**Exhibit 13**





**CONTENTS**





1
Investor Information2
Presidents Message3
Selected Consolidated Financial and Other Data5
Managements Discussion and Analysis of Financial Condition and Results of Operations22
Consolidated Financial Statements54
Report of Independent Registered Public Accounting Firm


****INVESTOR INFORMATION****


**COMMON STOCK PRICES & DIVIDENDS**





The common stock of Guaranty Federal Bancshares, Inc. (the "Company") is traded in the over-the-counter market and quoted on the NASDAQ National Market (symbol GFED). As of March 8, 2005, there were approximately 1,668 stockholders. At that date the Company had 6,506,562 shares of common stock issued and 2,988,579 shares of common stock outstanding.
 
 During the year ended December 31, 2004, the Company paid dividends of (i) $0.155 per share on April 14, 2004, to stockholders of record as of March 30, 2004, (ii) $0.155 per share on July 15, 2004 to stockholders of record as of July 1, 2004, and (iii) $0.16 per share on October 15, 2004, to stockholders of record as of October 1, 2004, and also declared a cash dividend of $0.16 per share on December 16, 2004, which was paid on January 21, 2005, to stockholders of record on January 7, 2005. During the six month period ended December 31, 2003 in which the Company transitioned from a June 30 fiscal year end to a December 31 calendar year end (See "Change of Fiscal Year"), the Company paid cash dividends of $0.155 per share on October 17, 2003, to the stockholders of record as of October 3, 2003, and declared a cash dividend of $0.155 per share on December 19, 2003, which was paid on January 23, 2004, to stockholders of record on January 9, 2004. During the Companys fiscal year ended June 30, 2003, the Company paid cash dividends of (i) $0.15 per share on October 18, 2002, to the stockholders of record as of October 4, 2002, (ii) $0.15 per share on January 24, 2003, to the stockholders of record as of January 10, 2003, and (iii) $0.15 per share on April 14, 2003 to stockholders of record as of March 31, 2003, and also declared a cash dividend of $0.15 per share on June 27, 2003, which was paid on July 15, 2003, to stockholders of record on July 1, 2003. The Companys Board of Directors anticipates paying dividends on comparable dates during fiscal year ended December 31, 2005 to the payment dates during the fiscal year ended December 31, 2004. Such future dividends, if any, will be at the discretion of the Companys Board of Directors and will depend on, among other things, the Companys results of operations, cash requirements and surplus, financial condition and other factors that the Companys Board of Directors may consider relevant.


The table below reflects the range of common stock closing prices per the NASDAQ Stock Market by quarter.


Year ended

Six months ended

Fiscal Year endedDecember 31, 2004

December 31, 2003

June 30, 2003High

Low

High

Low

High

LowQuarter ended:March 31

$
19.95


18.70


n/a


n/a


15.73


14.90June 30


19.95


18.81


n/a


n/a


16.40


15.15September 30


20.01


19.11


17.30


16.04


14.50


13.81December 31


24.15


20.00


19.59


17.15


15.75


13.35


**ANNUAL MEETING OF STOCKHOLDERS:** The Annual Meeting of Stockholders will be held Wednesday, May 25, 2005 at 6:00 p.m., at the Clarion Hotel, 3333 S. Glenstone, Springfield, Missouri.


****


**ANNUAL REPORT ON FORM 10-K:** Copies of the Guaranty Federal Bancshares Inc.s Annual Report on Form 10-K filed with the Securities and Exchange Commission are available without charge upon written request to: Lorene Thomas, Secretary, Guaranty Federal Bancshares, Inc., 1341 W. Battlefield St., Springfield, MO 65807-4181.


****


**TRANSFER AGENT:** Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016


****


**STOCK TRADING INFORMATION:** Over-the Counter Symbol: GFED


****


**SPECIAL LEGAL COUNSEL:** Blackwell Sanders Peper Martin, LLP, 901 St. Louis St., Suite 1900, Springfield, MO 65806


****


**INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS:** BKD, LLP, 901 St. Louis St., PO Box 1190, Springfield, MO 65801-1190


****


**STOCKHOLDER AND FINANCIAL INFORMATION:** Bruce Winston, Senior Vice President, Chief Financial Officer 417-520-0206





1








Dear Shareholders and Associates,





Let me begin by expressing how proud I am of everything our associates accomplished during the past fiscal year. In 2004, Guaranty Federal Bancshares, Inc. achieved double-digit increases in earnings per share and loan and deposit growth while maintaining excellent asset quality and significantly improving efficiency.





I am pleased to report that 2004 resulted in record net income of $1.53 per share ($4.3 million), an increase of 29% over the previous year. In addition, the company posted double-digit growth in the following areas: total assets up 14% to $440.6 million, net loans up 18% to $392.3 million, total deposits up 25% to $296.4 million, net interest income up 15%, and a 16 basis point (.16%) increase in the net interest margin.





Quality growth and efficient operations continue to be essential to our core strategy. Non-performing assets remained well below the peer industry average at .25% of total assets at year-end. Our efficiency ratio improved significantly, dropping from 55.9% in 2003 to 52.5% in 2004, again out- performing our peer group.





The companys capital position continues to be healthy. At December 31, 2004, stockholders equity was $40.8 million (9.3% of total assets), equivalent to a book value of $14.45 per share. The stock performed well in 2004 closings at a record high of $24.06 on December 31, 2004.





These financial results are significant. They are the product of the hard work and dedication of associates committed to a shared set of values which instills confidence that we can expect even greater achievements in the future.





We continue to expand our presence in the market to better serve our customers and to gain market share. During 2004 we opened a new full-service banking center on West Kearney in Springfield, Missouri and broadened our ATM network to 19 locations. Customers utilizing our Internet banking services at www.gbankmo.com increased 39% to over 5,000 users in 2004. We are pleased to announce that our sixth full-service location is underway in the rapidly growing community of Nixa and is expected to open in the third quarter of 2005.





In order to continue the companys growth, we must attract associates who understand and embrace our culture and who can help us fulfill our growth potential. We made several quality additions to our team in 2004 including two key management positions that brought 55 years of combined banking experience to our company and increased the depth and knowledge of our management team.





Finally, on a personal note, I would like to thank Don Gibson for his tenure as President and CEO since 2002. Dons vision and leadership provided stability to the organization and financial results unprecedented in the companys 91-year history. Don is a terrific leader and will continue to be a tremendous asset to the company as our new Chairman of the Board.





Thank you for your support and confidence as we look forward to 2005.








Sincerely,








\s\ Shaun A. Burke


Shaun A. Burke


President & CEO


Guaranty Federal Bancshares, Inc.




2***Guaranty Federal Bancshares, Inc.***
***Selected Consolidated Financial and Other Data***


The following tables include certain information concerning the financial position of Guaranty Federal Bancshares, Inc. (including consolidated data from


operations of subsidiaries) as of the dates indicated. Dollar amounts are expressed in thousands except per share data.




**Summary Statement of Income**

**Year ended**

**Six months ended**

**Six months ended****December 31,**

**December 31,**

**December 31,****2004**

**2003 (1)**

**2002**(Unaudited)Interest income

$
20,539


9,846


11,290Interest expense


8,446


4,491


6,086Net interest income


12,093


5,355


5,204Provision for loan losses


864


1,162


205Net interest income after provisionfor loan losses


11,229


4,193


4,999Noninterest income


3,616


2,089


1,752Noninterest expense


8,248


3,994


4,060Income before income taxes


6,597


2,288


2,691Provision for income taxes


2,313


788


927Net income

$
4,284


1,500


1,764Basic

$
1.53


0.54


0.63Diluted

$
1.47


0.52


0.62**Years ended****June 30,****2003**


**2002**


**2001**Interest income

$
21,782


25,223


27,182Interest expense


11,445


14,087


16,378Net interest income


10,337


11,136


10,804Provision for loan losses


610


291


310Net interest income after provisionfor loan losses


9,727


10,845


10,494Noninterest income


3,688


3,634


2,103Noninterest expense


8,179


8,994


7,621Income before income taxes


5,236


5,485


4,976Provision for income taxes


1,656


1,892


1,743Net income

$
3,580.00


3,593


3,233Basic

$
1.28


1.01


0.78Diluted

$
1.26


1.00


0.77




3***Guaranty Federal Bancshares, Inc.***
***Selected Consolidated Financial and Other Data***






**Summary Balance Sheet**

**As of December 31,**

**As of June 30,****2004**

**2003 (1)**

**2003**

**2002**ASSETSCash and cash equivalents

$
15,896


22,657


19,015


16,964Investment securities


21,553


16,731


15,522


19,683Loans receivable, net


392,333


332,130


336,838


319,916Accrued interest receivable


1,570


1,306


1,430


1,655Prepaids and other assets


1,976


7,351


10,455


10,293Foreclosed assets


78


6


182


683Premises and equipment


7,189


6,576


6,709


7,356$
440,597


386,757


390,151


376,550LIABILITIESDeposits

$
296,388


237,131


235,677


225,284Federal Home Loan Bank advances


100,000


108,837


114,619


111,083Other liabilities


3,436


2,811


3,313


4,748399,823


348,779


353,609


341,115Common stock


649


624


624


624Additional paid-in capital


52,385


47,366


47,366


47,366Unearned ESOP shares


(1,801
)

(3,100
)

(3,100
)

(3,100
)Retained earnings


32,437


23,236


23,236


23,236Unrealized appreciation on available-for-sale securities, net


2,816


3,439


3,439


3,439Treasury stock


(45,713
)

(8,132
)

(8,132
)

(8,132
)STOCKHOLDERS' EQUITY


40,773


37,978


36,542


35,435$
440,597


386,757


390,151


376,550**Supplemental Data**

**As of December 31,**
**As of June 30,****2004**


**2003 (1**
**)**

**2003**


**2002**Number of full-service offices


7


9


9


9Cash dividends per share

$
0.63


0.31


0.60


0.63




(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.  4***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


******GENERAL******


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


.


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





On December 6, 2001, the Bank completed its acquisition of the Springfield branch offices of Commercial Federal Bank. The Bank acquired approximately $15.5 million in selected consumer and home equity loans and assumed approximately $41.2 million in deposit liabilities. The Bank also assumed the leases and equipment at all but one of the branches. The acquired locations are located in Dillons Supermarkets in Springfield. The transaction increased the number of "in-store" locations from one to five and total locations from five to nine.





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





In 2003, the Company also determined to change its fiscal year end from June 30 to a calendar year end of December 31. The six-month period ended December 31, 2003, transitions between the Companys old and new fiscal year ends. 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.





The Companys principal business consists of attracting deposits from the general public and using such deposits to originate mortgage loans secured by one- to four-family residences, multi-family, construction and commercial real estate loans and consumer and business loans. The Company also uses these funds to purchase loans secured by one- to four-family residences, mortgage-backed securities, US government and agency obligations, and other permissible securities. When cash outflows exceed inflows, the Company uses borrowings and brokered deposits as additional financing sources.





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





The discussion set forth below , and in any other portion of this report, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and managements perception thereof as of the date of this report. When used in this document, words such as "anticipates," "estimates," "believes," "expects," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Companys operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time.





5***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**FINANCIAL CONDITION**





From December 31, 2003 to December 31, 2004, the Companys total assets increased $53,839,274 (14%), liabilities increased $51,044,132 (15%), and stockholders' equity increased $2,795,142 (7%). The ratio of stockholders equity to total assets decreased to 9% during this period.





From December 31, 2003 to December 31, 2004, securities available-for-sale increased $237,942 (2%). The Company currently owns 68,000 shares of Federal Home Loan Mortgage Corporation ("FHLMC") stock with an amortized cost of $66,588 in the securities available-for-sale category. As of December 31, 2004, the gross unrealized gain on the stock is $4,945,012, an increase of $357,748 from the gross unrealized gain at December 31, 2003. This increase is due to the increase in the stock price of FHLMC stock from $58.32 per share as of December 31, 2003 to $73.70 per share as of December 31, 2004. From December 31, 2003 to December 31, 2004, securities held-to-maturity decreased $562,436 (30%) due to repayments received during the period. Stock in the Federal Home Loan Bank of Des Moines ("FHLB") was reduced by $147,700 (3%), due to the sale of stock which exceeded the FHLB requirements. The Bank is required to own stock in the FHLB equal to 0.12% of assets plus 4.45% of advances.





From December 31, 2003 to December 31, 2004, net loans receivable increased by $57,880,917 (17%). During this period, permanent loans secured by both owner and non-owner occupied one to four unit residential real estate decreased by $10,493,553 (8%), consumer installment loans decreased $268,680 (1%), multi-family permanent loans increased by $8,017,176 (20%), construction loans decreased by $4,724,058 (7%), permanent loans secured by commercial real estate increased $25,444,859 (36%) and other commercial loans increased $30,987,925 (163%). During this period the Company continued to increase its emphasis on commercial lending, while selling the majority of conforming single family loan production on the secondary market. Loans sold on the secondary market are sold both servicing retained, whereby the Bank continues to service the loan and servicing released, whereby the third party who purchases the loan provides the servicing. Recently the majority of the loans sold on the secondary market have been sold servicing released. As a result of these loan sales, loans serviced for others decreased by $3,670,797 (3%).





