Guaranty
      Federal Bancshares, Inc.

                  2007
      Annual Report
 
  Investor
      InformationContents
                
                i  
      President’s Message
                
                1  Investor
      Information
                
                2  Common
      Stock Prices & Dividends
                
                4  Selected
      Consolidated Financial and Other Data
                
                6 
      Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                
                20Consolidated
      Financial Statements
                
                49Report of
      Independent Registered Public Accounting Firm
                
                50Notes
                Directors
      and Officers
              ANNUAL MEETING OF
      STOCKHOLDERS:
                The
      Annual Meeting of Stockholders of the Company will be held Wednesday, May
      28, 2008 at 6:00 p.m., local time, at the Clarion Hotel, 3333 S.
      Glenstone, Springfield, Missouri.
                
                ANNUAL REPORT ON FORM
      10-K:
                Copies
      of the Company’s Annual Report on Form 10-K, including the financial
      statements, filed with the Securities and Exchange Commission are
      available without charge upon written request to:
                Lorene Thomas, Secretary
                Guaranty Federal Bancshares, Inc.,
                1341 W. Battlefield St., Springfield,
MO  65807-4181
                
                TRANSFER
      AGENT:
                Registrar
      and Transfer Company
                10
      Commerce Drive
                Cranford,
      NJ  07016
                
                STOCK TRADING INFORMATION:
                Over-the
      Counter Symbol: GFED
                
                SPECIAL LEGAL
      COUNSEL:
                Husch
      Blackwell Sanders LLP
                901
      St. Louis St., Suite 1900
                Springfield,
      MO  65806______________________________________
                
                Bank
      History Fact 1:
                
                1913
      - St. Louis Savings moves to Springfield, MO
                and
      changes their name to Guaranty
                Federal
      Savings and Loan Association.
                ______________________________________
              INDEPENDENT
      REGISTERED PUBLIC ACCOUNTING FIRM:
                  BKD,
      LLP
                  901
      St. Louis St.
                  PO
      Box 1190
                  Springfield,
      MO  65801-1190
                
                STOCKHOLDER
      AND FINANCIAL INFORMATION:
                Carter
      Peters,
                Executive
      Vice President, Chief Financial Officer
                417-520-0235
 
  1
  Guaranty
      Federal Bancshares, Inc.
                2007
      Annual Report
  Common
      Stock Prices
                  &
      DividendsBank
      History Fact 2:
                  1935
      – Converts to a Federal charter and the name is changed to Guaranty
      Federal Savings and Loan Association.
                
                The
      common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is
      traded in the over-the-counter market and quoted on the NASDAQ National
      Market under the symbol “GFED”.  As of March 18, 2008, there
      were approximately 1,572 stockholders.  At that date the Company
      had 6,740,985 shares of common stock issued and 2,706,675 shares of common
      stock outstanding.
                  
                  During
      the year ended December 31, 2007, the Company paid dividends of (i) $0.17
      per share on April 13, 2007, to stockholders of record as of April 3,
      2007, (ii) $0.17 per share on July 13, 2007 to stockholders of record as
      of July 2, 2007, and (iii) $0.18 per share on October 15, 2007, to
      stockholders of record as of October 1, 2007, and also declared a cash
      dividend of $0.18 per share on December 21, 2007, which was paid on
      January 18, 2008, to stockholders of record on January 4,
      2008.  During the year ended December 31, 2006, the Company paid
      dividends of (i) $0.165 per share on April 14, 2006, to stockholders of
      record as of March 30, 2006, (ii) $0.165 per share on July 14, 2006 to
      stockholders of record as of July 3, 2006, and (iii) $0.17 per share on
      October 16, 2006, to stockholders of record as of October 2, 2006, and
      also declared a cash dividend of $0.17 per share on December 21, 2006,
      which was paid on January 19, 2007, to stockholders of record on January
      5, 2007. The Company’s Board of Directors anticipates paying dividends on
      comparable dates during fiscal year ended December 31, 2008 to the payment
      dates during the fiscal year ended December 31, 2007.  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 high and low closing prices per the NASDAQ Stock
      Market by quarter for the years ended December 31, 2007 and
      2006.Bank
      History Fact 3:
                  1979
      – Guaranty Federal opens first branch office.
                    1987
      – Guaranty Federal opens second branch office.Bank
      History Fact 4:
                  1995
      – Reorganizes and issues stock in connection with formation of MHC. Forms
      federally chartered stock savings bank.
   Year ended
              
              
              Year endedDecember 31, 2007
              
              
              December 31, 2006High
              
              
              Low
              
              
              High
              
              
              LowQuarter
      ended:March
      31
              
              $
              29.85
              
              
              
              28.43
              
              
              
              30.24
              
              
              
              27.68June
      30
              
              
              30.21
              
              
              
              28.75
              
              
              
              29.71
              
              
              
              27.80September
      30
              
              
              30.42
              
              
              
              29.00
              
              
              
              29.40
              
              
              
              27.51December
      31
              
              
              30.25
              
              
              
              27.05
              
              
              
              28.75
              
              
              
              27.89
  2
 
 Guaranty
      Federal Bancshares, Inc.
                  2007
      Annual Report
 Bank History Fact 5:
                
                2003 – The bank applies
                for State Charterand
                changes name to
                Guaranty
      Bank.
              
              Set
      forth below is a stock performance graph comparing the cumulative total
      shareholder return on the Common Stock with (a) the cumulative total
      stockholder return on stocks included in The Nasdaq – Total U.S. Index and
      (b) the cumulative total stockholder return on stocks included in The
      Nasdaq Bank Index.  All three investment comparisons assume the
      investment of $100 as of the close of business on December 31, 2002 and
      the hypothetical value of that investment as of the Company’s fiscal years
      ended December 31, 2003, 2004, 2005, 2006, and 2007, assuming that all
      dividends were reinvested.  The graph reflects the historical
      performance of the Common Stock, and, as a result, may not be indicative
      of possible future performance of the Common Stock.  The data
      used to compile this graph was obtained from
  NASDAQ.
  
 Period
      EndingIndex
                
                12/31/02
                
                
                12/31/03
                
                
                12/31/04
                
                
                12/31/05
                
                
                12/31/06
                
                
                12/31/07Guaranty
      Federal Bancshares, Inc.
                
                
                100.00
                
                
                
                128.26
                
                
                
                165.55
                
                
                
                197.22
                
                
                
                207.74
                
                
                
                212.72NASDAQ
      – Total US
                
                
                100.00
                
                
                
                149.52
                
                
                
                162.72
                
                
                
                166.18
                
                
                
                182.57
                
                
                
                197.98NASDAQ
      Bank Index
                
                
                100.00
                
                
                
                128.64
                
                
                
                147.22
                
                
                
                143.82
                
                
                
                161.41
                
                
                
                127.92
 3
 Guaranty
Federal Bancshares, Inc.
 Selected
Consolidated Financial and Other Data
  The
following tables include certain information concerning the financial position
and results of operations of Guaranty Federal Bancshares, Inc. (including
consolidated data from operations of subsidiaries) as of the dates
indicated.  Dollar amounts are expressed in thousands except per share
data.
   Summary
      Balance Sheet
              
              As of December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003ASSETSCash
      and cash equivalents
              
              $
              12,046
              
              
              
              14,881
              
              
              
              20,506
              
              
              
              15,896
              
              
              
              22,657Investment
      securities
              
              
              15,385
              
              
              
              8,669
              
              
              
              7,702
              
              
              
              21,553
              
              
              
              16,731Loans
      receivable, net
              
              
              516,242
              
              
              
              480,269
              
              
              
              435,528
              
              
              
              392,333
              
              
              
              332,130Accrued
      interest receivable
              
              
              3,323
              
              
              
              2,910
              
              
              
              2,089
              
              
              
              1,570
              
              
              
              1,306Prepaids
      and other assets
              
              
              8,612
              
              
              
              10,075
              
              
              
              7,696
              
              
              
              1,977
              
              
              
              7,351Foreclosed
      assets
              
              
              727
              
              
              
              173
              
              
              
              27
              
              
              
              78
              
              
              
              6Premises
      and equipment
              
              
              9,442
              
              
              
              7,868
              
              
              
              7,453
              
              
              
              7,189
              
              
              
              6,576$
              565,778
              
              
              
              524,845
              
              
              
              481,001
              
              
              
              440,596
              
              
              
              386,757LIABILITIESDeposits
              
              $
              418,191
              
              
              
              352,230
              
              
              
              320,059
              
              
              
              296,388
              
              
              
              237,131Federal
      Home Loan Bank advances
              
              
              76,086
              
              
              
              108,000
              
              
              
              100,000
              
              
              
              100,000
              
              
              
              108,837Subordinated
      debentures
              
              
              15,465
              
              
              
              15,465
              
              
              
              15,465
              
              
              
              -
              
              
              
              -Other
      liabilities
              
              
              13,349
              
              
              
              4,251
              
              
              
              3,385
              
              
              
              3,435
              
              
              
              2,811523,091
              
              
              
              479,946
              
              
              
              438,909
              
              
              
              399,823
              
              
              
              348,779STOCKHOLDERS'
      EQUITY
              
              
              42,687
              
              
              
              44,899
              
              
              
              42,092
              
              
              
              40,773
              
              
              
              37,978$
              565,778
              
              
              
              524,845
              
              
              
              481,001
              
              
              
              440,596
              
              
              
              386,757Supplemental
      Data
              
              As of December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Number
      of full-service offices
              
              
              8
              
              
              
              8
              
              
              
              7
              
              
              
              7
              
              
              
              9Cash
      dividends per share
              
              $
              0.70
              
              
              
              0.67
              
              
              
              0.65
              
              
              
              0.63
              
              
              
              0.61
  4
 Guaranty
Federal Bancshares, Inc.
 Selected
Consolidated Financial and Other Data
  Summary
      Statement of Income
              
              Years ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004Interest
      income
              
              $
              37,972
              
              
              
              35,204
              
              
              
              27,413
              
              
              
              20,539Interest
      expense
              
              
              20,519
              
              
              
              17,386
              
              
              
              11,860
              
              
              
              8,446Net
      interest income
              
              
              17,453
              
              
              
              17,818
              
              
              
              15,553
              
              
              
              12,093Provision
      for loan losses
              
              
              840
              
              
              
              750
              
              
              
              945
              
              
              
              864Net
      interest income after provisionfor
      loan losses
              
              
              16,613
              
              
              
              17,068
              
              
              
              14,608
              
              
              
              11,229Noninterest
      income
              
              
              4,729
              
              
              
              3,660
              
              
              
              3,468
              
              
              
              3,616Noninterest
      expense
              
              
              11,842
              
              
              
              10,177
              
              
              
              8,670
              
              
              
              8,248Income
      before income taxes
              
              
              9,500
              
              
              
              10,551
              
              
              
              9,406
              
              
              
              6,597Provision
      for income taxes
              
              
              3,400
              
              
              
              4,042
              
              
              
              3,507
              
              
              
              2,313Net
      income
              
              $
              6,100
              
              
              
              6,509
              
              
              
              5,899
              
              
              
              4,284Basic
              
              $
              2.25
              
              
              
              2.34
              
              
              
              2.12
              
              
              
              1.53Diluted
              
              $
              2.19
              
              
              
              2.25
              
              
              
              2.03
              
              
              
              1.47
 
  Six
      months endedDecember 31,2003 (1)
              
              
              2002 (1)(Unaudited)Interest
      income
              
              $
              9,846
              
              
              
              11,290Interest
      expense
              
              
              4,491
              
              
              
              6,086Net
      interest income
              
              
              5,355
              
              
              
              5,204Provision
      for loan losses
              
              
              1,162
              
              
              
              205Net
      interest income after provisionfor
      loan losses
              
              
              4,193
              
              
              
              4,999Noninterest
      income
              
              
              2,089
              
              
              
              1,752Noninterest
      expense
              
              
              3,994
              
              
              
              4,060Income
      before income taxes
              
              
              2,288
              
              
              
              2,691Provision
      for income taxes
              
              
              788
              
              
              
              927Net
      income
              
              $
              1,500
              
              
              
              1,764Basic
              
              $
              0.54
              
              
              
              0.63Diluted
              
              $
              0.52
              
              
              
              0.62
  (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.
  5
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
 
 GENERAL
  Guaranty
Federal Bancshares, Inc. (the “Company”) is a Delaware corporation organized on
December 30, 1997 for the purpose of becoming the holding company of Guaranty
Federal Savings Bank, a federal savings bank (the “Bank”).  The Bank
is a wholly-owned subsidiary of the Company.
 
 In April
1995, Guaranty Federal Savings & Loan Association reorganized from a
federally chartered mutual savings and loan association into a mutual holding
company, Guaranty Federal Bancshares, M. H. C. (the
“MHC”).  Concurrent with the reorganization, the Bank was
chartered.  In December 1997, the Company completed the conversion and
reorganization of the Bank and the former MHC by selling common stock to
depositors of the Bank and a benefit plan of the Bank.  In addition,
all shares of common stock of the Bank held by public stockholders were
exchanged for shares of common stock of the Company.
 
 On June
27, 2003, the Bank converted to a state-chartered trust company with banking
powers in Missouri, and the Company became a one-bank holding
company.  The name of the Bank was changed from Guaranty Federal
Savings Bank to Guaranty Bank.
 
 The
primary activity of the Company is to oversee its investment in the
Bank.  The Company engages in few other activities, and the Company
has no significant assets other than its investment in the Bank.  For
this reason, unless otherwise specified, references to the Company include the
operations of the Bank.  The Company’s principal business consists of
attracting deposits from the general public and using such deposits to originate
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 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
Company has two wholly-owned subsidiaries other than the Bank, its principal
subsidiary: (i) Guaranty Statutory Trust I, a Delaware statutory trust (“Trust
I”); and (ii) Guaranty Statutory Trust II, a Delaware statutory
trust.  These Trusts were formed in December 2005 for the exclusive
purpose of issuing trust preferred securities to acquire junior subordinated
debentures issued by the Company.  The Company’s banking operation
conducted through the Bank is the Company’s only reportable
segment.  See also the discussion contained in the section captioned
“Segment Information” in Note 1 of the Notes to Consolidated Financial
Statements in this report.
 
 The
discussion set forth below, and in any other portion of this report, may contain
forward-looking statements.  Such statements are based upon the
information currently available to management of the Company and management’s
perception thereof as of the date of this report.  When used in this
document, words such as “anticipates,” “estimates,” “believes,” “expects,” and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.  Such
statements are subject to risks and uncertainties.  Actual results of
the Company’s operations could materially differ from those forward-looking
comments.  The differences could be caused by a number of factors or
combination of factors including, but not limited to: changes in demand for
banking services; changes in portfolio composition; changes in management
strategy; increased competition from both bank and non-bank companies; changes
in the general level of interest rates; and other factors set forth in reports
and other documents filed by the Company with the Securities and Exchange
Commission from time to time including the risk factors of the Company set forth
in Item 1A. of the Company’s Form 10-K.
  6
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
  FINANCIAL
CONDITION
 
 From
December 31, 2006 to December 31, 2007, the Company’s total assets increased
$40,932,985 (8%) to $565,777,980, liabilities increased $43,145,568 (9%) to
$523,091,320, and stockholders' equity decreased $2,212,583 (5%) to
$42,686,660.  The ratio of stockholders’ equity to total assets
decreased to 7.5% during this period, compared to 8.6% as of December 31,
2006.
 
 From
December 31, 2006 to December 31, 2007, securities available-for-sale increased
$6,823,617 (86%).  The increase is primarily due to purchases of
$11,926,215, offset by maturities of $2,580,000 and the sale of 10,000 shares of
the Federal Home Loan Mortgage Corporation (“FHLMC”) stock.  The
Company currently owns 26,600 shares of FHLMC stock with an amortized cost of
$26,057 in the securities available-for-sale category.  As of December 31,
2007, the gross unrealized gain on the stock is $880,205, a decrease of
$1,569,088 from the gross unrealized gain at December 31, 2006, which was due to
the sale of 10,000 shares during the year and a decrease in the stock price from
$67.90 per share at December 31, 2006 to $34.07 at December 31,
2007.
  From
December 31, 2006 to December 31, 2007, securities held-to-maturity decreased
$108,250 (14%) to $654,775 due to repayments received during the period. Stock
of the Federal Home Loan Bank of Des Moines (“FHLB”) was decreased by $1,368,000
(25%) to $4,014,700 due to the reductions in stock necessary to meet FHLB
borrowing requirements.  The Bank is required to own stock in the FHLB
equal to 0.12% of assets plus 4.45% of advances.
 
