ex13.htm

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, 2011 versus December 31, 2010												December 31, 2010 versus December 31, 2009
	Average Balance			Interest Rate			Rate & Balance			Total			Average Balance			Interest Rate			Rate & Balance			Total
Interest income:
Loans	$	(593	)	$	(338	)	$	7		$	(924	)	$	(1,716	)	$	392		$	(23	)	$	(1,347	)
Investment securities		(601	)		(289	)		50			(840	)		295			(521	)		(41	)		(267	)
Other assets		(150	)		(58	)		17			(191	)		(117	)		259			(70	)		72
Net change in interest income		(1,344	)		(685	)		74			(1,955	)		(1,538	)		130			(134	)		(1,542	)

Interest expense:
Savings accounts		25			(40	)		(7	)		(22	)		39			(15	)		(5	)		19
Transaction accounts		(73	)		(1,340	)		25			(1,388	)		1,203			(2,833	)		(554	)		(2,184	)
Certificates of deposit		(980	)		(1,775	)		315			(2,440	)		(2,137	)		(1,896	)		445			(3,588	)
FHLB advances		(678	)		(190	)		43			(825	)		(62	)		(103	)		2			(163	)
Subordinated debentures		-			(413	)		-			(413	)		-			-			-			-
Repurchase agreements		(59	)		(51	)		2			(108	)		-			196			-			196
Net change in interest expense		(1,765	)		(3,809	)		378			(5,196	)		(957	)		(4,651	)		(112	)		(5,720	)
Change in net interest income	$	421		$	3,124		$	(304	)	$	3,241		$	(581	)	$	4,781		$	(22	)	$	4,178

RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

	Average for the Year Shown
	Prime			Ten-Year Treasury			One-Year Treasury
December 31, 2011		3.25	%		2.78	%		0.18	%
December 31, 2010		3.25	%		3.22	%		0.32	%
Change in rates		0.00	%		-0.44	%		-0.14	%

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, 2011 and December 31, 2010 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 and remained low for 2011 as the Federal Reserve Open Market Committee (“FOMC”) left the discount rate at 25 basis points. As of December 31, 2011, the prime rate was 3.25% and unchanged from December 31, 2010.

Interest Income. Total interest income decreased $1,955,538 (6%). The average balance of interest-earning assets decreased $44,120,000 (7%) while the yield on average interest earning assets increased 2 basis points to 4.81%.

Guaranty Federal Bancshares, Inc.

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

Interest on loans decreased $924,105 (3%) and the average loan receivable balance decreased $10,810,000 (2%) while the average yield decreased 6 basis points to 5.42%. The Company’s yield on loans was negatively impacted due to the expiration of interest income being recognized on a matured interest rate swap as of June 30, 2010. The income recognized for the year ended December 31, 2010 was approximately $509,000. Another factor that has negatively impacted the Company’s yield on loans is the high level of nonaccrual loans which has decreased to $17.0 million as of December 31, 2011, as compared to $23.0 million as of December 31, 2010.

Interest Expense. Total interest expense decreased $5,195,911 (35%) as the average balance of interest-bearing liabilities decreased $64,391,000 (10%) while the average cost of interest-bearing liabilities decreased 65 basis points to 1.66%.

Interest expense on deposits decreased $3,849,870 (40%) during 2011 as the average balance of interest bearing deposits decreased $37,270,000 (1%) and the average interest rate paid to depositors decreased 111 basis points to 2.02%. The primary reason for the significant decrease in the average cost of interest bearing deposits was the continued reduction throughout 2011 in the cost of money market deposits generated through an aggressive deposit campaign in the first quarter of 2009 as well as higher cost certificates of deposit maturing throughout 2011.

The average balance of FHLB advances decreased $25,097,000 (23%) while the average cost of those advances decreased 17 basis points to 2.53%. As a result, interest expense on these advances decreased $824,289 (28%). As of December 31, 2011, FHLB advances were 10% of total assets, compared to 14% of total assets as of December 31, 2010.

Net Interest Income. The Company’s net interest income increased $3,240,373 (18%). During the year ended December 31, 2011, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $53,738,000, resulting in an increase in the average net earning balance of $20,271,000 (61%), a result of management’s intent to roll off certain high priced deposits with low yielding assets. In addition, the Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 67 basis points from 2.48% to 3.15%.

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

Based on its internal analysis and methodology, management recorded a provision for loan losses of $3,350,000 and $5,200,000 for the years ended December 31, 2011 and 2010, respectively. Provisions recorded in 2011 are due to the Bank’s charge-offs during the year, continuing concerns over the local and national economy and over certain specific borrowers.

The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management of the Company anticipates the need to continue increasing the allowance for loan losses through charges to the provision for loan losses if growth in the Bank’s loan portfolio is experienced or other circumstances warrant. Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

Non-Interest Income. Non-interest income increased $205,876 (5%). The gain on sale of loans of $1,345,334 for 2011, compared to $1,749,857 for 2010 was due to a decline in volume associated with the Bank’s selling of fixed rate mortgage loans. Gains on investment securities for the year ended December 31, 2011 were $1,505,915 compared to $275,125 for the year ended December 31, 2010. The gains in fiscal 2011 were primarily the result of the sale of $28.1 million of available-for-sale securities to prepay two repurchase agreements totaling $14.75 million during the fourth quarter of 2011. Deposit service charges decreased $237,290 (15%) due primarily to declines in overdraft charges, which is partially due to the adoption of Regulation E. Regulation E has negatively impacted overdraft income due to new requirements on debit card and ATM transactions. The long-term impact cannot be fully determined. Loss on foreclosed assets increased $307,708 (62%) in 2011. The Company continues to experience declines in real estate values on foreclosed properties held or sold by the Company.

Guaranty Federal Bancshares, Inc.

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

Non-Interest Expense. Non-interest expense increased $1,831,528 (12%). This increase was primarily due to the prepayment penalty on repurchase agreements of $1,531,000. Also, salaries and employee benefits increased $250,198 (3%) offsetting the decrease in FDIC deposit insurance premiums of $278,533 (23%).

The increase in compensation was due to normal salary and benefits increases for the Bank’s employees. The overall staff increased from 170 full-time equivalent employees as of December 31, 2010 to 176 full-time equivalent employees as of December 31, 2011.

The decreases in FDIC deposit insurance premiums were driven primarily by the change in the FDIC’s assessment base and rate structure that went into effect in the second quarter of 2011.

Income Taxes. The increase in income tax expense is a direct result of the Company’s increase in taxable income for the year ended December 31, 2011 compared to the year ended December 31, 2010.

Cash Dividends Paid. The Company did not pay dividends on its common shares during 2011. During 2011, the Company paid $850,000 in dividends on its preferred stock.

RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009

	Average for the Year Shown
	Prime			Ten-Year Treasury			One-Year Treasury
December 31, 2010		3.25	%		3.22	%		0.32	%
December 31, 2009		3.25	%		3.26	%		0.47	%
Change in rates		0.00	%		-0.04	%		-0.15	%

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, 2010 and December 31, 2009 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 and remained low for 2010 as the FOMC left the discount rate at 25 basis points. As of December 31, 2010, the prime rate was 3.25% and unchanged from December 31, 2009.

Interest Income. Total interest income decreased $1,541,960 (5%). The average balance of interest-earning assets decreased $41,460,000 (6%) while the yield on average interest earning assets increased 6 basis points to 4.79%.

Interest on loans decreased $1,347,485 (5%) and the average loan receivable balance decreased $31,714,000 (6%) while the average yield increased 7 basis points to 5.48%. The Company’s yield on loans was negatively impacted due to the expiration of interest income being recognized on a matured interest rate swap as of June 30, 2010. The effect for the year ending December 31, 2010 was approximately $510,000. Another factor that has negatively impacted the Company’s yield on loans is the high level of nonaccrual loans which has decreased to $23.0 million as of December 31, 2010, as compared to $34.3 million as of December 31, 2009.

Interest Expense. Total interest expense decreased $5,719,706 (28%) as the average balance of interest-bearing liabilities decreased $17,479,000 (3%) while the average cost of interest-bearing liabilities decreased 80 basis points to 2.31%.

Guaranty Federal Bancshares, Inc.

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

Interest expense on deposits decreased $5,753,057 (37%) during 2010 as the average balance of interest bearing deposits decreased $15,241,000 (3%), but the average interest rate paid to depositors decreased 111 basis points to 2.02%. The primary reason for the significant decrease in the average cost of interest bearing deposits was the reduction at the beginning of 2010 in the cost of money market deposits generated through an aggressive deposit campaign in the first quarter of 2009.

The average balance of FHLB advances decreased $2,238,000 (2%) while the average cost of those advances decreased 9 basis points to 2.70%. As a result, interest expense on these advances decreased $163,806 (5%). As of December 31, 2010, FHLB advances were 14% of total assets, compared to 16% of total assets as of December 31, 2009.

Net Interest Income. The Company’s net interest income increased $4,177,746 (31%). During the year ended December 31, 2010, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $33,467,000, resulting in a decrease in the average net earning balance of $23,981,000 (42%), a result of management’s intent to roll off certain high priced deposits with low yielding assets. In addition, the Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 86 basis points from 1.62% to 2.48%.

Based on its internal analysis and methodology, management recorded a provision for loan losses of $5,200,000 and $6,900,000 for the years ended December 31, 2010 and 2009, respectively. Provisions recorded in 2010 are due to the Bank’s charge-offs during the year, continuing concerns over the local and national economy and over certain specific borrowers.

Non-Interest Income. Non-interest income increased $39,875 (1%). The gain on sale of loans of $1,749,857 for 2010, compared to $1,443,385 for 2009 was due to favorable mortgage rates resulting in increased volume on fixed rate mortgage loan sales. Gains on investment securities for the year ended December 31, 2010 were $275,125 compared to $689,769 for the year ended December 31, 2009. The gains in fiscal 2010 were the result of restructurings of the bond portfolio and to manage interest rate risk. Deposit service charges decreased $249,665 (14%) due primarily to declines in overdraft charges, which is partially due to the adoption of Regulation E. Regulation E has negatively impacted overdraft income due to new requirements on debit card and ATM transactions. The long-term impact cannot be fully determined. Loss on foreclosed assets decreased $31,015 (6%) in 2010, but remained elevated primarily due to the difficult market conditions causing sharp declines in real estate values on foreclosed properties held or sold by the Company. Earnings from bank owned life insurance were $380,090 for 2010 compared to $69,539 for 2009. This increase was due to the original purchase occurring on October 30, 2009.

Non-Interest Expense. Non-interest expense increased $368,317 (2%). This increase was primarily due to increases in salaries and employee benefits of $684,410 (9%) offsetting the decrease in FDIC deposit insurance premiums of $299,962 (20%).