During the six months ending December 31, 2003, the Bank changed the manner in which construction loans are recorded. The "loans-in-process" account has been eliminated on loans recorded after June 30, 2003. Prior to this change, the principal balance of construction loans were recorded at closing, and the proceeds were held in "loans in process" to be disbursed as the construction proceeded. Subsequent to June 30, 2003, this type of loan will be set up as a "closed-end" draw account where only the actual principal disbursed will be recorded. As a result of this change, loans in process has decreased by $9,425,318 (37%) from December 31, 2003 to December 31, 2004, and construction loan balances have decreased by $4,724,058 (7%) over the same period.





From December 31, 2003 to December 31, 2004, loans past due 90 days or more decreased $53,445 to $419,465 (0.1% of net loans). As of December 31, 2004, management considers loans totaling $6,086,631 as impaired with a related allowance for loan losses of $928,857. Single-family homes collateralize the majority of the impaired loans. The Bank recognizes interest income on impaired loans as payments are received. Management believes the loss allowances on these loans are sufficient to liquidate the collateral without further loss.





From December 31, 2003 to December 31, 2004, the allowance for loan losses increased $650,518. Loan charge-offs exceeded recoveries by $213,313 for the twelve months ended December 31, 2004. The allowance for loan losses as of December 31, 2004 and December 31, 2003 was 1.2% and 1.2% of net loans outstanding, respectively. As of December 31,2004, the allowance for loan losses was 75% of impaired loans versus 54% as of December 31, 2003.





As of December 31, 2004, foreclosed assets held for sale consists of one single family residence and five vehicles.





From December 31, 2003 to December 31, 2004, premises and equipment increased $612,864 (9%). This increase is primarily due the addition of a new branch location and new equipment.





6***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


From December 31, 2003 to December 31, 2004, deposits increased $59,256,998 (25%). During this period core deposit accounts increased by $10,307,199 (9%) to 49% of total deposits and certificates of deposit increased by $48,949,800 (41%). Included in the certificates of deposit total is $68,374,919 in deposits placed by brokers, an increase from $24,505,300 as of December 31, 2003. Management considers brokered deposits to be an effective source of funds that cost less at the margin than increasing rates on retail deposits in our local market.





From December 31, 2003 to December 31, 2004, the Company decreased borrowings from the Federal Home Loan Bank ("FHLB") by $8,836,948 (8%), in an effort to lower the overall cost of funds and to comply with the FHLB advances limitation of 35% of total assets.





Stockholders equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $2,795,142 (7%) to $40,773,263 as of December 31, 2004. Net income for the period exceeded cash dividends paid or declared by $2,537,436. The Company repurchased 56,109 shares as treasury stock at a cost of $1,163,115, an average price of $20.73 per share. As of December 31, 2004, 185,485 shares remain to be repurchased under the repurchase plan announced November 22, 2002. The increase in unrealized appreciation on securities available-for-sale, net of tax, increased stockholders equity by $149,685. On a per share basis, stockholders equity increased $0.83 (6%) from $13.62 as of December 31, 2003 to $14.45 as of December 31, 2004.





7***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS**





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







As of

Year Ended

Six Months EndedDecember 31, 2004

December 31, 2004

December 31, 2003Balance

Yield / Cost

Average Balance

Interest

Yield / Cost

Average Balance

Interest

Yield / Cost**ASSETS**Interest-earning:Loans

$
392,333


5.64
%
$
366,696

$
19,990


5.45
%
$
334,071

$
9,567


5.73
%Investment securities


9,955


2.80
%

10,076


289


2.87
%

9,899


135


2.73
%Other assets


13,407


2.18
%

14,508


260


1.79
%

13,867


144


2.08
%Total interest-earning


415,695


5.46
%

391,280


20,539


5.25
%

357,837


9,846


5.50
%Noninterest-earning


24,901





20,812








20,821$
440,596




$
412,092







$
378,658**LIABILITIES AND STOCKHOLDERS' EQUITY**Interest-bearing:Savings accounts

$
15,153


1.08
%
$
16,607


140


0.84
%
$
17,483


70


0.80
%Transaction accounts


86,615


1.30
%

80,001


793


0.99
%

74,578


327


0.88
%Certificates of deposit


169,036


2.62
%

139,264


3,986


2.86
%

121,926


1,971


3.23
%FHLB advances


100,000


3.62
%

111,169


3,519


3.17
%

101,841


2,121


4.17
%Other borrowed funds


1,264


1.50
%

987


7


0.71
%

907


2


0.44
%Total interest-bearing


372,068


2.51
%

348,029


8,446


2.43
%

316,735


4,491


2.84
%Noninterest-bearing


27,705





24,173








24,038Total liabilities


399,773





372,202








340,773Stockholders' equity


40,823





39,891








37,885$
440,596




$
412,092







$
378,658Net earning balance

$
43,627




$
43,252







$
41,102Earning yield less costing rate





2.95
%







2.82
%







2.66
%Net interest income, andnet yield spread oninterest-earning assets





3.21
%



$
12,094


3.09
%



$
5,355


2.99
%Ratio of interest-earning assets tointerest-bearing liabilities


112
%




112
%







113
%





8***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***





Six Months Ended

Year EndedDecember 31, 2002

June 30, 2003(Unaudited)Average Balance

Interest

Yield / Cost

Average Balance

Interest

Yield / Cost**ASSETS**Interest-earning:Loans

$
323,292

$
10,827


6.70
%
$
326,441

$
20,928


6.41
%Investment securities


11,988


231


3.85
%

11,103


419


3.77
%Other assets


24,800


232


1.87
%

18,864


434


2.30
%Total interest-earning


360,080


11,290


6.27
%

356,408


21,781


6.11
%Noninterest-earning


13,990








19,368$
374,070







$
375,776**LIABILITIES AND STOCKHOLDERS' EQUITY**Interest-bearing:Savings accounts

$
17,507


132


1.51
%
$
17,390


221


1.27
%Transaction accounts


67,002


460


1.37
%

67,614


814


1.20
%Certificates of deposit


127,218


2,530


3.98
%

126,376


4,768


3.77
%FHLB advances


107,612


2,959


5.50
%

108,020


5,634


5.22
%Other borrowed funds


971


5


1.03
%

832


7


0.84
%Total interest-bearing


320,310


6,086


3.80
%

320,232


11,444


3.57
%Noninterest-bearing


17,390








18,946Total liabilities


337,700








339,178Stockholders' equity


36,370








36,598$
374,070







$
375,776Net earning balance

$
39,770







$
36,176Earning yield less costing rate








2.47
%







2.54
%Net interest income, andnet yield spread oninterest-earning assets




$
5,204


2.89
%



$
10,337


2.90
%Ratio of interest-earning assets tointerest-bearing liabilities


112
%







111
%





9***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


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





Year ended

Six Months EndedDecember 31, 2004 versus June 30, 2003

December 31, 2003 versus 2002Average Balance

Interest Rate

Rate & Balance

Total

Average Balance

Interest Rate

Rate & Balance

TotalInterest income:Loans

$
(938
)

(3,133
)

(193
)

(4,264
)
$
361


(1,569
)

(52
)

(1,260
)Investment securitites


(130
)

(100
)

5


(225
)

(40
)

(68
)

12


(96
)Other assets


(174
)

(96
)

11


(88
)

(102
)

25


(11
)

(88
)Net change in interest income


(1,242
)

(3,329
)

(177
)

(4,577
)

219


(1,612
)

(51
)

(1,444
)Interest expense:Savings accounts


(81
)

(75
)

2


(154
)

-


(62
)

-


(62
)Transaction accounts


(21
)

(143
)

(13
)

(177
)

52


(166
)

(19
)

(133
)Certificates of deposit


(782
)

(1,151
)

(59
)

(1,992
)

(105
)

(474
)

20


(559
)Advances


(2,115
)

(2,214
)

(32
)

(4,361
)

(159
)

(717
)

38


(838
)Other borrowed funds


-


(1
)

-


(1
)

-


(3
)

-


(3
)Net change in interest expense


(2,999
)

(3,584
)

(102
)

(6,685
)

(212
)

(1,422
)

39


(1,595
)Change in net interest income

$
1,757


(190
)

(75
)

2,108

$
431


(190
)

(90
)

151





**RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2004 AND FISCAL YEAR ENDED JUNE 30, 2003**





Prime

Ten-Year Treasury

One-Year TreasuryDecember 31, 2004


4.34
%

4.27
%

1.88
%June 30, 2003


4.43
%

3.96
%

1.46
%Change in rates


-0.09
%

0.31
%

0.42
%





Interest Rates . The Bank charges borrowers and pays depositors interest rates that are largely a function of the general level of interest rates. The above table sets forth the weekly average interest rates for the 52 weeks ending December 31, 2004 and June 30, 2003 as reported by the Federal Reserve. The Bank typically indexes its adjustable rate commercial loans to prime and its adjustable rate mortgage loans to the one-year treasury rate. The ten-year treasury rate is a proxy for 30-year fixed rate home mortgage loans.





During 2003, interest rates were relatively stable achieving cycle low in June 2003 when the Federal Reserve Open Market Committee ("FOMC") reduced the discount rate 25 basis points. After that rate cut, longer-term interest rates began to increase and the mortgage loan refinancing activity began to slow. Rates trended upward during 2004 as the FOMC increased the discount rates 25 basis points after five consecutive meetings from June to December 2004. As of year-end 2004, the prime rate was 5.25% up from 4.00% where it was quoted from June 2003 to June 2004.





10***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


Interest Income . Total interest income decreased $1,242,447 (11%) as the average balance of interest-earning assets increased $34,872,000 (10%). In addition the yield on average interest earning assets decreased 85 basis points to 5.46%.





Interest on loans decreased $938,539 (9%) as the average loan receivable balance increased $40,255,000 (12%) while the average yield decreased 96 basis points to 5.45%. The decrease in loan yield is the result of the combination of new loans at lower rates, repayments of higher yielding loans, and the roll down of adjustable rate loans. Interest on investment securities decreased $129,810 (31%) as the average balance decreased $1,027,000 (9%) and the average yield decreased 90 basis points to 2.87.





Interest Expense . Total interest expense decreased $2,998,783 (26%) as the average balance of interest-bearing liabilities increased $27,797,000 (9%). In addition, the average cost of interest-bearing liabilities decreased 114 basis points to 2.43%.





Interest expense on deposits decreased $883,281 (15%) as the average balance of interest bearing deposits increased $24,492,000 (7%) while the average interest rate paid to depositors decreased 66 basis points to 2.09%. The average balance of interest bearing core deposit accounts increased $11,604,000 (13%) and the average balance of certificates of deposit increased $12,888,000 (10%).





In order to comply with the FHLB limitation of advances to 35% of assets, the Company decreased borrowings from the FHLB. The average balance of FHLB advances decreased by $3,149,000 (2%) while the average cost of those advances decreased 205 basis points to 3.17%. As a result interest expense on advances decreased $2,115,091 (38%). As of December 31, 2004 FHLB advances are 23% of total assets.





Net Interest Income . The Companys net interest income increased $1,756,335 (17%). During the year ended December 31, 2004, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $43,251,000, resulting in a increase in the average net earning balance of $34,872,000 (10%). The Companys spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 28 basis points from 2.54% to 2.82%.





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





During year ended December 31, 2004, the Company experienced loan charge-offs in excess of recoveries of $213,312 and based on a review as discussed above, elected to record a provision for loan loss of $863,830 to increase the allowance for loan losses. Management of the Company anticipates the need to continue increasing the loan loss allowance through charges to provision for loan losses based on the anticipated growth in its loan portfolio and the shift in the Companys emphasis from primarily single-family loans to a mix of single-family and commercial loans.





Non-Interest Income . Non-interest income decreased $72,155 (2%). The gain on sale of loans of $1,544,037 for fiscal year 2003 was the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. Due to increases in interest rates and a decrease in refinances, gain on sale of loans decreased by $1,059,117 (158%) for the year ended December 31, 2004. The Bank attempts to minimize its risk of price changes by committing to sell loans while the loans are in the origination process. The gain on sale of investments for year ended December 31, 2004 was $742,608. This was a result of the sale of 1,000 shares of FHLMC stock each month in 2004. There were no profits on sale of investments for fiscal year ended June 30, 2003. Deposit service charges increased $99,563 (6%) due to increases in insufficient funds and overdraft changes on the Banks checking accounts. In addition late charges and other fees increased $163,576 (86%) primarily due an increase in prepayment penalties collected in the year ended December 31, 2004.





11***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


Non-Interest Expense . Non-interest expense increased $67,884 (1%). There were slight increases in salaries, employee benefits and advertising. These increases were offset by decreases in occupancy and data processing expense.





Income Taxes . The change in income tax is a direct result of changes in the Companys taxable income for the period ended December 31, 2004.





Cash Dividends Paid . The Company paid dividends of $0.155 per share on April 14, 2004, to stockholders of record as of March 30, 2004, and $0.155 per share on July 15, 2004 to stockholders of record as of July 1, 2004, and $0.16 per share on October 15, 2004, to stockholders of record as of October 1, 2004. The Company declared a cash dividend of $0.16 per share on December 16, 2004, to be paid on January 21, 2005, to stockholders of record on January 7, 2005.





