UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549







FORM
10-K





T
            ANNUAL
      REPORT PURSUANT TO SECTION 13OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934





For the
fiscal year ended December
31,
2008


-
or -


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





For the
transition period from _____________________ to
_____________________




Commission
File Number:  0-23325




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





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





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





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





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


(Title of
Class)


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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes £ No T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.  Yes £ No T





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





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







1


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





Large
      accelerated file  £
              Accelerated
      filer  £
              Non-accelerated
      filer  £Smaller
      reporting company  T





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes £ No T





The
aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant, based on the average bid and asked prices of
the registrant's Common Stock as quoted on the Global Market of The NASDAQ Stock
Market on June 30, 2008 (the last business day of the registrant’s most recently
completed second quarter) was $43.5 million.  As of March 18, 2009
there were 2,617,140 shares of the registrant's Common Stock
outstanding.








DOCUMENTS
INCORPORATED BY REFERENCE





1.
            Portions
      of the Annual Report to Stockholders (the “2008 Annual Report”) for the
      fiscal year ended December 31, 2008 (Parts I and
  II).


2.
            Portions
      of the Proxy Statement for the Annual Meeting of Stockholders (the “Proxy
      Statement”)to be held on May
      27, 2009 (Part III).




2




GUARANTY
FEDERAL BANCSHARES, INC.





Form
10-K





TABLE OF
CONTENTS





Item
                                                                                
                                                                                
                                                                                PagePART
      I1
                                                                                Business
                                                                                
                                                                                51A
                                                                                Risk Factors
                                                                                
                                                                                311B
                                                                                Unresolved Staff Comments
                                                                                
                                                                                342
                                                                                Properties
                                                                                
                                                                                343
                                                                                Legal Proceedings
                                                                                
                                                                                344
                                                                                Submission of Matters to a Vote of Security
      Holders
                                                                                
                                                                                34PART
      II5
                                                                                Market
      for Registrant's Common Equity, Related Stockholder Mattersand
      Issuer Purchases of Equity Securities
                                                                                
                                                                                356
                                                                                Selected Financial Data
                                                                                
                                                                                357.
                                                                                Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                                                                                
                                                                                357A.
                                                                                Quantitative and Qualitative Disclosures About Market
      Risk
                                                                                
                                                                                358
                                                                                Financial Statements and Supplementary Data
                                                                                
                                                                                359
                                                                                Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                                                                                
                                                                                359A.(T)
                                                                                Controls and Procedures
                                                                                
                                                                                359B.
                                                                                Other Information
                                                                                
                                                                                37PART
      III10
                                                                                Directors, Executive Officers and Corporate
      Governance
                                                                                
                                                                                3811
                                                                                Executive Compensation
                                                                                
                                                                                3812
                                                                                Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                                                                                
                                                                                3913
                                                                                Certain
      Relationships and Related Transactions, andDirector
      Independence
                                                                                
                                                                                4014
                                                                                Principal Accountant Fees and Services
                                                                                
                                                                                40PART
      IV15
                                                                                Exhibits and Financial Statement Schedules
                                                                                
                                                                                41Signatures


3
 Table of Contents
  CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





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





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





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


4
 Table of Contents


PART
I





Item
1.  Business





Business
of the Company





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





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





Business
of the Bank





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





The Bank
is regulated by the Missouri Division of Finance and its deposits are insured by
the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the
"FDIC").  See discussion under section captioned “Regulation” in this
report.  The Bank is a member of the Federal Home Loan Bank of Des
Moines (the “FHLB”), which is one of twelve regional Federal Home Loan
Banks.





Information
regarding (i) average balances related to interest earning assets and interest
bearing liabilities and an analysis of net interest income for the last three
fiscal years and (ii) changes in interest income and interest expense resulting
from changes in average balances and average rates for the last two fiscal years
is provided under the section captioned “Management’s Discussion and Analysis of
Financial Condition and Results of Operation – Average Balances, Interest and
Averages Yields” of the 2008 Annual Report is incorporated herein by
reference.


5
 Table of Contents


Internet
Website





The
Company’s internet website address is www.gbankmo.com. The information contained
on that website is not included as part of, or incorporated by reference into,
this Annual Report on Form 10-K. The Company makes available through its website
its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K or amendments to these reports. These materials are also
available free of charge (other than a user's regular internet access charges)
on the Securities and Exchange Commission's website at www.sec.gov.





Market
Area





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





Lending
Activities





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





As of December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004$
                
                
                
                %
                
                
                $
                
                
                
                %
                
                
                $
                
                
                
                %
                
                
                $
                
                
                
                %
                
                
                $
                
                
                
                %Dollars
      in ThousandsMortgage
      loans (includes loans held for sale):One
      to four family
                
                $
                109,688
                
                
                
                19
                %
                
                $
                85,160
                
                
                
                16
                %
                
                $
                89,650
                
                
                
                18
                %
                
                $
                103,532
                
                
                
                23
                %
                
                $
                121,307
                
                
                
                31
                %Multi-family
                
                
                31,757
                
                
                
                6
                %
                
                
                41,948
                
                
                
                8
                %
                
                
                50,366
                
                
                
                10
                %
                
                
                53,631
                
                
                
                12
                %
                
                
                52,259
                
                
                
                13
                %Construction
                
                
                85,073
                
                
                
                15
                %
                
                
                89,724
                
                
                
                17
                %
                
                
                83,967
                
                
                
                17
                %
                
                
                70,390
                
                
                
                16
                %
                
                
                45,090
                
                
                
                11
                %Commercial
      real estate
                
                
                204,218
                
                
                
                36
                %
                
                
                175,995
                
                
                
                34
                %
                
                
                155,801
                
                
                
                32
                %
                
                
                122,884
                
                
                
                28
                %
                
                
                97,550
                
                
                
                25
                %Total
      mortgage loans
                
                
                430,736
                
                
                
                75
                %
                
                
                392,827
                
                
                
                75
                %
                
                
                379,784
                
                
                
                78
                %
                
                
                350,437
                
                
                
                79
                %
                
                
                316,206
                
                
                
                80
                %Commercial
      business loans
                
                
                118,468
                
                
                
                21
                %
                
                
                104,026
                
                
                
                20
                %
                
                
                82,676
                
                
                
                17
                %
                
                
                66,370
                
                
                
                15
                %
                
                
                55,606
                
                
                
                14
                %Consumer
      loans
                
                
                26,024
                
                
                
                5
                %
                
                
                25,576
                
                
                
                5
                %
                
                
                23,708
                
                
                
                5
                %
                
                
                24,264
                
                
                
                6
                %
                
                
                25,172
                
                
                
                6
                %Total
      consumer and other loans
                
                
                144,492
                
                
                
                25
                %
                
                
                129,602
                
                
                
                25
                %
                
                
                106,384
                
                
                
                22
                %
                
                
                90,634
                
                
                
                21
                %
                
                
                80,778
                
                
                
                20
                %Total
      loans
                
                
                575,228
                
                
                
                100
                %
                
                
                522,429
                
                
                
                100
                %
                
                
                486,168
                
                
                
                100
                %
                
                
                441,071
                
                
                
                100
                %
                
                
                396,984
                
                
                
                100
                %Less:Deferred
      loan fees/costs, net
                
                
                173
                
                
                
                
                
                
                
                224
                
                
                
                
                
                
                
                115
                
                
                
                
                
                
                
                141
                
                
                
                
                
                
                
                106Unearned
      discounts
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                
                
                
                
                3
                
                
                
                
                
                
                
                7Allowance
      for loan losses
                
                
                16,728
                
                
                
                
                
                
                
                5,963
                
                
                
                
                
                
                
                5,784
                
                
                
                
                
                
                
                5,400
                
                
                
                
                
                
                
                4,537Total
      Loans, net
                
                $
                558,327
                
                
                
                
                
                
                $
                516,242
                
                
                
                
                
                
                $
                480,269
                
                
                
                
                
                
                $
                435,527
                
                
                
                
                
                
                $
                392,334


6
 Table of Contents




The
following table sets forth the maturity of the Bank's loan portfolio as of
December 31, 2008.  The table shows loans that have adjustable rates
as due in the period during which they contractually mature.  The
table does not include prepayments or scheduled principal
amortization.





Loan
      Maturities
                
                Due in One Year or Less
                
                
                Due After One Through Five
      Years
                
                
                Due After Five Years
                
                
                Total(Dollars
      in thousands)One
      to four family
                
                $
                24,595
                
                
                $
                29,988
                
                
                $
                55,105
                
                
                $
                109,688Multi
      family
                
                
                14,912
                
                
                
                3,727
                
                
                
                13,118
                
                
                
                31,757Construction
                
                
                69,179
                
                
                
                14,564
                
                
                
                1,330
                
                
                
                85,073Commercial
      real estate
                
                
                80,258
                
                
                
                114,941
                
                
                
                9,019
                
                
                
                204,218Commercial
      loans
                
                
                80,812
                
                
                
                33,297
                
                
                
                4,359
                
                
                
                118,468Consumer
      loans
                
                
                2,543
                
                
                
                7,350
                
                
                
                16,131
                
                
                
                26,024Total
      loans (1)
                
                $
                272,299
                
                
                $
                203,867
                
                
                $
                99,062
                
                
                $
                575,228Less:Deferred
      loan fees/costs
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                173Allowance
      for loan losses
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16,728Loans
      receivable net
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                558,327


(1)
            Includes
      mortgage loans held for sale of
$1,934





The
following table sets forth the dollar amount, before deductions for unearned
discounts, deferred loan fees/costs and allowance for loan losses, as of
December 31, 2008 of all loans due after December 2009, which have
pre-determined interest rates and which have adjustable interest
rates.





Fixed
      and Adjustable Rate Loans by TypeFixed Rates
                
                
                Adjustable Rates
                
                
                Total
                
                
                % ARM(Dollars
      in Thousands)One-to
      four-family
                
                $
                21,921
                
                
                $
                65,151
                
                
                $
                87,072
                
                
                
                75
                %Multi-family
                
                
                10,686
                
                
                
                8,195
                
                
                
                18,881
                
                
                
                43
                %Construction
                
                
                3,178
                
                
                
                21,519
                
                
                
                24,697
                
                
                
                87
                %Commercial
      real estate
                
                
                47,697
                
                
                
                66,930
                
                
                
                114,627
                
                
                
                58
                %Commercial
      loans
                
                
                7,112
                
                
                
                28,884
                
                
                
                35,996
                
                
                
                80
                %Consumer
      loans
                
                
                3,927
                
                
                
                17,729
                
                
                
                21,656
                
                
                
                82
                %Total
      loans (1)
                
                $
                94,521
                
                
                $
                208,408
                
                
                $
                302,929
                
                
                
                69
                %


(1)
            Before
      deductions for unearned discounts, deferred loan fees/costs and allowances
      for loan losses.





