10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[ X ]ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005 

- 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: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.10 per share

                       (Title of Class)

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

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

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

1

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

Large accelerated file __ Accelerated filer ___ Non-accelerated filer   X

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the average bid and asked prices of the Registrant's Common Stock as quoted on the National Market of The NASDAQ Stock Market on June 30, 2005 (the last business day of the registrant’s most recently completed second quarter), was $52.7 million. As of March 31, 2006 there were 2,958,147 shares of the registrant's Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Annual Report to Stockholders (the “2005 Annual Report”)for the fiscal period ended December 31, 2005 (Parts I and II).

2. Portions of the Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”)to be held on May 25, 2006 (Part III).

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		GUARANTY FEDERAL BANCSHARES, INC.
		Form 10-K
		TABLE OF CONTENTS
	Item		Page
		PART I
	1	Business	5
	1A	Risk Factors	30
	1B	Unresolved Staff Comments	31
	2	Properties	32
	3	Legal Proceedings	32
	4	Submission of Matters to a Vote of Security Holders	32
		PART II
	5	Market for Registrant's Common Equity, Related Stockholder Matters	32
		and Issuer Purchases of Equity Securities
			34
	6	Selected Financial Data
	7.	Management's Discussion and Analysis of
		Financial Condition and Results of Operations	34
	7A.	Quantitative and Qualitative Disclosures About Market Risk	34
	8	Financial Statements and Supplementary Data	34
	9	Changes in and Disagreements with Accountants
		on Accounting and Financial Disclosure	34
	9A.	Controls and Procedures	34
	9B.	Other Information	34
		PART III
	10	Directors and Executive Officers of the Registrant	35
	11	Executive Compensation	35
	12	Security Ownership of Certain Beneficial Owners and Management
		and Related Stockholder Matters	35
	13	Certain Relationships and Related Transactions	37
	14	Principal Accountant Fees and Services	37
		PART IV
	15	Exhibits and Financial Statement Schedules	37
Signatures

3

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.

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PART I

Item 1. Business

Business of the Company

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

On June 27, 2003, the Bank converted from a federal savings bank to a state-chartered trust company with banking powers 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.

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

Business of the Bank

The Bank's principal business has been, and continues to be, attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, in permanent one-to four-family residential mortgage loans, multi-family residential mortgage loans, construction loans, commercial real estate loans, and consumer and other loans. The Bank also invests in mortgage-backed securities, U.S. Government and federal agency securities and other marketable securities. The Bank's revenues are derived principally from interest on its loans and other investments and fees charged for services provided, and 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 mortgage-backed securities.

The Bank is regulated by the Missouri Division of Finance and its deposits are insured by the Savings Association Insurance Fund ("SAIF") 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. As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to 0.12% of its assets plus 4.45% of its outstanding FHLB advances. At December 31, 2005, the Bank had $4,978,800 in FHLB stock, which was in compliance with this requirement.

5

Information regarding (i) average balances related to interest earning assets and interest bearing liabilities and an analysis of net interest earnings for the last three fiscal years and the Transition Period, and (ii) changes in interest income and interest expense resulting from changes in average balances and average rates for the last two fiscal years, including the Transition Period, is provided under the section captioned “Average Balances, Interest and Average Yields” under Item 7 of this report.

Market Area

The Bank's primary market area is Greene County, which is in the southwestern corner of Missouri and includes the city of Springfield,Missouri. There is a large regional health care presence with two large regional hospitals employing over 14,000. There also are four accredited colleges and one major university with total enrollment approaching 25,000. Part of Greene County'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.

6

Lending Activities

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

Composition of Loan Portfolio
		As of December 31,			As of December 31,			As of December 31,			As of June  30,			As of June 30,			As of June 30,
		2005			2004			2003			2003			2002			2001
		$	%		$	%		$	%		$	%
(Dollars in Thousands)
Mortgage loans (includes loans held for sale):
One to four family	$	103,532	23	%	121,307	31	%	129,477	37	%	144,404	40	%	149,443	44	%	189,436	55	%
Multi-family		53,631	12	%	52,259	13	%	44,242	13	%	41,022	11	%	44,055	13	%	42,641	12	%
Construction		70,390	16	%	45,090	11	%	49,814	14	%	64,464	18	%	49,807	15	%	55,317	16	%
Commercial real estate		122,884	28	%	97,550	25	%	72,105	21	%	71,046	19	%	58,434	17	%	43,893	13	%
Total mortgage loans		350,437	79	%	316,206	80	%	295,638	86	%	320,936	88	%	301,739	89	%	331,287	96	%
Commercial business loans		66,370	15	%	55,606	14	%	24,618	7	%	18,967	5	%	8,358	2	%	5,511	1	%
Consumer loans		24,264	6	%	25,172	6	%	25,441	7	%	25,486	7	%	31,075	9	%	10,573	3	%
Total consumer and other loans		90,634	21	%	80,778	20	%	50,059	14	%	44,453	12	%	39,433	11	%	16,084	4	%
Total loans		441,071	100	%	396,984	100	%	345,697	100	%	365,389	100	%	341,172	100	%	347,371	100	%
Less:
Loans in process		-			-			9,425			25,539			18,326			24,212
Deferred loan fees/costs, net		141			106			237			211			230			268
Unearned discounts		3			7			19			26			50			88
Allowance for loan losses		5,400			4,537			3,886			2,775			2,650			2,697
Total Loans, Net	$	435,527			392,334			332,130			336,838			319,916			320,106

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, 2005 of all loans due after December 2006, which have pre-determined interest rates and which have adjustable interest rates.

Fixed and Adjustable Rate Loans by Type
		Fixed Rates	Adjustable Rates	Total	% ARM
(Dollars in Thousands)
One-to four-family	$	22,157	71,428	93,585	76	%
Multi-family		22,892	20,047	42,939	47	%
Construction		447	15,186	15,633	97	%
Commercial real estate		39,637	63,203	102,840	61	%
Commercial loans		3,597	26,852	30,449	88	%
Consumer loans		5,596	16,441	22,037	75	%
Total loans (1)	$	94,326	213,157	307,483	69	%
(1) Before deductions for unearned discounts, deferred loan fees/costs and
allowances for loan losses.

7

The following table sets forth the maturity of the Bank's loan portfolio as of December 31, 2005. 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	$	9,947	18,845	74,740		103,532
Multi family		10,692	22,933	20,006		53,631
Construction		54,756	15,563	71		70,390
Commercial real estate		20,044	89,582	13,259		122,885
Commercial loans		35,922	25,982	4,466		66,370
Consumer loans		2,227	5,186	16,850		24,263
Total loans (1)	$	133,588	178,091	129,392		441,071
Less:
Deferred loan fees/costs						141
Unearned discounts						3
Allowance for loan losses						5,400
Loans receivable net					$	435,527
(1) Includes mortgage loans held for sale of $2,092.

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.

As of December 31, 2005, $103.5 million or 23% 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.

8

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, 2005, $53.6 million or 12% 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. The majority 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, $14.4 million as of December 31, 2005, 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, 2005, construction loans totaled $70.4 million or 16% 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.

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.

9

 Commercial Real Estate Loans. As of December 31, 2005, the Bank has commercial real estate loans totaling $122.9 million or 28% 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 $14.8 million as of December 31, 2005, 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, 2005, the Bank’s commercial real estate loan portfolio included approximately $7.9 million 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.

Commercial Business Loans. As of December 31, 2005, the Bank has commercial business loans totaling $66.4 million or 15% 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, 2005, the Bank has such loans totaling $24.3 million or 6% of the Bank’s total loan portfolio. The Bank expects to continue to expand its consumer lending as opportunities present themselves.

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Loan Approval Authority and Underwriting. All loans to borrowers with aggregate indebtedness exceeding $1.5 million must have the approval of the members of the Bank’s Loan Committee which consists of eight senior officers of the Bank. 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, 2005, the Bank has one loan 90 days or more past due with a principal balance of $28,418 and twenty three loans between 30 and 89 days past due with an aggregate principal balance of $579,852. The Bank generally does not accrue interest on loans past due more than 90 days.

11

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.

Delinquency Summary		As of		As of		As of		As of		As of		As of
		December 31,		December 31,		December 31,		June 30,		June 30,		June 30,
		2005		2004		2003		2003		2002		2001
(Dollars in Thousands)
Loans accounted for on a non-accrual basis
or contractually past due 90 days or more
Mortgage Loans:
One- to four-family	$	452		770		703		331		154		444
Multi-family		-		-		-		-		-		-
Construction		-		-		-		-		-		1,065
Commercial real estate		131		158		-		-		-		668
		583		928		703		331		154		2,177
Non-mortgage loans:
Commercial loans		-		-		-		-		-		109
Consumer and other loans		138		79		40		-		37		18
		138		79		40		-		37		127
Total non-accrual loans		721		1,007		743		331		191		2,304
Accruing loans which are contractually past
maturity or past due 90 days or more:
Mortgage Loans:
One- to four-family		-		-		-		-		-		-
Multi-family		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
-				-		-		-		-		-
Non-mortgage loans:
Commercial loans		-		-		-		-		-		-
Consumer and other loans		-		-		-		-		-		-
-				-		-		-		-		-
Total past maturity or past due accruing loans		-		-		-		-		-		-
Total accounted for on a non-accrual basis or contractually past maturity or 90 days or more past due	$	721		1,007		743		331		191		2,304
Total accounted for on a non-accrual basis or contractually past maturity or 90 days or more past due as a percentage of net loans		0.17	%	0.26	%	0.22	%	0.10	%	0.06	%	0.73
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		0.15	%	0.23	%	0.19	%	0.08	%	0.05	%	0.62

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

 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.

12

 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 of		As of		As of		As of		As of		As of
		December 31,		December 31,		December 31,		June 30,		June 30,		June 30,
		2005		2004		2003		2003		2002		2001
Non-accrual loans:								(Dollars in Thousands)
Mortgage loans:
One- to four-family	$	452		770		703		331		659		1,358
Multi-family		-		-		-		-		-		-
Construction		-		-		-		-		-		2,115
Commercial real estate		131		158		-		-		1,017		1,396
		583		928		703		331		1,676		4,869
Non-mortgage loans:
Commercial loans		-		-		-		-		-		60
Consumer and other loans		138		79		40		-		75		19
		138		79		40		-		75		79
Total non-accrual loans		721		1,007		743		331		1,751		4,948
Real estate and other assets acquired in settlement of loans		27		78		6		182		683		4
Total non-performing assets	$	748		1,085		749		513		2,434		4,952
Total non-accrual loans as a percentage of net loans		0.17	%	0.26	%	0.22	%	0.10	%	0.55	%	1.55	%
Total non-performing assets as a percentage of total assets		0.16	%	0.25	%	0.19	%	0.13	%	0.65	%	1.32	%
Impact on interest income for the period:
Interest income that would have been recorded on non-accruing loans	$	8		23		15		13		21		179

13

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, while specific valuation allowances for loan losses generally do not qualify as 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 substandardclassification.

The following table shows the aggregate amounts of the Bank's classified assets as of December 31, 2005. As of December 31, 2005, foreclosed assets held for sale consists of five vehicles.

Classification of Assets	Special Mention			Substandard			Doubtful			Loss			Total
	Number		Amount	Number		Amount	Number		Amount	Number		Amount	Number		Amount
(Dollars in Thousands)
Loans:
One- to four-family	3	$	224	43	$	2,181	-	$	-	-	$	-	46	$	2,405
Multi-family	-		-	-		-	-		-	-		-	-		-
Construction	-		-	-		-	-		-	-		-	-		-
Commercial real estate	-		-	-		-	-		-	-		-	-		-
Land	-		-	-		-	-		-	-		-	-		-
Other loans	6		178	15		2,418	-		-	-		-	21		2,596
Total loans	9		402	58		4,599	-		-	-		-	67		5,001
Foreclosed assets held-for-sale:
One- to four-family	-		-	-		-	-		-	-		-	-		-
Land and other assets	-		-	5		27	-		-	-		-	5		27
Total foreclosed assets	-		-	5		27	-		-	-		-	5		27
Total	9	$	402	63	$	4,626	-	$	-	-	$	-	72	$	5,028

[Missi

14

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, 2005 the Bank's total allowance for loan losses was $5.4 million or 1.2% of total loans. This allowance reflects not only management's determination to maintain an allowance for loan losses consistent with regulatory expectations for non-performing or problem assets, but also reflects the regional economy and the Bank's policy of evaluating the risks inherent in its loan portfolio.

For fiscal years 2001 through 2005, the Bank experienced loan charge offs in excess of recoveries, and based on the loan portfolio review discussed above, elected to add to the allowance through a provision for loan loss, as shown in the table below. Management anticipates the need to continue adding to the allowance through charges to provision for loan losses as anticipated growth in the loan portfolio or other circumstances warrant.

15

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

Allowance for Loan Losses		Year ended		Year ended		Six months ended		Year ended		Year ended		Year ended
		December 31,		December 31,		December 31,		June 30,		June 30,		June 30,
		2005		2004		2003		2003		2002		2001
(Dollars in Thousands)
Beginning balance	$	4,537		3,886		2,775		2,650		2,697		2,520
Gross loan charge offs
Mortgage Loans:
One- to four-family		(22	)	(188	)	(41	)	(358	)	(52	)	(5	)
Multi-family		-		-		-		-		-		-
Construction		-		-		-		(11	)	(235	)	-
Commercial real estate		-		-		-		-		(23	)	(115	)
		(22	)	(188	)	(41	)	(369	)	(310	)	(120	)
Non-mortgage loans:
Commercial loans		(12	)	-		-		-		-		-
Consumer and other loans		(119	)	(43	)	(14	)	(168	)	(28	)	(13	)
		(119	)	(43	)	(14	)	(168	)	(28	)	(13	)
Total charge offs		(153	)	(231	)	(55	)	(537	)	(338	)	(133	)
Recoveries
Mortgage Loans:
One- to four-family		61		9		1		19		-		-
Multi-family		-		-		-		-		-		-
Construction		-		-		1		6		-		-
Commercial real estate		-		-		-		-		-		-
		61		9		2		25		-		-
Non-mortgage loans:
Commercial loans		-		-		-		-		-		-
Consumer and other loans		10		9		2		27		-		-
		10		9		2		27		-		-
Total recoveries		71		18		4		52		-		-
Net loan charge-offs		(82	)	(213	)	(51	)	(485	)	(338	)	(133	)
Provision for loan losses charged to expense		945		864		1,162		610		291		310
Ending balance	$	5,400		4,537		3,886		2,775		2,650		2,697
Net charge-offs as a percentage of average loans, net		0.02	%	0.07	%	0.02	%	0.15	%	0.10	%	0.04	%
Allowance for loan losses as a percentage of average loans, net		1.29	%	1.39	%	1.19	%	0.85	%	0.82	%	0.87	%
Allowance for loan losses as a percentage of total non-performing loans		749	%	451	%	523	%	838	%	151	%	55	%

16

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 of					As of					As of					As of					As of					As of
		December 31,					December 31,					December 31,					June 30,					June 30,					June 30,
		2005					2004					2003					2003					2002					2001
Amount		%	%				Amount	%				Amount	%				Amount	%				Amount	%				Amount	%
(Dollars in thousands)
Mortgage Loans	$	4,266		79	%	$	3,630		80	%	$	3,342		86	%	$	2,442		88	%	$	2,358		89	%	$	2,562		95	%
Non-Mortgage Loans		1,134		21	%		907		20	%		544		14	%		333		12	%		292		11	%		135		5	%
Total	$	5,400		100	%	$	4,537		100	%	$	3,886		100	%	$	2,775		100	%	$	2,650		100	%	$	2,697		100	%

Investment Activities

The investment policy of the Company, which is established by the Company’s Board of Directors and reviewed by the Investment Committee of the Company’s Board of Directors, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank's lending activities. The policy currently provides for held-to-maturity and available-for-sale investment security portfolios. The Company has adopted an investment policy which strictly prohibits speculation in investment securities. The Company does not currently engage in trading investment securities and does not anticipate doing so in the future. As of December 31, 2005, the Company has investment securities with a carrying value of $7.7 million and an estimated fair value of $7.7 million. See Note 1 of Notes to Consolidated Financial Statements for description of accounting policy for investments. Based on the carrying value of these securities, $6.8 million, or 88%, 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.

