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UNITED STATES
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 September 30, 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
43-1792717
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
 
   
1341 West Battlefield
 
Springfield, Missouri
65807
(Address of principal executive offices)
(Zip Code)

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.

Class
Outstanding at November 6, 2003
Common Stock, Par Value $0.10
2,991,877 Shares
    
    
 
   
 
   
GUARANTY FEDERAL BANCSHARES, INC.
 
 
 
 
TABLE OF CONTENTS
Item
 
 
Page
PART I. Financial Information
 
 
 
 
 
 
 
 
     
 
 3
 
 
4
 
5
 
 
 
 
 
 
7
 
 
 
 
 
8
 
 
 
 
10
 
 
 
 
15
 
 
 
 
 
16
 
 
 
 
PART II. Other Information
 
 
 
 
 
17
 
 
 
 
 
17
 
 
 
 
 
17
 
 
 
 
17
 
 
 
 
 
17
 
 
 
 
 
17
 
 
 
 
 
 
 
 
 
 
 

  2  

PART I
Item 1. Financial Statements
GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2003 (UNAUDITED) AND JUNE 30, 2003
 
    
 
    
 
  
ASSETS
   
9/30/03
   
6/30/03
 
   
 
 
Cash
 
$
12,257,962
   
15,242,475
 
Interest-bearing deposits in other financial institutions
   
2,119,177
   
3,772,053
 
   
 
 
Cash and cash equivalents
   
14,377,139
   
19,014,528
 
Available-for-sale securities
   
14,061,963
   
13,271,147
 
Held-to-maturity securities
   
2,019,722
   
2,250,894
 
Stock in Federal Home Loan Bank, at cost
   
4,871,900
   
8,600,400
 
Mortgage loans held for sale
   
3,426,994
   
9,755,102
 
Loans receivable, net of allowance for loan losses;
   
 
    
 
  
9/30/03 - $2,988,182; 6/30/03 - $2,775,320
   
328,852,616
   
327,082,420
 
Accrued interest receivable:
   
 
    
 
  
Loans
   
1,285,288
   
1,357,434
 
Investments
   
66,126
   
72,691
 
Prepaid expenses and other assets
   
2,149,126
   
1,855,268
 
Foreclosed assets held for sale
   
172,500
   
182,064
 
Premises and equipment
   
6,523,851
   
6,708,996
 
   
 
 
 
  
$
377,807,225
   
390,150,944
 
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
   
 
    
 
  
LIABILITIES
   
 
    
 
  
Deposits
 
$
235,717,044
   
235,677,197
 
Federal Home Loan Bank advances
   
99,494,789
   
114,618,894
 
Securities sold under agreements to repurchase
   
1,368,109
   
702,024
 
Advances from borrowers for taxes and insurance
   
1,126,699
   
950,678
 
Accrued expenses and other liabilities
   
341,415
   
311,696
 
Accrued interest payable
   
663,941
   
203,237
 
Dividend payable
   
428,737
   
415,414
 
Income taxes payable
   
496,797
   
220,707
 
Deferred income taxes
   
781,656
   
509,285
 
   
 
 
 
    
340,419,187
   
353,609,132
 
   
 
 
STOCKHOLDERS' EQUITY
   
 
    
 
  
Common stock:
   
 
    
 
  
$0.10 par value; authorized 10,000,000 shares;
   
 
    
 
  
issued; 9/30/03 - 6,426,279 shares, 6/30/03 - 6,416,848 shares
   
642,628
   
641,685
 
Additional paid-in capital
   
51,233,464
   
51,065,581
 
Unearned ESOP shares
   
(2,093,930
)
 
(2,156,930
)
Retained earnings, substantially restricted
   
29,928,744
   
29,280,784
 
Accumulated other comprehensive income
   
 
    
 
  
Unrealized appreciation on available-for-sale securities,
   
 
    
 
  
net of income taxes; 9/30/03 - $1,270,634, 6/30/03 - $1,162,865
   
2,163,512
   
1,980,013
 
   
 
 
 
    
81,874,418
   
80,811,133
 
Treasury stock, at cost; 9/30/03 - 3,433,185 shares, 6/30/03 - 3,420,375 shares
   
(44,486,380
)
 
(44,269,321
)
   
 
 
 
    
37,388,038
   
36,541,812
 
   
 
