UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q


(Mark One)
              xQUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d)
                OF THE SECURITIES EXCHANGE ACT
      OF 1934


For the
quarterly period ended September 30,
2009


OR


oTRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF
                THE SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from _______ to _______





Commission
file number 0-23325





Guaranty
Federal Bancshares, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
            
            43-1792717(State
      or other jurisdiction of incorporation
      or organization)
            
            (IRS
      Employer Identification No.)1341
      West BattlefieldSpringfield, Missouri
            
            65807(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code:  (417)
520-4333





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.  Yes T No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).  Yes o No o





Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):  Large accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting company T




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes o No T





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





Class
            Outstanding as of November 10,
      2009Common
      Stock, Par Value $0.10 per share
            2,630,840
      Shares













GUARANTY FEDERAL BANCSHARES, INC.








TABLE
OF CONTENTS


PagePART
      I. FINANCIAL INFORMATIONItem
      1.  Financial StatementsCondensed
      Consolidated Financial Statements (Unaudited):Condensed Consolidated Statements of Financial
      Condition
            3Condensed Consolidated Statements of
      Operations
            4Condensed Consolidated Statements
      of  Stockholders’ Equity
            5Condensed Consolidated Statements of Cash
      Flows
            7Notes to Condensed Consolidated Financial
      Statements
            8Item 2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            19Item 3. Quantitative and Qualitative Disclosures about
      Market Risk
            25Item 4T.  Controls and
    Procedures
            26PART
      II. OTHER INFORMATIONItem 1.  Legal Proceedings
            28Item 1A.  Risk factors
            28Item 2.  Unregistered Sales of Equity Securities
      and Use of Proceeds
            28Item 3.  Defaults Upon Senior
      Securities
            28Item 4.  Submission of Matters to a Vote of
      Security Holders
            28Item 5.  Other Information
            28Item 6.  Exhibits
            28Signatures


2
 Table of Contents


PART
I  FINANCIAL INFORMATION


Item
1. Financial Statements





GUARANTY FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


SEPTEMBER
30, 2009 (UNAUDITED) AND DECEMBER 31, 2008





ASSETS
            
            9/30/09
            
            
            12/31/08Cash
            
            $
            1,600,687
            
            
            $
            3,826,567Interest-bearing
      deposits in other financial institutions
            
            
            17,474,539
            
            
            
            11,270,448Cash
      and cash equivalents
            
            
            19,075,226
            
            
            
            15,097,015Interest-bearing
      deposits
            
            
            27,105,802
            
            
            
            -Available-for-sale
      securities
            
            
            110,908,412
            
            
            
            65,505,339Held-to-maturity
      securities
            
            
            495,433
            
            
            
            556,465Stock
      in Federal Home Loan Bank, at cost
            
            
            6,730,100
            
            
            
            6,730,100Mortgage
      loans held for sale
            
            
            1,652,861
            
            
            
            1,933,798Loans
      receivable, net of allowance for loan losses of September 30, 2009 -
      $13,220,409 - December 31, 2008 - $16,728,492
            
            
            526,151,829
            
            
            
            556,393,243Accrued
      interest receivable:Loans
            
            
            2,076,414
            
            
            
            2,310,062Investments
            
            
            570,545
            
            
            
            322,388Prepaid
      expenses and other assets
            
            
            6,958,187
            
            
            
            4,065,359Foreclosed
      assets held for sale
            
            
            5,879,132
            
            
            
            5,655,257Premises
      and equipment
            
            
            12,029,723
            
            
            
            11,323,463Income
      taxes receivable
            
            
            3,780,084
            
            
            
            9,091Deferred
      income taxes
            
            
            3,981,842
            
            
            
            5,768,813$
            727,395,590
            
            
            $
            675,670,393LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIESDeposits
            
            $
            505,737,285
            
            
            $
            447,079,469Federal
      Home Loan Bank advances
            
            
            111,050,000
            
            
            
            132,436,000Securities
      sold under agreements to repurchase
            
            
            39,750,000
            
            
            
            39,750,000Subordinated
      debentures
            
            
            15,465,000
            
            
            
            15,465,000Notes
      payable
            
            
            -
            
            
            
            1,435,190Advances
      from borrowers for taxes and insurance
            
            
            514,734
            
            
            
            166,327Accrued
      expenses and other liabilities
            
            
            972,665
            
            
            
            448,226Accrued
      interest payable
            
            
            1,483,595
            
            
            
            1,577,279674,973,279
            
            
            
            638,357,491COMMITMENTS
      AND CONTINGENCIES
            
            
            -
            
            
            
            -STOCKHOLDERS'
      EQUITYCapital
      Stock:Series
      A preferred stock, $0.01 par value; authorized 2,000,000 shares;issued and
      outstanding September 30, 2009 - 17,000 shares
            
            
            15,805,897
            
            
            
            -Common
      stock, $0.10 par value; authorized 10,000,000 shares;issued September 30,
      2009 and December 31, 2008 - 6,779,800 shares;
            
            
            677,980
            
            
            
            677,980Common
      stock warrants; September 30, 2009 - 459,459 shares
            
            
            1,377,811
            
            
            
            -Additional
      paid-in capital
            
            
            58,531,848
            
            
            
            58,535,159Unearned
      ESOP shares
            
            
            (717,930
            )
            
            
            (888,930
            )Retained
      earnings, substantially restricted
            
            
            36,714,075
            
            
            
            39,114,189Accumulated
      other comprehensive income
            
            
            1,853,499
            
            
            
            1,687,858114,243,180
            
            
            
            99,126,256Treasury
      stock, at cost; September 30, 2009 and December 31, 2008 - 4,079,067and
      4,077,567 shares, respectively
            
            
            (61,820,869
            )
            
            
            (61,813,354
            )52,422,311
            
            
            
            37,312,902$
            727,395,590
            
            
            $
            675,670,393





See Notes
to Condensed Consolidated Financial Statements


3
 Table of Contents


GUARANTY FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


THREE  MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)





Three months ended
            
            
            Nine months ended9/30/2009
            
            
            9/30/2008
            
            
            9/30/2009
            
            
            9/30/2008Interest
      IncomeLoans
            
            $
            7,402,215
            
            
            $
            8,337,626
            
            
            $
            22,259,582
            
            
            $
            24,985,140Investment
      securities
            
            
            883,642
            
            
            
            863,757
            
            
            
            2,787,883
            
            
            
            2,267,945Other
            
            
            248,478
            
            
            
            66,416
            
            
            
            314,283
            
            
            
            170,9518,534,335
            
            
            
            9,267,799
            
            
            
            25,361,748
            
            
            
            27,424,036Interest
      ExpenseDeposits
            
            
            3,816,803
            
            
            
            3,341,155
            
            
            
            11,795,238
            
            
            
            10,847,725Federal
      Home Loan Bank advances
            
            
            791,470
            
            
            
            873,536
            
            
            
            2,359,115
            
            
            
            2,368,981Subordinated
      debentures
            
            
            255,945
            
            
            
            255,945
            
            
            
            767,837
            
            
            
            767,837Other
            
            
            221,864
            
            
            
            276,567
            
            
            
            676,257
            
            
            
            775,4365,086,082
            
            
            
            4,747,203
            
            
            
            15,598,447
            
            
            
            14,759,979Net
      Interest Income
            
            
            3,448,253
            
            
            
            4,520,596
            
            
            
            9,763,301
            
            
            
            12,664,057Provision
      for Loan Losses
            
            
            670,000
            
            
            
            1,675,000
            
            
            
            4,950,000
            
            
            
            8,179,079Net
      Interest Income After Provision for Loan Losses
            
            
            2,778,253
            
            
            