17

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:

Investment Securities		Amortized Cost	Gross Unrealized Gains	Gross Unrealized (Losses)		Approximate Fair Value
As of December 31, 2005
AVAILABLE-FOR-SALE SECURITIES:
Equity Securities:
FHLMC stock	$	47,595	3,128,415	-		3,176,010
Debt Securities:
U. S. government agencies		3,579,513	2,021	(397	)	3,581,137
HELD-TO-MATURITY SECURITIES:
U. S. government agencies		189,974	-	(2,478	)	187,496
Mortgage-backed securities		754,750	39,550	-		794,300
	$	4,571,832	3,169,986	(2,875	)	7,738,943
Investment Securities		Amortized Cost	Gross Unrealized Gains	Gross Unrealized (Losses)		Approximate Fair Value
As of December 31, 2004
AVAILABLE-FOR-SALE SECURITIES:
Equity Securities:
FHLMC stock	$	66,588	4,945,012	-		5,011,600
Other stock		2,000,000	-	(560,000	)	1,440,000
Debt Securities:
Trust preferred securities		6,570,814	84,468	-		6,655,282
U. S. government agencies		1,994,798	88	-		1,994,886
HELD-TO-MATURITY SECURITIES:
U. S. government agencies		228,807	375	-		229,182
Mortgage-backed securities		1,076,351	77,737	-		1,154,088
	$	11,937,358	5,107,680	(560,000	)	16,485,038

Investment Securities		Amortized Cost	Gross Unrealized Gains	Gross Unrealized (Losses)		Approximate Fair Value
As of December 31, 2003
AVAILABLE-FOR-SALE SECURITIES:
Equity Securities:
FHLMC stock	$	78,336	4,587,264	-		4,665,600
Other stock		2,000,000	-	(326,000	)	1,674,000
Debt Securities:
Trust preferred securities		6,557,201	11,071	(40,840	)	6,527,432
U. S. government agencies		1,996,317	477	-		1,996,794
HELD-TO-MATURITY SECURITIES:
U. S. government agencies		256,142	78	-		256,220
Mortgage-backed securities		1,611,452	81,240	-		1,692,692
	$	12,499,448	4,680,130	(366,840	)	16,812,738

18

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, 2005:

Investment Portfolio Maturities and Average Weighted Yields		Amortized Cost	Weighted Average Yield			Approximate Fair Value
Due within one year	$	499,512	3.52	%	$	499,429
Due within five years		3,269,975	5.05	%		3,269,204
Equity securities not due on
a single maturity date		47,595	0.00	%		3,176,010
Mortgage-backed securities not due on a
single maturity date		754,749	7.11	%		794,300
	$	4,571,831	5.23	%	$	7,738,943

19

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, 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, passbook 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 Accounts Types

The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated.

	As of December 31,						As of December 31,						As of December 31,
	2005						2004						2003
	Average				Percent		Average				Percent		Average				Percent
	Interest				of Total		Interest				of Total		Interest				of Total
	Rate			Amount	Deposits		Rate			Amount	Deposits		Rate			Amount	Deposits
NOW	0.33	%	$	35,864	11	%	0.53	%	$	34,605	12	%	0.30	%	$	34,257	14	%
Savings	1.80	%		14,298	5	%	1.08	%		15,153	5	%	0.81	%		17,221	7	%
Money Market	2.47	%		43,897	14	%	1.81	%		52,010	18	%	1.34	%		42,231	18	%
Non-interest
bearing demand	0.00	%		36,194	11	%	0.00	%		25,583	9	%	0.00	%		23,335	10	%
Total				130,253	41	%				127,351	44	%				117,044	49	%
Certificates of Deposit: (fixed-rate, fixed-term)
1-11 months	3.56	%		125,336	39	%	2.32	%		89,389	30	%	2.83	%		68,500	29	%
12-23 months	3.74	%		48,149	15	%	2.81	%		42,019	14	%	2.88	%		23,695	10	%
24-35 months	4.20	%		9,670	3	%	3.49	%		26,608	9	%	3.03	%		12,052	5	%
36-47 months	3.94	%		4,248	1	%	4.16	%		6,012	2	%	4.87	%		8,643	4	%
48-59 months	4.14	%		1,851	1	%	3.92	%		3,982	1	%	4.49	%		4,595	2	%
60-71 months	4.64	%		552	0	%	3.98	%		1,013	0	%	3.90	%		2,541	1	%
72-95 months	0.00	%		-	0	%	4.06	%		13	0	%	3.94	%		61	0	%
Total				189,806	59	%				169,036	56	%				120,087	51	%
Total Deposits			$	320,059	100	%			$	296,387	100	%			$	237,131	100	%

20

	As of June 30,
	2003
	Average				Percent
	Interest				of Total
	Rate			Amount	Deposits
(Dollars in Thousands)
NOW	0.31	%	$	32,806	14	%
Savings	0.80	%		17,458	7	%
Money Market	1.31	%		37,512	16	%
Non-interest
bearing demand	0.00	%		24,651	11	%
Total				112,427	48	%
Certificates of Deposit: (fixed-rate, fixed-term)
1-11 months	3.04	%		70,009	30	%
12-23 months	3.39	%		26,161	11	%
24-35 months	3.02	%		5,552	2	%
36-47 months	3.14	%		5,187	2	%
48-59 months	4.42	%		7,409	2	%
60-71 months	5.05	%		5,620	2	%
72-95 months	4.25	%		3,312	2	%
Total				123,250	52	%
Total Deposits			$	235,677	100	%

21

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, 2005, excluding brokered deposits.

(Dollars in thousands)
		December 31, 2005
Three months or less	$	5,109
Over three through six months		11,451
Over six through twelve months		7,481
Over twelve months		6,263
Total	$	30,305

Borrowings

The Company’s borrowings consist primarily of FHLB advances and issuances of junior subordinated debentures.

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.

Selected Data for Federal Home Loan Bank Advances
		As of						As of
		December 31,						June 30,
		2005		2004		2003		2003
(Dollars in Thousands)
Remaining maturity:
Less than one year	$	72,414		61,264		63,290		60,323
One to two years		3,000		12,500		7,850		7,350
Two to three years		16,650		3,000		10,500		6,500
Three to four years		386		16,650		1,000		3,000
Four to five years		3,000		386		14,950		3,950
Over five years		4,550		6,200		11,247		33,496
Total	$	100,000		100,000		108,837		114,619
Weighted average rate at end of period		4.55	%	3.62	%	3.58	%	4.14	%
For the period:
Average balance	$	111,104		111,169		101,841		108,020
Average interest rate		4.04	%	3.17	%	4.17	%	5.22	%
Maximum outstanding as of any month end	$	132,000		120,086		109,496		114,619

22

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 for [$465,000], 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 intends to use the proceeds of the sale of the Trust Preferred Securities for general corporate purposes which may include investment in the Bank (including funding of the Bank’s loan portfolio growth), acquisitions, investments, payment of dividends and repurchases of its outstanding Common Stock.

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,
		2005		2004	2003
(Dollars in Thousands)
Subordinated debentures	$	15,465		-	-
Weighted average interest
rate of subordinated debentures		6.62	%	-	-

23

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 (ii) 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.

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.

Other information about the Company’s business segments is contained in the section captioned “Segment Information” in Note 1 to the consolidated financial statements in the 2005 Annual Report. This information is incorporated herein by reference.

Critical Accounting Policies

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Item 8 of this report is based upon the Company’s consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. On an on-going basis, management evaluates its estimates and judgments.

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

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

The Company has identified the accounting policies for the allowance for loan losses and related significant estimates and judgments as critical to its business operations and the understanding of its results of operations. For a detailed discussion on the application of these significant estimates and judgments and our accounting policies, also see Note 1 to the consolidated financial statements in the December 31, 2005 Annual Report.

24

Financial Highlights	Year ended			Year ended		Six Months Ended		Year Ended
	December 31,			December 31,		December 31,		June 30,
	2005			2004		2003		2003
Dividend Payout Ratio		32	%	43	%	60	%	48	%
Return on Average Assets (1)		1.28	%	1.04	%	0.45	%	0.95	%
Return on Average Equity (1)		15.08	%	10.74	%	4.42	%	9.78	%
Stockholders' Equity to Assets		8.75	%	9.25	%	9.82	%	9.37	%
EPS Diluted	$	2.03		1.47		0.52		1.26
Dividends	$	0.65		0.63		0.31		0.60
(1) Annualized for six months ended December 31, 2003

Employees

 Substantially, all of the activities of the Company are conducted through the Bank. As of December 31, 2005 the Company has no salaried employees.

As of March 8, 2006, the Bank has 105 full-time employees and 37 part-time 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.

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

The Bank's primary competition comprises 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 23 commercial banks, 12 credit unions, and 1 savings institution.

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.

25

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.

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, 2005, 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 2005 Annual Report.

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

26

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.

Regulation of the Bank

General. The Bank is regulated and supervised by the Missouri Division of Finance, and its deposits are insured by the Savings Association Insurance Fund (“SAIF”) of the FDIC. 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 Missouri Division of Finance, 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.

27

The Bank must file reports with the Missouri Division of Finance 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 SAIF 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 Accounts. The deposit accounts held by the Bank are insured by the SAIF to a maximum of $100,000 for each insured depositor (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator.

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

 See “Recent Legislation and Legislative and Regulatory Initiatives below for recent legislation which affects insurance on deposit accounts and other matters."

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. 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, 2005. Applicable capital and ratio information is contained under the section titled “Regulatory Matters” in Note 1 to the consolidated financial statements in the 2005 Annual Report.

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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.

Anti-Terrorism Legislation. The USA Patriot Act of 2001 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.

Recent Legislation and Legislative and Regulatory Initiatives

On February 8, 2006, the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”) was signed into law as part of the Deficit Reduction Act of 2005 (conforming amendments are contained in the Federal Deposit Insurance Conforming Amendments Act of 2005 signed into law on February 15, 2006). Under FDIRA, the SAIF and the FDIC’s Bank Insurance Fund (“BIF”) will be merged into the new Deposit Insurance Fund (“DIF”). In addition, while general coverage remains at $100,000, beginning April 1, 2010 and the first day of each subsequent five year period the coverage is subject to increases for inflation, and FDRIA increases the deposit insurance coverage for individual retirement accounts and certain other employee benefit plan accounts to $250,000, subject to increases for inflation, and provides pass-through coverage for employee benefit plans. FDRIA also authorizes the FDIC the set deposit insurance premium assessments for depository institutions in amounts the FDIC determines to be necessary or appropriate, taking into consideration certain factors, including the estimated operating expenses of the DIF, the estimated case resolution expenses and income of the DIF, the projected effects on the capital and earnings of depository institutions, the risk factors taken into consideration under the risk-based assessment system and any other factors deemed by the FDIC to be appropriate. Further, FDRIA establishes the DIF’s reserve ratio to range from 1.15% to 1.50%, the ratio to be determined annually by the FDIC regulations, and requires the FDIC to declare dividends payable to depository institutions equal to 100% of the amount of the reserve in excess of 1.50% and 50% of the amount of the reserve between 1.35% and 1.50%. Other than the merger of the SAIF and the BIF, which will be effective July 1, 2006, the foregoing and other provisions of FDRIA will be effective upon the FDIC prescribing final regulations implementing the provisions, which shall not be later than 270 after enactment of FDRIA.

Additional proposals to change the laws governing the financial institutions industry may be introduced in the United States Congress and in state legislatures, and the various banking agencies often modify existing regulations or adopt new regulations. It cannot be determined what impact future legislation or regulations will have on the financial institutions industry generally or on the Company and the Bank.

29

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

Carter Peters is Executive Vice President and Chief Operations Officer of the Bank. He joined the Bank in 2005. Mr. Peters has over 13 years of experience in the financial services and public accounting industries. 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 also a member of the advisory committee for Families for Children, a project of the Council of Churches of the Ozarks.

Bruce Winston is Senior Vice President and Chief Financial Officer of the Bank. He joined the Bank in 1992. Mr. Winston has held the same positions with the Company since its formation in September 1997. Prior to joining the Bank, he served in various other capacities with two other financial institutions over a period of 20 years. He is a graduate of Missouri State University.

As of December 31, 2005, the age of these individuals was 42 for Mr. Burke, 35 for Mr. Peters, and 57 for Mr. Winston.

Item 1A. Risk Factors

An investment in shares of the Company’s common stock involves certain risks. The following risks and other information in this report are 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” incorporated by reference in this report, should be carefully considered in the evaluation of the Company before investing in shares of its common stock. 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 report is qualified in its entirety by all these risk factors.

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

•  Changes in securities analysts’ estimates of financial performance

•  Volatility of stock market prices and volumes

•  Rumors or erroneous information

•  Changes in market valuations of similar companies

•  Changes in interest rates

•  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

30

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

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

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

Regulatory Risk

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

Interest Rate Risk

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

Lending Risk

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

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.

31

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, four full-service branch offices in Springfield, one full-service branch and one in-store branch located in the Wal-Mart Supercenter in Nixa, Christian County, Missouri. The Bank has a relatively new main office building, which provides the Bank with a modern office for customer services and projects a favorable image for the Bank in the local marketplace.

The Bank maintains a network of Automated Teller Machines ("ATMs"). A total of 19 ATMs are located at various branches and primarily convenience stores located in Greene Christian Counties in Missouri. In addition, the Bank is a member of the Privileged Status ATM network, which provides its customers surcharge free access to over 60 area ATMs and over 1,000 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, 2005, 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, 2005.

PART II

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

The information contained in the section captioned “Common Stock Prices and Dividends” on page 1 of the 2005 Annual Report is incorporated herein by reference. Information under the section captioned “Cash Dividends Paid” on pages 12 and 13 of the 2005 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.

32

Issuer Purchase of Equity Securities

The following table summarizes the repurchase activity of the Company’s Common Stock during the Company’s fourth quarter ended December 31, 2005.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2005 to October 31, 2005		-		-		-		69,016
November 1, 2005 to November 30, 2005		18,473		27.45		18,473		50,543
December 1, 2005 to December 31, 2005		12,000		27.88		12,000		38,543
Total		30,473		27.62		30,473

(1) The Company has a repurchase plan which was announced on November 22, 2002. This plan authorizes the purchase by the Company of 300,000 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 information included under the caption “Junior Subordinated Debentures” in Item 1 of Part 1 of this Report, as such information relates to the offer and sale of certain trust preferred securities, is incorporated herein by reference. The securities were offered and sold in a private placement in reliance upon the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended (the “Act”), to a selected group of institutional purchasers who are “accredited investors” within the meaning of Section 501(a) of Regulation D under the Act. The Company paid $30,000 in legal fees on this offering.

33

Item 6. Selected Financial Data

The information contained on pages 3 and 4 under the section captioned “Selected Consolidated Financial and Other Data” of the 2005 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 5 through 22 under the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2005 Annual Report is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information contained on pages 16 and 17 under the sections captioned “Asset/Liability Management” and “Interest Rate Sensitivity Analysis” of the 2005 Annual Report is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The financial statements set forth on pages 23 to 54 of the 2005 Annual Report and the financial information contained under the section captioned “Summary of Unaudited Quarterly Operating Results” set forth on page 22 of the 2005 Annual Report is incorporated herein by reference.

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

Not applicable.

Item 9A. Controls and Procedures

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

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation 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, 2005.

(b) There have been no changes in the Company’s internal control over financial reporting during the fourth quarter ending December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 9B. Other Information

Not applicable.

34

PART III

Item 10. Directors and Executive Officers of the Registrant

The information contained under the section captioned "First Proposal: Election of Directors" on pages 3 to 5 (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.gfed.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 audit committee members 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 sections captioned "Directors Compensation", “Compensation Committee Interlocks and Insider Participation”, “Summary Compensation Table”,“Employment Agreements”, “Option Grants During 2005 Fiscal Year”, and “Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option Values” is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and 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.

35

Equity Compensation Plan Information
					(c)
					Number of securities
					remaining available
	(a)		(b)		for future issuance
	Number of securities to be		Weighted-average		under equity
	issued upon exercise of		exercise price of		compensation plans
	outstanding options,		outstanding options,		(excluding securities
Plan category	warrants and rights		warrants and rights		reflected in column (a))
Equity compensation plans		305,001		15.56		230,000
approved by security holders
Equity compensation plans not
approved by security holders		34,875		16.50		1,498
Totals		339,876		15.66		231,498

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, 2005, there are no restricted shares in this plan that are not vested. There have been 17,875 options granted underthis 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. If, however, a previously issued award expires, becomes unexercisable, or is forfeited prior to its exercise, then new awards may be granted under the plan for the number of shares which were subject to such expired or forfeited awards.

36

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, 2005, 2,047 of the shares in this plan are not vested. No options have been granted under this plan. 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 which expire, become unexercisable, or are forfeited prior to their exercise may be granted as new awards for the number of shares which were subject to such expired or forfeited awards.

2003 Stock Option 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 thisagreement 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 theseoptions were granted at an exercise price of $17.20 per share.

