ex13.htm

EX-13 2 ex13.htm EXHIBIT 13 ex13.htm

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

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

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

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

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

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.

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.

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.

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	%

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%.

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%).

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.

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%.

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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

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

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.

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.

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.

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	%

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.

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

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.

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	)

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

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	)

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

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.

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:

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.

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.

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.

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.

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.

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.

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

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.

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

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

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").

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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.

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.

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

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