10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

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

For the fiscal year ended                 December 31, 2008                

                                                                - or -

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

For the transition period from _____________________ to _____________________

 Commission File Number:      0-23325

GUARANTY FEDERAL BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

(Title of Class)

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

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GUARANTY FEDERAL BANCSHARES, INC.

Form 10-K

TABLE OF CONTENTS

	Item		Page
PART I
	1	Business	5
	1A	Risk Factors	31
	1B	Unresolved Staff Comments	34
	2	Properties	34
	3	Legal Proceedings	34
	4	Submission of Matters to a Vote of Security Holders	34
PART II
	5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
	6	Selected Financial Data	35
	7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
	7A.	Quantitative and Qualitative Disclosures About Market Risk	35
	8	Financial Statements and Supplementary Data	35
	9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	35
	9A.(T)	Controls and Procedures	35
	9B.	Other Information	37
PART III
	10	Directors, Executive Officers and Corporate Governance	38
	11	Executive Compensation	38
	12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	39
	13	Certain Relationships and Related Transactions, and Director Independence	40
	14	Principal Accountant Fees and Services	40
PART IV
	15	Exhibits and Financial Statement Schedules	41
Signatures

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

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

Business of the Bank

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

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

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

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Internet Website

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

Market Area

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

Lending Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Delinquencies, Non-Performing and Problem Assets.

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

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

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Delinquency Summary	As of
	December 31,
	2008			2007			2006			2005			2004
	(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	$	2,907		$	929		$	883		$	452		$	770
Multi-family		6,552			-			-			-			-
Construction		6,010			459			1,780			-			-
Commercial real estate		517			5,850			-			131			158
		15,986			7,238			2,663			583			928
Non-mortgage loans:
Commercial loans		4,629			-			44			-			-
Consumer and other loans		79			16			41			138			79
		4,708			16			85			138			79
Total non-accrual loans		20,694			7,254			2,748			721			1,007
Accruing loans which are contractually past maturity or past due 90 days or more:
Mortgage Loans:
One- to four-family		-			103			-			-			-
Multi-family		-			-			-			-			-
Construction		443			-			-			-			-
Commercial real estate		-			-			-			-			-
		443			103			-			-			-
Non-mortgage loans:
Commercial loans		-			-			-			-			-
Consumer and other loans		-			-			-			-			-
		-			-			-			-			-
Total past maturity or past due accruing loans		443			103			-			-			-
Total accounted for on a non-accrual basis or contractually past maturity or 90 days or more past due	$	21,137		$	7,357		$	2,748		$	721		$	1,007
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		3.80	%		1.43	%		0.58	%		0.17	%		0.26	%
Total accounted for on a non-accrual basis or contractually past maturity or 90 days or more past due as a percentage of total assets		3.13	%		1.30	%		0.52	%		0.15	%		0.23	%

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

11

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

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

Non-Performing Assets	As of
	December 31,
	2008			2007			2006			2005			2004
Non-accrual loans:	(Dollars in Thousands)
Mortgage loans:
One- to four-family	$	2,907		$	929		$	883		$	452		$	770
Multi-family		6,552			-			-			-			-
Construction		6,010			459			1,780			-			-
Commercial real estate		517			5,850			-			131			158
		15,986			7,238			2,663			583			928
Non-mortgage loans:
Commercial loans		4,629			-			44			-			-
Consumer and other loans		79			16			41			138			79
		4,708			16			85			138			79
Total non-accrual loans		20,694			7,254			2,748			721			1,007
Real estate and other assets acquired in settlement of loans		5,655			727			173			27			78
Total non-performing assets	$	26,349		$	7,981		$	2,921		$	748		$	1,085
Total non-accrual loans as a percentage of net loans		3.71	%		1.41	%		0.57	%		0.17	%		0.26	%
Total non-performing assets as a percentage of total assets		3.90	%		1.41	%		0.56	%		0.16	%		0.25	%
Impact on interest income for the period:
Interest income that would have been recorded on non-accruing loans	$	791		$	716		$	69		$	8		$	23

12

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

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

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

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

13

Allowance for Loan Losses

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

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

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

14

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
	December 31,
	2008			2007			2006			2005			2004
	(Dollars in Thousands)
Beginning balance	$	5,963		$	5,784		$	5,400		$	4,537		$	3,886
Gross loan charge offs
Mortgage Loans:
One- to four-family		(631	)		(56	)		(286	)		(22	)		(188	)
Multi-family		(401	)		(1	)		-			-			-
Construction		(2,147	)		(317	)		(29	)		-			-
Commercial real estate		(33	)		(49	)		-			-			-
		(3,212	)		(423	)		(315	)		(22	)		(188	)
Non-mortgage loans:
Commercial loans		(677	)		-			(206	)		(12	)		-
Consumer and other loans		(225	)		(309	)		(126	)		(119	)		(43	)
		(225	)		(309	)		(126	)		(119	)		(43	)
Total charge offs		(4,114	)		(732	)		(647	)		(153	)		(231	)
Recoveries
Mortgage Loans:
One- to four-family		21			10			109			61			9
Multi-family		-			-			-			-			-
Construction		63			-			29			-			-
Commercial real estate		-			11			-			-			-
		84			21			138			61			9
Non-mortgage loans:
Commercial loans		13			8			103			-			-
Consumer and other loans		38			42			40			10			9
		51			50			143			10			9
Total recoveries		135			71			281			71			18
Net loan charge-offs		(3,979	)		(661	)		(366	)		(82	)		(213	)
Provision charged to expense		14,744			840			750			945			864
Ending balance	$	16,728		$	5,963		$	5,784		$	5,400		$	4,537
Net charge-offs as a percentage of average loans, net		0.70	%		0.14	%		0.08	%		0.02	%		0.07	%
Allowance for loan losses as a percentage of average loans, net		2.92	%		1.24	%		1.28	%		1.29	%		1.39	%
Allowance for loan losses as a percentage of total non-performing loans		81	%		82	%		210	%		749	%		451	%

15

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

Investment Activities

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

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

Composition of Investment Securities Portfolio

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

16

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

17

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

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

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

18

Sources of Funds

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

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

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

Deposit Account Types

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

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

19

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

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

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

Borrowings

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

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

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

20

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

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

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

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

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

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

21

Federal Reserve Bank Borrowings

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

Securities Sold Under Agreements to Repurchase

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

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

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

Notes payable

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

Subsidiary Activity and Segment Information

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

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

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

22

Critical Accounting Policies

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

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

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

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

Return on Equity and Assets

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

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

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Employees

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

Competition

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

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

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

Troubled Asset Relief Program

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

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

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

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Regulation

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

Recent Regulatory Developments

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

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

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

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

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

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

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

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

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

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

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

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

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

Regulation of the Company

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

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

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

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

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

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

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

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

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

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

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

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Regulation of the Bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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Executive Officers of the Registrant

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

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

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

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

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

Item 1A.  Risk Factors

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

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

•  Changes in securities analysts’ estimates of financial performance

•  Volatility of stock market prices and volumes

•  Rumors or erroneous information

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•  Changes in market valuations of similar companies

•  Changes in interest rates

•  New developments in the banking industry

•  Variations in quarterly or annual operating results

•  New litigation or changes in existing litigation

•  Regulatory actions

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

Geographical Risk

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

Industry Risk

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

Regulatory Risk

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

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

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Troubled Asset Relief Program

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

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

Interest Rate Risk

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

Lending Risk

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

Litigation Risk

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

Employment Risk

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

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Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2. Properties

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

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

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

Item 3. Legal Proceedings

(a)           Material Legal Proceedings

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

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

Not applicable.

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

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

34

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

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

Issuer Purchases of Equity Securities

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

Item 6.  Selected Financial Data

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

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

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

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

Item  8.  Financial Statements and Supplementary Data

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

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

Not applicable.

Item 9A(T).  Controls and Procedures

Disclosure Controls and Procedures

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

35

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

Internal Control Over Financial Reporting

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

36

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

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

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

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

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

Item 9B.  Other Information

Not applicable.

37

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

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

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

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

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

Item 11.  Executive Compensation

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

38

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.

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 approved by security holders		188,079		24.33		122,500
Equity compensation plans not approved by security holders		36,875		18.01		5,608
Totals		224,954		23.29		128,108

Description of Stock Plans Not Approved by Stockholders

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

39

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

2003 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 this agreement are considered non-qualified for federal income tax purposes, vest at the rate of 20% per year over a five year period, become fully vested in the event of a “change in control” as defined in the agreement and expire no later than ten years from the date of grant.  In addition, pursuant to the term of the stock option agreement which requires that the price of the stock options granted thereunder may not be less than the market value of the Company’s common stock on the date of grant, all of these options were granted at an exercise price of $17.20 per share.

2004 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 this agreement are considered non-qualified for federal income tax purposes, vest at the rate of 20% per year over a five year period, become fully vested in the event of a “change in control” as defined in the agreement and expire no later than ten years from the date of grant.  In addition, pursuant to the term of the stock option agreement which requires that the price of the stock options granted thereunder may not be less than the market value of the Company’s common stock on the date of grant, all of these options were granted at an exercise price of $19.62 per share.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

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

Item 14.  Principal Accountant Fees and Services

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

40

PART IV

Item 15.  Exhibits and Financial Schedules

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

Report of Independent Registered Public Accounting Firm

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

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

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

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

Notes to Consolidated Financial Statements.

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

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

Index to Exhibits

Exhibit

Number Exhibit Description

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

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

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

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

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

4.3 Warrant to Purchase Common Stock (23)

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

10.1 1994 Stock Option Plan *(3)

10.2 Recognition and Retention Plan *(4)

10.3 1998 Stock Option Plan *(5)

10.4 Restricted Stock Plan *(6)

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

41

10.6 2000 Stock Compensation Plan *(6)

10.7 2001 Stock Compensation Plan *(6)

10.8 2003 Stock Option Agreement *(8)

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

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

10.11 2004 Stock Option Plan *(11)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

23 Consent of BKD, LLP

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

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

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

42

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

* Management contract or compensatory plan or arrangement

_____________________

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

43

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

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

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

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

SIGNATURES

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

		GUARANTY FEDERAL BANCSHARES, INC.
Dated:  March 31, 2009	By:	/s/ Shaun A. 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/ Tim Rosenbury
	Shaun A. Burke		Tim Rosenbury
	President and Chief Executive Officer		Director
	and Director	Date:	March 31, 2009
	(Principal Executive Officer)
Date:	March 31, 2009
By:	/s/ Carter Peters	By:	/s/ James R. Batten
	Carter Peters		James R. Batten
	EVP and Chief Financial Officer		Director
	(Principal Accounting and Financial Officer)	Date:	March 31, 2009
Date:	March 31, 2009
By:	/s/ John Griesemer	By:	/s/ Don M. Gibson
	John Griesemer		Don M. Gibson
	Director		Chairman of the Board and Director
Date:	March 31, 2009	Date:	March 31, 2009
By:	/s/ Gregory V. Ostergren	By:	/s/ James L. Sivils, III
	Gregory V. Ostergren		James L. Sivils, III
	Director		Director
Date:	March 31, 2009	Date:	March 31, 2009
By:	/s/ Kurt D. Hellweg	By:	/s/ Jack L. Barham
	Kurt D. Hellweg		Jack L. Barham
	Director		Director
Date:	March 31, 2009	Date:	March 31, 2009

44

EX-13

Exhibit 13

Guaranty Federal Bancshares, Inc.

