Exhibit 13




CONTENTS


1

Investor Information2

Presidents Message3

Selected Consolidated Financial and other Data5

Managements Discussion and Analysis of Financial Condition and Results of Operations22

Consolidated Financial Statements55

Independent Accountants Report





INVESTOR INFORMATION


COMMON STOCK PRICES & DIVIDENDS




The common stock of Guaranty Federal Bancshares, Inc. is traded in the over-the-counter market and quoted on the NASDAQ National Market. As of March 5, 2004, there were 1,701 stockholders. At that date the Company had 6,439,112 shares of common stock issued and 2,995,797 shares of common stock outstanding.
  The common stock of Guaranty Federal Bancshares, Inc. is traded in the over-the-counter market and quoted on the NASDAQ National Market. As of March 5, 2004, there were 1,701 stockholders. At that date the Company had 6,439,112 shares of common stock issued and 2,995,797 shares of common stock outstanding.
 During the six month transition period ended December 31, 2003, the Company paid cash dividends of $0.155 per share on October 17, 2003, to the stockholders of record as of October 3, 2003, and 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. During the Companys fiscal year ended June 30, 2003, the Company paid cash dividends of (i) $0.15 per share on October 18, 2002, to the stockholders of record as of October 4, 2002, (ii) $0.15 per share on January 24, 2003, to the stockholders of record as of January 10, 2003, (iii) $0.15 per share on April 14, 2003 to stockholders of record as of March 31, 2003, and (iv) declared a cash dividend of $0.15 per share on June 27, 2003, to be paid on July 15, 2003, to stockholders of record on July 1, 2003. The Companys Board of Directors anticipates paying dividends on comparable dates during fiscal year ended December 31, 2004 to the payment dates during the twelve month period ended December 31, 2003. 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. During the Companys fiscal period ended June 30, 2002, the Company paid cash dividends of (i) $0.25 per share on October 15, 2001, to the stockholders of record as of September 4, 2001, (ii) $0.25 per share on April 12, 2002, to the stockholders of record as of April 1, 2002, and (iii) declared a cash dividend of $0.125 per share on June 27, 2002, to be paid on July 19, 2002, to stockholders of record on July 8, 2002.


The table below reflects the range of common stock closing prices by quarter.


Six months ended
Fiscal Year endedDecember 31, 2003
June 30, 2003
June 30, 2002High

Low


High

Low


High

LowQuarter ended:June 30


n/a

n/a

$
16.40

15.15

$
14.35

13.01March 31


n/a

n/a


15.73

14.90


14.37

12.65December 31


19.59

17.15


15.75

13.35


14.73

12.31September 30


17.30

16.04


14.50

13.81


14.36

10.72





ANNUAL MEETING OF STOCKHOLDERS: The Annual Meeting of Stockholders will be held Wednesday, May 19, 2004 at 6:00 p.m., at the Clarion Hotel, 3333 S. Glenstone, Springfield, Missouri.





ANNUAL REPORT ON FORM 10-K: Copies of the Guaranty Federal Bancshares Inc.'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 CERTIFIED PUBLIC ACCOUNTANTS: 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


1

















Dear Shareholders,
 
 Guaranty Federal Bancshares, Inc. recently completed its transition period ended December 31, 2003, following Guaranty Banks June 2003 conversion from a federally chartered savings bank to a state chartered trust company with banking powers. Historically, the company has operated based on a June 30 fiscal year. However, following the six-month transition period from July 1, 2003 to December 31, 2003, we will operate on a calendar year basis.
 
 As you are aware, calendar year 2003 was an exciting year of change and transition for our company. Continued emphasis on core banking fundamentals, such as increasing our net interest margin, reducing our overhead, and improving our operating efficiencies, resulted in strong market acceptance of our stock. At December 31, 2003, our stock price closed at $19.25. Subsequently, our stock price closed at an all-time high of $19.95 on March 16, 2004.
 
 As a result of a normal regulatory examination in March 2004, an additional $800,000 provision was recorded against the banks loan loss reserve following the reclassification of about $9.0 million in loans. This provision is reflected in the earnings for the six months ended December 31, 2003 and increased the banks loan loss provision from 0.93% of total loans to 1.17% of total loans, which is in line with the banks peer group. These loans are being monitored closely, and to date all payments on these loans have been paid as agreed. We currently have no reason to believe that any of these loans will not be repaid in accordance with their terms.
 
 Even after the effect of this additional provision, earnings remained strong at $0.54 per share for the six-month period ending December 31, 2003, which was a 14% decrease compared to the same time period in 2002. The retained earnings for this period increased the banks capital level to 9.8% of total assets and increased its book value per share to $13.62. Our shareholders received quarterly dividends during calendar 2003 of $0.15, $0.15, $0.15, and $0.155 per share. Our shareholders also received a quarterly dividend of $0.155 in January 2004, and a $0.155 dividend per share has been declared for the first quarter of 2004.
 
 I am pleased to announce the addition of Shaun Burke as Guaranty Banks new president and chief executive officer. Shaun joined the company on March 9, 2004, and brings 20 years of commercial lending and banking experience in the Springfield and Branson, Missouri markets. While I will remain as president and CEO of Guaranty Federal Bancshares, the banks holding company, Shaun is now responsible for the management and operations of the bank. Please join me in welcoming Shaun to Guaranty Bank.
 
 We are continuing to expand our presence in our market and will be opening a new branch bank on West Kearney in Springfield, Missouri in 2004, with additional locations currently being considered. We will also be introducing check imaging during this upcoming year that will allow the bank to process checks internally, which should improve statement delivery to our customers while providing significant savings to the bank. Our Internet banking services available at  www.gbankmo.com continue to grow and provide additional service and convenience for our customers.
 
 As Guaranty Bank transitions to a more traditional commercial bank, we expect additional loan and deposit growth, a continued emphasis on developing technology for the convenience of our customers, and a renewed focus on exceptional customer service. We believe we are poised and positioned for growth in 2004, and Shaun and I look forward to reporting our progress to you.
 
 Sincerely,
 /s/ Don M. Gibson
 Don M. Gibson
 President & CEO
 Guaranty Federal Bancshares, Inc.


2Guaranty Federal Bancshares, Inc.
Selected Consolidated Financial and Other Data








Thefollowing 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

Six months ended
Six months endedDecember 31,
December 31,2003 (1)
2002(Unaudited)Interest income

$
9,846

11,290Interest expense


4,491

6,086Net interest income


5,355

5,204Provision for loan losses


1,162

205Net interest income after provisionfor loan losses


4,193

4,999Noninterest income


2,089

1,752Noninterest expense


3,994

4,060Income before income taxes


2,288

2,691Provision for income taxes


788

927Net income

$
1,500

1,764Basic

$
0.54

0.63Diluted

$
0.52

0.62Years endedJune 30,2003

2002

2001

2000

1999Interest income

$
21,782

25,223

27,182

23,564

20,763Interest expense


11,445

14,087

16,378

12,929

10,703Net interest income


10,337

11,136

10,804

10,635

10,060Provision for loan losses


610

291

310

180

180Net interest income after provisionfor loan losses


9,727

10,845

10,494

10,455

9,880Noninterest income


3,688

3,634

2,103

1,418

1,201Noninterest expense


8,179

8,994

7,621

6,420

5,958Income before income taxes


5,236

5,485

4,976

5,453

5,123Provision for income taxes


1,656

1,892

1,743

1,947

1,765Net income

$
3,580

3,593

3,233

3,506

3,358Basic

$
1.28

1.01

0.78

0.71

0.61Diluted

$
1.26

1.00

0.77

0.70

0.60





3Guaranty Federal Bancshares, Inc.
Selected Consolidated Financial and Other Data
    Summary Balance Sheet

As of December 31,
As of June 30,2003 (1)
2003
2002
2001
2000
1999ASSETSCash and cash equivalents

$
22,657

19,015

16,964

10,314

9,157

9,689Investment securities


16,731

15,522

19,683

23,994

20,414

24,346Loans receivable, net


332,130

336,838

319,916

320,106

296,053

264,269Accrued interest receivable


1,306

1,430

1,655

2,148

1,826

1,757Prepaids and other assets


7,351

10,455

10,293

9,769

7,605

5,672Foreclosed assets


6

182

683

4

1

101Premises and equipment


6,576

6,709

7,356

7,758

6,800

7,365$
386,757

390,151

376,550

374,093

341,856

313,199LIABILITIESDeposits

$
237,131

235,677

225,284

170,648

144,607

141,137Federal Home Loan Bank advances


108,837

114,619

111,083

146,657

136,507

104,795Other liabilities


2,811

3,313

4,748

6,583

4,157

3,834348,779

353,609

341,115

323,888

285,271

249,766Common stock


624

624

624

624

624

624Additional paid-in capital


47,366

47,366

47,366

47,366

47,366

47,366Unearned ESOP shares


(3,100
)
(3,100
)
(3,100
)
(3,100
)
(3,100
)
(3,100
)Retained earnings


23,236

23,236

23,236

23,236

23,236

23,236Unrealized appreciation on available-for-sale securities, net


3,439

3,439

3,439

3,439

3,439

3,439Treasury stock


(8,132
)
(8,132
)
(8,132
)
(8,132
)
(8,132
)
(8,132
)STOCKHOLDERS' EQUITY


37,978

36,542

35,435

50,205

56,585

63,433$
386,757

390,151

376,550

374,093

341,856

313,199Supplemental Data


As of December 31,

As of June 30,2003 (1)

2003

2002

2001

2000

1999Number of full-service offices


9

9

9

5

5

5Cash dividends per share

$
0.31

0.60

0.63

0.47

0.42

0.34 (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 is reporting a six-month transition period ended December 31, 2003 in order to change to this new calendar year end.






4Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations


GENERAL


Guaranty Federal Bancshares, Inc. 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", and together with Guaranty Federal Bancshares, Inc., the "Company"). 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 December 6, 2001, the Bank completed its acquisition of the Springfield branch offices of Commercial Federal Bank. The Bank acquired approximately $15.5 million in selected consumer and home equity loans and assumed approximately $41.2 million in deposit liabilities. The Bank also assumed the leases and equipment at all but one of the branches. The acquired locations are located in Dillons Supermarkets in Springfield. The transaction increased the number of "in-store" locations from one to five and total locations from five to nine.
 
 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.
 
 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 is reporting a six-month transition period ended December 31, 2003 in order to change to this new calendar year end.
 
 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 discussion set forth below , and in any other portion of this report, 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 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.


5Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations




FINANCIAL CONDITION




From June 30, 2003 to December 31, 2003, the Companys total assets decreased $3,393,690 (1%), liabilities decreased $4,829,999 (1%), and stockholders' equity increased $1,436,309 (4%). The ratio of stockholders equity to total assets increased to 10% during this period.
 