**RESULTS OF OPERATIONS - TRANSITION PERIOD - COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002**


Prime

Ten-Year Treasury

One-Year TreasuryDecember 31, 2003


4.12
%

4.01
%

1.25
%December 31, 2002


4.68
%

4.63
%

2.01
%Change in rates


-0.56
%

-0.62
%

-0.76
%





Interest Rates . The above table sets forth the weekly average interest rates for the 52 weeks ending December 31, 2003 and 2002 as reported by the Federal Reserve.





Interest rates continued their cyclical decline though out 2002. The FOMC reduced the discount rate 50 basis points in November 2002 and 25 basis points in June 2003. The prime rate began 2002 at 4.75%, cut to 4.25% in November 2002 and cut again to 4.00% in June 2003 where it stayed for the remainder of the year.





Interest Income . Total interest income decreased $1,444,518 (13%) as the average balance of interest-earning assets decreased $2,243,000 (1%). In addition the yield on average interest earning assets decreased 77 basis points to 5.50%.





Interest on loans decreased $1,260,103 (12%) as the average loan receivable balance increased $10,779,000 (3%) while the average yield decreased 97 basis points to 5.73%. The decrease in loan yield is the result of the combination of new loans at lower rates, repayments of higher yielding loans, and the roll down of adjustable rate loans. Interest on investment securities decreased $95,970 (42%) as the average balance decreased $2,089,000 (17%) and the average yield decreased 112 basis points to 2.73%. As long as interest rates remain at historical low levels, our customers will benefit from loan rates adjusting downward and from refinancing to fixed-rate mortgages to lock-in the lower rates. These adjustments and refinances will negatively impact portfolio loan yields in future quarters.





Interest Expense . Total interest expense decreased $1,594,531 (26%) as the average balance of interest-bearing liabilities decreased $3,575,000 (1%). In addition the average cost of interest-bearing liabilities decreased 96 basis points to 2.84%.





Interest expense on deposits decreased $752,975 (24%) as the average balance of interest bearing deposits increased $2,260,000 (1%) while the average interest rate paid to depositors decreased 74 basis points to 2.21%. The average balance of interest bearing core deposit accounts increased $7,552,000 (9%) and the average balance of certificates of deposit decreased $5,292,000 (4%).





Interest expense on FHLB advances decreased $838,337 (28%). In order to comply with the FHLB limitation of advances to 35% of assets, the Company decreased borrowings from the FHLB. The average balance of FHLB advances decreased by $5,771,000 (5%) while the average cost of those advances decreased 133 basis points to 4.17%. As of December 31, 2003, FHLB advances are 28% of total assets.





12***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


Net Interest Income . The Companys net interest income increased $150,013 (3%). During the six months ended December 31, 2003, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $41,102,000, resulting in an increase in the average net earning balance of $1,332,000 (3%). The Companys spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 19 basis points from 2.47% to 2.66%.





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





During the six month period ended December 31, 2003, the Company experienced loan charge-offs in excess of recoveries of only $51,183. However, as of December 31, 2003, the Bank classified a group of approximately 150 loans totaling approximately $9 million. These loans were classified because it was deemed that the loan files relating to these loans did not contain sufficient information to effectively evaluate the credits. With the addition of these loans to classified assets, the Company determined to increase the provision for loan losses by $800,000. Prior to this increase, the Company had recorded a provision for loan loss during the six-month transition period ended December 31, 2003 of $362,000 based on the growth in its loan portfolio and the shift in the Companys emphasis from primarily single-family loans to a mix of single-family and commercial loans. Management of the Company anticipates the need to continue increasing the loan loss allowance through charges to provision for loan losses based on the factors described in the previous sentence.





Non-Interest Income . Non-interest income increased $337,137 (19%). The gain on sale of loans increased by $88,842 as a result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. The Bank attempts to minimize its risk of price changes by committing to sell loans while the loans are in the origination process. Gain of sale of investments increased by $105,461. This was a result of the sale of 2,000 shares of FHLMC stock during the six months ended December 31, 2003. There were no profits on sale of investments for the same period in 2002. Deposit service charges increased $67,392 (8%) due to the continued growth in the Banks checking accounts. The amortization expense on originated mortgage servicing rights increased $90,616. The Bank recaptured $271,406 in loss on impairment of these rights based on the Banks fair value assessment of such rights.





Non-Interest Expense . Non-interest expense decreased $66,523 (2%). Data processing expense decreased $161, 541, primarily due to the full amortization prior to or during the six months ended December 31, 2003 of start up expenses in connection with the conversion to an "in-house" computer system that was completed in September of 2000. In addition, occupancy expense decreased by $69,579. This was partially offset by an increase in advertising of $116,023.





Income Taxes . The change in income tax is a direct result of changes in the Companys taxable income for the six month period ended December 31, 2003.





Cash Dividends Paid. The Company paid cash dividends of $0.15 per share on July 15, 2003, to the stockholders of record on July 1, 2003 (as declared on June 27, 2003), and $0.155 per share on October 17, 2003, to the stockholders of record as of October 3, 2003. The Company declared a cash dividend of $0.155 per share on December 19, 2003, to be paid on January 23, 2004, to stockholders of record on January 9, 2004.




13***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**RESULTS OF OPERATIONS - COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2003 AND 2002**





U.S. Treasury SecuritiesAverage for the Year EndedPrime

Ten-Year Maturity

One-Year MaturityJune 30, 2003


4.43
%

3.96
%

1.46
%June 30, 2002


5.33
%

4.99
%

2.56
%Change in rates


-0.90
%

-1.03
%

-1.10
%





Interest Rates . The above table sets forth the weekly average interest rates on U.S. Treasury securities for the twelve months ending June 30, 2003 and 2002.





Interest rates trended downward during the twelve months ended June 30, 2003. The FOMC reduced the discount rate 50 basis points in November 2002 and 25 basis points in June 2003. The last week in June 2003, the ten-year treasury averaged 3.42%, and the one-year treasury averaged 1.02%. The widely quoted bank prime rate fell from 4.75% to 4.00% during the twelve months ended June 30, 2003. As a result, loan customers continued to refinance their loans to lower rates.





Interest Income . Total interest income decreased $3,440,712 (14%) as the average balance of interest-earning assets decreased $16,574,000 (4%). In addition the yield on average interest earning assets decreased 65 basis points to 6.11%.





Interest on loans decreased $2,947,361 (12%) as the average loan receivable balance increased $1,645,000 (1%) while the average yield decreased 94 basis points to 6.41%. The decrease in loan yield is the result of the combination of new loans at lower rates, repayments of higher yielding loans, and the roll down of adjustable rate loans. Interest on investment securities decreased $199,904 (32%) as the average balance decreased $3,721,000 (25%) and the average yield decreased 41 basis points to 3.77%. As long as interest rates remain at historical low levels, our customers will benefit from loan rates adjusting downward and from refinancing to fixed-rate mortgages to lock-in the rates. These adjustments and refinances will negatively impact portfolio loan yields in future quarters.





Interest Expense . Total interest expense decreased $2,642,273 (19%) as the average balance of interest-bearing liabilities decreased $5,403,000 (2%). In addition, the average cost of interest-bearing liabilities decreased 76 basis points to 3.57%.





Interest expense on deposits decreased $1,214,839 (17%) as the average balance of interest bearing deposits increased $14,014,000 (7%) while the average interest rate paid to depositors decreased 81 basis points to 2.75%. The average balance of interest bearing core deposit accounts increased $16,356,000 (24%) and the average balance of certificates of deposit decreased $2,342,000 (2%).





In order to comply with the FHLB limitation of advances to 35% of assets, the Company decreased borrowings from the FHLB. The average balance of FHLB advances decreased by $18,514,000 (15%) while the average cost of those advances decreased 34 basis points to 5.22%. As of June 30, 2003, FHLB advances are 29% of total assets.





Net Interest Income . The Companys net interest income decreased $798,439 (7%). During the year ended June 30, 2003, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $36,176,000, resulting in a decrease in the average net earning balance of $11,171,000 (24%). The Companys spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 11 basis points from 2.43% to 2.54%.





14***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


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





During fiscal year ended June 30, 2003, the Company experienced loan charge-offs in excess of recoveries of $484,552 and based on a review as discussed above, elected to record a provision for loan loss of $610,000 to increase the allowance for loan losses. Management of the Company anticipates the need to continue increasing the loan loss allowance through charges to provision for loan losses based on the anticipated growth in its loan portfolio and the shift in the Companys emphasis from primarily single-family loans to a mix of single-family and commercial loans.





Non-Interest Income . Non-interest income increased $54,493 (1%). The gain on sale of loans of $1,544,037 for fiscal year 2003 is the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. The Bank attempts to minimize its risk of price changes by committing to sell loans while the loans are in the origination process. There were no profits on sale of investments for fiscal year ended June 30, 2003. Deposit service charges increased $223,910 (14%) due to the continued growth in the Banks checking accounts. These increases were partially offset by amortization expense associated with the Banks originated mortgage servicing rights and the recording of a loss on impairment. The amortization expense on originated mortgage servicing rights increased $295,808. A loss on impairment of these rights of $239,543 was recognized based on the Banks fair value assessment of such rights. There was no loss impairment recognized during the same periods in 2002. Decreases in fair value of these rights is primarily due to increased prepayment speeds on loans being serviced for others. The increase in prepayment speed is attributable to significant increases in refinancing in a historically low interest rate environment. In addition late charges and other fees decreased $111,088 (37%) primarily due to approximately $146,000 in prepayment penalties collected from two commercial borrowers during fiscal year ended June 30, 2002 which did not occur during fiscal year ended June 30, 2003.





Non-Interest Expense . Non-interest expense decreased $813,613 (9%). Decreases in salaries and employee benefits, occupancy, advertising and data processing expense are principally attributable to the Companys aggressive approach to lowering operating costs. In the same period one year ago the Company incurred approximately $183,000 in "one-time" costs in connection with the Commercial Federal acquisition and approximately $150,000 in legal and professional expenses in connection with the settlement of a dispute over the repurchase of the Companys stock.





Income Taxes . The change in income tax is a direct result of changes in the Companys taxable income for the period ended June 30, 2003.





Cash Dividends Paid . The Company paid cash dividends of $0.125 per share on July 19, 2002, to the stockholders of record on July 8, 2002 (as declared on June 27, 2002), and $0.15 per share on October 18, 2002, to the stockholders of record as of October 4, 2002 and $0.15 per share on January 24, 2003, to the stockholders of record as of January 10, 2003 and $0.15 per share on April 14, 2003 to stockholders of record as of March 31, 2003. The Company declared a cash dividend of $0.15 per share on June 27, 2003, to be paid on July 15, 2003, to stockholders of record on July 1, 2003.




15***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**ASSET / LIABILITY MANAGEMENT**





The goal of the Banks asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments. Management monitors the Banks net interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, it offers deposit rates and loan rates that maximize net interest income. Management also attempts to fund the Banks assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Banks net interest income. This matching is especially difficult because the residential mortgage loans that comprise a significant portion of the Banks assets give the borrower the right to prepay at any time. These borrowers act in their economic self-interest and refinance higher rate loans when rates are low. Since the relative spread between financial assets and liabilities is constantly changing, the Banks current net interest income may not be an indication of future net interest income.





As a part of its asset and liability management strategy, the Bank implemented an adjustable rate mortgage loan ("ARM") program beginning in the early 1980s. Throughout the past several years, the Bank has continued to emphasize the origination of adjustable-rate, one- to four-family residential loans and adjustable-rate or relatively short-term commercial real estate, construction, commercial business, home equity and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market on a service-retained basis. This allows the Bank to serve the customers needs and retain a banking relationship without the risk of carrying a long-term fixed-rate loan on the books.





The Bank is also managing interest rate risk by the origination of construction loans. As of December 31, 2004, such loans, net of loans in process, make up 15% of the Banks loan portfolio. In general, these loans have higher yields, shorter maturities, and greater interest rate sensitivity than other real estate loans.





The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Banks asset/liability management objectives and spread requirements. As of December 31, 2003, the Banks savings accounts, checking accounts, and money market deposit accounts totaled $117,044,097 or 49% of its total deposits. As of December 31, 2004, these accounts totaled $127,351,296 or 43% of total deposits. The weighted average rate paid on these accounts increased 32 basis points from .69% on December 31, 2003 to 1.01% on December 31, 2004. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive, core deposits.





During the year ending December 31, 2005, the FHLB has the option to call $11.0 million of advances with a weighted average rate of 5.43% and a remaining life of 3.7 years.




16***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**INTEREST RATE SENSITIVITY ANALYSIS**





The following table sets forth as of December 31, 2004, managements estimates of the projected changes in net portfolio value ("NPV") in the event of 100, 200, and 300 basis point ("bp") instantaneous and permanent increases and a 100 basis point instantaneous and permanent decrease in market interest rates. Dollar amounts are expressed in thousands.