 From
December 31, 2006 to December 31, 2007, net loans receivable increased by
$36,835,513 (8%) to $514,100,035.  During this period, permanent loans
secured by both owner and non-owner occupied one to four unit residential real
estate decreased $3,627,329 (4%), multi-family permanent loans decreased
$8,418,642 (17%), construction loans increased $5,757,244 (7%), permanent loans
secured by commercial real estate increased $20,194,156 (13%), commercial loans
increased $21,350,061 (26%), and installment loans increased $1,868,202
(8%).  During this period the Company continued to increase its
emphasis on commercial lending, while selling the majority of conforming single
family loan production on the secondary market.  Loans sold on the
secondary market are sold servicing released, whereby the third party who
purchases the loan provides the servicing.
 
 From
December 31, 2006 to December 31, 2007, loans past due 90 days or more increased
$4,202,056 to $6,215,533 (1.21% of net loans).  As of December 31,
2007, management considers loans totaling $7,254,334 as impaired with a related
allowance for loan losses of $415,000.  One commercial real estate
loan and various one to four residential loans comprise the majority of the
impaired loans.  The Bank recognizes interest income on impaired loans
as payments are received.  Management believes the allowance for loan
losses is at a level to be sufficient in providing for potential loan losses in
the Bank’s existing loan portfolio.
 
 From
December 31, 2006 to December 31, 2007, the allowance for loan losses increased
$179,446 to $5,962,923.  In addition to the provision for loan loss of
$840,000 recorded by the Company during the year ended December 31, 2007, loan
charge-offs exceeded recoveries by $660,554 for the twelve months ended December
31, 2007. The allowance for loan losses as of December 31, 2007 and December 31,
2006 was 1.16% and 1.21% of net loans outstanding, respectively.  As
of December 31, 2007, the allowance for loan losses was 82% of impaired loans
versus 192% as of December 31, 2006.  The allowance as a percentage of
impaired loans declined primarily due to one impaired commercial real estate
loan that was placed on non-accrual status in April 2007.
 
 As of
December 31, 2007, foreclosed assets held for sale consisted primarily of two
single family residences and single family patio homes and lots from one small
developer.
 
 From
December 31, 2006 to December 31, 2007, premises and equipment increased
$1,574,541 (20%) to $9,442,350 due primarily to two land purchases for future
branch and operations sites.
 
 From
December 31, 2006 to December 31, 2007, deposits increased $65,961,648 (19%) to
$418,191,284.  During this period, transaction accounts increased by
$12,779,497 (10%) to 34% of total deposits and certificates of deposit increased
by $53,182,151 (24%) to $276,418,573.  Included in the certificates of
deposit total is $4,381,699 in deposits placed by brokers, a decrease from
$29,146,308 as of December 31, 2006.
  7
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
 
 From December 31, 2006 to December 31, 2007, the Company’s borrowings from
the Federal Home Loan Bank (“FHLB”) decreased $31,914,000 to $76,086,000, due to
repayments exceeding new advances.  The Company was able to make such
repayments through the funds generated from deposit growth.
 
 Securities
sold under agreements to repurchase increased $8,146,074 (478%) from $1,703,221
as of December 31, 2006, to $9,849,295 as of December 31, 2007. due to a
floating rate leveraged transaction completed during the third
quarter.
 
 As of
December 31, 2007 and 2006, the Company had $15,465,000 of junior subordinated
debentures that were comprised of $5,155,000 issued to Guaranty Statutory Trust
I and $10,310,000 issued to Guaranty Statutory Trust II.  On December
15, 2005, the Company completed an offering of $15 million of trust preferred
securities (”Trust Securities”).  The Company formed Guaranty
Statutory Trust I and Guaranty Statutory Trust II as wholly-owned subsidiaries
and Delaware statutory trusts for the purpose of issuing the Trust
Securities.  The proceeds of the sale of Trust Securities issued by
Guaranty Statutory Trust I, together with the proceeds of the Trust’s sale of
its common securities issued to the Company, were used by the Trust to purchase
30-year junior subordinated deferrable interest debentures from the Company in
the principal amount of $5,155,000 (“Trust I Debentures”).  The
proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust II,
together with the proceeds of the Trust’s sale of its common securities issued
to the Company, were used by the Trust to purchase 30-year junior subordinated
deferrable interest debentures from the Company in the principal amount of
$10,310,000 (“Trust II Debentures”, and collectively with the Trust I
Debentures, the “Debentures”).  Both the Trust I Debentures and the
Trust II Debentures were issued pursuant to the terms of Indentures dated
December 15, 2005 by and between the Company and Wilmington Trust Company, as
trustee.  The Trust I Debentures bear interest at a fixed rate of
6.92%, payable quarterly.  The Trust II Debentures bear interest at a
fixed rate of 6.47% for 5 years, payable quarterly, after issuance and
thereafter at a floating rate equal to the three month LIBOR plus
1.45%.  The interest payments by the Company to the Trusts will be
used to pay the dividends payable by the Trusts to the holders of the Trust
Securities.
  The
Debentures mature on February 23, 2036. Subject to prior approval by the Federal
Reserve Board, the Debentures and the Trust Securities are each callable by the
Company or the Trusts, respectively and as applicable, at its option after five
years from issuance, and sooner in the case of a special redemption at a special
redemption price ranging up to 103.2% of the principal amount thereof, and upon
the occurrence of certain events, such as a change in the regulatory capital
treatment of the Trust Securities, either Trust being deemed an investment
company or the occurrence of certain adverse tax events.  In addition,
the Company and the Trusts may defer interest and dividend payments,
respectively, for up to five consecutive years without resulting in a
default.  An event of default may occur if the Company declares
bankruptcy, fails to make the required payments within 30 days or breaches
certain covenants under the Debentures.   The Debentures are
subordinated to the prior payment of any other indebtedness of the
Company.
  The
Company invested the proceeds of the sale of the Trust Securities in its banking
subsidiary, where the funds were used primarily to restructure the investment
portfolio, fund loan growth and repay FHLB advances.
  Stockholders’
equity (including unrealized appreciation on securities available-for-sale, net
of tax) decreased $2,212,583 (5%) to $42,686,660 as of December 31,
2007.  Net income for the year ended December 31, 2007 exceeded cash
dividends paid or declared by $4,219,443.  The Company repurchased
252,799 shares as treasury stock at a cost of $7,479,118, at an average price of
$29.59 per share.  As of December 31, 2007, 260,678 shares remain to
be repurchased under the repurchase plan announced August 20,
2007.  The decrease in unrealized appreciation on securities
available-for-sale, net of tax, decreased stockholders’ equity by
$1,030,781.  Stockholders’ equity also increased as a result of
exercises of stock options to purchase the Company’s Common Stock and the
release of shares of the Company’s Common Stock held by the Bank sponsored
Employee Stock Ownership Plan.  On a per share basis, stockholders’
equity increased $.07 from $16.30 as of December 31, 2006 to $16.37 as of
December 31, 2007.
  8
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
 AVERAGE
BALANCES, INTEREST AND AVERAGE YIELDS
 
 The
following table shows the balances as of December 31, 2007 of various categories
of interest-earning assets and interest-bearing liabilities and the
corresponding yields and costs, and, for the periods indicated: (1) the average
balances of various categories of interest-earning assets and interest-bearing
liabilities, (2) the total interest earned or paid thereon, and (3) the
resulting weighted average yields and costs.  In addition, the table
shows the Company’s rate spreads and net yields.  Average balances are
based on daily balances.  Tax-free income is not material;
accordingly, interest income and related average yields have not been calculated
on a tax equivalent basis.  Average loan balances include non-accrual
loans.  Dollar amounts are expressed in thousands.
  As
      of
              
              
              Year
      Ended
              
              
              Year
      Ended
              
              
              Year
      EndedDecember 31, 2007
              
              
              December 31, 2007
              
              
              December 31, 2006
              
              
              December 31, 2005Balance
              
              
              Yield / Cost
              
              
              Average Balance
              
              
              Interest
              
              
              Yield / Cost
              
              
              Average Balance
              
              
              Interest
              
              
              Yield / Cost
              
              
              Average Balance
              
              
              Interest
              
              
              Yield / CostASSETSInterest-earning:Loans
              
              $
              516,242
              
              
              
              7.23
              %
              
              
              482,806
              
              
              
              37,114
              
              
              
              7.69
              %
              
              
              452,348
              
              
              
              34,500
              
              
              
              7.63
              %
              
              
              419,552
              
              
              
              26,682
              
              
              
              6.36
              %Investment
      securities
              
              
              15,385
              
              
              
              5.30
              %
              
              
              10,688
              
              
              
              537
              
              
              
              5.02
              %
              
              
              7,261
              
              
              
              451
              
              
              
              6.21
              %
              
              
              9,905
              
              
              
              432
              
              
              
              4.36
              %Other
      assets
              
              
              4,976
              
              
              
              4.69
              %
              
              
              7,372
              
              
              
              322
              
              
              
              4.37
              %
              
              
              9,843
              
              
              
              253
              
              
              
              2.57
              %
              
              
              11,681
              
              
              
              299
              
              
              
              2.56
              %Total
      interest-earning
              
              
              536,603
              
              
              
              7.15
              %
              
              
              500,866
              
              
              
              37,973
              
              
              
              7.58
              %
              
              
              469,452
              
              
              
              35,204
              
              
              
              7.50
              %
              
              
              441,138
              
              
              
              27,413
              
              
              
              6.21
              %Noninterest-earning
              
              
              29,175
              
              
              
              
              
              
              
              18,730
              
              
              
              
              
              
              
              
              
              
              
              20,914
              
              
              
              
              
              
              
              
              
              
              
              20,205$
              565,778
              
              
              
              
              
              
              
              519,596
              
              
              
              
              
              
              
              
              
              
              
              490,366
              
              
              
              
              
              
              
              
              
              
              
              461,343LIABILITIES
      AND STOCKHOLDERS' EQUITYInterest-bearing:Savings
      accounts
              
              $
              12,217
              
              
              
              2.11
              %
              
              
              13,474
              
              
              
              320
              
              
              
              2.37
              %
              
              $
              14,830
              
              
              
              365
              
              
              
              2.46
              %
              
              $
              14,931
              
              
              
              201
              
              
              
              1.35
              %Transaction
      accounts
              
              
              100,831
              
              
              
              2.12
              %
              
              
              100,689
              
              
              
              2,940
              
              
              
              2.92
              %
              
              
              78,238
              
              
              
              1,710
              
              
              
              2.19
              %
              
              
              84,776
              
              
              
              1,300
              
              
              
              1.53
              %Certificates
      of deposit
              
              
              276,419
              
              
              
              5.10
              %
              
              
              246,785
              
              
              
              12,600
              
              
              
              5.11
              %
              
              
              195,772
              
              
              
              8,448
              
              
              
              4.32
              %
              
              
              178,301
              
              
              
              5,788
              
              
              
              3.25
              %FHLB
      advances
              
              
              76,086
              
              
              
              4.37
              %
              
              
              65,575
              
              
              
              3,470
              
              
              
              5.29
              %
              
              
              110,810
              
              
              
              5,722
              
              
              
              5.16
              %
              
              
              111,104
              
              
              
              4,494
              
              
              
              4.04
              %Subordinated
      debentures
              
              
              15,465
              
              
              
              6.62
              %
              
              
              15,465
              
              
              
              1,024
              
              
              
              6.62
              %
              
              
              15,465
              
              
              
              1,028
              
              
              
              6.65
              %
              
              
              701
              
              
              
              47
              
              
              
              6.70
              %Other
      borrowed funds
              
              
              10,567
              
              
              
              4.23
              %
              
              
              3,691
              
              
              
              165
              
              
              
              4.47
              %
              
              
              3,947
              
              
              
              114
              
              
              
              2.89
              %
              
              
              1,395
              
              
              
              31
              
              
              
              2.22
              %Total
      interest-bearing
              
              
              491,585
              
              
              
              4.33
              %
              
              
              445,679
              
              
              
              20,519
              
              
              
              4.60
              %
              
              
              419,062
              
              
              
              17,387
              
              
              
              4.15
              %
              
              
              391,208
              
              
              
              11,861
              
              
              
              3.03
              %Noninterest-bearing
              
              
              31,506
              
              
              
              
              
              
              
              28,401
              
              
              
              
              
              
              
              
              
              
              
              26,898
              
              
              
              
              
              
              
              
              
              
              
              28,374Total
      liabilities
              
              
              523,091
              
              
              
              
              
              
              
              474,080
              
              
              
              
              
              
              
              
              
              
              
              445,960
              
              
              
              
              
              
              
              
              
              
              
              419,582Stockholders'
      equity
              
              
              42,687
              
              
              
              
              
              
              
              45,516
              
              
              
              
              
              
              
              
              
              
              
              44,406
              
              
              
              
              
              
              
              
              
              
              
              41,761$
              565,778
              
              
              
              
              
              
              
              519,596
              
              
              
              
              
              
              
              
              
              
              $
              490,366
              
              
              
              
              
              
              
              
              
              
              $
              461,343Net
      earning balance
              
              $
              45,018
              
              
              
              
              
              
              
              55,187
              
              
              
              
              
              
              
              
              
              
              $
              50,390
              
              
              
              
              
              
              
              
              
              
              $
              49,930Earning
      yield less costing rate
              
              
              
              
              
              
              2.82
              %
              
              
              
              
              
              
              
              
              
              
              2.98
              %
              
              
              
              
              
              
              
              
              
              
              3.35
              %
              
              
              
              
              
              
              
              
              
              
              3.18
              %Net
      interest income, andnet
      yield spread oninterest-earning
      assets
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,454
              
              
              
              3.48
              %
              
              
              
              
              
              
              17,817
              
              
              
              3.80
              %
              
              
              
              
              
              
              15,552
              
              
              
              3.53
              %Ratio
      of interest-earning assets tointerest-bearing
      liabilities
              
              
              109
              %
              
              
              
              
              
              
              112
              %
              
              
              
              
              
              
              
              
              
              
              112
              %
              
              
              
              
              
              
              
              
              
              
              113
              %
  9
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
 
 The
following table sets forth information regarding changes in interest income and
interest expense for the periods indicated resulting from changes in average
balances and average rates shown in the previous table.  For each
category of interest-earning assets and interest-bearing liabilities information
is provided with respect to changes attributable to:  (i) changes in
balance (change in balance multiplied by the old rate), (ii) changes in interest
rates (change in rate multiplied by the old balance); and (iii) the combined
effect of changes in balance and interest rates (change in balance multiplied by
change in rate). Dollar amounts are expressed in thousands.
  Year ended
              
              
              Year endedDecember 31, 2007 versus December 31,
      2006
              
              
              December 31, 2006 versus December 31,
      2005Average Balance
              
              
              Interest Rate
              
              
              Rate & Balance
              
              
              Total
              
              
              Average Balance
              
              
              Interest Rate
              
              
              Rate & Balance
              
              
              TotalInterest
      income:Loans
              
              $
              2,323
              
              
              
              273
              
              
              
              18
              
              
              
              2,614
              
              
              
              2,075
              
              
              
              5,318
              
              
              
              416
              
              
              
              7,809Investment
      securities
              
              
              213
              
              
              
              (86
              )
              
              
              (41
              )
              
              
              86
              
              
              
              (115
              )
              
              
              183
              
              
              
              (49
              )
              
              
              19Other
      assets
              
              
              (64
              )
              
              
              177
              
              
              
              (44
              )
              
              
              69
              
              
              
              (47
              )
              
              
              1
              
              
              
              -
              
              
              
              (46
              )Net
      change in interest income
              
              
              2,472
              
              
              
              364
              
              
              
              (67
              )
              
              
              2,769
              
              
              
              1,913
              
              
              
              5,502
              
              
              
              367
              
              
              
              7,782Interest
      expense:Savings
      accounts
              
              
              (33
              )
              
              
              (13
              )
              
              
              1
              
              
              
              (45
              )
              
              
              (2
              )
              