2004 Stock Option 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 thisagreement 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 theseoptions were granted at an exercise price of $19.62 per share.

Item 13. Certain Relationships and Related Transactions

The information required by this item is contained under the section captioned "Indebtedness of Management and Directors and Transactions with Certain Related Persons" 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.

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 2005 Annual Report are filed as part of this Report and incorporated herein by reference.

37

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2005, 2004 and 2003.

Consolidated Statements of Income for the Years Ended December 31, 2005 and 2004, the Six Months Ended December 31, 2003 and 2002 and the Year Ended June 30, 2003.

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005 and 2004, the Six Months Ended December 31, 2003 andthe Year Ended June 30, 2003.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004, the Six Months Ended December 31, 2003 and 2002 and the Year Ended June 30, 2003.

Notes to Consolidated Financial Statements.

38

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

NumberExhibit Description

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

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

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

The Company hereby agrees to furnish the SEC upon request, copies of the instruments defining the rights of the holders of each issue of its junior subordinated debentures.

10.11994 Stock Option Plan *(3)

10.2Recognition and Retention Plan *(4)

10.31998 Stock Option Plan *(5)

10.4Restricted Stock Plan *(6)

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

10.6 2000 Stock Compensation Plan *(6)

10.7 2001 Stock Compensation Plan *(6)

10.8   2003 Stock Option Agreement *(8)

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

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

10.11   2004 Stock Option Plan *(11)

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

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

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)

10.17   Resignation and Separation Agreement and Release of All Claims effective as of October 1, 2005 between the Bank and Eldon Erwin *

10.18   Resignation and Separation Agreement and Release of All Claims effective as of August 6, 2005 between the Company, the Bank and William B. Williams *

10.19   Written Description of Compensatory Arrangement with Chief Operating Officer *(15)

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 2005 Annual Report.

13  Annual Report to Stockholders for the fiscal period ended December 31,2005 (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

39

31.1 Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act

31.2 Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act

32.1 CEO certification pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act

32.2 CFO certification pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act

* 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(ii) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 filed by the Registrant on August 10, 2004 (SEC File No. 0-23325) 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 10.18 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed by the Registrant on August 15, 2005 (SEC File No. 0-23325) and incorporated herein by reference.

40

SIGNATURES

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

GUARANTY FEDERAL BANCSHARES, INC.

Date:  March 31, 2006	By:	/s/ Shaun A. Burke
		Shaun A. Burke
		President 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/  Bruce Winston
Shaun A. Burke President and Chief Executive Officer and Director (Principal Executive Officer) Date:  March 31, 2006	Bruce Winston SVP/Chief Financial Officer (Principal Accounting and Financial Officer) Date:  March 31, 2006

By: /s/  Don M. Gibson	By: /s/  Jack L. Barham
Don M. Gibson Chairman of the Board and Director Date:  March 31, 2006	Jack L. Barham Director Date:  March 31, 2006

By: /s/ Wayne V. Barnes	By: /s/ Gary Lipscomb
Wayne V. Barnes Director March 31, 2006	Gary Lipscomb Director March 31, 2006

By: /s/ Greg V. Ostergren	By: /s/ Kurt D. Hellweg
Greg V. Ostergren Director Date:  March 31, 2006	Kurt D. Hellweg Director Date:  March 31, 2006

By: /s/ Tim Rosenbury	By: /s/ James L. Sivils, III
Tim Rosenbury Director Date:  March 31, 2006	James L. Sivils, III Director Date:  March 31, 2006

 

41

EX-13

CONTENTS

1 Investor Information

2 President’s Message

3 Selected Consolidated Financial and Other Data

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

23Consolidated Financial Statements

55Report of Independent Registered Public Accounting Firm

INVESTOR INFORMATION

COMMON STOCK PRICES & DIVIDENDS

The common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is traded in the over-the-counter market and quoted on the NASDAQ National Market under the symbol “GFED”. As of March 8, 2006, there were approximately 1,668 stockholders. At that date the Company had 6,607,250 shares of common stock issued and 2,954,728 shares of common stock outstanding.

During the year ended December 31, 2005, the Company paid dividends of (i) $0.16 per share on April 14, 2005, to stockholders of record as of March 30, 2005, (ii) $0.16 per share on July 15, 2005 to stockholders of record as of July 1, 2005, and (iii) $0.165 per share on October 14, 2005, to stockholders of record as of October 1, 2005, and also declared a cash dividend of $0.165 per share on December 22, 2005, which was paid on January 20, 2006, to stockholders of record on January 6, 2006. During the year ended December 31, 2004, the Company paid dividends of (i) $0.155 per share on April 14, 2004, to stockholders of record as of March 30, 2004, (ii) $0.155 per share on July 15, 2004 to stockholders of record as of July 1, 2004, and (iii) $0.16 per share on October 15, 2004, to stockholders of record as of October 1, 2004, and also declared a cash dividend of $0.16 per share on December 16, 2004, which was paid on January 21, 2005, to stockholders of record on January 7, 2005. The Company also paid a cash dividend of $0.155 per share on January 23, 2004 to stockholders of record on January 9, 2004. The Company’s Board of Directors anticipates paying dividends on comparable dates during fiscal year ended December 31, 2006 to the payment dates during the fiscal year ended December 31, 2005. Such future dividends, if any, will be at the discretion of the Company’s Board of Directors and will depend on, among other things, the Company’s results of operations, cash requirements and surplus, financial condition and other factors that the Company’s Board of Directors may consider relevant.

The table below reflects the range of common stock high and low closing prices per the NASDAQ Stock Market by quarter for the years ended December 31, 2005 and 2004.

	Year ended		Year ended
	December 31, 2005		December 31, 2004
	High	Low	High	Low
Quarter ended:
March 31	$24.06	22.55	19.95	18.70
June 30	23.73	21.93	19.95	18.81
September 30	27.25	23.00	20.01	19.11
December 31	28.25	26.10	24.15	20.00

ANNUAL MEETING OF STOCKHOLDERS: The Annual Meeting of Stockholders of the Company will be held Wednesday, May 24, 2006 at 6:00 p.m., local time, at the Clarion Hotel, 3333 S. Glenstone, Springfield, Missouri.

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

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

STOCK TRADING INFORMATION: Over-the Counter Symbol: GFED

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

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: BKD, LLP, 901 St. Louis St., PO Box 1190, Springfield, MO 65801-1190

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

1

Guaranty Federal Bancshares, Inc.                                                                                                                                    President's Message

Dear Shareholders and Associates,

We are pleased to present in this 2005 Annual Report another record year of operating results for Guaranty Federal Bancshares, Inc.

The Company continued its steady growth ending the year with assets totaling $481.0 million, up $40.4 million or 9.1% from the prior year. Fueling this growth is the Company’s focus in the commercial lending area. Strong loan demand in construction and commercial real estate resulted in loans outstanding at year end of $435.5 million, an increase of $43.2 million or 11.0% from the prior year. While experiencing this growth, Guaranty maintained its high standard of credit quality.

Our positive earnings trend continued with net income for 2005 totaling $5.9 million or $2.03 per diluted share compared to $1.47 per diluted share for the previous year, a 38.1% increase. The two-year improvement raised the Company’s return on assets and return on equity ratios to 1.28% and 14.12%, respectively, at December 31, 2005. Quality asset growth and improvement in our net interest margin were keys to our strong increase in earnings in 2005.

The performance of our stock continued to increase, beginning the year at $24.06 per share and reaching a high during the year of $28.25 on November 29, 2005, while closing at $27.90 on December 31, 2005. The closing price on March 29, 2006 was another record high at $30.24, an increase of 8.4% from December 31, 2005. More significantly, over the past five years the price of our stock has increased over 140%. Since inception of the Company, the annual dividend per share has increased from $0.31 per share in 1998 to $0.645 per share in 2005. This was the eighth consecutive year in which the annual dividend payment has increased.

The financial improvements achieved during the past two years are the result of our associates focusing on the positive aspects of the many changes at Guaranty Bank. The Board of Directors and new management team have made significant investments in people, products, facilities and technology. These investments combined with the dedication and commitment of our associates to deliver exemplary service,  have resulted in a substantial increase in shareholder value.

On behalf of the management, staff and Board of Directors, I want to express my heartfelt thanks to Gary Lipscomb for his service to the Company. After 15 years of dedicated service as a member of our Board of Directors, Gary will retire at the expiration of his current term later this year. We sincerely appreciate his valuable advice and counsel and wish him the very best in his retirement.

We are excited about our future, and on behalf of everyone at Guaranty, I want to thank you, our shareholders, for your confidence and support.

Sincerely,

/s/ Shaun A. Burke

President & CEO

Guaranty Federal Bancshares, Inc.

2

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

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

Summary Statement of Income	Year ended		Year ended		Six months ended
		December 31,		December 31,		December 31,
		2005		2004		2003
Interest income	$	27,283		20,539		9,846
Interest expense		11,860		8,446		4,491
Net interest income		15,423		12,093		5,355
Provision for loan losses		945		864		1,162
Net interest income after provision
for loan losses		14,478		11,229		4,193
Noninterest income		3,597		3,616		2,089
Noninterest expense		8,670		8,248		3,994
Income before income taxes		9,406		6,597		2,288
Provision for income taxes		3,507		2,313		788
Net income	$	5,899		4,284		1,500
Basic	$	2.12		1.53		0.54
Diluted	$	2.03		1.47		0.52
	Six months ended			Year ended
		December 31,		June 30,
		2002		2003
		(Unaudited)
Interest income	$	11,290		21,782
Interest expense		6,086		11,445
Net interest income		5,204		10,337
Provision for loan losses		205		610
Net interest income after provision
for loan losses		4,999		9,727
Noninterest income		1,752		3,688
Noninterest expense		4,060		8,179
Income before income taxes		2,691		5,236
Provision for income taxes		927		1,656
Net income	$	1,764		3,580
Basic	$	0.63		1.28
Diluted	$	0.62		1.26

3

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

Summary Balance Sheet	As of December 31,					As of June 30,
		2005	2004	2003 (1)		2003
ASSETS
Cash and cash equivalents	$	20,506	15,896	22,657		19,015
Investment securities		12,681	21,553	16,731		15,522
Loans receivable, net		435,528	392,333	332,130		336,838
Accrued interest receivable		2,089	1,570	1,306		1,430
Prepaids and other assets		2,717	1,976	7,351		10,455
Foreclosed assets		27	78	6		182
Premises and equipment		7,453	7,189	6,576		6,709
	$	481,001	440,597	386,757		390,151
LIABILITIES
Deposits	$	320,059	296,388	237,131		235,677
Federal Home Loan Bank advances		100,000	100,000	108,837		114,619
Subordinated debentures		15,465	-	-		-
Other liabilities		3,385	3,436	2,811		3,313
		438,909	399,824	348,779		353,609
STOCKHOLDERS' EQUITY		42,092	40,773	37,978		36,542
	$	481,001	440,597	386,757		390,151
Supplemental Data		As of December 31,				As of June 30,
		2005	2004	2003 (1	)	2003
Number of full-service offices		7	7	9		9
Cash dividends per share	$	0.65	0.63	0.31		0.60

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

4

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

GENERAL

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

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

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

In 2003, the Company also determined to change its fiscal year end from June 30 to a calendar year end of December 31. The six-month period ended December 31, 2003, transitions between the Company’s old and new fiscal year ends. As a result, the Company reported a six-month transition period ended December 31, 2003 in order to change to this new calendar year end.

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

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

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

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

5

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

FINANCIAL CONDITION

From December 31, 2004 to December 31, 2005, the Company’s total assets increased $40,404,140 (9%) to $481,000,668, liabilities increased $39,085,254 (10%) to $438,908,519, and stockholders' equity increased $1,318,886 (3%) to $42,092,149. The ratio of stockholders’ equity to total assets decreased to 8.8% during this period, compared to 9% as of December 31, 2004.

From December 31, 2004 to December 31, 2005, securities available-for-sale decreased $8,344,621 (55%).  During December 2005 the Company restructured its investment portfolio by selling its 40,000 shares in Fannie Mae preferred stock, at a loss of $526,000 and investments in trust preferred securities totaling $6.6 million at a gain of $58,663.  The net loss from these sales was offset with sales of shares of FHLMC stock as discussed further below. The Company currently owns 48,600 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $47,595 in the securities available-for-sale category.  As of December 31, 2005, the gross unrealized gain on the stock is $3,176,010, a decrease of $1,209,020 from the gross unrealized gain at December 31, 2004.  This decrease is primarily due to the sale of 19,400 shares of the FHLMC stock in 2005.  In addition the stock price of FHLMC stock decreased from $73.70 per share as of December 31, 2004 to $66.35 per share as of December 31, 2005.  See also discussion under “Results of Operations - Comparison of Year Ended December 31, 2005 and December 31, 2004 - Non-Interest Income.” 

From December 31, 2004 to December 31, 2005, securities held-to-maturity decreased $360,434 (28%) to $944,724 due to repayments received during the period, and stock of the Federal Home Loan Bank of Des Moines (“FHLB”) was reduced by $167,700 (3%) to $4,978,800 due to the sale of stock which exceeded the FHLB requirements.  The Bank is required to own stock in the FHLB equal to 0.12% of assets plus 4.45% of advances.

From December 31, 2004 to December 31, 2005, net loans receivable increased by $44,692,637 (11%) to $433,435,429. During this period, permanent loans secured by both owner and non-owner occupied one to four unit residential real estate decreased $16,275,648 (14%), consumer installment loans decreased $908,546 (4%), multi-family permanent loans increased $1,371,702 (3%), construction loans increased $25,299,646 (56%), permanent loans secured by commercial real estate increased $25,334,281 (26%) and other commercial loans increased $10,764,037 (19%). During this period the Company continued to increase its emphasis on commercial lending, while selling the majority of conforming single family loan production on the secondary market. Loans sold on the secondary market are sold both servicing retained, whereby the Bank continues to service the loan and servicing released, whereby the third party who purchases the loan provides the servicing. Recently, the majority of the loans sold on the secondary market have been sold servicing released. As a result of these loan sales, loans serviced for others decreased $10,543,585 (8%).

From December 31, 2004 to December 31, 2005, loans past due 90 days or more increased $302,075 to $721,540 (0.2% of net loans). As of December 31, 2005, management considers loans totaling $4,626,260 as impaired with a related allowance for loan losses of $532,811. Single-family homes collateralize the majority of the impaired loans. The Bank recognizes interest income on impaired loans as payments are received. Management believes the loss allowances recorded for these loans are sufficient to liquidate the collateral without further loss.

From December 31, 2004 to December 31, 2005, the allowance for loan losses increased $863,000 to $5,399,654. In addition to the provision for loan loss of $945,000 recorded by the Company during year ended December 31, 2005 loan charge-offs exceeded recoveries by $82,000 for the twelve months ended December 31, 2005. The allowance for loan losses as of December 31, 2005 and December 31, 2004 was 1.2% and 1.2% of net loans outstanding, respectively. As of December 31,2005, the allowance for loan losses was 117% of impaired loans versus 75% as of December 31, 2004.

As of December 31, 2005, foreclosed assets held for sale consisted of four vehicles. This represents a decrease from December 31, 2004 primarily resulting from the Company’s sale during 2005 of the single family residence which was held for sale as of December 31, 2004.

From December 31, 2004 to December 31, 2005, premises and equipment increased $263,931 (4%) to $7,452,798. This increase is primarily due the addition of a new branch location and new equipment.

6

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

From December 31, 2004 to December 31, 2005, deposits increased $23,671,209 (8%) to $320,058,951. During this period, core deposit accounts increased by $2,901,337 (2%) to 41% of total deposits and certificates of deposit increased by $20,769,872 (12%) to $189,806,318. Included in the certificates of deposit total is $57,629,088 in deposits placed by brokers, a decrease from $68,374,919 as of December 31, 2004. Management considers brokered deposits to be an effective source of funds that cost less at the margin than increasing rates on retail deposits in our local market.

From December 31, 2004 to December 31, 2005, the Company’s borrowings from the Federal Home Loan Bank (“FHLB”) remained the same, at $100,000,000, which satisfies the Company’s requirement to comply with the FHLB advances limitation of 35% of total assets.