 
 
  
$
377,807,225
   
390,150,944
 
   
 
 

 See Notes to Condensed Consolidated Financial Statements
  3  
 
 
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
 
  
 
 
 
  
9/30/03
9/30/02
   
INTEREST INCOME
 
 
 
Loans
 
$
4,842,640
   
5,488,439
 
Investment securities
   
66,878
   
125,994
 
Other
   
87,575
   
132,023
 
   
 
 
Total Interest Income
   
4,997,093
   
5,746,456
 
   
 
 
INTEREST EXPENSE
   
 
    
 
  
Deposits
   
1,204,966
   
1,616,380
 
Federal Home Loan Bank advances
   
1,120,549
   
1,500,718
 
Other
   
988
   
3,077
 
   
 
 
Total Interest Expense
   
2,326,503
   
3,120,175
 
   
 
 
Net Interest Income
   
2,670,590
   
2,626,281
 
Provision for Loan Losses
   
212,000
   
100,000
 
   
 
 
Net Interest Income after
   
 
    
 
  
Provision for Loan Losses
   
2,458,590
   
2,526,281
 
   
 
 
NONINTEREST INCOME
   
 
    
 
  
Service charges
   
471,889
   
440,580
 
Late charges and other fees
   
142,596
   
156,851
 
Gain on loans and investment securities
   
559,033
   
224,577
 
Gain (loss) on foreclosed assets
   
5,234
   
(4,793
)
Other income
   
52,502
   
46,237
 
   
 
 
Total Noninterest Income
   
1,231,254
   
863,452
 
   
 
 
NONINTEREST EXPENSE
   
 
    
 
  
Salaries and employee benefits
   
1,113,385
   
1,121,186
 
Occupancy
   
333,186
   
336,803
 
SAIF deposit insurance premiums
   
9,100
   
9,859
 
Data processing fees
   
96,140
   
141,140
 
Advertising
   
70,850
   
49,113
 
Other expense
   
372,624
   
368,128
 
   
 
 
Total Noninterest Expense
   
1,995,285
   
2,026,229
 
   
 
 
Income Before Income Taxes
   
1,694,559
   
1,363,504
 
Provision for Income Taxes
   
617,862
   
467,458
 
   
 
 
NET INCOME
 
$
1,076,697
   
896,046
 
   
 
 
 
    
 
    
 
  
BASIC EARNINGS PER SHARE
 
$
0.39
   
0.32
 
   
 
 
DILUTED EARNINGS PER SHARE
 
$
0.38
   
0.32
 
   
 
 

See Notes to Condensed Consolidated Financial Statements
  4  

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
 
  
 
 
 
 
 
 
  
Common Stock
Additional Paid-In Capital
Unearned ESOP Shares
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income
Total
   
Balance, July 1, 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
 
-
-
-
-
1,076,697
-
1,076,697
Change in unrealized appreciation
 
 
 
 
 
 
 
 
on available-for-sale securities, net
 
 
 
 
 
 
 
 
of income taxes of $107,769
 
-
-
-
-
-
183,499
183,499
   
Total comprehensive income
 
 
 
 
 
 
 
1,260,196
Dividends on common stock,
 
 
 
 
 
 
 
($0.155 per share on 2,766,046 shares)
 
-
-
-
-
(428,737)
-
(428,737)
Stock award plans
 
-
43,434
-
-
-
-
43,434
Stock options exercised
 
943
81,145
-
-
-
-
82,088
Release of ESOP shares
 
-
43,304
63,000
-
-
-
106,304
Treasury stock purchased
 
-
-
-
(217,059)
-
-
(217,059)
   
Balance, September 30, 2003
 
$ 642,628
51,233,464
(2,093,930)
(44,486,380)
29,928,744
2,163,512
37,388,038
   

See Notes to Condensed Consolidated Financial Statements
  5  
 

 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
 
  
 
 
 
 
 
 
  
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
 
-
-
-
-
896,046
-
896,046
Change in unrealized appreciation
 
 
 
 
 
 
 
 
on available-for-sale securities, net
 
 
 
 
 
 
 
 
of income taxes of ($210,278)
 
-
-
-
-
-
(358,883)
(358,883)
   
Total comprehensive income
 
 
 
 
 
 
 
537,163
Dividends on common stock,
 
 
 