The increase in compensation was due to normal salary and benefits increases for the Bank’s employees, along with a few key personnel additions in the latter half of the third quarter of 2009 and the second quarter of 2010. The overall staff increased from 162 full-time equivalent employees as of December 31, 2009 to 170 full-time equivalent employees as of December 31, 2010.

Guaranty Federal Bancshares, Inc.

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

Decreases in FDIC deposit insurance premiums were due to the special assessment of $341,000 that was incurred as of June 30, 2009 and paid on September 30, 2009.

Income Taxes. The increase in income tax expense is a direct result of the Company’s increase in taxable income for the year ended December 31, 2010 compared to the taxable loss for the year ended December 31, 2009.

Cash Dividends Paid. The Company did not pay dividends on its common shares during 2010. During 2010, the Company paid $850,000 in dividends on its preferred stock.

ASSET / LIABILITY MANAGEMENT

The responsibility of managing and executing the Bank’s Asset Liability Policy falls to the Bank’s Asset/ Liability Committee (ALCO.) ALCO seeks to manage interest rate risk so as to capture the highest net interest income, and to stabilize that net interest income, through changing interest rate environments. Management attempts to position the Bank’s instrument repricing characteristics in line with probable rate movements in order to minimize the impact of changing interest rates on the Bank’s net interest income. 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 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. Management continually monitors the loan portfolio for the purpose of product diversification and over concentration.

The Bank constantly monitors its deposits in an effort to prohibit them from adversely impacting the Bank’s 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, 2011 and 2010, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $329,174,830 or 68% of its total deposits and $304,499,807 or 63% of total deposits, respectively. The weighted average rate paid on these accounts decreased 39 basis points from 0.96% on December 31, 2010 to 0.56% on December 31, 2011 primarily due to the Bank’s efforts to reprice its money market deposit accounts during 2011.

INTEREST RATE SENSITIVITY ANALYSIS

The following table sets forth as of December 31, 2011, management’s estimates of the projected changes in Economic Value of Equity (“EVE”) in the event of instantaneous and permanent increases and decreases in market interest rates. Dollar amounts are expressed in thousands.

BP Change		Estimated Net Portfolio Value								NPV as % of PV of Assets
in Rates		$ Amount		$ Change			% Change			NPV Ratio			Change
	+300		62,123		(4,101	)		-6	%		9.71	%		-0.35	%
	+200		63,408		(2,816	)		-4	%		9.82	%		-0.24	%
	+100		64,769		(1,455	)		-2	%		9.94	%		-0.12	%
NC			66,224		-			0	%		10.06	%		0.00	%
	-100		67,870		1,646			2	%		10.21	%		0.15	%
	-200		72,049		5,825			9	%		10.74	%		0.68	%

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. All EVE and earnings projections are based on a point in time static balance sheet.

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 EVE in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of EVE. 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 floating-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 $26,574,082 as of December 31, 2011 and $14,145,329 as of December 31, 2010, representing an increase of $12,428,753. The Company’s interest-bearing deposits totaled $5,587,654 as of December 31, 2011 and $12,785,000 as of December 31, 2010. 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. The Bank has $87,409,324 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 25% of assets, the Bank has the ability to borrow an additional $81 million from the FHLB, as of December 31, 2011. Based on existing collateral, the Bank has the ability to borrow $37 million from the Federal Reserve Bank as of December 31, 2011. 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. Management has many policies and controls in place to attempt to manage the appropriate level of liquidity.

The Company’s Tier 1 capital position of $68,419,000 is 10.4% of average assets as of December 31, 2011. The Company has an excess of $42,163,000, $47,664,000, and $33,437,000 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.

With regards to the securities sold to the Treasury under the Capital Purchase Program, if the Company is unable to redeem the Series A Preferred Stock within five years of its issuance, the cost of capital to the Company will increase significantly from 5% per annum ($850,000 annually) to 9% per annum ($1,530,000 annually). Depending on the Company’s financial condition at the time, the increase in the annual dividend rate on the Series A Preferred Stock could have a material adverse effect on the Company’s liquidity and net income available to common stockholders.

Guaranty Federal Bancshares, Inc.

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

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, 2011 and 2010, the Bank had outstanding commitments to originate loans of approximately $10,955,000 and $7,949,000, 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, 2011 and 2010, unused lines of credit to borrowers aggregated approximately $36,931,000 and $50,473,000 for commercial lines and $17,625,000 and $17,525,000 for open-end consumer lines. Since a portion of the loan commitment and line of credit may expire without being drawn upon, the total unused commitments and lines do not necessarily represent future cash requirements.

Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank had total outstanding standby letters of credit amounting to $14,233,000 and $12,261,000 as of December 31, 2011 and 2010, respectively. The commitments extend over varying periods of time.

In connection with the Company’s issuance of the Trust Preferred 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 Preferred Securities whereby the Company has guaranteed any and all payment obligations of the Trusts related to the Trust Preferred Securities including distributions on, and the liquidation or redemption price of, the Trust Preferred Securities to the extent each Trust does not have funds available.

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table summarizes the Company’s fixed and determinable contractual obligations by payment date as of December 31, 2011. Dollar amounts are expressed in thousands.

			One Year		One to		Three to		More than
Contractual Obligations	Total		or less		Three Years		Five Years		Five Years

Deposits without stated maturity	$	329,175	$	329,175	$	-	$	-	$	-
Time and brokered certificates of deposit		155,409		87,409		56,043		11,892		65
Other borrowings		25,000		-		-		-		25,000
Federal Home Loan Bank advances		68,050		-		15,700		250		52,100
Subordinated debentures		15,465		-		-		-		15,465
Operating leases		484		139		196		114		36
Purchase obligations		50		50		-		-		-
Other long term obligations		231		231		-		-		-
Total	$	593,864	$	417,004	$	71,939	$	12,256	$	92,666

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 judgments and estimates, the Company’s financial results could change, and such change could be material to the Company.

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

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

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In April 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20. The provisions of ASU No. 2011-02 were effective for the Company’s reporting period ended September 30, 2011. The adoption of ASU No. 2011-02 did not have a material impact on the Company’s consolidated financial statements.

In May 2011, FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of ASU No. 2011-04 is not expected to have a material effect on the Company’s consolidated financial statements.

Guaranty Federal Bancshares, Inc.

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

In June 2011, FASB issued ASU 2011-05, “Other Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The ASU amends Topic 220 to require an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (“OCI”) either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments do not change items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, only the format for presentation. The requirements are effective during interim and annual periods beginning after December 15, 2011. The amendments should be applied retrospectively. On October 21, 2011, the FASB exposed a proposed deferral of the requirement that companies present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements. Early adoption is permitted. The adoption of ASU No.2011-05 is not expected to have a material effect on the Company’s consolidated financial statements.

SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS

	Year Ended December 31, 2011, Quarter ended
	Mar-11		Jun-11		Sep-11		Dec-11
Interest income	$	7,530,118	$	7,641,494	$	7,729,579	$	7,474,747
Interest expense		2,686,311		2,540,220		2,398,198		1,986,239
Net interest income		4,843,807		5,101,274		5,331,381		5,488,508
Provision for loan losses		900,000		1,000,000		900,000		550,000
Gain on loans and investment securities		281,904		364,229		452,552		1,752,564
Other noninterest income, net		475,995		350,970		543,668		263,347
Noninterest expense		4,152,224		3,918,807		3,884,544		5,405,880
Income before income taxes		549,482		897,666		1,543,057		1,548,539
Provision for income taxes		26,520		108,124		327,427		241,034
Net income		522,962		789,542		1,215,630		1,307,505
Preferred stock dividends and discount accretion		281,391		281,390		281,391		281,391
Net income available to common shareholders	$	241,571	$	508,152	$	934,239	$	1,026,114
Basic income per common share	$	0.09	$	0.19	$	0.35	$	0.38
Diluted income per common share	$	0.09	$	0.19	$	0.35	$	0.38

	Year Ended December 31, 2010, Quarter ended
	Mar-10		Jun-10		Sep-10		Dec-10
Interest income	$	8,265,282	$	8,228,615	$	7,845,909	$	7,991,670
Interest expense		4,155,805		3,806,088		3,659,835		3,185,151
Net interest income		4,109,477		4,422,527		4,186,074		4,806,519
Provision for loan losses		950,000		950,000		850,000		2,450,000
Gain on loans and investment securities		458,592		372,835		513,553		680,002
Other noninterest income, net		715,780		670,094		647,898		220,599
Noninterest expense		3,756,018		3,878,811		3,826,701		4,068,397
Income (loss) before income taxes		577,831		636,645		670,824		(811,277	)
Provision (credit) for income taxes		101,965		144,142		148,620		(451,475	)
Net income (loss)		475,866		492,503		522,204		(359,802	)
Preferred stock dividends and discount accretion		281,391		281,390		281,391		281,391
Net income (loss) available to common shareholders	$	194,475	$	211,113	$	240,813	$	(641,193	)
Basic income (loss) per common share	$	0.07	$	0.08	$	0.09	$	(0.24	)
Diluted income (loss) per common share	$	0.07	$	0.08	$	0.09	$	(0.24	)

Guaranty Federal Bancshares, Inc.