As of December 31, 2005, the Company had $15,465,000 of junior subordinated debentures that were comprised of $5,155,000 issued to Guaranty Statutory Trust I and $10,310,000 issued to Guaranty Statutory Trust II. During the year ended December 31, 2004, the Company did not issue or have outstanding any subordinated debentures. On December 15, 2005, the Company completed an offering of $15 million of trust preferred securities (”Trust Securities”). The Company formed Guaranty Statutory Trust I and Guaranty Statutory Trust II as wholly-owned subsidiaries and Delaware statutory trusts for the purpose of issuing the Trust Securities. The proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust I, together with the proceeds of the Trust’s sale of its common securities issued to the Company, were used by the Trust to purchase 30-year junior subordinated deferrable interest debentures from the Company in the principal amount of $5,155,000 (“Trust I Debentures”). The proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust II, together with the proceeds of the Trust’s sale of its common securities issued to the Company, were used by the Trust to purchase 30-year junior subordinated deferrable interest debentures from the Company in the principal amount of $10,310,000 (“Trust II Debentures”, and collectively with the Trust I Debentures, the “Debentures”). Both the Trust I Debentures and the Trust II Debentures were issued pursuant to the terms of Indentures dated December 15, 2005 by and between the Company and Wilmington Trust Company, as trustee. The Trust I Debentures bear interest at a fixed rate of 6.92%, payable quarterly. The Trust II Debentures bear interest at a fixed rate of 6.47% for 5 years, payable quarterly, after issuance and thereafter at a floating rate equal to the three month LIBOR plus 1.45%. The interest payments by the Company to the Trusts will be used to pay the dividends payable by the Trusts to the holders of the Trust Securities.

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

The Company invested $13,970,000 from the proceeds of the sale of the trust preferred securities in its banking subsidiary, where the funds were used primarily to restructure the investment portfolio, fund loan growth and repay FHLB advances.

Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $1,318,886 (3%) to $42,092,149 as of December 31, 2005. Net income for the period ended December 31, 2005 exceeded cash dividends paid or declared by $4,096,207. The Company repurchased 146,542 shares as treasury stock at a cost of $3,563,011, at an average price of $24.31 per share. As of December 31, 2005, 38,543 shares remain to be repurchased under the repurchase plan announced November 22, 2002. The decrease in unrealized appreciation on securities available-for-sale, net of tax, decreased stockholders’ equity by $843,903. Stockholders’ equity also increased as a result of exercises of stock options to purchase the Company’s Common Stock and the release of shares of the Company’s Common Stock held by the Bank sponsored Employee Stock Ownership Plan. On a per share basis, stockholders’ equity increased $0.72 (5%) from $14.45 as of December 31, 2004 to $15.17 as of December 31, 2005.

7

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

The following table shows the balances as of December 31, 2005 of various categories of interest-earning assets and interest-bearing liabilities and the corresponding yields and costs, and, for the periods indicated: (1) the average monthly balances of various categories of interest-earning assets and interest-bearing liabilities, (2) the total interest earned or paid thereon, and (3) the resulting weighted average yields and costs. In addition, the table shows the Company’s rate spreads and net yields. Average balances are based on daily balances. Tax-free income is not material; accordingly, interest income and related average yields have not been calculated on a tax equivalent basis. Average loan balances include non-accrual loans. Dollar amounts are expressed in thousands.

		As of					Year Ended							Year Ended
		December 31, 2005					December 31, 2005							December 31, 2004
		Balance		Yield / Cost			Average Balance			Interest	Yield / Cost			Average Balance		Interest	Yield / Cost
ASSETS
Interest-earning:
Loans	$	435,528		6.88	%	$	419,552		$	26,553	6.33	%	$	366,696		19,990	5.45	%
Investment securities		4,526		5.23	%		9,905			432	4.36	%		10,076		289	2.87	%
Other assets		10,670		3.04	%		11,681			299	2.56	%		14,508		260	1.79	%
Total interest-earning		450,724		6.77	%		441,138			27,284	6.18	%		391,280		20,539	5.25	%
Noninterest-earning		30,277					20,205							20,812
	$	481,001				$	461,343						$	412,092
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts	$	14,298		1.80	%	$	14,931			201	1.35	%	$	16,607		140	0.84	%
Transaction accounts		79,761		1.24	%		84,776			1,300	1.53	%		80,001		793	0.99	%
Certificates of deposit		189,807		3.66	%		178,301			5,788	3.25	%		139,264		3,986	2.86	%
FHLB advances		100,000		4.55	%		111,104			4,494	4.04	%		111,169		3,519	3.17	%
Subordinated debentures		15,465		6.62	%		701			47	6.70	%		-		-	-
Other borrowed funds		1,594		2.55	%		1,395			31	2.22	%		987		7	0.71	%
Total interest-bearing		400,925		3.44	%		391,208			11,861	3.03	%		348,029		8,446	2.43	%
Noninterest-bearing		37,984					28,374							24,173
Total liabilities		438,909					419,582							372,202
Stockholders' equity		42,092					41,761							39,891
	$	481,001				$	461,343						$	412,092
Net earning balance	$	49,799				$	49,930						$	43,252
Earning yield less costing rate				3.33	%						3.15	%					2.82	%
Net interest income, and
net yield spread on
interest-earning assets									$	15,423	3.50	%				12,094	3.09	%
Ratio of interest-earning assets to
interest-bearing liabilities		112	%				113	%						112	%

8

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

	Six Months Ended								Six Months Ended						Year Ended
	December 31, 2003								December 31, 2002						June 30, 2003
									(Unaudited)
		Average Balance			Interest	Yield / Cost			Average Balance		Interest	Yield / Cost			Average Balance		Interest	Yield / Cost
ASSETS
Interest-earning:
Loans	$	334,071		$	9,567	5.73	%	$	323,292		10,827	6.70	%	$	326,441		20,928	6.41	%
Investment securities		9,899			135	2.73	%		11,988		231	3.85	%		11,103		419	3.77	%
Other assets		13,867			144	2.08	%		24,800		232	1.87	%		18,864		434	2.30	%
Total interest-earning		357,837			9,846	5.50	%		360,080		11,290	6.27	%		356,408		21,781	6.11	%
Noninterest-earning		20,821							13,990						19,368
	$	378,658						$	374,070					$	375,776
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts	$	17,483			70	0.80	%	$	17,507		132	1.51	%	$	17,390		221	1.27	%
Transaction accounts		74,578			327	0.88	%		67,002		460	1.37	%		67,614		814	1.20	%
Certificates of deposit		121,926			1,971	3.23	%		127,218		2,530	3.98	%		126,376		4,768	3.77	%
FHLB advances		101,841			2,121	4.17	%		107,612		2,959	5.50	%		108,020		5,634	5.22	%
Other borrowed funds		907			2	0.44	%		971		5	1.03	%		832		7	0.84	%
Total interest-bearing		316,735			4,491	2.84	%		320,310		6,086	3.80	%		320,232		11,444	3.57	%
Noninterest-bearing		24,038							17,390						18,946
Total liabilities		340,773							337,700						339,178
Stockholders' equity		37,885							36,370						36,598
	$	378,658						$	374,070					$	375,776
Net earning balance	$	41,102						$	39,770					$	36,176
Earning yield less costing rate						2.66	%					2.47	%					2.54	%
Net interest income, and
net yield spread on
interest-earning assets				$	5,355	2.99	%				5,204	2.89	%				10,337	2.90	%
Ratio of interest-earning assets to
interest-bearing liabilities		113	%						112	%					111	%

9

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

		Year ended							Year ended
		December 31, 2005 versus December 31, 2004							December 31, 2004 versus June 30, 2003
		Average Balance		Interest Rate	Rate & Balance		Total		Average Balance		Interest Rate		Rate & Balance		Total
Interest income:
Loans	$	2,881		3,218	464		6,563	$	2,581		(3,133	)	(386	)	(938	)
Investment securitites		(5	)	150	(2	)	143		(39	)	(100	)	9		(130	)
Other assets		(50	)	111	(22	)	39		(100	)	(96	)	22		(174	)
Net change in interest income		2,826		3,479	440		6,745		2,442		(3,329	)	(355	)	(1,242	)
Interest expense:
Savings accounts		(14	)	84	(9	)	61		(10	)	(75	)	4		(81	)
Transaction accounts		47		433	26		506		149		(143	)	(27	)	(21	)
Certificates of deposit		1,117		535	150		1,802		486		(1,151	)	(117	)	(782	)
Advances		(2	)	977	(1	)	974		164		(2,214	)	(65	)	(2,115	)
Subordinated debentures		47		-	-		47		-		-		-		-
Other borrowed funds		3		15	6		24		1		(1	)	-		-
Net change in interest expense		1,198		2,044	172		3,414		790		(3,584	)	(205	)	(2,999	)
Change in net interest income	$	1,628		1,435	268		3,331	$	1,652		255		(150	)	1,757

RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004

	Prime			Ten-Year Treasury			One-Year Treasury
December 31, 2005		6.19	%		4.29	%		3.62	%
December 31, 2004		4.34	%		4.27	%		1.88	%
Change in rates		1.85	%		0.02	%		1.74	%

Interest Rates. The Bank charges borrowers and pays depositors interest rates that are largely a function of the general level of interest rates. The above table sets forth the weekly average interest rates for the 52 weeks ending December 31, 2005 and December 31, 2004 as reported by the Federal Reserve. The Bank typically indexes its adjustable rate commercial loans to prime and its adjustable rate mortgage loans to the one-year treasury rate. The ten-year treasury rate is a proxy for 30-year fixed rate home mortgage loans.

Rates trended upward during 2004 as the FOMC increased the discount rates 25 basis points after five consecutive meetings from June to December 2004. As of year-end 2004, the prime rate was 5.25% up from 4.00% where it was quoted from June 2003 to June 2004. This trend continued in 2005 as the FOMC increased the discount rates 25 basis points after eight consecutive meetings from January 2005 to December 2005. As of year-end 2005 the prime rate was 7.25%.

10

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Interest Income. Total interest income increased $6,744,135 (33%) as the average balance of interest-earning assets increased $49,858,000 (12%). In addition, the yield on average interest earning assets increased 93 basis points to 6.18%.

Interest on loans increased $6,562,743 (33%) and the average loan receivable balance increased $52,856,000 (14%) while the average yield increased 88 basis points to 6.33%. The increase in loan yield is the result of the combination of new loans at higher rates, a reduction in prepayments, and an increase of interest rates on adjustable rate loans.

Interest Expense. Total interest expense increased $3,414,774 (40%) as the average balance of interest-bearing liabilities increased $43,179,000 (12%). In addition, the average cost of interest-bearing liabilities increased 60 basis points to 3.03%.

Interest expense on deposits increased $2,368,909 (48%) as the average balance of interest bearing deposits increased $42,136,000 (18%) and the average interest rate paid to depositors increased 54 basis points to 2.62%. The average balance of interest bearing core deposit accounts increased $3,099,000 (3%) and the average balance of certificates of deposit increased $39,037,000 (28%).

In compliance with the FHLB limitation of advances to 35% of assets, the Company’s borrowings from the FHLB remained the same at $100,000,000. The average cost of those advances increased 87 basis points to 4.04%. As a result, interest expense on these advances increased $974,604 (28%). As of December 31, 2005 FHLB advances are 21% of total assets, compared to 23% of total assets as of December 31, 2004.

Net Interest Income. The Company’s net interest income increased $3,329,361 (28%). During the year ended December 31, 2005, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $49,930,000, resulting in an increase in the average net earning balance of $49,858,000 (12%). In addition, the Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 33 basis points from 2.82% to 3.15%.

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

During year ended December 31, 2005, the Company experienced loan charge-offs in excess of recoveries of $82,000 and, based on a review as discussed above, elected to record a provision for loan loss of $945,000 to increase the allowance for loan losses to $5,399,654 as of December 31, 2005. The provision for loan losses recorded by the Company during year ended December 31, 2004 was $863,830. Management of the Company anticipates the need to continue increasing the loan loss allowance in the future through charges to provision for loan losses based on the anticipated growth in its loan portfolio and the shift in the Company’s emphasis from primarily single-family loans to a mix of single-family and commercial loans.

Non-Interest Income. Non-interest income decreased $19,115 (1%). The gain on sale of loans of $623,252 for 2005, compared to $484,920 for 2004, was the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. The Bank attempts to minimize its risk of price changes by committing to sell loans while the loans are in the origination process. The gain on sale of investments for year ended December 31, 2005 was $743,335, compared to $742,608 for year ended December 31, 2004.  In 2005, this gain was primarily attributed to the gain of $1,210,672, arising from the sale of 19,400 shares of FHLMC stock, which was offset by the loss of $526,000 incurred with the sale of all of its shares of Fannie Mae preferred.    Deposit service charges decreased $234,396 (12%) due to decreases in insufficient funds and overdraft charges on the Bank’s checking accounts. In addition, late charges and other fees decreased $89,239 (25%) primarily due to a decrease in prepayment penalties collected during the year ended December 31, 2005.

11

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Non-Interest Expense. Non-interest expense increased $421,630 (5%). This increase was primarily due to increases in salaries and employee benefits of $313,328 (7%) and occupancy expense of $78,298 (6%). The increase in compensation was due to normal salary and benefits increases for the Bank’s employees, along with an increase in the number of employees. The staff increased from 115 full-time equivalent employees as of December 31, 2004 to 125 full-time equivalent employees as of December 31, 2005. In August 2005, the Company opened a new full-service branch in Nixa, Missouri. In addition, the full-service branch located on West Kearney was in operation for the entire year of 2005.

Income Taxes. The increase in income tax expense is a direct result of the increase in the Company’s taxable income for the period ended December 31, 2005 as compared to the period ended December 31, 2004.

Cash Dividends Paid. The Company paid dividends of $0.16 per share on April 14, 2005, to stockholders’ of record as of March 30, 2005, and $0.16 per share on July 15, 2005 to stockholders’ of record as of July 1, 2005, and $0.165 per share on October 14, 2005, to stockholders’ of record as of October 1, 2005. The Company declared a cash dividend of $0.165 per share on December 22, 2005, which was paid on January 20, 2006, to stockholders of record on January 6, 2006.

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

	Prime			Ten-Year Treasury			One-Year Treasury
December 31, 2004		4.34	%		4.27	%		1.88	%
June 30, 2003		4.43	%		3.96	%		1.46	%
Change in rates		-0.09	%		0.31	%		0.42	%

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

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

Interest Income. Total interest income decreased $1,242,447 (11%) as the average balance of interest-earning assets increased $34,872,000 (10%). The yield on average interest earning assets, however, decreased 85 basis points to 5.46%, which, despite the increase in interest-earning assets, resulted in the overall decrease in interest income.

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

12

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

In order to comply with the FHLB limitation of advances to 35% of assets, the Company decreased its borrowings from the FHLB. The average balance of FHLB advances decreased by $3,149,000 (2%) and the average cost of those advances decreased 205 basis points to 3.17%. As a result, interest expense on advances decreased $2,115,091 (38%). As of December 31, 2004, FHLB advances are 23% of total assets, compared to 29% of total assets as of June 30, 2003.

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

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

During year ended December 31, 2004, the Company experienced loan charge-offs in excess of recoveries of $213,312 and, based on a review as discussed above, elected to record a provision for loan loss of $863,830 to increase the allowance for loan losses to $4,536,654 as of December 31, 2004. The provision for loan losses recorded by the Company during year ended June 30, 2003 was $610,000. Management of the Company anticipates the need to continue increasing the loan loss allowance in the future through charges to provision for loan losses based on the anticipated growth in its loan portfolio and the shift in the Company’s emphasis from primarily single-family loans to a mix of single-family and commercial loans.

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

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

Income Taxes. The increase in income tax expense is a direct result of the increase in the Company’s taxable income for the period ended December 31, 2004, as compared to period ended June 30, 2003.

13

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

RESULTS OF OPERATIONS - TRANSITION PERIOD - COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2003 (AUDITED) AND 2002 (UNAUDITED)

	Prime			Ten-Year Treasury			One-Year Treasury
December 31, 2003		4.12	%		4.01	%		1.25	%
December 31, 2002		4.68	%		4.63	%		2.01	%
Change in rates		-0.56	%		-0.62	%		-0.76	%

Interest Rates. The above table sets forth the weekly average interest rates for the 26 weeks for the six month periods ending December 31, 2003 and 2002 as reported by the Federal Reserve. As stated previously, the Bank charges borrowers and pays depositors interest rates that are largely a function of the general level of interest rates, and the Bank typically indexes its adjustable rate commercial loans to prime and its adjustable rate mortgage loans to the one-year treasury rate. The ten-year treasury rate is a proxy for 30-year fixed rate home mortgage loans.

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

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

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

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

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

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

14

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Net Interest Income. The Company’s net interest income increased $150,013 (3%). During the six months ended December 31, 2003 and December 31, 2002, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $41,102,000 and $39,770,000, respectively, resulting in an increase in the average net earning balance of $1,332,000 (3%). The Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 19 basis points from 2.47% to 2.66%.