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


7
 Table of Contents


As of
December 31, 2008, $109.7 million or 19% of the Bank’s total loan portfolio
consisted of one- to four-family residential loans, of which 75% were ARM
loans.  The Bank currently offers ARM and balloon loans that have
fixed interest rate periods of one to seven years. Generally, ARM loans provide
for limits on the maximum interest rate adjustment ("caps") that can be made at
the end of each applicable period and throughout the duration of the
loan.  ARM loans are originated for a term of up to 30 years on
owner-occupied properties and generally up to 25 years on non-owner occupied
properties.  Typically, interest rate adjustments are calculated based
on U.S. treasury securities adjusted to a constant maturity of one year (CMT),
plus a 2.50% to 2.75% margin.  Interest rates charged on fixed-rate
loans are competitively priced based on market conditions and the cost of funds
existing at the time the loan is committed.  The Bank's fixed-rate
mortgage loans are made for terms of 15 to 30 years which are currently being
sold on the secondary market.





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





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





Multi-Family Mortgage
Loans.  The Bank originates multi-family mortgage loans in its
primary lending area.  As of December 31, 2008, $31.8 million or 6% of
the Bank's total loan portfolio consisted of multi-family residential real
estate loans.  With regard to multi-family mortgage loans, the Bank
generally requires personal guarantees of the principals as well as a security
interest in the real estate.  Multi-family mortgage loans are
generally originated in amounts of up to 80% of the appraised value of the
property.  A portion of the Bank’s multi-family mortgage loans have
been originated with adjustable rates of interest which are quoted at a spread
to the FHLB advance rate for the initial fixed rate period with subsequent
adjustments based on the Wall Street prime rate.  The
loan-to-one-borrower limitation, $10.0 million as of December 31, 2008, is the
maximum the Bank will lend on a multi-family residential real estate
loan.





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





Construction Loans. As of
December 31, 2008, construction loans totaled $85.1 million or 15% of the Bank's
total loan portfolio.  Construction loans originated by the Bank are
generally secured by permanent mortgage loans for the construction of
owner-occupied residential real estate or to finance speculative construction
secured by residential real estate or owner-operated commercial real estate.
This portion of the Bank’s loan portfolio predominantly consists of speculative
loans, i.e.,loans
to builders who are speculating that they will be able to locate a purchaser for
the underlying property prior to or shortly after the time construction has been
completed.


8
 Table of Contents


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





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





Commercial Real Estate
Loans.  As of December
31, 2008, the Bank has commercial real estate loans totaling $204.2 million or
36% of the Bank's total loan portfolio.  Commercial real estate loans
are generally originated in amounts up to 80% of the appraised value of the
mortgaged property. The majority of the Bank’s commercial real estate loans have
been originated with adjustable rates of interest, the majority of which are
quoted at a spread to the FHLB advance rate for the initial fixed rate period
with subsequent adjustments at a spread to the Wall Street prime rate. The
Bank's commercial real estate loans are generally permanent loans secured by
improved property such as office buildings, retail stores, small shopping
centers, medical offices, motels, churches and other non-residential
buildings.





To
originate commercial real estate loans, the Bank generally requires a mortgage
and security interest in the subject real estate, personal guarantees of the
principals, a security interest in the related personal property, and a standby
assignment of rents and leases.  The Bank has established its
loan-to-one borrower limitation, which was $10.0 million as of December 31,
2008, as its maximum commercial real estate loan amount.  Because of
the small number of commercial real estate loans and the relationship of each
borrower to the Bank, each such loan has differing terms and conditions
applicable to the particular borrower.





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





As of
December 31, 2008, the Bank’s commercial real estate loan portfolio included
approximately $31.1 million, or 6% of the Bank’s total loan portfolio, in loans
to develop land into residential lots. The Bank utilizes its knowledge of the
local market conditions and appraisals to evaluate the development cost and
estimate projected lot prices and absorption rates to assess loans on
residential subdivisions.  The Bank typically loans up to 80% of the
appraised value over terms up to two years.  Development loans
generally involve a greater degree of risk than residential mortgage loans
because (1) the funds are advanced upon the security of the land which has a
materially lower value prior to completion of the infrastructure required of a
subdivision, (2) the cash flow available for debt repayment is a function of the
sale of the individual lots, and (3) the amount of interest required to service
the debt is a function of the time required to complete the development and sell
the lots.


9
 Table of Contents


Commercial Business
Loans. As of December 31, 2008, the Bank has commercial business
loans totaling $118.5 million or 21% of the Bank's total loan
portfolio.  Commercial business loans are generally secured by
business assets, such as accounts receivable, equipment and
inventory. Unlike residential mortgage loans, which generally are made on
the basis of the borrower's ability to make repayment from his or her employment
and other income and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. The Bank expects to continue to
expand its commercial business lending as opportunities present
themselves.





Consumer and Other
Loans.  The Bank also offers other loans, primarily consisting
of loans secured by certificates of deposit, consumer loans, home equity loans
and automobile loans.  As of December 31, 2008, the Bank has such
loans totaling $26 million or 5% of the Bank’s total loan
portfolio.  The Bank expects to continue to expand its consumer
lending as opportunities present themselves.





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





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








Delinquencies,
Non-Performing and Problem Assets.





Delinquent
Loans.  As of December 31, 2008, the Bank has twenty-nine loans
90 days or more past due with a principal balance of $7,027,644 and seventy-six
loans between 30 and 89 days past due with an aggregate principal balance of
$11,980,379.  The Bank generally does not accrue interest on loans
past due more than 90 days.





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


10
 Table of Contents




Delinquency
      Summary
                
                As
      ofDecember 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in Thousands)Loans
      accounted for on a non-accrual basis or contractually past due 90 days or
      moreMortgage
      Loans:One-
      to four-family
                
                $
                2,907
                
                
                $
                929
                
                
                $
                883
                
                
                $
                452
                
                
                $
                770Multi-family
                
                
                6,552
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                6,010
                
                
                
                459
                
                
                
                1,780
                
                
                
                -
                
                
                
                -Commercial
      real estate
                
                
                517
                
                
                
                5,850
                
                
                
                -
                
                
                
                131
                
                
                
                15815,986
                
                
                
                7,238
                
                
                
                2,663
                
                
                
                583
                
                
                
                928Non-mortgage
      loans:Commercial
      loans
                
                
                4,629
                
                
                
                -
                
                
                
                44
                
                
                
                -
                
                
                
                -Consumer
      and other loans
                
                
                79
                
                
                
                16
                
                
                
                41
                
                
                
                138
                
                
                
                794,708
                
                
                
                16
                
                
                
                85
                
                
                
                138
                
                
                
                79Total
      non-accrual loans
                
                
                20,694
                
                
                
                7,254
                
                
                
                2,748
                
                
                
                721
                
                
                
                1,007Accruing
      loans which are contractually past maturity or past due 90 days or
      more:Mortgage
      Loans:One-
      to four-family
                
                
                -
                
                
                
                103
                
                
                
                -
                
                
                
                -
                
                
                
                -Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                443
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
      real estate
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -443
                
                
                
                103
                
                
                
                -
                
                
                
                -
                
                
                
                -Non-mortgage
      loans:Commercial
      loans
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Consumer
      and other loans
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                --
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      past maturity or past due accruing loans
                
                
                443
                
                
                
                103
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      accounted for on a non-accrual basis or contractually past maturity or 90
      days or more past due
                
                $
                21,137
                
                
                $
                7,357
                
                
                $
                2,748
                
                
                $
                721
                
                
                $
                1,007Total
      accounted for on a non-accrual basis or contractually past maturity or 90
      days or more past due as a percentage of net loans
                
                
                3.80
                %
                
                
                1.43
                %
                
                
                0.58
                %
                
                
                0.17
                %
                
                
                0.26
                %Total
      accounted for on a non-accrual basis or contractually past maturity or 90
      days or more past due as a percentage of total assets
                
                
                3.13
                %
                
                
                1.30
                %
                
                
                0.52
                %
                
                
                0.15
                %
                
                
                0.23
                %





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


11
 Table of Contents


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





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




Non-Performing
      Assets
                                                                      
                                                                      As
      ofDecember 31,2008
                                                                      
                                                                      
                                                                      2007
                                                                      
                                                                      
                                                                      2006
                                                                      
                                                                      
                                                                      2005
                                                                      
                                                                      
                                                                      2004Non-accrual
      loans:
                                                                      
                                                                      (Dollars
      in Thousands)Mortgage
      loans:One-
      to four-family
                                                                      
                                                                      $
                                                                      2,907
                                                                      
                                                                      
                                                                      $
                                                                      929
                                                                      
                                                                      
                                                                      $
                                                                      883
                                                                      
                                                                      
                                                                      $
                                                                      452
                                                                      
                                                                      
                                                                      $
                                                                      770Multi-family
                                                                      
                                                                      
                                                                      6,552
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Construction
                                                                      
                                                                      
                                                                      6,010
                                                                      
                                                                      
                                                                      
                                                                      459
                                                                      
                                                                      
                                                                      
                                                                      1,780
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Commercial
      real estate
                                                                      
                                                                      
                                                                      517
                                                                      
                                                                      
                                                                      
                                                                      5,850
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      131
                                                                      
                                                                      
                                                                      
                                                                      15815,986
                                                                      
                                                                      
                                                                      
                                                                      7,238
                                                                      
                                                                      
                                                                      
                                                                      2,663
                                                                      
                                                                      
                                                                      
                                                                      583
                                                                      
                                                                      
                                                                      
                                                                      928Non-mortgage
      loans:Commercial
      loans
                                                                      
                                                                      
                                                                      4,629
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      44
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Consumer
      and other loans
                                                                      
                                                                      
                                                                      79
                                                                      
                                                                      
                                                                      
                                                                      16
                                                                      
                                                                      
                                                                      
                                                                      41
                                                                      
                                                                      
                                                                      
                                                                      138
                                                                      
                                                                      
                                                                      
