UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549







FORM
10-K






x
              ANNUAL
      REPORT PURSUANT TO SECTION 13OR
      15(d) OF THE SECURITIESEXCHANGE ACT OF
1934
 
 For the
fiscal year ended   December
31, 2007
 -
or -
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF
      1934




For the transition period
from____________________  
to   ____________________




Commission File
Number:0-23325





GUARANTY
      FEDERAL BANCSHARES, INC.(Exact Name of Registrant as
      Specified in Its Charter)




Delaware
            
            43-1792717(State or Other Jurisdiction of
      Incorporation
            
            (I.R.S. Employer Identification
      No.)or
      Organization)





1341 West Battlefield,Springfield,Missouri
            
            65807(Address of Principal Executive
      Offices)
            
            (Zip
  Code)





Registrant's telephone number, including
area code:(417)
520-4333





Securities registered pursuant to
Section 12(b) of the Act:Common
Stock, par value $.10 per share


(Title of Class)


Securities registered pursuant to
Section 12(g) of the Act:None





Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.  Yes oNo x





Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.   Yes oNo x


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




Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K x.






1
 Table of Contents


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





Large accelerated file  o
            Accelerated filer  o
            Non-accelerated filer  o
            Smaller reporting company 
      x





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes oNo x





The aggregate market value of the voting
and non-voting common stock held by non-affiliates of the registrant, based on
the average bid and asked prices of the registrant's Common Stock as quoted on
the Global Market of The NASDAQ Stock Market onJune 30, 2007 (the last business day of
the registrant’s most recently completed second quarter) was $70.3
million.  As of March 18, 2008 there were 2,706,675 shares of the
registrant's Common Stock outstanding.








DOCUMENTS INCORPORATED BY
REFERENCE





1.
            Portions
      of the Annual Report to Stockholders (the “2007 Annual Report”) for the
      fiscal year ended December 31, 2007 (Parts I and
  II).


2.
            Portions
      of the Proxy Statement for the Annual Meeting of Stockholders (the “Proxy
      Statement”)to be held on May
      28, 2008 (Part III).




2


GUARANTY FEDERAL
BANCSHARES, INC.





Form 10-K





TABLE OF CONTENTS





Item
            
            
            PagePART I1
            Business
            
            51A
            Risk Factors
            
            291B
            Unresolved Staff Comments
            
            312
            Properties
            
            313
            Legal
      Proceedings
            
            314
            Submission of Matters
      to a Vote of Security Holders
            
            31PART II5
            Market for
      Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
            
            326
            Selected Financial
      Data
            
            337.
            Management's Discussion and Analysis of Financial Condition and Results
      of Operations
            
            337A.
            Quantitative and
      Qualitative Disclosures About Market Risk
            
            338
            Financial Statements
      and Supplementary Data
            
            339
            Changes in and
      Disagreements with Accountants on Accounting and
      Financial Disclosure
            
            339A.(T)
            Controls and
      Procedures
            
            339B.
            Other
      Information
            
            34PART III10
            Directors, Executive Officers and Corporate
      Governance
            
            3511
            Executive Compensation
            
            3512
            Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
            
            3613
            Certain Relationships and Related Transactions, and Director
      Independence
            
            3714
            Principal Accountant Fees and Services
            
            37PART IV15
            Exhibits and
      Financial Statement Schedules
            
            38Signatures




3
 Table of Contents





CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS





GUARANTY FEDERAL BANCSHARES, INC. (THE
"COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING
STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K
AND THE EXHIBITS THERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER
COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.WHEN USED IN THIS ANNUAL REPORT ON FORM
10-K, WORDS SUCH AS “ANTICIPATES,” “ESTIMATES,” “BELIEVES,” “EXPECTS,” AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS BUT
ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS.





THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON
VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY'S
CONTROL).  THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE
COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE PLANS, OBJECTIVES,
EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING
STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE
STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE
EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES AND LAWS,
INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS; THE
TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY
AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS,
INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS' PRODUCTS
AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE COMPETITORS' PRODUCTS AND
SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE SUCCESS OF THE COMPANY IN
GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND SERVICES, WHEN REQUIRED; THE
IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS
CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES;
ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; THE SUCCESS OF THE
COMPANY AT MANAGING THE RISKS RESULTING FROM THESE FACTORS; ANDOTHER
FACTORS SET FORTH IN REPORTS AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.  FOR FURTHER
INFORMATION ABOUT THESE AND OTHER RISKS, UNCERTAINTIES AND FACTORS, PLEASE
REVIEW THE DISCLOSURE INCLUDED IN ITEM 1A. OF THIS FORM 10-K.





THE COMPANY CAUTIONS THAT THE LISTED
FACTORS ARE NOT EXCLUSIVE.  THE COMPANY DOES NOT UNDERTAKE TO UPDATE
ANY FORWARD-LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM
TIME TO TIME BY OR ON BEHALF OF THE COMPANY.


4
 Table of Contents


PART I




Item 1.  Business





Business of the
Company





Guaranty Federal Bancshares, Inc. (the
“Company”) is a Delaware-chartered corporation that was created in September
1997 at the direction of Guaranty Federal Savings Bank, a federal savings bank
(the "Bank").  The Company became a unitary savings and loan holding
company for the Bank on December 30, 1997, in connection with a plan of
conversion and reorganization involving the Bank and its then existing mutual
holding company.  The mutual holding company structure had been
created in April 1995 at which time more than a majority of the shares of the
Bank were issued to the mutual holding company and the remaining shares were
sold in a public offering.  In connection with the conversion and
reorganization on December 30, 1997, 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 shares of the
Company.  All of the shares of the Bank which remained outstanding
after the conversion are owned by the Company.  Shares of the Company
were issued on December 30, 1997.





On June 27, 2003, the Bank converted
from a federal savings bank to a state-chartered trust company with banking
powers inMissouri, and the Company became a bank holding
company.On this
date, thename 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.  For
this reason, unless otherwise specified, references to the Company include
operations of the Bank.  Further, information in a chart or table
based on Bank only data is identical to or immaterially different from
information that would be provided on a consolidated basis.  In
addition to the Bank, the Company owns Guaranty Statutory Trust I and Guaranty
Statutory Trust II, bothDelawarestatutory trusts.





In 2003, the Company changed its fiscal
year end from June 30 to a calendar year end of December 31.  As a
result, the Company reported a six month transition period ended December 31,
2003 (the “Transition Period”) in order to change to this new calendar year
end.





Business of the Bank





The Bank's principal business has been,
and continues to be, attracting retail deposits from the general public and
investing those deposits, together with funds generated from operations, in
permanent one-to four-family residential mortgage loans, multi-family
residential mortgage loans, construction loans, commercial real estate loans,
and consumer and other loans.  The Bank also invests in
mortgage-backed securities, U.S. Government and federal agency securities and
other marketable securities.  The Bank's revenues are derived
principally from interest on its loans and other investments and fees charged
for services provided, and
gains generated from sales of loans and investment securities, and the Bank’s
results of operations are primarily dependent on net interest margin, which is
the difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. The Bank's primary sources of funds
are: deposits; borrowings; amortization and prepayments of loan principal; and
amortizations, prepayments and maturities of investment
securities.





The Bank is regulated by the Missouri
Division of Finance and its deposits are insured by theDepositInsurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC").  See discussion under section
captioned “Regulation” in this report.  The Bank is a member of the
Federal Home Loan Bank ofDes Moines(the “FHLB”), which is one of twelve
regional Federal Home Loan Banks.  As a member, the Bank is required
to purchase and maintain stock in the FHLB in an amount equal to 0.12% of its
assets plus 4.45% of its outstanding FHLB advances.  At December 31,
2007, the Bank had $4,014,700 in FHLB stock, which was in compliance with this
requirement.


5
 Table of Contents




Information regarding (i) average
balances related to interest earning assets and interest bearing liabilities and
an analysis of net interest earnings for the last three fiscal years and (ii)
changes in interest income and interest expense resulting from changes in
average balances and average rates for the last two fiscal years is provided
under the section captioned “Management’s Discussion and Analysis of Financial
Condition and Results of Operation– Average Balances, Interest and
Averages Yields”of the
2007 Annual Report is incorporated herein by reference.





Market Area





The Bank's primary market areas are
Greene andChristianCounties, which are in the southwestern corner
ofMissouriand includes the cities ofSpringfieldandNixa,Missouri.  There is a large regional
health care presence with two large regional hospitals.  There also
are four accredited colleges and one major university.  Part of the
area’s growth can be attributed to its proximity toBranson,Missouri, which has developed a strong tourism
industry related to country music and entertainment.  Branson is
located 30 miles south ofSpringfield, and attracts between five and six
million tourists each year, many of whom pass throughSpringfield.





Lending Activities





Set forth below is selected data
relating to the composition of the Bank’s loan portfolio at the dates
indicated:








As of December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003$
            
            
            
            %
            
            
            $
            
            
            
            %
            
            
            $
            
            
            
            %
            
            
            $
            
            
            
            %
            
            
            $
            
            
            
            %Dollars
      in ThousandsMortgage
      loans (includes loans held for sale):One
      to four family
            
            $
            85,160
            
            
            
            16
            %
            
            $
            89,650
            
            
            
            18
            %
            
            
            103,532
            
            
            
            23
            %
            
            
            121,307
            
            
            
            31
            %
            
            $
            129,477
            
            
            
            37
            %Multi-family
            
            
            41,948
            
            
            
            8
            %
            
            
            50,366
            
            
            
            10
            %
            
            
            53,631
            
            
            
            12
            %
            
            
            52,259
            
            
            
            13
            %
            
            
            44,242
            
            
            
            13
            %Construction
            
            
            89,724
            
            
            
            17
            %
            
            
            83,967
            
            
            
            17
            %
            
            
            70,390
            
            
            
            16
            %
            
            
            45,090
            
            
            
            11
            %
            
            
            49,814
            
            
            
            14
            %Commercial
      real estate
            
            
            175,995
            
            
            
            34
            %
            
            
            155,801
            
            
            
            32
            %
            
            
            122,884
            
            
            
            28
            %
            
            
            97,550
            
            
            
            25
            %
            
            
            72,105
            
            
            
            21
            %Total
      mortgage loans
            
            
            392,827
            
            
            
            75
            %
            
            
            379,784
            
            
            
            78
            %
            
            
            350,437
            
            
            
            79
            %
            
            
            316,206
            
            
            
            80
            %
            
            
            295,638
            
            
            
            86
            %Commercial
      business loans
            
            
            104,026
            
            
            
            20
            %
            
            
            82,676
            
            
            
            17
            %
            
            
            66,370
            
            
            
            15
            %
            
            
            55,606
            
            
            
            14
            %
            
            
            24,618
            
            
            
            7
            %Consumer
      loans
            
            
            25,576
            
            
            
            5
            %
            
            
            23,708
            
            
            
            5
            %
            
            
            24,264
            
            
            
            6
            %
            
            
            25,172
            
            
            
            6
            %
            
            
            25,441
            
            
            
            7
            %Total
      consumer and other loans
            
            
            129,602
            
            
            
            25
            %
            
            
            106,384
            
            
            
            22
            %
            
            
            90,634
            
            
            
            21
            %
            
            
            80,778
            
            
            
            20
            %
            
            
            50,059
            
            
            
            14
            %Total
      loans
            
            
            522,429
            
            
            
            100
            %
            
            
            486,168
            
            
            
            100
            %
            
            
            441,071
            
            
            
            100
            %
            
            
            396,984
            
            
            
            100
            %
            
            
            345,697
            
            
            
            100
            %Less:Loans
      in process
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            9,425Deferred
      loan fees/costs, net
            
            
            224
            
            
            
            
            
            
            
            115
            
            
            
            
            
            
            
            141
            
            
            
            
            
            
            
            106
            
            
            
            
            
            
            
            237Unearned
      discounts
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            3
            
            
            
            
            
            
            
            7
            
            
            
            
            
            
            
            19Allowance
      for loan losses
            
            
            5,963
            
            
            
            
            
            
            
            5,784
            
            
            
            
            
            
            
            5,400
            
            
            
            
            
            
            
            4,537
            
            
            
            
            
            
            
            3,886Total
      Loans, net
            
            $
            516,242
            
            
            
            
            
            
            $
            480,269
            
            
            
            
            
            
            
            435,527
            
            
            
            
            
            
            
            392,334
            
            
            
            
            
            
            $
            332,130





6
 Table of Contents





The following table sets forth the
maturity of the Bank's loan portfolio as of December 31, 2007.  The
table shows loans that have adjustable rates as due in the period during which
they contractually mature.  The table does not include prepayments or
scheduled principal amortization.