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

During the six month period ended December 31, 2003, the Company experienced loan charge-offs in excess of recoveries of only $51,183. However, as of December 31, 2003, the Bank classified a group of approximately 150 loans totaling approximately $9 million. These loans were classified because, pursuant to a normal regulatory examination, it was deemed that the loan files relating to these loans did not contain sufficient information to effectively evaluate the credits. With the addition of these loans to classified assets, the Company determined to increase the provision for loan losses by $800,000. Prior to this increase, the Company had recorded a provision for loan loss during the six-month transition period ended December 31, 2003 of $362,000 (resulting in an aggregate provision for loan losses during this period of $1,162,000) based on the growth in its loan portfolio and the shift in the Company’s emphasis from primarily single-family loans to a mix of single-family and commercial loans. The provision for loan loss recorded during the six month period ended December 31, 2002 was $205,000. Management of the Company anticipates the need to continue increasing the loan loss allowance in the future through charges to provision for loan losses based on the factors described in the previous sentence.

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

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

Income Taxes. The decrease in income tax expense is a direct result of the decrease in the Company’s taxable income for the six month period ended December 31, 2003, as compared to the six month period ended December 31, 2002.

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

15

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

ASSET / LIABILITY MANAGEMENT

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

As a part of its asset and liability management strategy, the Bank implemented an adjustable rate mortgage loan (“ARM”) program beginning in the early 1980s. Throughout the past several years, the Bank has continued to emphasize the origination of adjustable-rate, one- to four-family residential loans and adjustable-rate or relatively short-term commercial real estate, construction, commercial business, home equity and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market.

The Bank is also managing interest rate risk by the origination of construction loans. As of December 31, 2005, such loans, net of loans in process, constitute 16% of the Bank’s loan portfolio. In general, these loans have higher yields, shorter maturities, and greater interest rate sensitivity than other real estate loans.

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. As of December 31, 2005 and December 31, 2004, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $130,252,633 or 41% of its total deposits and $127,351,296 or 43% of total deposits, respectively. The weighted average rate paid on these accounts increased 11 basis points from 1.01% on December 31, 2004 to 1.12% on December 31, 2005. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive, core deposits. During the year ending December 31, 2006, the FHLB has the option to call $11.0 million of advances with a weighted average rate of 5.43% and a remaining life of 2.7 years.

16

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

INTEREST RATE SENSITIVITY ANALYSIS

The following table sets forth as of December 31, 2005, management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100, 200, and 300 basis point (“bp”) instantaneous and permanent increases and decreases in market interest rates. Dollar amounts are expressed in thousands.

BP Change		Estimated Net Portfolio Value						NPV as % of PV of Assets
in Rates	$	Amount	$	Change		% Change		NPV Ratio		Change
+300		52,322		(3,595	)	-6	%	12.55	%	-0.61	%
+200		54,356		(1,561	)	-3	%	12.96	%	-0.20	%
+100		55,803		(114	)	0	%	13.22	%	0.06	%
NC		55,917						13.16	%
-100		55,218		(699	)	-1	%	12.90	%	-0.26	%
-200		53,941		(1,976	)	-4	%	12.50	%	-0.66	%
-300		52,252		(3,665	)	-7	%	12.00	%	-1.16	%

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $20,506,478 as of December 31, 2005 and $15,896,458 as of December 31, 2004, representing an increase of

17

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

$4,610,020. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.

In addition to the capital necessary to meet the Company’s conditional commitments discussed under the caption “Off-Balance Sheet Arrangements” below, the Bank also has $133,708,307 in certificates of deposit that are scheduled to mature in one year or less. Management anticipates that the majority of these certificates will renew in the normal course of operations. Based on existing collateral as well as the FHLB’s limitation of advances to 35% of assets, the Bank has the ability to borrow an additional $34,772,000 from the FHLB, as of December 31, 2005. The Bank plans to maintain its FHLB borrowings to a level that will provide a borrowing capacity sufficient to provide for contingencies.

The Company’s regulatory capital position of $51,040,000 is 10.6% of total assets as of December 31, 2005. The Company has an excess of $31,957,000, $34,744,000, and $28,809,000 of required regulatory levels of tangible, core, and risk-based capital, respectively. Under current regulatory guidelines, the Bank is classified as well capitalized. See also additional information provided under the caption “Regulatory Matters” in Note 1 of the Notes to Consolidated Financial Statements.

During the year ended December 31, 2005, the Company declared dividends of $0.65 per share and paid dividends of $0.645 per share, compared to dividends declared of $0.63 per share and paid of $0.625 per share during the year ended December 31, 2004. The Board of Directors of the Company meets regularly to consider the level and the timing of dividend payments. Dividends declared but unpaid at December 31, 2005 ($0.165 per share), were paid to shareholders on January 20, 2006.

During the year ended December 31, 2004, the Company purchased 51,333 shares of common stock in open market transactions and 4,776 from the Company’s Recognition and Retention Plan at an average price of $20.73 to place in the treasury account. During the year ended December 31, 2005, the Company purchased 146,542 shares of common stock in open market transactions at an average price of $24.31 to place in the treasury account. The Company intends to monitor the common stock price and, with regulatory approval, may from time to time initiate further stock repurchases in order to improve the Company’s long-term earnings per share while at the same time maintaining an adequate level of stockholders’ equity. The Company has a repurchase plan which was announced on November 22, 2002, and as of December 31, 2005, a total of 38,543 shares of the Company’s common stock may be purchased under this plan.

On December 15, 2005, the Company issued $15 million of trust preferred securities (”Trust Securities”) in a private placement. The proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust I and Guaranty Statutory Trust II, together with the proceeds of the Trust’s sale of their common securities issued to the Company, were used by the Trusts to purchase 30-year junior subordinated deferrable interest debentures from the Company in the principal amount of $5,155,000 (“Trust I Debentures”) and $10,310,000 (“Trust II Debentures”), respectively. 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 Company intends to use the proceeds of the sale of the Trust Securities for general corporate purposes which may include investment in the Bank (including funding of the Bank’s loan portfolio growth), acquisitions, investments, payment of dividends and repurchases of its outstanding Common Stock.

OFF-BALANCE SHEET ARRANGEMENTS

Various commitments and contingent liabilities arise in the normal course of business, which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, lines of credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. As of December 31, 2005 and 2004, the Bank had outstanding commitments to originate loans of approximately $2,285,000 and $15,712,000, respectively. Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. As of December 31, 2005 and 2004, unused lines of credit to borrowers aggregated approximately $77,725,000 and $64,051,000 for commercial lines and $18,180,000 and $16,578,000 for open-end consumer lines. Since a portion of the loan commitment and line of credit may expire without being drawn upon, the total unused commitments and lines do not necessarily represent future cash requirements.

18

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same at that involved in extending loans to customers. The Bank had total outstanding standby letters of credit amounting to $9,731,000 and $1,314,000 as of December 31, 2005 and 2004, respectively. Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified date. As of December 31, 2005 and 2004, the Bank had approximately $0 and $2,695,000, respectively, of forward commitments outstanding.

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

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table summarizes the Company’s fixed and determinable contractual obligations by payment date as of December 31, 2005. Dollar amounts are expressed in thousands.

	Payments Due By Period
			One Year	One to	Three to	More than
Contractual Obligations		Total	or less	Three Years	Five Years	Five Years
Deposits without stated maturity	$	130,253	130,253	-	-	-
Time and brokered certificates of deposit		189,806	133,708	49,834	5,786	478
Short-term borrowings		1,594	1,594	-	-	-
Federal Home Loan Bank advances		100,000	72,414	19,650	3,386	4,550
Subordinated debentures		15,465	-	-	-	15,465
Operating leases		553	96	207	167	83
Purchase obligations		-	-	-	-	-
Other long term obligations		62	12	25	25	-
Total	$	437,733	338,077	69,716	9,364	20,576

IMPACT OF INFLATION AND CHANGING PRICES

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

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

19

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

CRITICAL ACCOUNTING POLICIES

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

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

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

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

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

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

FASB issued Staff Position (FSP) FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, in November 2005. This FSP provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether the impairment is “other-than-temporary” and the measurement of the impairment loss. This FSP also includes accounting for investments subsequent to the recognition of an impairment loss and requires certain disclosures about unrealized losses that have not been recognized. The FSP is effective for reporting periods beginning after December 15, 2005, with earlier application permitted. The Company does not believe that adoption of the FSP will have a material impact on the financial condition or operating results of the Company.

20

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

In December 2004, the FASB issued a revision to FASB Statement No. 123, Accounting for Stock Based Compensation (SFAS 123). FASB Statement No. 123R, Share Based Payment (SFAS 123R), supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and its related implementation guidance. SFAS 123R established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. The impact to the Company of SFAS 123R focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. The Company currently accounts for its stock-based compensation using the intrinsic method as defined in APB 25 and, accordingly, has not recognized any expense for stock option plans in the Consolidated Financial Statements (See Note 1 and Note 12 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s accounting for stock-based compensation). The SEC delayed the original required implementation date of SFAS 123R for public companies. Implementation of SFAS 123R is now required for the Company beginning in the interim period ending March 31, 2006. The Company does not believe the impact of applying the new statement will be material to the financial statements. Note 1 of the Notes to Consolidated Financial Statements discloses the effect on net income and earnings per share if the Company had applied the fair value provisions of SFAS 123.

The FASB issued an exposure draft in January 2006, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115. The purpose of the exposure draft is to reduce the complexity of accounting for financial assets and liabilities and to reduce the volatility in earnings caused by the existing accounting rules. Under the provisions in the exposure draft, companies would have the option to report certain financial assets and liabilities at fair value with the

changes in fair value included in earnings. Entities would be able to measure at fair value financial assets and liabilities selected on a contract-by-contract basis. Any contracts measured under these provisions would be shown separately than those measured under different attributes on the face of the balance sheet. The exposure draft also would require more disclosure information to help users of the financial statements more easily understand the effect on earnings. The Company is evaluating the exposure draft to determine the impact, if adopted, on its financial statements.

21

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS

	Year Ended December 31, 2005, Quarter ended
		Mar-05	Jun-05	Sep-05	Dec-05
Interest income	$	5,900,919	6,560,914	7,091,488	7,730,086
Interest expense		2,457,208	2,783,379	3,129,687	3,490,130
Net interest income		3,443,711	3,777,535	3,961,801	4,239,956
Provision for loan losses		225,000	240,000	240,000	240,000
Gain on sale of loans and investment securities		337,736	304,288	390,684	333,879
Other noninterest income, net		546,174	536,916	567,108	580,274
Noninterest expense		2,180,393	2,065,697	2,157,256	2,266,155
Income before income taxes		1,922,228	2,313,042	2,522,337	2,647,954
Provision for income taxes		707,454	864,327	935,076	999,734
Net income	$	1,214,774	1,448,715	1,587,261	1,648,220
Basic earnings per share	$	0.43	0.53	0.57	0.59
Diluted earnings per share	$	0.41	0.50	0.55	0.57
		Year Ended December 31, 2004, Quarter ended
		Mar-04	Jun-04	Sep-04	Dec-04
Interest income	$	4,841,117	4,872,149	5,192,334	5,633,673
Interest expense		2,050,298	1,934,800	2,123,222	2,337,309
Net interest income		2,790,819	2,937,349	3,069,111	3,296,363
Provision for loan losses		188,830	225,000	225,000	225,000
Gain on sale of loans and investment securities		299,569	247,956	309,109	370,894
Other noninterest income, net		550,694	628,678	648,125	561,150
Noninterest expense		2,042,996	2,079,394	2,043,422	2,082,059
Income before income taxes		1,409,256	1,509,589	1,757,923	1,921,348
Provision for income taxes		439,880	494,797	601,549	777,117
Net income	$	969,376	1,014,792	1,156,374	1,144,231
Basic earnings per share	$	0.35	0.36	0.41	0.41
Diluted earnings per share	$	0.33	0.35	0.40	0.39

22

Guaranty Federal Bancshares, Inc.

Consolidated Balance Sheets

December 31, 2005, 2004 and 2003

	December 31,			December 31,		December 31,
	2005			2004		2003
ASSETS
Cash	$	17,990,774		14,087,915		20,686,276
Interest-bearing deposits in other financial institutions		2,515,704		1,808,543		1,970,518
Cash and cash equivalents		20,506,478		15,896,458		22,656,794
Available-for-sale securities		6,757,147		15,101,768		14,863,826
Held-to-maturity securities		944,724		1,305,158		1,867,594
Stock in Federal Home Loan Bank, at cost		4,978,800		5,146,500		5,294,200
Mortgage loans held for sale		2,092,279		3,590,536		1,268,064
Loans receivable, net of allowance for loan losses of
December 31, 2005, 2004 and 2003, $5,399,654, $4,536,654
and $3,886,137, respectively		433,435,429		388,742,792		330,861,875
Accrued interest receivable:
Loans		2,040,872		1,500,170		1,242,683
Investments		48,255		69,845		63,045
Prepaid expenses and other assets		2,604,425		1,976,284		2,057,195
Foreclosed assets held for sale		26,775		78,150		5,975
Premises and equipment		7,452,798		7,188,867		6,576,003
Deferred income taxes		112,686		-		-
	$	481,000,668		440,596,528		386,757,254
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits	$	320,058,951		296,387,742		237,130,744
Federal Home Loan Bank advances		100,000,000		100,000,000		108,836,948
Securities sold under agreements to repurchase		1,594,258		1,264,020		738,399
Subordinated debentures		15,465,000		-		-
Advances from borrowers for taxes and insurance		212,320		271,796		259,267
Accrued expenses and other liabilities		288,587		234,818		308,497
Accrued interest payable		508,164		361,516		200,770
Dividend payable		459,074		450,868		432,513
Income taxes payable		322,165		220,046		227,495
Deferred income taxes		-		632,459		644,500
		438,908,519		399,823,265		348,779,133
STOCKHOLDERS' EQUITY
Common Stock:
$0.10 par value; authorized 10,000,000 shares; issued;
December 31, 2005, 2004 and 2003 - 6,571,348, 6,493,861
and 6,462,902 shares, respectively		657,135		649,386		642,890
Additional paid-in capital		53,778,686		52,384,842		51,330,202
Unearned ESOP shares		(1,572,930	)	(1,800,930	)	(2,030,930	)
Retained earnings, substantially restricted		36,533,338		32,437,131		29,919,695
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes; December 31, 2005, 2004 and 2003 - $1,158,114,
$1,653,740 and $1,565,830, respectively		1,971,925		2,815,828		2,666,143
		91,368,154		86,486,257		82,528,000
Treasury stock, at cost;
December 31, 2005, 2004 and 2003 - 3,639,301, 3,492,759
and 3,436,650 shares, respectively		(49,276,005	)	(45,712,994	)	(44,549,879	)
		42,092,149		40,773,263		37,978,121
	$	481,000,668		440,596,528		386,757,254

See Notes to Consolidated Financial Statements

23

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Income

Years Ended December 31, 2005 and 2004 and June 30, 2003 and

Six Months Ended December 31, 2003 and 2002

	Years ended					Six months ended		Year ended
	December 31,					December 31,		June 30,
	2005			2004		2003	2002	2003
							(Unaudited)
INTEREST INCOME
Loans	$	26,552,595		19,989,852		9,566,716	10,826,819	20,928,391
Investment securities		431,863		289,335		135,100	231,070	419,145
Other		298,949		260,085		143,862	232,307	434,184
		27,283,407		20,539,272		9,845,678	11,290,196	21,781,720
INTEREST EXPENSE
Deposits		7,288,073		4,919,164		2,368,200	3,121,175	5,802,445
Federal Home Loan Bank advances		4,493,997		3,519,393		2,120,876	2,959,213	5,634,484
Subordinated debentures		47,683		-		-	-	-
Other		30,651		7,073		1,969	5,188	7,484
		11,860,404		8,445,630		4,491,045	6,085,576	11,444,413
NET INTEREST INCOME		15,423,003		12,093,642		5,354,633	5,204,620	10,337,307
PROVISION FOR LOAN LOSSES		945,000		863,830		1,162,000	205,000	610,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		14,478,003		11,229,812		4,192,633	4,999,620	9,727,307
NONINTEREST INCOME
Service charges		1,643,433		1,877,829		951,524	884,132	1,778,267
Late charges and other fees		264,360		353,689		187,407	65,238	190,113
Gain on sale of investment securities		743,335		742,608		105,461	-	-
Gain on sale of loans		623,252		484,920		758,062	669,220	1,544,037
Income (loss) on foreclosed assets		(1,617	)	(3,157	)	5,726	19,865	10,830
Other income		324,296		160,285		80,691	113,279	165,082
		3,597,059		3,616,174		2,088,871	1,751,734	3,688,329
NONINTEREST EXPENSE
Salaries and employee benefits		4,884,869		4,571,541		2,246,993	2,238,783	4,557,376
Occupancy		1,365,559		1,287,261		604,268	673,847	1,322,790
FDIC deposit insurance premiums		39,796		36,038		17,928	19,416	37,950
Data processing		440,411		399,891		133,435	294,976	487,786
Advertising		230,254		287,594		220,233	104,210	217,066
Other expense		1,708,612		1,665,544		770,486	729,092	1,557,019
		8,669,501		8,247,871		3,993,343	4,060,324	8,179,987
INCOME BEFORE INCOME TAXES		9,405,561		6,598,115		2,288,161	2,691,030	5,235,649
PROVISION FOR INCOME TAXES		3,506,591		2,313,342		788,000	927,000	1,656,000
NET INCOME	$	5,898,970		4,284,773		1,500,161	1,764,030	3,579,649
BASIC EARNINGS PER SHARE	$	2.12		1.53		0.54	0.63	1.28
DILUTED EARNINGS PER SHARE	$	2.03		1.47		0.52	0.62	1.26

