        
                                        
                                        33.9
                                        %Certificates:0%
      - 3.99%
                                        
                                        
                                        3.25
                                        %
                                        
                                        
                                        182,335,203
                                        
                                        
                                        
                                        40.8
                                        %
                                        
                                        
                                        3.60
                                        %
                                        
                                        
                                        5,523,980
                                        
                                        
                                        
                                        1.3
                                        %4.00%
      - 5.99%
                                        
                                        
                                        4.79
                                        %
                                        
                                        
                                        126,209,344
                                        
                                        
                                        
                                        28.2
                                        %
                                        
                                        
                                        5.12
                                        %
                                        
                                        
                                        268,121,877
                                        
                                        
                                        
                                        64.1
                                        %6.00%
      - 7.99%
                                        
                                        
                                        7.77
                                        %
                                        
                                        
                                        30,000
                                        
                                        
                                        
                                        0.0
                                        %
                                        
                                        
                                        6.00
                                        %
                                        
                                        
                                        2,772,716
                                        
                                        
                                        
                                        0.7
                                        %3.88
                                        %
                                        
                                        
                                        308,574,547
                                        
                                        
                                        
                                        69.0
                                        %
                                        
                                        
                                        5.10
                                        %
                                        
                                        
                                        276,418,573
                                        
                                        
                                        
                                        66.1
                                        %Total
      Deposits
                                        
                                        
                                        3.03
                                        %
                                        
                                        $
                                        447,079,469
                                        
                                        
                                        
                                        100.0
                                        %
                                        
                                        
                                        4.09
                                        %
                                        
                                        $
                                        418,191,284
                                        
                                        
                                        
                                        100.0
                                        %




The
aggregate amount of certificates of deposit with a minimum balance of $100,000
was approximately $98,135,000 and $93,752,000, as of December 31, 2008 and 2007,
respectively.





A summary
of certificates of deposit by maturity as of December 31, 2008, is as
follows:





2009
                  
                  $
                  226,400,5972010
                  
                  
                  58,249,2112011
                  
                  
                  10,042,2302012
                  
                  
                  8,897,1372013
                  
                  
                  3,771,224Thereafter
                  
                  
                  1,214,148$
                  308,574,547








36





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








A summary
of interest expense on deposits is as follows:





Years
      endedDecember
      31,2008
                  
                  
                  2007
                  
                  
                  2006NOW
      and Money Market accounts
                  
                  $
                  1,806,564
                  
                  
                  $
                  2,940,311
                  
                  
                  $
                  1,709,996Savings
      accounts
                  
                  
                  142,739
                  
                  
                  
                  320,172
                  
                  
                  
                  364,685Certificate
      accounts
                  
                  
                  12,341,918
                  
                  
                  
                  12,657,119
                  
                  
                  
                  8,493,705Early
      withdrawal penalties
                  
                  
                  (71,489
                  )
                  
                  
                  (56,808
                  )
                  
                  
                  (45,183
                  )$
                  14,219,732
                  
                  
                  $
                  15,860,794
                  
                  
                  $
                  10,523,203





The Bank
utilizes brokered deposits as an additional funding source.  The
aggregate amount of brokered deposits was approximately $39,869,000 and
$14,914,000 as of December 31, 2008 and 2007, respectively.





NOTE
7:                      BORROWINGS








Federal Home Loan Bank
Advances





Federal
Home Loan Bank advances consist of the following:




December 31, 2008
                  
                  
                  December 31, 2007Maturity Date
                  
                  Amount
                  
                  
                  Weighted Average Rate
                  
                  
                  Amount
                  
                  
                  Weighted Average Rate2008
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  69,650,000
                  
                  
                  
                  4.24
                  %2009
                  
                  
                  21,386,000
                  
                  
                  
                  1.01
                  %
                  
                  
                  386,000
                  
                  
                  
                  7.21
                  %2010
                  
                  
                  18,000,000
                  
                  
                  
                  3.77
                  %
                  
                  
                  3,000,000
                  
                  
                  
                  6.37
                  %2011
                  
                  
                  25,000,000
                  
                  
                  
                  3.53
                  %
                  
                  
                  -
                  
                  
                  
                  -2013
                  
                  
                  15,700,000
                  
                  
                  
                  2.14
                  %
                  
                  
                  -
                  
                  
                  
                  -Thereafter
                  
                  
                  52,350,000
                  
                  
                  
                  2.26
                  %
                  
                  
                  3,050,000
                  
                  
                  
                  5.13
                  %$
                  132,436,000
                  
                  
                  
                  2.49
                  %
                  
                  $
                  76,086,000
                  
                  
                  
                  4.37
                  %




The FHLB
requires the Bank to maintain collateral in relation to outstanding balances of
advances.  For collateral purposes, the FHLB values mortgage loans
free of other pledges, liens and encumbrances at 80% of their fair value, and
investment securities free of other pledges, liens and encumbrances at 95% of
their fair value.





