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SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission number 0-23325

Guaranty Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

43-1792717

(IRS Employer Identification No.)

1341 West Battlefield

Springfield, Missouri, 65807

(Address of principal executive offices)

Telephone Number:  (417) 520-4333

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

Yes   X    No___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes        No   X    

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  

As of May 8, 2003, there were 2,998,548 shares of the registrant’s Common Stock, $0.10 par value per share, outstanding.

GUARANTY FEDERAL BANCSHARES, INC.

Form 10-Q

TABLE OF CONTENTS

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PART I

Item 1. Financial Statements

See Notes to Condensed Consolidated Financial Statements

3

See Notes to Condensed Consolidated Financial Statements

4

See Notes to Condensed Consolidated Financial Statements

5

See Notes to Condensed Consolidated Financial Statements

6

See Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1:  Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2002 filed with the Securities and Exchange Commission.  The condensed consolidated statement of financial condition of the Company as of June 30, 2002, has been derived from the audited consolidated statement of financial condition of the Company as of that date.  Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

Certain reclassifications have been made to the June 30, 2002 financial statement to conform to the March 31, 2003 financial statement presentation.  These reclassifications had no effect on net earnings.

Note 2:  Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Guaranty Federal Bancshares, Inc. (the “Company”), its wholly owned subsidiary, Guaranty Federal Savings Bank (the “Bank”) and the wholly-owned subsidiary of the Bank, Guaranty Financial Services of Springfield, Inc.  All significant intercompany transactions and balances have been eliminated in consolidation.  

Note 3:  Benefit 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.  

On October 18, 1995, the Bank’s stockholders voted to approve both a Recognition and Retention Plan (“RRP”) and a Stock Option Plan (“SOP”).  On July 22, 1998, the Company’s stockholders voted to approve both a 1998 Restricted Stock Plan (“RSP”) and a 1998 Stock Option Plan (“1998 SOP”). The RRP and RSP authorized shares to be issued to directors, officers and employees of the Bank.  On February 17, 2000, the directors of the Company established the 2000 Stock Compensation Plan (the “2000 SCP”) with both a stock award component and a stock option component.  On March 22, 2001, the directors of the Company established the 2001 Stock Compensation Plan (the “2001 SCP”) with both a stock award component and a stock option component. As of March 31, 2003, all of the RRP,RSP, 2000 SCP and 2001 SCP shares have been purchased and all except 13,046 shares have been awarded.  The Company is amortizing the RRP, RSP and SCP expense over each participant’s vesting period. The Company recognized $265,407 and  $302,274 of expense under these stock award plans for the nine month periods ended March 31, 2003 and 2002, respectively.  The SOP, 1998 SOP and the 2000 SCP authorized stock options on shares to be issued to directors, officers and employees of the Bank.  As of March 31, 2003 all options except those on 67,063 shares have been granted.  The RRP, RSP, SOP, 1998 SOP, 2000 SCP and 2001 SCP vest over a five year period. As of March 31, 2003, there were 371,776 unexercised options that have been granted at prices ranging from $5.83 to $15.31 per share and 113,754 options were unvested.

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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, an all options granted under those plans had as 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.

Note 4: Earnings Per Share

Options to purchase 10,000 shares of common stock at $15.31 per share, outstanding during the nine months ended March 31, 2003, were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The primary function of the Company has been to monitor its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities.  The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses.  The following discussion reviews the financial condition at March 31, 2003 and the results of operations for the three months and nine months ended March 31, 2003 and 2002.

The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of the Form 10-Q.  When used in this Form 10-Q, 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 competiti on 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.

Financial Condition

The Company’s total assets decreased $924,671 (1%) from $376,550,407 as of June 30, 2002, to $375,625,736 as of March 31, 2003.

Interest-bearing deposits in other financial institutions decreased $3,861,287 (28%) from $13,711,923 as of June 30, 2002, to $9,850,636 as of March 31, 2003, as funds from these deposits were used to fund new loans.

Securities available-for-sale decreased $2,846,340 (17%) from $16,463,460 as of June 30, 2002, to $13,617,120 as of March 31, 2003.  This decrease primarily resulted from principal repayments, maturities and decreases in market value of such securities exceeding additional purchases of such securities by $2,886,351.  The Bank continues to hold 82,000 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $80,294 in the available-for-sale category.  As of March 31, 2003, the gross unrealized gain on the FHLMC stock was $4,273,906, a decrease from $5,044,706 as of June 30, 2002 of such securities.