BP Change

Estimated Net Portfolio Value

NPV as % of PV of Assetsin Rates

$ Amount

$ Change

% Change

NPV Ratio

Change+300


37,875


(2,721)


-7
%

8.80
%

-0.39
%+200


39,820


(776)


-2
%

9.15
%

-0.04
%+100


40,669


73)


0
%

9.27
%

0.08
%NC


40,596








9.19
%-100


39,948


(648)


-2
%

8.99
%

-0.20
%





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





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





The Banks Board of Directors is responsible for reviewing the Banks asset and liability policies. The Banks management is responsible for administering the policies and determinations of the Board of Directors with respect to the Banks asset and liability goals and strategies. Management expects that the Banks asset and liability policies and strategies will continue as described above so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years.





**LIQUIDITY AND CAPITAL RESOURCES**





The Companys principal sources of funds for investments and operations are net income, deposits from its primary market area, FHLB advances, principal and interest payments on loans and mortgage-backed securities, and proceeds from maturing investment securities. The Company considers deposits and FHLB advances as primary sources of funds.





The Companys most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Banks operating, financing, and investment activities at any given time. The Companys cash and cash equivalents totaled $15,896,458 as of December 31, 2004. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.





17***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


As of December 31, 2004, the Bank has conditional commitments in the form of letters of credit in the amount of $1,314,000, and outstanding loan commitments of $15,712,000. In addition, the Bank has granted unused lines of credit to borrowers aggregating approximately $64,430,000 and $16,578,000 for commercial lines and open-end consumer lines, respectively. The Bank also has $96,113,575 in certificates of deposit that are scheduled to mature in one year or less. Management anticipates that the majority of these certificates will renew in the normal course of operations. Based on existing collateral as well as the FHLBs limitation of advances to 35% of assets, the Bank has the ability to borrow an additional $44,946,000 from the FHLB, as of December 31, 2004. The Bank plans to maintain its FHLB borrowings to a level that will provide a borrowing capacity sufficient to provide for contingencies.





The Companys capital position of $37,978,000 is 9.8% of total assets as of December 31, 2004. The Company has an excess of $20,453,000, $23,571,000, and $15,666,000 of required regulatory levels of tangible, core, and risk-based capital, respectively. Under current regulatory guidelines, the Bank is classified as well capitalized.





During fiscal year ended June 30, 2003, the Company purchased 74,240 shares of common stock in open market transactions and 13,046 from the RRP to place in the treasury account. During the year ended December 31, 2004, the Company purchased 51,333 shares of common stock in open market transactions and 4,776 from the RRP to place in the treasury account. The Company intends to monitor the common stock price and, with regulatory approval, may from time to time initiate further treasury stock transactions in order to improve the Companys long-term earnings per share while at the same time maintaining an adequate level of stockholders equity.





**AGGREGATE CONTRACTUAL OBLIGATIONS**





The following table summarizes the Companys fixed and determinable contractual obligations by payment date as of December 31, 2004. Dollar amounts are expressed in thousands.


Payments Due By PeriodOne Year

One to

Three to

More thanContractual Obligations

Total

or less

Three Years

Five Years

Five YearsDeposits without stated maturity

$
127,351


127,351


-


-


-Time and brokered certificates of deposit


169,036


96,114


62,386


9,856


680Short-term borrowings


1,264


1,264


-


-


-Federal Home Loan Bank advances


100,000


49,414


24,350


19,650


6,586Operating leases


361,750


63,550


102,100


102,100


94,000Purchase obligations


-


-


-


-


-Other long term obligations


-


-


-


-


-Total

$
759,401


337,693


188,836


131,606


101,266








18***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**IMPACT OF INFLATION AND CHANGING PRICES**





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





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







**CRITICAL ACCOUNTING POLICIES**




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





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





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





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





19***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS**


******


In 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105, *Application of Accounting Principles to Loan Commitment* (SAB 105), which addresses the accounting treatment for loan commitments accounted for as derivative instruments. SAB 105 permits recognition of servicing assets only when the servicing asset has been contractually separated from the underlying loan by sale or securitization. SAB 105 was effective for mortgage loan commitments that are accounted for as derivatives and are entered into after March 31, 2004. The adoption of SAB 105 had no impact on the Companys results of operations or financial condition.





In 2004, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), *Consolidation of Variable Interest Entities* , which requires the consolidation of certain special purpose entities (SPEs) by a company if it is determined to be the primary beneficiary of the SPEs operating activities. The adoption of FIN 46 had no impact on the Companys results of operations or financial condition.





The Emerging Issues Task Force (EITF) of FASB previously issued EITF Issue 03-1, *The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments* . EITF Issue 03-1 provides guidance on the meaning of the phrase other-than-temporary impairment and its application to several types of investments, including debt securities classified as held-to-maturity and available-for-sale under FASB Statement No. 115, *Accounting for Certain Investments in Debt and Equity Securities* . EITF Issue 03-1 provides guidance on whether impairment losses should be recognized on available-for-sale securities prior to sale of the securities. It provides guidance for evaluating whether and when unrealized losses should be deemed "other-than-temporary," requiring immediate recognition of those losses through earnings. In addition, EITF 03-1 requires financial statement disclosure for impaired securities on which an impairment loss has not been recognized, including the amount of unrealized loss and the term of that impairment. The portions of EITF 03-1 dealing with determining when losses are other-than-temporary have been delayed in order for the FASB staff to provide implementation guidance and reconsider issues that were raised by interested parties during the public comment period. The Company is monitoring developments related to this EITF Issue.





In December 2004, the FASB issued a revision to FASB Statement No. 123, *Accounting for Stock Based Compensation* (SFAS 123). FASB Statement No. 123(R), *Share Based Payment* (SFAS 123(R)), supersedes Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (APB 25), and its related implementation guidance. SFAS 123(R) established standard for the accounting for transactions in which an entity exchanges its equity instruments for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of the equity instruments. The impact to the Company of SFAS 123(R) focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. The Company currently accounts for its stock-based compensation using the intrinsic method as defined in APB 25 and, accordingly, has not recognized any expense for stock option plans in the Consolidated Financial Statements (See *Note 1* and *Note 11* of the Notes to Consolidated Financial Statements for additional information regarding the Companys accounting for stock-based compensation). Implementation of SFAS 123(R) is required for the Company beginning in the interim period ending September 30, 2005. The Company is currently analyzing this new pronouncement to determine the impact on its financial statements. *Note 1* of the Notes to Consolidated Financial Statements illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of SFAS 123.




20***Guaranty Federal Bancshares, Inc.***
***Managements Discussion and Analysis of Financial Condition***
***And Results of Operations***


**SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS**


Mar-04

Jun-04

Sep-04

Dec-04Interest income

$
4,841,117


4,872,149


5,192,334


5,633,673Interest expense


2,050,298


1,934,800


2,123,222


2,337,309Net interest income


2,790,819


2,937,349


3,069,111


3,296,363Provision for loan losses


188,830


225,000


225,000


225,000Gain on sale of loans and investment securities


299,569


247,956


309,109


370,894Other noninterest income, net


550,694


628,678


648,125


561,150Noninterest expense


2,042,996


2,079,394


2,043,422


2,082,059Income before income taxes


1,409,256


1,509,589


1,757,923


1,921,348Provision for income taxes


439,880


494,797


601,549


777,117Net income

$
969,376


1,014,792


1,156,374


1,144,231Basic earnings per share

$
0.35


0.36


0.41


0.41Diluted earnings per share

$
0.33


0.35


0.40


0.39Six Months Ended December 31, 2003, Quarter ended (1)September-03








December-03Interest income




$
4,997,093


4,848,585Interest expense





2,326,503


2,164,542Net interest income





2,670,590


2,684,043Provision for loan losses





212,000


950,000Gain on sale of loans and investment securities





559,033


304,490Other noninterest income, net





672,221


553,127Noninterest expense





1,995,285


1,998,170Income before income taxes





1,694,559


593,490Provision for income taxes





617,862


170,026Net income




$
1,076,697


423,464Basic earnings per share




$
0.39


0.15Diluted earnings per share




$
0.38


0.15Fiscal Year June 30, 2003, Quarter endedSeptember-02





December-02


March-03


June-03Interest income

$
5,746,456


5,543,740


5,304,477


5,187,047Interest expense


3,120,175


2,965,401


2,778,498


2,580,339Net interest income


2,626,281


2,578,339


2,525,979


2,606,708Provision for loan losses


100,000


105,000


255,000


150,000Gain on sale of loans and investment securities


224,577


444,643


403,633


471,184Other noninterest income, net


638,875


443,639


688,873


372,905Noninterest expense


2,026,229


2,033,749


2,050,978


2,069,031Income before income taxes


1,363,504


1,327,872


1,312,507


1,231,766Provision for income taxes


467,458


459,888


427,824


300,830Net income

$
896,046


867,984


884,683


930,936Basic earnings per share

$
0.32


0.31


0.32


0.33Diluted earnings per share

$
0.32


0.30


0.31


0.33


(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 is reporting a six-month transition period ended December 31, 2003 in order to change to this new calendar year end .







21******Guaranty Federal Bancshares, Inc.*********Consolidated Balance Sheets***
***December 31, 2004, and 2003 and June 30, 2003***








December 31,

December 31,

June 30,2004

2003

2003**ASSETS**Cash

$
14,087,915


20,686,276


15,242,475Interest-bearing deposits in other financial institutions


1,808,543


1,970,518


3,772,053Cash and cash equivalents


15,896,458


22,656,794


19,014,528Available-for-sale securities


15,101,768


14,863,826


13,271,147Held-to-maturity securities


1,305,158


1,867,594


2,250,894Stock in Federal Home Loan Bank, at cost


5,146,500


5,294,200


8,600,400Mortgage loans held for sale


3,590,536


1,268,064


9,755,102Loans receivable, net of allowance for loan losses ofDecember 31, 2004 and 2003, $4,536,654 and $3,886,137,respectively, June 30, 2003 - $2,775,320


388,742,792


330,861,875


327,082,420Accrued interest receivable:Loans


1,500,170


1,242,683


1,357,434Investments


69,845


63,045


72,691Prepaid expenses and other assets


1,976,284


2,057,195


1,855,268Foreclosed assets held for sale


78,150


5,975


182,064Premises and equipment


7,188,867


6,576,003


6,708,996$
440,596,528


386,757,254


390,150,944**LIABILITIES AND STOCKHOLDERS' EQUITY****LIABILITIES**Deposits

$
296,387,742


237,130,744


235,677,197Federal Home Loan Bank advances


100,000,000


108,836,948


114,618,894Securities sold under agreements to repurchase


1,264,020


738,399


702,024Advances from borrowers for taxes and insurance


271,796


259,267


950,678Accrued expenses and other liabilities


234,818


308,497


311,696Accrued interest payable


361,516


200,770


203,237Dividend payable


450,868


432,513


415,414Income taxes payable


220,046


227,495


220,707Deferred income taxes


632,459


644,500


509,285399,823,265


348,779,133


353,609,132**STOCKHOLDERS' EQUITY**Common Stock:$0.10 par value; authorized 10,000,000 shares; issued;December 31, 2004 and 2003 - 6,493,861 shares and6,462,902 shares, respectively; June 30, 2003 - 6,416,848 shares


649,386


642,890


641,685Additional paid-in capital


52,384,842


51,330,202


51,065,581Unearned ESOP shares


(1,800,930
)

(2,030,930
)

(2,156,930
)Retained earnings, substantially restricted


32,437,131


29,919,695


29,280,784Accumulated other comprehensive incomeUnrealized appreciation on available-for-sale securities,net of income taxes; December 31, 2004 and 2003 - $1,653,740and $1,565,830, respectively; June 30, 2003 - $1,162,865


2,815,828


2,666,143


1,980,01386,486,257


82,528,000


80,811,133Treasury stock, at cost;December 31, 2004 and 2003 - 3,492,759 shares and3,436,650 shares, respectively; June 30, 2003, 3,420,375 shares


(45,712,994
)

(44,549,879
)

(44,269,321
)40,773,263


37,978,121


36,541,812$
440,596,528


386,757,254


390,150,944










*See Notes to Consolidated Financial Statements*22***Guaranty Federal Bancshares, Inc.***
***Consolidated Statements of Income***
***Years Ended December 31, 2004 and June 30, 2003 and 2002***
***Six Months Ended December 31, 2003 and 2002***