Loan
      Maturities
            
            Due in One Year or Less
            
            
            Due After One Through Five
      Years
            
            
            Due After Five Years
            
            
            Total(Dollars
      in thousands)One
      to four family
            
            $
            13,353
            
            
            
            17,922
            
            
            
            53,884
            
            
            
            85,160Multi
      family
            
            
            14,460
            
            
            
            8,434
            
            
            
            19,054
            
            
            
            41,948Construction
            
            
            77,556
            
            
            
            12,169
            
            
            
            -
            
            
            
            89,724Commercial
      real estate
            
            
            83,383
            
            
            
            91,239
            
            
            
            1,372
            
            
            
            175,995Commercial
      loans
            
            
            57,262
            
            
            
            38,222
            
            
            
            8,541
            
            
            
            104,026Consumer
      loans
            
            
            3,309
            
            
            
            6,468
            
            
            
            15,800
            
            
            
            25,576Total
      loans (1)
            
            $
            249,323
            
            
            
            174,455
            
            
            
            98,651
            
            
            
            522,429Less:Deferred
      loan fees/costs
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            224Allowance
      for loan losses
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,963Loans
      receivable net
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            516,242(1)
      Includes mortgage loans held for sale of $2,142





The following table sets forth the
dollar amount, before deductions for unearned discounts, deferred loan
fees/costs and allowance for loan losses, as of December 31, 2007 of all loans
due after December 2008, which have pre-determined interest rates and which have
adjustable interest rates.








Fixed and Adjustable Rate Loans by
    TypeFixed Rates
            
            
            Adjustable Rates
            
            
            Total
            
            
            % ARM(Dollars
      in Thousands)One-to
      four-family
            
            $
            20,411
            
            
            
            51,396
            
            
            
            71,807
            
            
            
            72
            %Multi-family
            
            
            17,891
            
            
            
            9,597
            
            
            
            27,488
            
            
            
            35
            %Construction
            
            
            1,307
            
            
            
            10,862
            
            
            
            12,169
            
            
            
            89
            %Commercial
      real estate
            
            
            28,586
            
            
            
            64,025
            
            
            
            92,611
            
            
            
            69
            %Commercial
      loans
            
            
            10,786
            
            
            
            35,977
            
            
            
            46,763
            
            
            
            77
            %Consumer
      loans
            
            
            5,483
            
            
            
            16,785
            
            
            
            22,268
            
            
            
            75
            %Total
      loans (1)
            
            $
            84,464
            
            
            
            188,642
            
            
            
            273,106
            
            
            
            69
            %(1) Before
      deductions for unearned discounts, deferred loan fees/costs and allowances
      for loan losses.





One- to Four-Family
Mortgage Loans.The Bank offers fixed- and
adjustable-rate (“ARM”) first mortgage loans secured by one- to four-family
residences in the Bank's primary lending area.  Typically, such
residences are single family homes that serve as the primary residence of the
owner.  However, there are a significant number of loans originated by
the Bank which are secured by non-owner occupied properties.  Loan
originations are generally obtained from existing or past customers, members of
the local community, attorney referrals, established builders, and realtors
within the Bank's market area.  Originated mortgage loans in the
Bank's portfolio include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event that
the borrower transfers ownership of the property without the Bank's
consent.


7
 Table of Contents




As of December 31, 2007, $85.2 million
or 16% of the Bank’s total loan portfolio consisted of one- to four-family
residential loans, of which 72% were ARM loans.  The Bank currently
offers ARM and balloon loans that have fixed interest rate periods of one to
seven years. Generally, ARM loans provide for limits on the maximum interest
rate adjustment ("caps") that can be made at the end of each applicable period
and throughout the duration of the loan.  ARM loans are originated for
a term of up to 30 years on owner-occupied properties and generally up to 25
years on non-owner occupied properties.  Typically, interest rate
adjustments are calculated based onU.S.treasury securities adjusted to a
constant maturity of one year (CMT), plus a 2.50% to 2.75%
margin.  Interest rates charged on fixed-rate loans are competitively
priced based on market conditions and the cost of funds existing at the time the
loan is committed.  The Bank's fixed-rate mortgage loans are made for
terms of 15 to 30 years which are currently being sold on the secondary
market.





Generally, ARM loans pose credit risks
different from the risks inherent in fixed-rate loans, primarily because as
interest rates rise the underlying payments of the borrower rise, thereby
increasing the potential for default.  At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates.  The Bank does not originate ARM loans that provide
for negative amortization.





The Bank generally originates both owner
occupied and non-owner occupied one- to four-family residential mortgage loans
in amounts up to 80% of the appraised value or the selling price of the
mortgaged property, whichever is lower.  The Bank on occasion may make
loans up to 95% of appraised value or the selling price of the mortgage
property, whichever is lower.  However, the Bank typically requires
private mortgage insurance for the excess amount over 80% for mortgage loans
with loan to value percentages greater than 80%.





Multi-Family Mortgage
Loans.The Bank
originates multi-family mortgage loans in its primary lending
area.  As of December 31, 2007, $41.9 million or 8% of the Bank's
total loan portfolio consisted of multi-family residential real estate
loans.  With regard to multi-family mortgage loans, the Bank generally
requires personal guarantees of the principals as well as a security interest in
the real estate.  Multi-family mortgage loans are generally originated
in amounts of up to 80% of the appraised value of the property.  A
portion ofthe Bank’s
multi-family mortgage loans have been originated with adjustable rates of
interest which are quoted at a spread to theFHLBadvance rate for the initial fixed rate
period with subsequent adjustments based on the Wall Street prime
rate.  The loan-to-one-borrower limitation, $15.5 million as of
December 31, 2007, is the maximum the Bank will lend on a multi-family
residential real estate loan.





Loans secured by multi-family
residential real estate generally involve a greater degree of credit risk than
one- to four-family residential mortgage loans and carry larger loan
balances.  This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans.  Furthermore, the repayment of loans secured by
multi-family residential real estate is typically dependent upon the successful
operation of the related real estate property.  If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.





Construction
Loans.As of
December 31, 2007, construction loans totaled $89.7 million or 17% of the Bank's
total loan portfolio.  Construction loans originated by the Bank are
generally secured by permanent mortgage loans for the construction of
owner-occupied residential real estate or to finance speculative construction
secured by residential real estate or owner-operated commercial real estate.
This portion of the Bank’s loan portfolio predominantly consists of speculative
loans, i.e.,loans to builders who are speculating
that they will be able to locate a purchaser for the underlying property prior
to or shortly after the time construction has been
completed.


8
 Table of Contents





Construction loans are made to
contractors who have sufficient financial strength and a proven track record,
for the purpose of resale, as well as on a "pre-sold"
basis.  Construction loans made for the purpose of resale generally
provide for interest only payments at floating rates and have terms of six
months to fifteen months.  Construction loans to a borrower who will
occupy a home, or to a builder who has pre-sold the home, typically have loan to
value ratios of up to 85%.  Construction loans for speculative
purposes, models, and commercial properties typically have loan to value ratios
of up to 80%.  Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant.





Construction lending by its nature
entails significant additional risks as compared with one-to four-family
mortgage lending, attributable primarily to the fact that funds are advanced
upon the security of the project under construction prior to its
completion.  As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of the
ultimate project and the ability of the borrower or guarantor to repay the
loan.  Because of these factors, the analysis of the prospective
construction loan projects requires an expertise that is different in
significant respects from that which is required for residential mortgage
lending.  The Bank attempts to address these risks through its
underwriting and construction monitoring procedures.





Commercial Real
Estate Loans.As
of December 31, 2007, the Bank has commercial real estate loans totaling $176
million or 34% of the Bank's total loan portfolio.  Commercial real
estate loans are generally originated in amounts up to 80% of the appraised
value of the mortgaged property. The majority of the Bank’s commercial real
estate loans have been originated with adjustable rates of interest, the
majority of which are quoted at a spread to the FHLB advance rate for the
initial fixed rate period with subsequent adjustments at a spread to the Wall
Street prime rate. The Bank's commercial real estate loans are generally
permanent loans secured by improved property such as office buildings, retail
stores, small shopping centers, medical offices, motels, churches and other
non-residential buildings.





To originate commercial real estate
loans, the Bank generally requires a mortgage and security interest in the
subject real estate, personal guarantees of the principals, a security interest
in the related personal property, and a standby assignment of rents and
leases.  The Bank has established its loan-to-one borrower limitation,
which was $15.5 million as of December 31, 2007, as its maximum commercial real
estate loan amount.  Because of the small number of commercial real
estate loans and the relationship of each borrower to the Bank, each such loan
has differing terms and conditions applicable to the particular
borrower.





Loans secured by commercial real estate
are generally larger and involve a greater degree of risk than residential
mortgage loans.  Because payments on loans secured by commercial real
estate are often dependent on successful operation or management of the
properties, repayment of such loans may be subject, to a greater extent, to
adverse conditions in the real estate market or the economy.  The Bank
seeks to minimize these risks by careful underwriting, requiring personal
guarantees, lending only to established customers and borrowers otherwise known
by the Bank, and generally restricting such loans to its primary market
area.





As of
December 31, 2007, the Bank’s commercial real estate loan portfolio included
approximately $29.5 million, or 6% of the Bank’s total loan
portfolio,in loans to
develop land into residential lots. The Bank utilizes its knowledge of the local
market conditions and appraisals to evaluate the development cost and estimate
projected lot prices and absorption rates to assess loans on residential
subdivisions.  The Bank typically loans up to 80% of the appraised
value over terms up to two years.  Development loans generally involve
a greater degree of risk than residential mortgage loans because (1) the funds
are advanced upon the security of the land which has a materially lower value
prior to completion of the infrastructure required of a subdivision, (2) the
cash flow available for debt repayment is a function of the sale of the
individual lots, and (3) the amount of interest required to service the debt is
a function of the time required to complete the development and sell the
lots.


9
 Table of Contents





Commercial Business
Loans.As of
December 31, 2007, the Bank has commercial business loans totaling $104 million
or 20% of the Bank's total loan portfolio.Commercial business
loans are generally secured by business assets, such as accounts receivable,
equipment and inventory.Unlike residential mortgage
loans, which generally are made on the basis of the borrower's ability to make
repayment from his or her employment and other income and which are secured by
real property whose value tends to be more easily ascertainable, commercial
business loans are of higher risk and typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself. Further, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of the
business. The Bank expects to
continue to expand its commercial business lending as opportunities present
themselves.





Consumer and Other
Loans.The Bank
also offers other loans, primarily consisting of loans secured by certificates
of deposit, consumer loans, home equity loans and automobile
loans.  As of December 31, 2007, the Bank has such loans totaling
$25.6 million or 5% of the Bank’s total loan portfolio.  The Bank
expects to continue to expand its consumer lending as opportunities present
themselves.





Loan Approval
Authority and Underwriting.All loans to borrowers with
aggregate indebtedness exceeding $1.5 million must have the approval of the
Bank’s Loan Committee.  The Loan Committee meets weekly to review and
approve loans made within the scope of its authority.





For all loans originated by the Bank,
upon receipt of a completed loan application from a prospective borrower, a
credit report is requested, income, assets, and certain other information are
verified, and, if necessary, additional financial information is
requested.  An appraisal of the real estate intended to secure the
proposed loan is generally required and is performed by certified
appraisers.  It is the Bank's policy to obtain appropriate insurance
protection on all real estate first mortgage loans.  Borrowers
generally must also obtain hazard insurance prior to closing and generally are
required to advance funds for certain items such as real estate taxes, flood
insurance and private mortgage insurance, when applicable.