            2,845,596
            
            
            
            4,813,301
            
            
            
            4,484,978Noninterest
      IncomeService
      charges
            
            
            455,638
            
            
            
            528,609
            
            
            
            1,352,971
            
            
            
            1,490,587Other
      fees
            
            
            14,913
            
            
            
            12,911
            
            
            
            41,365
            
            
            
            27,120Gain
      (loss) on investment securities
            
            
            341,596
            
            
            
            -
            
            
            
            657,035
            
            
            
            (97,788
            )Gain
      on sale of loans
            
            
            314,440
            
            
            
            207,870
            
            
            
            1,114,223
            
            
            
            696,375Loss
      on foreclosed assets
            
            
            (14,045
            )
            
            
            (75,006
            )
            
            
            (66,720
            )
            
            
            (120,833
            )Other
      income
            
            
            217,826
            
            
            
            174,510
            
            
            
            562,929
            
            
            
            555,6941,330,368
            
            
            
            848,894
            
            
            
            3,661,803
            
            
            
            2,551,155Noninterest
      ExpenseSalaries
      and employee benefits
            
            
            1,963,962
            
            
            
            1,853,483
            
            
            
            5,975,389
            
            
            
            5,665,040Occupancy
            
            
            435,022
            
            
            
            452,510
            
            
            
            1,391,757
            
            
            
            1,247,203FDIC
      deposit insurance premiums
            
            
            330,000
            
            
            
            82,499
            
            
            
            1,275,030
            
            
            
            207,497Data
      processing
            
            
            107,063
            
            
            
            95,335
            
            
            
            321,521
            
            
            
            277,668Advertising
            
            
            75,000
            
            
            
            99,999
            
            
            
            241,666
            
            
            
            299,997Other
      expense
            
            
            480,909
            
            
            
            583,446
            
            
            
            1,966,480
            
            
            
            1,784,3753,391,956
            
            
            
            3,167,272
            
            
            
            11,171,843
            
            
            
            9,481,780Income
      (Loss) Before Income Taxes
            
            
            716,665
            
            
            
            527,218
            
            
            
            (2,696,739
            )
            
            
            (2,445,647
            )Provision
      (Credit) for Income Taxes
            
            
            142,202
            
            
            
            227,759
            
            
            
            (1,047,000
            )
            
            
            (865,684
            )Net
      Income (Loss)
            
            
            574,463
            
            
            
            299,459
            
            
            
            (1,649,739
            )
            
            
            (1,579,963
            )Preferred
      Stock Dividends and Discount Accretion
            
            
            281,391
            
            
            
            -
            
            
            
            750,376
            
            
            
            -Net
      Income (Loss) Available to Common Shareholders
            
            $
            293,072
            
            
            $
            299,459
            
            
            $
            (2,400,115
            )
            
            $
            (1,579,963
            )Basic
      Income (Loss) Per Common Share
            
            $
            0.11
            
            
            $
            0.11
            
            
            $
            (0.92
            )
            
            $
            (0.61
            )Diluted
      Income (Loss) Per Common Share
            
            $
            0.11
            
            
            $
            0.11
            
            
            $
            (0.92
            )
            
            $
            (0.61
            )





See Notes
to Condensed Consolidated Financial Statements


4
 Table of Contents


GUARANTY FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


NINE
MONTHS ENDED SEPTEMBER  30, 2009 (UNAUDITED)





Preferred
      Stock
            
            
            Common
      Stock
            
            
            Common
      Stock Warrants
            
            
            Additional
      Paid-In Capital
            
            
            Unearned
      ESOP Shares
            
            
            Treasury
      Stock
            
            
            Retained
      Earnings
            
            
            Accumulated
      Other Comprehensive Income
            
            
            TotalBalance,
      January 1, 2009
            
            $
            -
            
            
            $
            677,980
            
            
            $
            -
            
            
            $
            58,535,159
            
            
            $
            (888,930
            )
            
            $
            (61,813,354
            )
            
            $
            39,114,189
            
            
            $
            1,687,858
            
            
            $
            37,312,902Comprehensive
      lossNet
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,649,739
            )
            
            
            -
            
            
            
            (1,649,739
            )Change
      in unrealized appreciation on available-for-sale securities and effect of
      interest rate swaps, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            165,641
            
            
            
            165,641Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,484,098
            )Preferred
      stock issued
            
            
            15,622,189
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            15,622,189Common
      stock warrants issued
            
            
            -
            
            
            
            -
            
            
            
            1,377,811
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,377,811Preferred
      stock discount accretion
            
            
            183,708
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (183,708
            )
            
            
            -
            
            
            
            -Preferred
      stock dividends accrued (5%)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (566,667
            )
            
            
            -
            
            
            
            (566,667
            )Stock
      award plans
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            70,699
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            70,699Treasury
      stock purchased
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,515
            )
            
            
            -
            
            
            
            -
            
            
            
            (7,515
            )Release
      of ESOP shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (74,010
            )
            
            
            171,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            96,990Balance,
      September 30, 2009
            
            $
            15,805,897
            
            
            $
            677,980
            
            
            $
            1,377,811
            
            
            $
            58,531,848
            
            
            $
            (717,930
            )
            
            $
            (61,820,869
            )
            
            $
            36,714,075
            
            
            $
            1,853,499
            
            
            $
            52,422,311





See Notes
to Condensed Consolidated Financial Statements


5
 Table of Contents


GUARANTY
FEDERAL BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


NINE
MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)





Common
      Stock
            
            
            Additional
      Paid-In Capital
            
            
            Unearned
      ESOP Shares
            
            
            Treasury
      Stock
            
            
            Retained
      Earnings
            
            
            Accumulated
      Other Comprehensive Income (Loss)
            
            
            TotalBalance,
      January 1, 2008
            
            $
            673,649
            
            
            $
            57,571,929
            
            
            $
            (1,116,930
            )
            
            $
            (60,348,204
            )
            
            $
            45,402,449
            
            
            $
            503,767
            
            
            $
            42,686,660Comprehensive
      incomeNet
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,579,963
            )
            
            
            -
            
            
            
            (1,579,963
            )Change
      in unrealized appreciation on available-for-sale securities and effect of
      interest rate swaps, net of income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,057,197
            )
            
            
            (1,057,197
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,637,160
            )Dividends
      ($0.36 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (928,548
            )
            
            
            -
            
            
            
            (928,548
            )Stock
      award plans
            
            
            -
            
            
            
            187,877
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            187,877Stock
      options exercised
            
            
            4,331
            
            
            
            574,330
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            578,661Release
      of ESOP shares
            
            
            -
            
            
            
            195,105
            
            
            
            171,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            366,105Treasury
      stock purchased
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,465,150
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,465,150
            )Balance,
      September 30, 2008
            
            $
            677,980
            
            
            $
            58,529,241
            
            
            $
            (945,930
            )
            
            $
            (61,813,354
            )
            
            $
            42,893,938
            
            
            $
            (553,430
            )
            
            $
            38,788,445





See Notes
to Condensed Consolidated Financial Statements




6
 Table of Contents


GUARANTY FEDERAL  BANCSHARES, INC


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)





9/30/2009
            
            
            9/30/2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (1,649,739
            )
            
            $
            (1,579,963
            )Items
      not requiring (providing) cash:Deferred
      income taxes
            
            
            1,689,690
            
            
            
            (2,026,792
            )Depreciation
            
            
            742,368
            
            
            
            677,993Provision
      for loan losses
            
            
            4,950,000
            
            
            
            8,179,079Gain
      on loans and investment securities
            
            
            (1,771,258
            )
            