**INCOME STATEMENT**

Year ended

Six months ended

Year endedDecember 31,

December 31,

June 30,2004

2003

2002

2003

2002(Unaudited)**INTEREST INCOME**Loans

$
19,989,852


9,566,716


10,826,819


20,928,391


23,875,752Investment securities


289,335


135,100


231,070


419,145


619,049Other


260,085


143,862


232,307


434,184


727,63120,539,272


9,845,678


11,290,196


21,781,720


25,222,432**INTEREST EXPENSE**


****Deposits


4,919,164


2,368,200


3,121,175


5,802,445


7,017,284Federal Home Loan Bank advances


3,519,393


2,120,876


2,959,213


5,634,484


7,039,115Other


7,073


1,969


5,188


7,484


30,2878,445,630


4,491,045


6,085,576


11,444,413


14,086,686**NET INTEREST INCOME**


12,093,642


5,354,633


5,204,620


10,337,307


11,135,746**PROVISION FOR LOAN LOSSES**


863,830


1,162,000


205,000


610,000


291,000**NET INTEREST INCOME AFTER****PROVISION FOR LOAN LOSSES**


11,229,812


4,192,633


4,999,620


9,727,307


10,844,746**NONINTEREST INCOME**


****Service charges


1,877,829


951,524


884,132


1,778,267


1,554,357Late charges and other fees


353,689


187,407


65,238


190,113


301,201Gain on sale of investment securities


742,608


105,461


-


-


780,741Gain on sale of loans


484,920


758,062


669,220


1,544,037


786,526Income (loss) on foreclosed assets


(3,157
)

5,726


19,865


10,830


(13,369
)Other income


160,285


80,691


113,279


165,082


224,3803,616,174


2,088,871


1,751,734


3,688,329


3,633,836**NONINTEREST EXPENSE**Salaries and employee benefits


4,571,541


2,246,993


2,238,783


4,557,376


4,610,235Occupancy


1,287,261


604,268


673,847


1,322,790


1,324,043FDIC deposit insurance premiums


36,038


17,928


19,416


37,950


35,855Data processing


399,891


133,435


294,976


487,786


783,051Advertising


287,594


220,233


104,210


217,066


331,446Other expense


1,665,544


770,486


729,092


1,557,019


1,908,9708,247,871


3,993,343


4,060,324


8,179,987


8,993,600**INCOME BEFORE INCOME TAXES**


6,598,115


2,288,161


2,691,030


5,235,649


5,484,982**PROVISION FOR INCOME TAXES**


2,313,342


788,000


927,000


1,656,000


1,892,000**NET INCOME**

$
4,284,773


1,500,161


1,764,030


3,579,649


3,592,982**BASIC EARNINGS PER SHARE**

$
1.53


0.54


0.63


1.28


1.01**DILUTED EARNINGS PER SHARE**

$
1.47


0.52


0.62


1.26


1.00













*See Notes to Consolidated Financial Statements*23***Guaranty Federal Bancshares, Inc.***
***Consolidated Statements of Cash Flows***
***Years Ended December 31, 2004 and June 30, 2003 and 2002***
***Six Months Ended December 31, 2003 and 2002***








Year ended

Six months ended

Year endedDecember 31,

December 31,

June 30,2004

2003

2002

2003

2002(Unaudited)**CASH FLOWS FROM OPERATING ACTIVITIES**Net income

$
4,284,773


1,500,161


1,764,030


3,579,649


3,592,982Items not requiring (providing) cash:Deferred income taxes


(99,952
)

(267,750
)

168,917


(154,815
)

211,201Depreciation


670,096


339,101


404,498


783,933


1,020,070Provision for loan losses


863,830


1,162,000


205,000


610,000


291,000Gain on sale of loans and investment securities


(1,227,528
)

(863,524
)

(669,220
)

(1,544,037
)

(1,567,267
)Loss on sale of premises and equipment


11,517


-


-


37,761


28,970(Gain) loss on sale of foreclosed assets


(1,724
)

(13,226
)

(26,218
)

(12,310
)

1,712Amortization of deferred income,premiums and discounts


78,148


(18,862
)

(80,575
)

(99,192
)

(188,793
)Stock award plan expense


63,200


30,952


177,810


353,004


401,403Origination of loans held for sale


(30,561,273
)

(31,454,990
)

(34,910,348
)

(77,775,788
)

(63,372,364
)Proceeds from sale of loans held for sale


28,723,721


40,700,091


33,444,629


72,695,861


63,890,546Release of ESOP shares


461,512


225,154


180,244


373,724


319,595Changes in:Accrued interest receivable


(264,287
)

124,397


219,733


224,386


572,430Prepaid expenses and other assets


80,911


(201,927
)

(181,342
)

(55,508
)

(695,042
)Accrued expenses and other liabilities


105,421


(5,666
)

(67,971
)

(348,159
)

557,279Income taxes payable


7,484


34,578


205,676


69,278


(124,777
)Net cash provided by (used in) operating activities


3,195,849


11,290,489


834,863


(1,262,213
)

4,938,945**CASH FLOWS FROM INVESTING ACTIVITIES**Net (increase) decrease in loans


(59,380,244
)

(5,060,371
)

(3,172,569
)

(11,171,690
)

14,833,382Principal payments on held-to-maturity securities


574,920


379,245


406,222


995,693


1,319,992Principal payments on available-for-sale securities


-


-


172,835


172,835


1,738,299Purchase of available-for-sale securities


(5,971,840
)

(1,989,685
)

(2,978,928
)

(4,968,371
)

(9,387,524
)Purchase of premises and equipment


(1,300,977
)

(206,108
)

(138,129
)

(174,592
)

(500,569
)Proceeds from sale of premises and equipment


6,500


-


-


-


47,281Proceeds from sales of available-for-sale securities


754,355


107,419


-


-


2,945,061Proceeds from maturities of available-for-sale securities


6,000,000


1,500,000


4,000,000


6,500,000


7,000,000(Purchase) sale of FHLB stock


147,700


3,306,200


-


-


-Proceeds from sale of foreclosed assets


434,161


315,291


863,367


801,677


282,423Purchase of other investments


-


-


-


(106,000
)

(200,000
)Cash acquired in purchase of branches


-


-


-


-


25,556,972Net cash provided by (used in) investing activities


(58,735,425
)

(1,648,009
)

(847,202
)

(7,950,448
)

43,635,317










*See Notes to Consolidated Financial Statements*24***Guaranty Federal Bancshares, Inc.***
***Consolidated Statements of Cash Flows (continued)***
***Years Ended December 31, 2004 and June 30, 2003 and 2002***
***Six Months Ended December 31, 2003 and 2002\***








Year ended

Six months ended

Year endedDecember 31,

December 31,

June 30,2004

2003

2002

2003

2002(Unaudited)**CASH FLOWS FROM FINANCING ACTIVITIES**Stock options exercised


751,274


107,638


113,554


556,869


924,677Cash dividends paid


(1,767,337
)

(844,151
)

(764,854
)

(1,604,042
)

(1,823,928
)Cash dividends received on RRP Stock


217


292


1,322


2,387


2,942Net increase in demand deposits,NOW accounts and savings accounts


10,307,199


4,617,104


8,403,811


18,725,158


15,557,187Net increase (decrease) in certificates of deposit andsecurities sold under agreements to repurchase


49,475,420


(3,127,182
)

(3,819,504
)

(8,723,005
)

(3,940,368
)Proceeds from FHLB advances


201,614,000


124,500,000


12,000,000


121,500,000


46,500,000Repayments of FHLB advances


(210,450,948
)

(130,281,946
)

(18,714,871
)

(117,964,269
)

(82,073,420
)Advances from borrowers for taxes and insurance


12,529


(691,411
)

(724,015
)

(97,619
)

(244,765
)Reduction of shares in RRP Trust


-


-


(235,770
)




-Treasury stock purchased


(1,163,115
)

(280,558
)

(235,770
)

(1,131,792
)

(16,826,643
)Net cash provided by (used in) financing activities


48,779,239


(6,000,214
)

(3,740,327
)

11,263,687


(41,924,318
)**INCREASE (DECREASE) IN CASH****AND CASH EQUIVALENTS**


(6,760,337
)

3,642,266


(3,752,666
)

2,051,026


6,649,944**CASH AND CASH EQUIVALENTS,****BEGINNING OF PERIOD**


22,656,794


19,014,528


16,963,502


16,963,502


10,313,558**CASH AND CASH EQUIVALENTS,****END OF PERIOD**

$
15,896,457


22,656,794


13,210,836


19,014,528


16,963,502**Supplemental Cash Flows Information**Real estate acquired in settlement of loans

$
466,670


120,000


153,820


368,296


963,264Interest paid

$
8,445,630


4,493,513


6,102,303


12,000,275


14,278,261Income taxes paid

$
2,313,342


1,026,224


672,466


1,742,466


1,662,886Dividend declared and unpaid

$
450,868


432,513


420,430


415,414


347,656The Bank acquired the Springfield, Missouri branchoffices of another financial institution in 2002.In conjunction with the acquisition, assets wereacquired and liabilities were assumed as follows:Fair value of liabilities assumed


-


-


-


-


41,615,456Fair value of assets acquired


-


-


-


-


(16,058,484
)Cash received


-


-


-


-


25,556,972













*See Notes to Consolidated Financial Statements*25***Guaranty Federal Bancshares, Inc.***
***Consolidated Statements of Stockholders Equity***
***Years Ended December 31, 2004 and June 30, 2003 and 2002***
***Six Months Ended December 31, 2003***








Common Stock

Additional Paid-In Capital

Unearned ESOP Shares

Treasury Stock

Retained Earnings

Accumulated Other Comprehensive Income

Total**Balance, July 1, 2000**

$
625,004


47,921,681


(2,870,440
)

(16,144,767
)

24,654,965


2,398,947


56,585,390Comprehensive incomeNet income


-


-


-


-


3,232,973


-


3,232,973Change in unrealized appreciationon available-for-sale securitites, netof income taxes of $909,880


-


-


-


-


-


1,549,256


1,549,256Total comprehensive income




















4,782,229Dividends ($0.47 per share)


-


-


-


-


(1,936,401
)

-


(1,936,401
)Stock award plans


-


468,674


-


-


-


-


468,674Stock purchased for stock awards





(85,945
)

-


-


-


-


(85,945
)Stock options exercised


1,836


108,674


-


-


-


-


110,510Release of ESOP shares


-


38,431


229,640


-


-


-


268,071Treasury stock purchased


-


-


-


(9,986,737
)

-


-


(9,986,737
)**Balance, July 1, 2001**

$
626,840


48,451,515


(2,640,800
)

(26,131,504
)

25,951,537


3,948,203


50,205,791Comprehensive incomeNet income


-


-


-


-


3,592,982


-


3,592,982Change in unrealized appreciationon available-for-sale securitites, netof income taxes of ($587,664)


-


-


-


-


-


(1,000,616
)

(1,000,616
)Total comprehensive income




















2,592,366Dividends ($0.625 per share)


-


-


-


-


(2,171,584
)

-


(2,171,584
)Stock award plans


-


390,675


-


-


-


-


390,675Stock options exercised


9,700


914,977


-


-


-


-


924,677Release of ESOP shares


-


84,865


234,730


-


-


-


319,595Treasury stock purchased


-


-


-


(16,826,643
)

-


-


(16,826,643
)**Balance, June 30, 2002**


636,540


49,842,032


(2,406,070
)

(42,958,147
)

27,372,935


2,947,587


35,434,877Comprehensive incomeNet income


-


-


-


-


3,579,649


-


3,579,649Change in unrealized appreciationon available-for-sale securitites, netof income taxes of ($568,257)


-


-


-


-


-


(967,574
)

(967,574
)Total comprehensive income




















2,612,075Dividends ($0.60 per share)


-


-


-


-


(1,671,800
)

-


(1,671,800
)Stock award plans


-


547,241


-


-


-


-


547,241Stock options exercised


5,145


551,724


-


-


-


-


556,869Release of ESOP shares


-


124,584


249,140


-


-


-


373,724Treasury stock purchased


-


-


-


(1,311,174
)

-


-


(1,311,174
)**Balance, June 30, 2003**


641,685


51,065,581


(2,156,930
)

(44,269,321
)

29,280,784


1,980,013


36,541,812Comprehensive incomeNet income


-


-


-


-


1,500,161


-


1,500,161Change in unrealized appreciationon available-for-sale securitites, netof income taxes of $402,965


-


-


-


-


-


686,130


686,130Total comprehensive income




















2,186,291Dividends ($0.31 per share)


-


-


-


-


(861,250
)

-


(861,250
)Stock award plans


-


59,034


-


-


-


-


59,034Stock options exercised


1,205


106,433


-


-


-


-


107,638Release of ESOP shares


-


99,154


126,000


-


-


-


225,154Treasury stock purchased


-


-


-


(280,558
)

-


-


(280,558
)**Balance, December 31, 2003**


642,890


51,330,202


(2,030,930
)

(44,549,879
)

29,919,695


2,666,143


37,978,121Comprehensive incomeNet income


-


-


-


-


4,284,773


-


4,284,773Change in unrealized appreciationon available-for-sale securitites, netof income taxes of $87,911


-


-


-


-


-


149,685


149,685Total comprehensive income




















4,434,458Dividends ($0.64 per share)


-


-


-


-


(1,767,337
)

-


(1,767,337
)Stock award plans


-


78,350


-


-


-


-


78,350Stock options exercised


6,496


744,778


-


-


-


-


751,274Release of ESOP shares


-


231,512


230,000


-


-


-


461,512Treasury stock purchased


-


-


-


(1,163,115
)

-


-


(1,163,115
)**Balance, December 31, 2004**

$
649,386


52,384,842


(1,800,930
)

(45,712,994
)

32,437,131


2,815,828


40,773,263










*See Notes to Consolidated Financial Statements*26***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***








**NOTE 1:**  **NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT**


**ACCOUNTING POLICIES**





Organization


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





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





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





Fiscal Year Change


In 2003, the Company changed its fiscal year ended June 30 to a fiscal year ended December 31. The six-month period ended December 31, 2003, transitions between the Companys old and new fiscal year ends.