 
 
 
 
($0.15 per share on 2,781,315 shares)
 
-
-
-
-
(417,197)
-
(417,197)
Stock award plans
 
-
97,549
-
 
-
-
97,549
Stock options exercised
 
329
19,506
-
 
-
-
19,835
Release of ESOP shares
 
-
25,300
62,500
-
-
-
87,800
Treasury stock purchased
 
-
-
-
(45,535)
-
-
(45,535)
   
Balance, September 30, 2002
 
$ 636,869
49,984,387
(2,343,570)
(44,486,380)
27,806,249
2,588,704
35,714,492
   
 
  
 
 
 
 
 
 
 


See Notes to Condensed Consolidated Financial Statements
  6  


CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
 
    
9/30/03 
    
9/30/02
 
   
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
   
 
    
 
  
Net income
 
$
1,076,697
   
896,046
 
Items not requiring (providing) cash:
   
 
    
 
  
Deferred income taxes
   
164,602
   
162,094
 
Depreciation
   
190,798
   
200,693
 
Provision for loan losses
   
212,000
   
100,000
 
Gain on loans and investment securities
   
(559,033
)
 
(224,577
)
(Gain) loss on sale of foreclosed assets
   
(5,234
)
 
2,973
 
Amortization of deferred income, premiums and discounts
   
15,546
   
1,047
 
Stock award plan expense
   
43,266
   
89,998
 
Origination of loans held for sale
   
(24,132,186
)
 
(15,680,114
)
Proceeds from sale of loans held for sale
   
31,019,327
   
13,905,115
 
Release of ESOP shares
   
106,304
   
87,800
 
Changes in:
   
 
    
 
  
Accrued interest receivable
   
78,711
   
80,858
 
Prepaid expenses and other assets
   
(293,858
)
 
400,847
 
Accounts payable and accrued expenses
   
490,422
   
(67,329
)
Income taxes payable
   
276,090
   
305,766
 
   
 
 
Net cash provided by operating activities
   
8,683,452
   
261,217
 
   
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
   
 
    
 
  
Net increase in loans
   
(2,121,430
)
 
(1,804,261
)
Principal payments on available-for-sale securities
   
-
   
101,307
 
Principal payments on held-to-maturity securities
   
227,879
   
271,392
 
Proceeds from maturities of available-for-sale securities
   
1,000,000
   
3,000,000
 
Purchase of premises and equipment
   
(5,653
)
 
(62,413
)
Purchase of available-for-sale securities
   
(1,492,567
)
 
(2,978,928
)
Proceeds from sale of FHLB stock
   
3,728,500
   
-
 
Proceeds from sale of foreclosed assets
   
134,799
   
724,315
 
   
 
 
Net cash provided by (used in) investing activities
   
1,471,528
   
(748,588
)
   
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
   
 
    
 
  
Stock options exercised
   
82,088
   
19,835
 
Cash dividends paid
   
(415,414
)
 
(347,656
)
Cash dividends received on RRP stock
   
168
   
622
 
Net increase in demand deposits,
   
 
    
 
  
NOW accounts and savings accounts
   
343,540
   
4,563,088
 
Net increase (decrease) in certificates of deposit and securities sold
   
 
    
 
  
under agreements to repurchase
   
362,392
   
(5,770,780
)
Proceeds from FHLB advances
   
56,000,000
   
5,000,000
 
Repayments of FHLB advances
   
(71,124,105
)
 
(4,170,216
)
Advances from borrowers for taxes and insurance
   
176,021
   
343,401
 
Treasury stock purchased
   
(217,059
)
 
(45,535
)
   
 
 
Net used in financing activities
   
(14,792,369
)
 
(407,241
)
   
 
 
DECREASE IN CASH AND CASH EQUIVALENTS
   
(4,637,389
)
 
(894,612
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
19,014,528
   
16,963,502
 
   
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
14,377,139
   
16,068,890
 
   
 
 

See Notes to Condensed Consolidated Financial Statements
  7  
 
 

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 2003 filed with the Securities and Exchange Commission. The condensed consolidated balance sheet of the Company as of June 30, 2003, has been derived from the audited consolidated balance sheet 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.