 2008 Annual Report

	Investor Information
Contents  i          President’s Message 1           Investor Information 2          Common Stock Prices & Dividends 4          Selected Consolidated Financial and Other Data 6          Management’s Discussion and Analysis of Financial Condition and Results of Operations 21        Consolidated Financial Statements 51        Report of Independent Registered Public Accounting Firm Directors and Officers	ANNUAL MEETING OF STOCKHOLDERS: The Annual Meeting of Stockholders of the Company will be held Wednesday, May 27, 2009 at 6:00 p.m., local time, at the Guaranty Bank Operations Center, 1414 W. Elfindale, Springfield, Missouri. ANNUAL REPORT ON FORM 10-K:  Copies of the Company’s Annual Report on Form 10-K, including the financial statements, filed with the Securities and Exchange Commission are available without charge upon written request to: Lorene Thomas, Secretary Guaranty Federal Bancshares, Inc., 1341 W. Battlefield St., Springfield, MO 65807-4181 TRANSFER AGENT: Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 STOCK TRADING INFORMATION: Over-the Counter Symbol: GFED SPECIAL LEGAL COUNSEL: Husch Blackwell Sanders LLP 901 St. Louis St., Suite 1900 Springfield, MO 65806
Bank History Fact 1: 1913 - St. Louis Savings moves to Springfield, MO and changes its name to Guaranty Federal Savings and Loan Association.	INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: BKD, LLP 901 St. Louis St. PO Box 1190 Springfield, MO 65801-1190 STOCKHOLDER AND FINANCIAL INFORMATION: Carter Peters, Executive Vice President, Chief Financial Officer 417-520-0235

1

Guaranty Federal Bancshares, Inc.

2008 Annual Report

Common Stock Prices & Dividends

Bank History Fact 2: 1935 – Converts to a Federal charter and the name is changed to Guaranty Federal Savings and Loan Association. Bank History Fact 3: 1979 – Guaranty Federal opens first branch office. 1987 – Guaranty Federal opens second branch office. Bank History Fact 4: 1995 – Reorganizes and issues stock in connection with formation of MHC. Forms federally chartered stock savings bank.

The common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is traded in the over-the-counter market and quoted on the NASDAQ National Market under the symbol “GFED”.  As of March 18, 2009, there were approximately 1402 stockholders.  At that date the Company had 6,779,800 shares of common stock issued and 2,617,140 shares of common stock outstanding. During the year ended December 31, 2008, the Company paid dividends of (i) $0.18 per share on April 18, 2008, to stockholders of record as of April 7, 2008, (ii) $0.18 per share on July 18, 2008 to stockholders of record as of July 7, 2008.  The Company did not declare a cash dividend in the third and fourth quarters of the year.  During the year ended December 31, 2007, the Company paid dividends of (i) $0.17 per share on April 13, 2007, to stockholders of record as of April 3, 2007, (ii) $0.17 per share on July 13, 2007 to stockholders of record as of July 2, 2007, and (iii) $0.18 per share on October 15, 2007, to stockholders of record as of October 1, 2007, and also declared a cash dividend of $0.18 per share on December 21, 2007, which was paid on January 18, 2008, to stockholders of record on January 4, 2008. Any 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, 2008 and 2007.

	Year ended				Year ended
	December 31, 2008				December 31, 2007
	High		Low		High		Low
Quarter ended:
March 31	$	28.78		24.94		29.85		28.43
June 30		26.43		20.25		30.21		28.75
September 30		19.75		11.40		30.42		29.00
December 31		11.50		4.25		30.25		27.05

2

Guaranty Federal Bancshares, Inc.

2008 Annual Report

  Bank History Fact 5:   2003 – The bank applies for State Charter and changes name to Guaranty Bank. Set forth below is a stock performance graph comparing the cumulative total shareholder return on the Common Stock with (a) the cumulative total stockholder return on stocks included in The Nasdaq – Total U.S. Index and (b) the cumulative total stockholder return on stocks included in The Nasdaq Bank Index.  All three investment comparisons assume the investment of $100 as of the close of business on December 31, 2003 and the hypothetical value of that investment as of the Company’s fiscal years ended December 31, 2004, 2005, 2006, 2007, and 2008, assuming that all dividends were reinvested.  The graph reflects the historical performance of the Common Stock, and, as a result, may not be indicative of possible future performance of the Common Stock.  The data used to compile this graph was obtained from NASDAQ.  

	Period Ending
Index	12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
Guaranty Federal Bancshares, Inc.		100.00		129.07		153.76		161.97		165.84		31.38
NASDAQ – Total US		100.00		109.41		112.42		122.52		131.31		64.66
NASDAQ Bank Index		100.00		113.91		112.12		123.79		101.31		73.89

3

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

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

Summary Balance Sheet	As of December 31,
	2008		2007		2006		2005		2004
ASSETS
Cash and cash equivalents	$	15,097	$	12,046	$	14,881	$	20,506	$	15,896
Investment securities		66,062		15,385		8,669		7,702		21,553
Loans receivable, net		558,327		516,242		480,269		435,528		392,333
Accrued interest receivable		2,632		3,323		2,910		2,089		1,570
Prepaids and other assets		16,573		8,612		10,075		7,696		1,977
Foreclosed assets		5,655		727		173		27		78
Premises and equipment		11,324		9,442		7,868		7,453		7,189
	$	675,670	$	565,778	$	524,845	$	481,001	$	440,596
LIABILITIES
Deposits	$	447,079	$	418,191	$	352,230	$	320,059	$	296,388
Federal Home Loan Bank advances		132,436		76,086		108,000		100,000		100,000
Securities sold under agreements to repurchase		39,750		9,849		1,703		1,594		1,264
Subordinated debentures		15,465		15,465		15,465		15,465		-
Other liabilities		3,627		3,500		2,548		1,791		2,171
		638,357		523,091		479,946		438,909		399,823
STOCKHOLDERS' EQUITY		37,313		42,687		44,899		42,092		40,773
	$	675,670	$	565,778	$	524,845	$	481,001	$	440,596
Supplemental Data	As of December 31,
	2008		2007		2006		2005		2004
Number of full-service offices		10		8		8		7		9
Cash dividends per share	$	0.36	$	0.70	$	0.67	$	0.65	$	0.63

4

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

Summary Statement of Income	Years ended December 31,
	2008			2007		2006		2005		2004
Interest income	$	36,363		$	37,972	$	35,204	$	27,413	$	20,539
Interest expense		19,524			20,519		17,386		11,860		8,446
Net interest income		16,839			17,453		17,818		15,553		12,093
Provision for loan losses		14,744			840		750		945		864
Net interest income after provision for loan losses		2,095			16,613		17,068		14,608		11,229
Noninterest income		2,316			4,729		3,660		3,468		3,616
Noninterest expense		12,760			11,842		10,177		8,670		8,248
Income (loss) before income taxes		(8,349	)		9,500		10,551		9,406		6,597
Provision (credit) for income taxes		(2,989	)		3,400		4,042		3,507		2,313
Net income (loss)	$	(5,360	)	$	6,100	$	6,509	$	5,899	$	4,284
Basic	$	(2.06	)	$	2.25	$	2.34	$	2.12	$	1.53
Diluted	$	(2.06	)	$	2.19	$	2.25	$	2.03	$	1.47

5

Guaranty Federal Bancshares, Inc.

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

GENERAL

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

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

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

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

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

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

The discussion set forth below, and in any other portion of this report, may contain forward-looking statements.  Such statements are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this report.  When used in this document, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Such statements are subject to risks and uncertainties.  Actual results of the Company’s operations could materially differ from those forward-looking comments.  The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time including the risk factors of the Company set forth in Item 1A. of the Company’s Form 10-K.

6

Guaranty Federal Bancshares, Inc.

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

FINANCIAL CONDITION

From December 31, 2007 to December 31, 2008, the Company’s total assets increased $109,892,413 (19%) to $675,670,393, liabilities increased $115,266,171 (22%) to $638,357,491, and stockholders' equity decreased $5,373,758 (13%) to $37,312,902.  The ratio of stockholders’ equity to total assets decreased to 5.5% during this period, compared to 7.5% as of December 31, 2007.

From December 31, 2007 to December 31, 2008, securities available-for-sale increased $50,775,401 (345%).  The increase is primarily due to purchases of $55,463,436, offset by maturities and principal repayments of $4,572,188.  Approximately $35 million of the purchases were due to a structured leveraged transaction completed early in fiscal 2008.  The Company currently owns 26,600 shares of the Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $26,057 in the securities available-for-sale category.  As of December 31, 2008, the gross unrealized loss on the stock is $6,639, a decrease of $886,844 from the gross unrealized gain of $880,205 at December 31, 2007.  This decrease is due to a significant financial downturn in FHLMC resulting in a sharp decline in its stock price. 

From December 31, 2007 to December 31, 2008, securities held-to-maturity decreased $98,310 (15%) to $556,465 due to repayments received during the year. Stock of the Federal Home Loan Bank of Des Moines (“FHLB”) was increased by $2,715,400 (68%) to $6,730,100 due to stock necessary to meet FHLB borrowing requirements.  The Bank is required to own stock in the FHLB equal to 0.12% of assets plus 4.45% of advances.

From December 31, 2007 to December 31, 2008, net loans receivable increased by $42,293,208 (8%) to $556,393,243.  During this period, permanent loans secured by both owner and non-owner occupied one to four unit residential real estate increased $24,735,637 (30%), multi-family permanent loans decreased $10,190,403 (24%), construction loans decreased $4,651,643 (5%), permanent loans secured by commercial real estate increased $28,223,452 (16%), commercial loans increased $14,442,453 (14%), and installment loans increased $447,781 (2%).  During this period the Company continued to increase its emphasis on commercial lending, while selling the majority of conforming single family loan production on the secondary market.  Loans sold on the secondary market are sold servicing released, whereby the third party who purchases the loan provides the servicing.

From December 31, 2007 to December 31, 2008, loans past due 90 days or more increased $812,111 to $7,027,644 (1.26% of net loans) primarily due to the decline in the economy.  As of December 31, 2008, management identified loans totaling $39,888,665 as impaired with a related allowance for loan losses of $9,135,248.    Impaired loans increased by $32,634,331 during 2008, compared to the balance of $7,254,334 at December 31, 2007.  The Bank recognizes interest income on non-accrual loans as payments are received.

From December 31, 2007 to December 31, 2008, the allowance for loan losses increased $10,765,569 to $16,728,492.  In addition to the provision for loan loss of $14,744,079 recorded by the Company during the year ended December 31, 2008, loan charge-offs exceeded recoveries by $3,978,510 for the twelve months ended December 31, 2008. The allowance for loan losses as of December 31, 2008 and December 31, 2007 was 2.92% and 1.15% of gross loans outstanding (excluding mortgage loans held for sale), respectively.  As of December 31, 2008, the allowance for loan losses was 42% of impaired loans versus 82% as of December 31, 2007.   Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio.

As of December 31, 2008, foreclosed assets held for sale consisted primarily of real estate related to single family residences and lots totaling $1.6 million and one commercial development in Northwest Arkansas that totals $4.0 million.

From December 31, 2007 to December 31, 2008, premises and equipment increased $1,881,113 (20%) to $11,323,463 due primarily to building construction and purchases for two new branches opened in 2008 and the site of a future operations center to be opened in 2009.

From December 31, 2007 to December 31, 2008, deposits increased $28,888,185 (7%) to $447,079,469.  During this period, transaction accounts decreased by $3,267,786 (2%) to 31% of total deposits and certificates of deposit increased by $32,155,971 (12%) to $308,574,547.  Included in the certificates of deposit total is $39,869,000 in deposits placed by brokers, an increase of $24,995,000 from December 31, 2007.

From December 31, 2007 to December 31, 2008, the Company’s borrowings from the Federal Home Loan Bank (“FHLB”) increased $56,350,000 to $132,436,000, primarily to fund asset growth during the period.

7

Guaranty Federal Bancshares, Inc.

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

Securities sold under agreements to repurchase increased $29,900,705 (304%) from $9,849,295 as of December 31, 2007, to $39,750,000 as of December 31, 2008, due to the structured leveraged transaction completed during the period.

Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) decreased $5,373,758 (13%) to $37,312,902 as of December 31, 2008.  The Company incurred a net loss for the year ended December 31, 2008 of $5,359,711.  The Company repurchased 60,401 shares as treasury stock at a cost of $1,465,150, at an average price of $24.26 per share.  An increase in unrealized appreciation on securities available-for-sale and interest rate swaps, net of tax, increased stockholders’ equity by $1,184,091.  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 decreased $2.09 from $16.37 as of December 31, 2007 to $14.28 as of December 31, 2008.