                                                                      794,708
                                                                      
                                                                      
                                                                      
                                                                      16
                                                                      
                                                                      
                                                                      
                                                                      85
                                                                      
                                                                      
                                                                      
                                                                      138
                                                                      
                                                                      
                                                                      
                                                                      79Total
      non-accrual loans
                                                                      
                                                                      
                                                                      20,694
                                                                      
                                                                      
                                                                      
                                                                      7,254
                                                                      
                                                                      
                                                                      
                                                                      2,748
                                                                      
                                                                      
                                                                      
                                                                      721
                                                                      
                                                                      
                                                                      
                                                                      1,007Real
      estate and other assets acquired in settlement of loans
                                                                      
                                                                      
                                                                      5,655
                                                                      
                                                                      
                                                                      
                                                                      727
                                                                      
                                                                      
                                                                      
                                                                      173
                                                                      
                                                                      
                                                                      
                                                                      27
                                                                      
                                                                      
                                                                      
                                                                      78Total
      non-performing assets
                                                                      
                                                                      $
                                                                      26,349
                                                                      
                                                                      
                                                                      $
                                                                      7,981
                                                                      
                                                                      
                                                                      $
                                                                      2,921
                                                                      
                                                                      
                                                                      $
                                                                      748
                                                                      
                                                                      
                                                                      $
                                                                      1,085Total
      non-accrual loans as a percentage of net loans
                                                                      
                                                                      
                                                                      3.71
                                                                      %
                                                                      
                                                                      
                                                                      1.41
                                                                      %
                                                                      
                                                                      
                                                                      0.57
                                                                      %
                                                                      
                                                                      
                                                                      0.17
                                                                      %
                                                                      
                                                                      
                                                                      0.26
                                                                      %Total
      non-performing assets as a percentage of total assets
                                                                      
                                                                      
                                                                      3.90
                                                                      %
                                                                      
                                                                      
                                                                      1.41
                                                                      %
                                                                      
                                                                      
                                                                      0.56
                                                                      %
                                                                      
                                                                      
                                                                      0.16
                                                                      %
                                                                      
                                                                      
                                                                      0.25
                                                                      %Impact
      on interest income for the period:Interest
      income that would have been recorded on non-accruing loans
                                                                      
                                                                      $
                                                                      791
                                                                      
                                                                      
                                                                      $
                                                                      716
                                                                      
                                                                      
                                                                      $
                                                                      69
                                                                      
                                                                      
                                                                      $
                                                                      8
                                                                      
                                                                      
                                                                      $
                                                                      23


12
 Table of Contents




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





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





The
following table shows the aggregate amounts of the Bank's classified assets as
of December 31, 2008.





Classification
      of Assets
                            
                            Special Mention
                            
                            
                            Substandard
                            
                            
                            Doubtful
                            
                            
                            Loss
                            
                            
                            TotalNumber
                            
                            
                            Amount
                            
                            
                            Number
                            
                            
                            Amount
                            
                            
                            Number
                            
                            
                            Amount
                            
                            
                            Number
                            
                            
                            Amount
                            
                            
                            Number
                            
                            
                            Amount(Dollars
      in Thousands)Loans:One-
      to four-family
                            
                            
                            20
                            
                            
                            $
                            2,643
                            
                            
                            
                            60
                            
                            
                            $
                            6,672
                            
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            80
                            
                            
                            $
                            9,315Multi-family
                            
                            
                            1
                            
                            
                            
                            1,221
                            
                            
                            
                            2
                            
                            
                            
                            6,599
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3
                            
                            
                            
                            7,820Construction
                            
                            
                            14
                            
                            
                            
                            3,691
                            
                            
                            
                            20
                            
                            
                            
                            9,576
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            34
                            
                            
                            
                            13,267Commercial
      real estate
                            
                            
                            10
                            
                            
                            
                            4,306
                            
                            
                            
                            4
                            
                            
                            
                            1,840
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            14
                            
                            
                            
                            6,146Commercial
                            
                            
                            6
                            
                            
                            
                            4,416
                            
                            
                            
                            29
                            
                            
                            
                            12,385
                            
                            
                            
                            5
                            
                            
                            
                            10,533
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            40
                            
                            
                            
                            27,334Land
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Other
      loans
                            
                            
                            1
                            
                            
                            
                            2
                            
                            
                            
                            8
                            
                            
                            
                            82
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            9
                            
                            
                            
                            84Total
      loans
                            
                            
                            52
                            
                            
                            
                            16,279
                            
                            
                            
                            123
                            
                            
                            
                            37,154
                            
                            
                            
                            5
                            
                            
                            
                            10,533
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            180
                            
                            
                            
                            63,966Foreclosed
      assets held-for-sale:One-
      to four-family
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4
                            
                            
                            
                            1,124
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4
                            
                            
                            
                            1,124Land
      and other assets
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            8
                            
                            
                            
                            4,531
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            8
                            
                            
                            
                            4,531Total
      foreclosed assets
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            12
                            
                            
                            
                            5,655
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            12
                            
                            
                            
                            5,655Total
                            
                            
                            52
                            
                            
                            $
                            16,279
                            
                            
                            
                            135
                            
                            
                            $
                            42,809
                            
                            
                            
                            5
                            
                            
                            $
                            10,533
                            
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            192
                            
                            
                            $
                            69,621


13
 Table of Contents




Allowance
for Loan Losses





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





As of
December 31, 2008 the Bank's total allowance for loan losses was $16.7 million
or 2.92% of gross loans outstanding (excluding mortgage loans held for sale).
This allowance reflects not only management's determination to maintain an
allowance for loan losses consistent with regulatory expectations for
non-performing or problem assets, but also reflects the regional economy and the
Bank's policy of evaluating the risks inherent in its loan
portfolio.





For
fiscal year 2008, the Bank experienced loan charge offs in excess of recoveries,
and based on the loan portfolio review discussed above, elected to add to the
allowance through a provision for loan loss, as shown in the table
below.  Management anticipates the need to continue adding to the
allowance through charges to provision for loan losses as growth in the loan
portfolio or other circumstances warrant.


14
 Table of Contents


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





Allowance
      for Loan Losses
                
                Year
      endedDecember 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in Thousands)Beginning
      balance
                
                $
                5,963
                
                
                $
                5,784
                
                
                $
                5,400
                
                
                $
                4,537
                
                
                $
                3,886Gross
      loan charge offsMortgage
      Loans:One-
      to four-family
                
                
                (631
                )
                
                
                (56
                )
                
                
                (286
                )
                
                
                (22
                )
                
                
                (188
                )Multi-family
                
                
                (401
                )
                
                
                (1
                )
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                (2,147
                )
                
                
                (317
                )
                
                
                (29
                )
                
                
                -
                
                
                
                -Commercial
      real estate
                
                
                (33
                )
                
                
                (49
                )
                
                
                -
                
                
                
                -
                
                
                
                -(3,212
                )
                
                
                (423
                )
                
                
                (315
                )
                
                
                (22
                )
                
                
                (188
                )Non-mortgage
      loans:Commercial
      loans
                
                
                (677
                )
                
                
                -
                
                
                
                (206
                )
                
                
                (12
                )
                
                
                -Consumer
      and other loans
                
                
                (225
                )
                
                
                (309
                )
                
                
                (126
                )
                
                
                (119
                )
                
                
                (43
                )(225
                )
                
                
                (309
                )
                
                
                (126
                )
                
                
                (119
                )
                
                
                (43
                )Total
      charge offs
                
                
                (4,114
                )
                
                
                (732
                )
                
                
                (647
                )
                
                
                (153
                )
                
                
                (231
                )RecoveriesMortgage
      Loans:One-
      to four-family
                
                
                21
                
                
                
                10
                
                
                
                109
                
                
                
                61
                
                
                
                9Multi-family
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Construction
                
                
                63
                
                
                
                -
                
                
                
                29
                
                
                
                -
                
                
                
                -Commercial
      real estate
                
                
                -
                
                
                
                11
                
                
                
                -
                
                
                
                -
                
                
                
                -84
                
                
                
                21
                
                
                
                138
                
                
                
                61
                
                
                
                9Non-mortgage
      loans:Commercial
      loans
                
                
                13
                
                
                
                8
                
                
                
                103
                
                
                
                -
                
                
                
                -Consumer
      and other loans
                
                
                38
                
                
                
                42
                
                
                
                40
                
                
                
                10
                
                
                
                951
                
                
                
                50
                
                
                
                143
                
                
                
                10
                
                
                
                9Total
      recoveries
                
                
                135
                
                
                
                71
                
                
                
                281
                
                
                
                71
                
                
                
                18Net
      loan charge-offs
                
                
                (3,979
                )
                
                
                (661
                )
                
                
                (366
                )
                
                
                (82
                )
                
                
                (213
                )Provision
      charged to expense
                
                
                14,744
                
                
                
                840
                
                
                
                750
                
                
                
                945
                
                
                
                864Ending
      balance
                
                $
                16,728
                
                
                $
                5,963
                
                
                $
                5,784
                
                
                $
                5,400
                
                
                $
                4,537Net
      charge-offs as a percentage of average loans, net
                
                
                0.70
                %
                
                
                0.14
                %
                
                
                0.08
                %
                
                
                0.02
                %
                
                
                0.07
                %Allowance
      for loan losses as a percentage of average loans, net
                
                
                2.92
                %
                
                
                1.24
                %
                
                
                1.28
                %
                
                
                1.29
                %
                
                
                1.39
                %Allowance
      for loan losses as a percentage of total non-performing
    loans
                
                
                81
                %
                
                
                82
                %
                
                
                210
                %
                
                
                749
                %
                
                
                451
                %


15
 Table of Contents


Allocation
of Allowance for Loan Losses





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





As
      ofDecember 31,2008
                                                                                        
                                                                                        
                                                                                        2007
                                                                                        
                                                                                        
                                                                                        2006
                                                                                        
                                                                                        
                                                                                        2005
                                                                                        
                                                                                        
                                                                                        2004Amount
                                                                                        
                                                                                        
                                                                                        %
                                                                                        
                                                                                        
                                                                                        Amount
                                                                                        
                                                                                        
                                                                                        %
                                                                                        
                                                                                        
                                                                                        Amount
                                                                                        
                                                                                        
                                                                                        %
                                                                                        
                                                                                        
                                                                                        Amount
                                                                                        
                                                                                        
                                                                                        %
                                                                                        
                                                                                        
                                                                                        Amount
                                                                                        
                                                                                        
                                                                                        %(Dollars
      in thousands)Mortgage
      Loans
                                                                                        
                                                                                        $
                                                                                        12,526
                                                                                        