 From June 30, 2003 to December 31, 2003, securities available-for-sale increased $1,592,679 (12%). The Company currently owns 80,000 shares of Federal Home Loan Mortgage Corporation ("FHLMC") stock with an amortized cost of $78,336 in the securities available-for-sale category. As of December 31, 2003, the gross unrealized gain on the stock is $4,587,264, an increase of $504,418 from the gross unrealized gain at June 30, 2003. This increase is due to the increase in the stock price of FHLMC stock from $50.77 per share as of June 30, 2003 to $58.32 per share as of December 31, 2003. From June 30, 2003 to December 31, 2003, securities held-to-maturity decreased $383,300 (17%) due to repayments received during the period. Stock in the Federal Home Loan Bank of Des Moines ("FHLB") was reduced by $3,306,200, 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 June 30, 2003 to December 31, 2003, net loans receivable increased by $3,779,455 (1%). During this period, permanent loans secured by both owner and non-owner occupied one to four unit residential real estate decreased by $6,440,018, (5%), consumer installment loans decreased $30,653 (0.1%), multi-family permanent loans increased by $3,219,774 (8%), construction loans decreased by $14,649,523 (23%) , permanent loans secured by commercial real estate increased $1,058,778 (1%) and other commercial loans increased $5,651,587 (30%). 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. These loan sales allowed the Bank to provide customers with 30-year fixed rate mortgages while retaining a banking relationship with the customer. As a result of these loan sales, loans serviced for others increased by $11,308,997 (10%).
 
 During the six months ending December 31, 2003,  the Bank changed the manner in which construction loans are recorded. The "loans-in-process" account has been eliminated on loans recorded after June 30, 2003. Prior to this change, the principal balance of construction loans were recorded at closing, and the proceeds were held in "loans in process" to be disbursed as the construction proceeded. Subsequent to June 30, 2003, this type of loan will be set up as a "closed-end" draw account where only the actual principal disbursed will be recorded. As a result of this change, loans in process has decreased by $16,113,784 (63%) from June 30, 2003 to December 31, 2003, and construction loan balances have decreased by $14,649,523 (23%) over the same period.
 
 From June 30, 2003 to December 31, 2003, loans past due 90 days or more increased $141,938 to $472,909 (0.1% of net loans). As of December 31, 2003, management considers loans totaling $7,159,100 as impaired with a related allowance for loan losses of $1,110,130. 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 on these loans are sufficient to liquidate the collateral without further loss.
 
 From June 30, 2003 to December 31, 2003, the allowance for loan losses increased $1,110,817. Loan charge-offs exceeded recoveries by $51,183 for six months ended December 31, 2003 and $484,552 for fiscal year ended June 30, 2003. The allowance for loan losses as of December 31, 2003 and June 30, 2003 was 1.2% and 0.85% of net loans outstanding, respectively. As of December 31,2003, the allowance for loan losses was 54% of impaired loans versus 445% as of June 30, 2003.
 
 As of December 31, 2003 foreclosed assets held for sale consists of one automobile and one motorcycle.
 
 From June 30, 2003 to December 31, 2003, premises and equipment decreased $132,993 (2%). This decrease is primarily due to depreciation.


6Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations


From June 30, 2003 to December 31, 2003, deposits increased $1,453,547 (1%). During this period core deposit accounts increased by $4,617,105 (4%) to 49% of total deposits and certificates of deposit decreased by $3,163,557 (3%). Included in the certificates of deposit total is $24,505,000 in deposits placed by brokers. 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 June 30, 2003 to December 31, 2003, the Company decreased borrowings from the Federal Home Loan Bank ("FHLB") by $5,781,946 (5%), in an effort to lower the overall cost of funds and to comply with the FHLB advances limitation of 35% of total assets.

Stockholders equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $1,436,309 (4%) to $37,978,121 as of December 31, 2003. Net income for the period exceeded cash dividends paid or declared by $638,911. The Company repurchased 16,275 shares as treasury stock at a cost of $280,558, an average price of $17.24 per share. As of December 31, 2003, 241,194 shares remain to be repurchased under the repurchase plan announced November 22, 2002. The increase in unrealized appreciation on securities available-for-sale, net of tax, increased stockholders equity by $686,130. On a per share basis, stockholders equity increased $0.48 (4%) from $13.14 as of June 30, 2003 to $13.62 as of December 31, 2003.




7Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations





AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS





The following tables show (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
Six Months Ended
Six Months EndedDecember 31, 2003
December 31, 2003
December 31, 2002(Unaudited)Balance
Yield / Cost
Average Balance
Interest
Yield / Cost
Average Balance
Interest
Yield / CostASSETSInterest-earning:Loans

$ 332,130
5.39%
$ 334,071
$ 9,567
5.73%
$ 323,292
$ 10,827
6.70%Investment securities

10,421
2.65%
9,899
135
2.73%
11,988
231
3.85%Other assets

13,604
2.14%
13,867
144
2.08%
24,800
232
1.87%Total interest-earning

356,155
5.18%
357,837
9,846
5.50%
360,080
11,290
6.27%Noninterest-earning

30,602

20,821


13,990$ 386,757

$ 378,658


$ 374,070LIABILITIES AND STOCKHOLDERS' EQUITYInterest-bearing:Savings accounts

$ 17,221
0.81%
$ 17,483
70
0.80%
$ 17,507
132
1.51%Transaction accounts

76,488
0.87%
74,578
327
0.88%
67,002
460
1.37%Certificates of deposit

120,087
3.08%
121,926
1,971
3.23%
127,218
2,530
3.98%FHLB advances

108,837
3.58%
101,841
2,121
4.17%
107,612
2,959
5.50%Other borrowed funds

738
0.38%
907
2
0.44%
971
5
1.03%Total interest-bearing

323,371
2.60%
316,735
4,491
2.84%
320,310
6,086
3.80%Noninterest-bearing

25,408

24,038


17,390Total liabilities

348,779

340,773


337,700Stockholders' equity

37,978

37,885


36,370$ 386,757

$ 378,658


$ 374,070Net earning balance

$ 32,784

$ 41,102


$ 39,770Earning yield less costing rate


2.58%


2.66%


2.47%Net interest income, andnet yield spread oninterest-earning assets


2.83%

$ 5,355
2.99%

$ 5,204
2.89%Ratio of interest-earning assets tointerest-bearing liabilities

110%

113%


112%





8Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations











Year Ended
Year EndedJune 30, 2003
June 30, 2002Average Balance


Interest


Yield / Cost


Average Balance


Interest


Yield / CostASSETSInterest-earning:Loans

$
326,441

$
20,928


6.41
%
$
324,796

$
23,876


7.35
%Investment securities


11,103


419


3.77
%

14,824


619


4.18
%Other assets


18,864


434


2.30
%

33,362


727


2.18
%Total interest-earning


356,408


21,781


6.11
%

372,982


25,222


6.76
%Noninterest-earning


19,368








12,833$
375,776







$
385,815LIABILITIES AND STOCKHOLDERS' EQUITYInterest-bearing:Savings accounts

$
17,390


221


1.27
%
$
13,732


241


1.76
%Transaction accounts


67,614


814


1.20
%

54,916


934


1.70
%Certificates of deposit


126,376


4,768


3.77
%

128,718


5,842


4.54
%FHLB advances


108,020


5,634


5.22
%

126,534


7,039


5.56
%Other borrowed funds


832


7


0.84
%

1,735


30


1.73
%Total interest-bearing


320,232


11,444


3.57
%

325,635


14,086


4.33
%Noninterest-bearing


18,946








13,060Total liabilities


339,178








338,695Stockholders' equity


36,598








47,120$
375,776







$
385,815Net earning balance

$
36,176







$
47,347Earning yield less costing rate








2.54
%







2.43
%Net interest income, andnet yield spread oninterest-earning assets




$
10,337


2.90
%



$
11,136


2.99
%Ratio of interest-earning assets tointerest-bearing liabilities


111
%







115
%





9Guaranty 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.





Six Months Ended
Year EndedDecember 31, 2003 versus 2002
June 30, 2003 versus 2002Average Balance
Interest Rate
Rate & Balance
Total
Average Balance
Interest Rate
Rate & Balance
TotalInterest income:Loans

$ 361
(1,569)
(52)
(1,260)
121
(3,053)
(15)
(2,947)Investment securitites

(40)
(68)
12
(96)
(155)
(61)
16
(200)Other assets

(102)
25
(11)
(88)
(316)
40
(17)
(293)Net change in interest income

219
(1,612)
(51)
(1,444)
(350)
(3,074)
(16)
(3,440)Interest expense:Savings accounts

-
(62)
-
(62)
64
(67)
(17)
(20)Transaction accounts

52
(166)
(19)
(133)
216
(274)
(62)
(120)Certificates of deposit

(105)
(474)
20
(559)
(106)
(991)
23
(1,074)Advances

(159)
(717)
38
(838)
(1,029)
(430)
54
(1,405)Other borrowed funds

-
(3)
-
(3)
(16)
(15)
8
(23)Net change in interest expense

(212)
(1,422)
39
(1,595)
(871)
(1,777)
6
(2,642)Change in net interest income

$ 431
(190)
(90)
151
521
(1,297)
(22)
(798)





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


U.S. Treasury SecuritiesAverage for the Year EndedTen-Year Maturity

One-Year Maturity

SpreadDecember 31, 2003

4.28
%
1.25
%
3.03
%December 31, 2002

4.17
%
1.70
%
2.47
%Decrease in interest rates

0.11
%
-0.45
%
0.56
%





Interest Rates. The Company 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 on U.S. Treasury securities for the six months ended December 31, 2003 and 2002.

Shortly after the Federal Reserve Open Market Committee reduced the discount rate 25 basis points in June 2003, longer term rates increased almost 100 basis points. As a result, residential mortgage loan refinancing slowed significantly in the six months ended December 31, 2003, and commercial loan customers preferred prime floating rates over rates fixed for longer terms.


10Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations




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%) as the average balance of interest bearing deposits increased $2,260,000 (1%) while 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 borrowings from the FHLB. The average balance of FHLB advances decreased by $5,771,000 (5%) while 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.
 
 Net Interest Income . The Companys net interest income increased $150,013 (3%). During the six months ended December 31, 2003, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $41,102,000, 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 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 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. See also Note 15 of the notes to consolidated financial statements. 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 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. Management of the Company anticipates the need to continue increasing the loan loss allowance 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 of 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.


11Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations




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 change in income tax is a direct result of changes in the Companys taxable income for the six month period ended December 31, 2003.

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.





RESULTS OF OPERATIONS - COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2003 AND 2002





U.S. Treasury SecuritiesAverage for the Year EndedTen-Year Maturity

One-Year Maturity

SpreadJune 30, 2003

3.96
%
1.46
%
2.50
%June 30, 2002

4.99
%
2.56
%
2.43
%Change in interest rates

-1.03
%
-1.10
%
0.07
%





Interest Rates. The Company 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 on U.S. Treasury securities for the twelve months ending June 30, 2003 and 2002.