Consolidated Balance Sheets

December 31, 2011 and 2010

	December 31,			December 31,
	2011			2010
ASSETS
Cash and due from banks	$	7,200,969		$	2,968,669
Interest-bearing deposits in other financial institutions		19,373,113			11,176,660
Cash and cash equivalents		26,574,082			14,145,329
Interest-bearing deposits		5,587,654			12,785,000
Available-for-sale securities		81,064,878			96,844,653
Held-to-maturity securities		218,571			260,956
Stock in Federal Home Loan Bank, at cost		3,846,900			5,025,200
Mortgage loans held for sale		3,702,849			2,685,163
Loans receivable, net of allowance for loan losses of December 31, 2011 and 2010 - $10,613,145 and $13,082,703, respectively		478,960,736			501,980,385
Accrued interest receivable:
Loans		1,752,786			2,058,576
Investments and interest-bearing deposits		386,534			611,698
Prepaid expenses and other assets		7,116,067			6,161,861
Prepaid FDIC deposit insurance premiums		2,089,076			2,977,356
Foreclosed assets held for sale		10,012,035			10,539,867
Premises and equipment		11,423,822			11,324,685
Bank owned life insurance		10,770,887			10,449,630
Income taxes receivable		512,666			-
Deferred income taxes		4,486,315			4,817,761
	$	648,505,858		$	682,668,120

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits	$	484,583,665		$	480,694,273
Federal Home Loan Bank advances		68,050,000			93,050,000
Securities sold under agreements to repurchase		25,000,000			39,750,000
Subordinated debentures		15,465,000			15,465,000
Advances from borrowers for taxes and insurance		156,509			134,002
Accrued expenses and other liabilities		496,956			655,404
Accrued interest payable		518,881			878,675
		594,271,011			630,627,354

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS' EQUITY
Capital Stock:
Series A preferred stock, $0.01 par value; authorized 2,000,000 shares; issued and outstanding December 31, 2011 and 2010 - 17,000 shares		16,425,912			16,150,350
Common stock, $0.10 par value; authorized 10,000,000 shares; issued December 31, 2011 and 2010 - 6,779,800 shares;		677,980			677,980
Common stock warrants; December 31, 2011 and 2010 - 459,459 shares		1,377,811			1,377,811
Additional paid-in capital		58,333,614			58,505,046
Unearned ESOP shares		(204,930	)		(432,930	)
Retained earnings, substantially restricted		38,456,991			35,746,914
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities, net of income taxes; December 31, 2011 and 2010 - $464,723 and $1,082,399, respectively		791,285			1,843,004
		115,858,663			113,868,175

Treasury stock, at cost; December 31, 2011 and December 31, 2010 - 4,072,156 and 4,080,220 shares, respectively		(61,623,816	)		(61,827,409	)
		54,234,847			52,040,766
	$	648,505,858		$	682,668,120

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Operations

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009

Interest Income
Loans	$	27,423,897		$	28,348,002		$	29,695,487
Investment securities		2,636,799			3,476,721			3,743,688
Other		315,242			506,753			434,261
		30,375,938			32,331,476			33,873,436
Interest Expense
Deposits		5,778,263			9,628,133			15,381,190
Federal Home Loan Bank advances		2,164,259			2,988,548			3,152,354
Subordinated debentures		610,929			1,023,783			1,023,783
Securities sold under agreements to repurchase		1,057,517			1,166,415			969,258
		9,610,968			14,806,879			20,526,585
Net Interest Income		20,764,970			17,524,597			13,346,851
Provision for Loan Losses		3,350,000			5,200,000			6,900,000
Net Interest Income After
Provision for Loan Losses		17,414,970			12,324,597			6,446,851
Noninterest Income
Service charges		1,315,333			1,552,623			1,802,288
Other fees		28,282			33,705			52,233
Gain on investment securities		1,505,915			275,125			689,769
Gain on sale of loans		1,345,334			1,749,857			1,443,385
Loss on foreclosed assets		(800,250	)		(492,542	)		(523,557	)
Other income		1,090,615			1,160,585			775,360
		4,485,229			4,279,353			4,239,478
Noninterest Expense
Salaries and employee benefits		8,886,713			8,636,515			7,952,105
Occupancy		1,660,802			1,704,790			1,806,100
FDIC deposit insurance premiums		942,056			1,220,589			1,520,551
Data processing		529,940			454,611			423,205
Advertising		300,000			300,000			316,666
Prepayment penalty on repurchase agreements		1,531,000			-			-
Other expense		3,510,944			3,213,422			3,142,983
		17,361,455			15,529,927			15,161,610
Income (Loss) Before Income Taxes		4,538,744			1,074,023			(4,475,281	)
Provision (Credit) for Income Taxes		703,105			(56,748	)		(2,134,563	)
Net Income (Loss)	$	3,835,639		$	1,130,771		$	(2,340,718	)
Preferred Stock Dividends and Discount Accretion		1,125,563			1,125,563			1,031,766
Net Income (Loss) Available to Common Shareholders	$	2,710,076		$	5,208		$	(3,372,484	)

Basic Income (Loss) Per Common Share	$	1.01		$	-		$	(1.29	)
Diluted Income (Loss) Per Common Share	$	1.01		$	-		$	(1.29	)

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	3,835,639		$	1,130,771		$	(2,340,718	)
Items not requiring (providing) cash:
Deferred income taxes		949,122			(217,737	)		701,199
Depreciation		717,222			826,440			965,504
Provision for loan losses		3,350,000			5,200,000			6,900,000
Gain on sale of loans and investment securities		(2,851,249	)		(2,024,982	)		(2,133,154	)
Loss on sale of foreclosed assets		520,255			341,376			285,010
Accretion of gain on termination of interest rate swaps		-			(508,746	)		(1,017,492	)
Amortization of deferred income, premiums and discounts, net		529,016			587,769			352,345
Stock award plans		186,654			109,386			95,268
Origination of loans held for sale		(58,776,634	)		(81,958,753	)		(78,535,230	)
Proceeds from sale of loans held for sale		59,104,282			84,488,527			78,447,333
Release of ESOP shares		126,737			100,014			121,219
Increase in cash surrender value of bank owned life insurance		(321,257	)		(380,090	)		(69,540	)
Changes in:
Prepaid FDIC deposit insurance premiums		888,280			1,158,519			(4,135,875	)
Accrued interest receivable		530,954			1,289			(39,113	)
Prepaid expenses and other assets		(4,120	)		569,548			767,817
Accrued expenses and other liabilities		(349,891	)		(551,779	)		(214,248	)
Income taxes payable		(681,017	)		3,887,321			(3,333,407	)
Net cash provided by (used in) operating activities		7,753,993			12,758,873			(3,183,082	)

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans		14,093,653			7,493,436			18,959,641
Principal payments on held-to-maturity securities		42,385			211,827			83,682
Principal payments on available-for-sale securities		15,633,730			13,855,527			13,087,448
Purchase of available-for-sale securities		(73,537,207	)		(55,262,990	)		(82,769,479	)
Proceeds from sales of available-for-sale securities		46,274,707			17,516,564			25,356,214
Proceeds from maturities of available-for-sale securities		26,775,000			28,956,500			8,500,000
Purchase of premises and equipment		(816,359	)		(333,609	)		(1,459,557	)
Purchase of tax credit investments		(950,086	)		-			(3,433,867	)
Purchase of interest bearing deposits		-			-			(34,605,802	)
Proceeds from maturities of interest bearing deposits		7,197,346			5,000,000			18,045,000
Purchase of bank owned life insurance		-			-			(10,000,000	)
Redemption of Federal Home Loan Bank stock		1,178,300			951,400			753,500
Capitalized costs on foreclosed assets held for sale		(102,804	)		(737,336	)		(122,162	)
Insurance proceeds on foreclosed assets held for sale		-			637,427			-
Proceeds from sale of foreclosed assets held for sale		5,627,426			6,295,990			4,268,852
Net cash provided by (used in) investing activities		41,416,091			24,584,736			(43,336,530	)

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2011, 2010 and 2009

	2011			2010			2009

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and savings accounts	$	24,675,024		$	5,504,374		$	160,490,510
Net decrease in certificates of deposit		(20,785,632	)		(37,861,203	)		(94,518,877	)
Net decrease in securities sold under agreements to repurchase		(14,750,000	)		-			-
Proceeds from FHLB advances		-			-			5,000,000
Repayments of FHLB advances		(25,000,000	)		(23,000,000	)		(21,386,000	)
Repayments of notes payable		-			-			(1,435,190	)
Advances from borrowers for taxes and insurance		22,507			(1,608	)		(30,717	)
Proceeds from issuance preferred stock and warrants		-			-			17,000,000
Common and preferred cash dividends paid		(850,000	)		(850,000	)		(672,917	)
Treasury stock purchased		(53,230	)		(6,540	)		(7,515	)
Net cash provided by (used in) financing activities		(36,741,331	)		(56,214,977	)		64,439,294

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		12,428,753			(18,871,368	)		17,919,682

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		14,145,329			33,016,697			15,097,015

CASH AND CASH EQUIVALENTS, END OF YEAR	$	26,574,082		$	14,145,329		$	33,016,697

Supplemental Cash Flows Information

Real estate acquired in settlement of loans	$	5,517,045		$	17,564,615		$	5,536,091

Interest paid	$	9,970,762		$	15,326,326		$	20,705,742

Income taxes paid, net of (refunds)	$	435,000		$	(3,726,331	)	$	496,661

Sale and financing of foreclosed assets held for sale	$	1,461,378		$	7,246,939		$	315,000

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2011, 2010 and 2009

	Preferred Stock		Common Stock		Common Stock Warrants		Additional Paid-In Capital			Unearned ESOP Shares			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2009	$	-	$	677,980	$	-	$	58,535,159		$	(888,930	)	$	(61,813,354	)	$	39,114,189		$	1,687,858		$	37,312,902
Comprehensive income (loss)
Net loss		-		-		-		-			-			-			(2,340,718	)		-			(2,340,718	)
Change in unrealized appreciation on available-for-sale securities and interest rate swaps, net of income taxes of $5,061		-		-		-		-			-			-			-			8,644			8,644
Total comprehensive loss																							(2,332,074	)
Preferred stock issued		15,622,189		-		-		-			-			-			-			-			15,622,189
Common stock warrants issued		-		-		1,377,811		-			-			-			-			-			1,377,811
Preferred stock discount accretion		252,599		-		-		-			-			-			(252,599	)		-			-
Preferred stock dividends		-		-		-		-			-			-			(779,167	)		-			(779,167	)
Stock award plans		-		-		-		95,268			-			-			-			-			95,268
Release of ESOP shares		-		-		-		(106,781	)		228,000			-			-			-			121,219
Treasury stock purchased		-		-		-		-			-			(7,515	)		-			-			(7,515	)
Balance, December 31, 2009		15,874,788		677,980		1,377,811		58,523,646			(660,930	)		(61,820,869	)		35,741,705			1,696,502			51,410,633
Comprehensive income
Net income		-		-		-		-			-			-			1,130,771			-			1,130,771
Change in unrealized appreciation on available-for-sale securities and interest rate swaps, net of income taxes of $86,041		-		-		-		-			-			-			-			146,502			146,502
Total comprehensive income																							1,277,273
Preferred stock discount accretion		275,562		-		-		-			-			-			(275,562	)		-			-
Preferred stock dividends (5%)		-		-		-		-			-			-			(850,000	)		-			(850,000	)
Stock award plans		-		-		-		109,386			-			-			-			-			109,386
Release of ESOP shares		-		-		-		(127,986	)		228,000			-			-			-			100,014
Treasury stock purchased		-		-		-		-			-			(6,540	)		-			-			(6,540	)
Balance, December 31, 2010		16,150,350		677,980		1,377,811		58,505,046			(432,930	)		(61,827,409	)		35,746,914			1,843,004			52,040,766
Comprehensive income
Net income		-		-		-		-			-			-			3,835,639			-			3,835,639
Change in unrealized appreciation on available-for-sale securities, net of income taxes of $617,676		-		-		-		-			-			-			-			(1,051,719	)		(1,051,719	)
Total comprehensive income																							2,783,920
Preferred stock discount accretion		275,562		-		-		-			-			-			(275,562	)		-			-
Preferred stock dividends (5%)		-		-		-		-			-			-			(850,000	)		-			(850,000	)
Stock award plans		-		-		-		(70,169	)		-			256,823			-			-			186,654
Release of ESOP shares		-		-		-		(101,263	)		228,000			-			-			-			126,737
Treasury stock purchased		-		-		-		-			-			(53,230	)		-			-			(53,230	)
Balance, December 31, 2011	$	16,425,912	$	677,980	$	1,377,811	$	58,333,614		$	(204,930	)	$	(61,623,816	)	$	38,456,991		$	791,285		$	54,234,847

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

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.