              
              167
              
              
              
              (1
              )
              
              
              164Transaction
      accounts
              
              
              491
              
              
              
              574
              
              
              
              165
              
              
              
              1,230
              
              
              
              (100
              )
              
              
              553
              
              
              
              (43
              )
              
              
              410Certificates
      of deposit
              
              
              2,201
              
              
              
              1,548
              
              
              
              403
              
              
              
              4,152
              
              
              
              567
              
              
              
              1,907
              
              
              
              187
              
              
              
              2,661FHLB
      advances
              
              
              (2,336
              )
              
              
              142
              
              
              
              (58
              )
              
              
              (2,252
              )
              
              
              (12
              )
              
              
              1,243
              
              
              
              (3
              )
              
              
              1,228Subordinated
      debentures
              
              
              -
              
              
              
              (4
              )
              
              
              -
              
              
              
              (4
              )
              
              
              990
              
              
              
              -
              
              
              
              (9
              )
              
              
              981Other
      borrowed funds
              
              
              (7
              )
              
              
              62
              
              
              
              (4
              )
              
              
              51
              
              
              
              57
              
              
              
              9
              
              
              
              17
              
              
              
              83Net
      change in interest expense
              
              
              316
              
              
              
              2,309
              
              
              
              507
              
              
              
              3,132
              
              
              
              1,500
              
              
              
              3,879
              
              
              
              148
              
              
              
              5,527Change
      in net interest income
              
              $
              2,156
              
              
              
              (1,945
              )
              
              
              (574
              )
              
              
              (363
              )
              
              $
              413
              
              
              
              1,623
              
              
              
              219
              
              
              
              2,255
 
 RESULTS
OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2007 AND DECEMBER 31,
2006
  Average
      for the Year ShownPrime
                
                
                Ten
      –Year
                  Treasury
                
                
                One-Year
                  TreasuryDecember
      31, 2007
                
                
                8.05
                %
                
                
                4.63
                %
                
                
                4.53
                %December
      31, 2006
                
                
                7.96
                %
                
                
                4.80
                %
                
                
                4.94
                %Changes
      in rates
                
                
                0.09
                %
                
                
                -0.17
                %
                
                
                -0.41
                %
 Interest
Rates.  The Bank charges borrowers and pays depositors interest
rates that are largely a function of the general level of interest
rates.  The above table sets forth the weekly average interest rates
for the 52 weeks ending December 31, 2007 and December 31, 2006 as reported by
the Federal Reserve. The Bank typically indexes its adjustable rate commercial
loans to prime and its adjustable rate mortgage loans to the one-year treasury
rate.  The ten-year treasury rate is a proxy for 30-year fixed rate
home mortgage loans.
 
 Rates
trended upward during 2006 as the Federal Reserve Open Market Committee (“FOMC”)
continued its increase in the discount rates by 100 basis points from January
through June.  As of year-end 2006 the prime rate was
8.25%.  Rates were steady for the first eight months of 2007, but due
to several economic factors, the FOMC began decreasing the discount rate at its
September 2007 meeting and continued for each meeting thereafter.  As
of year-end 2007 the prime rate was 7.25%.
 
 10
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
 
 Interest
Income.  Total interest income increased $2,768,092 (8%) as the
average balance of interest-earning assets increased $31,414,000
(7%).  In addition, the yield on average interest earning assets
increased 8 basis points to 7.58%.
 
 Interest
on loans increased $2,613,520 (8%) and the average loan receivable balance
increased $30,458,000 (7%) while the average yield increased 6 basis points to
7.69%.
 
 Interest
Expense.  Total interest expense increased $3,132,710 (18%) as
the average balance of interest-bearing liabilities increased $26,617,000
(6%).  In addition, the average cost of interest-bearing liabilities
increased 45 basis points to 4.60%.
 
 Interest
expense on deposits increased $5,337,591 (51%) as the average balance of
interest bearing deposits increased $72,108,000 (25%) and the average interest
rate paid to depositors increased 76 basis points to 4.40%.
 
 The
Company’s borrowings from the FHLB decreased to $76,086,000, which remains in
compliance with the FHLB limitation of advances to 35% of assets.  The
average balance of advances decreased $45,235,000 (41%) and the average cost of
those advances increased 13 basis points to 5.29%.  As a result,
interest expense on these advances decreased $2,252,422 (39%).  As of
December 31, 2007 FHLB advances were 13% of total assets, compared to 21% of
total assets as of December 31, 2006.
 
 Net Interest
Income.  The Company’s net interest income decreased $364,618
(2%).  During the year ended December 31, 2007, the average balance of
interest-earning assets exceeded the average balance of interest-bearing
liabilities by $55,187,000, resulting in an increase in the average net earning
balance of $4,797,000 (10%).    In addition, the Company’s
spread between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities decreased by 37 basis points from 3.35% to
2.98%.
 
 Provision for Loan
Losses.  Provisions for loan losses are charged or credited to
earnings to bring the total allowance for loan losses to a level considered
adequate by the Company to provide for potential loan losses in the existing
loan portfolio.  When making its assessment, the Company considers
prior loss experience, volume and type of lending, local banking trends and past
due loans in the Company’s loan portfolio.  In addition, the Company
considers general economic conditions and other factors related to
collectibility of the Company’s loan portfolio.
 
 During
the year ended December 31, 2007, the Company experienced loan charge-offs, in
excess of recoveries, of $660,554 and, based on a review as discussed above,
elected to record a provision for loan loss of $840,000 to increase the
allowance for loan losses to $5,962,923 as of December 31, 2007.  The
provision for loan losses recorded by the Company during year ended December 31,
2006 was $750,000.  Management of the Company anticipates the need to
continue increasing the loan loss allowance in the future through charges to
provision for loan losses based on the anticipated growth in its loan
portfolio.
 
 Non-Interest
Income.  Non-interest income increased $1,068,849
(29%).  The gain on sale of loans of $1,177,017 for 2007, compared to
$692,276 for 2006, was the result of mortgage banking activities related to the
sale of single-family conforming residential loans in the secondary
market.  The Bank attempts to minimize its risk of price changes by
committing to sell loans while the loans are in the origination
process.  The gain on sale of investments for the year ended December
31, 2007 was $618,363, compared to $750,869 for the year ended December 31,
2006.  These gains were attributed to the sale of 10,000 shares of FHLMC
stock in 2007 and the sale of 12,000 shares in 2006.  Deposit service
charges increased $813,917 (58%) due to increases in insufficient funds and
overdraft charges primarily due to the Bank’s overdraft privilege program that
was implemented in the fourth quarter of 2006.
 
 Non-Interest
Expense.  Non-interest expense increased $1,665,457
(16%).  This increase was primarily due to increases in salaries and
employee benefits of $962,487 (16%), occupancy expense of $93,633 (6%), data
processing of $111,490 (40%) and other expense of $498,249 (27%).
  11
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
  The
increase in compensation was due to several factors, including additions in
executive and staff positions, pay increases to existing employees, increases in
employee benefit costs and an increase in the number of
employees.  The staff increased from 146 full-time equivalent
employees as of December 31, 2006 to 150 full-time equivalent employees as of
December 31, 2007.
 
 The
increases in occupancy and data processing expenses were primarily due to
increased depreciation as well as maintenance expenses relating to the Bank’s
conversion to a new core processing system in the first half of
2006.
 
 Increases
in other expenses are comprised of increased expenses related to audit and
compliance costs for the Sarbanes-Oxley Act of 2002, fees paid to a third party
vendor related to the Bank’s overdraft privilege program, increased amortization
on low income housing tax credits and an increase in ATM expense.  The
Bank converted to a new ATM network provider in September 2006.  The
expense is now recorded at gross, rather than net of income earned as was
previously done prior to the conversion.  Currently, the associated
income related to ATM services is recorded in noninterest income.
 
 Income
Taxes.  The decrease in income tax expense is a direct result
of the decrease in the Company’s taxable income for the year ended December 31,
2007 as compared to the year ended December 31, 2006.
 
 Cash Dividends
Paid.  The Company paid dividends of $0.17 per share on April
13, 2007, to stockholders’ of record as of April 3, 2007, and $0.17 per share on
July 13, 2007 to stockholders’ of record as of July 2, 2007, and $0.18 per share
on October 15, 2007, to stockholders’ of record as of October 1,
2007.  The Company declared a cash dividend of $0.18 per share on
December 21, 2007, which was paid on January 18, 2008, to stockholders of record
on January 4, 2008.
 
 RESULTS
OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2006 AND DECEMBER 31,
2005
 Average
      for the Year ShownPrime
                
                
                Ten
      –Year
                  Treasury
                
                
                One-Year
                  TreasuryDecember
      31, 2006
                
                
                7.96
                %
                
                
                4.80
                %
                
                
                4.94
                %December
      31, 2005
                
                
                6.19
                %
                
                
                4.29
                %
                
                
                3.62
                %Changes
      in rates
                
                
                1.77
                %
                
                
                0.51
                %
                
                
                1.32
                %
 
 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, 2006 and December 31, 2005 as reported by
the Federal Reserve. The Bank typically indexes its adjustable rate commercial
loans to prime and its adjustable rate mortgage loans to the one-year treasury
rate.  The ten-year treasury rate is a proxy for 30-year fixed rate
home mortgage loans.
 
 Rates
trended upward during 2005 as the FOMC increased the discount rates 25 basis
points after eight consecutive meetings from January 2005 to December 2005. As
of year-end 2005 the prime rate was 7.25%.This trend continued in 2006 as the
FOMC increased the discount rates 25 basis points after four consecutive
meetings from January 2006 to June 2006.  As of year-end 2006 the
prime rate was 8.25%.
 
 Interest
Income.  Total interest income increased $7,791,759 (28%) as
the average balance of interest-earning assets increased $28,314,000
(6%).  In addition, the yield on average interest earning assets
increased 129 basis points to 7.50%.
 
 Interest
on loans increased $7,818,452 (29%) and the average loan receivable balance
increased $32,796,000 (8%) while the average yield increased 127 basis points to
7.63%.  The increase in loan yield is
  12
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
  the
result of the combination of new loans at higher rates, a reduction in
prepayments, and an increase of interest rates on adjustable rate
loans.
 
 Interest
Expense.  Total interest expense increased $5,526,189 (47%) as
the average balance of interest-bearing liabilities increased $27,854,000
(7%).  In addition, the average cost of interest-bearing liabilities
increased 112 basis points to 4.15%.
 
 Interest
expense on deposits increased $3,235,130 (44%) as the average balance of
interest bearing deposits increased $10,832,000 (4%) and the average interest
rate paid to depositors increased 102 basis points to 3.64%.  The
average balance of interest bearing core deposit accounts decreased $6,639,000
(7%) and the average balance of certificates of deposit increased $17,471,000
(10%).
 
 The
Company’s borrowings from the FHLB increased to $108,000,000, which remains in
compliance with the FHLB limitation of advances to 35% of assets.  The
average cost of those advances increased 112 basis points to
5.16%.  As a result, interest expense on these advances increased
$1,227,976 (27%).  As of December 31, 2006 FHLB advances are 20% of
total assets, compared to 21% of total assets as of December 31,
2005.
 
 Net Interest
Income.  The Company’s net interest income increased $2,265,570
(14%).  During the year ended December 31, 2006, the average balance
of interest-earning assets exceeded the average balance of interest-bearing
liabilities by $50,390,000, resulting in an increase in the average net earning
balance of $460,000 (1%).    In addition, the Company’s
spread between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities increased by 17 basis points from 3.18% to
3.35%.
 
 Provision for Loan
Losses.  Provisions for loan losses are charged or credited to
earnings to bring the total allowance for loan losses to a level considered
adequate by the Company to provide for potential loan losses in the existing
loan portfolio.  When making its assessment, the Company considers
prior loss experience, volume and type of lending, local banking trends and past
due loans in the Company’s loan portfolio.  In addition, the Company
considers general economic conditions and other factors related to
collectibility of the Company’s loan portfolio.
 
 During
the year ended December 31, 2006, the Company experienced loan charge-offs, in
excess of recoveries, of $366,177 and, based on a review as discussed above,
elected to record a provision for loan loss of $750,000 to increase the
allowance for loan losses to $5,783,477 as of December 31, 2006.  The
provision for loan losses recorded by the Company during year ended December 31,
2005 was $945,000.  Management of the Company anticipates the need to
continue increasing the loan loss allowance in the future through charges to
provision for loan losses based on the anticipated growth in its loan portfolio
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 $191,941
(6%).  The gain on sale of loans of $692,276 for 2006, compared to
$623,252 for 2005, was the result of mortgage banking activities related to the
sale of single-family conforming residential loans in the secondary
market.  The Bank attempts to minimize its risk of price changes by
committing to sell loans while the loans are in the origination
process.  The gain on sale of investments for the year ended December
31, 2006 was $750,869, compared to $743,335 for year ended December 31,
2005.  In 2006, this gain was attributed to the sale of 12,000 shares of
FHLMC stock.  During 2006 the Bank sold its mortgage loan servicing
rights to a third party, which resulted in a profit on the sale of $89,441. In
addition the Bank had income from tax credits purchased of $191,678 during
2006.  Deposit service charges decreased $241,709 (15%) due to
decreases in insufficient funds and overdraft charges on the Bank’s checking
accounts.  In addition, other fees decreased $38,869
(29%) primarily due to a decrease in prepayment penalties collected during the
year ended December 31, 2006.
  13
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
  Non-Interest
Expense.  Non-interest expense increased $1,507,193
(17%).  This increase was primarily due to increases in salaries and
employee benefits of $1,226,893 (25%) and occupancy expense of $155,211
(11%).  The increase in compensation was due to normal salary and
benefits increases for the
Bank’s employees, along with an increase in the number of
employees.  The staff increased from 125 full-time equivalent
employees as of December 31, 2005 to 146 full-time equivalent employees as of
December 31, 2006.  In 2006, the Company opened a new full-service
branch in Springfield, Missouri.  In addition advertising expense
increased $173,038 (75%).  This increase was primarily due to the
Bank’s decision to increase its exposure through the use of several different
advertising mediums.  Data processing expense decreased $160,222
(36%). This decrease was primarily due to the Bank’s decision to terminate its
relationship with a third-party vendor that provided data processing
services.  This conversion was completed in January of
2006.
 
 Income
Taxes.  The increase in income tax expense is a direct result
of the increase in the Company’s taxable income for the period ended December
31, 2006 as compared to the period ended December 31, 2005.
 
 Cash Dividends
Paid.  The Company paid dividends of $0.165 per share on April
14, 2006, to stockholders’ of record as of March 30, 2006, and $0.165 per share
on July 15, 2006 to stockholders’ of record as of July 1, 2006, and $0.17 per
share on October 14, 2006, to stockholders’ of record as of October 1,
2006.  The Company declared a cash dividend of $0.17 per share on
December 21, 2006, which was paid on January 19, 2007, to stockholders of record
on January 5, 2007.
 
 
 ASSET
/ LIABILITY MANAGEMENT
 
 The goal
of the Bank’s asset/liability policy is to manage interest rate risk so as to
maximize net interest income over time in changing interest rate
environments.  Management monitors the Bank’s net interest spreads
(the difference between yields received on assets and paid on liabilities) and,
although constrained by market conditions, economic conditions, and prudent
underwriting standards, it offers deposit rates and loan rates that maximize net
interest income.  Management also attempts to fund the Bank’s assets
with liabilities of a comparable duration to minimize the impact of changing
interest rates on the Bank’s net interest income.  This matching is
especially difficult because the residential mortgage loans that comprise a
significant portion of the Bank’s assets give the borrower the right to prepay
at any time.  These borrowers act in their economic self-interest and
refinance higher rate loans when rates are low.  Since the relative
spread between financial assets and liabilities is constantly changing, the
Bank’s current net interest income may not be an indication of future net
interest income.
 
 The Bank
has continued to emphasize the origination of 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.
 