Federal Reserve Bank
Borrowings





During
2008, the Bank established a borrowing line with Federal Reserve
Bank.  The Bank has the ability to borrow $30,634,000 as of December
31, 2008.  The Federal Reserve Bank requires the Bank to maintain
collateral in relation to borrowings outstanding.  The Bank had an
outstanding balance of $0 as of December 31, 2008.





Securities Sold Under
Agreements to Repurchase





The
Company borrowed $9.8 million under a structured repurchase agreement in
September 2007.  Interest is based on a variable rate of three month
LIBOR minus 100 basis points until September 12, 2009 and converts into a fixed
rate of 3.56% thereafter until maturity in September 2014.  The
counterparty, Barclay’s Capital, Inc., has the right to terminate the
transaction after two years.





37





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The
Company borrowed $30 million under three structured repurchase agreements in
January 2008.  Interest is based on a fixed weighted average rate of
2.65% until maturity in January 2018.  The counterparty, Barclay’s
Capital, Inc., has the right to terminate the transactions after two
years.





The
Company has pledged certain investment securities with a fair value of $51.5
million as of December 31, 2008 to these repurchase agreements.





Notes
payable





The
Company had a $1.4 million revolving line of credit with a correspondent bank to
be used for stock repurchases and investments.  The line of credit was
secured by bank stock, bore interest at one-month LIBOR plus 1.75%, payable
quarterly, and matured on December 31, 2008.  The balance was
$1,435,190 and $718,190 at December 31, 2008 and 2007,
respectively.  On January 30, 2009, the outstanding balance of this
line of credit was paid in full.





NOTE
8:                      SUBORDINATED
DEBENTURES





During
2005, the Company formed two wholly owned grantor trust subsidiaries, Guaranty
Statutory Trust I and Guaranty Statutory Trust II, to issue preferred
securities representing undivided beneficial interests in the assets of the
trusts and to invest the gross proceeds of the preferred securities in notes of
the Company.  Trust I issued $5,000,000 of preferred securities and
Trust II issued $10,000,000 of preferred securities.  The sole assets
of Trust I were originally $5,155,000 aggregate principal amount of the
Company’s fixed rate subordinated debenture notes due 2036, which are redeemable
beginning in 2011.  The sole assets of Trust II were originally
$10,310,000 aggregate principal amount of the Company’s fixed/variable rate
subordinated debenture notes due 2036, which are redeemable beginning in
2011.  Trust II subordinated debenture notes bear interest at a fixed
rate for five years and thereafter at a floating rate based on
LIBOR.  The preferred securities qualify as either Tier I or Tier II
capital for regulatory purposes, subject to certain limitations.





NOTE
9:                      INCOME
TAXES





As of
December 31, 2008 and 2007, retained earnings included approximately $5,075,000
for which no deferred income tax liability has been recognized.  This
amount represents an allocation of income to bad debt deductions for tax
purposes only.  Reduction of amounts so allocated for purposes other
than tax bad debt losses or adjustments arising from carryback of net operating
losses would create income for tax purposes only, which would be subject to the
then current corporate income tax rate.  The unrecorded deferred
income tax liability on the above amount was approximately $1,878,000 as of
December 31, 2008 and 2007.





The
provision (credit) for income taxes consists of:





Years
      EndedDecember
      31,2008
                    
                    
                    2007
                    
                    
                    2006Taxes
      currently payable
                    
                    $
                    1,154,957
                    
                    
                    $
                    3,587,610
                    
                    
                    $
                    4,634,722Deferred
      income taxes
                    
                    
                    (4,143,816
                    )
                    
                    
                    (187,839
                    )
                    
                    
                    (592,927
                    )$
                    (2,988,859
                    )
                    
                    $
                    3,399,771
                    
                    
                    $
                    4,041,795





The tax
effects of temporary differences related to deferred taxes shown on the December
31, 2008 and 2007 balance sheets are:





38





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








December
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007Deferred
      tax assets:Allowances
      for loan losses
                  
                  $
                  6,189,542
                  
                  
                  $
                  2,206,281Accrued
      compensated absences
                  
                  
                  18,500
                  
                  
                  
                  18,500Interest
      on non-accrual loans
                  
                  
                  10,494
                  
                  
                  
                  43,525Impairment
      loss on available-for-sale securities
                  
                  
                  158,381
                  
                  
                  
                  -Deferred
      loan fees/costs
                  
                  
                  63,861
                  
                  
                  
                  82,9156,440,778
                  
                  
                  
                  2,351,221Deferred
      tax liabilities:FHLB
      stock dividends
                  
                  
                  (120,632
                  )
                  
                  
                  (120,632
                  )Unrealized
      appreciation on available-for-sale securities
                  
                  
                  (426,567
                  )
                  
                  
                  (295,863
                  )Accumulated
      depreciation
                  
                  
                  (62,580
                  )
                  
                  
                  (93,383
                  )Other
                  
                  
                  (62,186
                  )
                  
                  
                  (85,642
                  )(671,965
                  )
                  
                  
                  (595,520
                  )Net
      deferred tax asset
                  
                  $
                  5,768,813
                  
                  
                  $
                  1,755,701





A
reconciliation of income tax expense at the statutory rate to income tax expense
at the Company’s effective rate is shown below:





