Guaranty Federal Bancshares 10K 2005 Annual report | GFED Filing

CONTENTS

1 Investor Information

2 President’s Message

3 Selected Consolidated Financial and Other Data

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

23 Consolidated Financial Statements

55 Report of Independent Registered Public Accounting Firm

INVESTOR INFORMATION

COMMON STOCK PRICES & DIVIDENDS

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

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

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

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

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

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

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

STOCK TRADING INFORMATION: Over-the Counter Symbol: GFED

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

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

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

Guaranty Federal Bancshares, Inc. President's Message

Dear Shareholders and Associates,

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

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

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

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

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

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

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

Sincerely,

/s/ Shaun A. Burke

President & CEO

Guaranty Federal Bancshares, Inc.

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

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

Summary Statement of Income	Year ended		Year ended		Six months ended
		December 31,		December 31,		December 31,
		2005		2004		2003

Interest income	$	27,283		20,539		9,846
Interest expense		11,860		8,446		4,491
Net interest income		15,423		12,093		5,355
Provision for loan losses		945		864		1,162
Net interest income after provision
for loan losses		14,478		11,229		4,193
Noninterest income		3,597		3,616		2,089
Noninterest expense		8,670		8,248		3,994
Income before income taxes		9,406		6,597		2,288
Provision for income taxes		3,507		2,313		788

Net income	$	5,899		4,284		1,500

Basic	$	2.12		1.53		0.54
Diluted	$	2.03		1.47		0.52

	Six months ended			Year ended
		December 31,		June 30,
		2002		2003
		(Unaudited)
Interest income	$	11,290		21,782
Interest expense		6,086		11,445
Net interest income		5,204		10,337
Provision for loan losses		205		610
Net interest income after provision
for loan losses		4,999		9,727
Noninterest income		1,752		3,688
Noninterest expense		4,060		8,179
Income before income taxes		2,691		5,236
Provision for income taxes		927		1,656
Net income	$	1,764		3,580

Basic	$	0.63		1.28
Diluted	$	0.62		1.26

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

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

STOCKHOLDERS' EQUITY		42,092	40,773	37,978		36,542
	$	481,001	440,597	386,757		390,151

Supplemental Data		As of December 31,				As of June 30,
		2005	2004	2003 (1	)	2003
Number of full-service offices		7	7	9		9
Cash dividends per share	$	0.65	0.63	0.31		0.60

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

GENERAL

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

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

FINANCIAL CONDITION

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

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

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

		As of					Year Ended							Year Ended
		December 31, 2005					December 31, 2005							December 31, 2004

		Balance		Yield / Cost			Average Balance			Interest	Yield / Cost			Average Balance		Interest	Yield / Cost
ASSETS
Interest-earning:
Loans	$	435,528		6.88	%	$	419,552		$	26,553	6.33	%	$	366,696		19,990	5.45	%
Investment securities		4,526		5.23	%		9,905			432	4.36	%		10,076		289	2.87	%
Other assets		10,670		3.04	%		11,681			299	2.56	%		14,508		260	1.79	%
Total interest-earning		450,724		6.77	%		441,138			27,284	6.18	%		391,280		20,539	5.25	%
Noninterest-earning		30,277					20,205							20,812
	$	481,001				$	461,343						$	412,092

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts	$	14,298		1.80	%	$	14,931			201	1.35	%	$	16,607		140	0.84	%
Transaction accounts		79,761		1.24	%		84,776			1,300	1.53	%		80,001		793	0.99	%
Certificates of deposit		189,807		3.66	%		178,301			5,788	3.25	%		139,264		3,986	2.86	%
FHLB advances		100,000		4.55	%		111,104			4,494	4.04	%		111,169		3,519	3.17	%
Subordinated debentures		15,465		6.62	%		701			47	6.70	%		-		-	-
Other borrowed funds		1,594		2.55	%		1,395			31	2.22	%		987		7	0.71	%
Total interest-bearing		400,925		3.44	%		391,208			11,861	3.03	%		348,029		8,446	2.43	%
Noninterest-bearing		37,984					28,374							24,173
Total liabilities		438,909					419,582							372,202
Stockholders' equity		42,092					41,761							39,891
	$	481,001				$	461,343						$	412,092
Net earning balance	$	49,799				$	49,930						$	43,252
Earning yield less costing rate				3.33	%						3.15	%					2.82	%
Net interest income, and
net yield spread on
interest-earning assets									$	15,423	3.50	%				12,094	3.09	%
Ratio of interest-earning assets to
interest-bearing liabilities		112	%				113	%						112	%