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity are classified as “available-for-sale” and are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Effective April 1, 2009, the Company adopted new accounting guidance related to recognition and presentation of other-than-temporary impairment (ASC 320-10). When the Company does not intend to sell a debt security, and it is more likely than not, the Company will not have to sell the security before a recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

As a result of this guidance, the Company would recognize in its consolidated statements of operations the full impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Prior to the adoption of the recent accounting guidance on April 1, 2009, management considered, in determining whether other-than-temporary impairment exists, (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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 and the carrying amounts of the loans sold, and are recorded in noninterest income. Direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

Loans

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

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

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

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 less cost to sell 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. The estimated useful lives for each major depreciable classification of premises and equipment are as follows:

Buildings and improvements		35-40 years
Furniture and fixtures and vehicles		3-10 years

Bank Owned Life Insurance

Bank owned life insurance policies are carried at their cash surrender value. The Company recognizes tax-free income from the periodic increases in cash surrender value of these policies and from death benefits.

Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company files consolidated income tax returns with its subsidiary. With a few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2008.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2011 and 2010, the Company had no cash equivalents.

Pursuant to legislation enacted in 2010, the FDIC fully insures all noninterest-bearing transaction accounts through December 31, 2012, at all FDIC-insured institutions. The FDIC’s insurance limits for interest-bearing cash accounts were permanently increased to $250,000 effective July 21, 2010.

Restriction on Cash and Due From Banks

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required on December 31, 2011 and 2010, was $7,899,000 and $5,933,000, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities, unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income, unrealized appreciation (depreciation) on held-to-maturity securities for which a portion of an other-than-temporary impairment has been recognized in income, and unrealized gains on interest rate swaps.

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, 2011 and 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2011, 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, 2011

Tier 1 (core) capital, and ratio to adjusted total assets
Company	$	68,419		10.4	%	$	26,256		4.0	%		n/a		n/a
Bank	$	66,834		10.2	%	$	26,249		4.0	%	$	32,811		5.0	%

Tier 1 (core) capital, and ratio to risk-weighted assets
Company	$	68,419		13.2	%	$	20,755		4.0	%		n/a		n/a
Bank	$	66,834		12.9	%	$	20,730		4.0	%	$	31,095		6.0	%

Total risk-based capital, and ratio to risk-weighted assets
Company	$	74,948		14.4	%	$	41,511		8.0	%		n/a		n/a
Bank	$	73,363		14.2	%	$	41,460		8.0	%	$	51,825		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, 2010

Tier 1 (core) capital, and ratio to adjusted total assets
Company	$	65,174		9.3	%	$	27,992		4.0	%		n/a		n/a
Bank	$	63,306		9.1	%	$	27,878		4.0	%	$	34,847		5.0	%


Tier 1 (core) capital, and ratio to risk-weighted assets
Company	$	65,174		12.1	%	$	21,629		4.0	%		n/a		n/a
Bank	$	63,306		11.7	%	$	21,582		4.0	%	$	32,374		6.0	%

Total risk-based capital, and ratio to risk-weighted assets
Company	$	71,986		13.3	%	$	43,258		8.0	%		n/a		n/a
Bank	$	70,118		13.0	%	$	43,165		8.0	%	$	53,956		10.0	%

The amount of dividends that the Company and Bank may pay is subject to various regulatory limitations. As of December 31, 2011 and 2010 the Company and Bank exceeded their minimum capital requirements. The Bank may not pay dividends which would reduce capital below the minimum requirements shown above.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Segment Information

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

Reclassifications

Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 financial statement presentation. These reclassifications had no effect on net income.

General Litigation

The Company and the Bank, from time to time, may be parties to ordinary routine litigation, which arises in the normal course of business, such as claims to enforce liens, and condemnation proceedings, on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Company and the Bank. After reviewing pending and threatened litigation with legal counsel, management believes that as of December 31, 2011, the outcome of any such litigation will not have a material adverse effect on the Company’s results of operations.

Earnings Per Common Share

The computation for earnings per common share for the years ended December 31, 2011, 2010 and 2009 is as follows:


	Year Ended		Year Ended		Year Ended
	December 31, 2011		December 31, 2010		December 31, 2009

Net income (loss) available to common shareholders	$	2,710,076	$	5,208	$	(3,372,484	)
Average common shares outstanding		2,675,654		2,644,355		2,622,895
Effect of dilutive securities		826		-		-
Average diluted shares outstanding		2,676,480		2,644,355		2,622,895
Basic income (loss) per common share	$	1.01	$	0.00	$	(1.29	)
Diluted income (loss) per common share	$	1.01	$	0.00	$	(1.29	)

Stock options to purchase 351,500 and 365,579 shares of common stock were outstanding during the years ended December 31, 2011 and 2010, respectively, but were not included in the computation of diluted income per common share because their exercise price was greater than the average market price of the common shares.

Stock warrants to purchase 459,459 shares of common stock were outstanding during the year ended December 31, 2011 and were included in the computation of diluted income per common share because their exercise price was less than the average market price of the common shares during the period. These warrants were also outstanding during 2010 and 2009, but were not included in the computation of diluted income per common share because their exercise price was greater than the average market price of the common shares.

Due to the Company’s net loss for the year ended December 31, 2009, no potentially dilutive shares were included in the computation of diluted earnings per share.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 2: SECURITIES

The amortized cost and approximate fair values, together with gross unrealized gains and losses, 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, 2011
Equity Securities	$	102,212	$	-	$	(39,950	)	$	62,262
Debt Securities:
U. S. government agencies		34,668,833		122,093		(64,264	)		34,726,662
U. S. treasuries		2,037,168		5,469		-			2,042,637
Municipals		4,049,701		138,736		(44,038	)		4,144,399
Government sponsored mortgage-backed securities		38,950,955		1,148,789		(10,826	)		40,088,918
	$	79,808,869	$	1,415,087	$	(159,078	)	$	81,064,878

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2010
Equity Securities	$	102,212	$	7,089	$	(31,381	)	$	77,920
Debt Securities:
U. S. government agencies		27,409,482		222,014		(128,414	)		27,503,082
Government sponsored mortgage-backed securities		66,407,555		2,865,745		(9,649	)		69,263,651
	$	93,919,249	$	3,094,848	$	(169,444	)	$	96,844,653

Maturities of available-for-sale debt securities as of December 31, 2011:

	Amortized Cost		Approximate Fair Value
1-5 years	$	26,394,204	$	26,473,064
5-10 years		11,346,351		11,347,402
After ten years		3,015,147		3,093,232
Government sponsored mortgage-backed securities not due on a single maturity date		38,950,955		40,088,918
	$	79,706,657	$	81,002,616

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The amortized cost and approximate fair values, together with gross unrealized gains and losses, 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, 2011
Debt Securities:
Government sponsored mortgage-backed securities	$	218,571	$	17,003	$	-	$	235,574
	$	218,571	$	17,003	$	-	$	235,574

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Approximate Fair Value
As of December 31, 2010
Debt Securities:
Government sponsored mortgage-backed securities	$	260,956	$	20,828	$	-	$	281,784
	$	260,956	$	20,828	$	-	$	281,784

Maturities of held-to-maturity securities as of December 31, 2011:

	Amortized Cost		Approximate Fair Value

Government sponsored mortgage-backed securities not due on a single maturity date	$	218,571	$	235,574
	$	218,571	$	235,574

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $60,222,048 and $62,981,616 as of December 31, 2011 and 2010, respectively.

Gross gains of $1,505,915, $275,125 and $689,769 and gross losses of $0, $0 and $0 resulting from sale of available-for-sale securities were realized for the years ended December 31, 2011, 2010 and 2009, respectively. The tax effect of these net gains was $557,188, $101,796 and $255,215 in 2011, 2010 and 2009, respectively.

The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. 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, or declines in stock prices of equity securities. 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 the debt securities to maturity or until recovery of the unrealized loss. Should the impairment of any of these debt 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, to the extent the loss is related to credit issues, and to other comprehensive income to the extent the decline on debt securities is related to other factors and the Company does not intend to sell the security prior to recovery of the unrealized loss.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

No securities were written down for other-than-temporary impairment during the years ended December 31, 2011, 2010 and 2009.

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, 2011 and 2010, was $29,766,876 and $5,386,231, respectively, which is approximately 37% and 6% 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, 2011 and 2010.

	December 31, 2011

	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	$	26,316	$	(4,361	)	$	35,946	$	(35,589	)	$	62,262	$	(39,950	)
U. S. government agencies		21,351,961		(64,264	)		-		-			21,351,961		(64,264	)
Municipals		1,045,521		(44,038	)		-		-			1,045,521		(44,038	)
Government sponsored mortgage-backed securities		7,307,132		(10,826	)		-		-			7,307,132		(10,826	)
	$	29,730,930	$	(123,489	)	$	35,946	$	(35,589	)	$	29,766,876	$	(159,078	)

	December 31, 2010

	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	$	-	$	-		$	40,153	$	(31,381	)	$	40,153	$	(31,381	)
U. S. government agencies		4,374,049		(128,414	)		-		-			4,374,049		(128,414	)
Government sponsored mortgage-backed securities		972,029		(9,649	)		-		-			972,029		(9,649	)
	$	5,346,078	$	(138,063	)	$	40,153	$	(31,381	)	$	5,386,231	$	(169,444	)

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans at December 31, 2011 and 2010 include:

	December 31,
	2011			2010
Real estate - residential mortgage:
One to four family units	$	98,030,718		$	103,052,035
Multi-family		43,165,695			44,138,034
Real estate - construction		44,912,049			63,308,397
Real estate - commercial		194,856,374			195,889,801
Commercial loans		88,088,580			85,427,589
Consumer and other loans		20,758,027			23,425,843
Total loans		489,811,443			515,241,699
Less:
Allowance for loan losses		(10,613,145	)		(13,082,703	)
Deferred loan fees/costs, net		(237,562	)		(178,611	)
Net loans	$	478,960,736		$	501,980,385