            
            (598,587
            )(Gain)
      loss on sale of foreclosed assets
            
            
            (118,806
            )
            
            
            26,826Accretion
      of gain on termination of interest rate swaps
            
            
            (763,119
            )
            
            
            -Amortization
      of deferred income, premiums and discounts
            
            
            223,122
            
            
            
            10,114Stock
      award plan expense
            
            
            70,699
            
            
            
            72,211Origination
      of loans held for sale
            
            
            (61,381,907
            )
            
            
            (40,497,385
            )Proceeds
      from sale of loans held for sale
            
            
            62,777,067
            
            
            
            42,790,364Release
      of ESOP shares
            
            
            96,990
            
            
            
            366,105Changes
      in:Accrued
      interest receivable
            
            
            (14,509
            )
            
            
            (844,084
            )Prepaid
      expenses and other assets
            
            
            417,841
            
            
            
            (689,431
            )Accounts
      payable and accrued expenses
            
            
            324,505
            
            
            
            198,541Income
      taxes receivable
            
            
            (3,770,993
            )
            
            
            (263,672
            )Net
      cash provided by operating activities
            
            
            1,821,951
            
            
            
            5,821,319CASH
      FLOWS FROM INVESTING ACTIVITIESNet
      change in loans
            
            
            22,159,013
            
            
            
            (67,319,462
            )Principal
      payments on held-to-maturity securities
            
            
            46,240
            
            
            
            62,113Principal
      payments on available-for-sale securities
            
            
            9,796,901
            
            
            
            1,763,996Proceeds
      from maturities of available-for-sale securities
            
            
            6,500,000
            
            
            
            1,850,000Purchase
      of premises and equipment
            
            
            (1,448,628
            )
            
            
            (2,334,484
            )Purchase
      of available-for-sale securities
            
            
            (80,722,131
            )
            
            
            (55,383,487
            )Proceeds
      from sale of available-for-sale securities
            
            
            20,432,170
            
            
            
            -Purchase
      of interest-bearing deposits
            
            
            (29,605,802
            )
            
            
            -Proceeds
      from maturities of interest-bearing deposits
            
            
            2,500,000
            
            
            
            -Purchase
      of Federal Home Loan Bank stock
            
            
            -
            
            
            
            (3,669,100
            )Purchase
      of tax credit investments
            
            
            (3,310,669
            )
            
            
            -Capitalized
      costs on foreclosed assets
            
            
            (51,115
            )
            
            
            -Proceeds
      from sale of foreclosed assets
            
            
            3,143,180
            
            
            
            1,305,864Net
      cash used in investing activities
            
            
            (50,560,841
            )
            
            
            (123,724,560
            )CASH
      FLOWS FROM FINANCING ACTIVITIESStock
      options exercised
            
            
            -
            
            
            
            578,661Cash
      dividends paid on common stock
            
            
            -
            
            
            
            (1,397,921
            )Net
      increase in demand deposits, NOW and savings accounts
            
            
            139,679,422
            
            
            
            4,214,518Net
      increase (decrease) in certificates of deposit
            
            
            (81,021,606
            )
            
            
            13,700,686Net
      increase in securities sold under agreements to repurchase
            
            
            -
            
            
            
            29,900,705Proceeds
      from FHLB advances
            
            
            -
            
            
            
            1,884,050,075Repayments
      of FHLB advances
            
            
            (21,386,000
            )
            
            
            (1,811,700,075
            )Proceeds
      from issuance of notes payable
            
            
            -
            
            
            
            1,064,000Repayments
      of notes payable
            
            
            (1,435,190
            )
            
            
            (347,000
            )Advances
      from borrowers for taxes and insurance
            
            
            348,407
            
            
            
            416,694Proceeds
      from preferred stock and warrants
            
            
            17,000,000
            
            
            
            -Cash
      dividends paid on preferred stock
            
            
            (460,417
            )
            
            
            -Treasury
      stock purchased
            
            
            (7,515
            )
            
            
            (1,465,150
            )Net
      cash provided by financing activities
            
            
            52,717,101
            
            
            
            119,015,193INCREASE
      IN CASH AND CASH EQUIVALENTS
            
            
            3,978,211
            
            
            
            1,111,952CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            15,097,015
            
            
            
            12,046,202CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            19,075,226
            
            
            $
            13,158,154





See Notes
to Condensed Consolidated Financial Statements


7
 Table of Contents


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
1:  Basis of Presentation





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





These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company’s Form 10-K annual report for 2008 filed with the Securities and
Exchange Commission (the “SEC”). The results of operations for the periods are
not necessarily indicative of the results to be expected for the full
year.  The condensed consolidated statement of financial condition of
the Company as of December 31, 2008, has been derived from the audited
consolidated statement of financial condition of the Company as of that
date.  Certain information and note disclosures normally included in
the Company’s annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.





The
Company evaluated subsequent events for potential recognition and/or disclosure
through November 16, 2009, the date the condensed consolidated financial
statements were issued.





Note
2:  Principles of Consolidation





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





Note
3:  Securities





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





Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized (Losses)
            
            
            Approximate Fair ValueAs
      of September 30, 2009Equity
      Securities
            
            $
            102,211
            
            
            $
            2,576
            
            
            $
            (39,476
            )
            
            $
            65,311Debt
      Securities:U.
      S. government agencies
            
            
            30,486,795
            
            
            
            137,658
            
            
            
            (53,498
            )
            
            
            30,570,955Mortgage-backed
      securities
            
            
            78,140,479
            
            
            
            2,155,937
            
            
            
            (24,270
            )
            
            
            80,272,146$
            108,729,485
            
            
            $
            2,296,171
            
            
            $
            (117,244
            )
            
            $
            110,908,412


8
 Table of Contents





Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized (Losses)
            
            
            Approximate Fair ValueAs
      of December 31, 2008Equity
      Securities:FHLMC
      stock
            
            $
            26,057
            
            
            $
            -
            
            
            $
            (6,639
            )
            
            $
            19,418Other
            
            
            572,087
            
            
            
            4,157
            
            
            
            (34,611
            )
            
            
            541,633Debt
      Securities:U.
      S. government agencies
            
            
            2,450,000
            
            
            
            24,130
            
            
            
            -
            
            
            
            2,474,130Mortgage-backed
      securities
            
            
            61,304,310
            
            
            
            1,173,274
            
            
            
            (7,426
            )
            
            
            62,470,158$
            64,352,454
            
            
            $
            1,201,561
            
            
            $
            (48,676
            )
            
            $
            65,505,339





Maturities
of available-for-sale debt securities as of September 30, 2009:





Amortized Cost
            
            
            Approximate Fair ValueWithin
      one year
            
            $
            5,500,000
            
            
            $
            5,526,884One
      through five years
            
            
            22,536,795
            
            
            
            22,647,154After
      ten years
            
            
            2,450,000
            
            
            
            2,396,917Mortgage-backed
      securities not due on a single maturity date
            
            
            78,140,479
            
            
            
            80,272,146$
            108,627,274
            
            
            $
            110,843,101





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 September 30, 2009Debt
      Securities:U.
      S. government agencies
            
            $
            117,444
            
            
            $
            -
            
            
            $
            (259
            )
            
            $
            117,185Mortgage-backed
      securities
            
            
            377,989
            
            
            
            31,055
            
            
            
            -
            
            
            
            409,044$
            495,433
            
            
            $
            31,055
            
            
            $
            (259
            )
            
            $
            526,229





Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized (Losses)
            
            
            Approximate Fair ValueAs
      of December 31, 2008Debt
      Securities:U.
      S. government agencies
            
            $
            135,538
            
            
            $
            -
            
            
            $
            (3,236
            )
            
            $
            132,302Mortgage-backed
      securities
            
            
            420,927
            
            
            
            24,565
            
            
            
            (1,395
            )
            
            
            444,097$
            556,465
            
            
            $
            24,565
            
            
            $
            (4,631
            )
            
            $
            576,399


9
 Table of Contents


Maturities
of held-to-maturity securities as of September 30, 2009:





Amortized Cost
            
            
            Approximate Fair ValueFive
      through ten years
            
            $
            117,444
            
            
            $
            117,185Mortgage-backed
      securities not due on a single maturity date
            
            
            377,989
            
            
            
            409,044$
            495,433
            
            
            $
            526,229





The book
value of securities pledged as collateral, to secure public deposits and for
other purposes, amounted to $61,908,531 and $54,504,638 as of September 30, 2009
and December 31, 2008, respectively.  The approximate fair value of
pledged securities amounted to $63,527,999 and $55,417,307 as of September 30,
2009 and December 31, 2008, respectively.