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 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 Company’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 Sep tember 30, 2003, all of the RRP, RSP, 2000 SCP and 2001 SCP shares have been purchased and awarded. As of September 30, 2003 there are 13,991 shares that are not vested. The Company is amortizing the RRP, RSP and SCP expense over each participant’s vesting period. The Company recognized $15,476 and $89,998 of expense under these stock award plans for the three month periods ended September 30, 2003 and 2002, respectively. The SOP, 1998 SOP and the 2000 SCP authorized stock options on shares to be issued to officers and employees of the Bank. As of September 30, 2003 all options except those on 17,063 shares have be en granted. The RRP, RSP, SOP, 1998 SOP and 2000 SCP vest over a five year period. As of September 30, 2003, there were 411,545 unexercised options that have been granted at prices ranging from $5.83 to $16.65 per share and 306,076 of these options are exercisable.

 
  8  
 
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.

 
  
Three Months ended September 30,  
 
    
2003

 

 
2002
 
   
 
 
 
    
 
    
 
  
Net income, as reported
 
$
1,076,697
   
896,046
 
Less: Total stock-based employee compensation
   
 
    
 
  
cost determined under the fair value-based
   
 
    
 
  
method, net of income taxes
   
(6,492
)
 
(43,270
)
   
 
 
 
    
 
    
 
  
Pro forma net income
 
$
1,070,205
   
852,776
 
   
 
 
 
    
 
    
 
  
Earnings per share:
   
 
    
 
  
Basic - as reported
 
$
0.39
   
0.32
 
   
 
 
Basic - pro forma
 
$
0.38
   
0.31
 
   
 
 
Diluted - as reported
 
$
0.38
   
0.32
 
   
 
 
Diluted - pro forma
 
$
0.37
   
0.30
 
   
 
 

Note 4: Earnings Per Share
 
  
For three months ended September 30, 2003
   
Income Available to Stockholders  

 

 
Average Shares Outstanding

 

 
Per-share
 
   
 
 
 
Basic Earnings per Share
 
$
1,076,697
   
2,780,720
 
$
0.39
 
   
       
 
Effect of Dilutive Securities: Stock Options
   
 
    
88,208
   
 
  
         
       
Diluted Earnings per Share
 
$
1,076,697
   
2,868,928
 
$
0.38
 
   
 
 
 
 
    
 
    
 
    
 
  
   
   
For three months ended September 30, 2002
 
    
Income Available to Stockholders  

 

 
Average Shares Outstanding

 

 
Per-share
 
   
 
 
 
Basic Earnings per Share
 
$
896,046
   
2,793,044
 
$
0.32
 
   
       
 
Effect of Dilutive Securities: Stock Options
   
 
    
48,309
   
 
  
         
       
Diluted Earnings per Share
 
$
896,046
   
2,841,353
 
$
0.32
 
   
 
 
 

 
  9  
 
 
Note 5: Other Comprehensive Income

 
  
 
 
 
  
9/30/03
9/30/02
   
 
 
Unrealized gains (losses) on
 
$
291,268
   
(569,161
)
available-for-sale securities
   
 
    
 
  
Tax expense (benefit)
   
(107,769
)
 
210,278
 
   
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
$
183,499
   
(358,883
)
   
 
 

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 September 30, 2003, and the results of operations for the three months ended September 30, 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 fac tors 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.

Financial Condition

The Company’s total assets decreased $12,343,719 (3%) from $390,150,944 as of June 30, 2003, to $377,807,225 as of September 30, 2003.

Interest-bearing deposits in other financial institutions decreased $1,652,876 (44%) from $3,772,053 as of June 30, 2003, to $2,119,177 as of September 30, 2003, as funds from these deposits were used to fund new loans.

Securities available-for-sale increased $790,816 (6%) from $13,271,147 as of June 30, 2003, to $14,061,963 as of September 30, 2003. 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 September 30, 2003, the gross unrealized gain on the FHLMC stock was $4,212,406, an increase from $4,082,846 as of June 30, 2003.

Securities held-to-maturity decreased primarily due to principal repayments, by $231,172 (10%) from $2,250,894 as of June 30, 2003, to $2,019,722 as of September 30, 2003.

 
  10  
 
 
Stock in Federal Home Loan Bank (FHLB) decreased by $3,728,500 (43%), due to sale of stock held in excess of FHLB requirements.