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

	Six Months Ended								Six Months Ended						Year Ended
	December 31, 2003								December 31, 2002						June 30, 2003
									(Unaudited)
		Average Balance			Interest	Yield / Cost			Average Balance		Interest	Yield / Cost			Average Balance		Interest	Yield / Cost
ASSETS
Interest-earning:
Loans	$	334,071		$	9,567	5.73	%	$	323,292		10,827	6.70	%	$	326,441		20,928	6.41	%
Investment securities		9,899			135	2.73	%		11,988		231	3.85	%		11,103		419	3.77	%
Other assets		13,867			144	2.08	%		24,800		232	1.87	%		18,864		434	2.30	%
Total interest-earning		357,837			9,846	5.50	%		360,080		11,290	6.27	%		356,408		21,781	6.11	%
Noninterest-earning		20,821							13,990						19,368
	$	378,658						$	374,070					$	375,776

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts	$	17,483			70	0.80	%	$	17,507		132	1.51	%	$	17,390		221	1.27	%
Transaction accounts		74,578			327	0.88	%		67,002		460	1.37	%		67,614		814	1.20	%
Certificates of deposit		121,926			1,971	3.23	%		127,218		2,530	3.98	%		126,376		4,768	3.77	%
FHLB advances		101,841			2,121	4.17	%		107,612		2,959	5.50	%		108,020		5,634	5.22	%
Other borrowed funds		907			2	0.44	%		971		5	1.03	%		832		7	0.84	%
Total interest-bearing		316,735			4,491	2.84	%		320,310		6,086	3.80	%		320,232		11,444	3.57	%
Noninterest-bearing		24,038							17,390						18,946
Total liabilities		340,773							337,700						339,178
Stockholders' equity		37,885							36,370						36,598
	$	378,658						$	374,070					$	375,776
Net earning balance	$	41,102						$	39,770					$	36,176
Earning yield less costing rate						2.66	%					2.47	%					2.54	%
Net interest income, and
net yield spread on
interest-earning assets				$	5,355	2.99	%				5,204	2.89	%				10,337	2.90	%
Ratio of interest-earning assets to
interest-bearing liabilities		113	%						112	%					111	%

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

		Year ended							Year ended
		December 31, 2005 versus December 31, 2004							December 31, 2004 versus June 30, 2003
		Average Balance		Interest Rate	Rate & Balance		Total		Average Balance		Interest Rate		Rate & Balance		Total
Interest income:
Loans	$	2,881		3,218	464		6,563	$	2,581		(3,133	)	(386	)	(938	)
Investment securitites		(5	)	150	(2	)	143		(39	)	(100	)	9		(130	)
Other assets		(50	)	111	(22	)	39		(100	)	(96	)	22		(174	)
Net change in interest income		2,826		3,479	440		6,745		2,442		(3,329	)	(355	)	(1,242	)

Interest expense:
Savings accounts		(14	)	84	(9	)	61		(10	)	(75	)	4		(81	)
Transaction accounts		47		433	26		506		149		(143	)	(27	)	(21	)
Certificates of deposit		1,117		535	150		1,802		486		(1,151	)	(117	)	(782	)
Advances		(2	)	977	(1	)	974		164		(2,214	)	(65	)	(2,115	)
Subordinated debentures		47		-	-		47		-		-		-		-
Other borrowed funds		3		15	6		24		1		(1	)	-		-
Net change in interest expense		1,198		2,044	172		3,414		790		(3,584	)	(205	)	(2,999	)
Change in net interest income	$	1,628		1,435	268		3,331	$	1,652		255		(150	)	1,757