Delinquencies,
Non-Performingand Problem
Assets.





Delinquent
Loans.  As of
December 31, 2007, the Bank has eight loans 90 days or more past due with a
principal balance of $6,215,533 and seventy-eight loans between 30 and 89 days
past due with an aggregate principal balance of $8,242,217.  The Bank
generally does not accrue interest on loans past due more than 90
days.





The
following table sets forth the Bank's loans that were accounted for on a
non-accrual basis or 90 days or more delinquent at the dates
indicated.


10
 Table of Contents





Delinquency
      Summary
            
            As
      ofDecember 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in Thousands)Loans
      accounted for on a non-accrual basisor
      contractually past due 90 days or moreMortgage
      Loans:One-
      to four-family
            
            $
            929
            
            
            $
            883
            
            
            $
            452
            
            
            
            770
            
            
            
            703Multi-family
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Construction
            
            
            459
            
            
            
            1,780
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      real estate
            
            
            5,850
            
            
            
            -
            
            
            
            131
            
            
            
            158
            
            
            
            -7,238
            
            
            
            2,663
            
            
            
            583
            
            
            
            928
            
            
            
            703Non-mortgage
      loans:Commercial
      loans
            
            
            -
            
            
            
            44
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other loans
            
            
            16
            
            
            
            41
            
            
            
            138
            
            
            
            79
            
            
            
            4016
            
            
            
            85
            
            
            
            138
            
            
            
            79
            
            
            
            40Total
      non-accrual loans
            
            
            7,254
            
            
            
            2,748
            
            
            
            721
            
            
            
            1,007
            
            
            
            743Accruing
      loans which are contractually pastmaturity
      or past due 90 days or more:Mortgage
      Loans:One-
      to four-family
            
            
            103
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Multi-family
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Construction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      real estate
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -103
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Non-mortgage
      loans:Commercial
      loans
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other loans
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            --
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      past maturity or past due accruing loans
            
            
            103
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      accounted for on a non-accrual basis or contractually past maturity or 90
      days or more past due
            
            $
            7,357
            
            
            $
            2,748
            
            
            $
            721
            
            
            
            1,007
            
            
            
            743Total
      accounted for on a non-accrual basis or contractually past maturity or 90
      days or more past due as a percentage of net loans
            
            
            1.43
            %
            
            
            0.58
            %
            
            
            0.17
            %
            
            
            0.26
            %
            
            
            0.22
            %Total
      accounted for on a non-accrual basis or contractually past maturity or 90
      days or more past due as a percentage of total assets
            
            
            1.30
            %
            
            
            0.52
            %
            
            
            0.15
            %
            
            
            0.23
            %
            
            
            0.19
            %




Non-Performing
Assets.  Loans
are reviewed on a regular basis and are placed on non-accrual status when, in
the opinion of management, the collection of all interest at contractual rates
becomes doubtful. Included as part of such review, mortgage loans are placed on
non-accrual status generally when either principal or interest is more than 90
days past due.  Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest
income.


11
 Table of Contents


Real estate acquired by the Bank as a
result of foreclosure or by deed in lieu of foreclosure is deemed a foreclosed
asset held for sale until such time as it is sold.  When a foreclosed
asset held for sale is acquired it is recorded at its estimated fair value, less
estimated selling expenses.  Valuations of such foreclosed assets are
periodically performed by management, and any subsequent decline in estimated
fair value is charged to operations.





The following table shows the principal
amount of non-performing assets which are not performing under regulatory
guidelines and all foreclosed assets, including assets acquired in settlement of
loans and the resulting impact on interest income for the periods then
ended.





Non-Performing
      Assets
            
            As
      ofDecember 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Non-accrual
      loans:
            
            (Dollars
      in Thousands)Mortgage
      loans:One-
      to four-family
            
            $
            929
            
            
            $
            883
            
            
            $
            452
            
            
            $
            770
            
            
            $
            703Multi-family
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Construction
            
            
            459
            
            
            
            1,780
            
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      real estate
            
            
            5,850
            
            
            
            -
            
            
            
            131
            
            
            
            158
            
            
            
            -7,238
            
            
            
            2,663
            
            
            
            583
            
            
            
            928
            
            
            
            703Non-mortgage
      loans:Commercial
      loans
            
            
            -
            
            
            
            44
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other loans
            
            
            16
            
            
            
            41
            
            
            
            138
            
            
            
            79
            
            
            
            4016
            
            
            
            85
            
            
            
            138
            
            
            
            79
            
            
            
            40Total
      non-accrual loans
            
            
            7,254
            
            
            
            2,748
            
            
            
            721
            
            
            
            1,007
            
            
            
            743Real
      estate and other assets acquired in settlement of loans
            
            
            727
            
            
            
            173
            
            
            
            27
            
            
            
            78
            
            
            
            6Total
      non-performing assets
            
            $
            7,981
            
            
            $
            2,921
            
            
            $
            748
            
            
            $
            1,085
            
            
            $
            749Total
      non-accrual loans as a percentage of net loans
            
            
            1.41
            %
            
            
            0.57
            %
            
            
            0.17
            %
            
            
            0.26
            %
            
            
            0.22
            %Total
      non-performing assets as a percentage of total assets
            
            
            1.41
            %
            
            
            0.56
            %
            
            
            0.16
            %
            
            
            0.25
            %
            
            
            0.19
            %Impact
      on interest income for the period:Interest
      income that would have been recorded on non-accruing loans
            
            $
            716
            
            
            $
            69
            
            
            $
            8
            
            
            $
            23
            
            
            $
            15





12
 Table of Contents


Problem
Assets.Federal
regulations require that the Bank review and classify its assets on a regular
basis to determine those assets considered to be of lesser
quality.  In addition, in connection with examinations of insured
institutions, bank examiners have authority to identify problem assets and, if
appropriate, require them to be classified.  There are three
classifications for problem assets: substandard, doubtful, and
loss.  "Substandard assets" must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not
corrected.  "Doubtful assets" have the weaknesses of substandard
assets with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions, and
values questionable, and there is a high possibility of loss.  An
asset classified "loss" is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. The
regulations have also created a “special mention” category, described as assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Federal regulations require
the Bank to establish general allowances for loan losses from assets classified
as substandard or doubtful.  If an asset or portion thereof is
classified as loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss or charge off such amount.  A portion of general loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital.





For management purposes, the Bank also
designates certain loans for additional attention.  Such loans are
called “Special Mention” and have identified weaknesses, that if the situation
deteriorates, the loans would merit asubstandard classification.




The following table shows the aggregate
amounts of the Bank's classified assets as of December 31,
2007.





Classification
      of Assets
            
            Special Mention
            
            
            Substandard
            
            
            Doubtful
            
            
            Loss
            
            
            TotalNumber
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount(Dollars
      in Thousands)Loans:One-
      to four-family
            
            
            -
            
            
            $
            -
            
            
            
            14
            
            
            $
            1,184
            
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            
            14
            
            
            $
            1,184Multi-family
            
            
            1
            
            
            
            1,235
            
            
            
            1
            
            
            
            6,996
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            8,231Construction
            
            
            1
            
            
            
            2,322
            
            
            
            6
            
            
            
            513
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7
            
            
            
            2,835Commercial
      real estate
            
            
            6
            
            
            
            3,373
            
            
            
            2
            
            
            
            5,897
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8
            
            
            
            9,270Commercial
            
            
            4
            
            
            
            1,944
            
            
            
            1
            
            
            
            2,592
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5
            
            
            
            4,536Land
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      loans
            
            
            3
            
            
            
            203
            
            
            
            6
            
            
            
            622
            
            
            
            1
            
            
            
            5
            
            
            
            -
            
            
            
            -
            
            
            
            10
            
            
            
            830Total
      loans
            
            
            15
            
            
            
            9,077
            
            
            
            30
            
            
            
            17,804
            
            
            
            1
            
            
            
            5
            
            
            
            -
            
            
            
            -
            
            
            
            46
            
            
            
            26,886Foreclosed
      assets held-for-sale:One-
      to four-family
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            334
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            334Land
      and other assets
            
            
            -
            
            
            
            -
            
            
            
            11
            
            
            
            393
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11
            
            
            
            393Total
      foreclosed assets
            
            
            -
            
            
            
            -
            
            
            
            13
            
            
            
            727
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13
            
            
            
            727Total
            
            
            15
            
            
            $
            9,077
            
            
            
            43
            
            
            $
            18,531
            
            
            
            1
            
            
            $
            5
            
            
            
            -
            
            
            $
            -
            
            
            
            59
            
            
            $
            27,613





13
 Table of Contents




Allowance for Loan
Losses





The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and the general
economy.  Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience, and other factors that warrant
recognition in providing for an adequate loan loss allowance.  In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and valuation
of foreclosed assets held for sale.  Such agencies may require the
Bank to recognize additions to the allowance based on their judgments about
information available to them at the time of their
examination.





As of December 31, 2007 the Bank's total
allowance for loan losses was $6.0 million or 1.14% of total
loans.  This allowance reflects not only management's determination to
maintain an allowance for loan losses consistent with regulatory expectations
for non-performing or problem assets, but also reflects the regional economy and
the Bank's policy of evaluating the risks inherent in its loan
portfolio.





For fiscal year 2007, the Bank
experienced loan charge offs in excess of recoveries, and based on the loan
portfolio review discussed above, elected to add to the allowance through a
provision for loan loss, as shown in the table below.  Management
anticipates the need to continue adding to the allowance through charges to
provision for loan losses as anticipated growth in the loan portfolio or other
circumstances warrant.




14
 Table of Contents





The following tables set forth certain
information concerning the Bank's allowance for loan losses for the periods
indicated.





Allowance for Loan Losses
            
            Year
      ended
            
            
            Six
      months endedDecember 31,
            
            
            December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003 (1)(Dollars
      in Thousands)Beginning
      balance
            
            $
            5,784
            
            
            
            5,400
            
            
            
            4,537
            
            
            
            3,886
            
            
            
            2,775Gross
      loan charge offsMortgage
      Loans:One-
      to four-family
            
            
            (56
            )
            
            
            (286
            )
            
            
            (22
            )
            
            
            (188
            )
            
            
            (41
            )Multi-family
            
            
            (1
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Construction
            
            
            (317
            )
            
            
            (29
            )
            
            
            -
            
            
            
            -
            
            
            
            -Commercial
      real estate
            
            
            (49
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -(423
            )
            
            
            (315
            )
            
            
            (22
            )
            
            
            (188
            )
            
            
            (41
            )Non-mortgage
      loans:Commercial
      loans
            
            
            -
            
            
            
            (206
            )
            
            
            (12
            )
            
            
            -
            
            
            
            -Consumer
      and other loans
            
            
            (309
            )
            
            
            (126
            )
            
            
            (119
            )
            
            
            (43
            )
            
            
            (14
            )(309
            )
            
            
            (126
            )
            
            
            (119
            )
            
            
            (43
            )
            
            
            (14
            )Total
      charge offs
            
            
            (732
            )
            
            
            (647
            )
            
            
            (153
            )
            
            
            (231
            )
            
            
            (55
            )RecoveriesMortgage
      Loans:One-
      to four-family
            
            
            10
            
            
            
            109
            
            
            
            61
            
            
            
            9
            
            
            
            1Multi-family
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Construction
            
            
            -
            
            
            
            29
            
            
            
            -
            
            
            
            -
            
            
            
            1Commercial
      real estate
            
            
            11
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -21
            
            
            
            138
            
            
            
            61
            
            
            
            9
            
            
            
            2Non-mortgage
      loans:Commercial
      loans
            
            
            8
            
            
            
            103
            
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other loans
            
            
            42
            
            
            
            40
            
            
            
            10
            
            
            
            9
            
            
            
            250
            
            
            
            143
            
            
            
            10
            
            
            
            9
            
            
            
            2Total
      recoveries
            
            
            71
            
            
            
            281
            
            
            
            71
            
            
            
            18
            
            
            
            4Net
      loan charge-offs
            
            
            (661
            )
            
            
            (366
            )
            
            
            (82
            )
            
            
            (213
            )
            
            
            (51
            )Provision
      charged to expense
            
            
            840
            
            
            
            750
            
            
            
            945
            
            
            
            864
            
            
            
            1,162Ending
      balance
            
            $
            5,963
            
            
            
            5,784
            
            
            
            5,400
            
            
            
            4,537
            
            
            
            3,886Net
      charge-offs as a percentage of average loans, net
            
            
            0.14
            %
            
            
            0.08
            %
            
            
            0.02
            %
            
            
            0.07
            %
            
            
            0.02
            %Allowance
      for loan losses as a percentage of average loans, net
            
            
            1.24
            %
            
            
            1.28
            %
            
            
            1.29
            %
            
            
            1.39
            %
            
            
            1.19
            %Allowance
      for loan losses as a percentage of total non-performing
    loans
            
            
            82
            %
            
            
            210
            %
            
            
            749
            %
            
            
            451
            %
            
            
            523
            %(1)
      In 2003, the Company determined to change its fiscal year end from June 30
      to a calendar year end of  December
      31. As a result, the Company reported a six-month transition period
      ended December 31, 2003 in order
      to change to this new calendar year
  end.