Securities held-to-maturity decreased by $732,019 (23%) from $3,219,091 as of June 30, 2002, to $2,487,072 as of March 31, 2003 primarily due to principal repayments.

Net loans receivable increased by $2,541,953 (1%) from $316,785,118 as of June 30, 2002, to $319,327,071 as of  March 31, 2003.  During this period, the Bank continued its increased emphasis on commercial lending.  As a result, commercial loans increased by $13,178,561 during this period.  In addition, the Bank continues to sell conforming loans on single family residences, while retaining the servicing rights.  As a result, permanent mortgage loans secured by both owner and non-owner occupied residential real estate decreased by $8,463,471 while loans held for sale increased by $4,977,486. The Bank continued to be active in construction lending resulting in construction loans increasing by $10,527,241 during the period.  See discussion under “Quantitative and Qualitative Disclosures about Market Risk – Asset/Liability Management.”  Loan growth is anticipated to continue and represents a major part of the Bank’s pl anned asset growth.  

The allowance for loan losses increased $152,884 (6%) from $2,649,872 as of June 30, 2002 to $2,802,756 as of March 31, 2003.  The allowance for loan losses increased due to increases in the provision for loan losses exceeding charge-offs for the period.  The allowance for loan losses as of March 31, 2003 and June 30, 2002 was 0.86% and 0.83%, respectively, of net loans outstanding.  As of March 31, 2003, the allowance for loan losses was 194% of impaired loans versus 151% as of June 30, 2002.

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Premises and equipment decreased $450,019  (6%) from $7,356,098, as of June 30, 2002 to $6,906,079 as of March 31, 2003, primarily due to the depreciation recognized on these assets.

Deposits increased $5,343,321 (2%) from $225,283,994 as of June 30, 2002, to $230,627,315 as of March 31, 2003.  For the nine months ended March 31, 2003, checking and savings accounts increased by $11,097,121 (12%) while certificates of deposits decreased by $5,753,800 (4%).  See discussion under “Quantitative and Qualitative Disclosures about Market Risk – Asset/Liability Management.”

Federal Home Loan Bank advances decreased by $6,300,696 (6%) from $111,083,163 as of June 30, 2002, to $104,782,467 as of March 31, 2003 due to repayments of principal exceeding proceeds from new advances.

Advances from borrowers for taxes and insurance decreased $392,910 (37%) from $1,048,297 of June 30, 2002, to $655,387 as of March 31, 2003. This decrease was primarily due to the payment of 2002 real estate taxes from borrower’s escrow accounts during the quarter ended December 31, 2002.

Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $731,478 (2%) from $35,434,877 as of June 30, 2002, to $36,166,355 as of March 31, 2003.  This increase was due to several factors.  During this period, net income was $2,648,713 which was partially offset by a first quarter dividend of $417,197 ($0.15 per share) which was declared prior to September 30, 2002 and paid on October 18, 2002, to stockholders’ of record as of October 4, 2002, and a second quarter dividend of $420,820 ($0.15 per share) which was declared prior to December 31, 2002 and paid on January 24, 2003, to stockholders’ of record as of January 10, 2003 and a third quarter dividend of $418,239 ($0.15 per share) which was declared on March 21, 2003 and paid on April 14, 2003, to stockholders’ of record as of  March 31, 2003.  There was a

decrease in the unrealized appreciation on available-for-sale securities of $746,396.  In addition, the Company repurchased 66,882 shares of treasury stock at a cost of $1,017,235 (an average cost of $15.21 per share).  As of March 31, 2003, 264,827 shares remain to be repurchased under the repurchase plan announced November 22, 2002.  On a per share basis, stockholders’ equity increased from $12.69 as of June 30, 2002 to $12.94 as of March 31, 2003.

Average Balances, Interest and Average Yields

The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings.  Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities.  Non-interest income, non-interest expense, and income taxes also impact net income.