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

The following table shows the balances as of December 31, 2008 of various categories of interest-earning assets and interest-bearing liabilities and the corresponding yields and costs, and, for the periods indicated: (1) the average balances of various categories of interest-earning assets and interest-bearing liabilities, (2) the total interest earned or paid thereon, and (3) the resulting weighted average yields and costs.  In addition, the table shows the Company’s rate spreads and net yields.  Average balances are based on daily balances.  Tax-free income is not material; accordingly, interest income and related average yields have not been calculated on a tax equivalent basis.  Average loan balances include non-accrual loans.  Dollar amounts are expressed in thousands.

8

Guaranty Federal Bancshares, Inc.

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

	As of						Year Ended								Year Ended								Year Ended
	December 31, 2008						December 31, 2008								December 31, 2007								December 31, 2006
	Balance			Yield / Cost			Average Balance			Interest		Yield / Cost			Average Balance			Interest		Yield / Cost			Average Balance			Interest		Yield / Cost
ASSETS
Interest-earning:
Loans	$	572,055			5.41	%	$	555,828		$	33,019		5.94	%	$	482,806		$	37,114		7.69	%	$	452,348		$	34,500		7.63	%
Investment securities		66,061			5.20	%		58,727			3,125		5.32	%		10,688			537		5.02	%		7,261			451		6.21	%
Other assets		18,000			1.19	%		7,869			219		2.78	%		7,372			321		4.35	%		9,843			253		2.57	%
Total interest-earning		656,116			5.27	%		622,424			36,363		5.84	%		500,866			37,972		7.58	%		469,452			35,204		7.50	%
Noninterest-earning		19,554						24,092								18,730								20,914
	$	675,670					$	646,516							$	519,596							$	490,366
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts	$	12,253			0.94	%	$	12,980		$	143		1.10	%	$	13,474		$	320		2.37	%	$	14,830		$	365		2.46	%
Transaction accounts		95,032			1.52	%		102,341			1,806		1.76	%		100,689			2,940		2.92	%		78,238			1,710		2.19	%
Certificates of deposit		308,575			3.88	%		285,845			12,270		4.29	%		246,785			12,600		5.11	%		195,772			8,448		4.32	%
FHLB advances		132,436			2.49	%		119,957			3,238		2.70	%		65,575			3,470		5.29	%		110,810			5,722		5.16	%
Subordinated debentures		15,465			6.62	%		15,465			1,024		6.62	%		15,465			1,024		6.62	%		15,465			1,028		6.65	%
Other borrowed funds		41,185			2.39	%		38,604			1,043		2.70	%		3,691			165		4.47	%		3,947			113		2.86	%
Total interest-bearing		604,946			3.11	%		575,192			19,524		3.39	%		445,679			20,519		4.60	%		419,062			17,386		4.15	%
Noninterest-bearing		33,411						30,516								28,401								26,898
Total liabilities		638,357						605,708								474,080								445,960
Stockholders' equity		37,313						40,808								45,516								44,406
	$	675,670					$	646,516							$	519,596							$	490,366
Net earning balance	$	51,170					$	47,232							$	55,187							$	50,390
Earning yield less costing rate					2.16	%							2.45	%							2.98	%							3.35	%
Net interest income, and net yield spread on interest-earning assets										$	16,839		2.71	%				$	17,453		3.48	%				$	17,818		3.80	%
Ratio of interest-earning assets to interest-bearing liabilities		108	%					108	%							112	%							112	%

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, 2008 versus December 31, 2007												December 31, 2007 versus December 31, 2006
	Average Balance			Interest Rate			Rate & Balance			Total			Average Balance			Interest Rate			Rate & Balance			Total
Interest income:
Loans	$	5,613		$	(8,433	)	$	(1,275	)	$	(4,095	)	$	2,323		$	273		$	18		$	2,614
Investment securities		2,414			32			142			2,588			213			(86	)		(41	)		86
Other assets		22			(116	)		(8	)		(102	)		(64	)		177			(44	)		69
Net change in interest income		8,049			(8,517	)		(1,141	)		(1,609	)		2,472			364			(67	)		2,769
Interest expense:
Savings accounts		(12	)		(171	)		6			(177	)		(33	)		(13	)		1			(45	)
Transaction accounts		48			(1,163	)		(19	)		(1,134	)		491			574			165			1,230
Certificates of deposit		1,994			(2,006	)		(318	)		(330	)		2,201			1,548			403			4,152
FHLB advances		2,878			(1,700	)		(1,410	)		(232	)		(2,336	)		142			(58	)		(2,252	)
Subordinated debentures		-			-			-			-			-			(4	)		-			(4	)
Other borrowed funds		1,561			(65	)		(618	)		878			(7	)		62			(4	)		51
Net change in interest expense		6,469			(5,105	)		(2,359	)		(995	)		316			2,309			507			3,132
Change in net interest income	$	1,580		$	(3,412	)	$	1,218		$	(614	)	$	2,156		$	(1,945	)	$	(574	)	$	(363	)

RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007

	Average for the Year Shown
	Prime			Ten-Year Treasury			One-Year Treasury
December 31, 2008		5.09	%		3.66	%		1.83	%
December 31, 2007		8.05	%		4.63	%		4.53	%
Change in rates		-2.96	%		-0.97	%		-2.70	%

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, 2008 and December 31, 2007 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 were steady for the first eight months of 2007, but due to several economic factors, the Federal Reserve Open Market Committee (“FOMC”) began decreasing the discount rate at its September 2007 meeting and continued for each meeting thereafter in 2007.  The FOMC continued its aggressive easing of rates in the first quarter of 2008 and then again in the fourth quarter.  As of year-end 2008 the prime rate was 3.25%.

10

Guaranty Federal Bancshares, Inc.

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

Interest Income.  Total interest income decreased $1,609,148 (4%).  The average balance of interest-earning assets increased $121,558,000 (24%) while the yield on average interest earning assets decreased 174 basis points to 5.84%.

Interest on loans decreased $4,094,632 (11%) and the average loan receivable balance increased $73,022,000 (15%) while the average yield decreased 175 basis points to 5.94%.

Interest Expense.  Total interest expense decreased $995,079 (5%) as the average balance of interest-bearing liabilities increased $129,513,000 (29%) while the average cost of interest-bearing liabilities decreased 121 basis points to 3.39%.

Interest expense on deposits decreased $1,641,062 (10%) as the average balance of interest bearing deposits increased $40,218,000 (11%) and the average interest rate paid to depositors decreased 88 basis points to 3.52%.

The average balance of advances increased $54,382,000 (83%) and the average cost of those advances decreased 259 basis points to 2.70%.  As a result, interest expense on these advances decreased $232,062 (7%).  As of December 31, 2008 FHLB advances were 20% of total assets, compared to 13% of total assets as of December 31, 2007.

Net Interest Income.  The Company’s net interest income decreased $614,069 (4%).  During the year ended December 31, 2008, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $47,232,000, resulting in a decrease in the average net earning balance of $7,955,000 (14%).    In addition, the Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities decreased by 53 basis points from 2.98% to 2.45%.

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

During the year ended December 31, 2008, the Company experienced loan charge-offs, in excess of recoveries, of $3,978,510 and, based on a review as discussed above, elected to record a provision for loan loss of $14,744,079 to increase the allowance for loan losses to $16,728,492 as of December 31, 2008.  The provision for loan losses recorded by the Company during year ended December 31, 2007 was $840,000.  The increase in the provision for loan losses was due primarily to the significant increase in impaired and nonperforming loans during 2008.  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 potential increases in problem credits, any growth in its loan portfolio or other circumstances.

Non-Interest Income.  Non-interest income decreased $2,412,416 (51%).  The gain on sale of loans of $875,010 for 2008, compared to $1,177,017 for 2007, 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 loss on investments for the year ended December 31, 2008 was $563,615, compared to a gain of $618,363 for the year ended December 31, 2007.  The losses in fiscal 2008 were attributable to other-than-temporary impairment charges on its equity securities associated with companies operating in the financial sector.  The gains recognized in 2007 were solely due to the sale of shares in FHLMC stock.  The Company suspended its sale of its shares in FHLMC stock in the fourth quarter of 2007 due to its significant financial downturn and a sharp decline in the FHLMC stock price. Deposit service charges decreased $187,950 (8%) due primarily to declines in overdraft charges.  Loss on foreclosed assets increased $741,922 (1,770%) primarily due to the difficult market conditions causing sharp declines in real estate values on foreclosed properties held or sold by the Company.

Non-Interest Expense.  Non-interest expense increased $917,659 (8%).  This increase was primarily due to increases in salaries and employee benefits of $443,036 (6%) and FDIC deposit insurance premiums of $342,441 (805%).

11

Guaranty Federal Bancshares, Inc.

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

The increase in compensation was due to additions in several staff positions in the areas of commercial lending, corporate services, human resources and internal audit with the majority of these new hires beginning in fiscal 2008 or late in fiscal 2007.  The staff increased from 150 full-time equivalent employees as of December 31, 2007 to 163 full-time equivalent employees as of December 31, 2008.

Increases in FDIC premiums were due to insurance assessments that began in 2007.  Because of credits available to the Company for 2007, these increased costs were not owed by the Company until the first quarter of 2008.

Income Taxes.  The credit for income taxes is a direct result of the decrease in the Company’s taxable income for the year ended December 31, 2008 as compared to the year ended December 31, 2007.

Cash Dividends Paid.  The Company paid dividends of $0.18 per share on April 18, 2008, to stockholders of record as of April 7, 2008, and $0.18 per share on July 18, 2008 to stockholders of record as of July 7, 2008.

RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006

	Average for the Year Shown
	Prime			Ten-Year Treasury			One-Year Treasury
December 31, 2007		8.05	%		4.63	%		4.53	%
December 31, 2006		7.96	%		4.80	%		4.94	%
Change in rates		0.09	%		-0.17	%		-0.41	%

Interest Rates.  The Bank charges borrowers and pays depositors interest rates that are largely a function of the general level of interest rates.  The above table sets forth the weekly average interest rates for the 52 weeks ending December 31, 2007 and December 31, 2006 as reported by the Federal Reserve. The Bank typically indexes its adjustable rate commercial loans to prime and its adjustable rate mortgage loans to the one-year treasury rate.  The ten-year treasury rate is a proxy for 30-year fixed rate home mortgage loans.

Rates trended upward during 2006 as the FOMC continued its increase in the discount rates by 100 basis points from January through June.  As of year-end 2006 the prime rate was 8.25%.  Rates were steady for the first eight months of 2007, but due to several economic factors, the FOMC began decreasing the discount rate at its September 2007 meeting and continued for each meeting thereafter.  As of year-end 2007 the prime rate was 7.25%.

Interest Income.  Total interest income increased $2,768,092 (8%) as the average balance of interest-earning assets increased $31,414,000 (7%).  In addition, the yield on average interest earning assets increased 8 basis points to 7.58%.

Interest on loans increased $2,613,520 (8%) and the average loan receivable balance increased $30,458,000 (7%) while the average yield increased 6 basis points to 7.69%.

Interest Expense.  Total interest expense increased $3,132,710 (18%) as the average balance of interest-bearing liabilities increased $26,617,000 (6%).  In addition, the average cost of interest-bearing liabilities increased 45 basis points to 4.60%.

Interest expense on deposits increased $5,337,591 (51%) as the average balance of interest bearing deposits increased $72,108,000 (25%) and the average interest rate paid to depositors increased 76 basis points to 4.40%.

The Company’s borrowings from the FHLB decreased to $76,086,000, which remains in compliance with the FHLB limitation of advances to 35% of assets.  The average balance of advances decreased $45,235,000 (41%) and the average cost of those advances increased 13 basis points to 5.29%.  As a result, interest expense on these advances decreased $2,252,422 (39%).  As of December 31, 2007 FHLB advances were 13% of total assets, compared to 21% of total assets as of December 31, 2006.

12

Guaranty Federal Bancshares, Inc.

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

Net Interest Income.  The Company’s net interest income decreased $364,618 (2%).  During the year ended December 31, 2007, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $55,187,000, resulting in an increase in the average net earning balance of $4,797,000 (10%).    In addition, the Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities decreased by 37 basis points from 3.35% to 2.98%.