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.  Gross gains of $341,596 and $657,035 for the three and nine
months ended September 30, 2009, respectively, and gross losses of $0 and
$97,788 for the three and nine months ended September 30, 2008, respectively,
were realized from the sale of available-for-sale securities and other
write-downs.  The tax effect of these net gains (losses) was $126,391
and $243,103 for the three and nine month periods ended 2009, respectively, and
$0 and ($36,182) for the three and nine month periods ended 2008,
respectively.





The
Company evaluates all securities quarterly to determine if any unrealized losses
are deemed to be other than temporary.  Certain investment securities
are valued less than their historical cost. These declines are primarily the
result of the rate for these investments yielding less than current market
rates, or declines in stock prices of equity securities. Based on evaluation of
available evidence, management believes the declines in fair value for these
securities are temporary. It is management’s intent to hold the debt securities
to maturity or until recovery of the unrealized loss. Should the impairment of
any of these debt securities become other than temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in net income in
the period the other-than-temporary impairment is identified, to the extent the
loss is related to credit issues, and to other comprehensive income to the
extent the decline on debt securities is related to other factors and the
Company does not intend to sell the security prior to recovery of the unrealized
loss.





No
securities were written down for other-than-temporary impairment during the
three and nine month periods ended September 30, 2009 and 2008,
respectively.  During the fourth quarter of 2008, the Company
determined that one investment security in the other equity securities category
had become other than temporarily impaired. As a result of this impairment, the
Company charged down the security to its current market value. The total of this
charge-down was $465,827 for fiscal year 2008.




Certain
other investments in debt and equity securities are reported in the financial
statements at an amount less than their historical cost.  Total fair
value of these investments at September 30, 2009 and December 31, 2008, was
$8,652,217 and $1,629,386, respectively, which is approximately 8% and 3% of the
Company’s investment portfolio.  These declines primarily resulted
from changes in market interest rates and failure of certain investments to meet
projected earnings targets.





The
following table shows gross unrealized losses and fair value, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position at September 30, 2009 and December 31,
2008.


10
 Table of Contents





September
      30, 2009Less
      than 12 Months
            
            
            12
      Months or More
            
            
            TotalDescription of Securities
            
            Fair Value
            
            
            Unrealized Losses
            
            
            Fair Value
            
            
            Unrealized Losses
            
            
            Fair Value
            
            
            Unrealized LossesEquity
      Securities
            
            $
            32,058
            
            
            $
            (39,476
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            32,058
            
            
            $
            (39,476
            )U.
      S. Government Agencies
            
            
            3,520,157
            
            
            
            (53,757
            )
            
            
            -
            
            
            
            -
            
            
            
            3,520,157
            
            
            
            (53,757
            )Mortgage-backed
      securities
            
            
            5,100,002
            
            
            
            (24,270
            )
            
            
            -
            
            
            
            -
            
            
            
            5,100,002
            
            
            
            (24,270
            )$
            8,652,217
            
            
            $
            (117,503
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            8,652,217
            
            
            $
            (117,503
            )





December
      31, 2008Less
      than 12 Months
            
            
            12
      Months or More
            
            
            TotalDescription of Securities
            
            Fair Value
            
            
            Unrealized Losses
            
            
            Fair Value
            
            
            Unrealized Losses
            
            
            Fair Value
            
            
            Unrealized LossesEquity
      Securities
            
            $
            56,342
            
            
            $
            (41,250
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            56,342
            
            
            $
            (41,250
            )U.
      S. Government Agencies
            
            
            -
            
            
            
            -
            
            
            
            132,302
            
            
            
            (3,236
            )
            
            
            132,302
            
            
            
            (3,236
            )Mortgage-backed
      securities
            
            
            1,440,742
            
            
            
            (8,821
            )
            
            
            -
            
            
            
            -
            
            
            
            1,440,742
            
            
            
            (8,821
            )$
            1,497,084
            
            
            $
            (50,071
            )
            
            $
            132,302
            
            
            $
            (3,236
            )
            
            $
            1,629,386
            
            
            $
            (53,307
            )





Note
4:  Benefit Plans





The
Company has stock-based employee compensation plans, which are described fully
in the Company’s December 31, 2008 Annual Report on Form 10-K.





The table
below summarizes transactions under the Company’s stock option plans for the
nine months ended September 30, 2009:





Number of sharesIncentive Stock Option
            
            
            Non-Incentive Stock Option
            
            
            Weighted Average Exercise
    PriceBalance
      outstanding as of January 1, 2009
            
            
            108,250
            
            
            
            116,704
            
            
            $
            23.29Granted
            
            
            41,500
            
            
            
            20,000
            
            
            $
            5.31Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            (1,000
            )
            
            
            -
            
            
            $
            28.43Balance
      outstanding as of September 30, 2009
            
            
            148,750
            
            
            
            136,704
            
            
            $
            19.40Options
      exercisable as of September 30, 2009
            
            
            55,450
            
            
            
            87,704
            
            
            $
            20.90





Stock-based
compensation expense recognized for the three months ended September 30, 2009
and 2008 was $23,251 and $23,735, respectively.   Stock-based
compensation expense recognized for the nine months ended September 30, 2009 and
2008 was $70,699 and $72,211, respectively.  As of September 30, 2009,
there was $221,269 of unrecognized compensation expense related to nonvested
stock options, which will be recognized over the remaining vesting
period.


11
 Table of Contents


Note
5: Income (Loss) Per Common Share





For three months ended September 30,
      2009
            
            
            For nine months ended September 30,
      2009Income Available to Common
      Shareholders
            
            
            Average Common Shares
      Outstanding
            
            
            Per Common Share
            
            
            Loss Available to Common
      Shareholders
            
            
            Average Common Shares
      Outstanding
            
            
            Per Common ShareBasic
      Income (Loss) Per Common Share
            
            $
            293,072
            
            
            
            2,625,181
            
            
            $
            0.11
            
            
            $
            (2,400,115
            )
            
            
            2,620,197
            
            
            $
            (0.92
            )Effect
      of Dilutive Securities:Stock
      Warrants
            
            
            
            
            
            
            43,472
            
            
            
            
            
            
            
            
            
            
            
            N/ADiluted
      Income (Loss) Per Common Share
            
            $
            293,072
            
            
            
            2,668,653
            
            
            $
            0.11
            
            
            $
            (2,400,115
            )
            
            
            2,620,197
            
            
            $
            (0.92
            )For three months ended September 30,
      2008
            
            
            For nine months ended September 30,
      2008Income Available to Common
      Shareholders
            
            
            Average Common Shares
      Outstanding
            
            
            Per Common Share
            
            
            Loss Available to Common
      Shareholders
            
            
            Average Common Shares
      Outstanding
            
            
            Per Common ShareBasic
      Income (Loss) Per Common Share
            
            $
            299,459
            
            
            
            2,603,686
            
            
            $
            0.11
            
            
            $
            (1,579,963
            )
            
            
            2,602,706
            
            
            $
            (0.61
            )Effect
      of Dilutive Securities:Stock
      Options
            
            
            
            
            
            
            2,789
            
            
            
            
            
            
            
            
            
            
            
            N/ADiluted
      Income (Loss) Per Common Share
            
            $
            299,459
            
            
            
            2,606,475
            
            
            $
            0.11
            
            
            $
            (1,579,963
            )
            
            
            2,602,706
            
            
            $
            (0.61
            )





Due to
the Company’s net loss for the nine months ended September 30, 2009 and 2008, no
potentially dilutive shares were included in the computation of diluted earnings
per share.  Stock options to purchase 285,454 and 206,500 shares of
common stock were outstanding during the three months ended September 30, 2009
and 2008, 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.