The following table sets forth certain information relating to the Company’s average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated.  Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown.  Average balances were derived from average daily balances.  The average balance of loans includes loans on which the Company has discontinued accruing interest.  The yields and costs include fees which are considered adjustments to yields.  All dollar amounts are in thousands.

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Results of Operations - Comparison of Three Month and Nine Month Periods Ended March 31,   

2003 and 2002

Net income for the three months and nine months ended March 31, 2003 was $884,683 and $2,648,713, respectively, as compared to $817,557 and $2,719,325, respectively, for the three months and nine months ended March 31, 2002, which represents an increase in earnings of $67,126 (8%) for the three month period, and a decrease in earnings of $70,612 (3%) for the nine month period.

Interest Income

Total interest income for the three months and nine months ended March 31, 2003, decreased $846,163

(14%) and $2,794,050 (14%) as compared to the three months and nine months ended March 31, 2002.   For the three month and nine month periods ended March 31, 2003 compared to the same periods in 2002, the average yield on interest earning assets decreased 74 basis points to 5.87% and 74 basis points to 6.14%, respectively, while the average balance of interest earning assets decreased $10,610,000 and $15,388,000, respectively.

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Interest Expense

Total interest expense for the three months and nine months ended March 31, 2003, decreased  $548,408  (16%) and $2,096,687 (19%) when compared to the three months and nine months ended March 31, 2002.  For the three month and nine month periods ended March 31, 2003 compared to the same periods in 2002, the average cost of interest bearing liabilities decreased 50 basis points to 3.46% and 80 basis points to 3.69%, respectively, while the average balance decreased $14,990,000 and $4,489,000, respectively.

Net Interest Income

As a result of the changes in interest income and interest expense for the three months and nine months ended March 31, 2003, net interest income for the 2003 periods decreased $297,755 (11%) and $697,363 (8%), respectively, when compared to the same periods in 2002.

Provision for Loan Losses

Based on the continued growth of the commercial loan portfolio, loan charge-offs experienced and identified weaknesses in specific loans, management decided to record a provision for loan losses of $255,000 and $460,000 for the three months and nine months ended March 31, 2003, respectively, compared to $66,000 and $216,000 for the same periods in 2002.  Significant events affecting the allowance for loan losses, resulting in an increase in the provision during the three month period ended March 31, 2003 include:  the charge-off of a $73,000 loan secured by a second deed of trust on a single family residence; a borrower with loans totaling $663,000, secured by a single family residence, notifying the Bank that such borrower is contemplating bankruptcy; and the overall increase in impaired loans during the quarter.  The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions.   Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential losses, there can be no assurance that future losses will not exceed internal estimates.  In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loss provisions.  

Noninterest Income

Noninterest income increased $243,715 (29%) and $187,198 (7%) for the three months and nine months ended March 31, 2003, when compared to the three months and nine months ended March 31, 2002.  The increase for the three months and nine months ended March 31, 2003 was primarily due to increases in gain on sale of loans and increases in late charges and other fees discussed below.  

Gain on sale of loans increased $245,663 (156%) and  $396,942 (59%) for the three months and nine months ended March 31, 2003, respectively, when compared to the same periods in 2002. Gains on sale of single-family loans increased, which reflects the volume of fixed rate loans sold in the secondary market.  The Bank attempts to minimize risk of price changes by committing to sell loans while the loans are in the origination process.  Checking account service charges increased $50,574 (13%) and $192,287 (17%) for the three months and nine months ended March 31, 2003, respectively, compared to the same periods in 2002, due to the continued growth in the number of  checking accounts.

Late charges and other fees increased $180,020 (458%) and $186,291(189%) for the three months ended and nine months ended March 31, 2003 when compared to the same periods in 2002. The increase in the three months and nine months ended March 31, 2003 was primarily due to large prepayment penalties received on commercial loans that were paid off during these periods.  The Bank collected $336,556 and $462,438 in prepayment penalties during the three months and nine months ended March 31, 2003, respectively.  There were no prepayment penalties collected during the same periods in 2002.  These increases were partially offset by amortization expense associated with the Bank’s originated mortgage servicing rights and the recording of a loss on impairment.  The amortization expense on originated mortgage servicing rights increased $82,069 (230%) and $168,244 (145%) for the three months and nine months ended March 31, 2003, respectively, when compared t o the same periods in 2002.  A loss on impairment of these rights of  $96,561 and $176,902 was recognized during the three months and nine months ended March 31, 2003, respectively, based on the Bank’s fair value assessment of such rights at March 31, 2003.  There was no loss impairment recognized during the same periods in 2002.  Decreases in fair value of these rights is primarily due to increased prepayment speeds on loans being serviced

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for others.  The increase in prepayment speed is attributable to significant increases in refinancing in a historically low interest rate environment.