                                                                                        
                                                                                        
                                                                                        75
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        4,484
                                                                                        
                                                                                        
                                                                                        
                                                                                        75
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        4,512
                                                                                        
                                                                                        
                                                                                        
                                                                                        78
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        4,266
                                                                                        
                                                                                        
                                                                                        
                                                                                        79
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        3,630
                                                                                        
                                                                                        
                                                                                        
                                                                                        80
                                                                                        %Non-Mortgage
      Loans
                                                                                        
                                                                                        
                                                                                        4,202
                                                                                        
                                                                                        
                                                                                        
                                                                                        25
                                                                                        %
                                                                                        
                                                                                        
                                                                                        1,479
                                                                                        
                                                                                        
                                                                                        
                                                                                        25
                                                                                        %
                                                                                        
                                                                                        
                                                                                        1,272
                                                                                        
                                                                                        
                                                                                        
                                                                                        22
                                                                                        %
                                                                                        
                                                                                        
                                                                                        1,134
                                                                                        
                                                                                        
                                                                                        
                                                                                        21
                                                                                        %
                                                                                        
                                                                                        
                                                                                        907
                                                                                        
                                                                                        
                                                                                        
                                                                                        20
                                                                                        %Total
                                                                                        
                                                                                        $
                                                                                        16,728
                                                                                        
                                                                                        
                                                                                        
                                                                                        100
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        5,963
                                                                                        
                                                                                        
                                                                                        
                                                                                        100
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        5,784
                                                                                        
                                                                                        
                                                                                        
                                                                                        100
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        5,400
                                                                                        
                                                                                        
                                                                                        
                                                                                        100
                                                                                        %
                                                                                        
                                                                                        $
                                                                                        4,537
                                                                                        
                                                                                        
                                                                                        
                                                                                        100
                                                                                        %





Investment
Activities





The
investment policy of the Company, which is established by the Company’s Board of
Directors and reviewed by the Asset/Liability Committee of the Company’s Board
of Directors, is designed primarily to provide and maintain liquidity, to
generate a favorable return on investments without incurring undue interest rate
and credit risk, and to complement the Bank's lending activities.  The
policy currently provides for held-to-maturity and available-for-sale investment
security portfolios.  The Company does not currently engage in trading
investment securities and does not anticipate doing so in the
future.  As of December 31, 2008, the Company has investment
securities with a carrying value of $66.1 million and an estimated fair value of
$66.1 million.  See Note 1 of the Notes to Consolidated Financial
Statements for description of the accounting policy for
investments.  Based on the carrying value of these securities, $65.5
million, or 99.2%, of the Company’s investment securities portfolio are
available-for-sale.





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





Composition
of Investment Securities Portfolio





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


16
 Table of Contents




Amortized Cost
                    
                    
                    Gross Unrealized Gains
                    
                    
                    Gross Unrealized (Losses)
                    
                    
                    Approximate Fair ValueAs
      of December 31, 2008AVAILABLE-FOR-SALE
      SECURITIES:Equity
      Securities:FHLMC
      stock
                    
                    $
                    26,057
                    
                    
                    $
                    -
                    
                    
                    $
                    (6,639
                    )
                    
                    $
                    19,418Other
                    
                    
                    572,087
                    
                    
                    
                    4,157
                    
                    
                    
                    (34,611
                    )
                    
                    
                    541,633Debt
      Securities:U.
      S. government agencies
                    
                    
                    2,450,000
                    
                    
                    
                    24,130
                    
                    
                    
                    -
                    
                    
                    
                    2,474,130Mortgage-backed
      securities
                    
                    
                    61,304,310
                    
                    
                    
                    1,173,274
                    
                    
                    
                    (7,426
                    )
                    
                    
                    62,470,158HELD-TO-MATURITY
      SECURITIES:U.
      S. government agencies
                    
                    
                    135,538
                    
                    
                    
                    -
                    
                    
                    
                    (3,236
                    )
                    
                    
                    132,302Mortgage-backed
      securities
                    
                    
                    420,927
                    
                    
                    
                    24,565
                    
                    
                    
                    (1,395
                    )
                    
                    
                    444,097$
                    64,908,919
                    
                    
                    $
                    1,226,126
                    
                    
                    $
                    (53,307
                    )
                    
                    $
                    66,081,738Amortized Cost
                    
                    
                    Gross Unrealized Gains
                    
                    
                    Gross Unrealized (Losses)
                    
                    
                    Approximate Fair ValueAs
      of December 31, 2007AVAILABLE-FOR-SALE
      SECURITIES:Equity
      Securities:FHLMC
      stock
                    
                    $
                    26,057
                    
                    
                    $
                    880,205
                    
                    
                    $
                    -
                    
                    
                    $
                    906,262Other
                    
                    
                    718,190
                    
                    
                    
                    -
                    
                    
                    
                    (59,390
                    )
                    
                    
                    658,800Debt
      Securities:U.
      S. government agencies
                    
                    
                    1,800,034
                    
                    
                    
                    4,049
                    
                    
                    
                    -
                    
                    
                    
                    1,804,083Mortgage-backed
      securities
                    
                    
                    11,386,025
                    
                    
                    
                    84,390
                    
                    
                    
                    (109,622
                    )
                    
                    
                    11,360,793HELD-TO-MATURITY
      SECURITIES:U.
      S. government agencies
                    
                    
                    148,529
                    
                    
                    
                    -
                    
                    
                    
                    (2,000
                    )
                    
                    
                    146,529Mortgage-backed
      securities
                    
                    
                    506,246
                    
                    
                    
                    32,397
                    
                    
                    
                    -
                    
                    
                    
                    538,643$
                    14,585,081
                    
                    
                    $
                    1,001,041
                    
                    
                    $
                    (171,012
                    )
                    
                    $
                    15,415,110


17
 Table of Contents




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





The
following table sets forth certain information regarding the weighted average
yields and maturities of the Bank's investment securities portfolio as of
December 31, 2008:





Investment Portfolio Maturities and Average
      Weighted Yields
                
                Amortized Cost
                
                
                Weighted Average Yield
                
                
                Approximate Fair ValueDue
      after ten years
                
                $
                2,585,538
                
                
                
                5.10
                %
                
                $
                2,606,432Equity
      securities not due on a single maturity date
                
                
                598,144
                
                
                
                0.00
                %
                
                
                561,051Mortgage-backed
      securities not due on a single maturity date
                
                
                61,725,237
                
                
                
                5.26
                %
                
                
                62,914,255$
                64,908,919
                
                
                
                5.30
                %
                
                $
                66,081,738


18
 Table of Contents


Sources
of Funds





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





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





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





Deposit
Account Types





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





As of December 31,
                                                    
                                                    
                                                    As of December 31,
                                                    
                                                    
                                                    As of December 31,2008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    2006Average
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    Percent
                                                    
                                                    
                                                    Average
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    Percent
                                                    
                                                    
                                                    Average
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    PercentInterest
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    of
      Total
                                                    
                                                    
                                                    Interest
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    of
      Total
                                                    
                                                    
                                                    Interest
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    of
      TotalRate
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Deposits
                                                    
                                                    
                                                    Rate
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Deposits
                                                    
                                                    
                                                    Rate
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    DepositsNOW
                                                    
                                                    
                                                    1.13
                                                    %
                                                    
                                                    $
                                                    42,949
                                                    
                                                    
                                                    
                                                    9
                                                    %
                                                    
                                                    
                                                    1.35
                                                    %
                                                    
                                                    $
                                                    36,512
                                                    
                                                    
                                                    
                                                    9
                                                    %
                                                    
                                                    
                                                    1.18
                                                    %
                                                    
                                                    $
                                                    35,469
                                                    
                                                    
                                                    
                                                    10
                                                    %Savings
                                                    
                                                    
                                                    0.94
                                                    %
                                                    
                                                    
                                                    12,253
                                                    
                                                    
                                                    
                                                    3
                                                    %
                                                    
                                                    
                                                    2.11
                                                    %
                                                    
                                                    
                                                    12,421
                                                    
                                                    
                                                    
                                                    3
                                                    %
                                                    
                                                    
                                                    2.67
                                                    %
                                                    
                                                    
                                                    14,316
                                                    
                                                    
                                                    
                                                    4
                                                    %Money
      Market
                                                    
                                                    
                                                    1.85
                                                    %
                                                    
                                                    
                                                    52,083
                                                    
                                                    
                                                    
                                                    12
                                                    %
                                                    
                                                    
                                                    3.48
                                                    %
                                                    
                                                    
                                                    64,319
                                                    
                                                    
                                                    
                                                    15
                                                    %
                                                    
                                                    
                                                    3.38
                                                    %
                                                    
                                                    
                                                    52,314
                                                    
                                                    
                                                    
                                                    15
                                                    %Non-interest
      bearing demand
                                                    
                                                    
                                                    0.00
                                                    %
                                                    
                                                    
                                                    31,220
                                                    
                                                    
                                                    
                                                    7
                                                    %
                                                    
                                                    
                                                    0.00
                                                    %
                                                    
                                                    
                                                    28,520
                                                    
                                                    
                                                    
                                                    7
                                                    %
                                                    
                                                    
                                                    0.00
                                                    %
                                                    
                                                    
                                                    26,894
                                                    
                                                    
                                                    
                                                    8
                                                    %Total
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    138,505
                                                    
                                                    
                                                    
                                                    31
                                                    %
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    141,772
                                                    
                                                    
                                                    
                                                    34
                                                    %
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    128,993
                                                    
                                                    
                                                    
                                                    37
                                                    %Certificates
      of Deposit: (fixed-rate, fixed-term)1-11
      months
                                                    
                                                    
                                                    3.69
                                                    %
                                                    
                                                    
                                                    216,141
                                                    
                                                    
                                                    
                                                    48
                                                    %
                                                    
                                                    
                                                    5.09
                                                    %
                                                    
                                                    
                                                    190,772
                                                    
                                                    
                                                    
                                                    46
                                                    %
                                                    
                                                    
                                                    4.81
                                                    %
                                                    
                                                    
                                                    167,852
                                                    
                                                    
                                                    