 The Bank
is also managing interest rate risk by the origination of construction
loans.  As of December 31, 2007, such loans constitute 17% 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, 2007 and
December 31, 2006, the Bank’s savings accounts, checking accounts, and money
market deposit accounts totaled $141,772,709 or 34% of its total deposits and
$128,993,214 or 37% of total deposits, respectively.  The weighted
average rate paid on these accounts increased 12 basis points from 1.99% on
December 31, 2006 to 2.11% on December 31, 2007.  The Bank believes,
based on historical experience, that a substantial portion of such accounts
represents non-interest rate sensitive, core deposits.  As
of  December 31, 2007, the FHLB
has the option to call $9.0 million of advances with a weighted average rate of
5.55% and a remaining life of seven months.
  14
 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, 2007, management’s estimates of
the projected changes in net portfolio value (“NPV”) in the event of 100, 200,
and 300 basis point (“bp”) instantaneous and permanent increases and decreases
in market interest rates.  Dollar amounts are expressed in
thousands.
 
 BP
      Change
              
              Estimated Net Portfolio
    Value
              
              
              NPV as % of PV of Assetsin Rates
              
              $ Amount
              
              
              $ Change
              
              
              % Change
              
              
              NPV Ratio
              
              
              Change+300
              
              
              
              43,361
              
              
              
              1,657
              
              
              
              4
              %
              
              
              7.79
              %
              
              
              0.41
              %+200
              
              
              
              43,437
              
              
              
              1,733
              
              
              
              4
              %
              
              
              7.77
              %
              
              
              0.39
              %+100
              
              
              
              42,874
              
              
              
              1,170
              
              
              
              3
              %
              
              
              7.62
              %
              
              
              0.24
              %NC
              
              
              
              41,704
              
              
              
              -
              
              
              
              0
              %
              
              
              7.38
              %
              
              
              0.00
              %-100
              
              
              
              39,895
              
              
              
              (1,809
              )
              
              
              -4
              %
              
              
              7.03
              %
              
              
              -0.35
              %-200
              
              
              
              37,499
              
              
              
              (4,205
              )
              
              
              -10
              %
              
              
              6.59
              %
              
              
              -0.79
              %-300
              
              
              
              34,700
              
              
              
              (7,004
              )
              
              
              -17
              %
              
              
              6.07
              %
              
              
              -1.31
              %
 
 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 from operations, deposits from its primary market area, FHLB advances,
principal and interest payments on loans and mortgage-backed securities,
proceeds from maturing investment securities, and the issuance of subordinated
debentures.  The Company considers deposits and FHLB advances as its
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 $12,046,202 as of December 31, 2007 and $14,880,601 as of
December 31, 2006, representing a decrease of
  15
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
  $2,834,399.  The
variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows, which are subject to, and influenced
by, many factors.
 
 In
addition to the capital necessary to meet the Company’s conditional commitments
discussed under the caption “Off-Balance Sheet Arrangements” below, the Bank
also has $201,179,713 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 $68,951,000 from the
FHLB, as of December 31, 2007.  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 Tier 1 capital position of $56,244,000 is 10.8% of average assets as
of December 31, 2007.  The Company has an excess of $35,460,000,
$35,785,000, and $22,597,000 of required regulatory levels of tangible, core,
and risk-based capital, respectively.  In addition, under current
regulatory guidelines, the Bank is classified as well
capitalized.  See also additional information provided under the
caption “Regulatory Matters” in Note 1 of the Notes to Consolidated Financial
Statements.
 
 During
the year ended December 31, 2007, the Company purchased 252,799 shares of common
stock at an average price of $29.59 to place in the treasury
account.  During the year ended December 31, 2006, the Company
purchased 125,066 shares of common stock at an average price of $28.73 to place
in the treasury account.  The Company intends to monitor the common
stock price and, with regulatory approval, may from time to time initiate
further stock repurchases in order to improve the Company’s long-term earnings
per share while at the same time maintaining an adequate level of stockholders’
equity.  The Company has a repurchase plan which was announced on
August 20, 2007, and as of December 31, 2007, a total of 260,678 shares of the
Company’s common stock may be purchased under this plan.
 
 
 OFF-BALANCE
SHEET ARRANGEMENTS
  Various
commitments and contingent liabilities arise in the normal course of business,
which are not required to be recorded on the balance sheet.  The most
significant of these are loan commitments, lines of credit and standby letters
of credit.  Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract.  As of December 31, 2007 and 2006, the Bank had outstanding
commitments to originate loans of approximately $3,490,000 and $3,991,000,
respectively.  Lines of credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract.  As of December 31, 2007 and 2006, unused lines of credit to
borrowers aggregated approximately $63,403,000 and $64,370,000 for commercial
lines and $21,957,000 and $19,790,000 for open-end consumer
lines.  Since a portion of the loan commitment and line of credit may
expire without being drawn upon, the total unused commitments and lines do not
necessarily represent future cash requirements.
 
 Standby
letters of credit are irrevocable conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.  The credit
risk involved in issuing standby letters of credit is essentially the same as
that involved in extending loans to customers.  The Bank had total
outstanding standby letters of credit amounting to $12,464,000 and $9,182,000 as
of December 31, 2007 and 2006, respectively.  As of December 31, 2007
and 2006, the Bank had outstanding commitments to originate mortgage loans of
approximately $3,490,000 and $3,991,000, respectively.  The
commitments extend over varying periods of time with the majority being
disbursed within a thirty-day period.
 
 In
connection with the Company’s issuance of the Trust Securities and pursuant to
two guarantee agreements by and between the Company and Wilmington Trust
Company, the Company issued a limited, irrevocable
guarantee of the obligations of each Trust under the Trust Securities whereby
the Company has guaranteed any and all payment obligations of the Trusts related
to the Trust Securities including distributions on, and the liquidation or
redemption price of, the Trust Securities to the extent each Trust does not have
funds available.
 
 16
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
 
 
 AGGREGATE
CONTRACTUAL OBLIGATIONS
 
 The
following table summarizes the Company’s fixed and determinable contractual
obligations by payment date as of December 31, 2007.  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
              
              $
              141,773
              
              
              
              141,773
              
              
              
              -
              
              
              
              -
              
              
              
              -Time
      and brokered certificates of deposit
              
              
              276,419
              
              
              
              201,180
              
              
              
              60,843
              
              
              
              11,381
              
              
              
              3,014Other
      borrowings
              
              
              10,567
              
              
              
              817
              
              
              
              -
              
              
              
              -
              
              
              
              9,750Federal
      Home Loan Bank advances
              
              
              76,086
              
              
              
              69,650
              
              
              
              3,386
              
              
              
              -
              
              
              
              3,050Subordinated
      debentures
              
              
              15,465
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15,465Operating
      leases
              
              
              572
              
              
              
              125
              
              
              
              189
              
              
              
              99
              
              
              
              160Purchase
      obligations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      long term obligations
              
              
              117,984
              
              
              
              117,984
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              638,866
              
              
              
              531,529
              
              
              
              64,418
              
              
              
              11,480
              
              
              
              31,439
 
 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.
  17
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
  The
Company has identified the accounting policies for the allowance for loan losses
and related significant estimates and judgments as critical to its business
operations and the understanding of its results of operations.  For a
detailed discussion on the application of these significant estimates and
judgments and our accounting policies, also see Note 1 of the notes to
consolidated financial statements in this report.
 
 IMPACT
OF NEW ACCOUNTING PRONOUNCEMENTS
 
 In July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 - Accounting
for Income Taxes. This interpretation addresses accounting for tax
uncertainties that arise when a position that an entity takes on its tax return
may be different from the position that the taxing authority may take, and
provides guidance about the accounting for tax benefits associated with
uncertain tax positions, classification of a liability recognized for those
positions, and interim reporting considerations. This Interpretation requires
that the Company recognize in its financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit.
The provisions of FIN 48 were effective as of January 1, 2007, with any
cumulative effect of the change in accounting principle recorded as an
adjustment to retained earnings. The adoption of this standard did not have a
material impact on the consolidated financial condition or results of operations
of the Company.  The Company’s federal and state income tax returns
are open and subject to examinations from the 2004 tax year and
forward.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles and expands disclosure related to
the use of fair value measures in financial statements. This
 Statement
applies under other accounting pronouncements that require or permit fair value
measurements, and does not expand the use of fair value measures in financial
statements, but standardizes its definition and guidance in generally accepted
accounting principles. SFAS No. 157 emphasizes that fair value is a
market-based measurement based on an exchange transaction between market
participants in which an entity sells an asset or transfers a liability. SFAS
No. 157 also establishes a fair value hierarchy from observable market data as
the highest level to fair value based on an entity's own fair value assumptions
as the lowest level. The provisions of FASB 157 were effective as of January 1,
2008.  The adoption of the standard did not have a material impact on
the consolidated financial statements.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.  This statement permits
companies to choose to measure financial instruments and certain other financial
assets and liabilities at fair value.  SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007, with earlier adoption
permitted.  The provisions of this statement were effective for the
Company as of January 1, 2008.   The adoption of the standard did
not have a material impact on the consolidated financial
statements.
  18
 Guaranty
Federal Bancshares, Inc.
 Management’s
Discussion and Analysis of Financial Condition
 And
Results of Operations
  SUMMARY
OF UNAUDITED QUARTERLY OPERATING RESULTS
 
 Year Ended December 31, 2007, Quarter
      endedMar-07
              
              
              Jun-07
              
              
              Sep-07
              
              
              Dec-07Interest
      income
              
              $
              9,521,871
              
              
              
              9,103,145
              
              
              
              9,685,875
              
              
              
              9,661,649Interest
      expense
              
              
              4,946,487
              
              
              
              5,028,396
              
              
              
              5,201,745
              
              
              
              5,342,675Net
      interest income
              
              
              4,575,384
              
              
              
              4,074,749
              
              
              
              4,484,130
              
              
              
              4,318,974Provision
      for loan losses
              
              
              210,000
              
              
              
              210,000
              
              
              
              210,000
              
              
              
              210,000Gain
      on sale of loans and investment securities
              
              
              485,313
              
              
              
              524,526
              
              
              
              463,989
              
              
              
              321,552Other
      noninterest income, net
              
              
              780,117
              
              
              
              810,325
              
              
              
              752,916
              
              
              
              589,829Noninterest
      expense
              
              
              2,874,548
              
              
              
              2,995,788
              
              
              
              2,986,558
              
              
              
              2,985,257Income
      before income taxes
              
              
              2,756,266
              
              
              
              2,203,812
              
              
              
              2,504,477
              
              
              
              2,035,098Provision
      for income taxes
              
              
              1,002,726
              
              
              
              787,588
              
              
              
              891,786
              
              
              
              717,671Net
      income
              
              $
              1,753,540
              
              
              
              1,416,224
              
              
              
              1,612,691
              
              
              
              1,317,427Basic
      earnings per share
              
              $
              0.63
              
              
              
              0.51
              
              
              
              0.60
              
              
              
              0.50Diluted
      earnings per share
              
              $
              0.62
              
              
              
              0.50
              
              
              
              0.59
              
              
              
              0.49Year Ended December 31, 2006, Quarter
      endedMar-06
              
              
              Jun-06
              
              
              Sep-06
              
              
              Dec-06Interest
      income
              
              $
              8,077,915
              
              
              
              8,386,269
              
              
              
              9,054,605
              
              
              
              9,685,529Interest
      expense
              
              
              3,769,423
              
              
              
              4,125,175
              
              
              
              4,543,095
              
              
              
              4,948,900Net
      interest income
              
              
              4,308,492
              
              
              
              4,261,094
              
              
              
              4,511,510
              
              
              
              4,736,629Provision
      for loan losses
              
              
              225,000
              
              
              
              225,000
              
              
              
              150,000
              
              
              
              150,000Gain
      on sale of loans and investment securities
              
              
              317,997
              
              
              
              336,889
              
              
              
              349,425
              
              
              
              438,834Other
      noninterest income, net
              
              
              503,823
              
              
              
              621,981
              
              
              
              571,626
              
              
              
              519,273Noninterest
      expense
              
              
              2,367,394
              
              
              
              2,543,500
              
              
              
              2,630,195
              
              
              
              2,635,605Income
      before income taxes
              
              
              2,537,918
              
              
              
              2,451,464
              
              
              
              2,652,366
              
              
              
              2,909,131Provision
      for income taxes
              
              
              973,593
              
              
              
              870,074
              
              
              
              1,028,044
              
              
              
              1,170,084Net
      income
              
              $
              1,564,325
              
              
              
              1,581,390
              
              
              
              1,624,322
              
              
              
              1,739,047Basic
      earnings per share
              
              $
              0.56
              
              
              
              0.56
              
              
              
              0.58
              
              
              
              0.63Diluted
      earnings per share
              
              $
              0.54
              
              
              
              0.54
              
              
              
              0.56
              
              
              
              0.61
  19
 Guaranty
Federal Bancshares, Inc.
 Consolidated
Balance Sheets
 December
31, 2007 and 2006
  December
      31,
              
              
              December
      31,2007
              
              
              2006ASSETSCash
      and due from banks
              
              $
              11,135,960
              
              
              
              10,684,831Interest-bearing
      deposits in other financial institutions
              
              
              910,242
              
              
              
              4,195,770Cash
      and cash equivalents
              
              
              12,046,202
              
              
              
              14,880,601Available-for-sale
      securities
              
              
              14,729,938
              
              
              
              7,906,321Held-to-maturity
      securities
              
              
              654,775
              
              
              
              763,025Stock
      in Federal Home Loan Bank, at cost
              
              
              4,014,700
              
              
              
              5,382,700Mortgage
      loans held for sale
              
              
              2,141,998
              
              
              
              3,004,635Loans
      receivable, net of allowance for loan losses ofDecember
      31, 2007 and 2006 - $5,962,923 and $5,783,477,
respectively
              
              
              514,100,035
              
              
              
              477,264,522Accrued
      interest receivable:Loans
              
              
              3,218,845
              
              
              
              2,830,811Investments
              
              
              104,603
              
              
              
              79,498Prepaid
      expenses and other assets
              
              
              2,841,411
              
              
              
              2,955,483Foreclosed
      assets held for sale
              
              
              727,422
              
              
              
              172,637Premises
      and equipment
              
              
              9,442,350
              
              
              
              7,867,809Income
      taxes receivable
              
              
              -
              
              
              
              774,469Deferred
      income taxes
              
              
              1,755,701
              
              
              
              962,484$
              565,777,980
              
              
              
              524,844,995LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
              
              $
              418,191,284
              
              
              
              352,229,636Federal
      Home Loan Bank advances
              
              
              76,086,000
              
              
              
              108,000,000Securities
      sold under agreements to repurchase
              
              
              9,849,295
              
              
              
              1,703,221Subordinated
      debentures
              
              
              15,465,000
              
              
              
              15,465,000Notes
      payable
              
              
              718,190
              
              
              
              -Advances
      from borrowers for taxes and insurance
              
              
              157,811
              
              
              
              222,869Accrued
      expenses and other liabilities
              
              
              299,005
              
              
              
              441,890Accrued
      interest payable
              
              
              1,793,663
              
              
              
              1,414,946Dividend
      payable
              
              
              469,373
              
              
              
              468,190Income
      taxes payable
              
              
              61,699
              
              
              
              -523,091,320
              
              
              
              479,945,752COMMITMENTS
      AND CONTINGENCIES
              
              
              -
              
              
              
              -STOCKHOLDERS'
      EQUITYCommon
      Stock:$0.10
      par value; authorized 10,000,000 shares; issuedDecember
      31, 2007 and 2006 - 6,736,485 and 6,653,527shares,
      respectively
              
              
              673,649
              
              
              
              665,353Additional
      paid-in capital
              
              
              57,571,929
              
              
              
              55,730,352Unearned
      ESOP shares
              
              
              (1,116,930
              )
              
              
              (1,344,930
              )Retained
      earnings, substantially restricted
              
              
              45,402,449
              
              
              
              41,183,006Accumulated
      other comprehensive incomeUnrealized
      appreciation on available-for-sale securities,net
      of income taxes; December 31, 2007 and 2006 - $295,863,and
      $901,243, respectively
              
              
              503,767
              
              
              
              1,534,548103,034,864
              
              
              
              97,768,329Treasury
      stock, at cost;December
      31, 2007 and 2006 - 4,017,166 and 3,764,367shares,
      respectively
              
              
              (60,348,204
              )
              
              
              (52,869,086
              )42,686,660
              
              
              
              44,899,243$
              565,777,980
              
              
              