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

During the year ended December 31, 2007, the Company experienced loan charge-offs, in excess of recoveries, of $660,554 and, based on a review as discussed above, elected to record a provision for loan loss of $840,000 to increase the allowance for loan losses to $5,962,923 as of December 31, 2007.  The provision for loan losses recorded by the Company during year ended December 31, 2006 was $750,000.  Management of the Company anticipates the need to continue increasing the loan loss allowance in the future through charges to provision for loan losses based on the anticipated growth in its loan portfolio.

Non-Interest Income.  Non-interest income increased $1,068,849 (29%).  The gain on sale of loans of $1,177,017 for 2007, compared to $692,276 for 2006, was the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market.  The Bank attempts to minimize its risk of price changes by committing to sell loans while the loans are in the origination process.  The gain on sale of investments for the year ended December 31, 2007 was $618,363, compared to $750,869 for the year ended December 31, 2006.  These gains were attributed to the sale of 10,000 shares of FHLMC stock in 2007 and the sale of 12,000 shares in 2006.  Deposit service charges increased $813,917 (58%) due to increases in insufficient funds and overdraft charges primarily due to the Bank’s overdraft privilege program that was implemented in the fourth quarter of 2006.

Non-Interest Expense.  Non-interest expense increased $1,665,457 (16%).  This increase was primarily due to increases in salaries and employee benefits of $962,487 (16%), occupancy expense of $93,633 (6%), data processing of $111,490 (40%) and other expense of $498,249 (27%).

The increase in compensation was due to several factors, including additions in executive and staff positions, pay increases to existing employees, increases in employee benefit costs and an increase in the number of employees.  The staff increased from 146 full-time equivalent employees as of December 31, 2006 to 150 full-time equivalent employees as of December 31, 2007.

The increases in occupancy and data processing expenses were primarily due to increased depreciation as well as maintenance expenses relating to the Bank’s conversion to a new core processing system in the first half of 2006.

Increases in other expenses are comprised of increased expenses related to audit and compliance costs for the Sarbanes-Oxley Act of 2002, fees paid to a third party vendor related to the Bank’s overdraft privilege program, increased amortization on low income housing tax credits and an increase in ATM expense.  The Bank converted to a new ATM network provider in September 2006.  The expense is now recorded at gross, rather than net of income earned as was previously done prior to the conversion.  Currently, the associated income related to ATM services is recorded in noninterest income.

Income Taxes.  The decrease in income tax expense is a direct result of the decrease in the Company’s taxable income for the year ended December 31, 2007 as compared to the year ended December 31, 2006.

Cash Dividends Paid.  The Company paid dividends of $0.17 per share on April 13, 2007, to stockholders of record as of April 3, 2007, and $0.17 per share on July 13, 2007 to stockholders of record as of July 2, 2007, and $0.18 per share on October 15, 2007, to stockholders of record as of October 1, 2007.  The Company declared a cash dividend of $0.18 per share on December 21, 2007, which was paid on January 18, 2008, to stockholders of record on January 4, 2008.

13

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.

The Bank has continued to emphasize the origination of short-term commercial real estate, construction, commercial business, home equity, consumer and adjustable-rate, one- to four-family residential 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, 2008, such loans constitute 15% of the Bank’s loan portfolio.  In general, these loans have higher yields, shorter maturities, and greater interest rate sensitivity than other real estate loans.

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity.  Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements.  As of December 31, 2008 and 2007, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $138,504,922 or 31% of its total deposits and $141,772,711 or 34% of total deposits, respectively.  The weighted average rate paid on these accounts decreased 98 basis points from 2.11% on December 31, 2007 to 1.13% on December 31, 2008 due to the overall decline in market interest rates.  The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.

INTEREST RATE SENSITIVITY ANALYSIS

The following table sets forth as of December 31, 2008, management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100 and 200 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
+200		50,312		2,707			6	%		7.37	%		0.50	%
+100		49,229		1,624			3	%		7.16	%		0.28	%
NC		47,605		-			0	%		6.88	%		0.00	%
-100		47,348		(257	)		-1	%		6.79	%		-0.09	%
-200		46,926		(679	)		-1	%		6.70	%		-0.18	%

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.

14

Guaranty Federal Bancshares, Inc.

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

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

Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations.  Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities.  The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and FHLB borrowings.  The Company also has established borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.

The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less.  The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time.  The Company’s cash and cash equivalents totaled $15,097,015 as of December 31, 2008 and $12,046,202 as of December 31, 2007, representing an increase of $3,050,813.  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 $226,400,597 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 $37,372,000 from the FHLB, as of December 31, 2008.  Based on existing collateral, the Bank has the ability to borrow $30,634,000 from the Federal Reserve Bank as of December 31, 2008.  The Bank plans to maintain its FHLB and Federal Reserve Bank borrowings to a level that will provide a borrowing capacity sufficient to provide for contingencies.

The Company’s Tier 1 capital position of $50,619,000 is 7.5% of average assets as of December 31, 2008.  The Company has an excess of $23,656,000, $27,922,000, and $12,444,000 of required regulatory levels of tangible, core, and risk-based capital, respectively.  In addition, under current regulatory guidelines, the Bank is classified as well capitalized.  See also additional information provided under the caption “Regulatory Matters” in Note 1 of the Notes to Consolidated Financial Statements.

During the year ended December 31, 2008, the Company purchased 60,401 shares of common stock at an average price of $24.26 to place in the treasury account.  During the year ended December 31, 2007, the Company purchased 252,799 shares of common stock at an average price of $29.59 to place in the treasury account.  The Company intends to monitor the common stock price and, with regulatory approval, may from time to time initiate further stock repurchases in order to improve the Company’s long-term earnings per share while at the same time maintaining an adequate level of stockholders’ equity.  The Company has a repurchase plan which was announced on August 20, 2007, and as of December 31, 2008, a total of 200,277 shares of the Company’s common stock may be purchased under this plan.

15

Guaranty Federal Bancshares, Inc.

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

In order to address the weakened economy, and specifically the banking sector, and also to help consumers maintain confidence in the banking system, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008.

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

Secondly, the Troubled Asset Relief Program (“TARP”) was enacted under EESA.  As part of TARP, the United States Department of the Treasury (the "Treasury") established the Capital Purchase Program (“CPP”) to provide up to $250 billion of funding to eligible financial institutions through the purchase of debt or equity securities from participating institutions. 

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

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

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

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

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

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

16

Guaranty Federal Bancshares, Inc.

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

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

The Company's anticipated use of TARP funds is to protect against additional credit loss exposure if the economic conditions continue to worsen, to reduce concentration exposure to commercial real estate, to allow for loans to be made prudently and responsibly to creditworthy borrowers and to maintain a strong capital position to bolster the Bank’s ability withstand uncertain market conditions.

Since receipt of the funds on January 30, 2009, the Company's actual utilization of the funds has been the following:

· The Company utilized $1.4 million to pay off existing debt with a correspondent bank and injected $12 million of capital funds into the Bank.

· During February 2009, the Bank closed 61 mortgage loans totaling $7,970,178.  The Bank continues to meet the credits needs of the community.

· During February 2009, the Bank provided 117 new commercial and business loans totaling $16,468,415.  In addition, due to the increased capital we were able to continue to provide credit to the business community by renewing 28 loans totaling $15,745,241.  We remain dedicated to working with existing borrowers through these difficult economic times.

· The Bank continues to provide support to existing customers with projects to support community development and employment. The increase in capital provides additional support for our current unfunded commitments totaling $83.8 million.

· The Bank has reduced its exposure to commercial real estate concentration from 518 percent of risk- based capital to 428 percent.

· Management has committed to purchase $3 million in low income housing investments throughout southwestern Missouri.

· Improvement of the Bank’s reliance on non-core funding sources as evidenced by the Net Non Core Funding Dependence Ratio that declined from 39.9% at December 31, 2008 to 28.3% as of February 28, 2009 with the TARP capital injection and core deposit initiatives.

The Company's anticipated use of unspent TARP funds is for the continued support of estimated losses that arise in the loan portfolio as borrowers continue to suffer through economic vagaries, to assist in reducing the Bank's exposure to commercial real estate related credits, to meet credit needs of credit worthy borrowers in the community and support local projects with existing customers, to assist the Bank in working with existing borrowers to avoid preventable foreclosures and mitigate other potential mortgage-related losses and to remain less reliant on non-core funding sources to support the Bank's long term assets.

On October 14, 2008, the Temporary Liquidity Guarantee Program was enacted by the FDIC.  The program provides for the guarantee of newly-issued senior unsecured debt of financial institutions and bank holding companies and provides full deposit insurance coverage for all non-interest bearing deposit accounts.  The additional insurance coverage is assessed a cost of 10 basis points on each dollar of non-interest bearing account for those banks choosing to participate.  The Company has chosen to participate in this program.

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, 2008 and 2007, the Bank had outstanding commitments to originate loans of approximately $5,001,000 and $3,490,000, 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, 2008 and 2007, unused lines of credit to borrowers aggregated approximately $49,253,000 and $63,403,000 for commercial lines and $20,829,000 and $21,957,000 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.

17

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 as that involved in extending loans to customers.  The Bank had total outstanding standby letters of credit amounting to $15,059,000 and $12,464,000 as of December 31, 2008 and 2007, respectively.  The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period.

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

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table summarizes the Company’s fixed and determinable contractual obligations by payment date as of December 31, 2008.  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	$	138,505		138,505		-		-		-
Time and brokered certificates of deposit		308,574		226,401		68,291		12,668		1,214
Other borrowings		41,185		1,435		-		-		39,750
Federal Home Loan Bank advances		132,436		21,386		43,000		15,700		52,350
Subordinated debentures		15,465		-		-		-		15,465
Operating leases		451		102		144		89		117
Purchase obligations		681		681		-		-		-
Other long term obligations		144,905		144,905		-		-		-
Total	$	782,202		533,414		111,435		28,457		108,896

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.

18

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

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, and does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in generally accepted accounting principles. SFAS No. 157 emphasizes that fair value is a market-based measurement based on an exchange transaction between market participants in which an entity sells an asset or transfers a liability. SFAS No. 157 also establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value assumptions as the lowest level. The provisions of SFAS No. 157 were effective as of January 1, 2008.  The adoption of the standard did not have a material impact on the consolidated financial statements.  In February 2008, Financial Accounting Standards Board Staff Position No. 157-2, Effective Date of FASB Statement No. 157 was issued that delayed the application of SFAS No. 157 for non-financial assets and non-financial liabilities, until January 1, 2009. 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  This statement permits companies to choose to measure financial instruments and certain other financial assets and liabilities at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted.  The provisions of this statement were effective for the Company as of January 1, 2008.   The Company elected not to measure any eligible items using the fair value option in accordance with SFAS No. 159 and therefore, SFAS No. 159 did not have a material impact on the consolidated financial statements at adoption.

19

Guaranty Federal Bancshares, Inc.

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

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133.  SFAS 161 amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why and entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows.  To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.  SFAS 161 was effective for the Company on January 1, 2009 and did not have a material impact on the consolidated financial statements at adoption.

SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS

	Year Ended December 31, 2008, Quarter ended
	Mar-08		Jun-08			Sep-08		Dec-08
Interest income	$	9,231,033	$	8,925,204		$	9,267,799	$	8,939,356
Interest expense		5,201,066		4,811,710			4,747,203		4,764,245
Net interest income		4,029,967		4,113,494			4,520,596		4,175,111
Provision for loan losses		820,000		5,684,079			1,675,000		6,565,000
Gain (loss) on loans and investment securities		231,077		159,640			207,870		(287,192	)
Other noninterest income, net		650,774		660,770			641,024		52,188
Noninterest expense		3,101,408		3,213,100			3,167,272		3,278,030
Income (loss) before income taxes		990,410		(3,963,275	)		527,218		(5,902,923	)
Provision (credit) for income taxes		373,552		(1,466,995	)		227,759		(2,123,175	)
Net income (loss)	$	616,858	$	(2,496,280	)	$	299,459	$	(3,779,748	)
Basic earnings (loss) per share	$	0.24	$	(0.96	)	$	0.11	$	(1.45	)
Diluted earnings (loss) per share	$	0.23	$	(0.96	)	$	0.11	$	(1.45	)
	Year Ended December 31, 2007, Quarter ended
	Mar-07		Jun-07			Sep-07		Dec-07
Interest income	$	9,521,871	$	9,103,145		$	9,685,875	$	9,661,649
Interest expense		4,946,487		5,028,396			5,201,745		5,342,675
Net interest income		4,575,384		4,074,749			4,484,130		4,318,974
Provision for loan losses		210,000		210,000			210,000		210,000
Gain on sale of loans and investment securities		485,313		524,526			463,989		321,552
Other noninterest income, net		780,117		810,325			752,916		589,829
Noninterest expense		2,874,548		2,995,788			2,986,558		2,985,257
Income before income taxes		2,756,266		2,203,812			2,504,477		2,035,098
Provision for income taxes		1,002,726		787,588			891,786		717,671
Net income	$	1,753,540	$	1,416,224		$	1,612,691	$	1,317,427
Basic earnings per share	$	0.63	$	0.51		$	0.60	$	0.50
Diluted earnings per share	$	0.62	$	0.50		$	0.59	$	0.49

20

Guaranty Federal Bancshares, Inc.