See Notes to Consolidated Financial Statements

24

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2005 and 2004 and June 30, 2003

Six Months Ended December 31, 2003 and 2002

	Year ended					Six months ended				Year ended
	December 31,					December 31,				June 30,
	2005			2004		2003		2002		2003
								(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,898,970		4,284,773		1,500,161		1,764,030		3,579,649
Items not requiring (providing) cash:
Deferred income taxes		(249,519	)	(99,952	)	(267,750	)	168,917		(154,815	)
Depreciation		759,931		670,096		339,101		404,498		783,933
Provision for loan losses		945,000		863,830		1,162,000		205,000		610,000
Gain on sale of loans and investment securities		(1,366,587	)	(1,227,528	)	(863,524	)	(669,220	)	(1,544,037	)
Loss on sale of premises and equipment		3,055		11,517		-		-		37,761
Gain on sale of foreclosed assets		(1,323	)	(1,724	)	(13,226	)	(26,218	)	(12,310	)
Amortization of deferred income,
premiums and discounts		(48,305	)	78,148		(18,862	)	(80,575	)	(99,192	)
Stock award plan expense		45,694		63,200		30,952		177,810		353,004
Origination of loans held for sale		(45,528,012	)	(30,561,273	)	(31,454,990	)	(34,910,348	)	(77,775,788	)
Proceeds from sale of loans held for sale		47,649,521		28,723,721		40,700,091		33,444,629		72,695,861
Release of ESOP shares		564,980		461,512		225,154		180,244		373,724
Changes in:
Accrued interest receivable		(519,112	)	(264,287	)	124,397		219,733		224,386
Prepaid expenses and other assets		(628,141	)	80,912		(201,927	)	(181,342	)	(55,508	)
Accrued expenses and other liabilities		200,417		105,421		(5,666	)	(67,971	)	(348,159	)
Income taxes payable		89,638		7,484		34,578		205,676		69,278
Net cash provided by (used in) operating activities		7,816,207		3,195,850		11,290,489		834,863		(1,262,213	)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(45,967,115	)	(59,380,244	)	(5,060,371	)	(3,172,569	)	(11,171,690	)
Principal payments on held-to-maturity securities		358,395		574,920		379,245		406,222		995,693
Principal payments on available-for-sale securities		-		-		-		172,835		172,835
Purchase of available-for-sale securities		(10,516,958	)	(5,971,840	)	(1,989,685	)	(2,978,928	)	(4,968,371	)
Purchase of premises and equipment		(1,032,777	)	(1,300,977	)	(206,108	)	(138,129	)	(174,592	)
Proceeds from sale of premises and equipment		5,860		6,500		-		-		-
Proceeds from sales of available-for-sale securities		9,345,564		754,355		107,419		-		-
Proceeds from maturities of available-for-sale securities		9,000,000		6,000,000		1,500,000		4,000,000		6,500,000
Proceeds from sale of FHLB stock		167,700		147,700		3,306,200		-		-
Proceeds from sale of foreclosed assets		352,341		434,161		315,291		863,367		801,677
Purchase of other investments		-		-		-		-		(106,000	)
Net cash used in investing activities		(38,286,990	)	(58,735,425	)	(1,648,009	)	(847,202	)	(7,950,448	)

See Notes to Consolidated Financial Statements

25

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2005 and 2004, and June 30, 2003 and

Six Months Ended December 31, 2003 and 2002

	December 31,					December 31,				June 30,
	2005			2004		2003		2002		2003
								(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised		1,031,400		751,274		107,638		113,554		556,869
Cash dividends paid		(1,794,557	)	(1,767,337	)	(844,151	)	(764,854	)	(1,604,042	)
Cash dividends received on RRP Stock		-		217		292		1,322		2,387
Net increase in demand deposits,
NOW accounts and savings accounts		2,901,337		10,307,199		4,617,104		8,403,811		18,725,158
Net increase (decrease) in certificates of deposit and
securities sold under agreements to repurchase		21,100,110		49,475,420		(3,127,182	)	(3,819,504	)	(8,723,005	)
Proceeds from FHLB advances		1,322,664,000		201,614,000		124,500,000		12,000,000		121,500,000
Repayments of FHLB advances		(1,322,664,000	)	(210,450,948	)	(130,281,946	)	(18,714,871	)	(117,964,269	)
Proceeds from issuance of subordinated debentures		15,465,000		-		-		-		-
Advances from borrowers for taxes and insurance		(59,476	)	12,529		(691,411	)	(724,015	)	(97,619	)
Treasury stock purchased		(3,563,011	)	(1,163,115	)	(280,558	)	(235,770	)	(1,131,792	)
Net cash provided by (used in) financing activities		35,080,803		48,779,239		(6,000,214	)	(3,740,327	)	11,263,687
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS		4,610,020		(6,760,336	)	3,642,266		(3,752,666	)	2,051,026
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD		15,896,458		22,656,794		19,014,528		16,963,502		16,963,502
CASH AND CASH EQUIVALENTS,
END OF PERIOD	$	20,506,478		15,896,458		22,656,794		13,210,836		19,014,528
Supplemental Cash Flows Information
Real estate acquired in settlement of loans	$	299,643		466,670		120,000		153,820		368,296
Interest paid	$	11,713,756		8,445,630		4,493,513		6,102,303		12,000,275
Income taxes paid	$	3,506,591		2,313,342		1,026,224		672,466		1,742,466
Dividend declared and unpaid	$	459,074		450,868		432,513		420,430		415,414

See Notes to Consolidated Financial Statements

26

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2005 and 2004 and June 30, 2003 and

Six Months Ended December 31, 2003

	Common Stock		Additional Paid-In Capital	Unearned ESOP Shares		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Income		Total
Balance, July 1, 2002		636,540	49,842,032	(2,406,070	)	(42,958,147	)	27,372,935		2,947,587		35,434,877
Comprehensive income
Net income		-	-	-		-		3,579,649		-		3,579,649
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of ($568,257)		-	-	-		-		-		(967,574	)	(967,574	)
Total comprehensive income												2,612,075
Dividends ($0.60 per share)		-	-	-		-		(1,671,800	)	-		(1,671,800	)
Stock award plans		-	547,241	-		-		-		-		547,241
Stock options exercised		5,145	551,724	-		-		-		-		556,869
Release of ESOP shares		-	124,584	249,140		-		-		-		373,724
Treasury stock purchased		-	-	-		(1,311,174	)	-		-		(1,311,174	)
Balance, June 30, 2003		641,685	51,065,581	(2,156,930	)	(44,269,321	)	29,280,784		1,980,013		36,541,812
Comprehensive income
Net income		-	-	-		-		1,500,161		-		1,500,161
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of $402,965		-	-	-		-		-		686,130		686,130
Total comprehensive income												2,186,291
Dividends ($0.31 per share)		-	-	-		-		(861,250	)	-		(861,250	)
Stock award plans		-	59,034	-		-		-		-		59,034
Stock options exercised		1,205	106,433	-		-		-		-		107,638
Release of ESOP shares		-	99,154	126,000		-		-		-		225,154
Treasury stock purchased		-	-	-		(280,558	)	-		-		(280,558	)
Balance, December 31, 2003		642,890	51,330,202	(2,030,930	)	(44,549,879	)	29,919,695		2,666,143		37,978,121
Comprehensive income
Net income		-	-	-		-		4,284,773		-		4,284,773
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of $87,911		-	-	-		-		-		149,685		149,685
Total comprehensive income												4,434,458
Dividends ($0.64 per share)		-	-	-		-		(1,767,337	)	-		(1,767,337	)
Stock award plans		-	78,350	-		-		-		-		78,350
Stock options exercised		6,496	744,778	-		-		-		-		751,274
Release of ESOP shares		-	231,512	230,000		-		-		-		461,512
Treasury stock purchased		-	-	-		(1,163,115	)	-		-		(1,163,115	)
Balance, December 31, 2004		649,386	52,384,842	(1,800,930	)	(45,712,994	)	32,437,131		2,815,828		40,773,263
Comprehensive income
Net income		-	-	-		-		5,898,970		-		5,898,970
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of ($495,626)		-	-	-		-		-		(843,903	)	(843,903	)
Total comprehensive income												5,055,067
Dividends ($0.65 per share)		-	-	-		-		(1,802,763	)	-		(1,802,763	)
Stock award plans		-	33,213	-		-		-		-		33,213
Stock options exercised		7,749	1,023,651	-		-		-		-		1,031,400
Release of ESOP shares		-	336,980	228,000		-		-		-		564,980
Treasury stock purchased		-	-	-		(3,563,011	)	-		-		(3,563,011	)
Balance, December 31, 2005	$	657,135	53,778,686	(1,572,930	)	(49,276,005	)	36,533,338		1,971,925		42,092,149

See Notes to Consolidated Financial Statements

27

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 1:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

Organization

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

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

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

Fiscal Year Change

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

Nature of Operations

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

Principles of Consolidation

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

Use of Estimates

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

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

28

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Securities

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

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

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

Mortgage Loans Held for Sale

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

Loans

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

Loan Servicing

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

Allowance for Loan Losses

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

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

29

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

Foreclosed Assets Held for Sale

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

Premises and Equipment

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

Income Taxes

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

Cash Equivalents

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

Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31, 2005, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2005, the most recent notification from the Missouri Division of Finance categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Company’s or the Bank’s category.

30

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

										To Be Well Capitalized
						For Capital				Under Prompt Corrective
	Actual					Adequacy Purposes				Action Provisions
	Amount		Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2005
Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	51,040	10.7	%	$	19,083	4.0	%		n/a	n/a
Bank	$	53,796	11.3	%	$	19,010	4.0	%	$	23,762	5.0	%
Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	51,040	12.5	%	$	16,296	4.0	%		n/a	n/a
Bank	$	53,796	13.2	%	$	16,276	4.0	%	$	24,414	6.0	%
Total risk-based capital, and
ratio to risk-weighted assets
Company	$	57,544	14.1	%	$	32,592	8.0	%		n/a	n/a
Bank	$	60,294	14.8	%	$	32,552	8.0	%	$	40,690	10.0	%

31

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

										To Be Well Capitalized
						For Capital				Under Prompt Corrective
	Actual					Adequacy Purposes				Action Provisions
	Amount		Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2004
Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	37,938	8.7	%	$	17,485	4.0	%		n/a	n/a
Bank	$	36,869	8.4	%	$	17,470	4.0	%	$	21,838	5.0	%
Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	37,938	10.6	%	$	14,367	4.0	%		n/a	n/a
Bank	$	36,869	10.3	%	$	14,371	4.0	%	$	21,556	6.0	%
Total risk-based capital, and
ratio to risk-weighted assets
Company	$	44,401	12.4	%	$	28,735	8.0	%		n/a	n/a
Bank	$	43,253	12.0	%	$	28,742	8.0	%	$	35,927	10.0	%
										To Be Well Capitalized
						For Capital				Under Prompt Corrective
		Actual				Adequacy Purposes				Action Provisions
		Amount	Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2003
Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	35,181	9.4	%	$	15,108	4.0	%		n/a	n/a
Bank	$	34,476	9.2	%	$	15,045	4.0	%	$	18,807	5.0	%
Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	35,181	12.2	%	$	11,624	4.0	%		n/a	n/a
Bank	$	34,476	11.9	%	$	11,570	4.0	%	$	17,355	6.0	%
Total risk-based capital, and
ratio to risk-weighted assets
Company	$	40,185	13.9	%	$	23,248	8.0	%		n/a	n/a
Bank	$	39,480	13.6	%	$	23,141	8.0	%	$	28,926	10.0	%

The amount of dividends that the Bank may pay is subject to various regulatory limitations. As of December 31, 2005, 2004, and 2003, the Bank exceeded their minimum capital requirements. The Bank may not pay dividends which would reduce capital below the minimum requirements shown above.

32

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Earnings Per Share

The computation for earnings per share for years ended December 31, 2005 and 2004 and six months ended December 31, 2003 and 2002, and year ended June 30, 2003 is as follows:

	Year Ended		Year Ended	Six Months Ended
	December 31, 2005		December 31, 2004	December 31, 2003
Net income	$	5,898,970	4,284,773	1,500,161
Average common shares outstanding		2,780,249	2,808,412	2,782,788
Effect of stock options outstanding		126,885	113,425	103,555
Average diluted shares outstanding		2,907,134	2,921,837	2,886,343
Earnings per share - basic	$	2.12	1.53	0.54
Earnings per share - diluted	$	2.03	1.47	0.52
	Six Months Ended		Year Ended
	December 31, 2002		June 30, 2003
		(unaudited)
Net income	$	1,764,030	3,579,649
Average common shares outstanding		2,797,202	2,794,032
Effect of stock options outstanding		51,446	57,525
Average diluted shares outstanding		2,848,648	2,851,557
Earnings per share - basic	$	0.63	1.28
Earnings per share - diluted	$	0.62	1.26

 All outstanding options to purchase common stock were included in the computation of diluted earning per share for the six months ended December 31, 2003 and December 31, 2002. Options to purchase 21,500, 10,000, and 10,000 shares of common stock were outstanding during the years ended December 31, 2005 and 2004, and June 30, 2003, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

33

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Stock Option Plans

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

	Year Ended			Year Ended		Six Months
	December 31, 2005			December 31, 2004		December 31, 2003
Net income, as reported	$	5,898,970		4,284,773		1,500,161
Less: Total stock-based employee
compensation cost determined
under the fair value-based
method, net of income taxes		(51,516	)	(35,949	)	(18,085	)
Pro forma net income	$	5,847,454		4,248,824		1,482,076
Earnings per share:
Basic - as reported	$	2.12		1.53		0.54
Basic - pro forma	$	2.10		1.51		0.53
Diluted - as reported	$	2.03		1.47		0.52
Diluted - pro forma	$	2.01		1.45		0.51
	Six Months			Year Ended
	December 31, 2002			June 30, 2003
		(Unaudited)
Net income, as reported	$	1,764,030		3,579,649
Less: Total stock-based employee
compensation cost determined
under the fair value-based
method, net of income taxes		(89,950	)	(174,412	)
Pro forma net income	$	1,674,080		3,405,237
Earnings per share:
Basic - as reported	$	0.63		1.28
Basic - pro forma	$	0.60		1.22
Diluted - as reported	$	0.62		1.26
Diluted - pro forma	$	0.59		1.19

34

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Segment Information

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

NOTE 2:SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2005
Equity Securities:
FHLMC stock	$	47,595		3,128,415		-			3,176,010
Debt Securities:
U. S. government agencies		3,579,513		2,021		(397	)		3,581,137
	$	3,627,108		3,130,436		(397	)		6,757,147
As of December 31, 2004
Equity Securities:
FHLMC stock	$	66,588		4,945,012		-			5,011,600
Other stock		2,000,000		-		(560,000	)		1,440,000
Debt Securities:
Trust preferred securities		6,570,814		84,468		-			6,655,282
U. S. government agencies		1,994,798		88		-			1,994,886
	$	10,632,200		5,029,568		(560,000	)		15,101,768
As of December 31, 2003
Equity Securities:
FHLMC stock	$	78,336		4,587,264		-			4,665,600
Other stock		2,000,000		-		(326,000	)		1,674,000
Debt Securities:
Trust preferred securities		6,557,201		11,071		(40,840	)		6,527,432
U. S. government agencies		1,996,317		477		-			1,996,794
	$	10,631,854		4,598,812		(366,840	)		14,863,826

35

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Maturities of available-for-sale debt securities as of December 31, 2005:

	Amortized Cost		Approximate Fair Value
Within one year	$	499,512		499,429
2-5 years		3,080,001		3,081,708
	$	3,579,513		3,581,137

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

	Amortized Cost		Gross Unrealized Gains	Gross Unrealized (Losses)		Approximate Fair Value
As of December 31, 2005
Debt Securities:
U. S. government agencies	$	189,974	-	(2,478	)	187,496
Mortgage-backed securities		754,750	39,550	-		794,300
	$	944,724	39,550	(2,478	)	981,796
As of December 31, 2004
Debt Securities:
U. S. government agencies	$	228,807	375	-		229,182
Mortgage-backed securities		1,076,351	77,737	-		1,154,088
	$	1,305,158	78,112	-		1,383,270
As of December 31, 2003
Debt Securities:
U. S. government agencies	$	256,142	78	-		256,220
Mortgage-backed securities		1,611,452	81,240	-		1,692,692
	$	1,867,594	81,318	-		1,948,912

Maturities of held-to-maturity securities as of December 31, 2005:

		Amortized Cost	Approximate Fair Value
After ten years	$	189,974	187,496
Mortgage-backed securities not due on a
single maturity date		754,750	794,300
	$	944,724	981,796

The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $381,115, $31,875 and $42,096 as of December 31, 2005, 2004 and 2003, respectively. The approximate fair value of pledged securities amounted to $385,439, $31,950 and $41,061 as of December 31, 2005, 2004 and 2003, respectively.