Years
      endedDecember
      31,2008
                  
                  
                  2007
                  
                  
                  2006Computed
      at statutory rate
                  
                  
                  -34.0
                  %
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %Increase
      (reduction) in taxes resulting from:State
      financial institution tax
                  
                  
                  0.1
                  %
                  
                  
                  0.8
                  %
                  
                  
                  2.7
                  %ESOP
                  
                  
                  0.5
                  %
                  
                  
                  3.1
                  %
                  
                  
                  2.6
                  %Other
                  
                  
                  -2.4
                  %
                  
                  
                  -2.1
                  %
                  
                  
                  -1.0
                  %Actual
      tax provision (credit)
                  
                  
                  -35.8
                  %
                  
                  
                  35.8
                  %
                  
                  
                  38.3
                  %





Missouri
law provides that banks will be taxed based on an annual privilege tax of 7% of
net income.  The privilege tax is included in provision for income
taxes.





NOTE
10:                      DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS





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





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





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





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





39





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








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





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





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





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





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





The
following table summarizes financial assets and liabilities measured at fair
value on a recurring basis as of December 31, 2008, segregated by the level of
the valuation inputs within the fair value hierarchy utilized to measure fair
value (dollar amounts in thousands):





Financial
      Assets:Level 1 inputs
                
                
                Level 2 inputs
                
                
                Level 3 inputs
                
                
                Total fair valueAvailable-for-sale
      securities
                
                $
                561
                
                
                $
                64,944
                
                
                $
                -
                
                
                $
                65,505





Certain
financial assets are measured at fair value on a nonrecurring basis, that is,
the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).  Financial assets measured at fair
value during 2008 on a non-recurring basis that were still held on the balance
sheet at December 31, 2008, were valued using the valuation inputs shown below
(dollar amounts in thousands):




Level 1 inputs
                  
                  
                  Level 2 inputs
                  
                  
                  Level 3 inputs
                  
                  
                  Total fair valueImpaired
      loans
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  32,706
                  
                  
                  $
                  32,706


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





The
following table presents estimated fair values of the Company’s financial
instruments.  The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant
judgments by management and uncertainties.  Fair value is the
estimated amount at which financial assets or liabilities could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale.  Because no market exists for certain of these
financial instruments and because management does not intend to sell these
financial instruments, the Company does not know whether the fair values shown
below represent values at which the respective financial instruments could be
sold individually or in the aggregate.





40





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








December 31, 2008
                            
                            
                            December 31, 2007Carrying Amount
                            
                            
                            Fair Value
                            
                            
                            Carrying Amount
                            
                            
                            Fair ValueFinancial
      assets:Cash
      and cash equivalents
                            
                            $
                            15,097,015
                            
                            
                            
                            15,097,015
                            
                            
                            $
                            12,046,202
                            
                            
                            
                            12,046,202Available-for-sale
      securities
                            
                            
                            65,505,339
                            
                            
                            
                            65,505,339
                            
                            
                            
                            14,729,938
                            
                            
                            
                            14,729,938Held-to-maturity
      securities
                            
                            
                            556,465
                            
                            
                            
                            576,399
                            
                            
                            
                            654,775
                            
                            
                            
                            685,172Federal
      Home Loan Bank stock
                            
                            
                            6,730,100
                            
                            
                            
                            6,730,100
                            
                            
                            
                            4,014,700
                            
                            
                            
                            4,014,700Mortgage
      loans held for sale
                            
                            
                            1,933,798
                            
                            
                            
                            1,933,798
                            
                            
                            
                            2,141,998
                            
                            
                            
                            2,141,998Loans,
      net
                            
                            
                            556,393,243
                            
                            
                            
                            575,444,855
                            
                            
                            
                            514,100,035
                            
                            
                            
                            514,637,570Interest
      receivable
                            
                            
                            2,632,450
                            
                            
                            
                            2,632,450
                            
                            
                            
                            3,323,448
                            
                            
                            
                            3,323,448Financial
      liabilities:Deposits
                            
                            
                            447,079,469
                            
                            
                            
                            456,127,421
                            
                            
                            
                            418,191,284
                            
                            
                            
                            419,513,185Federal
      Home Loan Bank advances
                            
                            
                            132,436,000
                            
                            
                            
                            134,713,550
                            
                            
                            
                            76,086,000
                            
                            
                            
                            76,532,490Securities
      sold under agreements to repurchase
                            
                            
                            39,750,000
                            
                            
                            
                            40,622,942
                            
                            
                            
                            9,849,295
                            
                            
                            
                            9,890,736Subordinated
      debentures
                            
                            
                            15,465,000
                            
                            
                            
                            15,465,000
                            
                            
                            
                            15,465,000
                            
                            
                            
                            15,465,000Notes
      payable
                            
                            
                            1,435,190
                            
                            
                            
                            1,435,190
                            
                            
                            
                            718,190
                            
                            
                            
                            718,190Interest
      payable
                            
                            
                            1,577,279
                            
                            
                            
                            1,577,279
                            
                            
                            
                            1,793,663
                            
                            
                            
                            1,793,663Dividend
      payable
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            469,373
                            
                            
                            
                            469,373Unrecognized
      financial instruments (net of contractual value):Commitments
      to extend credit
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Unused
      lines of credit
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -





The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:





Cash and Cash Equivalents
and Federal Home Loan Bank stock


The
carrying amounts reported in the balance sheets approximate those assets' fair
value.