Classes of loans by aging at December 31, 2011 and 2010 were as follows:

As of December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	5	$	206	$	33	$	244	$	97,787	$	98,031	$	-
Multi-family		-		-		-		-		43,166		43,166		-
Real estate - construction		728		-		157		885		44,027		44,912		-
Real estate - commercial		167		-		1,193		1,360		193,496		194,856		-
Commercial loans		32		-		548		580		87,508		88,088		-
Consumer and other loans		14		18		20		52		20,706		20,758		-
Total	$	946	$	224	$	1,951	$	3,121	$	486,690	$	489,811	$	-

As of December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	1,158	$	562	$	1,591	$	3,311	$	99,741	$	103,052	$	-
Multi-family		-		-		-		-		44,138		44,138		-
Real estate - construction		1,969		89		311		2,369		60,939		63,308		-
Real estate - commercial		-		234		-		234		195,656		195,890		-
Commercial loans		2,571		-		2,021		4,592		80,836		85,428		-
Consumer and other loans		100		25		29		154		23,272		23,426		-
Total	$	5,798	$	910	$	3,952	$	10,660	$	504,582	$	515,242	$	-

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Nonaccruing loans are summarized as follows:

	December 31,
	2011		2010

Real estate - residential mortgage:
One to four family units	$	1,671,245	$	3,119,760
Multi-family		-		-
Real estate - construction		8,514,187		8,934,666
Real estate - commercial		4,082,416		2,980,117
Commercial loans		2,377,081		7,743,116
Consumer and other loans		357,060		234,475
Total	$	17,001,989	$	23,012,134

Activity in the allowance for loan losses was as follows:

	Years ended
	December 31,
	2011			2010			2009

Balance, beginning of year	$	13,082,703		$	14,076,123		$	16,728,492
Provision charged to expense		3,350,000			5,200,000			6,900,000
Losses charged off, net of recoveries of $1,955,578, $1,191,644 and $217,288 for the years ended December 31, 2011, 2010 and 2009, respectively		(5,819,558	)		(6,193,420	)		(9,552,369	)
Balance, end of year	$	10,613,145		$	13,082,703		$	14,076,123

The following table presents the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of and for the years ended December 31, 2011 and 2010:

As of December 31, 2011
	Construction			Commercial Real Estate			One to four family			Multi-family			Commercial			Consumer and Other			Unallocated		Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of year	$	4,547		$	3,125		$	1,713		$	528		$	2,483		$	687		$	-	$	13,083
Provision charged to expense		265			2,123			943			(138	)		505			(1,283	)		935	$	3,350
Losses charged off		(2,381	)		(2,744	)		(966	)		-			(1,362	)		(322	)		-	$	(7,775	)
Recoveries		77			221			45			-			322			1,290			-	$	1,955
Balance, end of year	$	2,508		$	2,725		$	1,735		$	390		$	1,948		$	372		$	935	$	10,613
Ending balance: individually evaluated for impairment	$	1,355		$	659		$	127		$	-		$	399		$	72		$	-	$	2,612
Ending balance: collectively evaluated for impairment	$	1,153		$	2,066		$	1,608		$	390		$	1,549		$	300		$	935	$	8,001
Loans:
Ending balance: individually evaluated for impairment	$	8,515		$	5,019		$	1,819		$	-		$	3,048		$	653		$	-	$	19,054
Ending balance: collectively evaluated for impairment	$	36,397		$	189,837		$	96,212		$	43,166		$	85,040		$	20,105		$	-	$	470,757

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2010
	Construction			Commercial Real Estate			One to four family			Multi-family		Commercial			Consumer and Other			Unallocated		Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of year	$	2,810		$	2,923		$	1,646		$	393	$	3,554		$	2,750		$	-	$	14,076
Provision charged to expense		5,620			563			948			135		716			(2,782	)		-	$	5,200
Losses charged off		(3,893	)		(373	)		(906	)		-		(1,847	)		(366	)		-	$	(7,385	)
Recoveries		10			12			25			-		60			1,085			-	$	1,192
Balance, end of year	$	4,547		$	3,125		$	1,713		$	528	$	2,483		$	687		$	-	$	13,083
Ending balance: individually evaluated for impairment	$	3,134		$	1,384		$	149		$	-	$	1,052		$	307		$	-	$	6,026
Ending balance: collectively evaluated for impairment	$	1,413		$	1,741		$	1,564		$	528	$	1,431		$	380		$	-	$	7,057
Loans:
Ending balance: individually evaluated for impairment	$	9,281		$	5,150		$	3,363		$	-	$	8,409		$	1,008		$	-	$	27,211
Ending balance: collectively evaluated for impairment	$	54,027		$	190,740		$	99,689		$	44,138	$	77,019		$	22,418		$	-	$	488,031

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC-310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The following summarizes impaired loans at and for the years ended December 31, 2011 and 2010:

As of December 31, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,424	$	1,424	$	-	$	2,373	$	50
Multi-family		-		-		-		-		-
Real estate - construction		1,181		1,181		-		3,705		-
Real estate - commercial		4,646		5,985		-		4,609		57
Commercial loans		1,148		1,459		-		1,573		55
Consumer and other loans		376		376		-		458		37
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	395	$	421	$	127	$	1,396	$	-
Multi-family		-		-		-		-		-
Real estate - construction		7,334		7,854		1,355		7,697		-
Real estate - commercial		373		373		659		2,189		-
Commercial loans		1,900		1,900		399		2,790		-
Consumer and other loans		277		277		72		381		-
Total

Real estate - residential mortgage:
One to four family units	$	1,819	$	1,845	$	127	$	3,769	$	50
Multi-family		-		-		-		-		-
Real estate - construction		8,515		9,035		1,355		11,402		-
Real estate - commercial		5,019		6,358		659		6,798		57
Commercial loans		3,048		3,359		399		4,363		55
Consumer and other loans		653		653		72		839		37
Total	$	19,054	$	21,250	$	2,612	$	27,171	$	199

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2010
	Recorded		Unpaid		Specific		Average		Interest
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,691	$	1,708	$	-	$	3,011	$	185
Multi-family		-		-		-		1,007		-
Real estate - construction		601		2,003		-		4,418		9
Real estate - commercial		2,881		2,881		-		2,674		30
Commercial loans		2,897		4,852		-		3,516		41
Consumer and other loans		369		372		-		2,253		93
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,672	$	1,672	$	357	$	1,570	$	-
Multi-family		-		-		-		-		-
Real estate - construction		8,680		8,680		3,134		2,804		-
Real estate - commercial		2,269		2,269		1,384		997		-
Commercial loans		5,512		5,512		1,052		4,867		-
Consumer and other loans		639		639		99		1,879		-
Total
Real estate - residential mortgage:
One to four family units	$	3,363	$	3,380	$	357	$	4,581	$	185
Multi-family		-		-		-		1,007		-
Real estate - construction		9,281		10,683		3,134		7,222		9
Real estate - commercial		5,150		5,150		1,384		3,671		30
Commercial loans		8,409		10,364		1,052		8,383		41
Consumer and other loans		1,008		1,011		99		4,132		93
Total	$	27,211	$	30,588	$	6,026	$	28,996	$	358

Interest of approximately $1,223,789 was recognized on average impaired loans of $39,642,406 for the year ended December 31, 2009.

At December 31, 2011, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (TDR). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction of the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

As a result of adopting the amendments in Accounting Standards Update No. 2011-02 (the ASU), the Bank reassessed all restructurings that occurred on or after the beginning of its current fiscal year December 31, 2011 for identification as troubled debt restructurings. The Bank identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology. Upon identifying those receivables as troubled debt restructurings, the Bank identified them as impaired under the guidance in Accounting Standards Codification (ASC) 310-10-35. The ASU requires prospective application of the impairment measurement guidance in ASC 310-10-35 for those receivables newly identified as impaired

The following table presents information regarding troubled debt restructurings by class for the year ended December 31, 2011:

	Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate - residential mortgage:
One to four family units		-	$	-	$	-
Multi-family		-		-		-
Real estate - construction		3		8,526,970		8,925,340
Real estate - commercial		3		6,526,382		4,591,406
Commercial loans		-		-		-
Consumer and other loans		-		-		-
Total		6	$	15,053,352	$	13,516,746

The troubled debt restructurings described above increased the allowance for loan losses by $1,299,226 and resulted in charge offs of $1,859,100 during the year ended December 31, 2011.

The following table presents the troubled debt restructurings by type of modification:

	Interest Rate		Term		Combination		Total Modification
Real estate - residential mortgage:
One to four family units	$	-	$	-	$	-	$	-
Multi-family		-		-		-		-
Real estate - construction		6,884,800		2,040,540		-		8,925,340
Real estate - commercial		-		-		4,591,406		4,591,406
Commercial loans		-		-		-		-
Consumer and other loans		-		-		-		-
Total	$	6,884,800	$	2,040,540	$	4,591,406	$	13,516,746

At December 31, 2010, the Bank did not have any troubled debt restructurings.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

Pass-This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Special mention-This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard-This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

The following table provides information about the credit quality of the loan portfolio using the Bank’s internal rating system as of December 31, 2011 and 2010:

As of December 31, 2011
	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	27,646	$	162,019	$	91,503	$	42,668	$	80,529	$	19,522	$	423,887
Special Mention		6,372		20,406		3,214		498		2,183		309		32,982
Substandard		10,894		12,431		3,314		-		5,376		927		32,942
Total	$	44,912	$	194,856	$	98,031	$	43,166	$	88,088	$	20,758	$	489,811

As of December 31, 2010
	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	45,307	$	173,210	$	93,816	$	44,138	$	73,291	$	21,580	$	451,342
Special Mention		4,621		7,604		2,962		-		1,028		4		16,219
Substandard		13,380		15,076		6,274		-		11,109		1,842		47,681
Total	$	63,308	$	195,890	$	103,052	$	44,138	$	85,428	$	23,426	$	515,242

The weighted average interest rate on loans as of December 31, 2011 and 2010 was 5.82% and 5.61%, respectively.

The Bank serviced mortgage loans for others amounting to $199,256 and $237,605 as of December 31, 2011 and 2010, respectively. The Bank serviced commercial loans for others amounting to $4,143,374 and $6,555,843 as of December 31, 2011 and 2010, respectively.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 4: PREMISES AND EQUIPMENT

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

	December 31,			December 31,
	2011			2010
Land	$	2,250,789		$	2,250,789
Buildings and improvements		11,860,040			11,503,087
Automobile		16,479			16,479
Furniture, fixtures and equipment		8,343,157			7,883,750
Leasehold improvements		271,799			271,799
		22,742,264			21,925,904
Less accumulated depreciation		(11,318,442	)		(10,601,219	)
Net premises and equipment	$	11,423,822		$	11,324,685

Depreciation expense was $717,222, $826,440 and $965,504 for the years ended December 31, 2011, 2010, and 2009, respectively.