During the three months and nine months ended March 31, 2002, gain on sale of investments was $218,141 and $585,052, respectively. During the same periods in 2003, there were no gains on sale of investments.  

Noninterest Expense

Noninterest expense decreased $313,662 (13%) and $639,374 (9%) for the three months and nine months ended March 31, 2003 when compared to the three months and nine months ended March 31, 2002.  These decreases resulted primarily from a decrease in other expense of $101,833 (22%) and $365,971 (25%), respectively, during the periods due to approximately $183,000 in “one-time” costs incurred in connection with the Commercial Federal branch acquisition during the three months and nine months ended March 31, 2002, and approximately $122,000 in “one-time” legal and professional expenses incurred during the same periods in 2002.   The remainder of the decreases can be attributed to the Company’s aggressive approach to controlling expenses.

Provision for Income Taxes

There was a  $3,496 increase and a $44,179 decrease in the provision for income taxes for the three months and nine months ended March 31, 2003, respectively, as compared to the same periods in 2002.

Nonperforming Assets

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the loans.  Management considers such factors as the repayment status of a loan, the estimated net realizable value of the underlying collateral, the borrower’s intent and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios.  The Bank’s allowance for loan losses as of March  31, 2003, was $2,802,756 or 0.86% of loans receivable.  Total assets classified as substandard or loss as of March 31, 2003, were $1,317,681 or 0.4% of total assets.  Management has considered nonperforming and total classified assets in evaluating the adequacy of the Bank’s allowance for loan losses.

The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk.  Nonperforming assets of the Bank include nonperforming loans (nonaccruing loans) and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure.  Dollar amounts in the table below are in thousands.

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Impact of Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) recently issued its Interpretation No. 46 “Consolidation of Variable Interest Entities” which requires the consolidation of certain special purposes entities (SPE’s) by a company if it is determined to be the primary beneficiary of the SPE’s operating activities. The adoption of this interpretation on January 31, 2003 had no effect on the Company’s financial statements.

The FASB recently issued its Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing a guarantee at its inception and prescribes disclosures regarding guarantees.  The Interpretation applies only to guarantees issued or modified after December 31, 2002.  Guarantees issued by the Bank are principally in the forms of letters of credit. The adoption of  FIN 45 did not have a material impact on the Company’s financial statements.

The FASB recently adopted Statement of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for Stock-Based Compensation—Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires disclosure of the pro forma effects of using the fair value based method of accounting for stock-based compensation and requires that these disclosures be included in interim as well as annual financial statements beginning with the quarter ended March 31, 2003. The disclosure provisions of SFAS No. 148 did not have a material impact on the Company’s financial statements.

The FASB recently adopted SFAS 142, “Goodwill and Other Intangible Assets”. This Statement establishes new financial accounting and reporting standards for acquired goodwill and other intangible assets.  The Statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition.  It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. SFAS 142 is effective for fiscal years beginning after December 15, 2001.  The Company adopted SFAS 142 in the quarter ending September 30, 2002.  Adoption of SFAS 142 as of that date had no effect on the Company’s financial statements.

The FASB recently adopted SFAS 147, “Acquisitions of Certain Financial Institutions.”  This statement removes acquisitions of financial institutions from the scope of  SFAS 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions” if those acquisitions meet the definition of a business combination.  Financial institutions meeting certain conditions in SFAS 147 will be required to cease amortizing certain intangible assets acquired in transactions previously accounted for under SFAS 72 and restate previously issued interim financial information.  The provisions of this Statement were effective on October 1, 2002.  Adoption of SFAS 147 had no effect on the Company’s financial statements.

Liquidity and Capital Resources

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and securities and extensions of credit from the Federal Home Loan Bank of Des Moines.  While scheduled loan and security repayments and the maturity of short-term investments are somewhat predictable sources of funding, deposit flows are influenced by many factors, which make their cash flows difficult to anticipate.  