Interest
Receivable


The
carrying amount of interest receivable approximates its fair value.





Mortgage Loans Held for
Sale


The
carrying amount of mortgage loans held for sale approximate their fair value due
to the short term nature of the category.





Loans


The fair
value of loans is estimated by discounting the future cash flows using the
Treasury Yield Curve over the estimated life of the loans, adjusted for credit
risk.  Loans with similar characteristics are aggregated for purposes
of the calculations.





Deposits


The fair
value of demand deposits and savings accounts is the amount payable on demand at
the reporting date (i.e., their carrying amounts).  The fair value of
fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the Treasury Yield Curve over their estimated
life.





41





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








Federal Home Loan Bank
Advances and Securities Sold under Agreements to
Repurchase


The fair
value of advances and subordinated debentures is estimated by using the Treasury
Yield Curve over the estimated life of the instruments.





Subordinated Debentures and
Notes Payable


For these
variable rate instruments, the carrying amount is a reasonable estimate of fair
value.





Interest and Dividend
Payable


The
carrying amounts of interest payable and dividend payable approximates their
fair value.





Commitments to Extend
Credit, Letters of Credit and Lines of Credit


The fair
value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present credit worthiness of the counterparties.  For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates.  The fair
value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.





NOTE
11:                   SIGNIFICANT
ESTIMATES AND CONCENTRATIONS





Accounting
principles generally accepted in the United States of America require disclosure
of certain significant estimates and current vulnerabilities due to certain
concentrations.  Estimates related to the allowance for loan losses
are reflected in the footnote regarding loans.  Current
vulnerabilities due to certain concentrations of credit risk are discussed in
the footnote on commitments and credit risk.





The
current economic environment presents financial institutions with unprecedented
circumstances and challenges which in some cases have resulted in large declines
in the fair values of investments and other assets, constraints on liquidity and
significant credit quality problems, including severe volatility in the
valuation of real estate and other collateral supporting loans.  The
financial statements have been prepared using the values and information
currently available to the Company.





Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material
future adjustments in asset values, the allowance for loan losses, or capital
that could negatively impact the Company’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.





NOTE
12:                   EMPLOYEE
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.





The Bank
recognized $0, $0 and $18,537 of expense under these stock award plans in the
years ended December 31, 2008, 2007 and 2006, respectively.





42





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








Stock Option
Plans


The
Company has established four stock option plans for the benefit of certain
directors, officers and employees of the Company 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 Company 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 Company 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 granted nonqualified stock
options for 13,263 shares of the Company’s common stock.





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 138,500 stock options have been
granted under this plan, with 11,000 stock options cancelled.





43





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The table
below summarizes transactions under the Company’s stock option
plans:





Number of sharesIncentive Stock Option
                
                
                Non-Incentive Stock Option
                
                
                Weighted Average Exercise
    PriceBalance
      outstanding as of January 1, 2006
                
                
                164,785
                
                
                
                175,091
                
                
                $
                15.65Granted
                
                
                20,000
                
                
                
                -
                
                
                
                28.06Exercised
                
                
                (24,294
                )
                
                
                (57,885
                )
                
                
                13.96Forfeited
                
                
                (5,000
                )
                
                
                (2,000
                )
                
                
                24.84Balance
      outstanding as of December 31, 2006
                
                
                155,491
                
                
                
                115,206
                
                
                
                17.30Granted
                
                
                19,500
                
                
                
                25,000
                
                
                
                29.48Exercised
                
                
                (56,958
                )
                
                
                (26,000
                )
                
                
                13.49Forfeited
                
                
                -
                
                
                
                -
                
                
                
                -Balance
      outstanding as of December 31, 2007
                
                
                118,033
                
                
                
                114,206
                
                
                
                20.48Granted
                
                
                34,000
                
                
                
                20,000
                
                
                
                26.72Exercised
                
                
                (28,313
                )
                
                
                (15,002
                )
                
                
                13.36Forfeited
                
                
                (15,470
                )
                
                
                (2,500
                )
                
                
                21.17Balance
      outstanding as of December 31, 2008
                
                
                108,250
                
                
                
                116,704
                
                
                
                23.29Options
      exercisable as of December 31, 2008
                
                
                36,950
                
                
                
                74,204
                
                
                
                19.44





As of
December 31, 2008, total outstanding stock options of 224,954 had a remaining
contractual life of 6.62 years.