                                                    48
                                                    %12-23
      months
                                                    
                                                    
                                                    4.06
                                                    %
                                                    
                                                    
                                                    10,260
                                                    
                                                    
                                                    
                                                    2
                                                    %
                                                    
                                                    
                                                    5.12
                                                    %
                                                    
                                                    
                                                    57,434
                                                    
                                                    
                                                    
                                                    14
                                                    %
                                                    
                                                    
                                                    5.02
                                                    %
                                                    
                                                    
                                                    35,424
                                                    
                                                    
                                                    
                                                    10
                                                    %24-35
      months
                                                    
                                                    
                                                    4.14
                                                    %
                                                    
                                                    
                                                    58,249
                                                    
                                                    
                                                    
                                                    13
                                                    %
                                                    
                                                    
                                                    5.04
                                                    %
                                                    
                                                    
                                                    12,593
                                                    
                                                    
                                                    
                                                    3
                                                    %
                                                    
                                                    
                                                    4.93
                                                    %
                                                    
                                                    
                                                    11,930
                                                    
                                                    
                                                    
                                                    3
                                                    %36-47
      months
                                                    
                                                    
                                                    4.76
                                                    %
                                                    
                                                    
                                                    10,042
                                                    
                                                    
                                                    
                                                    2
                                                    %
                                                    
                                                    
                                                    5.14
                                                    %
                                                    
                                                    
                                                    5,752
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    4.82
                                                    %
                                                    
                                                    
                                                    3,724
                                                    
                                                    
                                                    
                                                    1
                                                    %48-59
      months
                                                    
                                                    
                                                    5.01
                                                    %
                                                    
                                                    
                                                    8,897
                                                    
                                                    
                                                    
                                                    2
                                                    %
                                                    
                                                    
                                                    5.33
                                                    %
                                                    
                                                    
                                                    6,386
                                                    
                                                    
                                                    
                                                    2
                                                    %
                                                    
                                                    
                                                    5.24
                                                    %
                                                    
                                                    
                                                    2,847
                                                    
                                                    
                                                    
                                                    1
                                                    %60-71
      months
                                                    
                                                    
                                                    5.00
                                                    %
                                                    
                                                    
                                                    3,771
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    5.28
                                                    %
                                                    
                                                    
                                                    3,456
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    5.41
                                                    %
                                                    
                                                    
                                                    1,171
                                                    
                                                    
                                                    
                                                    0
                                                    %72-95
      months
                                                    
                                                    
                                                    3.94
                                                    %
                                                    
                                                    
                                                    1,214
                                                    
                                                    
                                                    
                                                    1
                                                    %
                                                    
                                                    
                                                    4.55
                                                    %
                                                    
                                                    
                                                    26
                                                    
                                                    
                                                    
                                                    0
                                                    %
                                                    
                                                    
                                                    5.44
                                                    %
                                                    
                                                    
                                                    289
                                                    
                                                    
                                                    
                                                    0
                                                    %Total
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    308,574
                                                    
                                                    
                                                    
                                                    69
                                                    %
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    276,419
                                                    
                                                    
                                                    
                                                    66
                                                    %
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    223,237
                                                    
                                                    
                                                    
                                                    63
                                                    %Total
      Deposits
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    447,079
                                                    
                                                    
                                                    
                                                    100
                                                    %
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    418,191
                                                    
                                                    
                                                    
                                                    100
                                                    %
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    $
                                                    352,230
                                                    
                                                    
                                                    
                                                    100
                                                    %





19
 Table of Contents


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





The
following table indicates the approximate amount of the Bank's certificate of
deposit accounts of $100,000 or more by time remaining until maturity as of
December 31, 2008.





(Dollars
      in thousands)As of December 31, 2008Three
      months or less
                  
                  $
                  34,346Over
      three through six months
                  
                  
                  11,224Over
      six through twelve months
                  
                  
                  20,801Over
      twelve months
                  
                  
                  31,764Total
                  
                  $
                  98,135





Borrowings





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





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





As
      of December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in Thousands)Remaining
      maturity:Less
      than one year
                  
                  $
                  21,386
                  
                  
                  $
                  69,650
                  
                  
                  $
                  85,414One
      to two years
                  
                  
                  18,000
                  
                  
                  
                  386
                  
                  
                  
                  13,650Two
      to three years
                  
                  
                  25,000
                  
                  
                  
                  3,000
                  
                  
                  
                  386Three
      to four years
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,000Four
      to five years
                  
                  
                  15,700
                  
                  
                  
                  -
                  
                  
                  
                  -Over
      five years
                  
                  
                  52,350
                  
                  
                  
                  3,050
                  
                  
                  
                  5,550Total
                  
                  $
                  132,436
                  
                  
                  $
                  76,086
                  
                  
                  $
                  108,000Weighted
      average rate at end of period
                  
                  
                  2.49
                  %
                  
                  
                  4.37
                  %
                  
                  
                  5.35
                  %For
      the period:Average
      outstanding balance
                  
                  $
                  123,611
                  
                  
                  $
                  65,575
                  
                  
                  $
                  110,810Weighted
      average interest rate
                  
                  
                  2.60
                  %
                  
                  
                  5.29
                  %
                  
                  
                  5.16
                  %Maximum
      outstanding as of any month end
                  
                  $
                  148,436
                  
                  
                  $
                  92,500
                  
                  
                  $
                  124,000


20
 Table of Contents




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





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





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





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





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





As of December 31,2008
                            
                            
                            2007
                            
                            
                            2006(Dollars
      in Thousands)Subordinated
      debentures
                            
                            $
                            15,465
                            
                            
                            $
                            15,465
                            
                            
                            $
                            15,465Weighted
      average interest rate of subordinated debentures
                            
                            
                            6.62
                            %
                            
                            
                            6.62
                            %
                            
                            
                            6.62
                            %


21
 Table of Contents


Federal Reserve Bank
Borrowings





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





Securities Sold Under
Agreements to Repurchase





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





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





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





Notes
payable





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





Subsidiary
Activity and Segment Information





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





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





The
Company’s banking operation conducted through its principal subsidiary, the
Bank, is the Company’s only reportable segment.  Other information
about the Company’s business segment is contained in the section captioned
“Segment Information” in Note 1 to the consolidated financial statements in the
2008 Annual Report. This information is incorporated herein by
reference.


22
 Table of Contents


Critical
Accounting Policies




“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
contained in Item 7 of this report is based upon the Company’s consolidated
financial statements and the notes thereto, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. On an on-going basis, management evaluates
its estimates and judgments.




Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources.  There can be no assurance that actual results will not
differ from those estimates.  If actual results are different than
management’s judgments 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 and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans.  In connection with the determination of the allowance for loan
losses and the valuation of foreclosed assets held for sale, management obtains
independent appraisals for significant properties.





The
Company has identified the accounting policies for the allowance for loan losses
and related significant estimates and judgments as critical to its business
operations and the understanding of its results of operations.  For a
detailed discussion on the application of these significant estimates and
judgments and our accounting policies, also see Note 1 to the Consolidated
Financial Statements in the 2008 Annual Report.





Return
on Equity and Assets





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





Year
      ended
                
                
                Year
      ended
                
                
                Year
      endedDecember 31,
                
                
                December 31,
                
                
                December 31,2008
                
                
                2007
                
                
                2006Dividend
      Payout Ratio
                
                
                -17
                %
                
                
                32
                %
                
                
                30
                %Return
      on Average Assets
                
                
                -0.83
                %
                
                
                1.17
                %
                
                
                1.33
                %Return
      on Average Equity
                
                
                -13.13
                %
                
                
                13.40
                %
                
                
                14.66
                %Stockholders'
      Equity to Assets
                
                
                5.52
                %
                
                
                7.54
                %
                
                
                8.55
                %EPS
      Diluted
                
                $
                (2.06
                )
                
                $
                2.19
                
                
                $
                2.25Dividends
                
                $
                0.36
                
                
                $
                0.70
                
                
                $
                0.67


23
 Table of Contents




Employees





As of
March 25, 2009, the Bank has 136 full-time employees and 38 part-time
employees.  As of December 31, 2008, the Company had no salaried
employees.  None of the Bank's employees are represented by a
collective bargaining group.  The Bank believes that its relationship
with its employees is good.





Competition





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





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





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





Troubled
Asset Relief Program





In
response to the financial crisis affecting the banking system and financial
markets, the Emergency Economic Stabilization Act (“EESA”) was signed into law
on October 3, 2008 and authorized the U.S. Department of the Treasury (the
"Treasury") to purchase from financial institutions and their holding companies
up to $700 billion in mortgage loans, mortgage-related securities and certain
other financial instruments under the Troubled Asset Relief Program
(”TARP”).  As part of TARP, the Treasury established the Capital
Purchase Program (“CPP”) to provide up to $250 billion of funding to eligible
financial institutions through the purchase of debt or equity securities from
participating institutions.





On
January 30, 2009, the Company issued and sold, and the Treasury purchased, (1)
17,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock
Series A, and (2) a ten-year warrant to purchase up to 459,459 shares of the
Company's common stock at an exercise price of $5.55 per share, for an aggregate
purchase price of $17.0 million.  The Series A preferred shares pay a
dividend at a rate of 5% per annum for the first five years, and at a rate of 9%
per annum thereafter.





The
Series A preferred shares will qualify as Tier 1 capital.  The Series
A preferred shares will be callable at par after three years.  Prior
to the end of three years, the Series A preferred shares may be redeemed with
the proceeds from a qualifying equity offering of any Tier 1 perpetual preferred
or common stock.


24
 Table of Contents


Regulation





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





Recent Regulatory
Developments





As
mentioned above, EESA was enacted to restore confidence and stability to the
U.S. banking system and to encourage financial institutions to increase their
lending to customers and to each other.





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





Secondly,
TARP was enacted as part of EESA.  See the discussion of the TARP
program under the section captioned “Troubled Asset Relief
Program”.   In connection with EESA, there have been numerous
actions by the Federal Reserve Board, Congress, the Treasury, the FDIC, the
Securities and Exchange Commission and others to further the economic and
banking industry stabilization efforts under EESA. It remains unclear at this
time what further legislative and regulatory measures will be implemented under
EESA affecting the Company.