Interest rates trended downward during the twelve months ended June 30, 2003. The Federal Reserve Open Market Committee reduced the discount rate 50 basis points in November 2002 and 25 basis points in June 2003. The last week in June 2003, the ten-year treasury averaged 3.42%, and the one-year treasury averaged 1.02%. The widely quoted bank prime rate fell from 4.75% to 4.00% during the twelve months ended June 30, 2003. As a result, loan customers continued to refinance their loans to lower rates.

Interest Income. Total interest income decreased $3,440,712 (14%) as the average balance of interest-earning assets decreased $16,574,000 (4%). In addition the yield on average interest earning assets decreased 65 basis points to 6.11%.

Interest on loans decreased $2,947,361 (12%) as the average loan receivable balance increased $1,645,000 (1%) while the average yield decreased 94 basis points to 6.41%. 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 $199,904 (32%) as the average balance decreased $3,721,000 (25%) and the average yield decreased 41 basis points to 3.77%. 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 rates. These adjustments and refinances will negatively impact portfolio loan yields in futurequarters.





12Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations


Interest Expense. Total interest expense decreased $2,642,273 (19%) as the average balance of interest-bearing liabilities decreased $5,403,000 (2%). In addition, the average cost of interest-bearing liabilities decreased 76 basis points to 3.57%.
 
 Interest expense on deposits decreased $1,214,839 (17%) as the average balance of interest bearing deposits increased $14,014,000 (7%) while the average interest rate paid to depositors decreased 81 basis points to 2.75%. The average balance of interest bearing core deposit accounts increased $16,356,000 (24%) and the average balance of certificates of deposit decreased $2,342,000 (2%).
 
 In order to comply with the FHLB limitation of advances to 35% of assets, the Company decreased borrowings from the FHLB. The average balance of FHLB advances decreased by $18,514,000 (15%) while the average cost of those advances decreased 34 basis points to 5.22%. As of June 30, 2003, FHLB advances are 29% of total assets.
 
 Net Interest Income. The Companys net interest income decreased $798,439 (7%). During the year ended June 30, 2003, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $36,176,000, resulting in a decrease in the average net earning balance of $11,171,000 (24%). The Companys spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 11 basis points from 2.43% to 2.54%.
 
 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 collectability of the Companys loan portfolio.
 
 During fiscal year ended June 30, 2003, the Company experienced loan charge-offs in excess of recoveries of $484,552 and based on a review as discussed above, elected to record a provision for loan loss of $610,000 to increase the allowance for loan losses. Management of the Company anticipates the need to continue increasing the loan loss allowance 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 increased $54,493 (1%). The gain on sale of loans of $1,544,037 for fiscal year 2003 is 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. There were no profits on sale of investments for fiscal year ended June 30, 2003. Deposit service charges increased $223,910 (14%) due to the continued growth in the Banks checking accounts. 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 $295,808. A loss on impairment of these rights of $239,543 was recognized based on the Banks fair value assessment of such rights. 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 for others. The increase in prepayment speed is attributable to significant increases in refinancing in a historically low interest rate environment. In addition late charges and other fees decreased $111,088 (37%) primarily due to approximately $146,000 in prepayment penalties collected from two commercial borrowers during fiscal year ended June 30, 2002 which did not occur during fiscal year ended June 30, 2003.
 
 Non-Interest Expense. Non-interest expense decreased $813,613 (9%). Decreases in salaries and employee benefits, occupancy, advertising and data processing expense are principally attributable to the Companys aggressive approach to lowering operating costs. In the same period one year ago the Company incurred approximately $183,000 in "one-time" costs in connection with the Commercial Federal acquisition and approximately $150,000 in legal and professional expenses in connection with the settlement of a dispute over the repurchase of the Companys stock.
 
 Income Taxes. The change in income tax is a direct result of changes in the Companys taxable income for the period ended June 30, 2003.


13Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations




Cash Dividends Paid. The Company paid cash dividends of $0.125 per share on July 19, 2002, to the stockholders of record on July 8, 2002 (as declared on June 27, 2002), and $0.15 per share on October 18, 2002, to the stockholders of record as of October 4, 2002 and $0.15 per share on January 24, 2003, to the stockholders of record as of January 10, 2003 and $0.15 per share on April 14, 2003 to stockholders of record as of March 31, 2003. The Company declared a cash dividend of $0.15 per share on June 27, 2003, to be paid on July 15, 2003, to stockholders of record on July 1, 2003.




RESULTS OF OPERATIONS  COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2002 AND 2001


Interest Rates . The Company 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 on U.S. Treasury securities for the twelve months ended June 30, 2002 and 2001.
 U.S. Treasury SecuritiesAverage for the Year EndedTen-Year Maturity

One-Year Maturity

SpreadJune 30, 2002

4.99%

2.56%

2.43%June 30, 2001

5.45%

5.10%

0.35%Change in rates

-0.46%

-2.54%

2.08% From July 1, 2001 until the events of September 11, interest rates were relatively stable. In the two weeks following September 11, the one-year Treasury rate fell 83 basis points. From the week ended September 21, 2001 through the week ended June 28, 2002, the one-year treasury security traded in a range from a low of 1.99% to a high of 2.70%. These historically low interest rates encouraged borrowers to refinance their loans and thereby lowered our yields. Depositors exhibited a preference for money market deposits over the certificates of deposit.
 
 Interest Income . Total interest income decreased $1,959,665 (7%) as the average balance of interest-earning assets increased $32,083,000 (9%). The yield on average interest earning assets, however, decreased 121 basis points to 6.76%.
 
 Interest on loans decreased $1,281,546 (5%) as the average loan receivable balance increased $15,374,000 (5%) while the average yield decreased 78 basis points to 7.35%. 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 $513,427 (45%) as the average balance decreased $413,000 (3%) and the average yield decreased 326 basis points to 4.18%. 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 $2,291,358 (14%) as the average balance of interest-bearing liabilities increased $30,347,000 (10%). The average cost of interest-bearing liabilities, however, decreased 122 basis points to 4.33%.
 
 Interest expense on deposits increased $298,754 (4%) as the average balance of interest bearing deposits increased $57,754,000 (41%) while the average interest rate paid to depositors decreased 125 basis points to 3.56%. The average balance of interest bearing core deposit accounts increased $22,044,000 (47%) and the average balance of certificates of deposit increased $35,710,000 (38%).
 
 Interest expense on FHLB advances decreased $2,606,626 (27%). In order to comply with the FHLB limitation of advances to 35% of assets, the Company decreased borrowings from the FHLB. The average balance of FHLB advances decreased by $28,791,000 (19%) while the average cost of those advances decreased 65 basis points to 5.56%. As of June 30, 2002, FHLB advances are 29% of total assets.
 
 14Guaranty 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 $331,693 (3%). During the year ended June 30, 2002, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $47,347,000, resulting in an increase in the average net earning balance of $1,736,000 (4%). With the treasury stock purchase in the fourth quarter of FY 2002, this net earning balance declined and as of June 30, 2002 is $36,108,000. The Companys spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 1 basis point from 2.42% to 2.43%.
 
 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 collectability of the Companys loan portfolio.
 
 During fiscal year ended June 30, 2002, the Company experienced loan charge-offs in excess of recoveries of $338,517 and based on a review as discussed above, elected to record a provision for loan loss of $291,000 to increase the allowance for loan losses. Management of the Company anticipates the need to continue increasing the loan loss allowance through charges to provision for loan losses based on the anticipated growth in its loan portfolio and the shift in emphasis from primarily single-family loans to a mix of single-family and commercial loans.
 
 Non-Interest Income . Non-interest income increased $1,530,537 (73%). This increase is primarily due to the $959,354 increase in gain on sale of loans and investments. The gain on sale of loans ($786,526 for fiscal year 2002) is 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 risk of price changes by committing to sell loans while the loans are in the origination process. The net gain on sale of investments ($780,741 for fiscal year 2002) is primarily a result of the sale of 11,000 shares of FHLMC stock during the twelve-month period ended June 30, 2002. Deposit service charges increased $279,754 (22%) due to the continued growth in the Banks checking accounts. As of June 30, 2002, the Bank services 16,286 checking accounts up 3,256 (25%) from a year earlier. Late charges and other fees increased $141,475 (89%) primarily due to approximately $146,000 in prepayment penalties collected from two commercial borrowers during the period ended June 30, 2002.
 
 Non-Interest Expense . Non-interest expense increased $1,372,221 (18%). Increases in salaries and employee benefits, occupancy and data processing expense are principally attributable to the Companys recent expansion through branch additions and an overall increase in accounts served. The Company incurred approximately $183,000 in "one-time" costs in connection with the Commercial Federal acquisition and approximately $150,000 in legal and professional expenses in connection with the settlement of a dispute over the repurchase of the Companys stock.
 
 Income Taxes . The increase in the provision for income taxes is a direct result of the increase in the Companys taxable income for the period ended June 30, 2002.
 
 Cash Dividends Paid. The Company paid cash dividends of $0.25 per share on October 15, 2001, to the stockholders of record as of September 4, 2001 and $0.25 per share on April 12, 2002, to the stockholders of record as of April 1, 2002. The Company declared a cash dividend of $0.125 per share on June 27, 2002, to be paid on July 19, 2002, to stockholders of record on July 8, 2002. Effective with this dividend, the Company anticipates paying dividends on a quarterly basis rather than on a semi-annual basis in future fiscal periods.
 15Guaranty 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 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 December 31, 2003, such loans, net of loans in process, make up 15% of the Banks loan portfolio. In general, these loans have higher yields, shorter maturities, and greater interest rate sensitivity than other real estate loans.





The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Banks asset/liability management objectives and spread requirements. As of 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 December 31, 2003, these accounts totaled $117,044,097 or 49% of total deposits. The weighted average rate paid on these accounts increased 4 basis points from .65% on June 30, 2003 to 0.69% on December 31, 2003. 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, 2004, the Bank has the option to prepay $4.7 million of FHLB advances with a remaining average life of 5.1 years and a weighted average rate of 6.05%. The current FHLB advance rate with a similar average life is 3.91%, a 214 basis point savings. Also in the year ending December 31, 2004, the FHLB has the option to call $11.0 million of advances with a weighted average rate of 5.40% and a remaining life of 4.7 years. 16Guaranty 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, 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 Assetsin Rates$
Amount

$
Change


% Change


NPV Ratio


Change+300


35,595


(1,766
)

-5
%

9.24
%

-0.32
%+200


37,078


(283
)

-1
%

9.62
%

0.07
%+100


37,803


442


1
%

9.73
%

0.17
%NC


37,361








9.55
%-100


37,071


(290
)

-1
%

9.41
%

-0.14
%








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, deposits from its primary market area, FHLB advances, principal and interest payments on loans and mortgage-backed securities, and proceeds from maturing investment securities. The Company considers deposits and FHLB advances as 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 $22,656,794 as of December 31, 2003. 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.





17Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations




As of December 31, 2003, the Bank has conditional commitments in the form of letters of credit in the amount of $1,189,351, and outstanding loan commitments of $24,414,000. In addition, the Bank has granted unused lines of credit to borrowers aggregating approximately $50,941,000 and $13,245,000 for commercial lines and open-end consumer lines, respectively. The Bank also has $73,304,289 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 $26,808,000 from the FHLB, as of December 31, 2003. 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 capital position of $37,978,000 is 9.8% of total assets as of December 31, 2003. The Company has an excess of $20,073,000, $23,557,000, and $16,937,000 of required regulatory levels of tangible, core, and risk-based capital, respectively. Under current regulatory guidelines, the Bank is classified as well capitalized.

During fiscal year ended June 30, 2003, the Company purchased 74,240 shares of common stock in open market transactions and 13,046 from the RRP to place in the treasury account. During the six months ended December 31, 2003, the Company purchased 16,275 shares of common stock in open market transactions 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 treasury stock transactions in order to improve the Companys long-term earnings per share while at the same time maintaining an adequate level of stockholders equity.


AGGREGATE CONTRACTUAL OBLIGATIONS


The following table summarizes the Companys fixed and determinable contractual obligations by payment date as of December 31, 2003. dollars amounts are expressed in thousands.





Payments Due By PeriodOne year

One to

Three to

More thanContractual Obligations

Total

or less

Three Years

Five Years

Five YearsDeposits without stated maturity
$
117,044

117,044

-

-

-Time and brokered certificates of deposit

120,087

73,304

20,482

11,836

14,465Short-term borrowings

738

738

-

-

-Federal Home Loan Bank Advances

108,837

63,290

7,850

10,500

27,197Operating leases

289

147

77

65

-Purchase obligations

250

250

-

-

-Other long term obligations
-

-

-

-

-Total
$
347,245

254,773

28,409

22,401

41,662




18Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations


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.




**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 the  2003 Annual Report.
 IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
 
 
 The Financial Accounting Standards Board (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.
 
 19Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations
  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 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.
 20Guaranty Federal Bancshares, Inc.
Managements Discussion and Analysis of Financial Condition
And Results of Operations
 
 SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS





Six Months Ended December 31, 2003, Quarter ended (1)September-03
December-03Interest income



$
4,997,093

4,848,585Interest expense




2,326,503

2,164,542Net interest income




2,670,590

2,684,043Provision for loan losses




212,000

950,000Gain on sale of loans and investment securities




559,033

304,490Other noninterest income, net




672,221

553,127Noninterest expense




1,995,285

1,998,170Income before income taxes




1,694,559

593,490Provision for income taxes




617,862

170,026Net income



$
1,076,697

423,464Basic earnings per share



$
0.39

0.15Diluted earnings per share



$
0.38

0.15Fiscal Year June 30, 2003, Quarter endedSeptember-02


December-02

March-03

June-03Interest income

5,746,456


5,543,740

5,304,477

5,187,047Interest expense

3,120,175


2,965,401

2,778,498

2,580,339Net interest income

2,626,281


2,578,339

2,525,979

2,606,708Provision for loan losses

100,000


105,000

255,000

150,000Gain on sale of loans and investment securities

224,577


444,643

403,633

471,184Other noninterest income, net

638,875


443,639

688,873

372,905Noninterest expense

2,026,229


2,033,749

2,050,978

2,069,031Income before income taxes

1,363,504


1,327,872

1,312,507

1,231,766Provision for income taxes

467,458


459,888

427,824

300,830Net income

896,046


867,984

884,683

930,936Basic earnings per share

0.32


0.31

0.32

0.33Diluted earnings per share

0.32


0.30

0.31

0.33Fiscal Year 2002, Quarter endedSeptember-01


December-01

March-02

June-02Interest income

6,741,476


6,496,607

6,150,640

5,833,709Interest expense

3,952,844


3,681,011

3,326,906

3,125,925Net interest income

2,788,632


2,815,596

2,823,734

2,707,784Provision for loan losses

75,000


75,000

66,000

75,000Gain on sale of loans and investment securities

342,498


542,354

376,111

306,304Other noninterest income, net

447,238


476,161

472,680

670,490Noninterest expense

2,006,291


2,379,399

2,364,640

2,243,270Income before income taxes

1,497,077


1,379,712

1,241,885

1,366,308Provision for income taxes

527,997


447,024

424,328

492,651Net income

969,080


932,688

817,557

873,657Basic earnings per share

0.25


0.25

0.22

0.31Diluted earnings per share

0.25


0.24

0.21

0.31


(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 is reporting a six-month transition period ended December 31, 2003 in order to change to this new calendar year end .


21GuarantyFederal Bancshares, Inc.
Consolidated Balance Sheets
***December 31, 2003, June 30, 2003 and 2002***




December 31,

June 30,2003

2003

2002ASSETSCash
$
20,686,276

15,242,475

8,530,060Interest-bearing deposits in other financial institutions

1,970,518

3,772,053

8,433,442Cash and cash equivalents

22,656,794

19,014,528

16,963,502Available-for-sale securities

14,863,826

13,271,147

16,463,460Held-to-maturity securities

1,867,594

2,250,894

3,219,091Stock in Federal Home Loan Bank, at cost

5,294,200

8,600,400

8,600,400Mortgage loans held for sale

1,268,064

9,755,102

3,131,138Loans receivable, net of allowance for loan losses ofDecember 31, 2003 - $3,886,137; June 30, 2003 and 2002 -$2,775,320 and $2,649,872, respectively

330,861,875

327,082,420

316,785,118Accrued interest receivable:Loans

1,242,683

1,357,434

1,569,260Investments

63,045

72,691

85,251Prepaid expenses and other assets

2,057,195

1,855,268

1,693,760Foreclosed assets held for sale

5,975

182,064

683,329Premises and equipment

6,576,003

6,708,996

7,356,098$
386,757,254

390,150,944

376,550,407LIABILITIES AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
$
237,130,744

235,677,197

225,283,994Federal Home Loan Bank advances

108,836,948

114,618,894

111,083,163Securities sold under agreements to repurchase

738,399

702,024

1,093,074Advances from borrowers for taxes and insurance

259,267

950,678

1,048,297Accrued expenses and other liabilities

308,497

311,696

103,993Accrued interest payable

200,770

203,237

759,099Dividend payable

432,513

415,414

347,656Income taxes payable

227,495

220,707

163,897Deferred income taxes

644,500

509,285

1,232,357348,779,133

353,609,132

341,115,530STOCKHOLDERS' EQUITYCommon Stock:$0.10 par value; authorized 10,000,000 shares;issued; December 31, 2003 - 6,428,902 shares;June 30, 2003 and 2002 - 6,416,848 and 6,365,404 shares

642,890

641,685

636,540Additional paid-in capital

51,330,202

51,065,581

49,842,032Unearned ESOP shares

(2,030,930
)
(2,156,930
)
(2,406,070
)Retained earnings, substantially restricted

29,919,695

29,280,784

27,372,935Accumulated other comprehensive incomeUnrealized appreciation on available-for-sale securities,net of income taxes; December 31, 2003 - $1,565,830;June 30, 2003 and 2002 - $1,162,865 and $1,731,122

2,666,143

1,980,013

2,947,58782,528,000

80,811,133

78,393,024Treasury stock, at cost; December 31, 2003 - 3,436,650 shares;June 30, 2003 and 2002 - 3,420,375 and 3,333,089 shares

(44,549,879
)
(44,269,321
)
(42,958,147
)37,978,121

36,541,812

35,434,877$
386,757,254

390,150,944

376,550,407





**See Notes to Consolidated Financial Statements**22Guaranty Federal Bancshares, Inc.
Consolidated Statements of Income
Six Months Ended December 31, 2003 and 2002
***Years Ended June 30, 2003, 2002, and 2001***







INCOME STATEMENT
Six months ended December 31,
Year ended June 30,2003

2002

2003

2002

2001(Unaudited)INTEREST INCOMELoans
$
9,566,716

10,826,819

20,928,391

23,875,752

25,157,298Investment securities

135,100

231,070

419,145

619,049

1,132,476Other

143,862

232,307

434,184

727,631

892,3239,845,678

11,290,196

21,781,720

25,222,432

27,182,097INTEREST EXPENSEDeposits

2,368,200

3,121,175

5,802,445

7,017,284

6,718,530Federal Home Loan Bank advances

2,120,876

2,959,213

5,634,484

7,039,115

9,645,741Other

1,969

5,188

7,484

30,287

13,7734,491,045

6,085,576

11,444,413

14,086,686

16,378,044NET INTEREST INCOME

5,354,633

5,204,620

10,337,307

11,135,746

10,804,053PROVISION FOR LOAN LOSSES

1,162,000

205,000

610,000

291,000

310,000NET INTEREST INCOME AFTERPROVISION FOR LOAN LOSSES

4,192,633

4,999,620

9,727,307

10,844,746

10,494,053NONINTEREST INCOMEService charges

951,524

884,132

1,778,267

1,554,357

1,274,603Late charges and other fees

187,407

65,238

190,113

301,201

159,726Gain on sale of investment securities

105,461

-

-

780,741

198,118Gain on sale of loans

758,062

669,220

1,544,037

786,526

409,795Income (loss) on foreclosed assets

5,726

19,865

10,830

(13,369
)
(80,189
)Other income

80,691

113,279

165,082

224,380

141,2462,088,871

1,751,734

3,688,329

3,633,836

2,103,299NONINTEREST EXPENSESalaries and employee benefits

2,246,993

2,238,783

4,557,376

4,610,235

4,088,038Occupancy

604,268

673,847

1,322,790

1,324,043

1,024,400SAIF deposit insurance premiums

17,928

19,416

37,950

35,855

28,724Data processing

133,435

294,976

487,786

783,051

642,460Advertising

220,233

104,210

217,066

331,446

392,930Other expense

770,486

729,092

1,557,019

1,908,970

1,444,8273,993,343

4,060,324

8,179,987

8,993,600

7,621,379INCOME BEFORE INCOME TAXES

2,288,161

2,691,030

5,235,649

5,484,982

4,975,973PROVISION FOR INCOME TAXES

788,000

927,000

1,656,000

1,892,000

1,743,000NET INCOME
$
1,500,161

1,764,030

3,579,649

3,592,982

3,232,973BASIC EARNINGS PER SHARE
$
0.54

0.63

1.28

1.01

0.78DILUTED EARNINGS PER SHARE
$
0.52

0.62

1.26

1.00

0.77








**See Notes to Consolidated Financial Statements**23Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows
Six Months Ended December 31, 2003 and 2002
Years Ended June 30, 2003, 2002, and 2001