              524,844,995
  See
Notes to Consolidated Financial Statements
 20
 Guaranty
Federal Bancshares, Inc.
 Consolidated
Statements of Income
 Years
Ended December 31, 2007, 2006 and 2005
  2007
              
              
              2006
              
              
              2005INTEREST
      INCOMELoans
              
              $
              37,113,849
              
              
              
              34,500,329
              
              
              
              26,681,877Investment
      securities
              
              
              537,176
              
              
              
              450,919
              
              
              
              431,863Other
              
              
              321,515
              
              
              
              253,200
              
              
              
              298,94937,972,540
              
              
              
              35,204,448
              
              
              
              27,412,689INTEREST
      EXPENSEDeposits
              
              
              15,860,794
              
              
              
              10,523,203
              
              
              
              7,288,073Federal
      Home Loan Bank advances
              
              
              3,469,551
              
              
              
              5,721,973
              
              
              
              4,493,997Subordinated
      debentures
              
              
              1,023,783
              
              
              
              1,027,526
              
              
              
              47,683Other
              
              
              165,175
              
              
              
              113,891
              
              
              
              30,65120,519,303
              
              
              
              17,386,593
              
              
              
              11,860,404NET
      INTEREST INCOME
              
              
              17,453,237
              
              
              
              17,817,855
              
              
              
              15,552,285PROVISION
      FOR LOAN LOSSES
              
              
              840,000
              
              
              
              750,000
              
              
              
              945,000NET
      INTEREST INCOME AFTERPROVISION
      FOR LOAN LOSSES
              
              
              16,613,237
              
              
              
              17,067,855
              
              
              
              14,607,285NONINTEREST
      INCOMEService
      charges
              
              
              2,215,641
              
              
              
              1,401,724
              
              
              
              1,643,433Other
      fees
              
              
              90,360
              
              
              
              96,209
              
              
              
              135,078Gain
      on sale of investment securities
              
              
              618,363
              
              
              
              750,869
              
              
              
              743,335Gain
      on sale of loans
              
              
              1,177,017
              
              
              
              692,276
              
              
              
              623,252Loss
      on foreclosed assets
              
              
              (41,909
              )
              
              
              (46,833
              )
              
              
              (1,617
              )Other
      income
              
              
              669,095
              
              
              
              765,473
              
              
              
              324,2964,728,567
              
              
              
              3,659,718
              
              
              
              3,467,777NONINTEREST
      EXPENSESalaries
      and employee benefits
              
              
              7,074,249
              
              
              
              6,111,762
              
              
              
              4,884,869Occupancy
              
              
              1,614,403
              
              
              
              1,520,770
              
              
              
              1,365,559FDIC
      deposit insurance premiums
              
              
              42,555
              
              
              
              39,661
              
              
              
              39,796Data
      processing
              
              
              391,679
              
              
              
              280,189
              
              
              
              440,411Advertising
              
              
              399,996
              
              
              
              403,292
              
              
              
              230,254Other
      expense
              
              
              2,319,269
              
              
              
              1,821,020
              
              
              
              1,708,61211,842,151
              
              
              
              10,176,694
              
              
              
              8,669,501INCOME
      BEFORE INCOME TAXES
              
              
              9,499,653
              
              
              
              10,550,879
              
              
              
              9,405,561PROVISION
      FOR INCOME TAXES
              
              
              3,399,771
              
              
              
              4,041,795
              
              
              
              3,506,591NET
      INCOME
              
              $
              6,099,882
              
              
              
              6,509,084
              
              
              
              5,898,970BASIC
      EARNINGS PER SHARE
              
              $
              2.25
              
              
              
              2.34
              
              
              
              2.12DILUTED
      EARNINGS PER SHARE
              
              $
              2.19
              
              
              
              2.25
              
              
              
              2.03
  See Notes to
Consolidated Financial Statements
 21
 Guaranty
Federal Bancshares, Inc.
 Consolidated
Statements of Cash Flows
 Years
Ended December 31, 2007, 2006 and 2005
 
 2007
              
              
              2006
              
              
              2005CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
              
              $
              6,099,882
              
              
              
              6,509,084
              
              
              
              5,898,970Items
      not requiring (providing) cash:Deferred
      income taxes
              
              
              (187,839
              )
              
              
              (592,927
              )
              
              
              (249,519
              )Depreciation
              
              
              902,322
              
              
              
              814,150
              
              
              
              759,931Provision
      for loan losses
              
              
              840,000
              
              
              
              750,000
              
              
              
              945,000Gain
      on sale of loans and investment securities
              
              
              (1,795,380
              )
              
              
              (1,443,145
              )
              
              
              (1,366,587
              )(Gain)
      loss on sale of equipment and other assets
              
              
              -
              
              
              
              (89,911
              )
              
              
              3,055(Gain)
      loss on sale of foreclosed assets
              
              
              (4,621
              )
              
              
              46,833
              
              
              
              (1,323
              )Amortization
      of deferred income,premiums
      and discounts
              
              
              108,733
              
              
              
              24,106
              
              
              
              (48,305
              )Stock
      award plans
              
              
              286,346
              
              
              
              388,884
              
              
              
              33,213Origination
      of loans held for sale
              
              
              (71,861,627
              )
              
              
              (51,685,484
              )
              
              
              (45,528,012
              )Proceeds
      from sale of loans held for sale
              
              
              73,901,281
              
              
              
              51,465,404
              
              
              
              47,649,521Release of ESOP shares
              
              
              672,765
              
              
              
              651,958
              
              
              
              564,980Changes
      in:Accrued
      interest receivable
              
              
              (413,139
              )
              
              
              (821,182
              )
              
              
              (519,112
              )Prepaid
      expenses and other assets
              
              
              114,073
              
              
              
              400,043
              
              
              
              (628,141
              )Accrued
      expenses and other liabilities
              
              
              235,832
              
              
              
              1,060,085
              
              
              
              200,417Income
      taxes payable
              
              
              836,168
              
              
              
              (1,096,634
              )
              
              
              102,119Net
      cash provided by operating activities
              
              
              9,734,796
              
              
              
              6,381,264
              
              
              
              7,816,207CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      increase in loans
              
              
              (39,788,084
              )
              
              
              (45,195,742
              )
              
              
              (45,967,115
              )Principal
      payments on held-to-maturity securities
              
              
              108,250
              
              
              
              186,219
              
              
              
              358,395Principal
      payments on available-for-sale securities
              
              
              376,625
              
              
              
              175,145
              
              
              
              -Purchase
      of available-for-sale securities
              
              
              (11,926,192
              )
              
              
              (3,780,315
              )
              
              
              (10,516,958
              )Purchase
      of premises and equipment
              
              
              (2,476,863
              )
              
              
              (719,094
              )
              
              
              (1,032,777
              )Purchase
      of tax credit investments
              
              
              -
              
              
              
              (2,195,334
              )
              
              
              -Proceeds
      from sale of originated mortgage servicing rights
              
              
              -
              
              
              
              1,023,608
              
              
              
              -Proceeds
      from sale of premises and equipment
              
              
              -
              
              
              
              470
              
              
              
              5,860Proceeds
      from sales of available-for-sale securities
              
              
              1,128,153
              
              
              
              762,617
              
              
              
              9,345,564Proceeds
      from maturities of available-for-sale securities
              
              
              2,580,000
              
              
              
              1,750,000
              
              
              
              9,000,000(Purchase)
      redemption of FHLB stock
              
              
              1,368,000
              
              
              
              (403,900
              )
              
              
              167,700Proceeds
      from sale of foreclosed assets
              
              
              1,453,674
              
              
              
              395,327
              
              
              
              352,341Net
      cash used in investing activities
              
              
              (47,176,437
              )
              
              
              (48,000,999
              )
              
              
              (38,286,990
              )
  See
Notes to Consolidated Financial Statements
 22
 Guaranty
Federal Bancshares, Inc.
 Consolidated
Statements of Cash Flows (continued)
 Years
Ended December 31, 2007, 2006 and 2005
 
 2007
              
              
              2006
              
              
              2005CASH
      FLOWS FROM FINANCING ACTIVITIESStock
      options exercised
              
              
              1,118,762
              
              
              
              1,147,042
              
              
              
              1,031,400Cash
      dividends paid
              
              
              (1,879,256
              )
              
              
              (1,850,300
              )
              
              
              (1,794,557
              )Net
      increase (decrease) in demand deposits,NOW
      accounts and savings accounts
              
              
              12,779,497
              
              
              
              (1,259,419
              )
              
              
              2,901,337Net
      increase in certificates of deposit
              
              
              53,182,151
              
              
              
              33,430,104
              
              
              
              20,769,872Net
      increase in securities sold under agreements to repurchase
              
              
              8,146,074
              
              
              
              108,963
              
              
              
              330,238Proceeds
      from FHLB advances
              
              
              1,855,538,600
              
              
              
              1,901,242,000
              
              
              
              1,322,664,000Repayments
      of FHLB advances
              
              
              (1,887,452,600
              )
              
              
              (1,893,242,000
              )
              
              
              (1,322,664,000
              )Proceeds
      from issuance of notes payable
              
              
              2,468,000
              
              
              
              -
              
              
              
              -Repayments
      of notes payable
              
              
              (1,749,810
              )
              
              
              -
              
              
              
              -Proceeds
      from issuance of subordinated debentures
              
              
              -
              
              
              
              -
              
              
              
              15,465,000Advances
      from borrowers for taxes and insurance
              
              
              (65,058
              )
              
              
              10,549
              
              
              
              (59,476
              )Treasury
      stock purchased
              
              
              (7,479,118
              )
              
              
              (3,593,081
              )
              
              
              (3,563,011
              )Net
      cash provided by financing activities
              
              
              34,607,242
              
              
              
              35,993,858
              
              
              
              35,080,803INCREASE
      (DECREASE) IN CASHAND
      CASH EQUIVALENTS
              
              
              (2,834,399
              )
              
              
              (5,625,877
              )
              
              
              4,610,020CASH
      AND CASH EQUIVALENTS,BEGINNING
      OF YEAR
              
              
              14,880,601
              
              
              
              20,506,478
              
              
              
              15,896,458CASH
      AND CASH EQUIVALENTS,END
      OF YEAR
              
              $
              12,046,202
              
              
              
              14,880,601
              
              
              
              20,506,478Supplemental
      Cash Flows InformationReal
      estate acquired in settlement of loans
              
              $
              2,003,838
              
              
              
              588,022
              
              
              
              299,643Interest
      paid
              
              $
              20,140,586
              
              
              
              16,479,811
              
              
              
              11,713,756Income
      taxes paid
              
              $
              2,563,603
              
              
              
              4,041,795
              
              
              
              3,506,591Dividend
      declared and unpaid
              
              $
              469,373
              
              
              
              468,190
              
              
              
              459,074
  See
Notes to Consolidated Financial Statements
 23
 Guaranty
Federal Bancshares, Inc.
 Consolidated
Statements of Stockholders’ Equity
 Years
Ended December 31, 2007, 2006 and 2005
 
 Common Stock
              
              
              Additional Paid-In Capital
              
              
              Unearned ESOP Shares
              
              
              Treasury Stock
              
              
              Retained Earnings
              
              
              Accumulated Other Comprehensive
      Income
              
              
              TotalBalance,
      January 1, 2005
              
              $
              649,386
              
              
              
              52,384,842
              
              
              
              (1,800,930
              )
              
              
              (45,712,994
              )
              
              
              32,437,131
              
              
              
              2,815,828
              
              
              
              40,773,263Comprehensive
      incomeNet
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,898,970
              
              
              
              -
              
              
              
              5,898,970Change
      in unrealized appreciationon
      available-for-sale securitites, netof
      income taxes of ($495,626)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (843,903
              )
              
              
              (843,903
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,055,067Dividends
      ($0.65 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,802,763
              )
              
              
              -
              
              
              
              (1,802,763
              )Stock
      award plans
              
              
              -
              
              
              
              33,213
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,213Stock
      options exercised
              
              
              7,749
              
              
              
              1,023,651
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,031,400Release
      of ESOP shares
              
              
              -
              
              
              
              336,980
              
              
              
              228,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              564,980Treasury
      stock purchased
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,563,011
              )
              
              
              -
              
              
              
              -
              
              
              
              (3,563,011
              )Balance,
      December 31, 2005
              
              
              657,135
              
              
              
              53,778,686
              
              
              
              (1,572,930
              )
              
              
              (49,276,005
              )
              
              
              36,533,338
              
              
              
              1,971,925
              
              
              
              42,092,149Comprehensive
      incomeNet
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,509,084
              
              
              
              -
              
              
              
              6,509,084Change
      in unrealized appreciationon
      available-for-sale securitites, netof
      income taxes of ($256,871)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (437,377
              )
              
              
              (437,377
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,071,707Dividends
      ($0.67 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,859,416
              )
              
              
              -
              
              
              
              (1,859,416
              )Stock
      award plans
              
              
              -
              
              
              
              388,884
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              388,884Stock
      options exercised
              
              
              8,218
              
              
              
              1,138,824
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,147,042Release
      of ESOP shares
              
              
              -
              
              
              
              423,958
              
              
              
              228,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              651,958Treasury
      stock purchased
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,593,081
              )
              
              
              -
              
              
              
              -
              
              
              
              (3,593,081
              )Balance,
      December 31, 2006
              
              $
              665,353
              
              
              
              55,730,352
              
              
              
              (1,344,930
              )
              
              
              (52,869,086
              )
              
              
              41,183,006
              
              
              
              1,534,548
              
              
              
              44,899,243Comprehensive
      incomeNet
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,099,882
              
              
              
              -
              
              
              
              6,099,882Change
      in unrealized appreciationon
      available-for-sale securitites, netof
      income taxes of ($605,380)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,030,781
              )
              
              
              (1,030,781
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,069,101Dividends
      ($0.70 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,880,439
              )
              
              
              -
              
              
              
              (1,880,439
              )Stock
      award plans
              
              
              -
              
              
              
              286,346
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              286,346Stock
      options exercised
              
              
              8,296
              
              
              
              1,110,466
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,118,762Release
      of ESOP shares
              
              
              -
              
              
              
              444,765
              
              
              
              228,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              672,765Treasury
      stock purchased
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,479,118
              )
              
              
              -
              
              
              
              -
              
              
              
              (7,479,118
              )Balance,
      December 31, 2007
              
              $
              673,649
              
              
              
              57,571,929
              
              
              
              (1,116,930
              )
              
              
              (60,348,204
              )
              
              
              45,402,449
              
              
              
              503,767
              
              
              
              42,686,660
  See
Notes to Consolidated Financial Statements
 24
 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.
 
 Nature of
Operations
 The
Company operates as a one-bank holding company. The Bank is primarily engaged in
providing a full range of banking and mortgage services to individual and
corporate customers in southwest Missouri.  The Bank is subject to
competition from other financial institutions.  The Company and the
Bank are also subject to the regulation of certain federal and state agencies
and receive periodic examinations by those regulatory authorities.
 
 Principles of
Consolidation
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, the Bank.  All significant intercompany
profits, transactions and balances have been eliminated in
consolidation.
 
 Use of
Estimates
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.  In connection with the determination of the
allowance for loan losses and the valuation of foreclosed assets held for sale,
management obtains independent appraisals for significant
properties.
 
 Securities
 Available-for-sale
securities, which include any security for which the Company or the Bank has no
immediate plan to sell but which may be sold in the future, are carried at fair
value.  Unrealized gains and losses are recorded, net of related
income tax effects, in other comprehensive income.
  25
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 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, if any, and the carrying amount of the loans sold,
net of discounts collected or paid and considering a normal servicing
rate.  Fees received from borrowers to guarantee the funding of
mortgage loans held for sale and fees paid to investors to ensure the ultimate
sale of such mortgage loans are recognized as income or expense when the loans
are sold or when it becomes evident that the commitment will not be
used.
 
 Loans
 Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-offs are reported at their outstanding principal balances
adjusted for any charge-offs, the allowance for loan losses, any deferred fees
or costs on originated loans and unamortized premiums or discounts on purchased
loans.  Interest income is reported on the interest method, and
includes amortization of net deferred loan fees and costs over the loan
term.  Generally, loans are placed on non-accrual status at ninety
days past due and interest is considered a loss, unless the loan is well-secured
and in the process of collection.
 