15
 Table of Contents




Allocation of Allowance for Loan
Losses





The following table shows the amount of
the allowance allocated to the mortgage and non-mortgage loan categories and the
respective percent of that loan category to total loans.





Allocation
of Allowance for Loan Losses


As
      ofDecember 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %(Dollars
      in thousands)Mortgage
      Loans
            
            $
            4,484
            
            
            
            75
            %
            
            
            4,512
            
            
            
            78
            %
            
            
            4,266
            
            
            
            79
            %
            
            
            3,630
            
            
            
            80
            %
            
            
            3,342
            
            
            
            86
            %Non-Mortgage
      Loans
            
            
            1,479
            
            
            
            25
            %
            
            
            1,272
            
            
            
            22
            %
            
            
            1,134
            
            
            
            21
            %
            
            
            907
            
            
            
            20
            %
            
            
            544
            
            
            
            14
            %Total
            
            $
            5,963
            
            
            
            100
            %
            
            
            5,784
            
            
            
            100
            %
            
            
            5,400
            
            
            
            100
            %
            
            
            4,537
            
            
            
            100
            %
            
            
            3,886
            
            
            
            100
            %





Investment
Activities





The investment policy of the Company,
which is established by the Company’s Board of Directors and reviewed by the
Investment Committee of the Company’s Board of Directors, is designed primarily
to provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk, and to complement the
Bank's lending activities.  The policy currently provides for
held-to-maturity and available-for-sale investment security portfolios.The Company does not currently engage in
trading investment securities and does not anticipate doing so in the
future.  As of December 31, 2007, the Company has investment
securities with a carrying value of $15.4 million and an estimated fair value of
$15.4 million.  See Note 1 of the Notes to Consolidated Financial
Statements for description of the accounting policy for
investments.  Based on the carrying value of these securities, $14.7
million, or 95.7%, of the Company’s investment securities portfolio are
available-for-sale.





The Company has the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, trust preferred securities, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements, and sale of federal
funds.


16
 Table of Contents




Composition of Investment Securities
Portfolio





The following tables set forth the
amortized cost and approximate fair market values of the available-for-sale
securities and held-to-maturity securities:





Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized (Losses)
            
            
            Approximate Fair ValueAs
      of December 31, 2007AVAILABLE-FOR-SALE
      SECURITIES:Equity
      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
            )
            
            
            11,360,793HELD-TO-MATURITY
      SECURITIES:U.
      S. government agencies
            
            
            148,529
            
            
            
            -
            
            
            
            (2,000
            )
            
            
            146,529Mortgage-backed
      securities
            
            
            506,246
            
            
            
            32,397
            
            
            
            -
            
            
            
            538,643$
            14,585,081
            
            
            
            1,001,041
            
            
            
            (171,012
            )
            
            
            15,415,110




Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized (Losses)
            
            
            Approximate Fair ValueAs
      of December 31, 2006AVAILABLE-FOR-SALE
      SECURITIES:Equity
      Securities:FHLMC
      stock
            
            $
            35,847
            
            
            
            2,449,293
            
            
            
            -
            
            
            
            2,485,140Debt
      Securities:U.
      S. government agencies
            
            
            4,870,979
            
            
            
            1,346
            
            
            
            (12,074
            )
            
            
            4,860,251Mortgage-backed
      securities
            
            
            563,704
            
            
            
            -
            
            
            
            (2,774
            )
            
            
            560,930HELD-TO-MATURITY
      SECURITIES:U.
      S. government agencies
            
            
            158,661
            
            
            
            -
            
            
            
            (481
            )
            
            
            158,180Mortgage-backed
      securities
            
            
            604,364
            
            
            
            31,920
            
            
            
            -
            
            
            
            636,284$
            6,233,555
            
            
            
            2,482,559
            
            
            
            (15,329
            )
            
            
            8,700,785


17
 Table of Contents




Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized (Losses)
            
            
            Approximate Fair ValueAs
      of December 31, 2005AVAILABLE-FOR-SALE
      SECURITIES:Equity
      Securities:FHLMC
      stock
            
            $
            47,595
            
            
            
            3,128,415
            
            
            
            -
            
            
            
            3,176,010Debt
      Securities:U.
      S. government agencies
            
            
            3,579,513
            
            
            
            2,021
            
            
            
            (397
            )
            
            
            3,581,137HELD-TO-MATURITY
      SECURITIES:U.
      S. government agencies
            
            
            189,974
            
            
            
            -
            
            
            
            (2,478
            )
            
            
            187,496Mortgage-backed
      securities
            
            
            754,750
            
            
            
            39,550
            
            
            
            -
            
            
            
            794,300$
            4,571,832
            
            
            
            3,169,986
            
            
            
            (2,875
            )
            
            
            7,738,943





The following table sets forth certain
information regarding the weighted average yields and maturities of the Bank's
investment securities portfolio as of December 31, 2007:








Investment Portfolio Maturities and Average
      Weighted Yields
            
            Amortized Cost
            
            
            Weighted Average Yield
            
            
            Approximate Fair ValueDue
      within one year
            
            $
            500,000
            
            
            
            5.00
            %
            
            $
            501,953Due
      within two and five years
            
            
            1,300,034
            
            
            
            5.06
            %
            
            
            1,302,130Due
      after ten years
            
            
            148,529
            
            
            
            4.25
            %
            
            
            146,529Equity
      securities not due ona
      single maturity date
            
            
            744,247
            
            
            
            0.00
            %
            
            
            1,565,062Mortgage-backed
      securities not due on asingle
      maturity date
            
            
            11,892,271
            
            
            
            5.85
            %
            
            
            11,899,436$
            14,585,081
            
            
            
            5.44
            %
            
            $
            15,415,110




18
 Table of Contents


Sources of Funds





General.  The Company's primary
sources of funds are deposits, borrowings (including issuances of subordinated
debentures), amortization and prepayments of loans and amortization,andprepayments and maturities of
mortgage-backed securities.





Deposits.The Bank offers a variety of
deposit accounts having a range of interest rates and terms.  The
Bank's deposits principally consist of fixed-term certificates of deposit,
savings, money market, individual retirement accounts, and NOW (checking)
accounts.  The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest rates,
local competition, and competition from non-bank financial service
providers.  The Bank's deposits are typically obtained from the areas
in which its offices are located.  The Bank relies primarily on
customer service and long-standing relationships with customers to attract and
retain these deposits.





The Bank seeks to maintain a high level
of stable core deposits by providing high quality service through its employees
and its convenient office and branch locations.





Deposit Account
Types





The following table sets forth the
distribution of the Bank's deposit accounts at the dates indicated(dollars in thousands).








Deposit
      Account TypesAs of December 31,
            
            
            As of December 31,
            
            
            As of December 31,2007
            
            
            2006
            
            
            2005Average
            
            
            
            
            
            Percent
            
            
            Average
            
            
            
            
            
            Percent
            
            
            Average
            
            
            
            
            
            PercentInterest
            
            
            
            
            
            of
      Total
            
            
            Interest
            
            
            
            
            
            of
      Total
            
            
            Interest
            
            
            
            
            
            of
      TotalRate
            
            
            Amount
            
            
            Deposits
            
            
            Rate
            
            
            Amount
            
            
            Deposits
            
            
            Rate
            
            
            Amount
            
            
            DepositsNOW
            
            
            1.35
            %
            
            $
            36,512
            
            
            
            9
            %
            
            
            1.18
            %
            
            
            35,469
            
            
            
            10
            %
            
            
            0.33
            %
            
            
            35,864
            
            
            
            11
            %Savings
            
            
            2.11
            %
            
            
            12,421
            
            
            
            3
            %
            
            
            2.67
            %
            
            
            14,316
            
            
            
            4
            %
            
            
            1.80
            %
            
            
            14,298
            
            
            
            5
            %Money
      Market
            
            
            3.48
            %
            
            
            64,319
            
            
            
            15
            %
            
            
            3.38
            %
            
            
            52,314
            
            
            
            15
            %
            
            
            2.47
            %
            
            
            43,897
            
            
            
            14
            %Non-interestbearing
      demand
            
            
            0.00
            %
            
            
            28,520
            
            
            
            7
            %
            
            
            0.00
            %
            
            
            26,894
            
            
            
            8
            %
            
            
            0.00
            %
            
            
            36,194
            
            
            
            11
            %Total
            
            
            
            
            
            
            141,772
            
            
            
            34
            %
            
            
            
            
            
            
            128,993
            
            
            
            37
            %
            
            
            
            
            
            
            130,253
            
            
            
            41
            %Certificates
      of Deposit: (fixed-rate, fixed-term)1-11
      months
            
            
            5.09
            %
            
            
            190,772
            
            
            
            46
            %
            
            
            4.81
            %
            
            
            167,852
            
            
            
            48
            %
            
            
            3.56
            %
            
            
            125,336
            
            
            
            39
            %12-23
      months
            
            
            5.12
            %
            
            
            57,434
            
            
            
            14
            %
            
            
            5.02
            %
            
            
            35,424
            
            
            
            10
            %
            
            
            3.74
            %
            
            
            48,149
            
            
            
            15
            %24-35
      months
            
            
            5.04
            %
            
            
            12,593
            
            
            
            3
            %
            
            
            4.93
            %
            
            
            11,930
            
            
            
            3
            %
            
            
            4.20
            %
            
            
            9,670
            
            
            
            3
            %36-47
      months
            
            
            5.14
            %
            
            
            5,752
            
            
            
            1
            %
            
            
            4.82
            %
            
            
            3,724
            
            
            
            1
            %
            
            
            3.94
            %
            
            
            4,248
            
            
            
            1
            %48-59
      months
            
            
            5.33
            %
            
            
            6,386
            
            
            
            2
            %
            
            
            5.24
            %
            
            
            2,847
            
            
            
            1
            %
            
            
            4.14
            %
            
            
            1,851
            
            
            
            1
            %60-71
      months
            
            
            5.28
            %
            
            
            3,456
            
            
            
            1
            %
            
            
            5.41
            %
            
            
            1,171
            
            
            
            0
            %
            
            
            4.64
            %
            
            
            552
            
            
            
            0
            %72-95
      months
            
            
            4.55
            %
            
            
            26
            
            
            
            0
            %
            
            
            5.44
            %
            
            
            289
            
            
            
            0
            %
            
            
            0.00
            %
            
            
            -
            
            
            
            0
            %Total
            
            
            
            
            
            
            276,419
            
            
            
            66
            %
            
            
            
            
            
            
            223,237
            
            
            
            63
            %
            
            
            
            
            
            
            189,806
            
            
            
            59
            %Total
      Deposits
            
            
            
            
            
            $
            418,191
            
            
            
            100
            %
            
            
            
            
            
            
            352,230
            
            
            
            100
            %
            
            
            
            
            
            
            320,059
            
            
            
            100
            %





19
 Table of Contents





Maturities of Certificates of Deposit of
$100,000 or More





The following table indicates the
approximate amount of the Bank's certificate of deposit accounts of $100,000 or
more by time remaining until maturity as of December 31,
2007.