Consolidated Balance Sheets

December 31, 2008 and 2007

	December 31,			December 31,
	2008			2007
ASSETS
Cash and due from banks	$	3,826,567		$	11,135,960
Interest-bearing deposits in other financial institutions		11,270,448			910,242
Cash and cash equivalents		15,097,015			12,046,202
Available-for-sale securities		65,505,339			14,729,938
Held-to-maturity securities		556,465			654,775
Stock in Federal Home Loan Bank, at cost		6,730,100			4,014,700
Mortgage loans held for sale		1,933,798			2,141,998
Loans receivable, net of allowance for loan losses of December 31, 2008 and 2007 - $16,728,492 and $5,962,923, respectively		556,393,243			514,100,035
Accrued interest receivable:
Loans		2,310,062			3,218,845
Investments		322,388			104,603
Prepaid expenses and other assets		4,065,359			2,841,411
Foreclosed assets held for sale		5,655,257			727,422
Premises and equipment		11,323,463			9,442,350
Income taxes receivable		9,091			-
Deferred income taxes		5,768,813			1,755,701
	$	675,670,393		$	565,777,980
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits	$	447,079,469		$	418,191,284
Federal Home Loan Bank advances		132,436,000			76,086,000
Securities sold under agreements to repurchase		39,750,000			9,849,295
Subordinated debentures		15,465,000			15,465,000
Notes payable		1,435,190			718,190
Advances from borrowers for taxes and insurance		166,327			157,811
Accrued expenses and other liabilities		448,226			299,005
Accrued interest payable		1,577,279			1,793,663
Dividend payable		-			469,373
Income taxes payable		-			61,699
		638,357,491			523,091,320
COMMITMENTS AND CONTINGENCIES		-			-
STOCKHOLDERS' EQUITY
Common Stock:
$0.10 par value; authorized 10,000,000 shares; issued December 31, 2008 and 2007 - 6,779,800 and 6,736,485 shares, respectively		677,980			673,649
Additional paid-in capital		58,535,159			57,571,929
Unearned ESOP shares		(888,930	)		(1,116,930	)
Retained earnings, substantially restricted		39,114,189			45,402,449
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities and effect of interest rate swaps, net of income taxes; December 31, 2008 and 2007 - $991,281 and $295,863, respectively		1,687,858			503,767
		99,126,256			103,034,864
Treasury stock, at cost;
December 31, 2008 and 2007 - 4,077,567 and 4,017,166 shares, respectively		(61,813,354	)		(60,348,204	)
		37,312,902			42,686,660
	$	675,670,393		$	565,777,980

See Notes to Consolidated Financial Statements

21

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Operations

Years  Ended December 31, 2008, 2007 and 2006

	2008			2007			2006
INTEREST INCOME
Loans	$	33,019,217		$	37,113,849		$	34,500,329
Investment securities		3,124,862			537,176			450,919
Other		219,313			321,515			253,200
		36,363,392			37,972,540			35,204,448
INTEREST EXPENSE
Deposits		14,219,732			15,860,794			10,523,203
Federal Home Loan Bank advances		3,237,489			3,469,551			5,721,973
Subordinated debentures		1,023,783			1,023,783			1,027,526
Other		1,043,220			165,175			113,891
		19,524,224			20,519,303			17,386,593
NET INTEREST INCOME		16,839,168			17,453,237			17,817,855
PROVISION FOR LOAN LOSSES		14,744,079			840,000			750,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,095,089			16,613,237			17,067,855
NONINTEREST INCOME
Service charges		2,027,691			2,215,641			1,401,724
Other fees		40,129			90,360			96,209
Gain (loss) on investment securities		(563,615	)		618,363			750,869
Gain on sale of loans		875,010			1,177,017			692,276
Loss on foreclosed assets		(783,831	)		(41,909	)		(46,833	)
Other income		720,767			669,095			765,473
		2,316,151			4,728,567			3,659,718
NONINTEREST EXPENSE
Salaries and employee benefits		7,517,285			7,074,249			6,111,762
Occupancy		1,682,277			1,614,403			1,520,770
FDIC deposit insurance premiums		384,996			42,555			39,661
Data processing		374,123			391,679			280,189
Advertising		399,996			399,996			403,292
Other expense		2,401,133			2,319,269			1,821,020
		12,759,810			11,842,151			10,176,694
INCOME (LOSS) BEFORE INCOME TAXES		(8,348,570	)		9,499,653			10,550,879
PROVISION (CREDIT) FOR INCOME TAXES		(2,988,859	)		3,399,771			4,041,795
NET INCOME (LOSS)	$	(5,359,711	)	$	6,099,882		$	6,509,084
BASIC EARNINGS (LOSS) PER SHARE	$	(2.06	)	$	2.25		$	2.34
DILUTED EARNINGS (LOSS) PER SHARE	$	(2.06	)	$	2.19		$	2.25

See Notes to Consolidated Financial Statements

22

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2008, 2007 and 2006

	2008			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(5,359,711	)	$	6,099,882		$	6,509,084
Items not requiring (providing) cash:
Deferred income taxes		(4,143,816	)		(187,839	)		(592,927	)
Depreciation		934,941			902,322			814,150
Provision for loan losses		14,744,079			840,000			750,000
Gain on sale of loans and investment securities		(777,222	)		(1,795,380	)		(1,443,145	)
Other than temporary impairment on investment securities		465,827			-			-
Gain on sale of equipment and other assets		-			-			(89,911	)
Loss (gain) on sale of foreclosed assets		627,888			(4,621	)		46,833
Accretion of gain on termination of interest rate swaps		(169,582	)		-			-
Amortization of deferred income,premiums and discounts, net		(47,702	)		108,733			24,106
Stock award plans		92,846			71,325			83,192
Origination of loans held for sale		(51,082,040	)		(71,861,627	)		(51,685,484	)
Proceeds from sale of loans held for sale		52,165,250			73,901,281			51,465,404
Release of ESOP shares		408,388			672,765			651,958
Changes in:
Accrued interest receivable		690,998			(413,139	)		(821,182	)
Prepaid expenses and other assets		372,439			114,073			400,043
Accrued expenses and other liabilities		(67,163	)		235,832			1,060,085
Income taxes payable		(519,838	)		1,051,189			(790,942	)
Net cash provided by operating activities		8,335,582			9,734,796			6,381,264
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(64,369,071	)		(39,788,084	)		(45,195,742	)
Principal payments on held-to-maturity securities		98,467			108,250			186,219
Principal payments on available-for-sale securities		2,373,721			376,625			175,145
Purchase of available-for-sale securities		(55,463,436	)		(11,926,192	)		(3,780,315	)
Purchase of premises and equipment		(2,816,054	)		(2,476,863	)		(719,094	)
Purchase of tax credit investments		(1,596,387	)		-			(2,195,334	)
Proceeds from sale of originated mortgage servicing rights		-			-			1,023,608
Proceeds from sale of premises and equipment		-			-			470
Proceeds from sales of available-for-sale securities		-			1,128,153			762,617
Proceeds from maturities of available-for-sale securities		2,100,000			2,580,000			1,750,000
Proceeds from termination of interest rate swaps		1,695,836			-			-
(Purchase) redemption of FHLB stock		(2,715,400	)		1,368,000			(403,900	)
Proceeds from sale of foreclosed assets		1,827,560			1,453,674			395,327
Net cash used in investing activities		(118,864,764	)		(47,176,437	)		(48,000,999	)

See Notes to Consolidated Financial Statements

23

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2008, 2007 and 2006

	2008			2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised	$	578,661		$	1,118,762		$	1,147,042
Cash dividends paid		(1,397,922	)		(1,879,256	)		(1,850,300	)
Net increase (decrease) in demand deposits,NOW accounts and savings accounts		(3,267,786	)		12,779,497			(1,259,419	)
Net increase in certificates of deposit		32,155,971			53,182,151			33,430,104
Net increase in securities sold under agreements to repurchase		29,900,705			8,146,074			108,963
Proceeds from FHLB advances		2,243,650,075			1,855,538,600			1,901,242,000
Repayments of FHLB advances		(2,187,300,075	)		(1,887,452,600	)		(1,893,242,000	)
Proceeds from issuance of notes payable		1,064,000			2,468,000			-
Repayments of notes payable		(347,000	)		(1,749,810	)		-
Advances from borrowers for taxes and insurance		8,516			(65,058	)		10,549
Treasury stock purchased		(1,465,150	)		(7,479,118	)		(3,593,081	)
Net cash provided by financing activities		113,579,995			34,607,242			35,993,858
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		3,050,813			(2,834,399	)		(5,625,877	)
CASH AND CASH EQUIVALENTS,BEGINNING OF YEAR		12,046,202			14,880,601			20,506,478
CASH AND CASH EQUIVALENTS,END OF YEAR	$	15,097,015		$	12,046,202		$	14,880,601
Supplemental Cash Flows Information
Real estate acquired in settlement of loans	$	7,383,283		$	2,003,838		$	588,022
Interest paid	$	19,740,608		$	20,140,586		$	16,479,811
Income taxes paid	$	1,525,017		$	2,563,603		$	4,041,795
Dividend declared and unpaid	$	-		$	469,373		$	468,190

See Notes to Consolidated Financial Statements

24

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2008, 2007 and 2006

	Common Stock		Additional Paid-In Capital		Unearned ESOP Shares			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2006	$	657,135	$	53,778,686	$	(1,572,930	)	$	(49,276,005	)	$	36,533,338		$	1,971,925		$	42,092,149
Comprehensive income
Net income		-		-		-			-			6,509,084			-			6,509,084
Change in unrealized appreciation on available-for-sale securitites, net of income taxes of ($256,871)		-		-		-			-			-			(437,377	)		(437,377	)
Total comprehensive income																		6,071,707
Dividends ($0.67 per share)		-		-		-			-			(1,859,416	)		-			(1,859,416	)
Stock award plans		-		388,884		-			-			-			-			388,884
Stock options exercised		8,218		1,138,824		-			-			-			-			1,147,042
Release of ESOP shares		-		423,958		228,000			-			-			-			651,958
Treasury stock purchased		-		-		-			(3,593,081	)		-			-			(3,593,081	)
Balance, December 31, 2006		665,353		55,730,352		(1,344,930	)		(52,869,086	)		41,183,006			1,534,548			44,899,243
Comprehensive income
Net income		-		-		-			-			6,099,882			-			6,099,882
Change in unrealized appreciation on available-for-sale securities, net of income taxes of ($605,380)		-		-		-			-			-			(1,030,781	)		(1,030,781	)
Total comprehensive income																		5,069,101
Dividends ($0.70 per share)		-		-		-			-			(1,880,439	)		-			(1,880,439	)
Stock award plans		-		286,346		-			-			-			-			286,346
Stock options exercised		8,296		1,110,466		-			-			-			-			1,118,762
Release of ESOP shares		-		444,765		228,000			-			-			-			672,765
Treasury stock purchased		-		-		-			(7,479,118	)		-			-			(7,479,118	)
Balance, December 31, 2007		673,649		57,571,929		(1,116,930	)		(60,348,204	)		45,402,449			503,767			42,686,660
Comprehensive income (loss)
Net loss		-		-		-			-			(5,359,711	)		-			(5,359,711	)
Change in unrealized appreciation on available-for-sale securities and interest rate swaps, net of income taxes of $695,418		-		-		-			-			-			1,184,091			1,184,091
Total comprehensive loss																		(4,175,620	)
Dividends ($0.36 per share)		-		-		-			-			(928,549	)		-			(928,549	)
Stock award plans		-		208,512		-			-			-			-			208,512
Stock options exercised		4,331		574,330		-			-			-			-			578,661
Release of ESOP shares		-		180,388		228,000			-			-			-			408,388
Treasury stock purchased		-		-		-			(1,465,150	)		-			-			(1,465,150	)
Balance, December 31, 2008	$	677,980	$	58,535,159	$	(888,930	)	$	(61,813,354	)	$	39,114,189		$	1,687,858		$	37,312,902

See Notes to Consolidated Financial Statements

25

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 1:                      NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

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

Nature of Operations

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

Principles of Consolidation

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

Use of Estimates

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

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

Securities

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

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.