 Loan
Servicing
 The cost
of originated mortgage-servicing rights is amortized over the shorter of the
actual or contractual loan life.  Impairment of mortgage-servicing
rights is assessed based on the fair value of those rights.  Fair
values are estimated by discounting expected cash flows.  For purposes
of measuring impairment, the rights are stratified based on the loan type,
remaining term to maturity and interest rate.  The key assumptions
used in the valuation include discount rates, prepayment speeds and servicing
costs.  The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceeds their fair
value.  During 2006, the Company sold its mortgage servicing rights to
a third party.
 
 Allowance for Loan
Losses
 The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income.  Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.  Subsequent
recoveries, if any, are credited to the allowance.
  The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic
conditions.  This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
  26
 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, 2007, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
 
 As of
December 31, 2007, the most recent notification from the Missouri Division of
Finance and the Federal Deposit Insurance Corporation categorized the Bank as
well capitalized under the regulatory framework for prompt corrective
action.  To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the following table.  There are no conditions or events since
that notification that management believes have changed the Company’s or the
Bank’s category.
  27
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 The
Company’s and the Bank's actual capital amounts and ratios are also presented in
the table.  No amount was deducted from capital for interest-rate
risk.  Dollar amounts are expressed in thousands.
  To
      Be Well CapitalizedFor
      Capital
              
              
              Under
      Prompt CorrectiveActual
              
              
              Adequacy Purposes
              
              
              Action ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 2007Tier
      1 (core) capital, andratio
      to adjusted total assetsCompany
              
              $
              56,244
              
              
              
              10.8
              %
              
              
              20,784
              
              
              
              4.0
              %
              
              
              n/a
              
              
              
              n/aBank
              
              $
              56,152
              
              
              
              10.5
              %
              
              
              21,432
              
              
              
              4.0
              %
              
              
              26,790
              
              
              
              5.0
              %Tier
      1 (core) capital, andratio
      to risk-weighted assetsCompany
              
              $
              56,244
              
              
              
              11.0
              %
              
              
              20,459
              
              
              
              4.0
              %
              
              
              n/a
              
              
              
              n/aBank
              
              $
              56,152
              
              
              
              11.0
              %
              
              
              20,437
              
              
              
              4.0
              %
              
              
              30,656
              
              
              
              6.0
              %Total
      risk-based capital, andratio
      to risk-weighted assetsCompany
              
              $
              63,515
              
              
              
              12.4
              %
              
              
              40,918
              
              
              
              8.0
              %
              
              
              n/a
              
              
              
              n/aBank
              
              $
              62,511
              
              
              
              12.2
              %
              
              
              40,874
              
              
              
              8.0
              %
              
              
              51,093
              
              
              
              10.0
              %
  
 To
      Be Well CapitalizedFor
      Capital
              
              
              Under
      Prompt CorrectiveActual
              
              
              Adequacy Purposes
              
              
              Action ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 2006Tier
      1 (core) capital, andratio
      to adjusted total assetsCompany
              
              $
              57,820
              
              
              
              11.8
              %
              
              
              19,615
              
              
              
              4.0
              %
              
              
              n/a
              
              
              
              n/aBank
              
              $
              57,062
              
              
              
              11.2
              %
              
              
              20,336
              
              
              
              4.0
              %
              
              
              25,420
              
              
              
              5.0
              %Tier
      1 (core) capital, andratio
      to risk-weighted assetsCompany
              
              $
              57,820
              
              
              
              12.0
              %
              
              
              19,231
              
              
              
              4.0
              %
              
              
              n/a
              
              
              
              n/aBank
              
              $
              57,062
              
              
              
              11.9
              %
              
              
              19,231
              
              
              
              4.0
              %
              
              
              28,846
              
              
              
              6.0
              %Total
      risk-based capital, andratio
      to risk-weighted assetsCompany
              
              $
              65,251
              
              
              
              13.6
              %
              
              
              38,461
              
              
              
              8.0
              %
              
              
              n/a
              
              
              
              n/aBank
              
              $
              63,948
              
              
              
              13.3
              %
              
              
              38,461
              
              
              
              8.0
              %
              
              
              48,077
              
              
              
              10.0
              %
  28
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  The
amount of dividends that the Bank may pay is subject to various regulatory
limitations.  As of December 31, 2007, 2006, and 2005, the Bank
exceeded its minimum capital requirements.  The Bank may not pay
dividends which would reduce capital below the minimum requirements shown
above.
 
 Earnings Per
Share
 
 The
computation for earnings per share for years ended December 31, 2007, 2006 and
2005 is as follows:
 
 Year
      Ended
              
              
              Year
      Ended
              
              
              Year
      EndedDecember 31, 2007
              
              
              December 31, 2006
              
              
              December 31, 2005Net
      income
              
              $
              6,099,882
              
              
              
              6,509,084
              
              
              
              5,898,970Average
      common shares outstanding
              
              
              2,713,384
              
              
              
              2,786,823
              
              
              
              2,780,249Effect
      of stock options outstanding
              
              
              77,998
              
              
              
              109,200
              
              
              
              126,885Average
      diluted shares outstanding
              
              
              2,791,382
              
              
              
              2,896,023
              
              
              
              2,907,134Earnings
      per share - basic
              
              $
              2.25
              
              
              
              2.34
              
              
              
              2.12Earnings
      per share - diluted
              
              $
              2.19
              
              
              
              2.25
              
              
              
              2.03
 
 Options
to purchase 69,500 and 21,500 shares of common stock were outstanding during the
year ended December 31, 2007 and 2005, 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.  All outstanding options to purchase common stock were
included in the computation of diluted earnings per share for the year ended
December 31, 2006.
 
 
 Stock Option
Plans
 
 In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS
123R). SFAS 123R requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, such as stock options and
restricted stock, based on the fair value of those awards at the date of grant
and eliminates the choice to account for employee stock options under Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25), which is how the Company previously accounted for its stock options.
The Company adopted SFAS 123R effective January 1, 2006 using the modified
prospective method and, as such, results for prior periods have not been
restated.  Stock-based compensation expense is recognized for all
stock options granted or modified after January 1, 2006.  In addition,
unvested options existing at January 1, 2006, are recognized in expense over the
remaining vesting period.  The fair value of all stock options has
been estimated using the Black-Scholes option pricing model using various
assumptions, some of which are highly subjective.
 
 As a
result of adopting SFAS 123R on January 1, 2006, incremental stock-based
compensation expense recognized was $71,324 and $64,655 for the years ended
December 31, 2007 and 2006, respectively.  As of December 31, 2007,
there was $233,199 of unrecognized compensation expense related to nonvested
stock options, which will be recognized over a weighted average period of 3.4
years.
 
 29
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 Prior to
January 1, 2006, no compensation expense was recognized for stock option
grants, as all such grants had an exercise price equal to the fair market value
on the date of grant. The following illustrates the effect on net income and
earnings per share if the Company had applied the fair value method of SFAS
No. 123, “Accounting for Stock-Based Compensation,” prior to
January 1, 2006:
 Year
      EndedDecember 31, 2005Net
      income, as reported
              
              $
              5,898,970Less:  Total
      stock-based employeecompensation
      cost determinedunder
      the fair value-basedmethod,
      net of income taxes
              
              
              (51,516
              )Pro
      forma net income
              
              $
              5,847,454Earnings
      per share:Basic
      - as reported
              
              $
              2.12Basic
      - pro forma
              
              $
              2.10Diluted
      - as reported
              
              $
              2.03Diluted
      - pro forma
              
              $
              2.01
 
 
 Segment
Information
 
 The principal business of the Company
is overseeing the business of the Bank.  The Company has no
significant assets other than its investment in the Bank. The banking operation
is the Company’s only reportable segment.  The banking segment is
principally engaged in the business of originating mortgage loans secured by
one-to-four family residences, multi-family, construction, commercial and
consumer loans.  These loans are funded primarily through the
attraction of deposits from the general public, borrowings from the Federal Home
Loan Bank and brokered deposits. Selected information is not presented
separately for the Company’s reportable segment, as there is no material
difference between that information and the corresponding information in the
consolidated financial statements.
  30
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  NOTE
2:                      SECURITIES
 
 The
amortized cost and approximate fair values of securities classified as
available-for-sale securities are as follows:
 
 Amortized Cost
              
              
              Gross Unrealized Gains
              
              
              Gross Unrealized (Losses)
              
              
              Approximate Fair ValueAs
      of December 31, 2007Equity
      Securities:FHLMC
      stock
              
              $
              26,057
              
              
              
              880,205
              
              
              
              -
              
              
              
              906,262Other
              
              
              718,190
              
              
              
              -
              
              
              
              (59,390
              )
              
              
              658,800Debt
      Securities:U.
      S. government agencies
              
              
              1,800,034
              
              
              
              4,049
              
              
              
              -
              
              
              
              1,804,083Mortgage-backed
      securities
              
              
              11,386,025
              
              
              
              84,390
              
              
              
              (109,622
              )
              
              
              11,360,793$
              13,930,306
              
              
              
              968,644
              
              
              
              (169,012
              )
              
              
              14,729,938As
      of December 31, 2006Equity
      Securities:FHLMC
      stock
              
              $
              35,847
              
              
              
              2,449,293
              
              
              
              -
              
              
              
              2,485,140Debt
      Securities:U.
      S. government agencies
              
              
              4,870,979
              
              
              
              1,346
              
              
              
              (12,074
              )
              
              
              4,860,251Mortgage-backed
      securities
              
              
              563,704
              
              
              
              -
              
              
              
              (2,774
              )
              
              
              560,930$
              5,470,530
              
              
              
              2,450,639
              
              
              
              (14,848
              )
              
              
              7,906,321
 
 Maturities
of available-for-sale debt securities as of December 31, 2007:
 
 
 Amortized Cost
              
              
              Approximate Fair ValueWithin
      one year
              
              $
              500,000
              
              
              
              501,9532-5
      years
              
              
              1,300,034
              
              
              
              1,302,130Mortgage-backed
      securities not due on asingle
      maturity date
              
              
              11,386,025
              
              
              
              11,360,793$
              13,186,059
              
              
              
              13,164,876
 
 31
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  The
amortized cost and approximate fair values of securities classified as held to
maturity are as follows:
  Amortized Cost
              
              
              Gross Unrealized Gains
              
              
              Gross Unrealized (Losses)
              
              
              Approximate Fair ValueAs
      of December 31, 2007Debt
      Securities:U.
      S. government agencies
              
              $
              148,529
              
              
              
              -
              
              
              
              (2,000
              )
              
              
              146,529Mortgage-backed
      securities
              
              
              506,246
              
              
              
              32,397
              
              
              
              -
              
              
              
              538,643$
              654,775
              
              
              
              32,397
              
              
              
              (2,000
              )
              
              
              685,172As
      of December 31, 2006Debt
      Securities:U.
      S. government agencies
              
              $
              158,661
              
              
              
              -
              
              
              
              (481
              )
              
              
              158,180Mortgage-backed
      securities
              
              
              604,364
              
              
              
              31,920
              
              
              
              -
              
              
              
              636,284$
              763,025
              
              
              
              31,920
              
              
              
              (481
              )
              
              
              794,464
 
 Maturities
of held-to-maturity securities as of December 31, 2007:
 
 Amortized Cost
              
              
              Approximate Fair ValueAfter
      ten years
              
              $
              148,529
              
              
              
              146,529Mortgage-backed
      securities not due on asingle
      maturity date
              
              
              506,246
              
              
              
              538,643$
              654,775
              
              
              
              685,172
 
 
 The book
value of securities pledged as collateral, to secure public deposits and for
other purposes, amounted to $12,661,393, $1,803,181 and $381,115 as of December
31, 2007, 2006 and 2005, respectively.  The approximate fair value of
pledged securities amounted to $12,659,842, $1,805,148 and $385,439 as of
December 31, 2007, 2006 and 2005, respectively.
 
 Gross
gains of $618,363, $750,869 and $1,269,396 and gross losses of $0, $0 and
$526,061 resulting from sale of available-for-sale securities were realized for
the years ended December 31, 2007, 2006 and 2005, respectively.  The
tax effect of these net gains was $228,794, $277,822 and $275,034 in 2007, 2006
and 2005, respectively.
 
 Certain
investments 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, 2007 and
2006, was $4,013,643 and $4,836,168, respectively, which is approximately 26%
and 56% of the Company’s investment portfolio, respectively.  These
declines primarily resulted from changes in market interest rates and failure of
certain investments to meet projected earnings targets.
 
 Based on
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.
  32
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  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 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, 2007 and
2006.
 
 December
      31, 2007Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalDescription of
    Securities
              
              Fair Value
              
              
              Unrealized Losses
              
              
              Fair Value
              
              
              Unrealized Losses
              
              
              Fair Value
              
              
              Unrealized LossesEquity
      Securities
              
              $
              658,800
              
              
              
              (59,390
              )
              
              
              -
              
              
              
              -
              
              
              
              658,800
              
              
              
              (59,390
              )U.
      S. Government Agencies
              
              
              -
              
              
              
              -
              
              
              
              146,529
              
              
              
              (2,000
              )
              
              
              146,529
              
              
              
              (2,000
              )Mortgage-backed
      securities
              
              
              3,208,314
              
              
              
              (109,622
              )
              
              
              -
              
              
              
              -
              
              
              
              3,208,314
              
              
              
              (109,622
              )$
              3,867,114
              
              
              
              (169,012
              )
              
              
              146,529
              
              
              
              (2,000
              )
              
              
              4,013,643
              
              
              
              (171,012
              )
 
 
 December
      31, 2006Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalDescription of
    Securities
              
              Fair Value
              
              
              Unrealized Losses
              
              
              Fair Value
              
              
              Unrealized Losses
              
              
              Fair Value
              
              
              Unrealized LossesU.
      S. Government Agencies
              
              $
              2,869,948
              
              
              
              (9,183
              )
              
              
              1,405,290
              
              
              
              (3,372
              )
              
              
              4,275,238
              
              
              
              (12,555
              )Mortgage-backed
      securities
              
              
              560,930
              
              
              
              (2,774
              )
              
              
              -
              
              
              
              -
              
              
              
              560,930
              
              
              
              (2,774
              )$
              3,430,878
              
              
              
              (11,957
              )
              
              
              1,405,290
              
              
              
              (3,372
              )
              
              
              4,836,168
              
              
              
              (15,329
              )
  33
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 NOTE
3:                      LOANS
AND ALLOWANCE FOR LOAN LOSSES
 
 Categories
of loans at December 31, 2007 and 2006 include:
 
 2007
              
              
              2006Real
      estate - residential mortgage:One
      to four family units
              
              $
              83,018,129
              
              
              
              86,645,458Multi-family
              
              
              41,947,555
              
              
              
              50,366,197Real
      estate - construction
              
              
              89,724,220
              
              
              
              83,966,976Real
      estate - commercial
              
              
              175,995,074
              
              
              
              155,800,918Commercial
      loans
              
              
              104,025,575
              
              
              
              82,675,514Installment
      loans
              
              
              25,576,502
              
              
              
              23,708,300Total
      loans
              
              
              520,287,055
              
              
              
              483,163,363Less:Allowance
      for loan losses
              
              
              (5,962,923
              )
              
              
              (5,783,477
              )Deferred
      loan fees/costs, net
              
              
              (224,097
              )
              
              
              (115,364
              )Net
      loans
              
              $
              514,100,035
              
              
              
              477,264,522
 
 
 Impaired
loans totaled $7,254,334 and $3,016,448 as of December 31, 2007 and 2006,
respectively with a related allowance for loan losses of $415,000 and $298,311,
respectively.  As of December 31, 2007 and 2006, respectively,
impaired loans of $1,047,618 and $991,398 had no related allowance for loan
losses.
 
 Interest
of $166,013, $275,143 and $615,928 was recognized on average impaired loans of
$5,136,396, $3,250,403 and $4,805,205 for the years ended December 31, 2007,
2006 and 2005, respectively.  Interest of $165,148, $272,600 and
$600,288, was recognized on impaired loans on a cash basis during the years
ended December 31, 2007, 2006 and 2005, respectively.
 
 At
December 31, 2007 and 2006 there were $103,270 and $0 in accruing loans
delinquent 90 days or more, respectively. Non-accruing loans at December 31,
2006 and 2005 were $7,254,334 and $2,748,000, respectively.
 