Net loans receivable increased by $1,770,196 (1%) from $327,082,420 as of June 30, 2003, to $328,852,616 as of September 30, 2003. During this period the Bank continued its increased emphasis on commercial lending. As a result, commercial loans have increased by $945,654 during this period. In addition the Bank is selling 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 $1,792,307 while residential loans sold increased by $7,405,876. Loans held for sale decreased $6,328,108 (65%) to $3,436,994 at September 30, 2003, compared to $9,755,102 at June 30, 2003. The Bank continued to be active in constr uction lending. However, construction loans decreased by $4,630,059 during the period due to a decrease in demand for construction loans. See discussion under "Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management." Loan growth is anticipated to continue and represents a major part of the Bank’s planned asset growth.

Allowance for loan losses increased $212,862 (8%) from $2,775,320 as of June 30, 2003 to $2,988,182 as of September 30, 2003. The allowance increased due to the provision for loan losses exceeding net loan charge-offs for the period. The allowance for loan losses as of September 30, 2003 and June 30, 2003 was 0.89% and 0.82%, respectively, of net loans outstanding. As of September 30, 2003, the allowance for loan losses was 576% of impaired loans versus 344% as of June 30, 2003.

Premises and equipment decreased $185,145 (3%) from $6,708,996, as of June 30, 2003 to $6,523,851 as of September 30, 2003, primarily due to the depreciation recognized on these assets.
Deposits increased $39,847 from $235,677,197 as of June 30, 2003, to $235,717,044 as of September 30, 2002. For the three months ended September 30, 2003, checking and savings accounts increased by $343,540 (0.3%) while certificates of deposits decreased by $303,693 (0.3%).

Federal Home Loan Bank advances decreased by $15,124,105 (13%) from $114,618,894 as of June 30, 2003, to $99,494,789 as of September 30, 2003, due to repayments of advances exceeding new advances.

Advances from borrowers for taxes and insurance increased $176,021 (19%) from $950,678 of June 30, 2003, to $1,126,699 as of September 30, 2003.
Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $846,226 (2%) from $36,541,812 as of June 30, 2003, to $37,388,038 as of September 30, 2003. This increase was due to several factors, including an increase in the unrealized appreciation on available-for-sale securities of $183,499 (net of tax). Another factor was the Company’s net income during this period of $1,076,697 which was partially offset by dividends in the amount of $428,737 ($0.155 per share) which were declared prior to September 30, 2003 and paid on October 17, 2003, to stockholders’ of record as of October 3, 2003. In addition, the increase in stockholders’ equity was further offset as the Company repurchased 12,810 shares of treasury stock at a cost of $217,059 (an average cost of $16.94 per share). As of September 30, 2003, 244,659 shares remain to be repurchased under the repurchase plan announced November 22, 2002. On a per share basis, stockholders’ equity increased from $13.14 as of June 30, 2003 to $13.43 as of September 30, 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.

 
  11  
 
 
 
  
Three Months ended 9/30/2003
Three Months ended 9/30/2002
   
 
    
Average Balance  

 

 
Interest

 

 
Yield / Cost

 

 
Average Balance

 

 
Interest

 

 
Yield / Cost
 
   
 
 
 
 
 
 
ASSETS
   
 
    
 
    
 
    
 
    
 
    
 
  
Interest-earning:
   
 
    
 
    
 
    
 
    
 
    
 
  
Loans
 
$
336,079
   
4,843
   
5.76
%
$
322,643
   
5,488
   
6.80
%
Investment securities
   
9,626
   
67
   
2.78
%
 
12,404
   
126
   
4.06
%
Other assets
   
13,977
   
87
   
2.49
%
 
25,460
   
132
   
2.07
%
   
 
 
 
 
 
 
Total interest-earning
   
359,682
   
4,997
   
5.56
%
 
360,507
   
5,746
   
6.38
%
         
 
       
 
 
Noninterest-earning
   
20,717
   
 
    
 
    
14,224
   
 
    
 
  
   
             
             
 
  
$
380,399
   
 
    
 
  
$
374,731
   
 
    
 
  
   
             
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
    
 
    
 
    
 
  
Interest-bearing:
   
 
    
 
    
 
    
 
    
 
    
 
  