Nature of Operations


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





Principles of Consolidation


The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and the Banks wholly-owned subsidiary, Guaranty Financial Services of Springfield, Inc. All significant intercompany profits, transactions and balances have been eliminated in consolidation.





Use of Estimates


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





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





27***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


Securities


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





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





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








Mortgage Loans Held for Sale


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





Loans


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





Loan Servicing


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





Allowance for Loan Losses


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




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




28***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


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




Foreclosed Assets Held for Sale


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





Premises and Equipment


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





Income Taxes


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





Cash Equivalents


The Company considers all highly liquid interest-bearing deposits in other financial institutions with an initial maturity of three months or less to be cash equivalents.





Regulatory Matters


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


Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.


29***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


As of December 31, 2004, the most recent notification from the Missouri Division of Finance categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Companys or the Banks category.





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


To Be Well CapitalizedFor Capital

Under Prompt CorrectiveActual

Adequacy Purposes

Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

Ratio**As of December 31, 2004**Tier 1 (core) capital, andratio to adjusted total assetsCompany

$
37,938


8.7
%
$
17,485


4.0
%

n/a


n/aBank

$
36,869


8.4
%
$
17,470


4.0
%
$
21,838


5.0
%Tier 1 (core) capital, andratio to risk-weighted assetsCompany

$
37,938


10.6
%
$
14,367


4.0
%

n/a


n/aBank

$
36,869


10.3
%
$
14,371


4.0
%
$
21,556


6.0
%Total risk-based capital, andratio to risk-weighted assetsCompany

$
44,401


12.4
%
$
28,735


8.0
%

n/a


n/aBank

$
43,253


12.0
%
$
28,742


8.0
%
$
35,927


10.0
%




30***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***




To Be Well CapitalizedFor Capital

Under Prompt CorrectiveActual

Adequacy Purposes

Action ProvisionsAmount

Ratio

Amount

Ratio

Amount

Ratio**As of December 31, 2003**Tier 1 (core) capital, andratio to adjusted total assetsCompany

$
35,181


9.4
%
$
15,108


4.0
%

n/a


n/aBank

$
34,476


9.2
%
$
15,045


4.0
%
$
18,807


5.0
%Tier 1 (core) capital, andratio to risk-weighted assetsCompany

$
35,181


12.2
%
$
11,624


4.0
%

n/a


n/aBank

$
34,476


11.9
%
$
11,570


4.0
%
$
17,355


6.0
%Total risk-based capital, andratio to risk-weighted assetsCompany

$
40,185


13.9
%
$
23,248


8.0
%

n/a


n/aBank

$
39,480


13.6
%
$
23,141


8.0
%
$
28,926


10.0
%To Be Well CapitalizedFor Capital
Under Prompt CorrectiveActual
Adequacy Purposes
Action ProvisionsAmount


Ratio


Amount


Ratio


Amount


Ratio**As of June 30, 2003**Tier 1 (core) capital, andratio to adjusted total assetsCompany

$
34,454


9.1
%
$
15,104


4.0
%

n/a


n/aBank

$
33,931


9.0
%
$
15,084


4.0
%
$
18,855


5.0
%Tier 1 (core) capital, andratio to risk-weighted assetsCompany

$
34,454


11.8
%
$
11,642


4.0
%

n/a


n/aBank

$
33,931


11.7
%
$
11,623


4.0
%
$
17,435


6.0
%Total risk-based capital, andratio to risk-weighted assetsCompany

$
38,920


13.4
%
$
23,284


8.0
%

n/a


n/aBank

$
38,397


13.2
%
$
23,246


8.0
%
$
29,058


10.0
%





The amount of dividends that the Bank may pay is subject to various regulatory limitations. As of December 31, 2004 and 2003, and June 30, 2003, the Bank exceeded their minimum capital requirements. The Bank may not pay dividends which would reduce capital below the minimum requirements shown above.




31***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


Earnings Per Share





The computation for earnings per share for year ended December 31, 2004 and six months ended December 31, 2003 and 2002, and years ended June 30, 2003 and 2002 is as follows:





Year Ended

Six Months Ended

Six Months EndedDecember 31, 2004

December 31, 2003

December 31, 2002(unaudited)Net income

$
4,284,773


1,500,161


1,764,030Average common shares outstanding


2,808,412


2,782,788


2,797,202Effect of stock options outstanding


113,425


103,555


51,446Average diluted shares outstanding


2,921,837


2,886,343


2,848,648Earnings per share - basic

$
1.53


0.54


0.63Earnings per share - diluted

$
1.47


0.52


0.62Year Ended


Year EndedJune 30, 2003


June 30, 2002Net income

$
3,579,649


3,592,982Average common shares outstanding


2,794,032


3,549,172Effect of stock options outstanding


57,525


38,728Average diluted shares outstanding


2,851,557


3,587,900Earnings per share - basic

$
1.28


1.01Earnings per share - diluted

$
1.26


1.00





All outstanding options to purchase common stock were included in the computation of diluted earning per share for the six months ended December 31, 2003 and December 31, 2002. Options to purchase 10,000, 10,000 and 15,000 shares of common stock were outstanding during the years ended December 31, 2004, and June 30, 2003 and 2002, respectively, but were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares.


32***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


Stock Option Plans





The Company accounts for its stock option plan under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.





Year Ended

Six Months

Six MonthsDecember 31, 2004

December 31, 2003

December 31, 2002(Unaudited)Net income, as reported

$
4,284,773


1,500,161


1,764,030Less: Total stock-based employeecompensation cost determinedunder the fair value-basedmethod, net of income taxes


(35,949
)

(18,085
)

(89,950
)Pro forma net income

$
4,248,824


1,482,076


1,674,080Earnings per share:Basic - as reported

$
1.53


0.54


0.63Basic - pro forma

$
1.51


0.53


0.60Diluted - as reported

$
1.47


0.52


0.62Diluted - pro forma

$
1.45


0.51


0.59Year Ended


Year EndedJune 30, 2003


June 30, 2002Net income, as reported

$
3,579,649


3,592,982Less: Total stock-based employeecompensation cost determinedunder the fair value-basedmethod, net of income taxes


(174,412
)

(174,142
)Pro forma net income

$
3,405,237


3,418,840Earnings per share:Basic - as reported

$
1.28


1.01Basic - pro forma

$
1.22


0.96Diluted - as reported

$
1.26


1.00Diluted - pro forma

$
1.19


0.95








33***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


Segment Information





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





**NOTE 2:**  **SECURITIES**





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





Amortized Cost

Gross Unrealized Gains

Gross Unrealized (Losses)

Approximate Fair Value**As of December 31, 2004**Equity Securities:FHLMC stock

$
66,588


4,945,012


-


5,011,600Other stock


2,000,000


-


(560,000
)

1,440,000Debt Securities:Trust preferred securities


6,570,814


84,468


-


6,655,282U. S. government agencies


1,994,798


88


-


1,994,886$
10,632,200


5,029,568


(560,000
)

15,101,768**As of December 31, 2003**Equity Securities:FHLMC stock

$
78,336


4,587,264


-


4,665,600Other stock


2,000,000


-


(326,000
)

1,674,000Debt Securities:Trust preferred securities


6,557,201


11,071


(40,840
)

6,527,432U. S. government agencies


1,996,317


477


-


1,996,794$
10,631,854


4,598,812


(366,840
)

14,863,826**As of June 30, 2003**Equity Securities:FHLMC stock

$
80,294


4,082,846


-


4,163,140Other stock


2,000,000


-


(324,000
)

1,676,000Debt Securities:Trust preferred securities


6,550,357


-


(615,889
)

5,934,468U. S. government agencies


1,497,618


-


(79
)

1,497,539$
10,128,269


4,082,846


(939,968
)

13,271,147








34***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


Maturities of available-for-sale debt securities as of December 31, 2004:


Amortized Cost

Approximate Fair ValueWithin one year

$
1,994,798


1,994,886After ten years


6,570,814


6,655,282$
8,565,612


8,650,168





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





Amortized Cost

Gross Unrealized Gains

Gross Unrealized (Losses)

Approximate Fair Value**As of December 31, 2004**Debt Securities:U. S. government agencies

$
228,807


375


-


229,182Mortgage-backed securities


1,076,351


77,737


-


1,154,088$
1,305,158


78,112


-


1,383,270**As of December 31, 2003**Debt Securities:U. S. government agencies

$
256,142


78


-


256,220Mortgage-backed securities


1,611,452


81,240


-


1,692,692$
1,867,594


81,318


-


1,948,912**As of June 30, 2003**Debt Securities:U. S. government agencies

$
263,781


952


-


264,733Mortgage-backed securities


1,987,113


149,541


-


2,136,654$
2,250,894


150,493


-


2,401,387





Maturities of held-to-maturity securities as of December 31, 2004:


Amortized Cost

Approximate Fair ValueAfter ten years

$
228,807


229,182Mortgage-backed securities not due on asingle maturity date


1,076,351


1,154,088$
1,305,158


1,383,270





The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $31,875 and $42,096 as of December 31, 2004 and 2003, respectively, and $51,075 as of June 30, 2003. The approximate fair value of pledged securities amounted to $31,950 and $41,061 as of December 31, 2004 and 2003, respectively, and $51,036 as of June 30, 2003.





Gross gains of $742,608, $105,461, $0, $0, and $784,557 and gross losses of $0, $0, $0, $0, and $3,816 resulting from sale of available-for-sale securities were realized for the year ended December 31, 2004 and the six months ended December 31, 2003 and 2002, and the years ended June 30, 2003 and 2002, respectively.





35***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***





Certain investment in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2004, was $1,440,000, which is approximately 9% of the Companys available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from decreases in market interest rates and failure of certain investments to meet projected earnings targets.





Based of evaluation of available evidence including recent changes in interest rates and other information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.





Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.





The following table shows our investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2004 and 2003.





December 31, 2004Less than 12 Months

12 Months or More

TotalDescription of Securities

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses****Equity Securities

$
-


-


1,440,000


(560,000
)

1,440,000


(560,000
)December 31, 2003Less than 12 Months
12 Months or More
TotalDescription of Securities


Fair Value


Unrealized Losses


Fair Value


Unrealized Losses


Fair Value


Unrealized Losses****Equity Securities

$
-


-


1,674,000


(326,000
)

1,674,000


(326,000
)Debt Securities


-


-


4,705,261


(40,840
)

4,705,261


(40,840
)$                  -


-


6,379,261


(366,840
)

6,379,261


(366,840
)




36***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


**NOTE 3:**  **LOANS AND ALLOWANCE FOR LOAN LOSSES**





Categories of loans at December 31, 2004 and 2003, and June 30, 2003, include:


December 31,

June 30,2004

2003

2003Real estate - residential mortgage:One to four family units

$
117,715,909


128,209,462


134,649,480Multi-family


52,258,859


44,241,683


41,021,909Real estate - construction


45,090,258


49,814,316


64,463,839Real estate - commercial


97,549,770


72,104,911


71,046,133Commercial loans


55,606,190


24,618,265


18,966,677Installment loans


25,172,615


25,441,295


25,486,441Total loans


393,393,601


344,429,932


355,634,479Less:Undisbursed portion of loans-in-process


-


(9,425,318
)

(25,539,102
)Allowance for loan losses


(4,536,654
)

(3,886,137
)

(2,775,320
)Unearned discounts


(7,734
)

(19,296
)

(26,356
)Deferred loan fees/costs, net


(106,421
)

(237,306
)

(211,281
)Net loans

$
388,742,792


330,861,875


327,082,420





Impaired loans totaled $6,083,635 and $7,159,100 as of December 31, 2004 and 2003, respectively, and $623,856 as of June 30, 2003 with a related allowance for loan losses of $928,857, $1,110,130 and $81,029, respectively. As of December 31, 2004 and 2003, and June 30, 2003, respectively, impaired loans of $1,995,593, $736,542 and $330,971 had no related allowance for loan losses.





Interest of $686,939, $153,685, $198,196 and $475,190 was recognized on average impaired loans of $7,659,179, $4,748,587, $661,746 and $3,165,567 for the year ended December 31, 2004 and the six months ended December 31, 2003 and the years ended June 30, 2003 and 2002, respectively. Interest of $694,169, $143,948, $191,040 and $262,402 was recognized on impaired loans on a cash basis during the year ended December 31, 2004 and six months ended December 31, 2003 and the years ended June 30, 2003 and 2002, respectively.





At December 31, 2004 and 2003 and June 30, 2003, accruing loan delinquent 90 days or more totaled $0, $0 and $0, respectively. Non-accruing loans at December 31, 2004 and 2003 and June 30, 2003, were $419,000, $743,000 and $331,000, respectively.