(Dollars
      in thousands)As of December 31, 2007Three
      months or less
            
            $
            29,440Over
      three through six months
            
            
            15,272Over
      six through twelve months
            
            
            22,723Over
      twelve months
            
            
            22,327Total
            
            $
            89,762





Borrowings





The Company’s borrowings consist
primarily of FHLB advances,
issuances ofjunior subordinated debentures and
securities sold under agreements to repurchase.





Deposits are the primary source of funds
for the Bank's lending activities and other general business
purposes.  However, during periods when supply of lendable funds
cannot meet the demand for such loans, the FHLB System, to which the Bank is a
member of, makes available, subject to compliance eligibility standards, a
portion of the funds necessary through loans (advances) to its members. The
following table presents certain data for FHLB advances as ofthe dates
indicated.





Selected
      Data for Federal Home Loan Bank AdvancesAs
      of December 31,2007
            
            
            2006
            
            
            2005(Dollars
      in Thousands)Remaining
      maturity:Less
      than one year
            
            $
            69,650
            
            
            
            85,414
            
            
            
            72,414One
      to two years
            
            
            386
            
            
            
            13,650
            
            
            
            3,000Two
      to three years
            
            
            3,000
            
            
            
            386
            
            
            
            16,650Three
      to four years
            
            
            -
            
            
            
            3,000
            
            
            
            386Four
      to five years
            
            
            -
            
            
            
            -
            
            
            
            3,000Over
      five years
            
            
            3,050
            
            
            
            5,550
            
            
            
            4,550Total
            
            $
            76,086
            
            
            
            108,000
            
            
            
            100,000Weighted
      average rate at end of period
            
            
            4.37
            %
            
            
            5.35
            %
            
            
            4.55
            %For
      the period:Average
      outstanding balance
            
            $
            65,575
            
            
            
            110,810
            
            
            
            111,104Weighted
      average interest rate
            
            
            5.29
            %
            
            
            5.16
            %
            
            
            4.04
            %Maximum
      outstanding as of any month end
            
            $
            92,500
            
            
            
            124,000
            
            
            
            132,000




20
 Table of Contents




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





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





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





The
Company used the proceeds of the sale of the Trust Preferred Securities for
general corporate purposes by investing in the Bank, including funding to
increase the Bank’s loan portfolio, restructuring of the Bank’s investment
portfolio and repaying a portion of the Bank’s FHLB advances.





The
following table sets forth certain information as to the Company's subordinated
debentures issued to the Trusts at the dates indicated.





As of December 31,2007
            
            
            2006
            
            
            2005(Dollars
      in Thousands)Subordinated
      debentures
            
            $
            15,465
            
            
            
            15,465
            
            
            
            15,465Weighted
      average interestrate
      of subordinated debentures
            
            
            6.62
            %
            
            
            6.62
            %
            
            
            6.62
            %





21
 Table of Contents





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 variable rate of two times the three month LIBOR
minus 4.72% thereafter until maturity in September 2014.  The
counterparty, Barclay’s Capital, Inc., has the right to terminate the
transaction after two years.  The Company has pledged certain
investment securities with a fair value of $10.5 million as of December 31,
2007.





Notes
payable:  The Company has a $3.5 million revolving line of
credit with a correspondent bank to be used for stock repurchases and
investments.  The line of credit is unsecured, bears interest at
one-month LIBOR plus 1.25%, payable quarterly, and matures on September 30,
2008.  The balance was $718,190 and $0 at December 31, 2007 and 2006,
respectively.





Subsidiary Activity and Segment
Information




The Company has three
wholly-owned subsidiaries: (i) the Bank, the Company’s principal subsidiary and
a state-chartered trust company with banking powers in Missouri; (ii) Guaranty
Statutory Trust I, a Delaware statutory trust (“Trust I”); and (iii) Guaranty Statutory Trust II, a
Delaware statutory trust (“Trust II”, and together with Trust I, the
“Trusts”).  Trust I and Trust II were formed in December 2005 for the
exclusive purpose of issuing trust preferred securities to acquire junior
subordinated debentures issued by the Company.  Those debentures are
the sole assets of the Trusts.  The interest payments by the Company
on the debentures are the sole revenues of the Trusts and are used by the Trusts
to pay the dividends to the holders of the trust preferred
securities.  The Company has guaranteed any and all payment
obligations of the Trusts related to the trust preferred
securities.  Under generally accepted accounting principles, the
Trusts are not consolidated with the Company.





The Bank has one service corporation
subsidiary, Guaranty Financial Services of Springfield, Inc., a Missouri
corporation.  This service corporation, which has been inactive since
February 1, 2003, had agreements with third party providers for the sale of
securities and casualty insurance products.





The Company’s banking operation
conducted through its principal subsidiary, the Bank, is the Company’s only
reportable segment.  Other information about the Company’s business
segment is contained inthe
section captioned “Segment Information” in Note 1 to the consolidated financial
statements in the 2007 Annual Report. This information is incorporated herein by
reference.





Critical
Accounting Policies




“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
contained in Item 7 of this report 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.




22
 Table of Contents


Material
estimates and judgments that are particularly susceptible to significant change
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.




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 to the Consolidated Financial
Statements in the 2007 Annual Report.





Return
on Equity and Assets





The
following table sets forth certain dividend, equity and asset ratios of the
Company for the periods indicated.





Year
      ended
            
            
            Year
      ended
            
            
            Year
      endedDecember 31,
            
            
            December 31,
            
            
            December 31,2007
            
            
            2006
            
            
            2005Dividend
      Payout Ratio
            
            
            32
            %
            
            
            30
            %
            
            
            32
            %Return
      on Average Assets
            
            
            1.17
            %
            
            
            1.33
            %
            
            
            1.28
            %Return
      on Average Equity
            
            
            13.40
            %
            
            
            14.66
            %
            
            
            15.08
            %Stockholders'
      Equity to Assets
            
            
            7.54
            %
            
            
            8.55
            %
            
            
            8.75
            %EPS
      Diluted
            
            $
            2.19
            
            
            
            2.25
            
            
            
            2.03Dividends
            
            $
            0.70
            
            
            
            0.67
            
            
            
            0.65




23
 Table of Contents





Employees





As of March 18, 2008, the Bank has 132
full-time employees and 37 part-time employees.  As of December 31,
2007,the Company had no salaried
employees.  None of the Bank's employees are represented by a
collective bargaining group.  The Bank believes that its relationship
with its employees is good.





Competition





The Bank experiences substantial
competition both in attracting and retaining deposit accounts and in the making
of mortgage and other loans.  The Bank's primary competition comprises
the financial institutions near each of the Bank's offices.  In theSpringfieldmetropolitan area, where the Bank's
main office and branch offices are located, primary competition consists of
commercial banks, credit unions, and savings institutions.





Direct competition for savings accounts
comes from other savings institutions, credit unions, regional bank and thrift
holding companies, and commercial banks located in its primary market
area.  Significant competition for the Bank's other deposit products
and services comes from money market mutual funds, brokerage firms, insurance
companies, and retail stores.  The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions.  Competition for
origination of real estate and other loans normally comes from commercial banks,
savings institutions, mortgage bankers, mortgage brokers, and insurance
companies.





The Bank believes it is able to compete
effectively in its primary market area by offering competitive interest rates
and loan fees, and a variety of deposit products, and by emphasizing personal
customer service.





Website




The Company maintains a website at the
following internet address:www.gbankmo.com.





Regulation





Set forth below is a brief description
of certain laws which relate to the regulation of the Company and the
Bank.These
laws, and regulations adopted under these laws, are primarily intended for the
protection of the Bank’s customers and depositors and not for the benefit of the
stockholders of the Company.  The followingdescription does not purport to be
complete and is qualified in its entirety by reference to the applicable laws
and regulations.





Regulation
of the Company





General.The Company is a registered
bank holding company subject to regulation and supervision of the Board of
Governors of the Federal Reserve System (“FRB”) under the Bank Holding Company
Act of 1956 (“BHCA”).


24
 Table of Contents


Capital.  The FRB has adopted
risk-based capital guidelines for bank holding companies. The minimum guideline
for the ratio (“Risk-Based Capital Ratio”) of total capital (“Total Capital”) to
risk-weighted assets (including certain off-balance-sheet commitments such as
standby letters of credit) is 8%.  At least one-half of Total Capital
must be composed of Tier 1 Capital which generally consists of common
shareholders' equity, minority interests in the equity accounts of consolidated
subsidiaries, noncumulative perpetual preferred stock, a limited amount of
cumulative perpetual preferred stock and certain nonfinancial equity
investments, less goodwill and certain other intangible assets. The remainder,
denominated "Tier 2 Capital," generally consists of limited amounts of
subordinated debt, qualifying hybrid capital instruments, other preferred stock,
loan loss reserves and unrealized gains on certain equity
securities.




In addition, the FRB has established
minimum leverage ratio guidelines for bank holding companies. These guidelines
provide for a minimum ratio of Tier 1 Capital to average total assets less
goodwill (“Leverage Ratio”) of 3% for bank holding companies that meet certain
specified criteria, including those having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 4%. The guidelines also provide that bank holding companies
anticipating or experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum supervisory
levels without significant reliance upon intangible assets. Furthermore, the FRB
has indicated that it will consider a "tangible Tier 1 Leverage Ratio" (after
deducting all intangibles) and other indicia of capital strength in evaluating
proposals for expansion or new activities.




The Bank is subject to Risk-Based
Capital and Leverage Ratio requirements adopted by the FDIC, which are
substantially similar to those adopted by the FRB.  See “Regulation of
the Bank – Prompt Corrective Action.”  In addition, a bank's capital
classifications may affect a bank's activities. For example, under regulations
adopted by the FDIC governing the receipt of brokered deposits, a bank may not
lawfully accept, roll over or renew brokered deposits unless either (i) it is
well capitalized or (ii) it is adequately capitalized and receives a waiver from
the FDIC.




As of December 31, 2007, the Company and
the Bank met their minimum capital adequacy guidelines, and the Bank was
categorized as well capitalized.  Applicable capital and ratio
information is contained under the section titled “Regulatory Matters” in Note 1
to the Consolidated Financial Statements in the 2007 Annual
Report.




Dividend Restrictions
and Share Repurchases.The Company’s source of cash flow
(including cash flow to pay dividends to stockholders) is dividends paid to it
by the Bank. The right of the Company to receive dividends or other
distributions from the Bank is subject to the prior claims of creditors of the
Bank, including depositors.




There are statutory and regulatory
limitations on the payment of dividends to the Company by the Bank. See
discussion under “Regulation of the Bank – Dividend
Limitations.”  Future dividends will depend primarily upon the level
of earnings of the Bank. Banking regulators also have the authority to prohibit
banks and bank holding companies from paying a dividend if they should deem such
payment to be an unsafe or unsound practice.




Unless a bank holding company is well
capitalized immediately before and after the repurchase of its equity
securities, is well managed and is not subject to any unresolved supervisory
issues, it must notify the FRB prior to the purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration (gross consideration paid
minus the gross consideration received from the sale of equity securities) paid
by the Company during the preceding twelve months, is equal to 10% or more of
the Company’s consolidated net worth.  The FRB may disapprove of the
purchase or redemption if it determines, among other things, that the proposal
would constitute an unsafe or unsound business practice.


25
 Table of Contents





Support of Banking
Subsidiaries.Under FRB policy, the
Company is expected to act as a source of financial strength to the Bank and,
where required, to commit resources to support the Bank. Moreover, if the Bank
should become undercapitalized, the Company would be required to guarantee the
Bank's compliance with its capital restoration plan in order for such plan to be
accepted by the FDIC.