Six months ended
Year endedDecember 31,
June 30,2003

2002

2003

2002

2001(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet income


1,500,161

1,764,030

3,579,649

3,592,982

3,232,973Items not requiring (providing) cash:Deferred income taxes


(267,750
)
168,917

(154,815
)
211,201

48,395Depreciation


339,101

404,498

783,933

1,020,070

622,855Provision for loan losses


1,162,000

205,000

610,000

291,000

310,000Gain on sale of loans and investment securities


(863,524
)
(669,220
)
(1,544,037
)
(1,567,267
)
(607,913
)(Gain) loss on sale of premises and equipment


-

-

37,761

28,970

(2,392
)(Gain) loss on sale of foreclosed assets


(13,226
)
(26,218
)
(12,310
)
1,712

81,481Amortization of deferred income,premiums and discounts


(18,862
)
(80,575
)
(99,192
)
(188,793
)
91,652Stock award plan expense


30,952

177,810

353,004

401,403

464,032Origination of loans held for sale


(31,454,990
)
(34,910,348
)
(77,775,788
)
(63,372,364
)
(38,604,806
)Proceeds from sale of loans held for sale


40,700,091

33,444,629

72,695,861

63,890,546

37,147,094Release of ESOP shares


225,154

180,244

373,724

319,595

268,071Changes in:Accrued interest receivable


124,397

219,733

224,386

572,430

(322,870
)Prepaid expenses and other assets


(201,927
)
(181,342
)
(55,508
)
(695,042
)
(84,105
)Accrued expenses and other liabilities


(5,666
)
(67,971
)
(348,159
)
557,279

507,415Income taxes payable


34,578

205,676

69,278

(124,777
)
(214,057
)Net cash provided by (used in) operating activities


11,290,489

834,863

(1,262,213
)
4,938,945

2,937,825CASH FLOWS FROM INVESTING ACTIVITIESNet (increase) decrease in loans


(5,060,371
)
(3,172,569
)
(11,171,690
)
14,833,382

(25,590,545
)Principal payments on held-to-maturity securities


379,245

406,222

995,693

1,319,992

2,211,435Principal payments on available-for-sale securities


-

172,835

172,835

1,738,299

345,309Purchase of available-for-sale securities


(1,989,685
)
(2,978,928
)
(4,968,371
)
(9,387,524
)
(4,079,079
)Purchase of premises and equipment


(206,108
)
(138,129
)
(174,592
)
(500,569
)
(1,584,669
)Proceeds from sale of premises and equipment


-

-

-

47,281

6,322Proceeds from sales of available-for-sale securities


107,419

-

-

2,945,061

587,734Proceeds from maturities of available-for-sale securities


1,500,000

4,000,000

6,500,000

7,000,000

-(Purchase) sale of FHLB stock


3,306,200

-

-

-

(1,725,000
)Proceeds from sale of foreclosed assets


315,291

863,367

801,677

282,423

2,931,555Purchase of other investments


-

-

(106,000
)
(200,000
)
(355,656
)Cash acquired in purchase of branches


-

-

-

25,556,972

-Net cash provided by (used in) investing activities


(1,648,009
)
(847,202
)
(7,950,448
)
43,635,317

(27,252,594
)





**See Notes to Consolidated Financial Statements**24Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows (continued)
Six Months Ended December 31, 2003 and 2002
Years Ended June 30, 2003, 2002, and 2001







Six months ended
Year endedDecember 31,
June 30,2003

2002

2003

2002

2001(Unaudited)CASH FLOWS FROM FINANCING ACTIVITIESStock options exercised


107,638

113,554

556,869

924,677

110,510Cash dividends paid


(844,151
)
(764,854
)
(1,604,042
)
(1,823,928
)
(1,936,401
)Cash dividends received on RRP Stock


292

1,322

2,387

2,942

6,652Net increase in demand deposits,NOW accounts and savings accounts


4,617,104

8,403,811

18,725,158

15,557,187

5,546,434Net increase (decrease) in certificates of deposit andsecurities sold under agreements to repurchase


(3,127,182
)
(3,819,504
)
(8,723,005
)
(3,940,368
)
21,758,276Proceeds from FHLB advances


124,500,000

12,000,000

121,500,000

46,500,000

80,924,742Repayments of FHLB advances


(130,281,946
)
(18,714,871
)
(117,964,269
)
(82,073,420
)
(70,775,306
)Advances from borrowers for taxes and insurance


(691,411
)
(724,015
)
(97,619
)
(244,765
)
(91,169
)Reduction of shares in RRP Trust


-

(235,770
)


-

-Stock purchased for stock awards


-

-

-

-

(85,945
)Treasury stock purchased


(280,558
)
(235,770
)
(1,131,792
)
(16,826,643
)
(9,986,737
)Net cash provided by (used in) financing activities


(6,000,214
)
(3,740,327
)
11,263,687

(41,924,318
)
25,471,056INCREASE (DECREASE) IN CASHAND CASH EQUIVALENTS


3,642,266

(3,752,666
)
2,051,026

6,649,944

1,156,287CASH AND CASH EQUIVALENTS,BEGINNING OF PERIOD


19,014,528

16,963,502

16,963,502

10,313,558

9,157,271CASH AND CASH EQUIVALENTS,END OF PERIOD


22,656,794

13,210,836

19,014,528

16,963,502

10,313,558Supplemental Cash Flows InformationReal estate acquired in settlement of loans


120,000

153,820

368,296

963,264

3,015,611Interest paid


4,493,513

6,102,303

12,000,275

14,278,261

16,304,274Income taxes paid


1,026,224

672,466

1,742,466

1,662,886

1,928,539Dividend declared and unpaid


432,513

420,430

415,414

347,656

-The Bank acquired the Springfield, Missouri branchoffices of another financial institution in 2002.In conjunction with the acquisition, assets wereacquired and liabilities were assumed as follows:Fair value of liabilities assumed


-

-

-

41,615,456

-Fair value of assets acquired


-

-

-

(16,058,484
)
-Cash received


-

-

-

25,556,972

-








**See Notes to Consolidated Financial Statements**25Guaranty Federal Bancshares, Inc.
Consolidated Statements of Stockholders Equity
Six Months Ended December 31, 2003
Years Ended June 30, 2003, 2002, and 2001







Common Stock
Additional Paid-In Capital
Unearned ESOP Shares
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income
TotalBalance, July 1, 2000

$ 625,004
47,921,681
(2,870,440)
(16,144,767)
24,654,965
2,398,947
56,585,390Comprehensive incomeNet income

-
-
-
-
3,232,973
-
3,232,973Change in unrealized appreciationon available-for-sale securitites, netof income taxes of $909,880

-
-
-
-
-
1,549,256
1,549,256Total comprehensive income







4,782,229Dividends ($0.47 per share)

-
-
-
-
(1,936,401)
-
(1,936,401)Stock award plans

-
468,674
-
-
-
-
468,674Stock purchased for stock awards


(85,945)
-
-
-
-
(85,945)Stock options exercised

1,836
108,674
-
-
-
-
110,510Release of ESOP shares

-
38,431
229,640
-
-
-
268,071Treasury stock purchased

-
-
-
(9,986,737)
-
-
(9,986,737)Balance, June 30, 2001

626,840
48,451,515
(2,640,800)
(26,131,504)
25,951,537
3,948,203
50,205,791Comprehensive incomeNet income

-
-
-
-
3,592,982
-
3,592,982Change in unrealized appreciationon available-for-sale securitites, netof income taxes of ($587,664)

-
-
-
-
-
(1,000,616)
(1,000,616)Total comprehensive income







2,592,366Dividends ($0.625 per share)

-
-
-
-
(2,171,584)
-
(2,171,584)Stock award plans

-
390,675
-
-
-
-
390,675Stock options exercised

9,700
914,977
-
-
-
-
924,677Release of ESOP shares

-
84,865
234,730
-
-
-
319,595Treasury stock purchased

-
-
-
(16,826,643)
-
-
(16,826,643)Balance, June 30, 2002

636,540
49,842,032
(2,406,070)
(42,958,147)
27,372,935
2,947,587
35,434,877Comprehensive incomeNet income

-
-
-
-
3,579,649
-
3,579,649Change in unrealized appreciationon available-for-sale securitites, netof income taxes of ($568,257)

-
-
-
-
-
(967,574)
(967,574)Total comprehensive income







2,612,075Dividends ($0.60 per share)

-
-
-
-
(1,671,800)
-
(1,671,800)Stock award plans

-
547,241
-
-
-
-
547,241Stock options exercised

5,145
551,724
-
-
-
-
556,869Release of ESOP shares

-
124,584
249,140
-
-
-
373,724Treasury 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
36,541,812Comprehensive incomeNet income

-
-
-
-
1,500,161
-
1,500,161Change in unrealized appreciationon available-for-sale securitites, netof income taxes of $402,965

-
-
-
-
-
686,130
686,130Total comprehensive income







2,186,291Dividends ($0.31 per share)

-
-
-
-
(861,250)
-
(861,250)Stock award plans

-
59,034
-
-
-
-
59,034Stock options exercised

1,205
106,433
-
-
-
-
107,638Release of ESOP shares

-
99,154
126,000
-
-
-
225,154Treasury 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








**See Notes to Consolidated Financial Statements**26Guaranty 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s subsidiary provides other services, such as insurance, annuities, and securities brokerage. 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, and the Banks wholly-owned subsidiary, Guaranty Financial Services of Springfield, Inc. 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.





27Guaranty 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.


28Guaranty 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, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.





29Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




As of December 31, 2003, 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.





The Companys and the Bank's actual capital amounts and ratios are also presented in the table. At December 31, 2003 and June 30, 2003, the Company was a one-bank holding company and, as such, subject to the capital ratios presented in the table. At June 30, 2002, the Company was a unitary savings and loan holding company and, as such, not required to disclose consolidated capital ratios. No amount was deducted from capital for interest-rate risk. Dollar amounts are expressed in thousands.