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

ASSET / LIABILITY MANAGEMENT

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

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

INTEREST RATE SENSITIVITY ANALYSIS

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

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

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

On December 15, 2005, the Company issued $15 million of trust preferred securities (”Trust Securities”) in a private placement. The proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust I and Guaranty Statutory Trust II, together with the proceeds of the Trust’s sale of their common securities issued to the Company, were used by the Trusts to purchase 30-year junior subordinated deferrable interest debentures from the Company in the principal amount of $5,155,000 (“Trust I Debentures”) and $10,310,000 (“Trust II Debentures”), respectively. The Trust I Debentures bear interest at a fixed rate of 6.92%, payable quarterly. The Trust II Debentures bear interest at a fixed rate of 6.47% for 5 years, payable quarterly, after issuance and thereafter at a floating rate equal to the three month LIBOR plus 1.45%. The Company intends to use the proceeds of the sale of the Trust Securities for general corporate purposes which may include investment in the Bank (including funding of the Bank’s loan portfolio growth), acquisitions, investments, payment of dividends and repurchases of its outstanding Common Stock.

OFF-BALANCE SHEET ARRANGEMENTS

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

AGGREGATE CONTRACTUAL OBLIGATIONS

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

	Payments Due By Period

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

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

IMPACT OF INFLATION AND CHANGING PRICES

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

CRITICAL ACCOUNTING POLICIES

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

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

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

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

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

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

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

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

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS

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

Guaranty Federal Bancshares, Inc.

Consolidated Balance Sheets

December 31, 2005, 2004 and 2003

	December 31,			December 31,		December 31,
	2005			2004		2003
ASSETS
Cash	$	17,990,774		14,087,915		20,686,276
Interest-bearing deposits in other financial institutions		2,515,704		1,808,543		1,970,518
Cash and cash equivalents		20,506,478		15,896,458		22,656,794
Available-for-sale securities		6,757,147		15,101,768		14,863,826
Held-to-maturity securities		944,724		1,305,158		1,867,594
Stock in Federal Home Loan Bank, at cost		4,978,800		5,146,500		5,294,200
Mortgage loans held for sale		2,092,279		3,590,536		1,268,064
Loans receivable, net of allowance for loan losses of
December 31, 2005, 2004 and 2003, $5,399,654, $4,536,654
and $3,886,137, respectively		433,435,429		388,742,792		330,861,875
Accrued interest receivable:
Loans		2,040,872		1,500,170		1,242,683
Investments		48,255		69,845		63,045
Prepaid expenses and other assets		2,604,425		1,976,284		2,057,195
Foreclosed assets held for sale		26,775		78,150		5,975
Premises and equipment		7,452,798		7,188,867		6,576,003
Deferred income taxes		112,686		-		-
	$	481,000,668		440,596,528		386,757,254

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits	$	320,058,951		296,387,742		237,130,744
Federal Home Loan Bank advances		100,000,000		100,000,000		108,836,948
Securities sold under agreements to repurchase		1,594,258		1,264,020		738,399
Subordinated debentures		15,465,000		-		-
Advances from borrowers for taxes and insurance		212,320		271,796		259,267
Accrued expenses and other liabilities		288,587		234,818		308,497
Accrued interest payable		508,164		361,516		200,770
Dividend payable		459,074		450,868		432,513
Income taxes payable		322,165		220,046		227,495
Deferred income taxes		-		632,459		644,500
		438,908,519		399,823,265		348,779,133
STOCKHOLDERS' EQUITY
Common Stock:
$0.10 par value; authorized 10,000,000 shares; issued;
December 31, 2005, 2004 and 2003 - 6,571,348, 6,493,861
and 6,462,902 shares, respectively		657,135		649,386		642,890
Additional paid-in capital		53,778,686		52,384,842		51,330,202
Unearned ESOP shares		(1,572,930	)	(1,800,930	)	(2,030,930	)
Retained earnings, substantially restricted		36,533,338		32,437,131		29,919,695
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes; December 31, 2005, 2004 and 2003 - $1,158,114,
$1,653,740 and $1,565,830, respectively		1,971,925		2,815,828		2,666,143
		91,368,154		86,486,257		82,528,000
Treasury stock, at cost;
December 31, 2005, 2004 and 2003 - 3,639,301, 3,492,759
and 3,436,650 shares, respectively		(49,276,005	)	(45,712,994	)	(44,549,879	)
		42,092,149		40,773,263		37,978,121
	$	481,000,668		440,596,528		386,757,254