Acquisitions.  Under the BHCA, the Company
must obtain the prior approval of the FRB before it may acquire all or
substantially all of the assets of any bank, acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or merge
or consolidate with any other bank holding company. The BHCA also restricts the
Company’s ability to acquire direct or indirect ownership or control of 5% or
more of any class of voting shares of any nonbanking corporation.  The
FRB is required to consider the financial and managerial resources and future
prospects of the bank holding companies and banks concerned and the convenience
and needs of the community to be served. Consideration of financial resources
generally focuses on capital adequacy. Consideration of convenience and needs
issues includes the involved institutions’ performance under the Community
Reinvestment Act of 1977, as amended (the “CRA”). Under the CRA, all financial
institutions have a continuing and affirmative obligation consistent with safe
and sound operation to help meet the credit needs of their entire communities,
including low-to-moderate income neighborhoods. Based on its most recent CRA
compliance examinations, the Bank has received a "satisfactory" CRA
rating.




Transactions With
Affiliates.There are various legal
restrictions on the extent to which a bank holding company may borrow or
otherwise obtain credit from or sell assets or affiliate securities to its bank
subsidiary. In general, covered transactions with a bank subsidiary must be on
nonpreferential terms and cannot exceed, as to any one of the holding company or
the holding company's nonbank subsidiaries, 10% of the bank's capital stock and
surplus, and as to the holding company and all of its nonbank subsidiaries in
the aggregate, 20% of such capital stock and surplus. Special collateral
requirements also apply to covered extensions of credit.





Regulation
of the Bank





General.  The Bank is regulatedas a bank under state and
federal law, including being regulated and supervised by the Missouri Division
of Finance (“MDF”). Its deposits are insured by the Depository Insurance Fund
(“DIF”) of the FDIC, which was created in 2006 in the merger of the Bank
Insurance Fund and the Savings Association Insurance Fund under the Federal
Deposit Insurance Reform Act.  Lending activities and other
investments must complywith various federal statutory and regulatory requirements.  The Bank
is also subject to certain reserve requirements promulgated by the
FRB.





TheMDF,in conjunction with the FDIC, will
regularly examine the Bank and provide reports to the Bank's Board of Directors
on any deficiencies that are found in the Bank's operations.  The
Bank's relationship with its depositors and borrowers is also regulated to a
great extent by federal and state law, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents.





The Bank must file reports with theMDFand the FDIC concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
banks or savings institutions.  This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of theDIFand depositors.  The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory
purposes.


26
 Table of Contents


Insurance of Deposit
Accounts.The
deposit accounts held by the Bank are insured by the DIF generally up to a
maximum of $100,000 for each insured account (as defined by law and
regulation).  Under the Federal Deposit Insurance Reform Act of 2005
(“FDIRA”) which was signed into law on February 8, 2006, this $100,000 insurance
limit can be indexed for inflation as determined by the FDIC on a 5 year
interval.FDRIA increases the deposit insurance coverage for
individual retirement accounts and certain other employee benefit plan accounts
to $250,000, subject to increases for inflation, and provides pass-through
coverage for employee benefit plans.  Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.




As part of FDIRA, three major changes
were made regarding the assessments on banks.  First, the Designated
Reserve Ratio (“DRR”) is no longer set in the law at 1.25%.  Instead,
the FDIC Board sets the DRR annually between a 1.15% and 1.50% rate as
determined by the FDIC regulations.  Second, under FDIRA, even if the
DIF’s reserve meets the DRR, this law allows for assessments on higher risk
banks.  Third, FDIRA eliminated the requirement that FDIC assess
premiums of 23 basis points if the reserve ratio falls below
1.25%.




FDRIA
also authorizes the FDIC to set deposit insurance premium assessments for
depository institutions in amounts the FDIC determines to be necessary or
appropriate, taking into consideration certain factors, including the estimated
operating expenses of the DIF, the estimated case resolution expenses and income
of the DIF, the projected effects on the capital and earnings of depository
institutions, the risk factors taken into consideration under the risk-based
assessment system and any other factors deemed by the FDIC to be
appropriate.  STET requires the FDIC to declare dividends payable to
depository institutions equal to 100% of the amount of the reserve in excess of
1.50% and 50% of the amount of the reserve between 1.35% and 1.50%.





The FDIC charges an annual assessment
for the insurance of deposits based on the risk a particular institution poses
to its deposit insurance fund. Under this system, DIF members pay within a range
of 0 cents to 27 cents per $100 of domestic deposits, depending upon the
institution's risk classification.  Risk classification is based on an
institution's capital group and supervisory subgroup assignment. In addition,
all FDIC-insured institutions are required to pay assessments to the FDIC at an
annual rate of approximately .0172% of insured deposits to fund interest
payments on bonds issued by the Financing Corporation ("FICO"), an agency of the
Federal government established to recapitalize the predecessor to the DIF. These
assessments will continue until the FICO bonds mature in
2017.




Prompt Corrective
Action.The FDIC is required to take prompt
corrective action if a depository institution for which it is the regulator,
including the Bank, does not meet its minimum capital requirements.The FDIC establishes five capital tiers:
“well capitalized”, “adequately capitalized”, “under capitalized”,
“significantly under capitalized” and “critically under
capitalized”.  A depository institution’s capital tier will depend
upon where its capital levels are in relation to various relevant capital
measures, which, among others, include a Tier 1 and total risk-based capital
measure and a leverage ratio capital measure.A depository institution is considered
to be significantly undercapitalized if it has a Total Capital Ratio of less
than 6.0%; a Tier I Capital ratio of less than 3.0%; or a Leverage Ratio of less
than 3.0%. An institution that has a tangible equity capital to assets ratio
equal to or less than 2.0% is deemed to be critically undercapitalized.
"Tangible equity" includes core capital elements counted as Tier 1 Capital for
purposes of the risk-based capital standards, plus the amount of outstanding
cumulative perpetual preferred stock (including related surplus), minus all
intangible assets, with certain exceptions.


27
 Table of Contents


The FDIC may, under certain
circumstances, reclassify a well capitalized insured depository institution as
adequately capitalized. It is also permitted to require an adequately
capitalized or undercapitalized institution to comply with the supervisory
provisions as if the institution were in the next lower category (but not treat
a significantly undercapitalized institution as critically undercapitalized)
based on supervisory information other than the capital levels of the
institution. An institution may be reclassified if the FDIC determines (after
notice and opportunity for hearing) that the institution is in an unsafe or
unsound condition or deems the institution to be engaging in an unsafe or
unsound practice.




As stated previously, the Company and
the Bank met their minimum capital adequacy guidelines, and the Bank was
categorized as well capitalized, as of December 31, 2007.  Applicable
capital and ratio information is contained under the section titled “Regulatory
Matters” in Note 1 to the Consolidated Financial Statements in the 2007 Annual
Report.




Safety and Soundness
Standards.  Federal bank regulators are
required to prescribe standards, by regulations or guidelines, relating to the
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest-rate-risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits and
such other operational and managerial standards as the agencies may deem
appropriate. The federal bank regulatory agencies have adopted guidelines
prescribing safety and soundness standards, which require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines.




Federal Home Loan
Bank System.The
Bank is a member of the Federal Home Loan Bank ofDes Moines(“FHLB-Des Moines”), which is one of 12
regional Federal Home Loan Banks.  As a member, the Bank is required
to purchase and maintain stock in FHLB-Des Moines in an amount equal to 0.12% of
assets plus 4.45% of Federal Home Loan Bank advances.  At December 31,
2007, the Bank had $4,014,700 in FHLB-Des Moines stock, which was in compliance
with this requirement.




Anti-Terrorism
Legislation.The USA Patriot Act of 2001,of which the majority was reauthorized
into law in March 2006, contains anti-money laundering measures affecting insured depository
institutions, broker-dealers and certain other financial institutions.U.S.financial institutions are required to
adopt policies and procedures to combat money launderingand the Treasury Secretaryis grantedbroad authority to establish
regulations and to impose requirements and restrictions on financial
institutions' operations.





Dividend
Limitations.  In
the event the Bank would fail to meet federal minimum capital adequacy
guidelines, its ability to pay dividends to the Company would be
restricted.  In addition, underMissourilaw dividends paid by banks are
restricted by a statutory formula, which provides for the maintenance of a
surplus fund and prohibits the payment of dividends which would impair the
surplus fund.





Recent
Legislation and Legislative and Regulatory Initiatives




Additional proposals to change the laws
governing the financial institutions industry may be introduced in the United
States Congress and in state legislatures, and the various banking agencies
often modify existing regulations or adopt new regulations. Any such changes to
which the Company or the Bank is and will be subject, however, could have a
material effect on the Company or the Bank, and the Company and the Bank cannot
predict what, if any, future actions may be taken by legislative or regulatory
authorities or what impact such future legislation or regulations will have on
the financial institutions industry generally or on the Company and the Bank.





Executive Officers of the
Registrant





Set forth below is information
concerning the executive officers of the Company.


28
 Table of Contents


Shaun A. Burke joined the Bank
in March 2004 as president and Chief Executive Officer. Mr. Burke was appointed
president and Chief Executive Officer of the Company on February 28,
2005.  Mr. Burke was previously with Signature Bank for seven years
where he served as executive vice president and senior credit officer and was a
member of the board of directors.  Mr. Burke has a total of 22 years
banking experience.  Mr. Burke is also a past member of the United Way
Allocations and Agency Relations Executive Committee, Salvation Army Board, and
Big Brothers Big Sisters Board.





Carter
Petersis Executive Vice President,Chief Financial Officer and Chief
Operations Officer of the Bank and the Company.  He joined the Bank
and the Company in August 2005.  Mr. Peters has over 15 years of
experience in the financial services and public accounting
industries.  Prior to joining the Company, Mr. Peters served as the
Chief Financial Officer of Southern Missouri Bank for approximately two years
and was employed by BKD, LLP, a certified public accounting and advising firm,
for approximately eleven years.  He is a Certified Public Accountant
with a Bachelor of Science Degree in Accounting fromMissouriStateUniversity.  He is a member of the
American Institute of Certified Public Accountants and the Missouri Society of
Certified Public Accountants.  He is a current Board member of the
local Make-A-Wish Foundation.




H. Michael Mattsonis Executive Vice President
and Chief Lending Officer of the Bank.  He joined the Bank in June
2006.  Mr. Mattson has over 29 years of commercial banking
experience.  He was previously with Liberty Bank for six years,
including four as Senior Loan Officer.  Mr. Mattson is currently Board
President of Ozarks Food Harvest, Inc., member of the Springfield Area Chamber
of Commerce and has served on its board nominating committee and venture capital
committee.  He is a member of Leadership Springfield Class XI and a
graduate ofRockhurstUniversityand the Graduate School of Banking of
The South atBaton
Rouge,LA.





As of December 31, 2007, the age of
these individuals was 45 for Mr. Burke, 38 for Mr. Peters, and 54 for Mr.
Mattson.





Item 1A.Risk Factors




The
Company’s business and operations are subject to, and may be adversely affected
by, certain risks and uncertainties. The following risks and other information
in this report that is incorporated in this report by reference, including the
Company’s consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”,
should be carefully considered. These risks are not the only ones facing the
Company. Additional risks and uncertainties that management is not aware of or
focused on may also adversely affect the Company’s business and operation. This
Form 10-K is qualified in its entirety by all these risk
factors.





The market price of the Company’s common
stock may fluctuate significantly in response to a number of factors,
including:





•
            Changes in securities analysts’
      estimates of financial performance•
            Volatility of stock market prices
      and volumes•
            Rumors or erroneous
      information•
            Changes in market valuations of
      similar companies•
            Changes in interest
      rates


29
 Table of Contents


•
            New developments in the banking
      industry•
            Variations in quarterly or annual
      operating results•
            New litigation or changes in
      existing litigation•
            Regulatory
      actions•
            Changes in accounting policies or
      procedures as may be required by the Financial AccountingStandards Board or other
      regulatory agencies


Geographical
Risk





The Company’s main markets are in Greene
and Christian counties in southwestMissouri. Since the Company does not have
significant presence in other parts of the country, a prolonged economic
downturn in these markets could negatively impact the
Company.