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





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





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





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


25
 Table of Contents


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





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





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





On
October 14, 2008, the Temporary Liquidity Guarantee Program was enacted by the
FDIC.  The program provides for the guarantee of newly-issued senior
unsecured debt of financial institutions and bank holding companies and provides
full deposit insurance coverage for all non-interest bearing deposit
accounts.  The additional insurance coverage is automatically
available with no additional cost initially, but will be assessed a cost of 10
basis points on each dollar of non-interest bearing account subsequently, unless
the Company elects to opt-out of the program by the established deadline of
December 5, 2008.  The Company has continued its participation in this
program after the initial period.





On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the
“ARRA”) was signed into law.  The ARRA imposes certain new executive
compensation and corporate expenditure limits on all current and future CPP
recipients that are in addition to those previously announced by the Treasury,
until the institution has repaid the Treasury, which is now permitted under ARRA
without penalty and without the need to raise new capital, subject to the
Treasury’s consultation with the recipient’s appropriate regulatory
agency.  As a result of our participation in the CPP, the restrictions
and standards established in the ARRA shall be applicable to the
Company.  The ARRA restrictions shall not apply to any TARP recipient
during such time when the federal government (i) only holds any warrants to
purchase common stock of such recipient or (ii) holds no preferred stock or
warrants to purchase common stock of such recipient.


26
 Table of Contents


Various
other legislative and regulatory initiatives, including proposals to overhaul
the banking regulatory system and to limit the investments that a depository
institution may make with insured funds, are from time to time introduced in
Congress and state legislatures, as well as regulatory agencies. Such
legislation may change banking statutes and the operating environment of the
Company and Guaranty Bank in substantial and unpredictable ways, and could
increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance depending upon whether any of this
potential legislation will be enacted, and if enacted, the effect that it or any
implementing regulations, would have on the financial condition or results of
operations of the Company or Guaranty Bank.  With the recent
enactments of EESA and ARRA, the nature and extent of future legislative and
regulatory changes affecting financial institutions is very unpredictable at
this time.  The Company cannot determine the ultimate effect that such
potential legislation, if enacted, would have upon its financial condition or
operations.





Regulation of the
Company





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




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





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





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





As of
December 31, 2008, the Company and the Bank met their minimum capital adequacy
guidelines, and the Bank was categorized as well
capitalized.  Applicable capital and ratio information is contained
under the section titled “Regulatory Matters” in Note 1 to the Consolidated
Financial Statements in the 2008 Annual Report.


27
 Table of Contents


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





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





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





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





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





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


28
 Table of Contents


Regulation of the
Bank





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





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





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





Insurance of Deposit
Accountsand
Assessments.  The deposit
accounts held by the Bank are insured by the DIF generally up to a maximum of
$100,000 for each insured account (as defined by law and regulation) and up to a
maximum of $250,000 for self-directed retirement accounts.  However,
the EESA provides for a temporary increase from $100,000 to $250,000 in deposit
insurance per depositor effective October 3, 2008 through December 31,
2009.





The FDIC
imposes an assessment against institutions for deposit
insurance.  This assessment is based on the risk category of the
institution.  On February 27, 2009, the FDIC increased regular premium
rates for 2009, implemented changes to its risk-based assessment system and
imposed a special assessment of 20 basis points.  The 20 basis point
special assessment on the industry will be effective as of June 30, 2009 payable
on September 30, 2009.  On March 5, 2009, the FDIC Chairman announced
that the FDIC intends to lower the special assessment from 20 basis points to 10
basis points.  The approval of the decrease is contingent on whether
Congress clears legislation that would expand the FDIC’s line of credit with the
Treasury to $100 billion.  Legislation to increase the FDIC’s
borrowing authority on a permanent basis is also expected to advance to
Congress.





The FDIC
may terminate its insurance of deposits if it finds that the institution has
engaged in unsafe and unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC.


29
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Prompt Corrective Action.The FDIC is required to
take prompt corrective action if a depository institution for which it is the
regulator, including the Bank, does not meet its minimum capital requirements.
The FDIC establishes five capital tiers: “well capitalized”, “adequately
capitalized”, “under capitalized”, “significantly under capitalized” and
“critically under capitalized”.  A depository institution’s capital
tier will depend upon where its capital levels are in relation to various
relevant capital measures, which, among others, include a Tier 1 and total
risk-based capital measure and a leverage ratio capital measure. A
depository institution is considered to be significantly undercapitalized if it
has a Total Capital Ratio of less than 6.0%; a Tier I Capital ratio of less than
3.0%; or a Leverage Ratio of less than 3.0%. An institution that has a tangible
equity capital to assets ratio equal to or less than 2.0% is deemed to be
critically undercapitalized. "Tangible equity" includes core capital elements
counted as Tier 1 Capital for purposes of the risk-based capital standards, plus
the amount of outstanding cumulative perpetual preferred stock (including
related surplus), minus all intangible assets, with certain
exceptions.





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





As stated
previously, the Company and the Bank met their minimum capital adequacy
guidelines, and the Bank was categorized as well capitalized, as of December 31,
2008.  Applicable capital and ratio information is contained under the
section titled “Regulatory Matters” in Note 1 to the Consolidated Financial
Statements in the 2008 Annual Report.





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





Federal Home Loan Bank
System.  The Bank is a member of the Federal Home Loan Bank of
Des Moines (“FHLB-Des Moines”), which is one of 12 regional Federal Home Loan
Banks.  As a member, the Bank is required to purchase and maintain
stock in FHLB-Des Moines in an amount equal to 0.12% of assets plus 4.45% of
Federal Home Loan Bank advances.  At December 31, 2008, the Bank had
$6,730,100 in FHLB-Des Moines stock, which was in compliance with this
requirement.





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





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


30
 Table of Contents


Executive
Officers of the Registrant





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





Shaun A. Burke joined the Bank
in March 2004 as president and Chief Executive Officer. Mr. Burke was appointed
president and Chief Executive Officer of the Company on February 28,
2005.  Mr. Burke was previously with Signature Bank for seven years
where he served as executive vice president and senior credit officer and was a
member of the board of directors.  Mr. Burke has a total of 23 years
banking experience.  Mr. Burke is also a past member of the United Way
Allocations and Agency Relations Executive Committee, Salvation Army Board, and
Big Brothers Big Sisters Board.





Carter Petersis Executive Vice
President, Chief Financial Officer and Chief Operations Officer of the Bank and
the Company.  He joined the Bank and the Company in August
2005.  Mr. Peters has over 16 years of experience in the financial
services and public accounting industries.  Prior to joining the
Company, Mr. Peters served as the Chief Financial Officer of Southern Missouri
Bank for approximately two years and was employed by BKD, LLP, a certified
public accounting and advising firm, for approximately eleven
years.  He is a Certified Public Accountant with a Bachelor of Science
Degree in Accounting from Missouri State University.  He is
a member of the American Institute of Certified Public Accountants and the
Missouri Society of Certified Public Accountants.  He is a current
Board member of the local Make-A-Wish Foundation.





H. Michael Mattsonis
Executive Vice President and Chief Lending Officer of the Bank.  He
joined the Bank in June 2006.  Mr. Mattson has over 30 years of
commercial banking experience.  He was previously with Liberty Bank
for six years, including four as Senior Loan Officer.  Mr. Mattson is
currently Board President of Ozarks Food Harvest, Inc., member of the
Springfield Area Chamber of Commerce and has served on its board nominating
committee and venture capital committee.  He is a member of Leadership
Springfield Class XI and a graduate of Rockhurst University and the
Graduate School of Banking of The South at Baton Rouge, LA.





As of
December 31, 2008, the age of these individuals was 46 for Mr. Burke, 39 for
Mr. Peters, and 55 for Mr. Mattson.





Item
1A.  Risk Factors





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





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








•
            Changes
      in securities analysts’ estimates of financial
  performance





•
            Volatility
      of stock market prices and volumes





•
            Rumors
      or erroneous information


31
 Table of Contents


•
            Changes
      in market valuations of similar
companies





•
            Changes
      in interest rates





•
            New
      developments in the banking
industry





•
            Variations
      in quarterly or annual operating
results





•
            New
      litigation or changes in existing
litigation





•
            Regulatory
      actions





•
            Changes
      in accounting policies or procedures as may be required by the Financial
      Accounting Standards Board or other regulatory
  agencies





Geographical
Risk





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





Industry
Risk





Negative
developments (beginning in the late 2007) in the sub-prime mortgage market and
the securitization markets for such loans, along with other factors, have
resulted in uncertainty in the financial markets and a related significant
economic downturn.  This downturn has continued throughout 2008 and
beyond.  Declines in the housing market, with decreasing home prices
and increasing delinquencies and foreclosures, have negatively impacted the
credit performance of mortgage and construction loans and resulted in
significant write-downs of assets by many banks.  In addition, real
estate values supporting many loans have declined and may
continue.  Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by institutions to their
customers and to each other.  Competition among depository
institutions for deposits has increased significantly.  Financial
institutions have experienced decreased access to deposits and other
borrowings.  The economic pressures and the volatility in the
financial markets may adversely affect our business, financial condition, result
of operations and ultimately, the Company’s stock price.





Regulatory
Risk





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





In order
to address the weakened economy, and specifically the banking sector, and also
to help consumers maintain confidence in the banking system, the Emergency
Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3,
2008.  The purpose of the many aspects of this legislation is to
stabilize the U.S. banking system.  The EESA and any other regulatory
initiatives may not have the desired effects.  If the volatility in
the markets continues and economic conditions fail to improve or worsen, the
Company’s financial condition and results of operations could be materially and
adversely affected.


32
 Table of Contents


Troubled
Asset Relief Program





With
regards to the securities sold to the Treasury under the CPP, if we are unable
to redeem the Preferred Shares within 5 years of their issuance, the cost of
this capital to us will increase significantly, from 5% per annum to 9% per
annum.  Depending on the Company’s financial condition at the time,
the increase in the annual dividend rate on the Shares could have a material
effect on our liquidity and net income available to common
stockholders.





The
securities purchase agreement between us and the Treasury limits our ability to
pay dividends on and repurchase our common stock without the consent of the
Treasury.  These restrictions, together with the potentially dilutive
impact of the Warrant, could have a negative effect on the value of our common
stock.