Note
6: Other Comprehensive Income (Loss)





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





9/30/2009
            
            
            9/30/2008Unrealized
      gains (losses) on available-for-sale securities
            
            $
            1,683,076
            
            
            $
            (1,775,878
            )Accretion
      of gains on interest rate swaps into income
            
            
            (763,119
            )
            
            
            -Less:
      Reclassification adjustment for realized (gains) losses included in
      income
            
            
            (657,035
            )
            
            
            97,788Other
      comprehensive income (loss), before tax effect
            
            
            262,922
            
            
            
            (1,678,090
            )Tax
      effect
            
            
            97,281
            
            
            
            (620,893
            )Other
      comprehensive income (loss)
            
            $
            165,641
            
            
            $
            (1,057,197
            )


12
 Table of Contents


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





9/30/2009
            
            
            12/31/2008Unrealized
      gain on available-for-sale securities
            
            $
            2,178,927
            
            
            $
            1,152,885Unrealized
      gain on interest rate swaps
            
            
            763,135
            
            
            
            1,526,2542,942,062
            
            
            
            2,679,139Tax
      effect
            
            
            1,088,563
            
            
            
            991,281Net
      of tax amount
            
            $
            1,853,499
            
            
            $
            1,687,858





Note
7: New Accounting Pronouncements





In June 2009, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-1
(formerly SFAS No. 168), “Topic 105 -Generally Accepted Accounting
Principles - Accounting Standards Codification and the Hierarchy of Generally
Accepted Principles.”This standard establishes the FASB
Accounting Standards Codification (ASC) as the single source of authoritative
U.S. generally accepted accounting principles (GAAP) to be applied by
nongovernmental entities.  Rules and interpretative releases of the
SEC under authority of federal securities laws are also sources of authoritative
guidance for SEC registrants. The Codification does not change current GAAP, but
is intended to simplify user access to all authoritative GAAP by providing all
the authoritative literature related to a particular topic in one
place.   All non-grandfathered, non-SEC accounting literature not
included in the Codification will become non-authoritative.  The
standard was effective for the third quarter of 2009 and did not have a material
impact on the Company’s consolidated financial statements.  However,
the appropriate changes to GAAP references have been made to the condensed
consolidated financial statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46R”(not yet reflected in FASB ASC).  The standard amends
FIN No. 46R to require a company to analyze whether its interest in a variable
interest entity (“VIE”) gives it a controlling financial interest.  A
company must assess whether it has an implicit financial responsibility to
ensure that the VIE operates as designed when determining whether it has the
power to direct the activities of the VIE that significantly impact its economic
performance.  Ongoing reassessments of whether a company is the
primary beneficiary are also required by the standard.  SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE.  This Statement will be effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within the first annual
reporting period, and for interim and annual reporting periods
thereafter.  Earlier application is not permitted.





In August
2009, the FASB issued ASU 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value” to provide
guidance when estimating the fair value of a liability.  When a quoted
price in an active market for the identical liability is not available, fair
value should be measured using:


·
            the
      quoted price of an identical liability when traded as an
      asset,


·
            quoted
      prices of similar liabilities or similar liabilities when traded as
      assets, or


·
            another
      valuation technique consistent with the principles of Topic 820 such as an
      income approach or a market
approach.


If a
restriction exists that prevents the transfer of the liability, a separate
adjustment related to the restriction is not required when estimating fair
value.  The ASU was effective for the Company on October 1,
2009.  Its adoption has no material impact on the Company’s
consolidated financial statements.





In
April 2009, the FASB issued ASC 320, Recognition and Presentation of
Other-Than-Temporary-Impairments. The objective of an
other-than-temporary impairment analysis under existing GAAP is to determine
whether the holder of an investment in a debt or equity security for which
changes in fair value are not regularly recognized in earnings (such as
securities classified as held-to-maturity or available-for-sale) should
recognize a loss in earnings when the investment is impaired. An investment is
impaired if the fair value of the investment is less than its amortized cost
basis. This ASC amends the other-than-temporary impairment guidance in GAAP for
debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This ASC did not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. This accounting standard was effective for the Company for
the second quarter of 2009. The adoption of the standard did not have a material
impact on the Company’s consolidated financial statements.


13
 Table of Contents


Note
8: Fair Value Disclosures





ASC 820 “Fair Value Measurements and
Disclosures” establishes a hierarchy that prioritizes the use of fair
value inputs used in valuation methodologies into the following three
levels:





Level
1:  Unadjusted quoted prices for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.





Level
2:  Significant observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities in active markets; quoted prices
for identical or similar assets or liabilities in markets that are not active;
or other inputs that are observable or can be derived from or corroborated by
observable market data by correlation or other means.





Level
3:  Significant unobservable inputs that reflect the reporting
entity’s own assumptions about the assumptions that market participants would
use in pricing an asset or liability.





The
following is a description of the Company’s valuation methodologies used to
measure and disclose the fair values of its assets on a recurring or
nonrecurring basis:





Available-for-sale
securities:  Securities classified as available for sale are
recorded at fair value on a recurring basis utilizing Level 1 and Level 2
inputs.  For these securities, the Company obtains fair value
measurements from an independent pricing service.  The fair value
measurements consider observable data that may include dealer quotes, benchmark
yields, market spreads, live trading levels and market consensus prepayment
speeds, among other things.





Loans:The
Company does not record loans at fair value on a recurring
basis.  However, nonrecurring fair value adjustments to collateral
dependent loans are recorded to reflect partial write-downs based on the
observable market price or current appraised value of the underlying
collateral.





Impaired
loans:   Impaired loans are reported at the lower of cost
or fair value of the underlying collateral if repayment is expected solely from
the collateral.  Collateral values are estimated using third party
appraisals or internally developed appraisals.





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 costs
to sell.