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Income

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

Six Months Ended December 31, 2003 and 2002

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

BASIC EARNINGS PER SHARE	$	2.12		1.53		0.54	0.63	1.28
DILUTED EARNINGS PER SHARE	$	2.03		1.47		0.52	0.62	1.26

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows

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

Six Months Ended December 31, 2003 and 2002

	Year ended					Six months ended				Year ended
	December 31,					December 31,				June 30,
	2005			2004		2003		2002		2003
								(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,898,970		4,284,773		1,500,161		1,764,030		3,579,649
Items not requiring (providing) cash:
Deferred income taxes		(249,519	)	(99,952	)	(267,750	)	168,917		(154,815	)
Depreciation		759,931		670,096		339,101		404,498		783,933
Provision for loan losses		945,000		863,830		1,162,000		205,000		610,000
Gain on sale of loans and investment securities		(1,366,587	)	(1,227,528	)	(863,524	)	(669,220	)	(1,544,037	)
Loss on sale of premises and equipment		3,055		11,517		-		-		37,761
Gain on sale of foreclosed assets		(1,323	)	(1,724	)	(13,226	)	(26,218	)	(12,310	)
Amortization of deferred income,
premiums and discounts		(48,305	)	78,148		(18,862	)	(80,575	)	(99,192	)
Stock award plan expense		45,694		63,200		30,952		177,810		353,004
Origination of loans held for sale		(45,528,012	)	(30,561,273	)	(31,454,990	)	(34,910,348	)	(77,775,788	)
Proceeds from sale of loans held for sale		47,649,521		28,723,721		40,700,091		33,444,629		72,695,861
Release of ESOP shares		564,980		461,512		225,154		180,244		373,724
Changes in:
Accrued interest receivable		(519,112	)	(264,287	)	124,397		219,733		224,386
Prepaid expenses and other assets		(628,141	)	80,912		(201,927	)	(181,342	)	(55,508	)
Accrued expenses and other liabilities		200,417		105,421		(5,666	)	(67,971	)	(348,159	)
Income taxes payable		89,638		7,484		34,578		205,676		69,278
Net cash provided by (used in) operating activities		7,816,207		3,195,850		11,290,489		834,863		(1,262,213	)

CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(45,967,115	)	(59,380,244	)	(5,060,371	)	(3,172,569	)	(11,171,690	)
Principal payments on held-to-maturity securities		358,395		574,920		379,245		406,222		995,693
Principal payments on available-for-sale securities		-		-		-		172,835		172,835
Purchase of available-for-sale securities		(10,516,958	)	(5,971,840	)	(1,989,685	)	(2,978,928	)	(4,968,371	)
Purchase of premises and equipment		(1,032,777	)	(1,300,977	)	(206,108	)	(138,129	)	(174,592	)
Proceeds from sale of premises and equipment		5,860		6,500		-		-		-
Proceeds from sales of available-for-sale securities		9,345,564		754,355		107,419		-		-
Proceeds from maturities of available-for-sale securities		9,000,000		6,000,000		1,500,000		4,000,000		6,500,000
Proceeds from sale of FHLB stock		167,700		147,700		3,306,200		-		-
Proceeds from sale of foreclosed assets		352,341		434,161		315,291		863,367		801,677
Purchase of other investments		-		-		-		-		(106,000	)
Net cash used in investing activities		(38,286,990	)	(58,735,425	)	(1,648,009	)	(847,202	)	(7,950,448	)

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows (continued)

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

Six Months Ended December 31, 2003 and 2002

	December 31,					December 31,				June 30,
	2005			2004		2003		2002		2003
								(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised		1,031,400		751,274		107,638		113,554		556,869
Cash dividends paid		(1,794,557	)	(1,767,337	)	(844,151	)	(764,854	)	(1,604,042	)
Cash dividends received on RRP Stock		-		217		292		1,322		2,387
Net increase in demand deposits,
NOW accounts and savings accounts		2,901,337		10,307,199		4,617,104		8,403,811		18,725,158
Net increase (decrease) in certificates of deposit and
securities sold under agreements to repurchase		21,100,110		49,475,420		(3,127,182	)	(3,819,504	)	(8,723,005	)
Proceeds from FHLB advances		1,322,664,000		201,614,000		124,500,000		12,000,000		121,500,000
Repayments of FHLB advances		(1,322,664,000	)	(210,450,948	)	(130,281,946	)	(18,714,871	)	(117,964,269	)
Proceeds from issuance of subordinated debentures		15,465,000		-		-		-		-
Advances from borrowers for taxes and insurance		(59,476	)	12,529		(691,411	)	(724,015	)	(97,619	)
Treasury stock purchased		(3,563,011	)	(1,163,115	)	(280,558	)	(235,770	)	(1,131,792	)
Net cash provided by (used in) financing activities		35,080,803		48,779,239		(6,000,214	)	(3,740,327	)	11,263,687

INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS		4,610,020		(6,760,336	)	3,642,266		(3,752,666	)	2,051,026

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD		15,896,458		22,656,794		19,014,528		16,963,502		16,963,502

CASH AND CASH EQUIVALENTS,
END OF PERIOD	$	20,506,478		15,896,458		22,656,794		13,210,836		19,014,528

Supplemental Cash Flows Information

Real estate acquired in settlement of loans	$	299,643		466,670		120,000		153,820		368,296

Interest paid	$	11,713,756		8,445,630		4,493,513		6,102,303		12,000,275

Income taxes paid	$	3,506,591		2,313,342		1,026,224		672,466		1,742,466

Dividend declared and unpaid	$	459,074		450,868		432,513		420,430		415,414

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Stockholders’ Equity

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

Six Months Ended December 31, 2003

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

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

Organization

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

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

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

Fiscal Year Change

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

Nature of Operations

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

Principles of Consolidation

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

Use of Estimates

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Securities

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

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

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

Mortgage Loans Held for Sale

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

Loans

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

Loan Servicing

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

Allowance for Loan Losses

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

Foreclosed Assets Held for Sale

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

Premises and Equipment

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

Income Taxes

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

Cash Equivalents

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

Regulatory Matters

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

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

										To Be Well Capitalized
						For Capital				Under Prompt Corrective
	Actual					Adequacy Purposes				Action Provisions
	Amount		Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2005

Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	51,040	10.7	%	$	19,083	4.0	%		n/a	n/a
Bank	$	53,796	11.3	%	$	19,010	4.0	%	$	23,762	5.0	%

Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	51,040	12.5	%	$	16,296	4.0	%		n/a	n/a
Bank	$	53,796	13.2	%	$	16,276	4.0	%	$	24,414	6.0	%

Total risk-based capital, and
ratio to risk-weighted assets
Company	$	57,544	14.1	%	$	32,592	8.0	%		n/a	n/a
Bank	$	60,294	14.8	%	$	32,552	8.0	%	$	40,690	10.0	%

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

										To Be Well Capitalized
						For Capital				Under Prompt Corrective
	Actual					Adequacy Purposes				Action Provisions
	Amount		Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2004

Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	37,938	8.7	%	$	17,485	4.0	%		n/a	n/a
Bank	$	36,869	8.4	%	$	17,470	4.0	%	$	21,838	5.0	%

Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	37,938	10.6	%	$	14,367	4.0	%		n/a	n/a
Bank	$	36,869	10.3	%	$	14,371	4.0	%	$	21,556	6.0	%

Total risk-based capital, and
ratio to risk-weighted assets
Company	$	44,401	12.4	%	$	28,735	8.0	%		n/a	n/a
Bank	$	43,253	12.0	%	$	28,742	8.0	%	$	35,927	10.0	%

										To Be Well Capitalized
						For Capital				Under Prompt Corrective
		Actual				Adequacy Purposes				Action Provisions
		Amount	Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2003

Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	35,181	9.4	%	$	15,108	4.0	%		n/a	n/a
Bank	$	34,476	9.2	%	$	15,045	4.0	%	$	18,807	5.0	%

Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	35,181	12.2	%	$	11,624	4.0	%		n/a	n/a
Bank	$	34,476	11.9	%	$	11,570	4.0	%	$	17,355	6.0	%

Total risk-based capital, and
ratio to risk-weighted assets
Company	$	40,185	13.9	%	$	23,248	8.0	%		n/a	n/a
Bank	$	39,480	13.6	%	$	23,141	8.0	%	$	28,926	10.0	%

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Earnings Per Share

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

	Year Ended		Year Ended	Six Months Ended
	December 31, 2005		December 31, 2004	December 31, 2003