To Be Well CapitalizedFor Capital
Under Prompt CorrectiveActual
Adequacy Purposes
Action ProvisionsAmount


Ratio


Amount


Ratio


Amount


RatioAs of December 31, 2003Tier 1 (core) capital, andratio to adjusted total assetsCompany
$
35,181


9.4
%
$
15,108


4.0
%

n/a


n/aBank
$
34,476


9.2
%
$
15,045


4.0
%
$
18,807


5.0
%Tier 1 (core) capital, andratio to risk-weighted assetsCompany
$
35,181


12.2
%
$
11,624


4.0
%

n/a


n/aBank
$
34,476


11.9
%
$
11,570


4.0
%
$
17,355


6.0
%Total risk-based capital, andratio to risk-weighted assetsCompany
$
40,185


13.9
%
$
23,248


8.0
%

n/a


n/aBank
$
39,480


13.6
%
$
23,141


8.0
%
$
28,926


10.0
%





30Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




To Be Well CapitalizedFor Capital
Under Prompt CorrectiveActual
Adequacy Purposes
Action ProvisionsAmount
Ratio
Amount
Ratio
Amount
RatioAs of June 30, 2003Tier 1 (core) capital, andratio to adjusted total assetsCompany

$
34,454


9.1
%
$
15,104


4.0
%

n/a


n/aBank

$
33,931


9.0
%
$
15,084


4.0
%
$
18,855


5.0
%Tier 1 (core) capital, andratio to risk-weighted assetsCompany

$
34,454


11.8
%
$
11,642


4.0
%

n/a


n/aBank

$
33,931


11.7
%
$
11,623


4.0
%
$
17,435


6.0
%Total risk-based capital, andratio to risk-weighted assetsCompany

$
38,920


13.4
%
$
23,284


8.0
%

n/a


n/aBank

$
38,397


13.2
%
$
23,246


8.0
%
$
29,058


10.0
%To Be Well CapitalizedFor Capital
Under Prompt CorrectiveActual
Adequacy Purposes
Action ProvisionsAmount


Ratio


Amount


Ratio


Amount


RatioAs of June 30, 2002Tangible capital, andratio to adjusted total assetsBank

$
31,555


8.5
%

7,432


2.0
%Tier 1 (core) capital, andratio to adjusted total assetsBank

$
31,555


8.5
%
$
14,863


4.0
%
$
18,579


5.0
%Tier 1 (core) capital, andratio to risk-weighted assetsBank

$
31,555


10.8
%
$
11,654


4.0
%
$
17,482


6.0
%Total risk-based capital, andratio to risk-weighted assetsBank

$
36,454


12.5
%
$
23,309


8.0
%
$
29,136


10.0
%





The amount of dividends that the Bank may pay is subject to various regulatory limitations. As of December 31, 2003, June 30, 2003 and 2002, the Bank exceeded their minimum capital requirements. The Bank may not pay dividends which would reduce capital below the minimum requirements shown above.





31Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




Earnings Per Share





The computation for earnings per share for six months ended December 31, 2003 and 2002, and years ended June 30, 2003, 2002 and 2001 is as follows:





Six Months Ended

Six Months EndedDecember 31, 2003

December 31, 2002(unaudited)Net income

$
1,500,161

1,764,030Average common shares outstanding


2,782,788

2,797,202Effect of stock options outstanding


103,555

51,446Average diluted shares outstanding


2,886,343

2,848,648Earnings per share - basic

$
0.54

0.63Earnings per share - diluted

$
0.52

0.62Year Ended

Year Ended

Year EndedJune 30, 2003

June 30, 2002

June 30, 2001Net income

$
3,579,649

3,592,982

3,232,973Average common shares outstanding


2,794,032

3,549,172

4,125,778Effect of stock options outstanding


57,525

38,728

47,778Average diluted shares outstanding


2,851,557

3,587,900

4,173,556Earnings per share - basic

$
1.28

1.01

0.78Earnings per share - diluted

$
1.26

1.00

0.77





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 10,000, 15,000 and 415,949 shares of common stock were outstanding during the years ended June 30, 2003, 2002 and 2001, 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.





32Guaranty 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.




Six Months
Six MonthsDecember 31, 2003

December 31, 2002(Unaudited)Net income, as reported

$
1,500,161

1,764,030Less: Total stock-based employeecompensation cost determinedunder the fair value-basedmethod, net of income taxes


(18,085
)
(89,950
)Pro forma net income

$
1,482,076

1,674,080Earnings per share:Basic - as reported

$
0.54

0.63Basic - pro forma

$
0.53

0.60Diluted - as reported

$
0.52

0.62Diluted - pro forma

$
0.51

0.59Year Ended

Year Ended

Year EndedJune 30, 2003

June 30, 2002

June 30, 2001Net income, as reported

$
3,579,649

3,592,982

3,232,973Less: Total stock-based employeecompensation cost determinedunder the fair value-basedmethod, net of income taxes


(174,412
)
(174,142
)
(200,548
)Pro forma net income

$
3,405,237

3,418,840

3,032,425Earnings per share:Basic - as reported

$
1.28

1.01

0.78Basic - pro forma

$
1.22

0.96

0.73Diluted - as reported

$
1.26

1.00

0.77Diluted - pro forma

$
1.19

0.95

0.72





33Guaranty 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 and, to a lesser extent, 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 ValueAs of December 31, 2003Equity Securities:FHLMC stock

$
78,336

4,587,264

-

4,665,600Other stock


2,000,000

-

(326,000
)
1,674,000Debt Securities:Trust preferred securities


6,557,201

11,071

(40,840
)
6,527,432U. S. government agencies


1,996,317

477

-

1,996,794$
10,631,854

4,598,812

(366,840
)
14,863,826As of June 30, 2003Equity Securities:FHLMC stock

$
80,294

4,082,846

-

4,163,140Other stock


2,000,000

-

(324,000
)
1,676,000Debt Securities:Trust preferred securities


6,550,357

-

(615,889
)
5,934,468U. S. government agencies


1,497,618

-

(79
)
1,497,539$
10,128,269

4,082,846

(939,968
)
13,271,147As of June 30, 2002Equity Securities:FHLMC stock

$
80,294

5,044,706

-

5,125,000Other stock


2,000,000

-

(48,000
)
1,952,000Debt Securities:Trust preferred securities


6,536,781

-

(316,937
)
6,219,844U. S. government agencies


2,993,109

632

-

2,993,741Mortgage-backed securities


174,563

-

(1,688
)
172,875$
11,784,747

5,045,338

(366,625
)
16,463,460





34Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




Maturities of available-for-sale debt securities as of December 31, 2003:


Amortized Cost
Approximate Fair ValueWithin one year

$ 1,996,317
1,996,794After ten years


6,557,201
6,527,432$
8,553,518
8,524,226




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 ValueAs of December 31, 2003Debt Securities:U. S. government agencies

$
256,142

78

-

256,220Mortgage-backed securities


1,611,452

81,240

-

1,692,692$
1,867,594

81,318

-

1,948,912As of June 30, 2003Debt Securities:U. S. government agencies

$
263,781

952

-

264,733Mortgage-backed securities


1,987,113

149,541

-

2,136,654$
2,250,894

150,493

-

2,401,387As of June 30, 2002Debt Securities:U. S. government agencies

$
301,139

3,629

-

304,768Mortgage-backed securities


2,917,952

204,033

(5,007
)
3,116,978$
3,219,091

207,662

(5,007
)
3,421,746





Maturities of held-to-maturity securities as of December 31, 2003:


Amortized Cost

Approximate Fair ValueAfter ten years
$
256,142

256,220Mortgage-backed securities not due on asingle maturity date

1,611,452

1,692,692$
1,867,594

1,948,912





The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $42,096 as of December 31, 2003, and $51,075 as of June 30, 2003 and $1,485,620 as of June 30, 2002. The approximate fair value of pledged securities amounted to $41,061 as of December 31, 2003, and $51,036 as of June 30, 2003 and $1,441,700 as of June 30, 2002.





35Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




Gross gains of $105,461, $0, $0, $784,557 and $198,118 and gross losses of $0, $0, $0, $3,816 and $0 resulting from sale of available-for-sale securities were realized for the six months ended December 31, 2003 and 2002, and the years ended June 30, 2003, 2002 and 2001, respectively.





Certain investment 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, 2003, was $6,379,260, which is approximately 38% of the Companys available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from decreases 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, 2003.





Less than 12 Months
12 Months or More
TotalDescription of Securities


Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized LossesEquity 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
)





36Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




NOTE 3:  LOANS AND ALLOWANCE FOR LOAN LOSSES





Categories of loans at December 31, 2003, June 30, 2003 and 2002, include:


December 31,
June 30,2003


2003


2002Real estate - residential mortgage:One to four family units

$
128,209,462


134,649,480


146,312,164Multi-family


44,241,683


41,021,909


44,054,924Real estate - construction


49,814,316


64,463,839


49,807,548Real estate - commercial


72,104,911


71,046,133


58,433,792Commercial loans


24,618,265


18,966,677


8,357,752Installment loans


25,173,452


25,204,105


30,707,834Loans on savings accounts


267,843


282,336


366,555Total loans


344,429,932


355,634,479


338,040,569Less:Undisbursed portion of loans-in-process


(9,425,318
)

(25,539,102
)

(18,325,897
)Allowance for loan losses


(3,886,137
)

(2,775,320
)

(2,649,872
)Unearned discounts


(19,296
)

(26,356
)

(50,070
)Deferred loan fees/costs, net


(237,306
)

(211,281
)

(229,612
)Net loans

$
330,861,875


327,082,420


316,785,118





Impaired loans totaled $7,159,100 as of December 31, 2003, and $623,856 and $1,751,139 as of June 30, 2003 and 2002, respectively, with a related allowance for loan losses of $1,110,130, $81,029 and $168,519, respectively. As of December 31, 2003, June 30, 2003 and 2002, respectively, impaired loans of $736,542, $330,971 and $663,587 had no related allowance for loan losses.




Interest of $153,685, $198,196, $475,190, and $586,156 was recognized on average impaired loans of $4,748,587, $661,746, $3,165,567 and $5,929,505 for the six months ended December 31, 2003 and the years ended June 30, 2003, 2002, and 2001, respectively. Interest of $143,948, $191,040, $262,402, and $339,220 was recognized on impaired loans on a cash basis during the six months ended December 31, 2003 and the years ended June 30, 2003, 2002, and 2001, respectively.





At December 31, 2003 and June 30, 2003 and 2002, accruing loan delinquent 90 days or more totaled $0, $0, and $0, respectively. Non-accruing loans at December 31, 2003 and June 30, 2003 and 2002, were $743,000, $331,000 and $1,751,000, respectively.





37Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




Activity in the allowance for loan losses was as follows:





Six months ended
Years endedDecember 31,
December 31,
June 30,2003
2002
2003
2002
2001(Unaudited)Balance, beginning of period

$
2,775,320

2,649,872

2,649,872

2,697,389

2,519,946Provision charged to expense


1,162,000

205,000

610,000

291,000

310,000Losses charged off net of recoveriesof $3,323 and $150 for six monthsended December 31, 2003, and 2002,$52,015, $482 and $0, for yearsended June 30, 2003, 2002 and 2001


(51,183
)
(215,320
)
(484,552
)
(338,517
)
(132,557
)Balance, end of period

$
3,886,137

2,639,552

2,775,320

2,649,872

2,697,389








The weighted average interest rate on loans as of December 31, 2003, was 5.39%, and as of June 30, 2003 and 2002 was 5.72% and 6.62%, respectively.