Industry
Risk





The Company operates in the financial
services industry, a rapidly changing environment having numerous competitors
including other banks and insurance companies, securities dealers, brokers,
trust and investment companies and mortgage bankers. The pace of consolidation
among financial service providers is accelerating and there are many new changes
in technology, product offerings and regulation.


The Company must continue to make
investments in its products and delivery systems to stay competitive with the
industry as a whole or its financial performance may
suffer.





Regulatory
Risk





The Company and its subsidiaries are
subject to extensive state and federal regulation, supervision and legislation
that govern nearly every aspect of its operations. Changes to these laws could
affect the Company’s ability to deliver or expand its services and diminish the
value of its business.





Interest Rate
Risk





The Company’s net interest income is the
largest source of overall revenue to the Company and is mainly based on the
difference between interest earned on loans and investment securities, and the
interest paid on deposits and other borrowings. Interest rates are beyond the
Company’s control, and they fluctuate in response to general economic conditions
and the policies of various governmental and regulatory agencies, in particular,
the Federal Reserve Board. Changes in monetary policy, including changes in
interest rates, will influence the origination of loans, the purchase of
investments, the generation of deposits, and the rates received on loans and
investment securities and paid on deposits.





Lending
Risk





There are inherent risks associated with
the Company’s lending activities. Changes in economic conditions and changes in
interest rates among other things could impact borrowers’ capabilities to repay
the Company outstanding loans. For a complete discussion of the risk elements of
the Company’s loan portfolio, please refer to
page 7.


30
 Table of Contents





Litigation
Risk





From time to time, the Company is
subject to claims and litigation from customers and other individuals. Whether
such claims and legal action are founded or unfounded, if such claims and legal
actions are not resolved in a manner favorable to the Company, they may result
in significant financial liability and/or adversely affect the market perception
of the Company and its products and services. Any financial liability or
reputation damage could have a material adverse effect on the Company’s business
and financial performance.





Item 1B.  Unresolved Staff Comments





Not applicable.





Item 2. Properties





The offices of the Company are located
in the main office of the Bank.





The Bank's office facilities currently
consist of its main office located at 1341 W. Battlefield in Springfield, Greene
County, Missouri, six full-service branch offices in Springfield,one full-service branchoffice in Nixa, Christian County,
Missouri,and one in-store
branch located in the Wal-Mart Supercenter in Nixa, Christian County,
Missouri.  The Bank has a relatively new main office building, which
provides the Bank with a modern office for customer services and projects a
favorable image for the Bank in the local marketplace.  The Bank also
leases afacilityin West Plains, Mountain Grove andMarshfield,Missourifor recently established loan
production offices.





The Bank
maintains a network of Automated Teller Machines ("ATMs").  A total of
20 ATMs are located at various branches and primarily convenience stores located
in Greene and Christian Counties in Missouri.  In addition, the Bank
is a member of the TransFund ATM network which provides its customers surcharge
free access to over 80 area ATMs and over 700 ATMs nationwide.  The
Bank will evaluate and relocate existing ATMs as needed.





Item 3.Legal Proceedings





(a)
              Material Legal
      Proceedings





The Company and the Bank, from time to
time, may be parties to ordinary routine litigation, which arises in the normal
course of business, such as claims to enforce liens, and condemnation
proceedings, on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the business of the Company and the Bank.  As of December
31, 2007, there were no claims or lawsuits pending or known to be contemplated
against the Company or the Bank that would have had a material effect on the
Company or the Bank.





(b)
            Proceedings Terminated During theLastQuarter of the
      Fiscal Year Covered by This
Report





Not applicable.





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





No matter was submitted to a vote of
security holders during thelastquarter of the fiscal year ended
December 31, 2007.


31
 Table of Contents




PART II





Item 5. Market for Registrant's Common Equity,Related
Stockholder Mattersand Issuer Purchases of
Equity Securities





The informationcontained in the section captioned
“Investor Information-Common Stock Prices and Dividends”on page 2 of the 2007 Annual Report is
incorporated herein by reference.





With respect tothe equity compensation planinformationrequired by this item,see“Item 12.  Security Ownership
of Certain Owners and ManagementandRelatedStockholderMatters”in this report.








Issuer Purchasesof Equity
Securities





The
following table summarizes the repurchase activity of the Company’s Common Stock
during the Company’s fourth quarter ended December 31, 2007.








Period
            
            (a)
      Total Number of Shares Purchased
            
            
            (b)
      Average Price Paid per Share
            
            
            (c)
      Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs (1)
            
            
            (d)
      Maximum Number of Shares that May Yet Be Purchased Under the Plans or
      ProgramsOctober
      1, 2007 to October 31, 2007
            
            
            3,143
            
            
            $
            29.86
            
            
            
            3,143
            
            
            
            343,113November
      1, 2007 to November 30, 2007
            
            
            61,900
            
            
            
            29.49
            
            
            
            61,900
            
            
            
            281,213December
      1, 2007 to December 31, 2007
            
            
            20,535
            
            
            
            28.77
            
            
            
            20,535
            
            
            
            260,678Total
            
            
            85,578
            
            
            $
            29.33
            
            
            
            85,578





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




32
 Table of Contents


Item 6.  Selected Financial Data





The information contained on
pages4and 5under the section captioned “Selected
Consolidated Financial and Other Data” of the 2007 Annual Report is incorporated
herein by reference.





Item 7.  Management's Discussion and Analysis of Financial
Condition and Results of Operations





The information contained on pages 6
through 19 under the section captioned “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of the 2007 Annual Report is
incorporated herein by reference.





Item 7A. Quantitative and Qualitative Disclosures About
Market Risk





The information contained on page14and 15 under the
sections captioned “Asset/Liability Management” and “Interest Rate Sensitivity
Analysis” of the 2007 Annual Report is incorporated herein by
reference.





Item  8.  FinancialStatements and Supplementary
Data





The financial statements set forth on
pages 20 to 48of the 2007 Annual Reportand the financial information contained
under the section captioned “Summary of Unaudited Quarterly Operating Results”
set forth on page19of the 2007 Annual Reportare incorporated herein by
reference.





Item 9. Changes in and Disagreements with Accountants On
Accounting and Financial Disclosure





Not applicable.





Item 9A(T).  Controls
and Procedures





Disclosure Controls and
Procedures





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




The Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the Company’s disclosure controls and
procedures.  Based on the foregoing evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of December 31,
2007.





Internal Control Over Financial
Reporting





There have been no changes in the
Company’s internal control over financial reporting during the fourth quarter
ending December 31, 2007 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal controls over financial
reporting.


33
 Table of Contents


MANAGEMENT’S
REPORT ON INTERNAL CONTROL


OVER
FINANCIAL REPORTING








The
management of Guaranty Federal Bancshares, Inc. (the “Company”) is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule
13a-15(f).  The Company’s internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.  The Company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  All internal control systems, no
matter how well designed, have inherent limitations, including the possibility
of human error and the circumvention of overriding
controls.  Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial
statement preparation.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007, based on the framework set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Based on that assessment, management
concluded that, as of December 31, 2007, the Company’s internal control over
financial reporting was effective.





This
annual report on Form 10-K does not include an attestation report of the
Company’s independent registered public accounting firm regarding internal
control over financial reporting.  Management’s report was not subject
to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.








Item 9B.  Other Information





Not applicable.


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 Table of Contents


PART
III








Item 10.  Directors, Executive Officers and Corporate
Governance





The information contained under the
section captioned "First Proposal:  Election of Directors"(excluding any information contained
under the section captioned “Meetings and Committees of the Board of Directors”)
ofthe Proxy Statement is
incorporated herein by reference.





The Company has adopted a Code of
Conduct and Ethics, and it applies to all of the members of the board of
directors, officers and employees of the Company (including the Bank), with
special emphasis on compliance by the directors of the Company and the Company’s
Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer
or Controller or persons performing similar functions for the Company. The
Company’s Code of Conduct and Ethics is available on the Company’s website atwww.gbankmo.comand may be accessed by logging onto the
Company’s website and clicking on the “About Us” link and then the “Code of
Conduct” link.  You will then be able to click on, and access, the
Company’s Code of Conduct and Ethics.  Amendments to, and waivers
granted under, the Company’s Code of Conduct and Ethics, if any, will be posted
to the Company’s website as well.





The information required by Item 10
regarding an audit committee financial expert and the identification of the
members of the audit committee, a separately designated committee of the
Company’s board of directors established in accordance with section 3(a)(58)(A)
of the Securities Exchange Act of 1934, is contained under the section captioned
“Report of the Audit Committee” of the Proxy Statement and is incorporated
herein by reference.





Additional informationrequired by this itemiscontained(i) in the Proxy Statementunderthe section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" andis incorporated herein by reference, and
(ii)underthe section captioned"Executive Officers of the Registrant"
in Item 1 of this report.





Item
11.  Executive Compensation





The information contained in theProxy Statement under thesection captioned "Report
of the Compensation Committee” is incorporated herein by
reference.




35
 Table of Contents





Item 12.Security Ownership of Certain Beneficial Owners
and Managementand Related
Stockholder Matters





Except as set forth below, information
required by this item iscontained underthesection captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statementand isincorporated herein by
reference.





Equity
      Compensation Plan Information(c)Number
      of securitiesremaining
      available(a)
            
            (b)
            
            for
      future issuanceNumber
      of securities to be
            
            Weighted-average
            
            under
      equityissued
      upon exercise  of
            
            exercise
      price of
            
            compensation
      plansoutstanding
      options,
            
            outstanding
      options,
            
            (excluding
      securitiesPlan category
            warrants and rights
            
            warrants and rights
            
            reflected in column (a))Equity
      compensation plans
            193,254
            
            20.89
            
            171,082approved
      by security holdersEquity
      compensation plans notapproved
      by security holders
            38,985
            
            18.42
            
            3,498Totals
            232,239
            
            20.48
            
            174,580





Description of Stock Plans Not Approved
by Stockholders





2000 Stock
Compensation Plan.  During the year ended June
30, 2000, the directors of the Company established the 2000 Stock Compensation
Plan (the “2000 SCP”) with both a stock award component and a stock option
component for a term of ten years.A committee of the Bank’s Board of
Directors (the “Committee”) administers this plan and the 2001 SCP (discussed
below).Stock
options awarded under the plan are considered non-qualified for federal income
tax purposes.  Officers, directors and employees of the Company and
its subsidiaries are eligible under the plan.  Stock awards and stock options vest at
the rate of 20% per year over a five year period andbecome fully vested in the event of a
“change in control” as defined in the plan.  In addition, the price of
the stock options may not be less than the market value of the Company’s common
stock on the date of grant, and the stock options expire no later than ten years
from the date of grant.  Under the stock award
component of this plan, the Committee awarded 7,125 restricted shares of the
Company’s common stock.  As of December 31,2007,there are no restricted shares in this
plan that are not vested.  Therehave been17,875 options grantedunderthisplan atan exercise price of$10.50 per share.The maximum number of shares of the
Company’s common stock permitted to be awarded under this plan (25,000) have
been awarded.  Previously issued awards or options which expire,
become unexercisable, or are forfeited prior to their exercise may be granted as
new awards or options under the plan for the number of shares which were subject
to such expired or forfeited awards or options.


36
 Table of Contents


2001 Stock Compensation
Plan.  During the year ended June 30, 2001, the directors of
the Company established the 2001 Stock Compensation Plan (the “2001 SCP”) with
both a stock award component and a stock option component for a term of ten
years.  Stock options awarded under the plan are considered
non-qualified for federal income tax purposes.  Officers, directors
and employees of the Company and its subsidiaries are eligible under the
plan.  Stock
awards and stock options vest at the rate of 20% per year over a five year
period and become fully vested in the event of a “change in control” as
defined in the plan.  In
addition, the price of the stock options may not be less than the market value
of the Company’s common stock on the date of grant, and the stock options expire
no later than ten years from the date of grant.Under the
stock award component of this plan, the Committee awarded 10,239 restrictedshares of the Company’s
common stock.  As of December 31, 2007, all restricted shares in this
plan are vested.  There have been 13,263 options granted under this
plan at a weighted-average exercise price of $23.61 per share.  The
maximum number of shares of the Company’s Common Stock permitted to be awarded
under this plan is 25,000 shares.  Previously issued awards or options
which expire, become exercisable, or are forfeited prior to their exercise may
be granted as new awards or options under the plan for the number of shares
which were subject to such expired or forfeited awards or options.