 Activity
in the allowance for loan losses was as follows:
  Years
      endedDecember
      31,2007
              
              
              2006
              
              
              2005Balance,
      beginning of year
              
              $
              5,783,477
              
              
              
              5,399,654
              
              
              
              4,536,654Provision
      charged to expense
              
              
              840,000
              
              
              
              750,000
              
              
              
              945,000Losses
      charged off, net of recoveriesof
      $70,990, $280,854 and $71,385 for the years endedDecember
      31, 2007, 2006 and 2005 respectively
              
              
              (660,554
              )
              
              
              (366,177
              )
              
              
              (82,000
              )Balance,
      end of year
              
              $
              5,962,923
              
              
              
              5,783,477
              
              
              
              5,399,654
 
 
 34
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  The
weighted average interest rate on loans as of December 31, 2007 and 2006 was
7.23% and 7.78%, respectively.
 
 The Bank
serviced mortgage loans for others amounting to $613,633 and $654,974 as of
December 31, 2007 and 2006, respectively. The Bank serviced commercial loans for
others amounting to $20,724,871 and $15,847,746 as of December 31, 2007 and
2006, respectively.
  NOTE
4:                      PREMISES
AND EQUIPMENT
 
 Major
classifications of premises and equipment, stated at cost, are as
follows:
 
 
 December
      31,
              
              
              December
      31,2007
              
              
              2006Land
              
              $
              2,323,789
              
              
              
              1,250,789Buildings
      and improvements
              
              
              8,461,883
              
              
              
              7,387,668Automobile
              
              
              16,479
              
              
              
              -Furniture,
      fixtures and equipment
              
              
              6,251,839
              
              
              
              5,938,670Leasehold
      improvements
              
              
              271,799
              
              
              
              271,79917,325,789
              
              
              
              14,848,926Less
      accumulated depreciation
              
              
              (7,883,439
              )
              
              
              (6,981,117
              )Net
      premises and equipment
              
              $
              9,442,350
              
              
              
              7,867,809
 
 
 Depreciation
expense was $902,322, $814,150 and $759,931 for the years ended December 31,
2007, 2006, and 2005, respectively.
  NOTE
5:                      OTHER
COMPREHENSIVE LOSS
 
 Other
comprehensive loss components and related taxes were as follows:
  Year
      endedDecember
      31,2007
              
              
              2006
              
              
              2005Unrealized
      gains (losses) onavailable-for-sale
      securities
              
              $
              (1,017,798
              )
              
              
              56,621
              
              
              
              (596,194
              )Less:
      Reclassification adjustment forrealized
      gains included in income
              
              
              (618,363
              )
              
              
              (750,869
              )
              
              
              (743,335
              )Other
      comprehensive loss before tax effect
              
              
              (1,636,161
              )
              
              
              (694,248
              )
              
              
              (1,339,529
              )Tax
      benefit
              
              
              (605,380
              )
              
              
              (256,871
              )
              
              
              (495,626
              )Other
      comprehensive loss
              
              $
              (1,030,781
              )
              
              
              (437,377
              )
              
              
              (843,903
              )
  35
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 NOTE
6:                      DEPOSITS
 
 
 December 31, 2007
              
              
              December 31, 2006Weighted Average Rate
              
              
              Balance
              
              
              Percentage of Deposits
              
              
              Weighted Average Rate
              
              
              Balance
              
              
              Percentage of DepositsDemand
              
              
              
              0.00
              %
              
              $
              28,520,385
              
              
              
              6.8
              %
              
              
              0.00
              %
              
              
              26,893,997
              
              
              
              7.6
              %NOW
              
              
              
              1.35
              %
              
              
              36,511,976
              
              
              
              8.7
              %
              
              
              1.18
              %
              
              
              35,468,920
              
              
              
              10.1
              %Money
      market
              
              
              
              3.48
              %
              
              
              64,319,237
              
              
              
              15.4
              %
              
              
              3.38
              %
              
              
              52,313,962
              
              
              
              13.7
              %Savings
              
              
              
              2.11
              %
              
              
              12,421,113
              
              
              
              3.0
              %
              
              
              2.67
              %
              
              
              14,316,335
              
              
              
              4.1
              %2.11
              %
              
              
              141,772,711
              
              
              
              33.9
              %
              
              
              1.99
              %
              
              
              128,993,214
              
              
              
              36.6
              %Certificates:0%
      - 3.99%
              
              
              3.60
              %
              
              
              5,523,980
              
              
              
              1.3
              %
              
              
              3.16
              %
              
              
              29,366,266
              
              
              
              8.3
              %4.00%
      - 5.99%
              
              5.12
              %
              
              
              268,121,877
              
              
              
              64.1
              %
              
              
              5.12
              %
              
              
              193,446,432
              
              
              
              54.9
              %6.00%
      - 7.99%
              
              6.00
              %
              
              
              2,772,716
              
              
              
              0.7
              %
              
              
              6.06
              %
              
              
              423,724
              
              
              
              0.1
              %5.10
              %
              
              
              276,418,573
              
              
              
              66.1
              %
              
              
              4.86
              %
              
              
              223,236,422
              
              
              
              63.4
              %Total
      Deposits
              
              
              
              4.09
              %
              
              $
              418,191,284
              
              
              
              100.0
              %
              
              
              3.81
              %
              
              
              352,229,636
              
              
              
              100.0
              %
 
 The
aggregate amount of certificates of deposit with a minimum balance of $100,000
was approximately $89,762,000 and $87,796,000, as of December 31, 2007 and 2006,
respectively.
 
 A summary
of certificates of deposit by maturity as of December 31, 2007, is as
follows:
 
 2008
              $
              201,179,7132009
              
              51,356,3482010
              
              9,486,6842011
              
              5,335,2322012
              
              6,046,258Thereafter
              
              3,014,338$
              276,418,573
  A summary
of interest expense on deposits is as follows:
 
 Years
      endedDecember
      31,2007
              
              
              2006
              
              
              2005NOW
      and Money Market accounts
              
              $
              2,940,311
              
              
              
              1,709,996
              
              
              
              1,299,800Savings
      accounts
              
              
              320,172
              
              
              
              364,685
              
              
              
              200,509Certificate
      accounts
              
              
              12,657,119
              
              
              
              8,493,705
              
              
              
              5,814,064Early
      withdrawal penalties
              
              
              (56,808
              )
              
              
              (45,183
              )
              
              
              (26,300
              )$
              15,860,794
              
              
              
              10,523,203
              
              
              
              7,288,073
 
 
 The Bank
utilizes brokered deposits as an additional funding source.  The
aggregate amount of brokered deposits was approximately $4,382,000 and
$29,146,000 as of December 31, 2007 and 2006, respectively.
  36
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  NOTE
7:                      BORROWINGS
 
 Federal Home Loan Bank
Advances
 
 Federal
Home Loan Bank advances consist of the following:
 
 December 31, 2007
              
              
              December 31, 2006Maturity Date
              
              Amount
              
              
              Weighted Average Rate
              
              
              Amount
              
              
              Weighted Average Rate2007
              
              $
              -
              
              
              
              -
              
              
              
              85,414,000
              
              
              
              5.32
              %2008
              
              
              69,650,000
              
              
              
              4.24
              %
              
              
              13,650,000
              
              
              
              5.30
              %2009
              
              
              386,000
              
              
              
              7.21
              %
              
              
              386,000
              
              
              
              7.21
              %2010
              
              
              3,000,000
              
              
              
              6.37
              %
              
              
              3,000,000
              
              
              
              6.37
              %2011
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -2012
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Thereafter
              
              
              3,050,000
              
              
              
              5.13
              %
              
              
              5,550,000
              
              
              
              5.39
              %$
              76,086,000
              
              
              
              4.37
              %
              
              
              108,000,000
              
              
              
              5.35
              %
 
 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.
 
 Securities Sold Under
Agreements to Repurchase
 
 The
Company borrowed $9.8 million under a structured repurchase agreement in
September 2007.  Interest is based on a variable rate of three month
LIBOR minus 100 basis points until September 12, 2009 and converts into a
variable rate of two times the three month LIBOR minus 4.72% thereafter until
maturity in September 2014.  The counterparty, Barclay’s Capital,
Inc., has the right to terminate the transaction after two years.  The
Company has pledged certain investment securities with a fair value of $10.5
million as of December 31, 2007.
 
 Notes
payable
 
 The
Company has a $3.5 million revolving line of credit with a correspondent bank to
be used for stock repurchases and investments.  The line of credit is
unsecured, bears interest at one-month LIBOR plus 1.25%, payable quarterly, and
matures on September 30, 2008.  The balance was $718,190 and $0 at
December 31, 2007 and 2006, respectively.
 
 NOTE
8:                      SUBORDINATED
DEBENTURES
 
 During
2005, the Company formed two wholly owned grantor trust subsidiaries, Guaranty
Statutory Trust I and Guaranty Statutory Trust II, to issue preferred
securities representing undivided beneficial interests in the assets of the
trusts and to invest the gross proceeds of the preferred securities in notes of
the Company.  Trust I issued $5,000,000 of preferred securities and
Trust II issued $10,000,000 of preferred securities.  The sole assets
of Trust I were originally $5,155,000 aggregate principal amount of the
Company’s fixed rate subordinated debenture notes due 2036, which are redeemable
beginning in 2011.  The sole assets of Trust II were originally
$10,310,000 aggregate principal amount of the Company’s fixed/variable rate
subordinated debenture notes due 2036, which are redeemable beginning in
2011.  Trust II subordinated debenture notes bear interest at a fixed
rate for five years and thereafter at a floating rate based on
LIBOR.  The preferred securities qualify as either Tier I or Tier II
capital for regulatory purposes, subject to certain limitations.
  37
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  NOTE
9:                      INCOME
TAXES
 
 As of
December 31, 2007 and 2006, 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, 2007 and 2006.
 
 The
provision for income taxes consists of:
  Years
      EndedDecember
      31,2007
              
              
              2006
              
              
              2005Taxes
      currently payable
              
              $
              3,587,610
              
              
              
              4,634,722
              
              
              
              3,756,110Deferred
      income taxes
              
              
              (187,839
              )
              
              
              (592,927
              )
              
              
              (249,519
              )$
              3,399,771
              
              
              
              4,041,795
              
              
              
              3,506,591
  The tax
effects of temporary differences related to deferred taxes shown on the December
31, 2007 and 2006 balance sheets are:
  December
      31,
              
              
              December
      31,2007
              
              
              2006Deferred
      tax assets:Allowances
      for loan and foreclosed asset losses
              
              $
              2,206,281
              
              
              
              2,139,886Accrued
      compensated absences and bonuses
              
              
              18,500
              
              
              
              18,500Interest
      on non-accrual loans
              
              
              43,525
              
              
              
              -Deferred
      loan fees/costs
              
              
              82,915
              
              
              
              42,6842,351,221
              
              
              
              2,201,070Deferred
      tax liabilities:FHLB
      stock dividends
              
              
              (120,632
              )
              
              
              (120,632
              )Unrealized
      appreciation on available-for-sale securities
              
              
              (295,863
              )
              
              
              (901,243
              )Accumulated
      depreciation
              
              
              (93,383
              )
              
              
              (142,323
              )Other
              
              
              (85,642
              )
              
              
              (74,388
              )(595,520
              )
              
              
              (1,238,586
              )Net
      deferred tax asset
              
              $
              1,755,701
              
              
              
              962,484
 
 A
reconciliation of income tax expense at the statutory rate to income tax expense
at the Company’s effective rate is shown below:
  38
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  Years
      endedDecember
      31,2007
              
              
              2006
              
              
              2005Computed
      at statutory rate
              
              
              34.0
              %
              
              
              34.0
              %
              
              
              34.0
              %Increase
      (reduction) in taxes resulting from:State
      financial institution tax
              
              
              0.8
              %
              
              
              2.7
              %
              
              
              1.8
              %ESOP
              
              
              3.1
              %
              
              
              2.6
              %
              
              
              1.2
              %Other
              
              
              -2.1
              %
              
              
              -1.0
              %
              
              
              0.3
              %Actual
      tax provision
              
              
              35.8
              %
              
              
              38.3
              %
              
              
              37.3
              %
 
 Missouri law
provides that banks will be taxed based on an annual privilege tax of 7% of net
income.  The privilege tax is included in provision for income
taxes.
  NOTE
10:                      DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 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.
  39
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  December 31, 2007
              
              
              December 31, 2006Carrying Amount
              
              
              Fair Value
              
              
              Carrying Amount
              
              
              Fair ValueFinancial
      assets:Cash
      and cash equivalents
              
              $
              12,046,202
              
              
              
              12,046,202
              
              
              
              14,880,601
              
              
              
              14,880,601Available-for-sale
      securities
              
              
              14,729,938
              
              
              
              14,729,938
              
              
              
              7,906,321
              
              
              
              7,906,321Held-to-maturity
      securities
              
              
              654,775
              
              
              
              685,172
              
              
              
              763,025
              
              
              
              794,464Federal
      Home Loan Bank stock
              
              
              4,014,700
              
              
              
              4,014,700
              
              
              
              5,382,700
              
              
              
              5,382,700Mortgage
      loans held for sale
              
              
              2,141,998
              
              
              
              2,141,998
              
              
              
              3,004,635
              
              
              
              3,004,635Loans,
      net
              
              
              514,100,035
              
              
              
              514,637,570
              
              
              
              477,264,522
              
              
              
              474,906,965Interest
      receivable
              
              
              3,323,448
              
              
              
              3,323,448
              
              
              
              2,910,309
              
              
              
              2,910,309Financial
      liabilities:Deposits
              
              
              418,191,284
              
              
              
              419,513,185
              
              
              
              352,229,636
              
              
              
              351,887,931Federal
      Home Loan Bank advances
              
              
              76,086,000
              
              
              
              76,532,490
              
              
              
              108,000,000
              
              
              
              108,167,567Securities
      sold under agreementsto
      repurchase
              
              
              9,849,295
              
              
              
              9,849,295
              
              
              
              1,703,221
              
              
              
              1,703,221Subordinated
      debentures
              
              
              15,465,000
              
              
              
              15,465,000
              
              
              
              15,465,000
              
              
              
              15,465,000Notes
      payable
              
              
              718,190
              
              
              
              718,190
              
              
              
              -
              
              
              
              -Interest
      payable
              
              
              1,793,663
              
              
              
              1,793,663
              
              
              
              1,414,946
              
              
              
              1,414,946Dividend
      payable
              
              
              469,373
              
              
              
              469,373
              
              
              
              468,190
              
              
              
              468,190Unrecognized
      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.
 
 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.
  40
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 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 and Subordinated Debentures
 Rates
currently available to the Bank for debt with similar terms and remaining
maturities are used to estimate fair value of existing advances and subordinated
debentures.
 
 Securities Sold under
Agreements to Repurchase and Notes Payable
 For these variable rate instruments,
the carrying amount is a reasonable estimate of fair value.
 
 Interest and Dividend
Payable
 The
carrying amounts of interest payable and dividend payable approximates their
fair value.
 
 Commitments to Extend
Credit, Letters of Credit and Lines of Credit
 The fair
value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present credit worthiness of the counterparties.  For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates.  The fair
value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
  NOTE
11:                      SIGNIFICANT
ESTIMATES AND CONCENTRATIONS
 
 Accounting
principles generally accepted in the United States of America require disclosure
of certain significant estimates and current vulnerabilities due to certain
concentrations.  Estimates related to the allowance for loan losses
are reflected in the footnote regarding loans.  Current
vulnerabilities due to certain concentrations of credit risk are discussed in
the footnote on commitments and credit risk.
  NOTE
12:                      EMPLOYEE
BENEFIT PLANS
 
 Stock Award
Plans
 The
Company has established four stock award plans for the benefit of certain
directors, officers and employees of the Bank and its subsidiary. The plans
provide a proprietary interest in the Company in a manner designed to encourage
these individuals to remain with the Bank.  A committee of the Bank’s
Board of Directors administers the plans.  The Company accounts for
the cost of share purchases under the plans as a reduction of stockholders'
equity.  The awards vest at the rate of 20% per year over a five-year
period.  Compensation expense is recognized based on the Company’s
stock price on the date the shares are awarded to employees.
 
 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, 2007 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, 2007 all shares in this
plan have vested.
  41
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 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, 2007 all shares in this plan have
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, 2007 all shares in this plan have vested.
 