The Bank serviced mortgage loans for others amounting to $128,875,871, $116,183,857 and $90,384,363 as of December 31, 2003 and June 30, 2003 and 2002, respectively. The Bank serviced commercial loans for others amounting to $1,072,449, $1,221,432 and $4,877,246 as of December 31, 2003 and June 30, 2003 and 2002, respectively.




NOTE 4:  PREMISES AND EQUIPMENT





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




December 31,

June 30,2003


2003


2002Land
$
1,250,789


1,250,789


1,250,789Buildings and improvements

6,468,609


6,303,142


6,287,443Furniture, fixtures and equipment

3,672,063


3,645,301


3,701,686Leasehold improvements

217,948


204,069


204,06911,609,409


11,403,301


11,443,987Less accumulated depreciation

(5,033,406
)

(4,694,305
)

(4,087,889
)Net premises and equipment
$
6,576,003


6,708,996


7,356,098





Depreciation expense was $339,101 and $404,498 for the six months ended December 31, 2003 and 2002 and $783,933, $1,020,070, and $622,855 and for the years ended June 30, 2003 and 2002, respectively.




38Guaranty 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:


Six months endedDecember 31,
Years ended June 30,2003

2002

2003

2002

2001(Unaudited)Unrealized gains (losses) onavailable-for-sale securities

$
1,194,556

(536,987
)
(1,535,831
)
(807,538
)
2,657,254Less: Reclassification adjustment forrealized (gains) losses included in income


(105,461
)
-

-

(780,742
)
(198,118
)Other comprehensive income (loss),before tax effect


1,194,556

(536,987
)
(1,535,831
)
(1,588,280
)
2,459,136Tax expense (benefit)


402,965

(198,685
)
(568,257
)
(587,664
)
909,880Other comprehensive income (loss)

$
686,130

(338,302
)
(967,574
)
(1,000,616
)
1,549,256






NOTE 6:  DEPOSITS


December 31, 2003
June 30, 2003
June 30, 2002Weighted Average Rate
Balance
Percentage of Deposits
Weighted Average Rate
Balance
Percentage of Deposits
Weighted Average Rate
Balance
Percentage of DepositsDemand
0.00%
$ 23,335,707
9.8%
0.00%
24,650,393
10.5%
0.00%
11,656,950
5.2%NOW
0.30%
34,256,771
14.5%
0.31%
32,806,352
13.2%
0.79%
29,386,101
13.0%Money market
1.34%
42,231,015
17.8%
1.31%
37,511,932
15.9%
2.07%
34,889,127
15.5%Savings
0.81%
17,220,605
7.3%
0.80%
17,458,316
7.4%
1.65%
17,769,657
7.9%0.69%
117,044,097
49.4%
0.65%
112,426,993
47.7%
1.35%
93,701,835
41.6%Certificates:0% - 3.99%
2.21%
85,237,827
35.9%
2.40%
81,797,903
34.7%
2.84%
60,129,356
26.7%4.00% - 5.99%
5.07%
31,062,415
13.1%
4.98%
36,483,700
15.5%
4.86%
59,760,493
26.5%6.00% - 7.99%
6.46%
3,786,404
1.6%
6.44%
4,968,601
2.1%
6.39%
11,692,310
5.2%3.08%
120,086,647
50.6%
3.33%
123,250,204
52.3%
4.07%
131,582,159
58.4%Total Deposits
1.90%
$ 237,130,744
100.0%
2.05%
235,677,197
100.0%
2.95%
225,283,994
100.0%





The aggregate amount of certificates of deposit with a minimum balance of $100,000 was approximately $11,841,000, $12,258,000 and $15,107,000 as of December 31, 2003, June 30, 2003 and 2002, respectively.





39Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




A summary of certificates of deposit by maturity as of December 31, 2003, is as follows:


2004

$
73,304,2892005


20,481,6532006


11,835,8112007


7,622,8832008


4,595,990Thereafter


2,246,020$
120,086,646





A summary of interest expense on deposits is as follows:


Six months ended

Years endedDecember 31,

June 30,2003


2003


2002


2001NOW and Money Market accounts
$
327,245


813,619


934,165


1,162,486Savings accounts

70,339


221,264


241,553


198,793Certificate accounts

1,981,806


4,792,812


5,860,915


5,383,870Early withdrawal penalties

(11,190
)

(25,250
)

(19,349
)

(26,619
)$
2,368,200


5,802,445


7,017,284


6,718,530





The Bank utilizes brokered deposits as an additional funding source. The aggregate amount of brokered deposits was approximately $24,505,000 as of December 31, 2003, and $25,000,000 and $22,000,000 as of June 30, 2003 and 2002, respectively.





40Guaranty 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, 2003Maturity Date


Amount


Weighted Average RateFiscal Year 2004

$
63,290,000


2.34
%Fiscal Year 2005


7,850,000


4.51
%Fiscal Year 2006


10,500,000


5.12
%Fiscal Year 2007


1,000,000


3.47
%Fiscal Year 2008


14,950,000


5.54
%Thereafter


11,246,948


5.83
%$
108,836,948


3.58
%June 30, 2003
June 30, 2002Maturity Date


Amount


Weighted Average Rate


Amount


Weighted Average RateFiscal Year 2003

$
-


-


13,333,600


4.20
%Fiscal Year 2004


60,322,500


2.79
%

26,322,500


4.68
%Fiscal Year 2005


7,350,000


4.86
%

5,350,000


5.95
%Fiscal Year 2006


6,500,000


5.84
%

6,500,000


5.84
%Fiscal Year 2007


3,000,000


5.34
%

3,000,000


5.34
%Fiscal Year 2008


3,950,000


5.91
%

4,250,000


5.91
%Thereafter


33,496,394


5.77
%

52,327,063


5.88
%$
114,618,894


4.14
%
$
111,083,163


5.38
%





In the year ending December 31, 2004, the Bank has the option to prepay $4.7million of FHLB advances with a remaining average life of 5.1 years and a weighted average rate of 6.05%. The current FHLB advance rate with a similar average life is 3.91%, a 214 basis point savings. Also in the year ending December 31, 2004, the Bank had advances equal to $11,000,000 with a weighted average rate of 5.40% callable between January 20, 2004 and January 30, 2004 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.





NOTE 8:  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. In August 1996 this statutory bad debt deduction was repealed and is no longer available for thrifts. In addition, bad debt reserves accumulated after 1987, which was included as a component of the net deferred tax liability, must be recaptured over a six-year period beginning in 1999. The recapture period was completed during the six months ended December 31, 2003.





41Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***


As of December 31, 2003 and June 30, 2003, and 2002, 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, 2003, June 30, 2003 and 2002.





The provision for income taxes consists of:





Six Months Ended
Years EndedDecember 31,
June 30,2003

2002

2003

2002

2001(Unaudited)Taxes currently payable

$
1,055,750

758,083

1,810,815

1,680,799

1,694,605Deferred income taxes


(267,750
)
168,917

(154,815
)
211,201

48,395$
788,000

927,000

1,656,000

1,892,000

1,743,000





The tax effects of temporary differences related to deferred taxes shown on the December 31, 2003, June 30, 2003 and 2002, balance sheets are:





December 31,

June 30,2003

2003

2002Deferred tax assets:Allowances for loan and foreclosed asset losses
$
1,441,871

1,026,868

980,453Accrued compensated absences and bonuses

11,749

21,021

21,267Unrealized loss on loans held for sale

7,140

9,752

18,526RRP expense

11,559

116,325

136,541Deferred loan fees/costs

87,803

78,174

84,956State tax credits

64,049

117,658

-Other

20,127

13,790

4,9481,644,298

1,383,588

1,246,691Deferred tax liabilities:FHLB stock dividends

(128,262
)
(206,867
)
(206,867
)Tax bad debt reserves in excess of base year

-

(56,271
)
(112,543
)Mortgage servicing rights

(365,110
)
(261,471
)
(284,816
)Unrealized appreciation on available-for-sale securities

(1,565,830
)
(1,162,865
)
(1,731,122
)Accumulated depreciation

(173,592
)
(125,532
)
(112,630
)Other

(56,004
)
(79,867
)
(31,070
)(2,288,798
)
(1,892,873
)
(2,479,048
)Net deferred tax liability
$
(644,500
)
(509,285
)
(1,232,357
)





42Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




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


Six months ended
Year endedDecember 31,
June 30,(Unaudited)2003

2002

2003

2002

2001Computed at statutory rate


34.0
%
34.0
%
34.0
%
34.0
%
34.0
%Increase (reduction) in taxes resulting from:State financial institution tax


2.2
%
3.9
%
-2.4
%
2.0
%
2.3
%ESOP


1.2
%
1.0
%
1.0
%
-0.2
%
0.8
%Other


-2.2
%
-4.4
%
-1.0
%
-1.3
%
-2.1
%Actual tax provision


35.2
%
34.5
%
31.6
%
34.5
%
35.0
%








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.




43Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




NOTE 9:  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, 2003
June 30, 2003
June 30, 2002Carrying Amount

Fair Value

Carrying Amount

Fair Value

Carrying Amount

Fair ValueFinancial assets:Cash and cash equivalents

$
22,656,794

22,656,794

19,014,528

19,014,528

16,963,502

16,963,502Available-for-sale securities


14,863,826

14,863,826

13,271,147

13,271,147

16,463,460

16,463,460Held-to-maturity securities


1,867,594

1,948,912

2,250,894

2,401,387

3,219,091

3,421,746Mortgage loans held-for-sale


1,268,064

1,268,064

9,755,102

9,755,102

3,131,138

3,131,138Loans, net


330,861,875

334,344,000

327,082,420

331,370,000

316,785,118

316,895,000Federal Home Loan Bank stock


5,294,200

5,294,200

8,600,400

8,600,400

8,600,400

8,600,400Interest receivable


1,305,728

1,305,728

1,430,125

1,430,125

1,654,511

1,654,511Financial liabilities:Deposits


237,130,744

237,500,000

235,677,197

237,602,000

225,283,994

225,475,675Federal Home Loan Bank advances


108,836,948

113,099,000

114,618,894

116,470,000

111,083,163

117,481,000Securities sold under agreementsto repurchase


738,399

738,399

702,024

702,024

1,093,074

1,093,074Interest payable


200,770

200,770

203,237

203,237

759,099

759,099Dividend payable


432,513

432,513

415,414

415,414

347,656

347,656Unrecognized 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.





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.





44Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




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


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





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 10:  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.





NOTE 11:  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.





45Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




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, 2003, there are 600 shares in this plan that are not vested.





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, 2003 there are 2,800 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, 2003 there are 1,425 shares in this plan that are not 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, 2003 there are 6,141 shares in this plan that are not vested.