The total
intrinsic value of outstanding stock options was $0 and $1,914,130 at December
31, 2008 and 2007, respectively, and the total intrinsic value of outstanding
exercisable stock options was $0 and $1,600,704 at December 31, 2008 and 2007,
respectively.  The total intrinsic value of stock options exercised
was $387,957 and $1,298,634 in 2008 and 2007, respectively.  The total
fair value of share awards vested was $193,815 and $919,069 during 2008 and
2007, respectively.





The fair
value of each option granted is estimated on the date of the grant using the
Black-Scholes pricing model with the following weighted-average
assumptions:





December 31, 2008
                
                
                December 31, 2007
                
                
                December 31, 2006Dividends
      per share
                
                $
                0.36
                
                
                $
                0.70
                
                
                $
                0.66Risk-free
      interest rate
                
                
                3.25
                %
                
                
                4.54
                %
                
                
                4.52
                %Expected
      life of options
                
                5
      years
                
                
                5
      years
                
                
                5
      yearsWeighted-average
      volatility
                
                
                7.17
                %
                
                
                4.62
                %
                
                
                9.16
                %Weighted-average
      fair value of options granted during year
                
                $
                1.72
                
                
                $
                2.95
                
                
                $
                3.41





Employee Stock Ownership
Plan


The Bank
sponsors an internally-leveraged Employee Stock Ownership Plan
(ESOP).  All employees are eligible to participate after they attain
age twenty-one and complete twelve consecutive months of service during which
they work at least 1,000 hours. The ESOP borrowed $3,444,540 from the Company
and purchased 344,454 shares of the common stock of the Company. The ESOP debt
is secured by shares of the Company.  The loan will be repaid from
contributions to the ESOP as approved annually by the Bank’s Board of
Directors.  As the debt is repaid, shares are released from collateral
and allocated to employees’ accounts. The shares pledged as collateral are
reported as unearned ESOP shares in the consolidated balance sheet. When shares
are committed for release, the shares become outstanding for earnings per share
computations.  Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings and may be paid directly to participants or
credited to their account; dividends are not paid on unallocated ESOP
shares.  Compensation expense is recognized ratably based on the
average fair value of shares committed to be released.  Compensation
expense attributed to the ESOP was $408,388, $672,765 and $651,958 for the years
ended December 31, 2008, 2007 and 2006, respectively.





44





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The
following is a summary of ESOP shares as of December 31, 2008:





Beginning
      ESOP shares
                  
                  
                  344,454Released
      shares
                  
                  
                  (230,567
                  )Shares
      committed for release
                  
                  
                  (23,414
                  )Unreleased
      shares
                  
                  
                  90,473Fair
      value of unreleased shares
                  
                  $
                  480,412




NOTE
13:                   DERIVATIVE
FINANCIAL INSTRUMENTS





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





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





In June
2008, the Company entered into three, 2 year interest rate swap agreements
totaling a $90 million notional amount to hedge against interest rate risk on
variable rate loans.  As a cash flow hedge, the portion of the change
in the fair value of the derivative that has been deemed highly effective is
recognized in other comprehensive income until the related cash flows from the
hedged item are recognized in earnings.    The Company
documents, both at inception and periodically over the life of the hedge, its
analysis of actual and expected hedge effectiveness.  To the extent
that the hedge of future cash flows is deemed ineffective, changes in the fair
value of the derivative are recognized in earnings as a component of other
noninterest expense.  For the duration of the swap agreements, there
was no ineffectiveness attributable to the cash flow hedges.





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





NOTE
14:                   RELATED
PARTY TRANSACTIONS





In the
ordinary course of business, the Bank has granted loans to executive officers
and directors and their affiliates.  Annual activity consisted of the
following:





Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Balance,
      beginning of year
                  
                  $
                  3,590,630
                  
                  
                  $
                  3,508,387
                  
                  
                  $
                  3,270,812New
      Loans
                  
                  
                  4,460,569
                  
                  
                  
                  100,000
                  
                  
                  
                  680,588Repayments
                  
                  
                  (1,250,760
                  )
                  
                  
                  (17,757
                  )
                  
                  
                  (443,013
                  )Balance,
      end of year
                  
                  $
                  6,800,439
                  
                  
                  $
                  3,590,630
                  
                  
                  $
                  3,508,387




45





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








In
management's opinion, such loans and other extensions of credit and deposits
were made in the ordinary course of business and were made on substantially the
same terms as those prevailing at the time for comparable transactions with
other persons.  Further, in management's opinion, these loans did not
involve more than normal risk of collectability or present other unfavorable
features.





NOTE
15:                   COMMITMENTS
AND CREDIT RISK





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  Since a portion of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.  The Bank evaluates each
customer's credit worthiness on a case-by-case basis.  The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation of the
counterparty.  Collateral held varies but may include accounts
receivable, inventory, property and equipment, commercial real estate and
residential real estate.





As of
December 31, 2008 and 2007, the Bank had outstanding commitments to originate
mortgage loans of approximately $5,001,000 and $3,490,000,
respectively.  The commitments extend over varying periods of time
with the majority being disbursed within a thirty-day period.  As of
December 31, 2008 and 2007, commitments of $5,001,000 and $2,941,000,
respectively, were at fixed rates and $0 and $549,000, respectively, were at
floating market rates.