 The Bank
recognized $0, $18,537 and $45,694 of expense under these stock award plans in
the years ended December 31, 2007, 2006 and 2005, respectively.
 
 Stock Option
Plans
 The
Company has established four stock option plans for the benefit of certain
directors, officers and employees of the Bank and its subsidiary.  A
committee of the Company’s Board of Directors administers the
plans.  The stock options under these plans may be either incentive
stock options or nonqualified stock options.  Incentive stock options
can be granted only to participants who are employees of the Bank or its
subsidiary.  The option price must not be less than the market value
of the Company stock on the date of grant.  All options expire no
later than ten years from the date of grant.  The options vest at the
rate of 20% per year over a five-year period.
 
 At the
annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders
approved the 1994 Stock Option and Incentive Plan for the benefit of certain
directors, officers and employees of the Bank and its
subsidiary.  Under this Plan, the Committee may grant stock options
for up to 187,764 shares of the Company’s common stock.
 
 At a
special stockholders’ meeting on July 22, 1998, the Company’s stockholders
approved the 1998 Stock Option and Incentive Plan.  Under this plan,
the Committee may grant stock options for up to 434,081 shares of the Company’s
common stock.
 
 Under the
stock option component of the 2000 SCP, the Committee granted nonqualified stock
options for 17,875 shares of the Company’s common stock.
 
 Under the
stock option component of the 2001 SCP, the Committee granted nonqualified stock
options for 13,263 shares of the Company’s common stock.
 
 During
the six months ended December 31, 2003, the directors of the Company authorized
the issuance of 5,000 stock options as an employment inducement to a new officer
of the Bank pursuant to a stock option agreement.  Stock options
awarded under this agreement are considered non-qualified for federal income tax
purposes.
 
 During
the year ended December 31, 2004, the directors of the Company authorized the
issuance of 25,000 stock options as an employment inducement to a new officer of
the Bank pursuant to a stock option agreement.  Stock options awarded
under this agreement are considered non-qualified for federal income tax
purposes.
 
 On
May 19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option
Plan (“2004 SOP”).  The purpose of the plan is to attract and retain
qualified personnel for positions of substantial responsibility.  The
aggregate number of shares with respect to options issued under this plan shall
not exceed 250,000 shares.  To date 84,500 stock options have been
granted under this plan, with 5,000 stock options cancelled.
 
 42
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  The table
below summarizes transactions under the Company’s stock option
plans:
 
 Number of sharesIncentive Stock Option
              
              
              Non-Incentive Stock Option
              
              
              Weighted Average Exercise
    PriceBalance
      outstanding as of January 1, 2005
              
              
              198,772
              
              
              
              186,091
              
              
              $
              14.27Granted
              
              
              42,500
              
              
              
              -
              
              
              
              25.11Exercised
              
              
              (66,487
              )
              
              
              (11,000
              )
              
              
              13.31Forfeited
              
              
              (10,000
              )
              
              
              -
              
              
              
              20.88Balance
      outstanding as of December 31, 2005
              
              
              164,785
              
              
              
              175,091
              
              
              
              15.65Granted
              
              
              20,000
              
              
              
              -
              
              
              
              28.06Exercised
              
              
              (24,294
              )
              
              
              (57,885
              )
              
              
              13.96Forfeited
              
              
              (5,000
              )
              
              
              (2,000
              )
              
              
              24.84Balance
      outstanding as of December 31, 2006
              
              
              155,491
              
              
              
              115,206
              
              
              
              17.30Granted
              
              
              19,500
              
              
              
              25,000
              
              
              
              29.48Exercised
              
              
              (56,958
              )
              
              
              (26,000
              )
              
              
              13.49Forfeited
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      outstanding as of December 31, 2007
              
              
              118,033
              
              
              
              114,206
              
              
              
              20.48Options
      exercisable as of December 31, 2007
              
              
              60,036
              
              
              
              67,206
              
              
              
              16.14
 
 As of
December 31, 2007, total outstanding stock options of 232,239 had a remaining
contractual life of 5.57 years.
 
 The total
intrinsic value of outstanding stock options was $1,914,130 and $3,087,638 at
December 31, 2007 and 2006, respectively, and the total intrinsic value of
outstanding exercisable stock options was $1,600,704 and $2,587,449 at December
31, 2007 and 2006, respectively.  The total intrinsic value of stock
options exercised was $1,298,634 and $1,177,399 in 2007 and 2006,
respectively.  The total fair value of share awards vested was
$919,069 and $1,053,858 during 2007 and 2006, respectively.
 
 The fair
value of each option granted is estimated on the date of the grant using the
Black-Scholes pricing model with the following weighted-average
assumptions:
 
 December 31, 2007
              
              
              December 31, 2006
              
              
              December 31, 2005Dividends
      per share
              
              $
              0.70
              
              
              
              0.66
              
              
              
              0.64Risk-free
      interest rate
              
              
              4.54
              %
              
              
              4.52
              %
              
              
              4.00
              %Expected
      life of options
              
              5
      years
              
              
              5
      years
              
              
              5
      yearsWeighted-average
      volatility
              
              
              4.62
              %
              
              
              9.16
              %
              
              
              13.01
              %Weighted-average
      fair valueof
      options granted during year
              
              $
              2.95
              
              
              
              3.41
              
              
              
              3.30
 
 43
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 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 $672,765, $651,958 and $564,980 for the years
ended December 31, 2007, 2006 and 2005, respectively.
 
 The
following is a summary of ESOP shares as of December 31, 2007:
 
 Beginning
      ESOP shares
              
              
              344,454Released
      shares
              
              
              (207,353
              )Shares
      committed for release
              
              
              (23,214
              )Unreleased
      shares
              
              
              113,887Fair
      value of unreleased shares
              
              $
              3,270,835
 
 
 NOTE
13:                      RELATED
PARTY TRANSACTIONS
 
 In the
ordinary course of business, the Bank has granted loans to executive officers
and directors and their affiliates.  Annual activity consisted of the
following:
 
 Year
      ended December 31,2007
              
              
              2006Balance,
      beginning of year
              
              $
              3,508,387
              
              
              
              3,270,812New
      Loans
              
              
              100,000
              
              
              
              680,588Repayments
              
              
              (17,757
              )
              
              
              (443,013
              )Balance,
      end of year
              
              $
              3,590,630
              
              
              
              3,508,387
 
 
 In
management's opinion, such loans and other extensions of credit and deposits
were made in the ordinary course of business and were made on substantially the
same terms as those prevailing at the time for comparable transactions with
other persons.  Further, in management's opinion, these loans did not
involve more than normal risk of collectability or present other unfavorable
features.
 
 NOTE
14:                      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.
  44
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 As of
December 31, 2007 and 2006, the Bank had outstanding commitments to originate
mortgage loans of approximately $3,490,000 and $3,991,000,
respectively.  The commitments extend over varying periods of time
with the majority being disbursed within a thirty-day period.  As of
December 31, 2007 and 2006, commitments of $2,941,000 and $3,991,000,
respectively, were at fixed rates and $549,000 and $0, respectively, were at
floating market rates.
 
 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.
 
 The Bank
had total outstanding standby letters of credit amounting to $12,464,000 and
$9,182,000 as of December 31, 2007 and 2006, respectively, with terms ranging
from 30 days to 5 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, 2007 and 2006, unused lines of credit to borrowers aggregated
approximately $63,403,000 and $64,370,000 for commercial lines and $21,957,000
and $19,790,000 for open-end consumer lines.
 
 NOTE
15:                      CONDENSED
PARENT COMPANY STATEMENTS
 
 The
condensed balance sheets as of December 31, 2007 and 2006, and statements of
income and cash flows for the years ended December 31, 2007, 2006 and 2005 for
the parent company, Guaranty Federal Bancshares, Inc., are as
follows:
 
 45
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 Balance
      Sheets2007
              
              
              2006AssetsCash
              
              $
              547,796
              
              
              
              711,485Available-for-sale
      securities
              
              
              658,800
              
              
              
              -Due
      from subsidiary
              
              
              28,126
              
              
              
              28,895Investment
      in subsidiary
              
              
              56,693,200
              
              
              
              58,597,264Investment
      in Capital Trust I & II
              
              
              468,420
              
              
              
              468,420Prepaid
      expenses and other assets
              
              
              463,642
              
              
              
              482,852Refundable
      income taxes
              
              
              681,266
              
              
              
              820,225Deferred
      income taxes
              
              
              21,974
              
              
              
              -$
              59,563,224
              
              
              
              61,109,141LiabilitiesNotes
      payable
              
              $
              718,190
              
              
              
              -Subordinated
      debentures
              
              
              15,465,000
              
              
              
              15,465,000Accrued
      expenses and other liabilities
              
              
              224,001
              
              
              
              276,708Dividend
      payable
              
              
              469,373
              
              
              
              468,190Stockholders'
      equityCommon
      stock
              
              
              673,649
              
              
              
              665,353Additional
      paid-in capital
              
              
              57,571,929
              
              
              
              55,730,352Unearned
      ESOP shares
              
              
              (1,116,930
              )
              
              
              (1,344,930
              )Retained
      earnings
              
              
              45,402,449
              
              
              
              41,183,006Unrealized
      appreciation onavailable-for-sale
      securities, net
              
              
              503,767
              
              
              
              1,534,548Treasury
      stock
              
              
              (60,348,204
              )
              
              
              (52,869,086
              )$
              59,563,224
              
              
              
              61,109,141
 
 
 46
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
 
 Income
      Statements
              
              Years ended December 31,2007
              
              
              2006
              
              
              2005IncomeDividends
      from subsidiary bank
              
              $
              8,487,268
              
              
              
              4,639,062
              
              
              
              3,540,000Interest
      income:Related
      party
              
              
              135,015
              
              
              
              150,308
              
              
              
              127,786Other
              
              
              30,783
              
              
              
              31,125
              
              
              
              38,653,066
              
              
              
              4,820,495
              
              
              
              3,667,789ExpenseInterest
      expense:Other
              
              
              13,037
              
              
              
              963
              
              
              
              -Related
      party
              
              
              1,023,783
              
              
              
              1,027,526
              
              
              
              47,683Occupancy
              
              
              2,400
              
              
              
              2,400
              
              
              
              2,400Other
              
              
              953,200
              
              
              
              879,484
              
              
              
              759,7221,992,420
              
              
              
              1,910,373
              
              
              
              809,805Income
      before income taxesand
      equity in undistributedearnings
      of subsidiaries
              
              
              6,660,646
              
              
              
              2,910,122
              
              
              
              2,857,984Credit
      for income taxes
              
              
              (349,935
              )
              
              
              (427,642
              )
              
              
              (117,312
              )Income
      before equity in undistributedearnings
      of subsidiaries
              
              
              7,010,581
              
              
              
              3,337,764
              
              
              
              2,975,296Equity
      in undistributedearnings
      of subsidiaries
              
              
              (910,699
              )
              
              
              3,171,320
              
              
              
              2,923,674Net
      income
              
              $
              6,099,882
              
              
              
              6,509,084
              
              
              
              5,898,970
  47
 Guaranty
Federal Bancshares, Inc.
 Notes
to Consolidated Financial Statements
  Statements
      of Cash Flows
              
              Years ended December 31,2007
              
              
              2006
              
              
              2005Cash
      Flows From Operating ActivitiesNet
      income
              
              $
              6,099,882
              
              
              
              6,509,084
              
              
              
              5,898,970Items
      not requiring (providing) cash:Equity
      in undistributed earnings of subsidiaries
              
              
              -
              
              
              
              (3,171,320
              )
              
              
              (2,923,674
              )Release
      of ESOP shares
              
              
              672,765
              
              
              
              651,958
              
              
              
              564,980Stock
      award plan expense
              
              
              71,325
              
              
              
              83,192
              
              
              
              23,161Changes
      in:Prepaid
      expenses and other assets
              
              
              19,210
              
              
              
              (8,810
              )
              
              
              (36,407
              )Income
      taxes payable/refundable
              
              
              353,980
              
              
              
              (307,380
              )
              
              
              17,707Accrued
      expenses
              
              
              (52,707
              )
              
              
              151,084
              
              
              
              98,005Net
      cash provided by operating activities
              
              
              7,164,455
              
              
              
              3,907,808
              
              
              
              3,642,742Cash
      Flows From Investing ActivitiesCapital
      contribution to subsidiary bank
              
              
              -
              
              
              
              -
              
              
              
              (13,970,000
              )Purchase
      of AFS securities
              
              
              (718,190
              )
              
              
              -
              
              
              
              -Purchase
      of investment in capital trusts
              
              
              -
              
              
              
              -
              
              
              
              (465,000
              )Distributions
      in excess of net income of subsidiary
              
              
              910,699
              
              
              
              -
              
              
              
              -Net
      (increase) decrease in advance to subsidiary
              
              
              769
              
              
              
              (28,895
              )
              
              
              574,000Net
      cash provided by (used in) investing activities
              
              
              193,278
              
              
              
              (28,895
              )
              
              
              (13,861,000
              )Cash
      Flows From Financing ActivitiesStock
      options exercised
              
              
              1,118,762
              
              
              
              1,147,042
              
              
              
              1,031,400Cash
      dividends paid
              
              
              (1,879,256
              )
              
              
              (1,850,300
              )
              
              
              (1,794,557
              )Treasury
      stock purchased
              
              
              (7,479,118
              )
              
              
              (3,593,081
              )
              
              
              (3,563,011
              )Proceeds
      from issuance of notes payable
              
              
              2,468,000
              
              
              
              -
              
              
              
              -Repayment
      of notes payable
              
              
              (1,749,810
              )
              
              
              -
              
              
              
              -Proceeds
      from issuance of subordinated debentures
              
              
              -
              
              
              
              -
              
              
              
              15,465,000Net
      cash provided by (used in) financing activities
              
              
              (7,521,422
              )
              
              
              (4,296,339
              )
              
              
              11,138,832Increase
      (decrease) in cash
              
              
              (163,689
              )
              
              
              (417,426
              )
              
              
              920,574Cash,
      beginning of year
              
              
              711,485
              
              
              
              1,128,911
              
              
              
              208,337Cash,
      end of year
              
              $
              547,796
              
              
              
              711,485
              
              
              
              1,128,911
  48
  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, 2007 and 2006, and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the years
in the three-year period ended December 31, 2007.  The Company’s
management is responsible for these financial statements.  Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting.  Accordingly, we express no
such opinion.  Our audits also included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Guaranty Federal Bancshares,
Inc. as of December 31, 2007 and 2006, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.
 
 
 /s/BKD,
LLP
 
 Springfield,
Missouri
 March 27,
2008
   49
  Guaranty
      Federal Bancshares, Inc.

                    2007
      Annual Notes
 50
  Guaranty
      Federal Bancshares, Inc.

                  2007
      Annual Report
  Board
      of Directors
                GuarantyGuaranty
      Federal Bancshares, Inc.
                Federaland
      Guaranty Bank
                Bancshares,
      Inc.Don
      M. Gibson
                OfficersChairman
      of the BoardGuaranty
      Federal Bancshares and
                Shaun
      A. BurkeGuaranty
      Bank
                President,Chief
      Executive OfficerJack
      L. BarhamVice
      Chairman of the Board
                Carter
      M. PetersGuaranty
      Federal Bancshares
                Executive
      Vice President,Chief
      Financial Officer/ChiefOperations
      OfficerShaun
      A. BurkePresident
      and CEO
                H.
      Michael MattsonGuaranty
      Federal Bancshares and
                Executive
      Vice President,Guaranty
      Bank
                Chief
      Lending OfficerWayne
      V. Barnes
                E.
      Lorene ThomasRetired
                Corporate
      SecretaryJames
      R. Batten, CPAChief
      Operations OfficerAG
      FinancialKurt
      D. HellwegPresident
      and CEOInternational
      Dehydrated Foods, Inc. andAmerican
      Dehydrated Foods, Inc.Gregory
      V. OstergrenChairman,
      President and CEOAmerican
      National Property and CasualtyInsurance
      CompaniesTim
      Rosenbury, AIAExecutive
      Vice President and ChairmanButler,
      Rosenbury and Partners, Inc.James
      L. Sivils, III, JDPartner  -
      Morelock Ross Companies