Gross gains of $1,269,396, $742,608, $105,461, $0 and $0 and gross losses of $526,061, $0, $0, $0 and $0 resulting from sale of available-for-sale securities were realized for the years ended December 31, 2005 and 2004, the six months ended December 31, 2003 and 2002, and the year ended June 30, 2003, respectively.

36

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2005, 2004 and 2003, was $1,186,612, $1,440,000 and $6,379,261, which is approximately 15%, 9% and 38% of the Company’s investment portfolio, respectively. These declines primarily resulted from changes in market interest rates and failure of certain investments to meet projected earnings targets.

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

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

The following table shows our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2005, 2004 and 2003.

	December 31, 2005
	Less than 12 Months				12 Months or More			Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
U. S. Government Agencies	$	1,186,612	(2,875	)	-	-		1,186,612	(2,875	)
		December 31, 2004
		Less than 12 Months			12 Months or More			Total
Description of Securities		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
Equity Securities	$	-	-		1,440,000	(560,000	)	1,440,000	(560,000	)
		December 31, 2003
		Less than 12 Months			12 Months or More			Total
Description of Securities		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
Equity Securities	$	-	-		1,674,000	(326,000	)	1,674,000	(326,000	)
Debt Securities		-	-		4,705,261	(40,840	)	4,705,261	(40,840	)
	$	-	-		6,379,261	(366,840	)	6,379,261	(366,840	)

37

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 3:LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans at December 31, 2005, 2004 and 2003 include:

	December 31,
	2005			2004		2003
Real estate - residential mortgage:
One to four family units	$	101,440,261		117,715,909		128,209,462
Multi-family		53,630,562		52,258,859		44,241,683
Real estate - construction		70,389,903		45,090,258		49,814,316
Real estate - commercial		122,884,052		97,549,770		72,104,911
Commercial loans		66,370,227		55,606,190		24,618,265
Installment loans		24,264,069		25,172,615		25,441,295
Total loans		438,979,074		393,393,601		344,429,932
Less:
Undisbursed portion of loans-in-process		-		-		(9,425,318	)
Allowance for loan losses		(5,399,654	)	(4,536,654	)	(3,886,137	)
Unearned discounts		(2,512	)	(7,734	)	(19,296	)
Deferred loan fees/costs, net		(141,479	)	(106,421	)	(237,306	)
Net loans	$	433,435,429		388,742,792		330,861,875

Impaired loans totaled $5,123,042, $6,083,635 and $7,159,100 as of December 31, 2005, 2004 and 2003, respectively with a related allowance for loan losses of $532,810, $928,857 and $1,110,130 respectively. As of December 31, 2005, 2004 and 2003, respectively, impaired loans of $3,404,200, $1,995,593 and $736,542 had no related allowance for loan losses.

Interest of $615,628, $686,939, $153,685 and $198,196 was recognized on average impaired loans of $4,805,205, $7,659,179, $4,748,587 and $661,746 for the year ended December 31, 2005 and 2004, the six months ended December 31, 2003 and the year ended June 30, 2003, respectively. Interest of $600,288, $694,169, $143,948 and $191,040 was recognized on impaired loans on a cash basis during the years ended December 31, 2005 and 2004 and six months ended December 31, 2003 and the year ended June 30, 2003, respectively.

At December 31, 2005, 2004 and 2003 there were no accruing loans delinquent 90 days or more. Non-accruing loans at December 31, 2005, 2004 and 2003 were $722,000, $419,000 and $743,000, respectively.

38

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Activity in the allowance for loan losses was as follows:

	Years ended					Six months ended				Year ended
	December 31,					December 31,				June 30,
	2005			2004		2003		2002		2003
								(Unaudited)
Balance, beginning of period	$	4,536,654		3,886,137		2,775,320		2,649,872		2,649,872
Provision charged to expense		945,000		863,830		1,162,000		205,000		610,000
Losses charged off net of recoveries
of $71,385 and $17,761 for the years ended
December 31, 2005 and 2004 and $3,323 and
$150 for the six months ended December 31,
2003 and 2002, and $52,015 for year ended
June 30, 2003		(82,000	)	(213,313	)	(51,183	)	(215,320	)	(484,552	)
Balance, end of period	$	5,399,654		4,536,654		3,886,137		2,639,552		2,775,320

 The weighted average interest rate on loans as of December 31, 2005, 2004 and 2003, was 6.88% and 5.64%, and 5.39%, respectively.

The Bank serviced mortgage loans for others amounting to $110,511,321, $123,466,113, and $128,875,871 as of December 31, 2005, 2004 and 2003, respectively. The Bank serviced commercial loans for others amounting to $4,149,438, $1,738,961 and $1,072,449 as of December 31, 2005, 2004 and 2003, respectively.

NOTE 4:PREMISES AND EQUIPMENT

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

		December 31,		December 31,		December 31,
		2005		2004		2003
Land	$	1,250,789		1,250,789		1,250,789
Buildings and improvements		7,349,536		6,748,579		6,468,609
Furniture, fixtures and equipment		4,913,877		4,658,904		3,672,063
Leasehold improvements		130,905		157,905		217,948
		13,645,108		12,816,177		11,609,409
Less accumulated depreciation		(6,192,310	)	(5,627,298	)	(5,033,406	)
Net premises and equipment	$	7,452,798		7,188,879		6,576,003

Depreciation expense was $759,931 and $669,479 for the years ended December 31, 2005 and 2004, $339,101 and $404,498, for the six months ended December 31, 2003 and 2002 and $783,933 for the year ended June 30, 2003, respectively.

39

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 5:OTHER COMPREHENSIVE INCOME (LOSS)

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

		Year ended				Six months ended				Year ended
		December 31,				December 31,				June 30,
		2005		2004		2003		2002		2003
								(Unaudited)
Unrealized gains (losses) on
available-for-sale securities	$	(596,194	)	980,204		1,194,556		(536,987	)	(1,535,831	)
Less: Reclassification adjustment for
realized gains included in income		(743,335	)	(742,608	)	(105,461	)	-		-
Other comprehensive income (loss),
before tax effect		(1,339,529	)	237,596		1,089,095		(536,987	)	(1,535,831	)
Tax expense (benefit)		(495,626	)	87,911		402,965		(198,685	)	(568,257	)
Other comprehensive income (loss)	$	(843,903	)	149,685		686,130		(338,302	)	(967,574	)

NOTE 6:DEPOSITS

	December 31, 2005						December 31, 2004					December 31, 2003
	Weighted Average Rate			Balance	Percentage of Deposits		Weighted Average Rate		Balance	Percentage of Deposits		Weighted Average Rate		Balance	Percentage of Deposits
Demand	0.00	%	$	36,193,467	11.3	%	0.00	%	25,583,803	8.6	%	0.00	%	23,335,707	9.8	%
NOW	0.33	%		35,864,150	11.2	%	0.53	%	34,604,789	11.7	%	0.30	%	34,256,771	14.5	%
Money market	2.47	%		43,896,563	13.7	%	1.81	%	52,009,761	17.6	%	1.34	%	42,231,015	17.8	%
Savings	1.80	%		14,298,452	4.5	%	1.08	%	15,152,943	5.1	%	0.81	%	17,220,605	7.3	%
	1.12	%		130,252,633	40.7	%	1.01	%	127,351,296	43.0	%	0.69	%	117,044,097	49.4	%
Certificates:
0% - 3.99%	3.25	%		121,299,785	37.9	%	2.46	%	151,753,139	51.2	%	2.21	%	85,237,827	35.9	%
4.00% - 5.99%	4.35	%		67,779,251	21.2	%	4.95	%	14,934,483	5.0	%	5.07	%	31,062,415	13.1	%
6.00% - 7.99%	6.17	%		727,283	0.2	%	6.51	%	2,348,823	0.8	%	6.46	%	3,786,404	1.6	%
	3.66	%		189,806,318	59.3	%	2.74	%	169,036,446	57.0	%	3.08	%	120,086,647	50.6	%
Total Deposits	2.62	%	$	320,058,951	100.0	%	2.00	%	296,387,742	100.0	%	1.90	%	237,130,744	100.0	%

 The aggregate amount of certificates of deposit with a minimum balance of $100,000 was approximately $30,305,000, $12,070,000, and $11,841,000, as of December 31, 2005, 2004 and 2003, respectively.

40

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

A summary of certificates of deposit by maturity as of December 31, 2005, is as follows:

2006	$	133,708,307
2007		41,846,244
2008		7,987,443
2009		4,264,490
2010		1,521,871
Thereafter		477,964
	$	189,806,318

A summary of interest expense on deposits is as follows:

	Years ended					Six months ended				Year ended
	December 31,					December 31,				June 30,
		2005		2004		2003		2002		2003
								(Unaudited)
NOW and Money Market accounts	$	1,299,800		793,432		327,245		459,869		813,619
Savings accounts		200,509		139,890		70,339		131,337		221,264
Certificate accounts		5,814,064		4,012,780		1,981,806		2,546,358		4,792,812
Early withdrawal penalties		(26,300	)	(26,938	)	(11,190	)	(16,389	)	(25,250	)
	$	7,288,073		4,919,164		2,368,200		3,121,175		5,802,445

 The Bank utilizes brokered deposits as an additional funding source. The aggregate amount of brokered deposits was approximately $ 57,629,000, $68,375,000 and $24,505,000 as of December 31, 2005, 2004 and 2003, respectively.

41

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 7:FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances consist of the following:

	December 31, 2005				December 31, 2004
Maturity Date		Amount	Weighted Average Rate			Amount	Weighted Average Rate
2005	$	-	-		$	61,264,000	2.73	%
2006		72,414,000	4.33	%		12,500,000	4.62	%
2007		3,000,000	2.83	%		3,000,000	2.83	%
2008		16,650,000	5.22	%		16,650,000	5.22	%
2009		386,000	7.21	%		386,000	7.21	%
2010		3,000,000	6.37	%		3,000,000	6.37	%
Thereafter		4,550,000	5.39	%		3,200,000	5.96	%
	$	100,000,000	4.55	%	$	100,000,000	3.58	%
		December 31, 2003
Maturity Date		Amount	Weighted Average Rate
2004	$	63,290,000	2.34	%
2005		7,850,000	4.51	%
2006		10,500,000	5.12	%
2007		1,000,000	3.47	%
2008		14,950,000	5.54	%
2009		386,000	7.21	%
Thereafter		10,860,948	5.78	%
	$	108,836,948	3.58	%

 In the year ending December 31, 2006, the Bank has advances equal to $11,000,000 with a weighted average rate of 5.43% callable between January 20, 2006 and January 30, 2006 at the FHLB’s option with a maturity date between July 30, 2008 and October 20, 2008.

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

42

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 8:SUBORDINATED DEBENTURES

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

NOTE 9:INCOME TAXES

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

As of December 31, 2005, 2004 and 2003, retained earnings included approximately $5,075,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $1,878,000 as of December 31, 2005, 2004 and 2003.

The provision for income taxes consists of:

	Years Ended					Six Months Ended			Year Ended
		December 31,				December 31,			June 30,
		2005		2004		2003		2002	2003
								(Unaudited)
Taxes currently payable	$	3,756,110		2,413,294		1,055,750		758,083	1,810,815
Deferred income taxes		(249,519	)	(99,952	)	(267,750	)	168,917	(154,815	)
	$	3,506,591		2,313,342		788,000		927,000	1,656,000

43

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The tax effects of temporary differences related to deferred taxes shown on the December 31, 2005, 2004 and 2003 balance sheets are:

	December 31,			December 31,			December 31,
	2005			2004			2003
Deferred tax assets:
Allowances for loan and foreclosed asset losses	$	1,997,872			1,678,562			1,441,871
Accrued compensated absences and bonuses		14,538			12,524			11,749
Unrealized loss on loans held for sale		929			2,862			7,140
RRP expense		18,417			13,450			11,559
Deferred loan fees/costs		18,393			39,376			87,803
State tax credits		-			-			64,049
Other		-			-			20,127
		2,050,149			1,746,774			1,644,298
Deferred tax liabilities:
FHLB stock dividends		(124,683	)		(128,262	)		(128,262	)
Mortgage servicing rights		(315,557	)		(365,768	)		(365,110	)
Unrealized appreciation on available-for-sale securities		(1,158,114	)		(1,653,740	)		(1,565,830	)
Accumulated depreciation		(253,373	)		(163,879	)		(173,592	)
Other		(85,736	)		(67,584	)		(56,004	)
		(1,937,463	)		(2,379,233	)		(2,288,798	)
Net deferred tax asset (liability)	$	112,686			(632,459	)		(644,500	)

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

	Years ended					Six months ended				Year ended
	December 31,					December 31,				June 30,
								(Unaudited)
		2005		2004		2003		2002		2003
Computed at statutory rate		34.0	%	34.0	%	34.0	%	34.0	%	34.0	%
Increase (reduction) in taxes resulting from:
State financial institution tax		1.8	%	1.0	%	2.2	%	3.9	%	-2.4	%
ESOP		1.2	%	1.2	%	1.2	%	1.0	%	1.0	%
Other		0.3	%	-1.1	%	-2.2	%	-4.4	%	-1.0	%
Actual tax provision		37.3	%	35.1	%	35.2	%	34.5	%	31.6	%

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

44

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 10:DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	December 31, 2005				December 31, 2004				December 31, 2003
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	20,506,478		20,506,478		15,896,458		15,896,458		22,656,794		22,656,794
Available-for-sale securities		6,757,147		6,757,147		15,101,768		15,101,768		14,863,826		14,863,826
Held-to-maturity securities		944,724		981,796		1,305,158		1,383,270		1,867,594		1,948,912
Mortgage loans held-for-sale		2,092,279		2,092,279		3,590,536		3,590,536		1,268,064		1,268,064
Loans, net		433,435,429		435,477,000		388,742,792		389,853,000		330,861,875		334,344,000
Federal Home Loan Bank stock		4,978,800		4,978,800		5,146,500		5,146,500		5,294,200		5,294,200
Interest receivable		2,089,127		2,089,127		1,570,015		1,570,015		1,305,728		1,305,728
Financial liabilities:
Deposits		320,058,951		318,829,000		296,387,742		295,760,000		237,130,744		237,500,000
Federal Home Loan Bank advances		100,000,000		100,610,000		100,000,000		101,962,000		108,836,948		113,099,000
Securities sold under agreements
to repurchase		1,594,258		1,594,258		1,264,020		1,264,020		738,399		738,399
Subordinated debentures		15,465,000		15,465,000		-		-		-		-
Interest payable		508,164		508,164		361,516		361,516		200,770		200,770
Dividend payable		459,074		459,074		450,868		450,868		432,513		432,513
Unrecognized financial instruments
(net of contractual value):
Commitments to extend credit		-		-		-		-		-		-
Unused lines of credit		-		-		-		-		-		-

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

Cash and Cash Equivalents and Federal Home Loan Bank stock

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

Investment Securities

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

Interest Receivable

The carrying amount of interest receivable approximates its fair value.

45

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Mortgage Loans Held for Sale

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

Loans

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

Deposits

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

Federal Home Loan Bank Advances and Subordinated Debentures

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

Securities Sold under Agreements to Repurchase

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

Interest and Dividend Payable

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

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

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

NOTE 11:SIGNIFICANT ESTIMATES AND CONCENTRATIONS

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

At December 31, 2005, approximately 30% of the Bank's total time deposits consisted of certificates of deposit which were issued through a broker and had minimum denominations in excess of $100,000.