Standby
letters of credit are irrevocable conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.  Financial
standby letters of credit are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions.  Performance standby letters of credit are issued to
guarantee performance of certain customers under non-financial contractual
obligations.  The credit risk involved in issuing standby letters of
credit is essentially the same as that involved in extending loans to
customers.  Fees for letters of credit issued after December 31, 2002
are initially recorded by the Bank as deferred revenue and are included in
earnings at the termination of the respective agreements.  Should the
Bank be obligated to perform under the standby letters of credit, the Bank may
seek recourse from the customer for reimbursement of amounts paid.





The Bank
had total outstanding standby letters of credit amounting to $15,059,000 and
$12,464,000 as of December 31, 2008 and 2007, respectively, with terms ranging
from 30 days to 4 years.





Lines of
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract.  Lines of credit generally
have fixed expiration dates.  Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements.  Each customer's credit worthiness is
evaluated on a case-by-case basis.  The amount of collateral obtained,
if deemed necessary, is based on management's credit evaluation of the
counterparty.  Collateral held varies but may include accounts
receivable, inventory, property and equipment, commercial real estate and
residential real estate.  Management uses the same credit policies in
granting lines of credit as it does for on balance sheet
instruments.





46





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








As of
December 31, 2008 and 2007, unused lines of credit to borrowers aggregated
approximately $49,253,000 and $63,403,000 for commercial lines and $20,829,000
and $21,957,000 for open-end consumer lines.





As of
December 31, 2008, the Company has commitments to purchase $3 million in low
income housing investments in southwest Missouri.





NOTE
16:                   CONDENSED
PARENT COMPANY STATEMENTS





The
condensed balance sheets as of December 31, 2008 and 2007, and statements of
income and cash flows for the years ended December 31, 2008, 2007 and 2006 for
the parent company, Guaranty Federal Bancshares, Inc., are as
follows:





2008
                
                
                2007AssetsCash
                
                $
                1,050,726
                
                
                $
                547,796Available-for-sale
      securities
                
                
                541,633
                
                
                
                658,800Due
      from subsidiary
                
                
                22,195
                
                
                
                28,126Investment
      in subsidiary
                
                
                51,546,714
                
                
                
                56,693,200Investment
      in Capital Trust I & II
                
                
                465,000
                
                
                
                468,420Prepaid
      expenses and other assets
                
                
                402,565
                
                
                
                463,642Refundable
      income taxes
                
                
                204,136
                
                
                
                681,266Deferred
      income taxes
                
                
                169,649
                
                
                
                21,974$
                54,402,618
                
                
                $
                59,563,224LiabilitiesNotes
      payable
                
                $
                1,435,190
                
                
                $
                718,190Subordinated
      debentures
                
                
                15,465,000
                
                
                
                15,465,000Accrued
      expenses and other liabilities
                
                
                189,526
                
                
                
                224,001Dividend
      payable
                
                
                -
                
                
                
                469,373Stockholders'
      equityCommon
      stock
                
                
                677,980
                
                
                
                673,649Additional
      paid-in capital
                
                
                58,535,159
                
                
                
                57,571,929Unearned
      ESOP shares
                
                
                (888,930
                )
                
                
                (1,116,930
                )Retained
      earnings
                
                
                39,114,189
                
                
                
                45,402,449Unrealized
      appreciation on available-for-sale securities and interest rate swaps,
      net
                
                
                1,687,858
                
                
                
                503,767Treasury
      stock
                
                
                (61,813,354
                )
                
                
                (60,348,204
                )$
                54,402,618
                
                
                $
                59,563,224




47





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








Income
      Statements
                    
                    Years ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006IncomeDividends
      from subsidiary bank
                    
                    $
                    2,537,098
                    
                    
                    $
                    8,487,268
                    
                    
                    $
                    4,639,062Loss
      on investment securities
                    
                    
                    (563,615
                    )
                    
                    
                    -
                    
                    
                    
                    -Interest
      income:Related
      party
                    
                    
                    70,165
                    
                    
                    
                    135,015
                    
                    
                    
                    150,308Other
                    
                    
                    78,865
                    
                    
                    
                    30,783
                    
                    
                    
                    31,1252,122,513
                    
                    
                    
                    8,653,066
                    
                    
                    
                    4,820,495ExpenseInterest
      expense:Other
                    
                    
                    53,132
                    
                    
                    
                    13,037
                    
                    
                    
                    963Related
      party
                    
                    
                    1,023,783
                    
                    
                    
                    1,023,783
                    
                    
                    
                    1,027,526Occupancy
                    
                    
                    2,200
                    
                    
                    
                    2,400
                    
                    
                    
                    2,400Other
                    
                    
                    686,676
                    
                    
                    
                    953,200
                    
                    
                    
                    879,4841,765,791
                    
                    
                    
                    1,992,420
                    
                    
                    
                    1,910,373Income
      before income taxes and equity in undistributed earnings of
      subsidiaries
                    
                    
                    356,722
                    
                    
                    
                    6,660,646
                    
                    
                    