37***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


Activity in the allowance for loan losses was as follows:





Year ended

Six months ended

Years endedDecember 31,

December 31,

December 31,

June 30,2004

2003

2002

2003

2002(Unaudited)Balance, beginning of period

$
3,886,137


2,775,320


2,649,872


2,649,872


2,697,389Provision charged to expense


863,830


1,162,000


205,000


610,000


291,000Losses charged off net of recoveriesof $17,761 for year ended December 31,2004 and $3,323 and $150 for six monthsended December 31, 2003 and 2002,$52,015 and $482 , for yearsended June 30, 2003 and 2002


(213,313
)

(51,183
)

(215,320
)

(484,552
)

(338,517
)Balance, end of period

$
4,536,654


3,886,137


2,639,552


2,775,320


2,649,872





The weighted average interest rate on loans as of December 31, 2004 and 2003, was 5.45% and 5.39%, and as of June 30, 2003 was 5.72%.





The Bank serviced mortgage loans for others amounting to $123,466,113, $128,875,871, and $116,183,857 as of December 31, 2004 and 2003 and June 30, 2003, respectively. The Bank serviced commercial loans for others amounting to $1,738,961, $1,072,449 and $1,221,432 as of December 31, 2004 and 2003 and June 30, 2003, respectively.





**NOTE 4:**  **PREMISES AND EQUIPMENT**





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





December 31,

December 31,

June 30,2004

2003

2003Land

$
1,250,789


1,250,789


1,250,789Buildings and improvements


6,748,579


6,468,609


6,303,142Furniture, fixtures and equipment


4,658,904


3,672,063


3,645,301Leasehold improvements


157,905


217,948


204,06912,816,177


11,609,409


11,403,301Less accumulated depreciation


(5,627,298
)

(5,033,406
)

(4,694,305
)Net premises and equipment

$
7,188,879


6,576,003


6,708,996





Depreciation expense was $669,479 for the year ended December 31, 2004, $339,101 and $404,498, for the six months ended December 31, 2003 and 2002, $783,933 and $1,020,070 and for the years ended June 30, 2003 and 2002, respectively.




38***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***




**NOTE 5:**  **OTHER COMPREHENSIVE INCOME (LOSS)**





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


Year ended

Six months endedDecember 31,

December 31,

Years ended June 30,2004

2003

2002

2003

2002(Unaudited)Unrealized gains (losses) onavailable-for-sale securities

$
980,204


1,194,556


(536,987
)

(1,535,831
)

(807,538
)Less: Reclassification adjustment forrealized (gains) losses included in income


(742,608
)

(105,461
)

-


-


(780,742
)Other comprehensive income (loss),before tax effect


237,596


1,089,095


(536,987
)

(1,535,831
)

(1,588,280
)Tax expense (benefit)


87,911


402,965


(198,685
)

(568,257
)

(587,664
)Other comprehensive income (loss)

$
149,685


686,130


(338,302
)

(967,574
)

(1,000,616
)








**NOTE 6:**  **DEPOSITS**


December 31, 2004

December 31, 2003

June 30, 2003Weighted Average Rate

Balance

Percentage of Deposits

Weighted Average Rate

Balance

Percentage of Deposits

Weighted Average Rate

Balance

Percentage of DepositsDemand


0.00
%
$
25,583,803


8.6
%

0.00
%

23,335,707


9.8
%

0.00
%

24,650,393


10.5
%NOW


0.53
%

34,604,789


11.7
%

0.30
%

34,256,771


14.5
%

0.31
%

32,806,352


13.2
%Money market


1.81
%

52,009,761


17.6
%

1.34
%

42,231,015


17.8
%

1.31
%

37,511,932


15.9
%Savings


1.08
%

15,152,943


5.1
%

0.81
%

17,220,605


7.3
%

0.80
%

17,458,316


7.4
%1.01
%

127,351,296


43.0
%

0.69
%

117,044,097


49.4
%

0.65
%

112,426,993


47.7
%Certificates:0% - 3.99%


2.46
%

151,753,139


51.2
%

2.21
%

85,237,827


35.9
%

2.40
%

81,797,903


34.7
%4.00% - 5.99%


4.95
%

14,934,483


5.0
%

5.07
%

31,062,415


13.1
%

4.98
%

36,483,700


15.5
%6.00% - 7.99%


6.51
%

2,348,823


0.8
%

6.46
%

3,786,404


1.6
%

6.44
%

4,968,601


2.1
%2.74
%

169,036,446


57.0
%

3.08
%

120,086,647


50.6
%

3.33
%

123,250,204


52.3
%Total Deposits


2.00
%
$
296,387,742


100.0
%

1.90
%

237,130,744


100.0
%

2.05
%

235,677,197


100.0
%





The aggregate amount of certificates of deposit with a minimum balance of $100,000 was approximately $12,070,000, $11,841,000, and $12,258,000 as of December 31, 2004 and 2003, and June 30, 2003, respectively.


39***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***





A summary of certificates of deposit by maturity as of December 31, 2004, is as follows:





2005
$
96,113,9752006

37,527,9912007

24,858,0032008

5,886,5742009

3,969,853Thereafter

680,050$
169,036,446





A summary of interest expense on deposits is as follows:


Year ended

Six months ended

Years endedDecember 31,

December 31,

June 30,2004

2003

2002

2003

2002NOW and Money Market accounts

$
793,432


327,245


459,869


813,619


934,165Savings accounts


139,890


70,339


131,337


221,264


241,553Certificate accounts


4,012,780


1,981,806


2,546,358


4,792,812


5,860,915Early withdrawal penalties


(26,938
)

(11,190
)

(16,389
)

(25,250
)

(19,349
)$
4,919,164


2,368,200


3,121,175


5,802,445


7,017,284





The Bank utilizes brokered deposits as an additional funding source. The aggregate amount of brokered deposits was approximately $68,375,000 and $24,505,000 as of December 31, 2004 and 2003, and $25,000, as of June 30, 2003, respectively.





40


**NOTE 7:**  **FEDERAL HOME LOAN BANK ADVANCES**





Federal Home Loan Bank advances consist of the following:


December 31, 2004

December 31, 2003Maturity Date

Amount

Weighted Average Rate

Amount

Weighted Average Rate2004

$
-


-


63,290,000


2.34
%2005


61,264,000


2.73
%

7,850,000


4.51
%2006


12,500,000


4.62
%

10,500,000


5.12
%2007


3,000,000


2.83
%

1,000,000


3.47
%2008


16,650,000


5.22
%

14,950,000


5.54
%2009


386,000


7.21
%

386,000


7.21
%Thereafter


6,200,000


6.16
%

10,860,948


5.78
%$
100,000,000


3.62
%
$
108,836,948


3.58
%June 30, 2003Maturity Date


Amount


Weighted Average RateFiscal Year 2004

$
60,322,500


2.79
%Fiscal Year 2005


7,350,000


4.86
%Fiscal Year 2006


6,500,000


5.84
%Fiscal Year 2007


3,000,000


5.34
%Fiscal Year 2008


3,950,000


5.91
%Thereafter


33,496,394


5.77
%$
114,618,894


4.14
%





In the year ending December 31, 2005, the Bank has advances equal to $11,000,000 with a weighted average rate of 5.40% callable between January 20, 2005 and January 30, 2005 at the FHLBs option with a maturity date between July 30, 2008 and October 20, 2008.





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





41*****Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements*****


**NOTE 8:**  INCOME TAXES


The Company files a consolidated federal income tax return. In computing federal income taxes for taxable years prior to July 1, 1996, the Bank has been allowed an 8% deduction from otherwise taxable income as a statutory bad debt deduction, subject to limitations based on aggregate loans and savings balances





As of December 31, 2004 and 2003, and June 30, 2003, retained earnings included approximately $5,075,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $1,878,000 as of December 31, 2004 and 2003, and June 30, 2003.





The provision for income taxes consists of:





Year Ended

Six Months Ended

Years EndedDecember 31,

December 31,

June 30,2004

2003

2002

2003

2002(Unaudited)Taxes currently payable

$
2,413,294


1,055,750


758,083


1,810,815


1,680,799Deferred income taxes


(99,952
)

(267,750
)

168,917


(154,815
)

211,201$
2,313,342


788,000


927,000


1,656,000


1,892,000







42***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


The tax effects of temporary differences related to deferred taxes shown on the December 31, 2004 and 2003, and June 30, 2003, balance sheets are:





December 31,

December 31,

June 30,2004

2003

2003Deferred tax assets:Allowances for loan and foreclosed asset losses

$
1,678,562


1,441,871


1,026,868Accrued compensated absences and bonuses


12,524


11,749


21,021Unrealized loss on loans held for sale


2,862


7,140


9,752RRP expense


13,450


11,559


116,325Deferred loan fees/costs


39,376


87,803


78,174State tax credits


-


64,049


117,658Other


-


20,127


13,7901,746,774


1,644,298


1,383,588Deferred tax liabilities:FHLB stock dividends


(128,262
)

(128,262
)

(206,867
)Tax bad debt reserves in excess of base year


-


-


(56,271
)Mortgage servicing rights


(365,768
)

(365,110
)

(261,471
)Unrealized appreciation on available-for-sale securities


(1,653,740
)

(1,565,830
)

(1,162,865
)Accumulated depreciation


(163,879
)

(173,592
)

(125,532
)Other


(67,584
)

(56,004
)

(79,867
)(2,379,233
)

(2,288,798
)

(1,892,873
)Net deferred tax liability

$
(632,459
)

(644,500
)

(509,285
)





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


Year ended

Six months ended

Year endedDecember 31,

December 31,

June 30,(Unaudited)2004

2003

2002

2003

2002Computed at statutory rate


34.0
%

34.0
%

34.0
%

34.0
%

34.0
%Increase (reduction) in taxes resulting from:State financial institution tax


1.0
%

2.2
%

3.9
%

-2.4
%

2.0
%ESOP


1.2
%

1.2
%

1.0
%

1.0
%

-0.2
%Other


-1.1
%

-2.2
%

-4.4
%

-1.0
%

-1.3
%Actual tax provision


35.1
%

35.2
%

34.5
%

31.6
%

34.5
%





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




43***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


**NOTE 9:**  **DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**





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


December 31, 2004

December 31, 2003

June 30, 2003Carrying Amount

Fair Value

Carrying Amount

Fair Value

Carrying Amount

Fair ValueFinancial assets:Cash and cash equivalents

$
15,896,458


15,896,458


22,656,794


22,656,794


19,014,528


19,014,528Available-for-sale securities


15,101,768


15,101,768


14,863,826


14,863,826


13,271,147


13,271,147Held-to-maturity securities


1,305,158


1,383,270


1,867,594


1,948,912


2,250,894


2,401,387Mortgage loans held-for-sale


3,590,536


3,590,536


1,268,064


1,268,064


9,755,102


9,755,102Loans, net


388,742,792


389,853,000


330,861,875


334,344,000


327,082,420


331,370,000Federal Home Loan Bank stock


5,146,500


5,146,500


5,294,200


5,294,200


8,600,400


8,600,400Interest receivable


1,570,015


1,570,015


1,305,728


1,305,728


1,430,125


1,430,125Financial liabilities:Deposits


296,387,742


295,760,000


237,130,744


237,500,000


235,677,197


237,602,000Federal Home Loan Bank advances


100,000,000


101,962,000


108,836,948


113,099,000


114,618,894


116,470,000Securities sold under agreementsto repurchase


1,264,020


1,264,020


738,399


738,399


702,024


702,024Interest payable


361,516


361,516


200,770


200,770


203,237


203,237Dividend payable


450,868


450,868


432,513


432,513


415,414


415,414Unrecognized financial instruments(net of contractual value):Commitments to extend credit


-


-


-


-


-


-Unused lines of credit


-


-


-


-


-


-





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





Cash and Cash Equivalents and Federal Home Loan Bank stock


The carrying amounts reported in the balance sheets for cash and cash equivalents approximate those assets' fair value.





Investment Securities


Fair values for investment securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities.





Interest Receivable


The carrying amount of interest receivable approximates its fair value.





Mortgage Loans Held for Sale


Fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.


44***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***




Loans


The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics are aggregated for purposes of the calculations.





Deposits


The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.





Federal Home Loan Bank Advances


Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing advances.





Securities Sold under Agreements to Repurchase


For these short-term instruments, the carrying amount is a reasonable estimate of fair value.





Interest and Dividend Payable


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





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


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





**NOTE 10:**  **SIGNIFICANT ESTIMATES AND CONCENTRATIONS**





Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk. Other significant estimates and concentrations not discussed in those footnotes include:





At December 31, 2004, approximately 40% of the Bank's total time deposits consisted of certificates of deposit which were issued through a broker and had minimum denominations in excess of $100,000.





**NOTE 11:**  **EMPLOYEE BENEFIT PLANS**





Stock Award Plans


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





45***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***





At the annual stockholders meeting on October 18, 1995, the Banks stockholders approved the Recognition and Retention Plan (the "RRP"). Following approval of the Plan, the Bank contributed $464,643 to a separate trust to purchase the 75,106 shares of the Companys common stock in the RRP. As of December 31, 2004 all shares in this plan have vested.