Savings accounts
 
$
17,460
   
35
   
0.80
%
$
17,685
   
74
   
1.67
%
Transaction accounts
   
73,173
   
159
   
0.87
%
 
65,621
   
244
   
1.49
%
Certificates of deposit
   
122,888
   
1,011
   
3.29
%
 
128,318
   
1,298
   
4.05
%
FHLB Advances
   
103,604
   
1,121
   
4.33
%
 
109,350
   
1,501
   
5.49
%
Other Borrowed Funds
   
-
   
-
   
-
    
-
   
-
   
-
 
   
 
       
 
       
Other borrowed funds
   
953
   
1
   
0.42
%
 
1,014
   
3
   
1.18
%
   
 
 
 
 
 
 
Total interest-bearing
   
318,078
   
2,327
   
2.93
%
 
321,988
   
3,120
   
3.88
%
         
 
       
 
 
Noninterest-bearing
   
24,830
   
 
    
 
    
16,455
   
 
    
 
  
   
             
             
Total liabilities
   
342,908
   
 
    
 
    
338,443
   
 
    
 
  
Stockholders’ equity
   
37,491
   
 
    
 
    
36,288
   
 
    
 
  
   
             
             
 
  
$
380,399
   
 
    
 
  
$
374,731
   
 
    
 
  
   
             
             
Net earning balance
 
$
41,604
   
 
    
 
  
$
38,519
   
 
    
 
  
   
             
             
Earning yield less costing rate
   
 
    
 
    
2.63
%
 
 
    
 
    
2.50
%
               
             
 
Net interest income, and net yield spread
 
 
    
 
    
 
    
 
    
 
  
on interest earning assets
   
 
  
$
2,670
   
2.97
%
 
 
  
$
2,626
   
2.91
%
         
 
       
 
 
Ratio of interest-earning assets to
 
 
    
 
    
 
    
 
    
 
  
interest-bearing liabilities
   
 
    
113
%
 
 
    
 
    
112
%
 
 
  
         
             
       

 
  12  
 

 
Results of Operations - Comparison of Three Month Periods Ended September 30,
2003 and 2002

Income for the three months ended September 30, 2003 was $1,076,697 ($0.39 per share) as compared to $896,046, ($0.32 per share) for the three months ended September 30, 2002, which represents an increase in earnings of $180,651 (20%) for the three month period ended September 30, 2003, compared to the same period in 2002.

Interest Income

Total interest income for the three months ended September 30, 2003, decreased $749,363 (13%) as compared to the three months ended September 30, 2002. For the three month period ended September 30, 2003 compared to the same period in 2002, the average yield on interest earning assets decreased 82 basis points to 5.56%, while the average balance of interest earnings assets decreased $825,000.

Interest Expense

Total interest expense for the three months ended September 30, 2003, decreased $793,672 (25%) when compared to the three months ended September 30, 2002. For the three month period ended September 30, 2003, the average cost of interest bearing liabilities decreased 95 basis points to 2.93% while the average balance decreased $3,910,000 when compared to the same period in 2002.

Net Interest Income

Net interest income for the three months ended September 30, 2003, increased $44,309 (2%) when compared to the same period in 2002. The average balance of interest bearing liabilities decreased $3,085,000 more than the average balance in interest earning assets. For the three month period ended September 30, 2003, the earning yield minus the costing rate spread increased 13 basis points to 2.63% compared to the same period in 2002.

Provision for Loan Losses

Based primarily on the continued growth of the commercial loan portfolio, management decided to increase the allowance for loan losses through a provision for loan loss of $212,000 for the three months ended September 30, 2003, and of $100,000 for the same period in 2002. 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 establishm ent of additional loss provisions.

Noninterest Income

Noninterest income increased $367,802 (43%) for the three months ended September 30, 2003, when compared to the three months ended September 30, 2002. The primary reason for the increase in income this quarter when compared to the same period one year ago was the Bank’s mortgage banking activities. During the quarter ended September 30, 2003, the Bank originated and sold over $31 in million residential loans, resulting in $559,000 in profits on loans sold, compared to $225,000 in profits on loans sold during the same period one year ago. Due to this large amount of activity, along with an increase in interest rates and a slowing of prepayment speeds, the amortization and valuation of originated mortgage service rights resulted in net income of $9,700 for the quarter ended September 30, 2003, compared to a net expense of $67,000 for the same period one year ago.
 