26

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Amortization of premiums and accretion of discounts 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 a decline in value occurs.  Forward commitments to sell mortgage loans are sometimes acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale.  Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors.  Gains and losses are determined by the difference between the selling price plus the value of retained servicing rights, if any, and the carrying amount of the loans sold, net of discounts collected or paid and considering a normal servicing rate.  Fees received from borrowers to guarantee the funding of mortgage loans held for sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used.

Loans

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

Loan Servicing

The cost of originated mortgage-servicing rights is amortized over the shorter of the actual or contractual loan life.  Impairment of mortgage-servicing rights is assessed based on the fair value of those rights.  Fair values are estimated by discounting expected cash flows.  For purposes of measuring impairment, the rights are stratified based on the loan type, remaining term to maturity and interest rate.  The key assumptions used in the valuation include discount rates, prepayment speeds and servicing costs.  The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights exceeds their fair value.  During 2006, the Company sold its mortgage servicing rights to a third party.

Allowance for Loan Losses

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

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

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 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.

27

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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.  At December 31, 2008 and 2007, nearly all of the interest-bearing deposits were uninsured, with nearly all of these balances held at the Federal Reserve Bank or the Federal Home Loan Bank of Des Moines.

Restriction on Cash and Due From Bank

The Company is required to maintain reserve funds in cash and/or on deposit with Federal Reserve Bank.  The reserve required on December 31, 2008 and 2007, was $3,662,000 and $2,878,000, respectively.

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, 2008 and 2007, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2008, the most recent notification from the Missouri Division of Finance and the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since that notification that management believes have changed the Company’s or the Bank’s category.

28

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, 2008
Tier 1 (core) capital, and ratio to adjusted total assets Company	$	50,619		7.5	%	$	26,963		4.0	%		n/a		n/a
Bank	$	49,833		7.4	%	$	26,914		4.0	%	$	33,642		5.0	%
Tier 1 (core) capital, and ratio to risk-weighted assets Company	$	50,619		8.9	%	$	22,697		4.0	%		n/a		n/a
Bank	$	49,833		8.8	%	$	22,697		4.0	%	$	34,046		6.0	%
Total risk-based capital, and ratio to risk-weighted assets Company	$	57,838		10.2	%	$	45,394		8.0	%		n/a		n/a
Bank	$	57,045		10.1	%	$	45,394		8.0	%	$	56,743		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, 2007
Tier 1 (core) capital, and ratio to adjusted total assets Company	$	56,244		10.8	%	$	20,784		4.0	%		n/a		n/a
Bank	$	56,152		10.5	%	$	21,432		4.0	%	$	26,790		5.0	%
Tier 1 (core) capital, and ratio to risk-weighted assets Company	$	56,244		11.0	%	$	20,459		4.0	%		n/a		n/a
Bank	$	56,152		11.0	%	$	20,437		4.0	%	$	30,656		6.0	%
Total risk-based capital, and ratio to risk-weighted assets Company	$	63,515		12.4	%	$	40,918		8.0	%		n/a		n/a
Bank	$	62,511		12.2	%	$	40,874		8.0	%	$	51,093		10.0	%

29

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The amount of dividends that the Bank may pay is subject to various regulatory limitations.  As of December 31, 2008 and 2007 the Bank exceeded its minimum capital requirements.  The Bank may not pay dividends which would reduce capital below the minimum requirements shown above.

Earnings Per Share

The computation for earnings per share for the years ended December 31, 2008, 2007 and 2006 is as follows:

	Year Ended			Year Ended		Year Ended
	December 31, 2008			December 31, 2007		December 31, 2006
Net income (loss)	$	(5,359,711	)	$	6,099,882	$	6,509,084
Average common shares outstanding		2,604,440			2,713,384		2,786,823
Effect of stock options outstanding		-			77,998		109,200
Average diluted shares outstanding		2,604,440			2,791,382		2,896,023
Earnings (loss) per share - basic	$	(2.06	)	$	2.25	$	2.34
Earnings (loss) per share - diluted	$	(2.06	)	$	2.19	$	2.25

Due to the Company’s net loss for the year ended December 31, 2008, no potentially dilutive shares were included in the computation of diluted earnings per share.

Segment Information

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

30

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 2:                      SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2008
Equity Securities:
FHLMC stock	$	26,057	$	-	$	(6,639	)	$	19,418
Other		572,087		4,157		(34,611	)		541,633
Debt Securities:
U. S. government agencies		2,450,000		24,130		-			2,474,130
Mortgage-backed securities		61,304,310		1,173,274		(7,426	)		62,470,158
	$	64,352,454	$	1,201,561	$	(48,676	)	$	65,505,339
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2007
Equity Securities:
FHLMC stock	$	26,057	$	880,205	$	-		$	906,262
Other		718,190		-		(59,390	)		658,800
Debt Securities:
U. S. government agencies		1,800,034		4,049		-			1,804,083
Mortgage-backed securities		11,386,025		84,390		(109,622	)		11,360,793
	$	13,930,306	$	968,644	$	(169,012	)	$	14,729,938

Maturities of available-for-sale debt securities as of December 31, 2008:

	Amortized Cost		Approximate Fair Value
After ten years	$	2,450,000	$	2,474,130
Mortgage-backed securities not due on a  single maturity date		61,304,310		62,470,158
	$	63,754,310	$	64,944,288

31

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2008
Debt Securities:
U. S. government agencies	$	135,538	$	-	$	(3,236	)	$	132,302
Mortgage-backed securities		420,927		24,565		(1,395	)		444,097
	$	556,465	$	24,565	$	(4,631	)	$	576,399
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2007
Debt Securities:
U. S. government agencies	$	148,529	$	-	$	(2,000	)	$	146,529
Mortgage-backed securities		506,246		32,397		-			538,643
	$	654,775	$	32,397	$	(2,000	)	$	685,172

Maturities of held-to-maturity securities as of December 31, 2008:

	Amortized Cost		Approximate Fair Value
After ten years	$	135,538	$	132,302
Mortgage-backed securities not due on a single maturity date		420,927		444,097
	$	556,465	$	576,399

The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $54,504,638 and $12,661,393 as of December 31, 2008 and 2007, respectively.  The approximate fair value of pledged securities amounted to $55,417,307 and $12,659,842 as of December 31, 2008 and 2007, respectively.

Gross gains of $0, $618,363 and $750,869 and gross losses of $563,615, $0 and $0 resulting from sale of available-for-sale securities and other than temporary impairment write-downs were realized for the years ended December 31, 2008, 2007 and 2006 respectively.  The tax effect of these net gains (losses) was ($208,538), $228,794 and $277,822 in 2008, 2007 and 2006, respectively.

The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. In completing these evaluations the Company follows the requirements of paragraph 16 of SFAS No. 115, Staff Accounting Bulletin 59 and FASB Staff Position No. 115-1. Certain investment securities are valued less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold these securities to maturity. 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.

32

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

During the fourth quarter of 2008, the Company determined that one investment security in the other equity securities category had become other than temporarily impaired. As a result of this impairment, the Company charged down the security to its current market value. The total of this charge-down was $465,827 for 2008. No other securities were written down for other-than-temporary impairment in 2008, 2007 and 2006.

Certain other investments in debt and 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, 2008 and 2007, was $1,629,386 and $4,013,643, respectively, which is approximately 3% and 26% of the Company’s investment portfolio.  These declines primarily resulted from changes in market interest rates and failure of certain investments to meet projected earnings targets.

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2008 and 2007.

	December 31, 2008
	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	$	56,342	$	(41,250	)	$	-	$	-		$	56,342	$	(41,250	)
U. S. Government Agencies		-		-			132,302		(3,236	)		132,302		(3,236	)
Mortgage-backed securities		1,440,742		(8,821	)		-		-			1,440,742		(8,821	)
	$	1,497,084	$	(50,071	)	$	132,302	$	(3,236	)	$	1,629,386	$	(53,307	)
	December 31, 2007
	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	$	658,800	$	(59,390	)	$	-	$	-		$	658,800	$	(59,390	)
U. S. Government Agencies		-		-			146,529		(2,000	)		146,529		(2,000	)
Mortgage-backed securities		3,208,314		(109,622	)		-		-			3,208,314		(109,622	)
	$	3,867,114	$	(169,012	)	$	146,529	$	(2,000	)	$	4,013,643	$	(171,012	)

33

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 3:                      LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans at December 31, 2008 and 2007 include:

	2008			2007
Real estate - residential mortgage:
One to four family units	$	107,753,766		$	83,018,129
Multi-family		31,757,153			41,947,555
Real estate - construction		85,072,577			89,724,220
Real estate - commercial		204,218,526			175,995,074
Commercial loans		118,468,028			104,025,575
Installment loans		26,024,283			25,576,502
Total loans		573,294,333			520,287,055
Less:
Allowance for loan losses		(16,728,492	)		(5,962,923	)
Deferred loan fees/costs, net		(172,598	)		(224,097	)
Net loans	$	556,393,243		$	514,100,035

Impaired loans totaled $39,888,665 and $7,254,334 as of December 31, 2008 and 2007, respectively with a related allowance for loan losses of $9,135,248 and $415,000, respectively.  As of December 31, 2008 and 2007, respectively, impaired loans of $5,407,045 and $991,398 had no related allowance for loan losses.

Interest of $960,075, $166,013 and $275,143 was recognized on average impaired loans of $22,220,454, $5,136,396 and $3,250,403 for the years ended December 31, 2008, 2007 and 2006, respectively.  Interest of $144,615, $165,148 and $272,600, was recognized on impaired loans on a cash basis during the years ended December 31, 2008, 2007 and 2006, respectively.

At December 31, 2008 and 2007 there were $442,850 and $103,270 in accruing loans delinquent 90 days or more, respectively. Non-accruing loans at December 31, 2008 and 2007 were $20,694,465 and $7,254,334, respectively.

Activity in the allowance for loan losses was as follows:

	Years ended
	December 31,
	2008			2007			2006
Balance, beginning of year	$	5,962,923		$	5,783,477		$	5,399,654
Provision charged to expense		14,744,079			840,000			750,000
Losses charged off, net of recoveries of $135,274, $70,990 and $280,854 for the years ended December 31, 2008, 2007 and 2006 respectively		(3,978,510	)		(660,554	)		(366,177	)
Balance, end of year	$	16,728,492		$	5,962,923		$	5,783,477

34

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The weighted average interest rate on loans as of December 31, 2008 and 2007 was 5.41% and 7.23%, respectively.

The Bank serviced mortgage loans for others amounting to $488,626 and $613,633 as of December 31, 2008 and 2007, respectively. The Bank serviced commercial loans for others amounting to $22,914,384 and $20,724,871 as of December 31, 2008 and 2007, respectively.

NOTE 4:                       PREMISES AND EQUIPMENT

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

	December 31,			December 31,
	2008			2007
Land	$	2,250,789		$	1,250,789
Buildings and improvements		10,742,945			9,534,883
Automobile		16,479			16,479
Furniture, fixtures and equipment		6,850,726			6,251,839
Leasehold improvements		271,799			271,799
		20,132,738			17,325,789
Less accumulated depreciation		(8,809,275	)		(7,883,439	)
Net premises and equipment	$	11,323,463		$	9,442,350

Depreciation expense was $934,941, $902,322 and $814,150 for the years ended December 31, 2008, 2007, and 2006, respectively.