The Bank recognized $30,952, $177,810, $353,004, $401,403 and $464,032 of expense under these stock award plans in the six months ended December 31, 2003 and 2002 and the years ended June 30, 2003, 2002, and 2001 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.





46Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




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  .




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


Number of sharesIncentive Stock Option

Non-Qualified Options to Directors

Weighted Average Exercise PriceBalance outstanding as of July 1, 2000

430,375

156,589

11.83Granted

26,000

-

12.06Exercised

(18,357
)
-

6.02Forfeited

(29,821
)
(23,402
)
13.12Balance outstanding as of June 30, 2001

408,197

133,187

11.92Granted

15,000

25,533

13.01Exercised

(97,010
)
-

9.53Forfeited

(54,850
)
-

13.24Balance outstanding as of June 30, 2002

271,337

158,720

12.39Granted

10,000

-

15.31Exercised

(19,698
)
(31,746
)
10.82Forfeited

(4,277
)
(13,360
)
12.47Balance outstanding as of June 30, 2003

257,362

113,614

12.68Granted

5,000

50,000

16.65Exercised

(12,054
)
-

8.93Forfeited

-

-

-Balance outstanding as of December 31, 2003

250,308

163,614

13.32Options exercisable as of December 31, 2003

212,308

91,145

12.79





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, 2003


June 30, 2003


June 30, 2002Dividends per share
$
0.31

$
0.68

$
0.50Risk-free interest rate

2.73
%

3.00
%

4.54
%Expected life of options

5 years


5 years


5 yearsWeighted-average fair valueof options granted during year
$
0.64

$
0.57

$
1.77








47Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




The following table summarizes information about stock options under the plans outstanding as of December 31, 2003:


Exercise Price

Number Outstanding
Number Exercisable
Remaining Contractual Life$                                                             5.83

2,548
2,548
3.0 years6.02

11,397
11,397
2.0 years6.08

5,370
5,370
2.5 years9.94

1,600
-
6.3 years10.25

4,000
2,400
6.1 years10.50

17,875
10,725
6.1 years11.05

2,000
800
7.5 years12.13

3,000
1,200
7.2 years12.50

25,533
10,214
7.6 years12.75

8,000
3,200
7.1 years13.44

252,599
252,599
4.6 years13.89

15,000
3,000
8.1 years15.31

10,000
-
9.1 years16.65

50,000
-
9.6 years17.20

5,000
-
9.7 years





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 $225,154, $180,244, $373,724, $319,275, and $268,624 for the six months ended December 31, 2003 and 2002 and the years ended June 30, 2003, 2002,and 2001 respectively.




The following is a summary of ESOP shares as of December 31, 2003:





Beginning ESOP shares

344,454Released shares

(116,347
)Shares committed for release

(25,014
)Unreleased shares

203,093Fair value of unreleased shares
$
3,909,540








48Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***  NOTE 12:  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, 2003, June 30, 2003 and 2002, loans outstanding to these directors and executive officers amounted to $565,066, $463,323 and $302,518, 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 (including interest rates and collateral) 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 13:  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, 2003, June 30, 2003 and 2002, the Bank had outstanding commitments to originate loans of approximately $24,414,000, $23,835,000 and $9,485,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period. As of December 31, 2003, June 30, 2003 and 2002, commitments of $721,000, $16,397,000 and $3,910,000, respectively, were at fixed rates and $23,693,000, $7,438,000 and $5,575,000, 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, 2003, June 30, 2003 and 2002 the Bank had approximately $0, $13,551,000 and $4,793,000, 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.





The Bank had total outstanding standby letters of credit amounting to $1,189,000, $1,671,000 and $24,000 as of December 31, 2003, June 30, 2003 and 2002, respectively, with terms ranging from 30 days to 2 years.





49Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




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, 2003, unused lines of credit to borrowers aggregated approximately $50,941,000 for commercial lines and $13,245,000 for open-end consumer lines. As of June 30, 2003, unused lines of credit to borrowers aggregated approximately $17,955,000 for commercial lines and $13,397,000 for open-end consumer lines. As of June 30, 2002, unused lines of credit to borrowers aggregated approximately $12,472,000 for commercial lines and $11,205,000 for open-end consumer lines.




50Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




NOTE 14:  CONDENSED PARENT COMPANY STATEMENTS





The condensed balance sheets as of December 31, 2003, and June 30, 2003 and 2002, and statements of income and cash flows for the six months ended December 31, 2003 and 2002, and the years ended June 30, 2003, 2002 and 2001, for the parent company, Guaranty Federal Bancshares, Inc., are as follows:


Balance Sheets

As of

As ofDecember 31,

June 30,2003

2003

2002AssetsCash
$
31,177

465,350

362,187Due from subsidiary

563,219

9,405

17,484Investment in subsidiary

37,272,723

36,019,229

34,620,317Loans receivable, net

-

-

290,580Accrued interest receivable

-

-

3,377Prepaid expenses and other assets

448,612

437,385

418,441Refundable income taxes

94,903

37,195

116,209$
38,410,634

36,968,564

35,828,595LiabilitiesAccrued expenses and other liabilities
$
-

11,338

46,062Due to holding company



-

-Deferred income taxes



-

-Dividend payable

432,513

415,414

347,656Stockholders' equityCommon stock

642,890

641,685

636,540Additional paid-in capital

51,330,202

51,065,581

49,842,032Unearned ESOP shares

(2,030,930
)
(2,156,930
)
(2,406,070
)Retained earnings

29,919,695

29,280,784

27,372,935Unrealized appreciation onavailable-for-sale securities, net

2,666,143

1,980,013

2,947,587Treasury stock

(44,549,879
)
(44,269,321
)
(42,958,147
)$
38,410,634

36,968,564

35,828,595





51Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***





Income Statements
For the six months ended
For the years endedDecember 31,
June 30,2003

2002

2003

2002


2001(Unaudited)IncomeDividends from subsidiary bank
$
1,099,000

452,291

1,750,468

17,310,694


11,260,000Interest income:Related party

50,703

66,491

121,542

163,665


268,602Other

-

-

-

21,001


79,617Other

-

-

-

66,138


8,5841,149,703

518,782

1,872,010

17,561,498


11,616,803ExpenseOccupancy

1,200

1,200

2,400

2,400


2,400Other

219,947

84,731

190,491

401,242


170,940221,147

85,931

192,891

403,642


173,340Income before income taxesand equity in undistributed earnings

928,556

432,851

1,679,119

17,157,856


11,443,463earnings of subsidiaryProvision (credit) for income taxes

(63,274
)
(7,217
)
(26,487
)
(56,739
)

68,108Income before equity in undistributedearnings of subsidiary

991,830

440,068

1,705,606

17,214,595


11,375,355Equity in undistributedearnings of subsidiary

508,331

1,323,962

1,874,043

(13,621,613
)

(8,142,382
)Net income
$
1,500,161

1,764,030

3,579,649

3,592,982


3,232,973





52Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***




Statements of Cash Flows
For the six months ended
For the years endedDecember 31,
June 30,2003

2002

2003

2002

2001(Unaudited)Cash Flows From Operating ActivitiesNet income
$
1,500,161

1,764,030

3,579,649

3,592,982

3,232,973Items not requiring (providing) cash:Equity in undistributed earnings of subsidiary

(508,331
)
(1,323,962
)
(1,874,043
)
-

-Gain on sale of available-for-sale securities





-

(66,138
)
(8,574
)Release of ESOP shares

225,154

125,000

249,140

234,730

229,640Changes in:Accrued interest receivable

-

3,377

3,377

(3,377
)
-Prepaid expenses and other assets

(11,226
)
409,266

(18,944
)
(67,506
)
(75,541
)Income taxes payable/refundable

(57,708
)
98,685

79,014

(67,194
)
(4,794
)Accrued expenses

(11,338
)
(46,062
)
(34,724
)
50,642

(47,853
)Net cash provided by operating activities

1,136,712

1,030,334

1,983,469

3,674,139

3,325,851Cash Flows From Investing ActivitiesInvestment in subsidiaryLoan to ESOP





-

-

-Purchase of loans

-

291,402

-

(291,402
)
-Net collections of loans

-

(822
)
-

822

-Purchase of land





-

-

-Proceeds from sale of loans

-

-

290,580

-

-Proceeds from sale of available-for-sale securities

-

-

-

719,476

395,253Purchase of available-for-sale securities

-

-

-

-

(102,012
)Net (increase) decrease in advance to subsidiary

(553,814
)
(421,463
)
8,079

(4,442
)
8,635Distribution in excess of net income of subsidiary

-

-

-

13,621,613

8,142,382Net cash provided by investing activities

(553,814
)
(130,883
)
298,659

14,046,067

8,444,258Cash Flows From Financing ActivitiesProceeds from sale of common stock, net





-

-

-Stock options exercised

107,638

113,554

556,869

924,677

110,510Cash dividends received on RRP shares





-

-

-Cash dividends paid

(844,151
)
(764,854
)
(1,604,042
)
(1,823,928
)
(1,936,401
)Treasury stock purchased

(280,558
)
(235,770
)
(1,131,792
)
(16,826,643
)
(9,986,737
)Net cash used in financing activities

(1,017,071
)
(887,070
)
(2,178,965
)
(17,725,894
)
(11,812,628
)Increase (decrease) in cash

(434,173
)
12,381

103,163

(5,688
)
(42,519
)Cash, beginning of period

465,350

362,187

362,187

367,875

410,394Cash, end of period
$
31,177

374,568

465,350

362,187

367,875







53Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***






NOTE 15:  ADJUSTMENT TO ALLOWANCE FOR LOAN LOSSES





Subsequent to December 31, 2003, in connection with a normal regulatory examination, the Bank identified a group of approximately 150 loans secured by single family residences, totaling approximately $9 million, that were lacking sufficient information in the loans files to effectively evaluate the credits. The Bank classified these loans in accordance with its policies described is Note 1 and determined that its allowance for loan losses must be increased by $800,000. This increase was recorded as an adjustment to the Banks results of operations in the quarter ended December 31, 2003.







54Guaranty Federal Bancshares, Inc.
***Notes to Consolidated Financial Statements***






Independent Accountants Report








Board of Directors


Guaranty Federal Bancshares, Inc.


Springfield, Missouri








We have audited the accompanying balance sheets of Guaranty Federal Bancshares, Inc. as of December 31, 2003 and June 30, 2003 and 2002, and the related statements of income, stockholders equity and cash flows for the six months ended December 31, 2003, and for each of the three years in the period 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 auditing standards generally accepted in the United States of America. 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 financial statements referred to above present fairly, in all material respects, the financial position of Guaranty Federal Bancshares, Inc. as of December 31, 2003 and June 30, 2003 and 2002, and the results of its operations and its cash flows for each of the six months ended December 31, 2003, and for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.





/s/ BKD, LLP


March 22, 2004


Springfield, Missouri







55