NOTE 5: BANK OWNED LIFE INSURANCE

In October 2009, the Company purchased $10 million of Bank owned life insurance on certain key members of management. Such policies are recorded at their cash surrender value, or the amount that can be realized. The increase in cash surrender value in excess of the single premium paid is reported as other noninterest income. The balance at December 31, 2011 and 2010 was $10,770,887 and $10,449,630, respectively.

NOTE 6: OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income components and related taxes were as follows:

	Year ended
	December 31,
	2011			2010			2009

Unrealized gains (losses) on available-for-sale securities	$	(163,480	)	$	1,016,414		$	1,720,966
Accretion of gains on interest rate swaps		-			(508,746	)		(1,017,492	)
Less: Reclassification adjustment for realized gains included in income		(1,505,915	)		(275,125	)		(689,769	)
Other comprehensive income (loss) before tax effect		(1,669,395	)		232,543			13,705
Tax expense (benefit)		(617,676	)		86,041			5,061
Other comprehensive income (loss)	$	(1,051,719	)	$	146,502		$	8,644

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

	2011		2010

Unrealized gain on available-for-sale securities	$	1,256,008	$	2,925,403
Tax effect		464,723		1,082,399
Net of tax amount	$	791,285	$	1,843,004

NOTE 7: INVESTMENTS IN AFFORDABLE HOUSING PARTNERSHIPS

The Company has purchased investments in limited partnerships that were formed to operate low-income housing apartment complexes and single-family housing units throughout Missouri. The investments are accounted for under the cost method as the Company does not have the ability to exert significant influence over the partnerships. For a minimum 15 year compliance period, each partnership must adhere to affordable housing regulatory requirements in order to maintain the utilization of the tax credits. At December 31, 2011 and 2010, the net carrying value of the Company’s investments in these entities were $6,249,021 and $5,251,318, respectively, and are included in other assets on the Company’s Consolidated Balance Sheets.

The Company received federal tax credits of $806,324, $551,000 and $499,943 during 2011, 2010 and 2009, respectively. Amortization of the investment costs were $676,700, $480,322 and $451,927 during 2011, 2010 and 2009, respectively.

NOTE 8: DEPOSITS

	December 31, 2011								December 31, 2010
	Weighted Average Rate			Balance		Percentage of Deposits			Weighted Average Rate			Balance		Percentage of Deposits

Demand		0.00	%	$	56,315,467		11.6	%		0.00	%	$	26,634,448		5.5	%
NOW		0.56	%		81,804,342		16.9	%		0.78	%		74,984,520		15.6	%
Money market		0.77	%		169,759,166		35.0	%		1.20	%		183,691,603		38.2	%
Savings		0.44	%		21,295,855		4.4	%		0.69	%		19,189,236		4.0	%
		0.56	%		329,174,830		67.9	%		0.96	%		304,499,807		63.3	%
Certificates:
0% - 1.99%		1.08	%		127,813,801		26.4	%		1.12	%		100,992,487		21.0	%
2.00% - 3.99%		2.88	%		15,059,924		3.1	%		2.84	%		43,016,216		8.9	%
4.00% - 6.00%		5.05	%		12,535,110		2.6	%		4.76	%		32,185,764		6.7	%
		1.57	%		155,408,835		32.1	%		2.20	%		176,194,466		36.7	%
Total Deposits		0.89	%	$	484,583,665		100.0	%		1.42	%	$	480,694,273		100.0	%

The aggregate amount of certificates of deposit with a minimum balance of $100,000 was approximately $63,823,000 and $67,264,000, as of December 31, 2011 and 2010, respectively.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

A summary of certificates of deposit by maturity as of December 31, 2011, is as follows:

2012	$	87,409,324
2013		42,580,169
2014		13,462,872
2015		6,428,637
2016		5,463,296
Thereafter		64,537
	$	155,408,835

A summary of interest expense on deposits is as follows:

	Years ended
	December 31,
	2011			2010			2009

NOW and Money Market accounts	$	2,580,341		$	3,968,205		$	6,151,371
Savings accounts		118,432			140,382			121,362
Certificate accounts		3,099,265			5,536,701			9,140,075
Early withdrawal penalties		(19,775	)		(17,155	)		(31,618	)
	$	5,778,263		$	9,628,133		$	15,381,190

The Bank utilizes brokered deposits as an additional funding source. The aggregate amount of brokered deposits was approximately $22,229,000 and $37,073,000 as of December 31, 2011 and 2010, respectively.

NOTE 9: BORROWINGS

Federal Home Loan Bank Advances

Federal Home Loan Bank advances consist of the following:

	December 31, 2011					December 31, 2010
Maturity Date	Amount		Weighted Average Rate			Amount		Weighted Average Rate
2011	$	-		-		$	25,000,000		3.53	%
2013		15,700,000		2.14	%		15,700,000		2.14	%
2015		250,000		4.66	%		250,000		4.66	%
2018		50,000,000		2.14	%		50,000,000		2.14	%
2019		2,100,000		4.87	%		2,100,000		4.87	%
	$	68,050,000		2.23	%	$	93,050,000		2.58	%

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. Based on existing collateral as well as the FHLB’s limitation of advances to 25% of assets, the Bank has the ability to borrow an additional $81.0 million from the FHLB, as of December 31, 2011.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Federal Reserve Bank Borrowings

During 2008, the Bank established a borrowing line with the Federal Reserve Bank. The Bank has the ability to borrow $37.0 million as of December 31, 2011. The Federal Reserve Bank requires the Bank to maintain collateral in relation to borrowings outstanding. The Bank had no borrowings outstanding on this line as of December 31, 2011 and 2010.

Securities Sold Under Agreements to Repurchase

The Company borrowed $9.8 million under a structured repurchase agreement in September 2007. Effective in September 2009, interest was based on a fixed rate of 3.56% until maturity in September 2014. The counterparty, Barclay’s Capital, Inc., had the option to terminate the agreement on a quarterly basis until maturity date. Prior to the stated maturity date, the Company paid off this agreement in November 2011.

The Company borrowed $30.0 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. Beginning in February 2010, the counterparty, Barclay’s Capital, Inc., has the option to terminate the agreements on a quarterly basis until maturity. Prior to the stated maturity date, the Company paid off one of these agreements in the amount of $5.0 million in November 2011.

The Company has pledged certain investment securities with a fair value of $32.2 million and $46.9 million as of December 31, 2011 and 2010, respectively, to these repurchase agreements.

NOTE 10: 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 11: INCOME TAXES

As of December 31, 2011 and 2010, 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, 2011 and 2010.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The provision (credit) for income taxes consists of:

	Years Ended
	December 31,
	2011			2010			2009

Taxes currently payable	$	(246,017	)	$	160,989		$	(2,835,762	)
Deferred income taxes		949,122			(217,737	)		701,199
	$	703,105		$	(56,748	)	$	(2,134,563	)

The tax effects of temporary differences related to deferred taxes shown on the December 31, 2011 and 2010 balance sheets are:

	2011			2010
Deferred tax assets:
Allowances for loan losses	$	3,926,864		$	4,840,600
Writedowns on foreclosed assets held for sale		589,773			482,604
State low income housing tax credits		1,708,621			1,476,757
Federal low income housing tax and other credits		478,223			710,651
Deferred loan fees/costs		87,898			66,086
Other		241,658			164,610
		7,033,037			7,741,308
Deferred tax liabilities:
FHLB stock dividends		(120,632	)		(120,632	)
Unrealized appreciation on available-for-sale securities		(473,711	)		(1,082,400	)
Accumulated depreciation		(175,448	)		(175,448	)
Other		(68,310	)		(68,310	)
		(838,101	)		(1,446,790	)
Deferred tax asset before valuation allowance		6,194,936			6,294,518
Valuation allowance:
Beginning balance		(1,476,757	)		(785,696	)
Increase for state low income housing tax credits during the period		(231,864	)		(691,061	)
Ending balance		(1,708,621	)		(1,476,757	)
Net deferred tax asset	$	4,486,315		$	4,817,761

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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,

	2011			2010			2009
Computed at statutory rate		34.0	%		34.0	%		(34.0	%)
Increase (reduction) in taxes resulting from:
State financial institution tax and credits		(17.8	%)		(83.7	%)		(30.6	%)
ESOP		(5.6	%)		(4.4	%)		(1.9	%)
Cash surrender value of life insurance		(7.1	%)		(8.0	%)		(0.8	%)
Valuation allowance		5.1	%		64.3	%		19.8	%
Other		6.9	%		(7.5	%)		6.4	%
Actual tax provision (credit)		15.5	%		(5.3	%)		(41.1	%)

NOTE 12: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-sale securities: Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. government agencies and government sponsored mortgage-backed securities. The Company has no Level 3 securities.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2011 and 2010 (dollar amounts in thousands):

As of December 31, 2011
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Equity securities:
Other	$	62	$	-	$	-	$	62
Debt securities:
U.S. government agencies		-		34,727		-		34,727
U. S. treasuries		2,043		-		-		2,043
Municipals		-		4,144		-		4,144
Government sponsored mortgage-backed securities		-		40,089		-		40,089
Available-for-sale securities	$	2,105	$	78,960	$	-	$	81,065

As of December 31, 2010
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Equity securities:
Other	$	78	$	-	$	-	$	78
Debt securities:
U.S. government agencies		-		27,503		-		27,503
Government sponsored mortgage-backed securities		-		69,264		-		69,264
Available-for-sale securities	$	78	$	96,767	$	-	$	96,845

The following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Foreclosed Assets Held for Sale: Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs. Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.

Impaired loans (Collateral Dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2011 and 2010 (dollar amounts in thousands):

2011
Impaired loans:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
December 31, 2011	$	-	$	-	$	11,243	$	11,243

December 31, 2010	$	-	$	-	$	16,163	$	16,163

Foreclosed assets held for sale:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
December 31, 2011	$	-	$	-	$	3,626	$	3,626

December 31, 2010	$	-	$	-	$	6,686	$	6,686

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and cash equivalents, interest-bearing deposits and Federal Home Loan Bank stock

The carrying amounts reported in the balance sheets approximate those assets' fair value.

Held-to-maturity securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances and securities sold under agreements to repurchase

The fair value of advances and securities sold under agreements to repurchase is estimated by using rates on debt with similar terms and remaining maturities.

Subordinated debentures and notes payable

For these variable rate instruments, the carrying amount is a reasonable estimate of fair value. There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated debentures at an amount close to its par value.