The Bank uses its liquidity resources principally to satisfy its ongoing commitments which include funding loan commitments, funding maturing certificates of deposit as well as deposit withdrawals, maintaining liquidity, purchasing investments, and meeting operating expenses.  As of March 31, 2003, the Bank had approximately $13,064,000 in commitments to originate mortgage loans and $21,121,902 in loans-in-process on mortgage loans.  These commitments will be funded through existing cash balances, cash flow from operations and, if required, FHLB advances.  Management believes that anticipated cash flows and deposit growth will be adequate to meet the Bank’s liquidity needs.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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, the Bank offers deposit rates and loan rates designed to 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.  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 on a service-retained basis. This allows the Bank to serve the customer’s needs and retain a banking relationship without the risk of carrying a long-term fixed-rate loan on the books.

The Bank is also managing interest rate risk by the origination of construction loans.  As of  March 31, 2003, such loans made up 19% of the net loans receivable.  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 June 30, 2002, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $93,701,835 or 42% of its total deposits.  As of March 31, 2003 these accounts totaled $104,798,956 or 45% of total deposits.  The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive, core deposits.  

Interest Rate Sensitivity Analysis

The following table sets forth as of December 31, 2002 (the most recent available), the Office of Thrift Supervision (“OTS”) estimate 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 a 100 basis point instantaneous and permanent decrease in market interest rates.  Dollar amounts are expressed in thousands.

Computations of prospective effects of hypothetical interest rate changes are calculated by the OTS from data provided by the Bank 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.

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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 portfolio could decrease in future periods due to refinancing activity if market interest rates remain steady in the future.  Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate sign ificantly 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 asset and liability policies.  The Board meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements.  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.  

Item 4. Controls and Procedures

(a)  The Company maintains disclosure controls and procedures as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934 that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.   

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.   Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

(b)  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

Item 5.  Other information

On May 7, 2003 the Company published notice that it intends to apply to the Federal Reserve System for permission to become a bank holding company through the conversion of its subsidiary, Guaranty Federal Savings Bank, from a federally chartered savings bank to a Missouri state chartered bank.

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PART II

Item 1.

Legal Proceedings

None.

Item 2.

Changes in Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to Vote of Common Stockholders

None.

Item 5.

Other Information

On May 7, 2003 the Company published notice that it intends to apply to the Federal Reserve System for permission to become a bank holding company through the conversion of its subsidiary, Guaranty Federal Savings Bank, from a federally chartered savings bank to a Missouri state chartered bank.

Item 6.

Exhibits and Reports on Form 8-K

 a) Exhibits

      99.1 CEO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

      99.2 CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

b)  Reports on Form 8-K

      Filed on April 15, 2003 relating to financial information for the registrant for the quarter ended March     

                     31, 2003; and announcing remaining shares to be repurchased under the repurchase plan announced           

                     November 22, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                                                                      Guaranty Federal Bancshares, Inc.

(registrant)

Date

Signature and Title

May  8, 2003

/s/ Don M. Gibson                              

                                           Don M. Gibson

                                           President and Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

Date

May 8, 2003

/s/ Bruce Winston

                                           Bruce Winston

                                           Senior Vice President and Chief Financial Officer

                                          (Principal Financial and Accounting Officer)

19

Certification of the Principal Executive Officer

(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Don M. Gibson, certify that:

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

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

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

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 8, 2003

/s/ Don M. Gibson               

Don M. Gibson
President and Chief Executive Officer

(Principal Executive Officer)

20

Certification of the Principal Financial Officer

(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Bruce Winston, certify that:

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

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

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

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 8, 2003

 /s/ Bruce Winston
Bruce Winston

Chief Financial Officer

(Principal Financial Officer)

21

Exhibit 99.1

CEO CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Guaranty Federal Bancshares, Inc. (the “Company”) on Form 10-Q for the period ending March  31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Don M. Gibson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/  Don M. Gibson

Don M. Gibson
Chief Executive Officer
May 8, 2003

22

Exhibit 99.2

CFO CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Guaranty Federal Bancshares, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce Winston, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/  Bruce Winston

Bruce Winston
Chief Financial Officer
May 8, 2003

23