2003 StockOption
Agreement.During the period ended December 31,
2003, the independent directors of the Companyauthorizedtheissuance of 5,000 stock
options as an employment inducement to a new officer of theBank pursuant toan individual stock optionagreement.  Stock
options awarded underthisagreementare considered non-qualified for
federal income tax purposes,vest at the rate of 20% per year over a
five year period,become
fully vested in the event of a “change in control” as defined in theagreement and expire no later than ten years from the date of grant.In addition, pursuant to the term of the
stock option agreement which requires that the price of the stock options
granted thereunder may not be less than the market value of the Company’s common
stock on the date of grant, all of these options were granted atan exercise price of$17.20 per share.





2004 StockOption
Agreement.Pursuant to the authorization of the
independent directors of the Company, 25,000 stock options were issued by
the Company on March 9, 2004 as an employment inducement to a new officer (Shaun
Burke) of theBank under an
individualstock optionagreement.  Stock
options awarded underthisagreementare considered non-qualified for
federal income tax purposes,vest at the rate of 20% per year over a
five year period,become
fully vested in the event of a “change in control” as defined in theagreement and expire no later than ten years from the date of grant.In addition, pursuant to the term of the
stock option agreement which requires that the price of the stock options
granted thereunder may not be less than the market value of the Company’s common
stock on the date of grant, all of these options were granted atan exercise price of$19.62 per share.





Item 13.Certain Relationships and Related Transactions,
and DirectorIndependence





The information required by this item iscontained underthe sections captioned "Indebtedness of
Management and Directors and Transactions with Certain Related Persons" and
“Director Independence” in the Proxy Statementand isincorporated herein by
reference.





Item 14.PrincipalAccountant Fees and
Services





The
information required by this item is contained under the section captioned"Principal Accountant Fees
and Services" in the Proxy Statement and is incorporated herein by
reference.


37
 Table of Contents





PART IV





Item
15.Exhibitsand Financial Schedules





1.
            The
      following financial statements and the report of independent registered
      public accounting firm included in the 2007 Annual Report are filed as
      part of this Report and incorporated herein by reference.Report
      of Independent Registered Public Accounting FirmConsolidated Balance Sheets as ofDecember 31, 2007 and 2006.Consolidated
      Statements of Income for the Years Ended December 31, 2007, 2006 and
      2005.Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2007,
      2006 and 2005.Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
      2005.Notes to Consolidated Financial
      Statements.2.
            Financial statement schedules for
      which provision is made in the applicable accounting regulations of the
      SEC are not required under the related instructions or are inapplicable
      and therefore have been omitted.3.
            The
      following exhibits are filed with this Report or incorporated herein
      by reference:




38
 Table of Contents







Index to
Exhibits





Exhibit
              Number
            Exhibit
      Description3(i)
            Restated Certificate of
      Incorporation of Guaranty Federal Bancshares, Inc.
    (1)3(ii)
            Bylaws of Guaranty Federal
      Bancshares, Inc., as amended (7)4
            Rights Agreement dated January 20,
      1999 concerning the issuance of preferred stock and related rights.
      (2)
              The
      Company hereby agrees to furnish the SEC upon request, copies of (i) the
      instruments defining the rights of the holders of each issue of its junior
      subordinated debentures and (ii) the repurchase agreement between the
      Company and Barclay’s Capital, Inc. dated September
  2007.10.1
            1994 Stock Option Plan
      *(3)10.2
            Recognition and Retention Plan
      *(4)10.3
            1998 Stock Option Plan
      *(5)10.4
            Restricted Stock Plan
      *(6)10.5
            Form ofChange in Control Severance
      Agreement *(6)10.6
            2000 Stock Compensation Plan
      *(6)10.7
            2001 Stock Compensation Plan
      *(6)10.8
            2003
      Stock Option Agreement *(8)10.9
            Employment
      Agreement effective as of March 9, 2004 by and between the Bank and Shaun
      A. Burke *(9)10.10
            2004
      Stock Option Agreement dated March 9, 2004 between the Company and Shaun
      A. Burke *(10)10.11
            2004
      Stock Option Plan *(11)10.12
            Form
      of Incentive Stock Option Agreement under the 2004 Stock Option Plan
      *(15)10.13
            Form
      of Non-Incentive Stock Option Agreement under the 2004 Stock Option Plan
      *(16)10.14
            Form
      of Incentive Stock Option Agreement under the 1994 Stock Option Plan
      *(12)10.15
            Form
      of Non-Incentive Stock Option Agreement under the 1994 Stock Option Plan
      *(13)10.16
            Incentive
      Stock Option Agreement dated March 17, 2005 between the Company and Shaun
      A. Burke (issued pursuant to the 2001 Stock Option Plan)
    *(14)10.19
            Written
      Description of Compensatory Arrangement with Chief Operating Officer and
      Chief Financial Officer *(17)10.20
            Written Description of 2007
      Executive Incentive Compensation Annual Plan-President and Chief Executive
      Officer *(18)10.21
            Written Description of 2008
      Executive Incentive Compensation Annual Plan-President and Chief Executive
      Officer *(19)10.22
            Written Description of 2008
      Executive Incentive Compensation Annual Plan-Chief Financial Officer
      *(20)11
            Computation of per share earnings
      is set forth in Note 1 of the Notes to the Consolidated Financial
      Statements under the section captioned “Earnings Per Share” in the 2007
      Annual Report.13
            Annual
      Report to Stockholders for the fiscal period endedDecember
      31,2007
      (only those portions incorporated by reference in this document are deemed
      “filed”)21
            Subsidiaries of the Registrant (
      See Item 1. Business – Subsidiary and Segment
      Information)23
            Consent of BKD,
      LLP31(i).1
            Certification of the Principal Executive Officer
      pursuant to Rule 13a-14(a) of the Exchange
  Act31(i).2
            Certification of the Principal Financial Officer
      pursuant to Rule 13a-14(a) of the Exchange
  Act32.1
            CEO
      certification pursuant to18
      U.S.C. Section 135032.2
            CFO certification pursuant to
      18 U.S.C. Section
      1350* Management contract or
      compensatory plan or
arrangement




39
 Table of Contents








(1)
              Filed
      as an exhibit to the Annual Report on Form 10-K for the fiscal year ended
      June 30, 1998 (SEC File No. 0-23325) and incorporated herein by
      reference.(2)
              Filed
      as an exhibit to the Form 8A filed by Registrant on January 22, 1999 and
      incorporated herein by reference.(3)
              Filed
      as  Exhibit 10.1 of the Registration Statement on Form S-1 filed
      by the Registrant on September 23, 1997 (SEC File No. 333-36141) and
      incorporated herein by reference.(4)
              Filed
      as  Exhibit 10.2 of the Registration Statement on Form S-1 filed
      by the Registrant on September 23, 1997 (SEC File No. 333-36141) and
      incorporated herein by reference.(5)
              Filed
      as Exhibit 4 to the Form S-8 Registration Statement filed by the
      Registrant on March 6, 2002 (SEC File No. 333-83822) and incorporated
      herein by reference.(6)
              Filed
      as an exhibit to the Annual Report on Form 10-K for the fiscal year ended
      June 30, 2001 (SEC File No. 0-23325) and incorporated herein by
      reference.(7)
              Filed
      as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant
      on December 3, 2007 and incorporated herein by
  reference.(8)
              Filed
      as Exhibit 10.8 to the Annual Report on Form 10-K for the transition
      period ended December 31, 2003 filed by the Registrant on March 30, 2004
      (SEC File No. 0-23325) and incorporated herein by
    reference.(9)
              Filed
      as Exhibit 10.9 to the Current Report on Form 8-K filed by the Registrant
      on January 24, 2005 (SEC File No. 0-23325) and incorporated herein by
      reference.(10)
              Filed
      as Exhibit 10.10 to the Current Report on Form 8-K filed by the Registrant
      on January 24, 2005 (SEC File No. 0-23325) and incorporated herein by
      reference.(11)
              Filed
      as Appendix A to the proxy statement for the annual meeting of
      stockholders held on May 19, 2004 (SEC File No. 0-23325) and incorporated
      herein by reference.(12)
              Filed
      as Exhibit 4.2 to the Form S-8 Registration Statement filed by the
      Registrant on March 3, 1998 (SEC File No. 333-47241) and incorporated
      herein by reference.(13)
              Filed
      as Exhibit 4.3 to the Form S-8 Registration Statement filed by the
      Registrant on March 3, 1998 (SEC File No. 333-47241) and incorporated
      herein by reference.(14)
              Filed
      as Exhibit 10.16 to the Current Report on Form 8-K filed by the Registrant
      on March 22,     2005 (SEC File No. 0-23325) and
      incorporated herein by reference.(15)
              Filed
      as Exhibit 10.12 to the Annual Report on Form 10-K for the fiscal
      year ended December 31, 2004 filed by the Registrant on March 30, 2005 and
      incorporated herein by reference.(16)
              Filed
      as Exhibit 10.13 to the Annual Report on Form 10-K for the fiscal
      year ended December 31, 2004 filed by the Registrant on March 30, 2005 and
      incorporated herein by reference.(17)
              Filed
      as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal
      year ended December 31, 2005 filed by the Registrant on March 31, 2006 and
      incorporated herein by reference.(18)
              Filed
      as Exhibit 10.20 to the Quarterly Report on Form 10-Q/A for the
      quarter ended June 30, 2007 filed by the Registrant on November 14, 2007
      and incorporated herein by reference.(19)
              Filed
      as Exhibit 10.21 to the Current Report on Form 8-K filed by the Registrant
      on December 29, 2007 and incorporated herein by
  reference.(20)
              Filed
      as Exhibit 10.22 to the Current Report on Form 8-K filed by the Registrant
      on December 29, 2007 and incorporated herein by
  reference.


40
 Table of Contents





SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




GUARANTY FEDERAL BANCSHARES,
      INC.Date:
      March 31, 2008
              By:
              /s/ Shaun
      A. BurkeShaun A. BurkePresident
      and Chief Executive Officer (Duly Authorized
      Representative)








Pursuant to the requirement of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.






By:
              /s/
      Shaun A. Burke
              
              By:
              /s/
      Tim RosenburyShaun
      A. Burke
              
              
              Tim
      RosenburyPresident
      and Chief Executive Officer and Director
              
              
              Director(Principal
      Executive Officer)
              
              Date:
              March
      31, 2008Date:
              March
      31, 2008
  By:
              /s/
      Carter Peters
              
              By:
              /s/
      James R. BattenCarter
      Peters
              
              
              James
      R. BattenEVP
      and Chief Financial Officer
              
              
              Director(Principal
      Accounting and Financial Officer)
              
              Date:
              March
      31, 2008Date:
              March
      31, 2008
  By:
              /s/
      Wayne V. Barnes
              
              By:
              /s/
      Don M. GibsonWayne
      V. Barnes
              
              
              Don
      M. GibsonDirector
              
              
              Chairman
      of the Board and DirectorDate:
              March
      31, 2008
              
              Date:
              March
      31, 2008
  By:
              /s/
      Gregory V. Ostergren
              
              By:
              /s/
      James L. Sivils, IIIGregory
      V. Ostergren
              
              
              James
      L. Sivils, IIIDirector
              
              
              DirectorDate:
              March
      31, 2008
              
              Date:
              March
      31, 2008
  By:
              /s/
      Kurt D. Hellweg
              
              By:
              /s/
      Jack L. BarhamKurt
      D. Hellweg
              
              
              Jack
      L. BarhamDirector
              
              
              DirectorDate:
              March
      31, 2008
              
              Date:
              March
      31, 2008