  13  
 
 
Noninterest Expense

Noninterest expense decreased $30,944 (1%) for the three months ended September 30, 2003, when compared to the three months ended September 30, 2002. This small decrease can be attributed to the Company’s aggressive approach to controlling expenses. There was no significant change in any individual expense category.

Provision for Income Taxes
The provision for income taxes increased $150,404 (32%) for the three months ended September 30, 2003, as compared to the same period in 2002. This increase was due to the increase in before tax income for the three months ended September 30, 2003, compared to the same period 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 September 30, 2003, was $2,988,182 or 0.9% of loans receivable. Total assets classified as substandard or loss as of September 30, 2003, were $1,737,105 or 0.5% of total assets. Management has considered nonperforming and total classified assets in evaluating the adequacy of the Bank’s allowance f or 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. All dollar amounts are in thousands.
 
  
9/30/03
6/30/03
6/30/02
   
 
 
 
Nonperforming loans
 
$
407
   
331
   
1,751
 
Real estate acquired in settlement of loans
   
110
   
182
   
683
 
   
 
 
 
Total nonperforming assets
 
$
517
   
513
   
2,434
 
   
 
 
 
 
    
 
    
 
    
 
  
Total nonperforming assets as a percentage of total assets
   
0.14
%
 
0.13
%
 
0.65
%
Allowance for loan losses
 
$
2,988
   
2,775
   
2,650
 
Allowance for loan losses as a percentage of average net loans
   
0.89
%
 
0.85
%
 
0.82
%

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 September 30, 2003, the Bank had approximately $5,304,000 in commitments to originate mortgage loans and $17,414,000 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.
 
 
  14  
 
 
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 const antly 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 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, commercial business 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 September 30, 2003, such loans made up 18.0% 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, 2003, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $112,426,993 or 48% of its total deposits. As of September 30, 2003, these accounts totaled $112,770,533 or 48% 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 September 30, 2003 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 a 100 basis point instantaneous and permanent decrease 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
 
$
32,937
 
$
(5,155
)
 
-14
%
 
8.88
%
 
-1.10
%
+200
   
34,827
   
(3,265
)
 
-9
%
 
9.30
%
 
-0.68
%
+100
   
36,670
   
(1,422
)
 
-4
%
 
9.69
%
 
-0.29
%
NC
   
38,092
   
-
   
-
   
9.98
%
 
-
 
-100
   
40,886
   
2,794
   
7
%
 
10.58
%
 
0.60
%

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.

 
  15  
 
 
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 inter est rates remain steady 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 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-15(e) 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.

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 as of September 30, 2003.

(b) There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2003 that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
  16  
 
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
The annual meeting of stockholders of the registrant was held on October 22, 2003. At the meeting the stockholders elected Kurt D. Hellweg and Gary Lipscomb to three-year terms as directors of the Company, while Jack L. Barham, Wayne V. Barnes, Don M. Gibson, Gregory V. Ostergren, Tim Rosenbury and James L. Sivils, III, continue to serve as directors. Also at that meeting, BKD, LLP was ratified as the Company’s Independent Certified Public Accountants. These same entities serve in identical capacities for Guaranty Bank, the subsidiary bank of the Company.

The results of voting are shown for each matter considered.

Director election:
 
 Nominee  Votes For
Votes withheld
     
 Kurt D. Hellweg  2,466,869  144,666
     
 Gary Lipscomb  2,506,361  105,174
     
 Auditor ratification:    
     
 Votes for  2,582,684  
     
 Votes against  15,855  
     
 Abstentions   15,296  
 
Item 5.    Other Information
None.

Item 6.    Exhibits and Reports on Form 8-K
a)    List of Exhibits

11. Statement re computation of per share earnings (set forth in "Note 4: Earnings Per Share" of
the Notes to condensed financial statements (unaudited))
31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 
32.1 CEO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002

b)    Reports on Form 8-K

Furnished on July 16, 2003 relating to the registrant’s earnings release for the fourth quarter ended
June 30, 2003, and announcing the repurchase of additional shares of common stock and quarterly
dividend information.
 
  17  
 
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.


Signature and Title    Date

/s/ Don M. Gibson     November 6,2003 
Don M. Gibson
President and Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)

 


/s/ Bruce Winston    November 6, 2003     
Bruce Winston        
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

  18