Interest Rate
Risk





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





Lending
Risk





There are
inherent risks associated with the Company’s lending activities. Changes in
economic conditions and changes in interest rates among other things could
impact borrowers’ capabilities to repay the Company outstanding loans. A
significant portion of the Bank’s loan portfolio is dependent on real
estate.  The weakened real estate market has and may continue to
increase our level non-performing loans.  While we believe our
allowance for loan losses is adequate as of December 31, 2008, as additional
facts become known about relevant internal and external factors that affect loan
collectability and our assumptions, it may result in the Bank making additions
to the provision for loan loss during 2009.  For a complete discussion
of the risk elements of the Company’s loan portfolio, please refer to
page 7.





Litigation
Risk





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





EmploymentRisk





The
Company’s success depends significantly on our Bank officers, especially
executive officers Shaun A. Burke, Carter M. Peters and H. Michael
Mattson.  Because we do not have employment agreements or non-compete
agreements with our officers or employees, they are free to resign at any time
and accept an employment offer from another company, including a
competitor.  The unexpected loss of key officers may materially and
adversely affect our business, financial condition, results of operations and
future prospects.


33
 Table of Contents


Item
1B.  Unresolved Staff Comments





Not
applicable.





Item 2.
Properties





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





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





The Bank
maintains a network of Automated Teller Machines ("ATMs").  A total of
22 ATMs are located at various branches and primarily convenience stores located
in Greene and Christian Counties in Missouri.  In addition, the Bank
is a member of the TransFund ATM network which provides its customers surcharge
free access to over 100 area ATMs and over 700 ATMs nationwide.  The
Bank will evaluate and relocate existing ATMs as needed.





Item 3. Legal
Proceedings





(a)           Material
Legal Proceedings





The
Company and the Bank, from time to time, may be parties to ordinary routine
litigation, which arises in the normal course of business, such as claims to
enforce liens, and condemnation proceedings, on properties in which the Bank
holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of the Company and the
Bank.  As of December 31, 2008, there were no claims or lawsuits
pending or known to be contemplated against the Company or the Bank that would
have had a material effect on the Company or the Bank.





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





Not
applicable.





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





No matter
was submitted to a vote of security holders during the last quarter of the
fiscal year ended December 31, 2008.


34
 Table of Contents


PART
II





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





The
information contained in the section captioned “Investor Information-Common
Stock Prices and Dividends” on page 2 of the 2008 Annual Report is incorporated
herein by reference.





With
respect to the equity compensation plan information required by this item, see
“Item 12.  Security Ownership of Certain Owners and Management and
Related Stockholder Matters” in this report.








Issuer
Purchases of Equity Securities





The
Company has a repurchase plan which was announced on August 20,
2007.  This plan authorizes the purchase by the Company of up to
350,000 shares of the Company’s common stock.  There is no expiration
date for this plan.  There are no other repurchase plans in effect at
this time. The Company had no repurchase activity of the Company’s common stock
during the fourth quarter ended December 31, 2008.





Item
6.  Selected Financial Data





The
information contained on pages 4 and 5 under the section captioned “Selected
Consolidated Financial and Other Data” of the 2008 Annual Report is incorporated
herein by reference.





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





The
information contained on pages 6 through 20 under the section captioned
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of the 2008 Annual Report is incorporated herein by
reference.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk





The
information contained on page 14 and 15 under the sections captioned
“Asset/Liability Management” and “Interest Rate Sensitivity Analysis” of the
2008 Annual Report is incorporated herein by reference.





Item  8.  Financial Statements and Supplementary
Data





The
financial statements set forth on pages 21 to 50 of the 2008 Annual Report and
the financial information contained under the section captioned “Summary of
Unaudited Quarterly Operating Results” set forth on page 20 of the 2008 Annual
Report are incorporated herein by reference.





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





Not
applicable.





Item
9A(T).  Controls and
Procedures





Disclosure
Controls and Procedures





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


35
 Table of Contents




The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company’s disclosure controls and procedures.  Based on the foregoing
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of December 31, 2008.





Internal
Control Over Financial Reporting





There
have been no changes in the Company’s internal control over financial reporting
during the fourth quarter ending December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
controls over financial reporting.


36
 Table of Contents


MANAGEMENT’S
REPORT ON INTERNAL CONTROL


OVER
FINANCIAL REPORTING








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





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





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on the framework set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Based on that assessment, management
concluded that, as of December 31, 2008, the Company’s internal control over
financial reporting was effective.





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








Item
9B.  Other Information





Not
applicable.


37
 Table of Contents


PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance





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





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





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





Additional
information required by this item is contained (i) in the Proxy Statement under
the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance"
and is incorporated herein by reference, and (ii) under the section captioned
"Executive Officers of the Registrant" in Item 1 of this report.





Item
11.  Executive Compensation





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


38
 Table of Contents


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





Except as
set forth below, information required by this item is contained under the
section captioned "Voting Securities and Principal Holders Thereof" in the Proxy
Statement and is incorporated herein by reference.





Equity
Compensation Plan Information




(c)Number of securitiesremaining available(a)
                              
                              
                              (b)
                              
                              
                              for future issuanceNumber of securities to be
                              
                              
                              Weighted-average
                              
                              
                              under equityissued upon
      exercise of
                              
                              
                              exercise
      price of
                              
                              
                              compensation plansoutstanding
      options,
                              
                              
                              outstanding options,
                              
                              
                              (excluding securitiesPlan category
                              
                              warrants and rights
                              
                              
                              warrants and rights
                              
                              
                              reflected in column (a))Equity
      compensation plansapproved
      by security holders
                              
                              
                              188,079
                              
                              
                              
                              24.33
                              
                              
                              
                              122,500Equity
      compensation plans notapproved
      by security holders
                              
                              
                              36,875
                              
                              
                              
                              18.01
                              
                              
                              
                              5,608Totals
                              
                              
                              224,954
                              
                              
                              
                              23.29
                              
                              
                              
                              128,108





Description
of Stock Plans Not Approved by Stockholders





2000 Stock Compensation
Plan.  During the year ended June 30, 2000, the directors of
the Company established the 2000 Stock Compensation Plan (the “2000 SCP”) with
both a stock award component and a stock option component for a term of ten
years.  A committee of the Bank’s Board of Directors (the “Committee”)
administers this plan and the 2001 SCP (discussed below).  Stock
options awarded under the plan are considered non-qualified for federal income
tax purposes.  Officers, directors and employees of the Company and
its subsidiaries are eligible under the plan.  Stock awards and stock
options vest at the rate of 20% per year over a five year period and become
fully vested in the event of a “change in control” as defined in the
plan.  In addition, the price of the stock options may not be less
than the market value of the Company’s common stock on the date of grant, and
the stock options expire no later than ten years from the date of
grant.  Under the stock award component of this plan, the Committee
awarded 7,125 restricted shares of the Company’s common stock.  As of
December 31, 2008, there are no restricted shares in this plan that are not
vested.  There have been 17,875 options granted under this plan
at an exercise price of $10.50 per share. The maximum number of shares of the
Company’s common stock permitted to be awarded under this plan (25,000)
have been awarded.  Previously issued awards or options which expire,
become unexercisable, or are forfeited prior to their exercise may be granted as
new awards or options under the plan for the number of shares which were subject
to such expired or forfeited awards or options.


39
 Table of Contents


2001 Stock Compensation
Plan.  During the year ended June 30, 2001, the directors of
the Company established the 2001 Stock Compensation Plan (the “2001 SCP”) with
both a stock award component and a stock option component for a term of ten
years.  Stock options awarded under the plan are considered
non-qualified for federal income tax purposes.  Officers, directors
and employees of the Company and its subsidiaries are eligible under the
plan.  Stock awards and stock options vest at the rate of 20% per year
over a five year period and become fully vested in the event of a “change in
control” as defined in the plan.  In addition, the price of the stock
options may not be less than the market value of the Company’s common stock on
the date of grant, and the stock options expire no later than ten years from the
date of grant.  Under the stock award component of this plan, the
Committee awarded 10,239 restrictedshares of the Company’s
common stock.  As of December 31, 2008, all restricted shares in this
plan are vested.  There have been 11,000 options granted under this
plan at a weighted-average exercise price of $23.23 per share.  The
maximum number of shares of the Company’s Common Stock permitted to be awarded
under this plan is 25,000 shares.  Previously issued awards or options
which expire, become exercisable, or are forfeited prior to their exercise may
be granted as new awards or options under the plan for the number of shares
which were subject to such expired or forfeited awards or options.





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





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





Item
13.  Certain Relationships and Related Transactions, and DirectorIndependence





The
information required by this item is contained under the sections captioned
"Indebtedness of Management and Directors and Transactions with Certain Related
Persons" and “Director Independence” in the Proxy Statement and is incorporated
herein by reference.





Item
14.Principal
Accountant Fees and Services





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


40
 Table of Contents


PART
IV





Item
15.Exhibits and Financial Schedules








1.           The
following financial statements and the report of independent registered public
accounting firm included in the 2008 Annual Report are filed as part of this
Report and incorporated herein by reference.





Report of
Independent Registered Public Accounting Firm





Consolidated
Balance Sheets as of December 31, 2008 and 2007.





Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006.





Consolidated
Statements of Stockholders' Equity for the Years Ended December 31, 2008, 2007
and 2006.





Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006.





Notes to
Consolidated Financial Statements.





2.
            Financial
      statement schedules for which provision is made in the applicable
      accounting regulations of the SEC are not required under the related
      instructions or are inapplicable and therefore have been
      omitted.





3.
            The
      following exhibits are filed with this Report or incorporated herein
      by reference:





Index to
Exhibits


Exhibit


Number
            Exhibit
      Description





3(i).1
            Restated
      Certificate of Incorporation of Guaranty Federal Bancshares, Inc.
      (1)


3(i).2
            Certificate
      of Designations for the Series A Preferred Stock
  (21)


3(ii)
            Bylaws
      of Guaranty Federal Bancshares, Inc., as amended
  (7)


4.1
            Rights
      Agreement dated January 20, 1999 concerning the issuance of preferred
      stock and related rights. (2)


4.2
            Form
      of Certificate for the Series A Preferred Stock
  (22)


4.3
            Warrant
      to Purchase Common Stock (23)





The
Company hereby agrees to furnish the SEC upon request, copies of (i) the
instruments defining the rights of the holders of each issue of its junior
subordinated debentures and (ii) the repurchase agreements between the Company
and Barclay’s Capital, Inc. dated September 2007 and January 2008.