The
following table summarizes assets measured at fair value on a recurring basis as
of September 30, 2009 and December 31, 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value
(dollar amounts in thousands):


14
 Table of Contents





9/30/2009Available-for-sale
      securities:
            
            Level 1 inputs
            
            
            Level 2 inputs
            
            
            Level 3 inputs
            
            
            Total fair valueEquity
      securities
            
            $
            65
            
            
            $
            -
            
            
            $
            -
            
            
            $
            65U.S.
      government agencies
            
            
            -
            
            
            
            30,571
            
            
            
            -
            
            
            
            30,571Mortgage-backed
      securities
            
            
            -
            
            
            
            80,272
            
            
            
            -
            
            
            
            80,272$
            65
            
            
            $
            110,843
            
            
            $
            -
            
            
            $
            110,90812/31/2008Available-for-sale
      securities:
            
            Level 1 inputs
            
            
            Level 2 inputs
            
            
            Level 3 inputs
            
            
            Total fair valueEquity
      securities
            
            $
            561
            
            
            $
            -
            
            
            $
            -
            
            
            $
            561U.S.
      government agencies
            
            
            -
            
            
            
            2,474
            
            
            
            -
            
            
            
            2,474Mortgage-backed
      securities
            
            
            -
            
            
            
            62,470
            
            
            
            -
            
            
            
            62,470$
            561
            
            
            $
            64,944
            
            
            $
            -
            
            
            $
            65,505





Certain
assets are measured at fair value on a nonrecurring basis; that is, the
instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances (for example, when there is
evidence of impairment).  Assets measured at fair value on a
non-recurring basis during the periods were valued using the valuation inputs
shown below (dollar amounts in thousands):





9/30/2009Level 1 inputs
            
            
            Level 2 inputs
            
            
            Level 3 inputs
            
            
            Total fair valueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            17,644
            
            
            $
            17,64412/31/2008Level 1 inputs
            
            
            Level 2 inputs
            
            
            Level 3 inputs
            
            
            Total fair valueImpaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            32,706
            
            
            $
            32,706





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.


15
 Table of Contents





September 30, 2009
            
            
            December 31, 2008Carrying Amount
            
            
            Fair Value
            
            
            Carrying Amount
            
            
            Fair ValueFinancial
      assets:Cash
      and cash equivalents
            
            $
            19,075,226
            
            
            $
            19,075,226
            
            
            $
            15,097,015
            
            
            $
            15,097,015Interest-bearing
      deposits
            
            
            27,105,802
            
            
            
            27,105,802
            
            
            
            -
            
            
            
            -Available-for-sale
      securities
            
            
            110,908,412
            
            
            
            110,908,412
            
            
            
            65,505,339
            
            
            
            65,505,339Held-to-maturity
      securities
            
            
            495,433
            
            
            
            526,229
            
            
            
            556,465
            
            
            
            576,399Federal
      Home Loan Bank stock
            
            
            6,730,100
            
            
            
            6,730,100
            
            
            
            6,730,100
            
            
            
            6,730,100Mortgage
      loans held for sale
            
            
            1,652,861
            
            
            
            1,652,861
            
            
            
            1,933,798
            
            
            
            1,933,798Loans,
      net
            
            
            526,151,829
            
            
            
            531,485,785
            
            
            
            556,393,243
            
            
            
            575,444,855Interest
      receivable
            
            
            2,646,959
            
            
            
            2,646,959
            
            
            
            2,632,450
            
            
            
            2,632,450Financial
      liabilities:Deposits
            
            
            505,737,285
            
            
            
            510,641,496
            
            
            
            447,079,469
            
            
            
            456,127,421Federal
      Home Loan Bank advances
            
            
            111,050,000
            
            
            
            108,674,873
            
            
            
            132,436,000
            
            
            
            134,713,550Securities
      sold under agreements to repurchase
            
            
            39,750,000
            
            
            
            40,395,309
            
            
            
            39,750,000
            
            
            
            40,622,942Subordinated
      debentures
            
            
            15,465,000
            
            
            
            15,465,000
            
            
            
            15,465,000
            
            
            
            15,465,000Notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            1,435,190
            
            
            
            1,435,190Interest
      payable
            
            
            1,483,595
            
            
            
            1,483,595
            
            
            
            1,577,279
            
            
            
            1,577,279Unrecognized
      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 approximate those assets' fair
value.





Interest
Receivable


The
carrying amount of interest receivable approximates its fair value.





Mortgage Loans Held for
Sale


The
carrying amount of mortgage loans held for sale approximate their fair value due
to the short term nature of the category.





Loans


The fair
value of loans is estimated by discounting the future cash flows using the
Treasury Yield Curve over the estimated life of the loans, adjusted for credit
risk.  Loans with similar characteristics are aggregated for purposes
of the calculations.





Deposits


The fair
value of demand deposits and savings accounts is the amount payable on demand at
the reporting date (i.e., their carrying amounts).  The fair value of
fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the Treasury Yield Curve over their estimated
life.




16
 Table of Contents




Federal Home Loan Bank
Advances and Securities Sold under Agreements to Repurchase


The fair
value of advances and subordinated debentures is estimated by using the Treasury
Yield Curve over the estimated life of the instruments.





Subordinated Debentures and
Notes Payable


For these
variable rate instruments, the carrying amount is a reasonable estimate of fair
value.





Interest
Payable


The
carrying amounts of interest payable approximates 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
9: Derivative Financial Instruments





The
Company recorded all derivative financial instruments at fair value in the
financial statements.  Derivatives were used as a risk management tool
to hedge the exposure to changes in interest rates or other identified market
risks.





When a
derivative is intended to be a qualifying hedged instrument, the Company
prepares written hedge documentation that designates the derivative as 1) a
hedge of fair value of a recognized asset or liability (fair value hedge) or 2)
a hedge of a forecasted transaction, such as, the variability of cash flows to
be received or paid related to a recognized asset or liability (cash flow
hedge).  The written documentation includes identification of, among
other items, the risk management objective, hedging instrument, hedged item, and
methodologies for assessing and measuring hedge effectiveness and
ineffectiveness, along with support for management’s assertion that the hedge
will be highly effective.





On
November 7, 2008, the Company elected to terminate its three interest rate swap
agreements with a total notional value of $90 million.  At
termination, the swaps had a market value (gain) of $1.7 million.  The
remaining gain of $763,000 as of September 30, 2009 will be accreted into
interest income over the remaining nine month term in accordance with the stated
maturity date of the original agreements.  See Note 6 for the effects
of the swaps on the statements of financial condition and statements of
operations.





Note
10: Preferred Stock and Common Stock Warrants





On
January 30, 2009, as part of the U.S. Department of the Treasury's Troubled
Asset Relief Program's Capital Purchase Program (“CPP”), the Company entered
into a Securities Purchase Agreement - Standard Terms with the United States
Department of the Treasury (the "Treasury") pursuant to which the Company sold
to the Treasury 17,000 shares of Fixed Rate Cumulative Perpetual Preferred
Stock, Series A (the "Series A Preferred Stock") and issued a ten year warrant
(the "Warrant") to purchase 459,459 shares of the Company's common stock (the
"Common Stock") for $5.55 per share (the "Warrant Shares") for a total purchase
price of $17.0 million (the "Transaction").





The
Series A Preferred Stock qualifies as Tier 1 capital and is entitled to
cumulative preferred dividends at a rate of 5% per year for the first five
years, payable quarterly, and 9% thereafter. The Series A Preferred Stock has a
liquidation preference of $1,000 per share, plus accrued and unpaid
dividends.  The failure by the Company to pay a total of six quarterly
dividends, whether or not consecutive, gives the holders of the Series A
Preferred Stock the right to elect two directors to the Company's Board of
Directors.


17
 Table of Contents


During
the first three years after the Transaction, the Company may not redeem the
Series A Preferred Stock except in conjunction with a "qualified equity
offering" meeting certain requirements. After three years, the Company may
redeem the Series A Preferred Stock for $1,000 per share, plus accrued and
unpaid dividends, in whole or in part, subject to regulatory
approval.





The
Warrant is exercisable immediately upon issuance and expires in ten years. The
Warrant has anti-dilution protections and certain other protections for the
holder of the Warrant, as well as potential registration rights upon written
request from the Treasury.  The Treasury has agreed not to exercise
voting rights with respect to the Warrant Shares that it may acquire upon
exercise of the Warrant. The number of Warrant Shares may be reduced by up to
one-half if the Company completes an equity offering satisfying certain
requirements by December 31, 2009. If the Series A Preferred Stock is redeemed
in whole, the Company has the right to purchase any shares of the Common Stock
held by the Treasury at their fair market value at that time.