NOTE 5:                      OTHER COMPREHENSIVE INCOME (LOSS)

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

	Year ended
	December 31,
	2008			2007			2006
Unrealized gains (losses) on available-for-sale securities	$	(210,360	)	$	(1,017,798	)	$	56,621
Unrealized gains on interest rate swaps		1,695,836			-			-
Accretion of gains on interest rate swaps		(169,582	)		-			-
Less: Reclassification adjustment for realized (gains) losses and write-downs included in income		563,615			(618,363	)		(750,869	)
Other comprehensive income (loss) before tax effect		1,879,509			(1,636,161	)		(694,248	)
Tax expense (benefit)		695,418			(605,380	)		(256,871	)
Other comprehensive income (loss)	$	1,184,091		$	(1,030,781	)	$	(437,377	)

35

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

	2008		2007
Unrealized gain on available-for-sale securities	$	1,152,885	$	799,630
Unrealized gain on interest rate swaps		1,526,254		-
		2,679,139		799,630
Tax effect		991,281		295,863
Net of tax amount	$	1,687,858	$	503,767

NOTE 6:                      DEPOSITS

	December 31, 2008								December 31, 2007
	Weighted Average Rate			Balance		Percentage of Deposits			Weighted Average Rate			Balance		Percentage of Deposits
Demand		0.00	%	$	31,219,635		7.0	%		0.00	%	$	28,520,385		6.8	%
NOW		1.13	%		42,949,458		9.6	%		1.35	%		36,511,976		8.7	%
Money market		1.85	%		52,082,723		11.7	%		3.48	%		64,319,237		15.4	%
Savings		0.94	%		12,253,106		2.7	%		2.11	%		12,421,113		3.0	%
		1.13	%		138,504,922		31.0	%		2.11	%		141,772,711		33.9	%
Certificates:
0% - 3.99%		3.25	%		182,335,203		40.8	%		3.60	%		5,523,980		1.3	%
4.00% - 5.99%		4.79	%		126,209,344		28.2	%		5.12	%		268,121,877		64.1	%
6.00% - 7.99%		7.77	%		30,000		0.0	%		6.00	%		2,772,716		0.7	%
		3.88	%		308,574,547		69.0	%		5.10	%		276,418,573		66.1	%
Total Deposits		3.03	%	$	447,079,469		100.0	%		4.09	%	$	418,191,284		100.0	%

The aggregate amount of certificates of deposit with a minimum balance of $100,000 was approximately $98,135,000 and $93,752,000, as of December 31, 2008 and 2007, respectively.

A summary of certificates of deposit by maturity as of December 31, 2008, is as follows:

2009	$	226,400,597
2010		58,249,211
2011		10,042,230
2012		8,897,137
2013		3,771,224
Thereafter		1,214,148
	$	308,574,547

36

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

A summary of interest expense on deposits is as follows:

	Years ended
	December 31,
	2008			2007			2006
NOW and Money Market accounts	$	1,806,564		$	2,940,311		$	1,709,996
Savings accounts		142,739			320,172			364,685
Certificate accounts		12,341,918			12,657,119			8,493,705
Early withdrawal penalties		(71,489	)		(56,808	)		(45,183	)
	$	14,219,732		$	15,860,794		$	10,523,203

The Bank utilizes brokered deposits as an additional funding source.  The aggregate amount of brokered deposits was approximately $39,869,000 and $14,914,000 as of December 31, 2008 and 2007, respectively.

NOTE 7:                      BORROWINGS

Federal Home Loan Bank Advances

Federal Home Loan Bank advances consist of the following:

	December 31, 2008					December 31, 2007
Maturity Date	Amount		Weighted Average Rate			Amount		Weighted Average Rate
2008	$	-		-		$	69,650,000		4.24	%
2009		21,386,000		1.01	%		386,000		7.21	%
2010		18,000,000		3.77	%		3,000,000		6.37	%
2011		25,000,000		3.53	%		-		-
2013		15,700,000		2.14	%		-		-
Thereafter		52,350,000		2.26	%		3,050,000		5.13	%
	$	132,436,000		2.49	%	$	76,086,000		4.37	%

The FHLB requires the Bank to maintain collateral in relation 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.

Federal Reserve Bank Borrowings

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

Securities Sold Under Agreements to Repurchase

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

37

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

Notes payable

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

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

As of December 31, 2008 and 2007, 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, 2008 and 2007.

The provision (credit) for income taxes consists of:

	Years Ended
	December 31,
	2008			2007			2006
Taxes currently payable	$	1,154,957		$	3,587,610		$	4,634,722
Deferred income taxes		(4,143,816	)		(187,839	)		(592,927	)
	$	(2,988,859	)	$	3,399,771		$	4,041,795

The tax effects of temporary differences related to deferred taxes shown on the December 31, 2008 and 2007 balance sheets are:

38

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

	December 31,			December 31,
	2008			2007
Deferred tax assets:
Allowances for loan losses	$	6,189,542		$	2,206,281
Accrued compensated absences		18,500			18,500
Interest on non-accrual loans		10,494			43,525
Impairment loss on available-for-sale securities		158,381			-
Deferred loan fees/costs		63,861			82,915
		6,440,778			2,351,221
Deferred tax liabilities:
FHLB stock dividends		(120,632	)		(120,632	)
Unrealized appreciation on available-for-sale securities		(426,567	)		(295,863	)
Accumulated depreciation		(62,580	)		(93,383	)
Other		(62,186	)		(85,642	)
		(671,965	)		(595,520	)
Net deferred tax asset	$	5,768,813		$	1,755,701

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
	December 31,
	2008			2007			2006
Computed at statutory rate		-34.0	%		34.0	%		34.0	%
Increase (reduction) in taxes resulting from:
State financial institution tax		0.1	%		0.8	%		2.7	%
ESOP		0.5	%		3.1	%		2.6	%
Other		-2.4	%		-2.1	%		-1.0	%
Actual tax provision (credit)		-35.8	%		35.8	%		38.3	%

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

NOTE 10:                      DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 157 was implemented by the Company effective January 1, 2008.  SFAS No. 157 establishes a hierarchy that prioritizes the use of fair value inputs used in valuation methodologies into the following three levels:

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

Level 3: Significant unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

39

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:

Available-for-sale securities:  Securities classified as available for sale are recorded at fair value on a recurring basis utilizing Level 1 and Level 2 inputs.  For these securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, benchmark yields, market spreads, live trading levels, market consensus prepayment speeds, among other things.

Loans:   The Company does not record loans at fair value on a recurring basis.  However, nonrecurring fair value adjustments to collateral dependent loans are recorded to reflect partial write-downs based on the observable market price or current appraised value of the underlying collateral.

Impaired loans:   Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using third party appraisals or internally developed appraisals or discounted cash flow analysis.

Derivative Financial Instruments:    Derivatives are recorded at fair value on a recurring basis utilizing Level 2 inputs.  The Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, live trading levels, among other things.

The following table summarizes financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollar amounts in thousands):

Financial Assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Available-for-sale securities	$	561	$	64,944	$	-	$	65,505

Certain financial assets are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  Financial assets measured at fair value during 2008 on a non-recurring basis that were still held on the balance sheet at December 31, 2008, were valued using the valuation inputs shown below (dollar amounts in thousands):

	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Impaired loans	$	-	$	-	$	32,706	$	32,706

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring and non-recurring basis include non-financial long-lived assets, such as premises and equipment.  SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009.

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.

40

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

	December 31, 2008				December 31, 2007
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	15,097,015		15,097,015	$	12,046,202		12,046,202
Available-for-sale securities		65,505,339		65,505,339		14,729,938		14,729,938
Held-to-maturity securities		556,465		576,399		654,775		685,172
Federal Home Loan Bank stock		6,730,100		6,730,100		4,014,700		4,014,700
Mortgage loans held for sale		1,933,798		1,933,798		2,141,998		2,141,998
Loans, net		556,393,243		575,444,855		514,100,035		514,637,570
Interest receivable		2,632,450		2,632,450		3,323,448		3,323,448
Financial liabilities:
Deposits		447,079,469		456,127,421		418,191,284		419,513,185
Federal Home Loan Bank advances		132,436,000		134,713,550		76,086,000		76,532,490
Securities sold under agreements to repurchase		39,750,000		40,622,942		9,849,295		9,890,736
Subordinated debentures		15,465,000		15,465,000		15,465,000		15,465,000
Notes payable		1,435,190		1,435,190		718,190		718,190
Interest payable		1,577,279		1,577,279		1,793,663		1,793,663
Dividend payable		-		-		469,373		469,373
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 approximate those assets' fair value.

Interest Receivable

The carrying amount of interest receivable approximates its fair value.

Mortgage Loans Held for Sale

The carrying amount of mortgage loans held for sale approximate their fair value due to the short term nature of the category.

Loans

The fair value of loans is estimated by discounting the future cash flows using the Treasury Yield Curve over the estimated life of the loans, adjusted for credit risk.  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 by discounting the future cash flows using the Treasury Yield Curve over their estimated life.

41

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Federal Home Loan Bank Advances and Securities Sold under Agreements to Repurchase

The fair value of advances and subordinated debentures is estimated by using the Treasury Yield Curve over the estimated life of the instruments.

Subordinated Debentures and Notes Payable

For these variable rate instruments, the carrying amount is a reasonable estimate of fair value.

Interest and Dividend Payable

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

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

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

NOTE 11:                   SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Estimates related to the allowance for loan losses are reflected in the footnote regarding loans.  Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.

The current economic environment presents financial institutions with unprecedented circumstances and challenges which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans.  The financial statements have been prepared using the values and information currently available to the Company.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, or capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

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.

The Bank recognized $0, $0 and $18,537 of expense under these stock award plans in the years ended December 31, 2008, 2007 and 2006, respectively.

42

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Stock Option Plans

The Company has established four stock option plans for the benefit of certain directors, officers and employees of the Company 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 Company 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 Company and its subsidiary.  Under this Plan, the Committee may grant stock options for up to 187,764 shares of the Company’s common stock.

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

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

Under the stock option component of the 2001 SCP, the Committee granted nonqualified stock options for 13,263 shares of the Company’s common stock.

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

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

 On May 19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan (“2004 SOP”).  The purpose of the plan is to attract and retain qualified personnel for positions of substantial responsibility.  The aggregate number of shares with respect to options issued under this plan shall not exceed 250,000 shares.  To date 138,500 stock options have been granted under this plan, with 11,000 stock options cancelled.

43

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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 January 1, 2006		164,785			175,091		$	15.65
Granted		20,000			-			28.06
Exercised		(24,294	)		(57,885	)		13.96
Forfeited		(5,000	)		(2,000	)		24.84
Balance outstanding as of December 31, 2006		155,491			115,206			17.30
Granted		19,500			25,000			29.48
Exercised		(56,958	)		(26,000	)		13.49
Forfeited		-			-			-
Balance outstanding as of December 31, 2007		118,033			114,206			20.48
Granted		34,000			20,000			26.72
Exercised		(28,313	)		(15,002	)		13.36
Forfeited		(15,470	)		(2,500	)		21.17
Balance outstanding as of December 31, 2008		108,250			116,704			23.29
Options exercisable as of December 31, 2008		36,950			74,204			19.44

As of December 31, 2008, total outstanding stock options of 224,954 had a remaining contractual life of 6.62 years.

The total intrinsic value of outstanding stock options was $0 and $1,914,130 at December 31, 2008 and 2007, respectively, and the total intrinsic value of outstanding exercisable stock options was $0 and $1,600,704 at December 31, 2008 and 2007, respectively.  The total intrinsic value of stock options exercised was $387,957 and $1,298,634 in 2008 and 2007, respectively.  The total fair value of share awards vested was $193,815 and $919,069 during 2008 and 2007, respectively.