                    2,910,122Credit
      for income taxes
                    
                    
                    (595,913
                    )
                    
                    
                    (349,935
                    )
                    
                    
                    (427,642
                    )Income
      before equity in undistributed earnings of subsidiaries
                    
                    
                    952,635
                    
                    
                    
                    7,010,581
                    
                    
                    
                    3,337,764Equity
      in undistributedearnings
      (losses) of subsidiaries
                    
                    
                    (6,312,346
                    )
                    
                    
                    (910,699
                    )
                    
                    
                    3,171,320Net
      income (loss)
                    
                    $
                    (5,359,711
                    )
                    
                    $
                    6,099,882
                    
                    
                    $
                    6,509,084




48





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








Statements
      of Cash Flows
                
                Years ended December 31,2008
                
                
                2007
                
                
                2006Cash
      Flows From Operating ActivitiesNet
      income (loss)
                
                $
                (5,359,711
                )
                
                $
                6,099,882
                
                
                $
                6,509,084Items
      not requiring (providing) cash:Equity
      in undistributed (earnings) loss of subsidiaries
                
                
                3,775,248
                
                
                
                -
                
                
                
                (3,171,320
                )Release
      of ESOP shares
                
                
                408,388
                
                
                
                672,765
                
                
                
                651,958Stock
      award plan expense
                
                
                92,846
                
                
                
                71,325
                
                
                
                83,192Loss
      on investment securities
                
                
                563,615
                
                
                
                -
                
                
                
                -Changes
      in:Prepaid
      expenses and other assets
                
                
                64,497
                
                
                
                19,210
                
                
                
                (8,810
                )Income
      taxes payable/refundable
                
                
                434,415
                
                
                
                353,980
                
                
                
                (307,380
                )Accrued
      expenses
                
                
                (34,475
                )
                
                
                (52,707
                )
                
                
                151,084Net
      cash provided by (used in) operating activities
                
                
                (55,177
                )
                
                
                7,164,455
                
                
                
                3,907,808Cash
      Flows From Investing ActivitiesPurchase
      of AFS securities
                
                
                (717,512
                )
                
                
                (718,190
                )
                
                
                -Maturities
      of AFS securities
                
                
                300,000
                
                
                
                -
                
                
                
                -Distributions
      in excess of net income of subsidiary
                
                
                2,537,098
                
                
                
                910,699
                
                
                
                -Net
      (increase) decrease in advance to subsidiary
                
                
                5,931
                
                
                
                769
                
                
                
                (28,895
                )Net
      cash provided by (used in) investing activities
                
                
                2,125,517
                
                
                
                193,278
                
                
                
                (28,895
                )Cash
      Flows From Financing ActivitiesStock
      options exercised
                
                
                578,661
                
                
                
                1,118,762
                
                
                
                1,147,042Cash
      dividends paid
                
                
                (1,397,921
                )
                
                
                (1,879,256
                )
                
                
                (1,850,300
                )Treasury
      stock purchased
                
                
                (1,465,150
                )
                
                
                (7,479,118
                )
                
                
                (3,593,081
                )Proceeds
      from issuance of notes payable
                
                
                1,064,000
                
                
                
                2,468,000
                
                
                
                -Repayment
      of notes payable
                
                
                (347,000
                )
                
                
                (1,749,810
                )
                
                
                -Net
      cash used in financing activities
                
                
                (1,567,410
                )
                
                
                (7,521,422
                )
                
                
                (4,296,339
                )Increase
      (decrease) in cash
                
                
                502,930
                
                
                
                (163,689
                )
                
                
                (417,426
                )Cash,
      beginning of year
                
                
                547,796
                
                
                
                711,485
                
                
                
                1,128,911Cash,
      end of year
                
                $
                1,050,726
                
                
                $
                547,796
                
                
                $
                711,485





NOTE
17:                   SUBSEQUENT
EVENTS





Troubled Asset Relief
Program





On
January 30, 2009, as part of the U.S. Department of the Treasury's Troubled
Asset Relief Program's Capital Purchase Program, the Company entered into an
Agreement with the United States Department of the Treasury (the "Treasury")
pursuant to which the Company sold to the Treasury 17,000 shares of Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, (the "Series A Preferred Stock")
and issued a ten year warrant (the "Warrant") to purchase 459,459 shares of the
Company's common stock (the "Common Stock") for $5.55 per share (the "Warrant
Shares") for a total purchase price of $17.0 million in cash (the
"Transaction").





49





Guaranty
Federal Bancshares, Inc.


Notes
to Consolidated Financial Statements








The
Series A Preferred Stock will qualify as Tier 1 capital and will be entitled to
cumulative preferred dividends at a rate of 5% per year for the first five
years, payable quarterly, and 9% thereafter. The Series A Preferred Stock has a
liquidation preference of $1,000 per share, plus accrued and unpaid
dividends.  The failure by the Company to pay a total of six quarterly
dividends, whether or not consecutive, gives the holders of the Series A
Preferred Stock the right to elect two directors to the Company's Board of
Directors.