Net income	$	5,898,970	4,284,773	1,500,161
Average common shares outstanding		2,780,249	2,808,412	2,782,788
Effect of stock options outstanding		126,885	113,425	103,555
Average diluted shares outstanding		2,907,134	2,921,837	2,886,343
Earnings per share - basic	$	2.12	1.53	0.54
Earnings per share - diluted	$	2.03	1.47	0.52

	Six Months Ended		Year Ended
	December 31, 2002		June 30, 2003
		(unaudited)
Net income	$	1,764,030	3,579,649
Average common shares outstanding		2,797,202	2,794,032
Effect of stock options outstanding		51,446	57,525
Average diluted shares outstanding		2,848,648	2,851,557
Earnings per share - basic	$	0.63	1.28
Earnings per share - diluted	$	0.62	1.26

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Stock Option Plans

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

	Year Ended			Year Ended		Six Months
	December 31, 2005			December 31, 2004		December 31, 2003

Net income, as reported	$	5,898,970		4,284,773		1,500,161
Less: Total stock-based employee
compensation cost determined
under the fair value-based
method, net of income taxes		(51,516	)	(35,949	)	(18,085	)

Pro forma net income	$	5,847,454		4,248,824		1,482,076

Earnings per share:
Basic - as reported	$	2.12		1.53		0.54
Basic - pro forma	$	2.10		1.51		0.53
Diluted - as reported	$	2.03		1.47		0.52
Diluted - pro forma	$	2.01		1.45		0.51

	Six Months			Year Ended
	December 31, 2002			June 30, 2003
		(Unaudited)
Net income, as reported	$	1,764,030		3,579,649
Less: Total stock-based employee
compensation cost determined
under the fair value-based
method, net of income taxes		(89,950	)	(174,412	)

Pro forma net income	$	1,674,080		3,405,237

Earnings per share:
Basic - as reported	$	0.63		1.28
Basic - pro forma	$	0.60		1.22
Diluted - as reported	$	0.62		1.26
Diluted - pro forma	$	0.59		1.19

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Segment Information

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

NOTE 2: SECURITIES

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

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

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

	December 31, 2005
	Less than 12 Months				12 Months or More			Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses

U. S. Government Agencies	$	1,186,612	(2,875	)	-	-		1,186,612	(2,875	)

		December 31, 2004
		Less than 12 Months			12 Months or More			Total
Description of Securities		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses

Equity Securities	$	-	-		1,440,000	(560,000	)	1,440,000	(560,000	)

		December 31, 2003
		Less than 12 Months			12 Months or More			Total
Description of Securities		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses

Equity Securities	$	-	-		1,674,000	(326,000	)	1,674,000	(326,000	)
Debt Securities		-	-		4,705,261	(40,840	)	4,705,261	(40,840	)
	$	-	-		6,379,261	(366,840	)	6,379,261	(366,840	)

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Activity in the allowance for loan losses was as follows:

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

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

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

NOTE 4: PREMISES AND EQUIPMENT

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

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 5: OTHER COMPREHENSIVE INCOME (LOSS)

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

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

NOTE 6: DEPOSITS

	December 31, 2005						December 31, 2004					December 31, 2003
	Weighted Average Rate			Balance	Percentage of Deposits		Weighted Average Rate		Balance	Percentage of Deposits		Weighted Average Rate		Balance	Percentage of Deposits

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

A summary of interest expense on deposits is as follows:

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 7: FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances consist of the following:

	December 31, 2005				December 31, 2004
Maturity Date		Amount	Weighted Average Rate			Amount	Weighted Average Rate
2005	$	-	-		$	61,264,000	2.73	%
2006		72,414,000	4.33	%		12,500,000	4.62	%
2007		3,000,000	2.83	%		3,000,000	2.83	%
2008		16,650,000	5.22	%		16,650,000	5.22	%
2009		386,000	7.21	%		386,000	7.21	%
2010		3,000,000	6.37	%		3,000,000	6.37	%
Thereafter		4,550,000	5.39	%		3,200,000	5.96	%
	$	100,000,000	4.55	%	$	100,000,000	3.58	%

		December 31, 2003
Maturity Date		Amount	Weighted Average Rate
2004	$	63,290,000	2.34	%
2005		7,850,000	4.51	%
2006		10,500,000	5.12	%
2007		1,000,000	3.47	%
2008		14,950,000	5.54	%
2009		386,000	7.21	%
Thereafter		10,860,948	5.78	%
	$	108,836,948	3.58	%