The
holder of the Warrant has certain registration rights to facilitate a sale of
the Series A Preferred Stock upon written request to the
Company.  Neither the Series A Preferred Stock, the Warrant nor the
Warrant Shares will be subject to any contractual restrictions on transfer,
except that Treasury may not transfer the Warrant with respect to, and/or
exercise the Warrant for more than one-half of the 459,459 Warrant Shares prior
to the earlier of (i) the date on which the Company has received aggregate gross
proceeds of at least $17.0 million from one or more “Qualified Equity Offerings”
and (ii) December 31, 2009.  A “Qualified Equity Offering” is defined
as the sale for cash by the Company of preferred stock or common stock that
qualifies as Tier 1 capital.





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





The
proceeds from the CPP were allocated between the Series A Preferred Stock and
the Warrant based on a fair value assigned using a discounted cash flow
model.  This resulted in an initial value of $15.6 million for the
Series A Preferred Stock and $1.4 million for the Warrant.  The
discount of $1.4 million on the Series A Preferred Stock is being accreted over
the straight-line method (which approximates the level-yield method) over five
years ending February 28, 2014.





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





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





Note
11: FDIC deposit insurance assessments





On
February 27, 2009, the FDIC approved a Restoration Plan for replenishing the
Deposit Insurance Fund (DIF).  The FDIC Restoration Plan increased
regular premium rates for 2009, implemented changes to the risk-based assessment
system and imposed a special assessment on insured institutions as of June 30,
2009, to be collected on September 30, 2009.  It also allows the FDIC
to impose possible additional special assessments thereafter to maintain public
confidence in the DIF.


18
 Table of Contents


On May
22, 2009, the FDIC issued a final rule which levied a special assessment
applicable to all insured depository institutions totaling 5 basis points of
each institution’s total assets less Tier 1 capital as of June 30, 2009, not to
exceed 10 basis points of domestic deposits.  The special assessment
is part of the FDIC’s efforts to rebuild the DIF.  The final rule also
allows the FDIC to impose additional special assessments of 5 basis points for
the third and fourth quarters of 2009, if the FDIC estimates that the DIF
reserve ratio will fall to a level that would adversely affect public confidence
in federal deposit insurance or to a level that would be close to or below
zero.





On
November 12, 2009, the FDIC adopted a final rule to collect, in advance,
insurance premiums for 2010, 2011 and 2012 in lieu of an additional special
assessment.  The payment will be due on December 30, 2009, along with
the Bank’s assessment payment for the third quarter of 2009.





As a
result of these changes and the special assessment, the Company has experienced
a significant increase in its FDIC deposit insurance premium expense for
2009.  FDIC deposit insurance expense, including the special
assessment, for the three and nine months ended September 30, 2009 were $330,000
and $1,275,030, respectively, compared to $82,499 and $207,497, respectively,
during the same periods in 2008.





Note
12: Subsequent Events





On
October 30, 2009, the Company purchased $10 million of Bank owned life insurance
on key members of management.  Such policies will be recorded at their
cash surrender value, or the amount that can be realized.  Increases
in cash surrender value in excess of the single premium paid will be reported as
other noninterest income.





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





General





The
primary function of the Company is to monitor and oversee its investment in
Guaranty Bank (the “Bank”), a wholly-owned subsidiary of the
Company.  The Company engages in few other activities, and the Company
has no significant assets other than its investment in the Bank.  As a
result, the results of operations of the Company are derived primarily from
operations of the Bank. The Bank’s results of operations are primarily dependent
on net interest margin, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing
liabilities.  The Bank’s income is also affected by the level of its
noninterest expenses, such as employee salaries and benefits, occupancy expenses
and other expenses.  The following discussion reviews the Company’s
financial condition as of September 30, 2009, and the results of operations for
the three and nine months ended September 30, 2009 and 2008.





The
discussion set forth below, as well as other portions of this Form 10-Q, may
contain forward-looking comments. Such comments are based upon the information
currently available to management of the Company and management’s perception
thereof as of the date of this Form 10-Q.  When used in this Form
10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.  Such
statements are subject to risks and uncertainties.  Actual results of
the Company’s operations could materially differ from those forward-looking
comments.  The differences could be caused by a number of factors or
combination of factors including, but not limited to: changes in demand for
banking services; changes in portfolio composition; changes in management
strategy; increased competition from both bank and non-bank companies; changes
in the general level of interest rates, in general or local economic conditions,
in the real estate market, and in federal or state regulations and legislation
governing the operations of the Company or the Bank; and other factors set forth
in reports and other documents filed by the Company with the Securities and
Exchange Commission from time to time, including the risk factors described
under Item 1A. of the Company’s Form 10-K for the fiscal year ended December 31,
2008.





Financial
Condition





The
Company’s total assets increased $51,725,197 (8%) from $675,670,393 as of
December 31, 2008, to $727,395,590 as of September 30, 2009.


19
 Table of Contents


Cash and
cash equivalents increased $3,978,211 (26%) from $15,097,015 as of December 31,
2008, to $19,075,226 as of September 30, 2009.  Interest-bearing
deposits increased $27,105,802 from $0 as of December 31, 2008, to $27,105,802
as of September 30, 2009.  These increases were due to the funding
provided by the Bank’s money market deposit campaign and the decline in loan
balances.  See further explanation below.




Securities
available-for-sale increased $45,403,073 (69%) from $65,505,339 as of December
31, 2008, to $110,908,412 as of September 30, 2009. The increase is primarily
due to purchases of $80.7 million offset by sales and principal payments
received of $36.7 million.  The purchases were made with funding
provided by the Bank’s money market deposit campaign and the decline in loan
balances.  See further explanation below.  During the three
months ended September 30, 2009, the Company sold various securities in its
investment portfolio with a recognized gain of $341,596, including its remaining
26,600 shares of Federal Home Loan Mortgage Corporation stock.





Securities
held-to-maturity decreased primarily due to principal repayments by $61,032
(11%) from $556,465 as of December 31, 2008, to $495,433 as of September 30,
2009.





Net loans
receivable decreased by $30,241,414 (5%) from $556,393,243 as of December 31,
2008, to $526,151,829 as of September 30, 2009 primarily due to principal
paydowns and unanticipated payoffs.  Commercial real estate loans
increased by $30,256,974 (15%) from $204,218,526 as of December 31, 2008, to
$234,475,500 as of September 30, 2009.  Commercial loans decreased
$7,424,294 (6%) from $118,468,028 as of December 31, 2008, to $111,043,734 as of
September 30, 2009.  Permanent multi-family loans increased by
$1,500,105 (5%) from $31,757,152 as of December 31, 2008, to $33,257,257 as of
September 30, 2009.  Construction loans decreased by $56,708,000 (67%)
to $28,364,577 as of September 30, 2009 compared to $85,072,577 as of December
31, 2008.