At a special stockholders meeting on July 22, 1998, the Companys stockholders approved the Restricted Stock Plan (the "RSP"). Following approval of the Plan, the Company contributed $2,373,065 to a separate trust to purchase the 173,632 shares in the RSP. As of December 31, 2004 there are 2,000 shares in this plan that are not vested.





During the year ended June 30, 2000, the directors of the Company established the Stock Compensation Plan (the "2000 SCP") with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 7,125 shares of the Companys common stock. Following approval of the Plan, the Company contributed $85,945 to a separate trust to purchase the 7,125 shares in the SCP. As of December 31, 2003 there are 1,425 shares in this plan that are not vested.





During the year ended June 30, 2001, the directors of the Company established the Stock Compensation Plan (the "2001 SCP") with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 10,239 shares of the Companys common stock. The shares for this plan were taken from forfeited shares in the RSP. As of December 31, 2004 there are 4,094 shares in this plan that are not vested.





The Bank recognized $58,423, $30,952, $177,810, $353,004 and $401,403 of expense under these stock award plans in the year ended December 31, 2004 and the six months ended December 31, 2003 and 2002 and the years ended June 30, 2003 and 2002, respectively.





Stock Option Plans


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





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





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





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





Under the stock option component of the 2001 SCP, the Committee had granted no nonqualified stock options as of December 31, 2003.




46***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


During the six months ended December 31, 2003, the directors of the Company authorized the issuance of 5,000 stock options as an employment inducement to a new officer of  the  Bank pursuant to a stock option  agreement . Stock options awarded under this  agreement are considered non-qualified for federal income tax purposes .





During the year ended December 31, 2004, the directors of the Company authorized the issuance of 25,000 stock options as an employment inducement to a new officer of the Bank pursuant to a stock option agreement . Stock options awarded under this  agreement are considered non-qualified for federal income tax purposes.





On May 19, 2004, the Companys stockholders voted to approve a 2004 Stock Option Plan ("2004 SOP"). The purpose of the plan is to attract and retain qualified personnel for positions of substantial responsibility. The aggregate number of shares with respect to options issued under this plan shall not exceed 250,000 shares. To date no options have been granted under this plan.





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


Number of sharesIncentive Stock Option

Non-Qualified Options to Directors

Weighted Average Exercise PriceBalance outstanding as of July 1, 2001


408,197


133,187


11.92Granted


15,000


25,533


13.01Exercised


(97,010
)

-


9.53Forfeited


(54,850
)

-


13.24Balance outstanding as of June 30, 2002


271,337


158,720


12.39Granted


10,000


-


15.31Exercised


(19,698
)

(31,746
)

10.82Forfeited


(4,277
)

(13,360
)

12.47Balance outstanding as of June 30, 2003


257,362


113,614


12.68Granted


5,000


50,000


16.70Exercised


(12,054
)

-


8.93Forfeited


-


-


-Balance outstanding as of December 31, 2003


250,308


163,614


13.32Granted


37,500


-


19.93Exercised


(40,436
)

(24,523
)

11.57Forfeited


(1,600
)

-


10.02Balance outstanding as of December 31, 2004


245,772


139,091


14.27Options exercisable as of December 31, 2004


181,072


85,304


13.21


47***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


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





December 31, 2004

December 31, 2003

June 30, 2003Dividends per share

$
0.64

$
0.31

$
0.68Risk-free interest rate


3.03
%

2.73
%

3.00
%Expected life of options


5 years


5 years


5 yearsWeighted-average fair valueof options granted during year

$
1.84

$
0.64

$
0.57





The following table summarizes information about stock options under the plans outstanding as of December 31, 2004:


Exercise Price

Number Outstanding

Number Exercisable

Remaining Contractual Life$ 5.83


1,248


1,248


2.0 years6.02


3,204


3,204


1.0 years6.08


4,170


4,170


1.5 years10.50


10,875


7,300


5.1 years11.05


800


-


6.5 years12.13


3,000


1,800


6.2 years12.50


12,510


2,298


6.6 years12.75


8,000


4,800


6.1 years13.44


231,556


231,556


3.6 years13.89


9,000


-


7.1 years15.31


8,000


-


8.1 years16.65


50,000


10,000


8.6 years17.20


5,000


-


8.7 years19.27


2,500


-


9.7 years19.62


25,000


-


9.1 years20.88


10,000


-


9.8 years$ 14.28


384,863


266,376





Employee Stock Ownership Plan


The Bank sponsors an internally-leveraged Employee Stock Ownership Plan (ESOP). All employees are eligible to participate after they attain age twenty-one and complete twelve consecutive months of service during which they work at least 1,000 hours. The ESOP borrowed $3,444,540 from the Company and purchased 344,454 shares of the common stock of the Company. The ESOP debt is secured by shares of the Company. The loan will be repaid from contributions to the ESOP as approved annually by the Banks Board of Directors. As the debt is repaid, shares are released from collateral and allocated to employees accounts. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. When shares are committed for release, the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings and may be paid directly to participants or credited to their account; dividends are not paid on unallocated ESOP shares. Compensation expense is recognized ratably based on the average fair value of shares committed to be released. Compensation expense attributed to the ESOP was $461,512, $225,154, $180,244, $373,724 and $319,275 for the year ended December 31, 2004, six months ended December 31, 2003 and 2002 and the years ended June 30, 2003 and 2002, respectively.





48***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***





The following is a summary of ESOP shares as of December 31, 2004:





Beginning ESOP shares


344,454Released shares


(140,225
)Shares committed for release


(24,136
)Unreleased shares


180,093Fair value of unreleased shares

$
4,333,038





**NOTE 12:**  **RELATED PARTY TRANSACTIONS**





Certain directors and executive officers of the Company and the Bank were customers of and had transactions with the Bank in the ordinary course of business. As of December 31, 2004 and 2003, and


June 30, 2003, loans outstanding to these directors and executive officers amounted to $747,903, $565,066 and $463,323, respectively.





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





**NOTE 13:**  **COMMITMENTS AND CREDIT RISK**





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





As of December 31, 2004 and 2003, and June 30, 2003, the Bank had outstanding commitments to originate loans of approximately $15,712,000, $24,414,000 and $23,835,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period. As of December 31, 2004 and 2003, and June 30, 2003, commitments of $4,879,000, $721,000 and $16,397,000, respectively, were at fixed rates and $10,833,000, $23,693,000 and $7,438,000, respectively, were at floating market rates.





Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified date. The Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. As of December 31, 2004 and 2003, and June 30, 2003 the Bank had approximately $2,695,000, $0 and $13,551,000, respectively, of commitments outstanding.





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




49***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***




The Bank had total outstanding standby letters of credit amounting to $1,314,000, $1,189,000 and $1,671,000 as of December 31, 2004 and 2003, and June 30, 2003, respectively, with terms ranging from 30 days to 2 years.





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





As of December 31, 2004 and 2003, unused lines of credit to borrowers aggregated approximately $64,051,000 and $50,941,000 for commercial lines and $16,578,000 and $13,245,000 for open-end consumer lines. As of June 30, 2003, unused lines of credit to borrowers aggregated approximately $17,955,000 for commercial lines and $13,397,000 for open-end consumer lines.


50***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


**NOTE 14:**  **CONDENSED PARENT COMPANY STATEMENTS**





The condensed balance sheets as of December 31, 2004 and 2003, and June 30, 2003, and statements of income and cash flows for the year ended December 31, 2004, and the six months ended December 31, 2003 and 2002, and the years ended June 30, 2003 and 2002, for the parent company, Guaranty Federal Bancshares, Inc., are as follows:


**Balance Sheets**

As of

As of

As ofDecember 31,

December 31,

June 30,2004

2003

2003**Assets**Cash

$
208,337


31,177


465,350Due from subsidiary


574,000


563,219


9,405Investment in subsidiary


39,804,931


37,272,723


36,019,229Prepaid expenses and other assets


439,622


448,612


437,385Refundable income taxes


224,860


94,903


37,195$
41,251,750


38,410,634


36,968,564**Liabilities**Accrued expenses and other liabilities

$
27,619


-


11,338Due to holding company








-Deferred income taxes








-Dividend payable


450,868


432,513


415,414**Stockholders' equity**Common stock


649,386


642,890


641,685Additional paid-in capital


52,384,842


51,330,202


51,065,581Unearned ESOP shares


(1,800,930
)

(2,030,930
)

(2,156,930
)Retained earnings


32,437,131


29,919,695


29,280,784Unrealized appreciation onavailable-for-sale securities, net


2,815,828


2,666,143


1,980,013Treasury stock


(45,712,994
)

(44,549,879
)

(44,269,321
)$
41,251,750


38,410,634


36,968,564


51***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


**Income Statements**

Year ended

For the six months ended

For the years endedDecember 31,

December 31,

June 30,2004

2003

2002

2003

2002(Unaudited)IncomeDividends from subsidiary bank

$
2,334,714


1,099,000


452,291


1,750,468


17,310,694Interest income:Related party


100,275


50,703


66,491


121,542


163,665Other


-


-


-


-


21,001Other


21


-


-


-


66,1382,435,010


1,149,703


518,782


1,872,010


17,561,498ExpenseOccupancy


2,400


1,200


1,200


2,400


2,400Other


581,566


219,947


84,731


190,491


401,242583,966


221,147


85,931


192,891


403,642Income before income taxesand equity in undistributed earnings


1,851,044


928,556


432,851


1,679,119


17,157,856earnings of subsidiaryProvision (credit) for income taxes


(129,555
)

(63,274
)

(7,217
)

(26,487
)

(56,739
)Income before equity in undistributedearnings of subsidiary


1,980,599


991,830


440,068


1,705,606


17,214,595Equity in undistributedearnings of subsidiary


2,304,174


508,331


1,323,962


1,874,043


(13,621,613
)Net income

$
4,284,773


1,500,161


1,764,030


3,579,649


3,592,982




52***Guaranty Federal Bancshares, Inc.***
***Notes to Consolidated Financial Statements***


**Statements of Cash Flows**

For year ended

For the six months ended

For the years endedDecember 31,

December 31,

June 30,2004

2003

2002

2003

2002(Unaudited)**Cash Flows From Operating Activities**Net income

$
4,284,773


1,500,161


1,764,030


3,579,649


3,592,982Items not requiring (providing) cash:Equity in undistributed earnings of subsidiary


(2,304,174
)

(508,331
)

(1,323,962
)

(1,874,043
)

-Gain on sale of available-for-sale securities











-


(66,138
)Release of ESOP shares


461,512


225,154


125,000


249,140


234,730Changes in:Accrued interest receivable





-


3,377


3,377


(3,377
)Prepaid expenses and other assets


8,990


(11,226
)

409,266


(18,944
)

(67,506
)Income taxes payable/refundable


(129,957
)

(57,708
)

98,685


79,014


(67,194
)Accrued expenses


27,619


(11,338
)

(46,062
)

(34,724
)

50,642Net cash provided by operating activities


2,348,763


1,136,712


1,030,334


1,983,469


3,674,139**Cash Flows From Investing Activities**Investment in subsidiaryLoan to ESOP











-


-Purchase of loans


-


-


291,402


-


(291,402
)Net collections of loans


-


-


(822
)

-


822Purchase of land











-


-Proceeds from sale of loans


-


-


-


290,580


-Proceeds from sale of available-for-sale securities


-


-


-


-


719,476Net (increase) decrease in advance to subsidiary


(10,780
)

(553,814
)

(421,463
)

8,079


(4,442
)Distribution in excess of net income of subsidiary


-


-


-


-


13,621,613Net cash provided by (used in) investing activities


(10,780
)

(553,814
)

(130,883
)

298,659


14,046,067**Cash Flows From Financing Activities**Proceeds from sale of common stock, net











-


-Stock options exercised


751,274


107,638


113,554


556,869


924,677Cash dividends received on RRP shares











-


-Cash dividends paid


(1,748,982
)

(844,151
)

(764,854
)

(1,604,042
)

(1,823,928
)Treasury stock purchased


(1,163,115
)

(280,558
)

(235,770
)

(1,131,792
)

(16,826,643
)Net cash used in financing activities


(2,160,823
)

(1,017,071
)

(887,070
)

(2,178,965
)

(17,725,894
)**Increase (decrease) in cash**


177,160


(434,173
)

12,381


103,163


(5,688
)**Cash, beginning of period**


31,177


465,350


362,187


362,187


367,875**Cash, end of period**

$
208,337


31,177


374,568


465,350


362,187








53


****Report** of Independent Registered Public Accounting Firm**











Audit Committee, Board of Directors


and Stockholders


Guaranty Federal Bancshares, Inc.


Springfield, Missouri








We have audited the accompanying consolidated balance sheets of Guaranty Federal Bancshares, Inc. as of December 31, 2004 and 2003 and June 30, 2003, and the related statements of income, stockholders equity and cash flows for the year ended December 31, 2004, the six month period ended December 31, 2003, and for the years ended June 30, 2003 and 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guaranty Federal Bancshares, Inc. as of December 31, 2004 and 2003 and June 30, 2003, and the results of its operations and its cash flows for the year ended December 31, 2004, the six month period ended December 31, 2003, and for the years ended June 30, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.








**/s/BKD,** **LLP**








January 28, 2005


Springfield, Missouri

















































54