NOTE 12:EMPLOYEE BENEFIT PLANS

Stock Award Plans

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

At the annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders approved the Recognition and Retention Plan (the “RRP”). Following approval of the Plan, the Bank contributed $464,643 to a separate trust to purchase the 75,106 shares of the Company’s common stock in the RRP. As of December 31, 2005 all shares in this plan have vested.

46

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

At a special stockholders’ meeting on July 22, 1998, the Company’s stockholders approved the Restricted Stock Plan (the “RSP”). Following approval of the Plan, the Company contributed $2,373,065 to a separate trust to purchase the 173,632 shares in the RSP. As of December 31, 2005 there are 1,400 shares in this plan that are not vested.

During the year ended June 30, 2000, the directors of the Company established the Stock Compensation Plan (the “2000 SCP”) with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 7,125 shares of the Company’s common stock. Following approval of the Plan, the Company contributed $85,945 to a separate trust to purchase the 7,125 shares in the SCP. As of December 31, 2005 all shares in this plan have vested.

During the year ended June 30, 2001, the directors of the Company established the Stock Compensation Plan (the “2001 SCP”) with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 10,239 shares of the Company’s common stock. The shares for this plan were taken from forfeited shares in the RSP. As of December 31, 2005 there are 2,047 shares in this plan that are not vested.

The Bank recognized $45,694, $63,200, $30,952, $177,810 and $353,004 of expense under these stock award plans in the years ended December 31, 2005 and 2004, the six months ended December 31, 2003 and 2002 and the year ended June 30, 2003, respectively.

Stock Option Plans

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

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

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

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

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

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

47

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

On May 19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan (“2004 SOP”). The purpose of the plan is to attract and retain qualified personnel for positions of substantial responsibility. The aggregate number of shares with respect to options issued under this plan shall not exceed 250,000 shares. To date 20,000 stock options have been granted under this plan.

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

	Number of shares
	Incentive Stock Option			Non-Incentive Stock Option			Weighted Average Exercise Price
Balance outstanding as of July 1, 2002		271,337			158,720			12.39
Granted		-			10,000			15.31
Exercised		(19,698	)		(31,746	)		10.82
Forfeited		(4,277	)		(13,360	)		12.47
Balance outstanding as of June 30, 2003		247,362			123,614			12.68
Granted		-			55,000			16.70
Exercised		(12,054	)		-			8.93
Forfeited		-			-			-
Balance outstanding as of December 31, 2003		235,308			178,614			13.32
Granted		12,500			25,000			19.93
Exercised		(32,436	)		(32,523	)		11.57
Forfeited		(1,600	)		-			10.02
Balance outstanding as of December 31, 2004		213,772			171,091			14.27
Granted		42,500			-			25.11
Exercised		(66,487	)		(11,000	)		13.31
Forfeited		(10,000	)		-			20.88
Balance outstanding as of December 31, 2005		179,785			160,091			15.65
Options exercisable as of December 31, 2005		129,560			93,111			13.48

48

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

	December 31, 2005				December 31, 2004			December 31, 2003
Dividends per share	$	0.64		$	0.64		$	0.31
Risk-free interest rate		4.00	%		3.03	%		2.73	%
Expected life of options		5 years			5 years			5 years
Weighted-average fair value
of options granted during year	$	3.30		$	1.84		$	0.64

The following table summarizes information about stock options under the plans outstanding as of December 31, 2005:

Exercise Price	Number Outstanding	Number Exercisable	Remaining Contractual Life
$ 6.08	2,170	2,170	0.5 years
10.50	10,875	10,875	4.1 years
11.05	400	-	5.5 years
12.13	3,000	2,400	5.2 years
12.50	12,510	7,405	5.6 years
12.75	6,800	5,200	5.1 years
13.44	173,121	173,121	2.6 years
13.89	6,000	-	6.1 years
15.31	6,000	-	7.1 years
16.65	50,000	20,000	7.6 years
17.20	4,000	1,000	7.7 years
19.27	2,500	500	8.7 years
19.62	20,000	-	8.1 years
23.20	10,000	-	9.2 years
23.50	11,000	-	9.1 years
25.59	10,000	-	9.6 years
26.50	1,500	-	9.6 years
28.12	10,000	-	10.0 years
$ 15.66	339,876	222,671

Employee Stock Ownership Plan

The Bank sponsors an internally-leveraged Employee Stock Ownership Plan (ESOP). All employees are eligible to participate after they attain age twenty-one and complete twelve consecutive months of service during which they work at least 1,000 hours. The ESOP borrowed $3,444,540 from the Company and purchased 344,454 shares of the common stock of the Company. The ESOP debt is secured by shares of the Company. The loan will be repaid from contributions to the ESOP as approved annually by the Bank’s Board of Directors. As the debt is repaid, shares are released from collateral and allocated to employees’ accounts. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. When shares are committed for release, the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings and may be paid directly to participants or credited to their account; dividends are not paid on unallocated ESOP shares. Compensation expense is recognized ratably based on the average fair value of shares committed to be released. Compensation expense attributed to the ESOP was $564,980, $461,512, $225,154, $180,244 and $373,724 for the years ended December 31, 2005 and 2004, six months ended December 31, 2003 and 2002 and the year ended June 30, 2003, respectively.

49

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The following is a summary of ESOP shares as of December 31, 2005:

Beginning ESOP shares		344,454
Released shares		(162,525	)
Shares committed for release		(24,636	)
Unreleased shares		157,293
Fair value of unreleased shares	$	4,388,475

NOTE 13:RELATED PARTY TRANSACTIONS

Certain directors and executive officers of the Company and the Bank were customers of and had transactions with the Bank in the ordinary course of business. As of December 31, 2005, 2004 and 2003, loans outstanding to these directors and executive officers amounted to $3,270,812, $747,903, and $565,066, respectively.

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

NOTE 14:COMMITMENTS AND CREDIT RISK

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

As of December 31, 2005, 2004 and 2003, the Bank had outstanding commitments to originate loans of approximately $2,285,000, $15,712,000 and $24,414,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period. As of December 31, 2005, 2004 and 2003, commitments of $2,058,000, $4,879,000 and $721,000, respectively, were at fixed rates and $227,000, $10,833,000 and $23,693,000, respectively, were at floating market rates.

Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified date. The Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. As of December 31, 2005, 2004 and 2003, the Bank had approximately $0, $2,695,000, and $0, respectively, of commitments outstanding.

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

50

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The Bank had total outstanding standby letters of credit amounting to $9,731,000, $1,314,000 and $1,189,000 as of December 31, 2005, 2004 and 2003, respectively, with terms ranging from 30 days to 2 years.

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

As of December 31, 2005, 2004 and 2003, unused lines of credit to borrowers aggregated approximately $77,725,000, $64,051,000 and $50,941,000 for commercial lines and $18,180,000, $16,578,000 and $13,245,000 for open-end consumer lines.

NOTE 15:FUTURE CHANGE IN ACCOUNTING PRINCIPLE

In December 2004, the FASB issued a revision to FASB Statement No. 123, Accounting for Stock Based Compensation (SFAS 123). FASB Statement No. 123R, Share Based Payment (SFAS 123R), supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and its related implementation guidance. SFAS 123R established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. The impact to the Company of SFAS 123R focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions. The Company currently accounts for its stock-based compensation using the intrinsic method as defined in APB 25 and, accordingly, has not recognized any expense for stock option plans in the Consolidated Financial Statements (See Note 1 and Note 12 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s accounting for stock-based compensation). The SEC delayed the original required implementation date of SFAS 123R for public companies. Implementation of SFAS 123R is now required for the Company beginning in the interim period ending March 31, 2006. The Company does not believe the impact of applying the new statement will be material to the financial statements.

51

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 16:CONDENSED PARENT COMPANY STATEMENTS

The condensed balance sheets as of December 31, 2005, 2004 and 2003, and statements of income and cash flows for the years ended December 31, 2005 and 2004, the six months ended December 31, 2003 and 2002, and the year ended June 30, 2003, for the parent company, Guaranty Federal Bancshares, Inc., are as follows:

Balance Sheets	As of			As of			As of
	December 31,			December 31,			December 31,
	2005			2004			2003
Assets
Cash	$	1,128,911			208,337			31,177
Due from subsidiary		-			574,000			563,219
Investment in subsidiary		55,863,320			39,804,931			37,272,723
Investment in Capital Trust I & II		466,434			-			-
Prepaid expenses and other assets		476,029			439,622			448,612
Refundable income taxes		207,153			224,860			94,903
	$	58,141,847			41,251,750			38,410,634
Liabilities
Subordinated debentures	$	15,465,000			-			-
Accrued expenses and other liabilities		125,624			27,619			-
Dividend payable		459,074			450,868			432,513
Stockholders' equity
Common stock		657,135			649,386			642,890
Additional paid-in capital		53,778,686			52,384,842			51,330,202
Unearned ESOP shares		(1,572,930	)		(1,800,930	)		(2,030,930	)
Retained earnings		36,533,338			32,437,131			29,919,695
Unrealized appreciation on
available-for-sale securities, net		1,971,925			2,815,828			2,666,143
Treasury stock		(49,276,005	)		(45,712,994	)		(44,549,879	)
	$	58,141,847			41,251,750			38,410,634

52

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Income Statements	Years ended						For the six months ended						Year ended
	December 31,						December 31,						June 30,
	2005			2004			2003			2002			2003
											(Unaudited)
Income
Dividends from subsidiary bank	$	3,540,000			2,334,714			1,099,000			452,291			1,750,468
Interest income:
Related party		127,786			100,275			50,703			66,491			121,542
Other		3			21			-			-			-
		3,667,789			2,435,010			1,149,703			518,782			1,872,010
Expense
Interest expense:
Related party		47,683			-			-			-			-
Occupancy		2,400			2,400			1,200			1,200			2,400
Other		759,722			581,566			219,947			84,731			190,491
		809,805			583,966			221,147			85,931			192,891
Income before income taxes
and equity in undistributed
earnings of subsidiaries		2,857,984			1,851,044			928,556			432,851			1,679,119
Provision (credit) for income taxes		(117,312	)		(129,555	)		(63,274	)		(7,217	)		(26,487	)
Income before equity in undistributed
earnings of subsidiaries		2,975,296			1,980,599			991,830			440,068			1,705,606
Equity in undistributed
earnings of subsidiaries		2,923,674			2,304,174			508,331			1,323,962			1,874,043
Net income	$	5,898,970			4,284,773			1,500,161			1,764,030			3,579,649

53

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Statements of Cash Flows	For the						For the						For the
	years ended						six months ended						year ended
	December 31,						December 31,						June 30,
	2005			2004			2003			2002			2003
										(Unaudited)
Cash Flows From Operating Activities
Net income	$	5,898,970			4,284,773			1,500,161			1,764,030			3,579,649
Items not requiring (providing) cash:
Equity in undistributed earnings of subsidiaries		(2,923,674	)		(2,304,174	)		(508,331	)		(1,323,962	)		(1,874,043	)
Release of ESOP shares		564,980			461,512			225,154			125,000			249,140
Stock award plan expense		23,161			-			-			-			-
Changes in:
Accrued interest receivable		-			-			-			3,377			3,377
Prepaid expenses and other assets		(36,407	)		8,990			(11,226	)		409,266			(18,944	)
Income taxes payable/refundable		17,707			(129,957	)		(57,708	)		98,685			79,014
Accrued expenses		98,005			27,619			(11,338	)		(46,062	)		(34,724	)
Net cash provided by operating activities		3,642,742			2,348,763			1,136,712			1,030,334			1,983,469
Cash Flows From Investing Activities
Capital contribution to subsidiary bank		(13,970,000	)		-			-			-			-
Purchase of loans		-			-			-			291,402			-
Purchase of investment in capital trusts		(465,000	)		-			-			-			-
Net collections of loans		-			-			-			(822	)		-
Proceeds from sale of loans		-			-			-			-			290,580
Net (increase) decrease in advance to subsidiary		574,000			(10,780	)		(553,814	)		(421,463	)		8,079
Net cash provided by (used in) investing activities		(13,861,000	)		(10,780	)		(553,814	)		(130,883	)		298,659
Cash Flows From Financing Activities
Stock options exercised		1,031,400			751,274			107,638			113,554			556,869
Cash dividends paid		(1,794,557	)		(1,748,982	)		(844,151	)		(764,854	)		(1,604,042	)
Treasury stock purchased		(3,563,011	)		(1,163,115	)		(280,558	)		(235,770	)		(1,131,792	)
Proceeds from issuance of subordinated debentures		15,465,000			-			-			-			-
Net cash provided by (used in) financing activities		11,138,832			(2,160,823	)		(1,017,071	)		(887,070	)		(2,178,965	)
Increase (decrease) in cash		920,574			177,160			(434,173	)		12,381			103,163
Cash, beginning of period		208,337			31,177			465,350			362,187			362,187
Cash, end of period	$	1,128,911			208,337			31,177			374,568			465,350

54

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors

and Stockholders

Guaranty Federal Bancshares, Inc.

Springfield, Missouri

We have audited the accompanying consolidated balance sheets of Guaranty Federal Bancshares, Inc. as of December 31, 2005, 2004 and 2003, and the related statements of income, stockholders’ equity and cash flows for the years ended December 31, 2005 and 2004, the six-month period ended December 31, 2003, and for the year ended June 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guaranty Federal Bancshares, Inc. as of December 31, 2005, 2004 and 2003, and the results of its operations and its cash flows for the years ended December 31, 2005 and 2004, the six-month period ended December 31, 2003, and for the year ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/BKD, LLP

February 3, 2006

Springfield, Missouri

55

[

EX-10.19

Exhibit 10.19

Written Description of Compensatory Arrangement with Chief Operating Officer

Carter Peters was appointed as Executive Vice President and Chief Operating Officer of Guaranty Federal Bancshares and Guaranty Bank (the “Bank”) effective August 8, 2005. The Bank has agreed to pay Mr. Peters an annual salary of $125,000, which will be reviewed annually, and may be increased based on such review, by the Bank. Mr. Peters may also receive a performance bonus in 2006 based on the Bank achieving profit plan and earnings per share growth. There is no written employment agreement between the parties.

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

Board of Directors

Guaranty Federal Bancshares, Inc.

Springfield, Missouri

We consent to the incorporation by reference in Registration Statement Nos. 333-47241, 333-31196, 333-65544, 333-83822 and 333-117918 on Forms S-8 of Guaranty Federal Bancshares, Inc. of our report dated February 3, 2006, relating to the consolidated balance sheets of Guaranty Federal Bancshares, Inc. as of December 31, 2005, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for the years ended December 31, 2005 and 2004, the six-month period ended December 31, 2003, and for the year ended June 30, 2003, which report appears in the Annual Report on Form 10-K of Guaranty Federal Bancshares, Inc. for the period ended December 31, 2005.

/s/BKD, LLP

March 30, 2006

Springfield, Missouri

EX-31.1

Exhibit 31.1

Certification of the Principal Executive Officer

Rule 13a-14(a) of the Securities Exchange Act of 1934

I, Shaun A. Burke, certify that:

1. I have reviewed this annual report on Form 10-K of Guaranty Federal Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Reserved - not effective]

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2006/s/ Shaun A. Burke

        Shaun A. Burke

        President and Chief Executive Officer

        (Principal Executive Officer)

EX-31.2

                                                                                                                       Exhibit 31.2

Certification of the Principal Financial Officer

Rule 13a-14(a) of the Securities Exchange Act of 1934

I, Bruce Winston, certify that:

1. I have reviewed this annual report on Form 10-K of Guaranty Federal Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Reserved - not effective]

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2006/s/ Bruce Winston

                                                                                                                                         0;                    Bruce Winston

                                                                                                                                                             Chief Financial Officer

                                                            (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CEO CERTIFICATION PURSUANT TO

RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 *

In connection with the Annual Report of Guaranty Federal Bancshares, Inc. (the “Company”) on Form 10--K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Shaun A. Burke, Chief Executive Officer (principal executive officer) of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes--Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Shaun A. Burke

Shaun A. Burke

Chief Executive Officer

(Principal Executive Officer)

March 31, 2006

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CFO CERTIFICATION PURSUANT TO

RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 *

In connection with the Annual Report of Guaranty Federal Bancshares, Inc. (the “Company”) on Form 10--K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce Winston, Chief Financial Officer (principal financial officer) of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes--Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Bruce Winston

Bruce Winston

Chief Financial Officer

(Principal Financial Officer)

March 31, 2006

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.