Interest payable

The carrying amount approximates fair value.

Commitments to originate loans, letters of credit and lines of credit

The fair value of commitments to originate loans 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 and lines 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.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The following table presents estimated fair values of the Company’s financial instruments at December 31, 2011 and 2010.

	December 31, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	26,574,082	$	26,574,082	$	14,145,329	$	14,145,329
Interest-bearing deposits		5,587,654		5,587,654		12,785,000		12,785,000
Held-to-maturity securities		218,571		235,574		260,956		281,784
Federal Home Loan Bank stock		3,846,900		3,846,900		5,025,200		5,025,200
Mortgage loans held for sale		3,702,849		3,702,849		2,685,163		2,685,163
Loans, net		478,960,736		485,714,408		501,980,385		508,839,154
Interest receivable		2,139,320		2,139,320		2,670,274		2,670,274
Financial liabilities:
Deposits		484,583,665		485,803,947		480,694,273		482,094,550
Federal Home Loan Bank advances		68,050,000		70,815,606		93,050,000		92,694,525
Securities sold under agreements to repurchase		25,000,000		25,025,344		39,750,000		40,473,482
Subordinated debentures		15,465,000		15,465,000		15,465,000		15,465,000
Interest payable		518,881		518,881		878,675		878,675
Unrecognized financial instruments (net of contractual value):
Commitments to extend credit		-		-		-		-
Unused lines of credit		-		-		-		-

NOTE 13: 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 regarding loans.

The current protracted economic decline continues to present financial institutions with 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 14: EMPLOYEE BENEFIT PLANS

Equity Plans

On May 26, 2010, the Company’s stockholders voted to approve the Guaranty Federal Bancshares, Inc. 2010 Equity Plan (the ”Plan”). The Plan provides for the grant of up to 200,000 shares of Common Stock under equity awards including stock options, stock awards, restricted stock, stock appreciation rights, performance units, or other equity-based awards payable in cash or stock to key employees and directors of the Company and the Bank. As of December 31, 2011, non-incentive stock options for 25,000 shares and restricted stock for 16,952 shares of Common Stock have been granted under the Plan.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

In addition, the Company 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.

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, 2009		108,250			116,704		$	23.29
Granted		41,500			20,000			5.31
Exercised		-			-			-
Forfeited		(1,000	)		-			28.43
Balance outstanding as of December 31, 2009		148,750			136,704			19.40
Granted		46,000			45,000			5.24
Exercised		-			-			-
Forfeited		-			(10,875	)		10.50
Balance outstanding as of December 31, 2010		194,750			170,829			16.14
Granted		-			-			-
Exercised		-			-			-
Forfeited		(10,250	)		(3,829	)		17.51
Balance outstanding as of December 31, 2011		184,500			167,000		$	16.09
Options exercisable as of December 31, 2011		109,100			108,250		$	19.98

In January 2011, the Company granted restricted stock to directors that was fully vested and thus, expensed in full during the year ended December 31, 2011. The amount expensed of $100,017 for the year represents 16,952 shares of common stock at a market price of $5.90 at the date of grant.

Total stock-based compensation expense recognized for the years ended December 31, 2011, 2010 and 2009 was $186,655, $109,386 and $95,268, respectively. As of December 31, 2011, there was $171,636 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period.

As of December 31, 2011, total outstanding stock options of 351,500 had a remaining contractual life of 4.53 years.

The total intrinsic value of outstanding stock options was $0 at December 31, 2011 and 2010, respectively, and the total intrinsic value of outstanding exercisable stock options was $0 at December 31, 2011 and 2010, respectively. There were no options exercised during fiscal years 2011 and 2010. The total fair value of share awards vested was $237,525 and $144,347 during 2011 and 2010, respectively.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The fair value of each option granted is estimated on the date of the grant using the Black-Scholes pricing model with the following weighted-average assumptions. There were no options granted during the year ended December 31, 2011.

	December 31, 2010			December 31, 2009
Dividends per share	$	-		$	-
Risk-free interest rate		2.15	%		1.75	%
Expected life of options	5 years			5 years
Weighted-average volatility		42.62	%		57.58	%
Weighted-average fair value of options granted during year	$	2.04		$	1.31

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 sheets. 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 $126,736, $100,014 and $121,219 for the years ended December 31, 2011, 2010 and 2009, respectively.

The following is a summary of ESOP shares as of December 31, 2011:

Beginning ESOP shares		344,454
Released shares		(299,218	)
Shares committed for release		(22,618	)
Unreleased shares		22,618

Fair value of unreleased shares	$	128,923

NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTS

The Company recorded all derivative financial instruments at fair value in the financial statements. Derivatives were 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.

On November 7, 2008, the Company elected to terminate three interest rate swap agreements with a total notional value of $90 million. At termination, the swaps had a market value (gain) of approximately $1.7 million. The gain was deferred and was accreted into income. The Company recognized $508,746 and $1.0 million of this gain in 2010 and 2009, respectively. As of June 30, 2010, the original gain at termination was fully accreted into income in accordance with the stated maturity date of the original agreement.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 16: PREFERRED STOCK AND COMMON STOCK WARRANTS

On January 30, 2009, as part of the U.S. Department of the Treasury's Troubled Asset Relief Program's Capital Purchase Program (“CPP”), the Company entered into a Securities Purchase Agreement - Standard Terms 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 (the "Transaction").

The Series A Preferred Stock qualifies as Tier 1 capital and is 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.

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 of the Warrant, 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. 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 Company is subject to certain contractual restrictions under the CPP and the Certificate of Designations for the Series A Preferred Stock that could prohibit the Company from declaring or paying dividends on its common stock or the Series A Preferred Stock.

The proceeds from the CPP were allocated between the Series A Preferred Stock and the Warrant based on a fair value assigned using a discounted cash flow model. This resulted in an initial value of $15,622,189 for the Series A Preferred Stock and $1,377,811 for the Warrants. The discount of approximately $1.4 million on the Series A Preferred Stock is being accreted over the straight-line method (which approximates the level-yield method) over five years ending February 28, 2014.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was signed into law. The ARRA imposes certain additional executive compensation and corporate expenditure limits on all current and future CPP recipients. These limits are in addition to those previously imposed by the Treasury under the Emergency Economic Stabilization Act of 2008 (the “EESA”). The Treasury released an interim final rule (the “IFR”) on TARP standards for compensation and corporate governance on June 10, 2009, which implemented and further expanded the limitations and restrictions imposed by EESA and ARRA. The IFR applies to the Company as of the date of publication in the Federal Register on June 15, 2009, but was subject to comment which ended on August 14, 2009. The Treasury has not yet published a final version of the IFR.

As a result of the Company’s participation in the CPP, the restrictions and standards established under EESA and ARRA are applicable to the Company. Neither the ARRA nor the EESA restrictions shall apply to any CPP recipient, including the Company, at such time that the federal government no longer holds any of the Company’s Series A Preferred Stock.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 17: OTHER EXPENSES

Other expenses for the years ended December 31, 2011, 2010 and 2009 were as follows:

	December 31,		December 31,		December 31,
	2011		2010		2009
Directors compensation	$	215,980	$	178,376	$	167,749
Outside services		55,000		55,000		86,730
Legal expense		628,444		444,904		370,988
Miscellaneous deposit expense		73,712		44,864		103,752
Office supplies		94,002		109,424		126,844
Telephone		116,826		107,738		104,166
Postage		165,837		172,792		175,017
Insurance		74,287		68,628		62,971
Supervisory exam		58,609		60,115		57,271
Accounting		149,475		165,000		187,389
Organization dues		118,568		114,037		98,853
Loan expense		307,021		427,775		285,078
Contributions		40,118		40,140		40,302
ATM expense		219,329		200,224		260,375
Federal tax credits amortization		676,700		480,322		451,927
Other operating		517,036		544,083		563,571

	$	3,510,944	$	3,213,422	$	3,142,983

NOTE 18: 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,
	2011			2010			2009

Balance, beginning of year	$	5,982,120		$	6,829,498		$	6,800,439
New Loans		650,095			-			688,200
Repayments		(837,319	)		(847,378	)		(659,141	)

Balance, end of year	$	5,794,896		$	5,982,120		$	6,829,498

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 19: 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.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2011 and 2010, the Bank had outstanding commitments to originate fixed-rate mortgage loans of approximately $10,955,000 and $7,949,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period.

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 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 $14,233,000 and $12,261,000 as of December 31, 2011 and 2010, respectively, with terms ranging from 1 year to 5 years.

The Bank has confirming letters of credit from the FHLB issued to enhance Bank issued letters of credit granted to various customers for industrial revenue bond issues. As of December 31, 2011 and 2010, these letters of credit aggregated approximately $10,656,000 and $10,984,000.

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

As of December 31, 2011 and 2010, unused lines of credit to borrowers aggregated approximately $36,931,000 and $50,473,000, respectively, for commercial lines and $17,625,000 and $17,525,000, respectively, for open-end consumer lines.

As of December 31, 2010, the Company had commitments to purchase $1.9 million in federal low income housing investments in southwest Missouri. The Company had no remaining purchase commitments in these investments as of December 31, 2011.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 20: CONDENSED PARENT COMPANY STATEMENTS

The condensed balance sheets as of December 31, 2011 and 2010, and statements of operations and cash flows for the years ended December 31, 2011, 2010 and 2009 for the parent company, Guaranty Federal Bancshares, Inc., are as follows:

Balance Sheets	December 31,
	2011			2010
Assets
Cash	$	781,432		$	1,197,553
Available-for-sale securities		62,262			77,920
Due from subsidiary		21,295			21,295
Investment in subsidiary		67,649,693			65,164,131
Investment in Capital Trust I & II		465,000			465,000
Prepaid expenses and other assets		183,508			287,684
Refundable income taxes		717,319			499,486
Deferred income taxes		5,793			38,833
	$	69,886,302		$	67,751,902
Liabilities
Subordinated debentures	$	15,465,000		$	15,465,000
Accrued expenses and other liabilities		186,455			246,136
Stockholders' equity
Series A preferred stock		16,425,912			16,150,350
Common stock		677,980			677,980
Common stock warrants		1,377,811			1,377,811
Additional paid-in capital		58,333,614			58,505,046
Unearned ESOP shares		(204,930	)		(432,930	)
Retained earnings		38,456,991			35,746,914
Unrealized appreciation on available-for-sale securities and interest rate swaps, net		791,285			1,843,004
Treasury stock		(61,623,816	)		(61,827,409	)
	$	69,886,302		$	67,751,902

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Statements of Operations	Years ended December 31,
	2011			2010			2009