During
the first three years after the Transaction, the Company may not redeem the
Series A Preferred Stock except in conjunction with a "qualified equity
offering" meeting certain requirements. After three years, the Company may
redeem the Series A Preferred Stock for $1,000 per share, plus accrued and
unpaid dividends, in whole or in part, subject to regulatory
approval.





In
conformity with requirements of the SPA and Section 111(b) of the Emergency
Economic Stabilization Act of 2008 (the "EESA"), the Company and its subsidiary,
Guaranty Bank, and each of its Senior Executive Officers agreed to limit certain
compensation, bonus, incentive and other benefits plans, arrangements, and
policies with respect to the Senior Executive Officers during the period that
the Treasury owns any debt or equity securities acquired in connection with the
Transaction.  The applicable Senior Executive Officers have entered
into letter agreements with the Company consenting to the foregoing and have
executed a waiver voluntarily waiving any claim against the Treasury or the
Company for any changes to such Senior Executive Officer's compensation or
benefits that are required to comply with Section 111(b) of EESA.





The
Warrant is exercisable immediately upon issuance and expires in ten years. The
Warrant has anti-dilution protections and certain other protections for the
holder, as well as potential registration rights upon written request from the
Treasury.  The Treasury has agreed not to exercise voting rights with
respect to the Warrant Shares that it may acquire upon exercise of the Warrant.
The number of Warrant Shares may be reduced by up to one-half if the Company
completes an equity offering satisfying certain requirements by December 31,
2009. If the Series A Preferred Stock is redeemed in whole, the Company has the
right to purchase any shares of the Common Stock held by the Treasury at their
fair market value at that time.





The
holder has certain registration rights to facilitate a sale of the Series A
Preferred Stock upon written request to the Company.  Neither the
Series A Preferred Stock, the Warrant nor the Warrant Shares will be subject to
any contractual restrictions on transfer, except that Treasury may only transfer
or exercise an aggregate of one-half of the Warrant Shares prior to the earlier
of the redemption of 100% of the shares of Series A Preferred Stock and December
31, 2009.





FDIC deposit insurance
assessments





On
February 27, 2009, the FDIC approved to amend the plan for restoring the Deposit
Insurance Fund.  The FDIC approved to increase regular premium rates
for 2009, implement changes to the risk-based assessment system and impose a
special assessment on insured institutions of 20 basis points.





On March
5, 2009, the FDIC stated that it intends to lower the special assessment from 20
basis points to 10 basis points, contingent upon Congress legislation yet to be
enacted.  The legislation relates to increasing the FDIC’s borrowing
availability with the Department of the Treasury.  The special
assessment will be incurred as of June 30, 2009, payable on September 30,
2009.





As a
result of these changes and the special assessment, the Company projects a
significant increase in its FDIC deposit insurance premium expense by
approximately $1.4 million for 2009.





50





Report
of Independent Registered Public Accounting Firm











Audit
Committee, Board of Directors and Stockholders


Guaranty
Federal Bancshares, Inc.


Springfield,
Missouri








We have
audited the accompanying consolidated balance sheets of Guaranty Federal
Bancshares, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
years in the three-year period ended December 31, 2008.  The Company’s
management is responsible for these financial statements.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting.  Accordingly, we express no
such opinion.  Our audits also included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Guaranty Federal Bancshares,
Inc. as of December 31, 2008 and 2007, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America.





As
discussed in Note 10, in 2008 the Company changed its method of accounting for
fair value measurements in accordance with Statement of Financial Accounting
Standards No. 157.








/s/BKD,
LLP





Springfield,
Missouri


March 30,
2009





51





Guaranty
Federal Bancshares, Inc.


2008
Annual Report





Board
      of Directors
              OfficersGuaranty
      Federal Bancshares, Inc.
              Guaranty
      Federal Bancshares, Inc.and
      Guaranty BankDon
      M. GibsonChairman
      of the BoardGuaranty
      Federal Bancshares and
              Shaun
      A. BurkeGuaranty
      Bank
              President,Chief
      Executive OfficerJack
      L. BarhamVice
      Chairman of the Board
              Carter
      M. PetersGuaranty
      Federal Bancshares
              Executive
      Vice President,Chief
      Financial Officer/Chief Operations OfficerShaun
      A. BurkePresident
      and CEO
              H.
      Michael MattsonGuaranty
      Federal Bancshares and
              Executive
      Vice President,Guaranty
      Bank
              Chief
      Lending OfficerJames
      R. Batten, CPA
              E.
      Lorene ThomasExecutive
      Vice President
              Corporate
      SecretaryConvoy
      of HopeKurt
      D. HellwegPresident
      and CEOInternational
      Dehydrated Foods, Inc. andAmerican
      Dehydrated Foods, Inc.Gregory
      V. OstergrenChairman,
      President and CEOAmerican
      National Property and CasualtyInsurance
      CompaniesTim
      Rosenbury, AIAExecutive
      Vice President and ChairmanButler,
      Rosenbury and Partners, Inc.James
      L. Sivils, III, JDPartner  -
      Morelock Ross Companies






52