10.1
            1994
      Stock Option Plan *(3)


10.2
            Recognition
      and Retention Plan *(4)


10.3
            1998
      Stock Option Plan *(5)


10.4
            Restricted
      Stock Plan *(6)


10.5
            Form
      of Change in Control Severance Agreement
*(6)


41
 Table of Contents


10.6
            2000
      Stock Compensation Plan *(6)


10.7
            2001
      Stock Compensation Plan *(6)


10.8
            2003
      Stock Option Agreement *(8)


10.9
            Employment
      Agreement effective as of March 9, 2004 by and between the Bank and Shaun
      A. Burke *(9)


10.10
            2004
      Stock Option Agreement dated March 9, 2004 between the Company and Shaun
      A. Burke *(10)


10.11
            2004
      Stock Option Plan *(11)


10.12
            Form
      of Incentive Stock Option Agreement under the 2004 Stock Option Plan
      *(15)


10.13
            Form
      of Non-Incentive Stock Option Agreement under the 2004 Stock Option Plan
      *(16)


10.14
            Form
      of Incentive Stock Option Agreement under the 1994 Stock Option Plan
      *(12)


10.15
            Form
      of Non-Incentive Stock Option Agreement under the 1994 Stock Option Plan
      *(13)


10.16
            Incentive
      Stock Option Agreement dated March 17, 2005 between the Company and Shaun
      A. Burke (issued pursuant to the 2001 Stock Option Plan)
    *(14)


10.19
            Written
      Description of Compensatory Arrangement with Chief Operating Officer and
      Chief Financial Officer *(17)


10.20
            Written
      Description of 2007 Executive Incentive Compensation Annual Plan-President
      and Chief Executive Officer *(18)


10.21
            Written
      Description of 2008 Executive Incentive Compensation Annual Plan-President
      and Chief Executive Officer *(19)


10.22
            Written
      Description of 2008 Executive Incentive Compensation Annual Plan-Chief
      Financial Officer *(20)


10.23
            Letter
      Agreement dated January 30, 2009, including Securities Purchase Agreement
      – standard terms incorporated by reference therein, between the Company
      and the United States Department of the Treasury, with respect to the
      issuance and sale of Series A Preferred Stock and the Warrant
      (24)


10.24
            Amendment
      and Waiver Regarding Compensation Arrangements dated January 28, 2009 by
      and among the Bank, the Company and its Senior Executive Officers*
      (25)


10.25
            Written
      Description of 2009 Executive Incentive Compensation Annual Plan-President
      and Chief Executive Officer *(26)


10.26
            Written
      Description of 2009 Executive Incentive Compensation Annual Plan-Chief
      Financial Officer and Chief Operating Officer
  *(27)


10.27
            Written
      Description of 2009 Executive Incentive Compensation Annual Plan-Chief
      Lending Officer *(28)


11
            Computation
      of per share earnings is set forth in Note 1 of the Notes to the
      Consolidated Financial Statements under the section captioned “Earnings
      Per Share” in the 2008 Annual
Report.


13
            Annual
      Report to Stockholders for the fiscal period ended December 31, 2008 (only
      those portions incorporated by reference in this document are deemed
      “filed”)


21
            Subsidiaries
      of the Registrant ( See Item 1. Business – Subsidiary and Segment
      Information)


23
            Consent
      of BKD, LLP


31(i).1
            Certification
      of the Principal Executive Officer pursuant to Rule 13a-14(a) of the
      Exchange Act


31(i).2
            Certification
      of the Principal Financial Officer pursuant to Rule 13a-14(a) of the
      Exchange Act


32.1
            CEO
      certification pursuant to 18 U.S.C. Section
1350


42
 Table of Contents


32.2
            CFO
      certification pursuant to 18 U.S.C. Section
1350





*
Management contract or compensatory plan or arrangement


_____________________


(1)
            Filed
      as an exhibit to the Annual Report on Form 10-K for the fiscal year ended
      June 30, 1998 (SEC File No. 0-23325) and incorporated herein by
      reference.


(2)
            Filed
      as an exhibit to the Form 8A filed by Registrant on January 22, 1999 and
      incorporated herein by reference.


(3)
            Filed
      as  Exhibit 10.1 of the Registration Statement on Form S-1 filed
      by the Registrant on September 23, 1997 (SEC File No. 333-36141) and
      incorporated herein by reference.


(4)
            Filed
      as  Exhibit 10.2 of the Registration Statement on Form S-1 filed
      by the Registrant on September 23, 1997 (SEC File No. 333-36141) and
      incorporated herein by reference.


(5)
            Filed
      as Exhibit 4 to the Form S-8 Registration Statement filed by the
      Registrant on March 6, 2002 (SEC File No. 333-83822) and incorporated
      herein by reference.


(6)
            Filed
      as an exhibit to the Annual Report on Form 10-K for the fiscal year ended
      June 30, 2001 (SEC File No. 0-23325) and incorporated herein by
      reference.


(7)
            Filed
      as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant
      on December 3, 2007 and incorporated herein by
  reference.


(8)
            Filed
      as Exhibit 10.8 to the Annual Report on Form 10-K for the transition
      period ended December 31, 2003 filed by the Registrant on March 30, 2004
      (SEC File No. 0-23325) and incorporated herein by
    reference.


(9)
            Filed
      as Exhibit 10.9 to the Current Report on Form 8-K filed by the Registrant
      on January 24, 2005 (SEC File No. 0-23325) and incorporated herein by
      reference.


(10)
            Filed
      as Exhibit 10.10 to the Current Report on Form 8-K filed by the Registrant
      on January 24, 2005 (SEC File No. 0-23325) and incorporated herein by
      reference.


(11)
            Filed
      as Appendix A to the proxy statement for the annual meeting of
      stockholders held on May 19, 2004 (SEC File No. 0-23325) and incorporated
      herein by reference.


(12)
            Filed
      as Exhibit 4.2 to the Form S-8 Registration Statement filed by the
      Registrant on March 3, 1998 (SEC File No. 333-47241) and incorporated
      herein by reference.


(13)
            Filed
      as Exhibit 4.3 to the Form S-8 Registration Statement filed by the
      Registrant on March 3, 1998 (SEC File No. 333-47241) and incorporated
      herein by reference.


(14)
            Filed
      as Exhibit 10.16 to the Current Report on Form 8-K filed by the Registrant
      on March 22,     2005 (SEC File No. 0-23325) and
      incorporated herein by reference.


(15)
            Filed
      as Exhibit 10.12 to the Annual Report on Form 10-K for the fiscal
      year ended December 31, 2004 filed by the Registrant on March 30, 2005 and
      incorporated herein by reference.


(16)
            Filed
      as Exhibit 10.13 to the Annual Report on Form 10-K for the fiscal
      year ended December 31, 2004 filed by the Registrant on March 30, 2005 and
      incorporated herein by reference.


(17)
            Filed
      as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal
      year ended December 31, 2005 filed by the Registrant on March 31, 2006 and
      incorporated herein by reference.


(18)
            Filed
      as Exhibit 10.20 to the Quarterly Report on Form 10-Q/A for the quarter
      ended June 30, 2007 filed by the Registrant on November 14, 2007 and
      incorporated herein by reference.


(19)
            Filed
      as Exhibit 10.21 to the Current Report on Form 8-K filed by the Registrant
      on December 29, 2007 and incorporated herein by
  reference.


(20)
            Filed
      as Exhibit 10.22 to the Current Report on Form 8-K filed by the Registrant
      on December 29,  2007 and incorporated herein by
      reference.


(21)
            Filed
      as Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant
      on February 3, 2009 and incorporated herein by
  reference.


(22)
            Filed
      as Exhibit 4.1 to the Current Report on Form 8-K filed by the Registrant
      on February 3, 2009 and incorporated herein by
  reference.


(23)
            Filed
      as Exhibit 4.2 to the Current Report on Form 8-K filed by the Registrant
      on February 3, 2009 and incorporated herein by
  reference.


(24)
            Filed
      as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant
      on February 3, 2009 and incorporated herein by
  reference.


43
 Table of Contents


(25)
            Filed
      as Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant
      on February 3, 2009 and incorporated herein by
  reference.


(26)
            Filed
      as Exhibit 10.23 to the Current Report on Form 8-K filed by the Registrant
      on February 9, 2009 and incorporated herein by
  reference.


(27)
            Filed
      as Exhibit 10.24 to the Current Report on Form 8-K filed by the Registrant
      on February 9, 2009 and incorporated herein by
  reference.


(28)
            Filed
      as Exhibit 10.25 to the Current Report on Form 8-K filed by the Registrant
      on February 9, 2009 and incorporated herein by
  reference.





SIGNATURES





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





GUARANTY
      FEDERAL BANCSHARES, INC.Dated:  March
      31, 2009
                  By:
                  /s/ Shaun A. BurkeShaun
      A. BurkePresident
      and Chief Executive Officer(Duly
      Authorized
Representative)





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








By:
                        /s/ Shaun A. Burke
                        
                        By:
                        /s/ Tim RosenburyShaun
      A. Burke
                        
                        
                        Tim
      RosenburyPresident
      and Chief Executive Officer
                        
                        
                        Directorand
      Director
                        
                        Date:
                        March
      31, 2009(Principal
      Executive Officer)Date:
                        March
      31, 2009By:
                        /s/ Carter Peters
                        
                        By:
                        /s/ James R. BattenCarter
      Peters
                        
                        
                        James
      R. BattenEVP
      and Chief Financial Officer
                        
                        
                        Director(Principal
      Accounting and Financial Officer)
                        
                        Date:
                        March
      31, 2009Date:
                        March
      31, 2009By:
                        /s/ John Griesemer
                        
                        By:
                        /s/ Don M. GibsonJohn
      Griesemer
                        
                        
                        Don
      M. GibsonDirector
                        
                        
                        Chairman
      of the Board and DirectorDate:
                        March
      31, 2009
                        
                        Date:
                        March
      31, 2009By:
                        /s/ Gregory V. Ostergren
                        
                        By:
                        /s/ James L. Sivils, IIIGregory
      V. Ostergren
                        
                        
                        James
      L. Sivils, IIIDirector
                        
                        
                        DirectorDate:
                        March
      31, 2009
                        
                        Date:
                        March
      31, 2009By:
                        /s/ Kurt D. Hellweg
                        
                        By:
                        /s/ Jack L. BarhamKurt
      D. Hellweg
                        
                        
                        Jack
      L. BarhamDirector
                        
                        
                        DirectorDate:
                        March
      31, 2009
                        
                        Date:
                        March
      31,
2009






44