Income
Dividends from subsidiary bank	$	1,000,000		$	-		$	-
Gain on investment securities		-			-			365,077
Interest income:
Related party		14,753			25,933			36,726
Other		18,369			30,783			55,425
		1,033,122			56,716			457,228
Expense
Interest expense:
Other		-			-			2,556
Related party		610,929			1,023,783			1,023,783
Other		462,971			463,502			458,947
		1,073,900			1,487,285			1,485,286


Loss before income taxes and equity in undistributed income (loss) of subsidiaries		(40,778	)		(1,430,569	)		(1,028,058	)
Credit for income taxes		(349,000	)		(480,000	)		(302,528	)

Income (Loss) before equity in undistributed earnings of subsidiaries		308,222			(950,569	)		(725,530	)
Equity in undistributed income (losses) of subsidiaries		3,527,417			2,081,340			(1,615,188	)
Net income (loss)	$	3,835,639		$	1,130,771		$	(2,340,718	)

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Statements of Cash Flows	Years ended December 31,
	2011			2010			2009

Cash Flows From Operating Activities

Net income (loss)	$	3,835,639		$	1,130,771		$	(2,340,718	)
Items not requiring (providing) cash:
Equity in undistributed (income) loss of subsidiaries		(3,527,417	)		(2,081,340	)		1,615,188
Deferred income taxes		38,834			-			-
Release of ESOP shares		126,737			100,014			121,219
Stock award plan expense		186,655			109,386			95,268
Gain on investment securities		-			-			(365,077	)
Changes in:
Prepaid expenses and other assets		104,176			103,787			11,094
Income taxes payable/refundable		(217,833	)		(104,143	)		(62,672	)
Accrued expenses		(59,682	)		(18,376	)		(31,264	)
Net cash provided by (used in) operating activities		487,109			(759,901	)		(956,962	)

Cash Flows From Investing Activities
Capital contributions to subsidiary bank		-			-			(13,000,000	)
Proceeds from sales of AFS securities		-			-			834,952
Net cash used in investing activities		-			-			(12,165,048	)

Cash Flows From Financing Activities
Cash dividends paid on common and preferred stock		(850,000	)		(850,000	)		(672,917	)
Treasury stock purchased		(53,230	)		(6,540	)		(7,515	)
Repayment of advances from subsidiary		-			900			-
Repayment of notes payable		-			-			(1,435,190	)
Proceeds from issuance of preferred stock and warrants		-			-			17,000,000
Net cash provided by (used in) financing activities		(903,230	)		(855,640	)		14,884,378

Increase (decrease) in cash		(416,121	)		(1,615,541	)		1,762,368

Cash, beginning of year		1,197,553			2,813,094			1,050,726

Cash, end of year	$	781,432		$	1,197,553		$	2,813,094

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, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/BKD, LLP

Springfield, Missouri

March 30, 2012

Guaranty Federal Bancshares, Inc.

2011 Annual Report

Board of Directors	Executive Officers
Guaranty Federal Bancshares, Inc.	Guaranty Federal Bancshares, Inc.
and Guaranty Bank	and Guaranty Bank

Don M. Gibson	Shaun A. Burke
Chairman of the Board	President,
Guaranty Federal Bancshares and	Chief Executive Officer
Guaranty Bank
	Carter M. Peters
Jack L. Barham	Executive Vice President,
Vice Chairman of the Board	Chief Financial Officer
Guaranty Federal Bancshares
	H. Michael Mattson
Shaun A. Burke	Executive Vice President,
President and CEO	Chief Lending Officer
Guaranty Federal Bancshares and
Guaranty Bank	Sheri Biser
	Executive Vice President,
James R. Batten, CPA	Chief Credit Officer
Executive Vice President
Convoy of Hope	E. Lorene Thomas
	Corporate Secretary
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

John F. Griesemer
Executive Vice President and COO
Springfield Underground, Inc.

	Year ended				Year ended
	December 31, 2011				December 31, 2010
	High		Low		High		Low
Quarter ended:
March 31	$	6.85		4.60	$	5.85		5.08
June 30		6.83		4.97		6.50		5.30
September 30		5.42		4.50		6.31		5.15
December 31		6.40		4.20		5.18		4.30

	Period Ending
Index	12/31/2006		12/31/2007		12/31/2008		12/31/2009		12/31/2010		12/31/2011
Guaranty Federal Bancshares, Inc.		100		102.39		19.37		18.53		17.53		20.80
NASDAQ – Total US		100		110.55		66.30		96.34		113.70		112.76
NASDAQ Bank Index		100		77.93		59.29		48.32		54.06		47.34

Summary Balance Sheets	As of December 31,
	2011		2010		2009		2008		2007
ASSETS
Cash and cash equivalents	$	26,574	$	14,145	$	33,017	$	15,097	$	12,046
Investments and interest-bearing deposits		86,871		109,891		119,693		66,062		15,385
Loans receivable, net		482,664		504,665		528,503		558,327		516,242
Accrued interest receivable		2,139		2,670		2,671		2,632		3,323
Prepaids and other assets		18,051		18,982		25,249		16,573		8,613
Foreclosed assets		10,012		10,540		6,760		5,655		727
Premises and equipment		11,424		11,325		11,818		11,324		9,442
Bank owned life insurance		10,771		10,450		10,069		-		-
	$	648,506	$	682,668	$	737,780	$	675,670	$	565,778
LIABILITIES
Deposits	$	484,584	$	480,694	$	513,051	$	447,079	$	418,191
Federal Home Loan Bank advances		68,050		93,050		116,050		132,436		76,086
Securities sold under agreements to repurchase		25,000		39,750		39,750		39,750		9,849
Subordinated debentures		15,465		15,465		15,465		15,465		15,465
Other liabilities		1,172		1,668		2,053		3,627		3,500
		594,271		630,627		686,369		638,357		523,091

STOCKHOLDERS' EQUITY		54,235		52,041		51,411		37,313		42,687
	$	648,506	$	682,668	$	737,780	$	675,670	$	565,778

Supplemental Data	As of December 31,
	2011		2010		2009		2008		2007
Number of full-service offices		9		9		9		10		8
Cash dividends per common share	$	-	$	-	$	-	$	0.36	$	0.70

	As of						Year Ended								Year Ended								Year Ended
	December 31, 2011						December 31, 2011								December 31, 2010								December 31, 2009

	Balance			Yield / Cost			Average Balance			Interest		Yield / Cost			Average Balance			Interest		Yield / Cost			Average Balance			Interest		Yield / Cost
ASSETS
Interest-earning:
Loans	$	493,277			5.82	%	$	506,323		$	27,424		5.42	%	$	517,133		$	28,348		5.48	%	$	548,847		$	29,695		5.41	%
Investment securities		81,283			1.74	%		91,114			2,637		2.89	%		110,149			3,477		3.16	%		102,096			3,744		3.67	%
Other assets		28,862			0.46	%		33,779			315		0.93	%		48,054			506		1.05	%		65,853			434		0.66	%
Total interest-earning		603,422			5.01	%		631,216			30,376		4.81	%		675,336			32,331		4.79	%		716,796			33,873		4.73	%
Noninterest-earning		45,084						47,031								48,148								25,294
	$	648,506					$	678,247							$	723,484							$	742,090

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts	$	21,296			0.43	%	$	20,480		$	118		0.58	%	$	17,322		$	140		0.81	%	$	13,069		$	121		0.93	%
Transaction accounts		251,563			0.92	%		252,915			2,580		1.02	%		257,629			3,968		1.54	%		215,494			6,152		2.85	%
Certificates of deposit		155,408			1.59	%		165,376			3,080		1.86	%		201,090			5,520		2.75	%		262,719			9,108		3.47	%
FHLB advances		68,050			2.26	%		85,516			2,164		2.53	%		110,613			2,989		2.70	%		112,851			3,152		2.79	%
Subordinated debentures		15,465			3.65	%		15,465			611		3.95	%		15,465			1,024		6.62	%		15,465			1,024		6.62	%
Repurchase agreements		25,000			2.14	%		37,726			1,058		2.80	%		39,750			1,166		2.93	%		39,750			970		2.44	%
Total interest-bearing		536,782			1.40	%		577,478			9,611		1.66	%		641,869			14,807		2.31	%		659,348			20,527		3.11	%
Noninterest-bearing		57,489						46,602								28,302								30,467
Total liabilities		594,271						624,080								670,171								689,815
Stockholders' equity		54,235						54,167								53,313								52,275
	$	648,506					$	678,247							$	723,484							$	742,090
Net earning balance	$	66,640					$	53,738							$	33,467							$	57,448
Earning yield less costing rate					3.61	%							3.15	%							2.48	%							1.62	%
Net interest income, and net yield spread on interest-earning assets										$	20,765		3.29	%				$	17,524		2.59	%				$	13,346		1.86	%
Ratio of interest-earning assets to interest-bearing liabilities		112	%					109	%							105	%							109	%

	Common Stock Prices & Dividends

	The common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is listed for trading on the NASDAQ Global Market under the symbol “GFED”. As of March 13, 2012, there were approximately 1,217 holders of shares of the Company’s common stock. At that date the Company had 6,779,800 shares of common stock issued and 2,709,471 shares of common stock outstanding. During the years ended December 31, 2011 and 2010, the Company did not declare a cash dividend. Any future dividends 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, regulatory limitations 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 Global Market by quarter for the years ended December 31, 2011 and 2010.

Summary Statements of Operations	Years ended December 31,
	2011		2010			2009			2008			2007

Interest income	$	30,376	$	32,331		$	33,873		$	36,363		$	37,972
Interest expense		9,611		14,806			20,527			19,524			20,519
Net interest income		20,765		17,525			13,346			16,839			17,453
Provision for loan losses		3,350		5,200			6,900			14,744			840
Net interest income after provision for loan losses		17,415		12,325			6,446			2,095			16,613
Noninterest income		4,485		4,279			4,240			2,316			4,729
Noninterest expense		17,361		15,530			15,161			12,760			11,842
Income (loss) before income taxes		4,539		1,074			(4,475	)		(8,349	)		9,500
Provision (credit) for income taxes		703		(57	)		(2,134	)		(2,989	)		3,400

Net income (loss)	$	3,836	$	1,131		$	(2,341	)	$	(5,360	)	$	6,100
Preferred stock dividends and discount accretion		1,126		1,126			1,032			-			-
Net income (loss) available to common shareholders	$	2,710	$	5		$	(3,373	)	$	(5,360	)	$	6,100

Basic income (loss) per common share	$	1.01	$	-		$	(1.29	)	$	(2.06	)	$	2.25
Diluted income (loss) per common share	$	1.01	$	-		$	(1.29	)	$	(2.06	)	$	2.19