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 8: SUBORDINATED DEBENTURES

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

NOTE 9: INCOME TAXES

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

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

The provision for income taxes consists of:

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

Cash and Cash Equivalents and Federal Home Loan Bank stock

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

Investment Securities

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

Interest Receivable

The carrying amount of interest receivable approximates its fair value.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Mortgage Loans Held for Sale

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

Loans

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

Deposits

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

Federal Home Loan Bank Advances and Subordinated Debentures

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

Securities Sold under Agreements to Repurchase

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

Interest and Dividend Payable

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

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

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

NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS

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

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

NOTE 12: EMPLOYEE BENEFIT PLANS

Stock Award Plans

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

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

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

Stock Option Plans

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

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

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

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

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

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

	Number of shares
	Incentive Stock Option			Non-Incentive Stock Option			Weighted Average Exercise Price

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

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

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

Employee Stock Ownership Plan

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

Beginning ESOP shares		344,454
Released shares		(162,525	)
Shares committed for release		(24,636	)
Unreleased shares		157,293

Fair value of unreleased shares	$	4,388,475

NOTE 13: RELATED PARTY TRANSACTIONS

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

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

NOTE 14: COMMITMENTS AND CREDIT RISK

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

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

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

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

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

NOTE 15: FUTURE CHANGE IN ACCOUNTING PRINCIPLE

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 16: CONDENSED PARENT COMPANY STATEMENTS

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

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

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

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Statements of Cash Flows	For the						For the						For the
	years ended						six months ended						year ended
	December 31,						December 31,						June 30,
	2005			2004			2003			2002			2003
										(Unaudited)
Cash Flows From Operating Activities

Net income	$	5,898,970			4,284,773			1,500,161			1,764,030			3,579,649
Items not requiring (providing) cash:
Equity in undistributed earnings of subsidiaries		(2,923,674	)		(2,304,174	)		(508,331	)		(1,323,962	)		(1,874,043	)
Release of ESOP shares		564,980			461,512			225,154			125,000			249,140
Stock award plan expense		23,161			-			-			-			-
Changes in:
Accrued interest receivable		-			-			-			3,377			3,377
Prepaid expenses and other assets		(36,407	)		8,990			(11,226	)		409,266			(18,944	)
Income taxes payable/refundable		17,707			(129,957	)		(57,708	)		98,685			79,014
Accrued expenses		98,005			27,619			(11,338	)		(46,062	)		(34,724	)
Net cash provided by operating activities		3,642,742			2,348,763			1,136,712			1,030,334			1,983,469

Cash Flows From Investing Activities
Capital contribution to subsidiary bank		(13,970,000	)		-			-			-			-
Purchase of loans		-			-			-			291,402			-
Purchase of investment in capital trusts		(465,000	)		-			-			-			-
Net collections of loans		-			-			-			(822	)		-
Proceeds from sale of loans		-			-			-			-			290,580
Net (increase) decrease in advance to subsidiary		574,000			(10,780	)		(553,814	)		(421,463	)		8,079
Net cash provided by (used in) investing activities		(13,861,000	)		(10,780	)		(553,814	)		(130,883	)		298,659

Cash Flows From Financing Activities
Stock options exercised		1,031,400			751,274			107,638			113,554			556,869
Cash dividends paid		(1,794,557	)		(1,748,982	)		(844,151	)		(764,854	)		(1,604,042	)
Treasury stock purchased		(3,563,011	)		(1,163,115	)		(280,558	)		(235,770	)		(1,131,792	)
Proceeds from issuance of subordinated debentures		15,465,000			-			-			-			-
Net cash provided by (used in) financing activities		11,138,832			(2,160,823	)		(1,017,071	)		(887,070	)		(2,178,965	)

Increase (decrease) in cash		920,574			177,160			(434,173	)		12,381			103,163

Cash, beginning of period		208,337			31,177			465,350			362,187			362,187

Cash, end of period	$	1,128,911			208,337			31,177			374,568			465,350

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors

and Stockholders

Guaranty Federal Bancshares, Inc.

Springfield, Missouri

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

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

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

/s/BKD, LLP

February 3, 2006

Springfield, Missouri

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Guaranty Federal Bancshares (GFED) 10-K2005 FY Annual report

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