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

	December 31, 2008			December 31, 2007			December 31, 2006
Dividends per share	$	0.36		$	0.70		$	0.66
Risk-free interest rate		3.25	%		4.54	%		4.52	%
Expected life of options	5 years			5 years			5 years
Weighted-average volatility		7.17	%		4.62	%		9.16	%
Weighted-average fair value of options granted during year	$	1.72		$	2.95		$	3.41

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 $408,388, $672,765 and $651,958 for the years ended December 31, 2008, 2007 and 2006, respectively.

44

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The following is a summary of ESOP shares as of December 31, 2008:

Beginning ESOP shares		344,454
Released shares		(230,567	)
Shares committed for release		(23,414	)
Unreleased shares		90,473
Fair value of unreleased shares	$	480,412

NOTE 13:                   DERIVATIVE FINANCIAL INSTRUMENTS

The Company records all derivative financial instruments at fair value in the financial statements.  Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.

When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as 1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).  The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective.

In June 2008, the Company entered into three, 2 year interest rate swap agreements totaling a $90 million notional amount to hedge against interest rate risk on variable rate loans.  As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings.    The Company documents, both at inception and periodically over the life of the hedge, its analysis of actual and expected hedge effectiveness.  To the extent that the hedge of future cash flows is deemed ineffective, changes in the fair value of the derivative are recognized in earnings as a component of other noninterest expense.  For the duration of the swap agreements, there was no ineffectiveness attributable to the cash flow hedges.

On November 7, 2008, the Company elected to terminate the three interest rate swap agreements with a total notional value of $90 million.  At termination, the swaps had a market value (gain) of $1.7 million.  The gain is being accreted into interest income over the remaining twenty month term in accordance with the stated maturity date of the original agreements.

NOTE 14:                   RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Bank has granted loans to executive officers and directors and their affiliates.  Annual activity consisted of the following:

	Year ended December 31,
	2008			2007			2006
Balance, beginning of year	$	3,590,630		$	3,508,387		$	3,270,812
New Loans		4,460,569			100,000			680,588
Repayments		(1,250,760	)		(17,757	)		(443,013	)
Balance, end of year	$	6,800,439		$	3,590,630		$	3,508,387

45

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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 15:                   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, 2008 and 2007, the Bank had outstanding commitments to originate mortgage loans of approximately $5,001,000 and $3,490,000, respectively.  The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period.  As of December 31, 2008 and 2007, commitments of $5,001,000 and $2,941,000, respectively, were at fixed rates and $0 and $549,000, respectively, were at floating market rates.

Standby letters of credit are irrevocable conditional commitments issued by the Bank 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 as that involved in extending loans to customers.  Fees for letters of credit issued after December 31, 2002 are initially recorded by the Bank as deferred revenue and are included in earnings at the termination of the respective agreements.  Should the Bank be obligated to perform under the standby letters of credit, the Bank may seek recourse from the customer for reimbursement of amounts paid.

The Bank had total outstanding standby letters of credit amounting to $15,059,000 and $12,464,000 as of December 31, 2008 and 2007, respectively, with terms ranging from 30 days to 4 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.

46

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2008 and 2007, unused lines of credit to borrowers aggregated approximately $49,253,000 and $63,403,000 for commercial lines and $20,829,000 and $21,957,000 for open-end consumer lines.

As of December 31, 2008, the Company has commitments to purchase $3 million in low income housing investments in southwest Missouri.

NOTE 16:                   CONDENSED PARENT COMPANY STATEMENTS

The condensed balance sheets as of December 31, 2008 and 2007, and statements of income and cash flows for the years ended December 31, 2008, 2007 and 2006 for the parent company, Guaranty Federal Bancshares, Inc., are as follows:

	2008			2007
Assets
Cash	$	1,050,726		$	547,796
Available-for-sale securities		541,633			658,800
Due from subsidiary		22,195			28,126
Investment in subsidiary		51,546,714			56,693,200
Investment in Capital Trust I & II		465,000			468,420
Prepaid expenses and other assets		402,565			463,642
Refundable income taxes		204,136			681,266
Deferred income taxes		169,649			21,974
	$	54,402,618		$	59,563,224
Liabilities
Notes payable	$	1,435,190		$	718,190
Subordinated debentures		15,465,000			15,465,000
Accrued expenses and other liabilities		189,526			224,001
Dividend payable		-			469,373
Stockholders' equity
Common stock		677,980			673,649
Additional paid-in capital		58,535,159			57,571,929
Unearned ESOP shares		(888,930	)		(1,116,930	)
Retained earnings		39,114,189			45,402,449
Unrealized appreciation on available-for-sale securities and interest rate swaps, net		1,687,858			503,767
Treasury stock		(61,813,354	)		(60,348,204	)
	$	54,402,618		$	59,563,224

47

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Income Statements	Years ended December 31,
	2008			2007			2006
Income
Dividends from subsidiary bank	$	2,537,098		$	8,487,268		$	4,639,062
Loss on investment securities		(563,615	)		-			-
Interest income:
Related party		70,165			135,015			150,308
Other		78,865			30,783			31,125
		2,122,513			8,653,066			4,820,495
Expense
Interest expense:
Other		53,132			13,037			963
Related party		1,023,783			1,023,783			1,027,526
Occupancy		2,200			2,400			2,400
Other		686,676			953,200			879,484
		1,765,791			1,992,420			1,910,373
Income before income taxes and equity in undistributed earnings of subsidiaries		356,722			6,660,646			2,910,122
Credit for income taxes		(595,913	)		(349,935	)		(427,642	)
Income before equity in undistributed earnings of subsidiaries		952,635			7,010,581			3,337,764
Equity in undistributed earnings (losses) of subsidiaries		(6,312,346	)		(910,699	)		3,171,320
Net income (loss)	$	(5,359,711	)	$	6,099,882		$	6,509,084

48

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Statements of Cash Flows	Years ended December 31,
	2008			2007			2006
Cash Flows From Operating Activities
Net income (loss)	$	(5,359,711	)	$	6,099,882		$	6,509,084
Items not requiring (providing) cash:
Equity in undistributed (earnings) loss of subsidiaries		3,775,248			-			(3,171,320	)
Release of ESOP shares		408,388			672,765			651,958
Stock award plan expense		92,846			71,325			83,192
Loss on investment securities		563,615			-			-
Changes in:
Prepaid expenses and other assets		64,497			19,210			(8,810	)
Income taxes payable/refundable		434,415			353,980			(307,380	)
Accrued expenses		(34,475	)		(52,707	)		151,084
Net cash provided by (used in) operating activities		(55,177	)		7,164,455			3,907,808
Cash Flows From Investing Activities
Purchase of AFS securities		(717,512	)		(718,190	)		-
Maturities of AFS securities		300,000			-			-
Distributions in excess of net income of subsidiary		2,537,098			910,699			-
Net (increase) decrease in advance to subsidiary		5,931			769			(28,895	)
Net cash provided by (used in) investing activities		2,125,517			193,278			(28,895	)
Cash Flows From Financing Activities
Stock options exercised		578,661			1,118,762			1,147,042
Cash dividends paid		(1,397,921	)		(1,879,256	)		(1,850,300	)
Treasury stock purchased		(1,465,150	)		(7,479,118	)		(3,593,081	)
Proceeds from issuance of notes payable		1,064,000			2,468,000			-
Repayment of notes payable		(347,000	)		(1,749,810	)		-
Net cash used in financing activities		(1,567,410	)		(7,521,422	)		(4,296,339	)
Increase (decrease) in cash		502,930			(163,689	)		(417,426	)
Cash, beginning of year		547,796			711,485			1,128,911
Cash, end of year	$	1,050,726		$	547,796		$	711,485

NOTE 17:                   SUBSEQUENT EVENTS

Troubled Asset Relief Program

On January 30, 2009, as part of the U.S. Department of the Treasury's Troubled Asset Relief Program's Capital Purchase Program, the Company entered into an Agreement with the United States Department of the Treasury (the "Treasury") pursuant to which the Company sold to the Treasury 17,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, (the "Series A Preferred Stock") and issued a ten year warrant (the "Warrant") to purchase 459,459 shares of the Company's common stock (the "Common Stock") for $5.55 per share (the "Warrant Shares") for a total purchase price of $17.0 million in cash (the "Transaction").

49

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

In conformity with requirements of the SPA and Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the "EESA"), the Company and its subsidiary, Guaranty Bank, and each of its Senior Executive Officers agreed to limit certain compensation, bonus, incentive and other benefits plans, arrangements, and policies with respect to the Senior Executive Officers during the period that the Treasury owns any debt or equity securities acquired in connection with the Transaction.  The applicable Senior Executive Officers have entered into letter agreements with the Company consenting to the foregoing and have executed a waiver voluntarily waiving any claim against the Treasury or the Company for any changes to such Senior Executive Officer's compensation or benefits that are required to comply with Section 111(b) of EESA.

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

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

FDIC deposit insurance assessments

On February 27, 2009, the FDIC approved to amend the plan for restoring the Deposit Insurance Fund.  The FDIC approved to increase regular premium rates for 2009, implement changes to the risk-based assessment system and impose a special assessment on insured institutions of 20 basis points.

On March 5, 2009, the FDIC stated that it intends to lower the special assessment from 20 basis points to 10 basis points, contingent upon Congress legislation yet to be enacted.  The legislation relates to increasing the FDIC’s borrowing availability with the Department of the Treasury.  The special assessment will be incurred as of June 30, 2009, payable on September 30, 2009.

As a result of these changes and the special assessment, the Company projects a significant increase in its FDIC deposit insurance premium expense by approximately $1.4 million for 2009.

50

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, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2008.  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guaranty Federal Bancshares, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 10, in 2008 the Company changed its method of accounting for fair value measurements in accordance with Statement of Financial Accounting Standards No. 157.

/s/BKD, LLP

Springfield, Missouri

March 30, 2009

51

Guaranty Federal Bancshares, Inc.

2008 Annual Report

Board of Directors	Officers
Guaranty Federal Bancshares, Inc.	Guaranty Federal Bancshares, Inc.
and Guaranty Bank
Don M. Gibson
Chairman of the Board
Guaranty Federal Bancshares and	Shaun A. Burke
Guaranty Bank	President,
	Chief Executive Officer
Jack L. Barham
Vice Chairman of the Board	Carter M. Peters
Guaranty Federal Bancshares	Executive Vice President,
	Chief Financial Officer/Chief Operations Officer
Shaun A. Burke
President and CEO	H. Michael Mattson
Guaranty Federal Bancshares and	Executive Vice President,
Guaranty Bank	Chief Lending Officer
James R. Batten, CPA	E. Lorene Thomas
Executive Vice President	Corporate Secretary
Convoy of Hope
Kurt D. Hellweg
President and CEO
International Dehydrated Foods, Inc. and
American Dehydrated Foods, Inc.
Gregory V. Ostergren
Chairman, President and CEO
American National Property and Casualty
Insurance Companies
Tim Rosenbury, AIA
Executive Vice President and Chairman
Butler, Rosenbury and Partners, Inc.
James L. Sivils, III, JD
Partner  - Morelock Ross Companies

52

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

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 and Registration Statement No. 333-157634 on Form S-3 of Guaranty Federal Bancshares, Inc. of our report dated March 30, 2009, relating to the consolidated balance sheets of Guaranty Federal Bancshares, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2008, 2007 and 2006, which appears in the Annual Report on Form 10-K of Guaranty Federal Bancshares, Inc. for the period ended December 31, 2008.

/s/BKD, LLP

Springfield, Missouri

March 30, 2009

EX-31.1

Exhibit 31(i).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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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, 2009	/s/ Shaun A. Burke
	Shaun A. Burke
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31(i).2

Certification of the Principal Financial Officer

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

I, Carter Peters, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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, 2009	/s/ Carter Peters
	Carter Peters
	Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CEO CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350*

In connection with the Annual Report of Guaranty Federal Bancshares, Inc. (the “Company”) on Form 10--K for the period ending December 31, 2008 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, 2009

* 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

18 U.S.C. SECTION 1350 *

In connection with the Annual Report of Guaranty Federal Bancshares, Inc. (the “Company”) on Form 10--K for the period ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carter Peters, 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/ Carter Peters

Carter Peters

Chief Financial Officer

(Principal Financial Officer)

March 31, 2009

* 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.