Allowance
for loan losses decreased $3,508,083 (21%) from $16,728,492 as of December 31,
2008 to $13,220,409 as of September 30, 2009. The allowance decreased due to net
loan charge-offs of $8,458,083 exceeding the provision for loan losses of
$4,950,000 recorded during the period.  Management charged off
specific loans that had been identified and classified as impaired at December
31, 2008.  Due to the charge-offs noted, increases in nonperforming
loans and continuing concerns over the local and national economy and specific
borrowers, management decided to record a provision for loan losses for the
period in order to maintain the allowance at a level in accordance with
management’s internal review and methodology.  See additional
discussion under “Results of Operations –
Comparison of Three and Nine Month Periods Ended September 30, 2009 and 2008 –
Provision for Loan Losses” and “Nonperforming Assets”.The allowance for loan losses, as a
percentage of gross loans outstanding (excluding mortgage loans held for sale),
as of September 30, 2009 and December 31, 2008 was 2.45% and 2.92%,
respectively.  The allowance for loan losses, as a percentage of
nonperforming loans outstanding, as of September 30, 2009 and December 31, 2008
was 37.0% and 80.8%, respectively.  Management believes the allowance
for loan losses is at a level to be sufficient in providing for potential loans
losses in the Bank’s existing loan portfolio.





Deposits
increased $58,657,816 (13%) from $447,079,469 as of December 31, 2008, to
$505,737,285 as of September 30, 2009.  For the nine months ended
September 30, 2009, checking and savings accounts increased by $139.7 million
and certificates of deposit decreased by $81.0 million.  The increase
in checking and savings was due to the Bank’s strong emphasis on increasing
money market accounts through an aggressive deposit
campaign.  Management has implemented additional marketing efforts to
obtain additional personal and commercial checking business from these money
market customers.  See also the discussion under “Quantitative and Qualitative Disclosure about Market
Risk – Asset/Liability Management.”





Federal
Home Loan Bank of Des Moines (“FHLB”) advances decreased by $21,386,000 from
$132,436,000 as of December 31, 2008, to $111,050,000 as of September 30, 2009
due to principal repayments during the period.


20
 Table of Contents


Notes
payable decreased $1,435,190 (100%) from $1,435,190 as of December 31, 2008, to
$0 as of September 30, 2009, due to the full repayment of the existing note
payable during the period.





Stockholders’
equity (including unrealized appreciation on securities available-for-sale and
interest rate swaps, net of tax) increased $15,109,409 from $37,312,902 as of
December 31, 2008, to $52,422,311 as of September 30, 2009.  As a
result of the Company’s participation in the CPP, stockholders’ equity increased
by $17,000,000 during the period (See Note 10 to the Condensed
Consolidated Financial Statements for further discussion).  In
addition, in conjuction with the Series A Preferred Stock issued under the CPP,
the Company has accrued $566,667 of dividends (5%) and recorded $183,708 of
accretion associated with the discount on the preferred stock.  The Company’s net loss during
this nine month periodwas
$1,649,739.





Average
Balances, Interest and Average Yields





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





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





Three months ended
9/30/2009
            
            
            Three months ended
9/30/2008Average Balance
            
            
            Interest
            
            
            Yield / Cost
            
            
            Average Balance
            
            
            Interest
            
            
            Yield / CostASSETSInterest-earning:Loans
            
            $
            538,229
            
            
            $
            7,402
            
            
            
            5.50
            %
            
            $
            571,616
            
            
            $
            8,338
            
            
            
            5.83
            %Investment
      securities
            
            
            114,818
            
            
            
            884
            
            
            
            3.08
            %
            
            
            63,729
            
            
            
            864
            
            
            
            5.42
            %Other
      assets
            
            
            60,674
            
            
            
            248
            
            
            
            1.63
            %
            
            
            8,105
            
            
            
            66
            
            
            
            3.26
            %Total
      interest-earning
            
            
            713,721
            
            
            
            8,534
            
            
            
            4.78
            %
            
            
            643,450
            
            
            
            9,268
            
            
            
            5.76
            %Noninterest-earning
            
            
            24,933
            
            
            
            
            
            
            
            
            
            
            
            26,666$
            738,654
            
            
            
            
            
            
            
            
            
            
            $
            670,116LIABILITIES
      AND STOCKHOLDERS’ EQUITYInterest-bearing:Savings
      accounts
            
            $
            13,275
            
            
            
            31
            
            
            
            0.93
            %
            
            $
            13,288
            
            
            
            31
            
            
            
            0.93
            %Transaction
      accounts
            
            
            230,104
            
            
            
            1,693
            
            
            
            2.94
            %
            
            
            111,178
            
            
            
            480
            
            
            
            1.73
            %Certificates
      of deposit
            
            
            247,712
            
            
            
            2,093
            
            
            
            3.38
            %
            
            
            280,324
            
            
            
            2,829
            
            
            
            4.04
            %FHLB
      advances
            
            
            111,393
            
            
            
            792
            
            
            
            2.84
            %
            
            
            139,220
            
            
            
            876
            
            
            
            2.52
            %Securities
      sold under agreements to repurchase
            
            
            39,750
            
            
            
            221
            
            
            
            2.22
            %
            
            
            39,750
            
            
            
            260
            
            
            
            2.62
            %Subordinated
      debentures
            
            
            15,465
            
            
            
            256
            
            
            
            6.62
            %
            
            
            15,465
            
            
            
            256
            
            
            
            6.62
            %Other
      borrowed funds
            
            
            -
            
            
            
            -
            
            
            
            0.00
            %
            
            
            1,435
            
            
            
            15
            
            
            
            4.18
            %Total
      interest-bearing
            
            
            657,699
            
            
            
            5,086
            
            
            
            3.09
            %
            
            
            600,660
            
            
            
            4,747
            
            
            
            3.16
            %Noninterest-bearing
            
            
            28,807
            
            
            
            
            
            
            
            
            
            
            
            31,091Total
      liabilities
            
            
            686,506
            
            
            
            
            
            
            
            
            
            
            
            631,751Stockholders’
      equity
            
            
            52,148
            
            
            
            
            
            
            
            
            
            
            
            38,365$
            738,654
            
            
            
            
            
            
            
            
            
            
            $
            670,116Net
      earning balance
            
            $
            56,022
            
            
            
            
            
            
            
            
            
            
            $
            42,790Earning
      yield less costing rate
            
            
            
            
            
            
            
            
            
            
            1.69
            %
            
            
            
            
            
            
            
            
            
            
            2.60
            %Net
      interest income, and net yield spread on interest earning
      assets
            
            
            
            
            
            $
            3,448
            
            
            
            1.93
            %
            
            
            
            
            
            $
            4,521
            
            
            
            2.81
            %Ratio
      of interest-earning assets to interest-bearing liabilities
            
            
            
            
            
            
            109
            %
            
            
            
            
            
            
            
            
            
            
            107
            %


21
 Table of Contents





Nine months ended 9/30/2009
            
            
            Nine months ended 9/30/2008Average Balance
            
            
            Interest
            
            
            Yield / Cost
            
            
            Average Balance
            
            
            Interest
            
            
            Yield / CostASSETSInterest-earning:Loans
            
            $
            551,904
            
            
            $
            22,260
            
            
            
            5.38
            %
            
            $
            548,355
            
            
            $
            24,985
            
            
            
            6.08
            %Investment
      securities
            
            
            99,338
            
            
            
            2,788
            
            
            
            3.74
            %
            
            
            56,959
            
            
            
            2,268
            
            
            
            5.31
            %Other
      assets
            
            
            70,118
            
            
            
            314
            
            
            
            0.60
            %
            
            
            7,388
            
            
            
            171
            
            
            
            3.09
            %Total
      interest-earning
            
            
            721,360
            
            
            
            25,362
            
            
            
            4.69
            %
            
            
            612,702
            
            
            
            27,424
            
            
            
            5.97
            %Noninterest-earning
            
            
            23,621
            
            
            
            
            
            
            
            
            
            
            
            22,872$
            744,981
            
            
            
            
            
            
            
            
            
            
            $
            635,574LIABILITIES
      AND STOCKHOLDERS’ EQUITYInterest-bearing:Savings
      accounts
            
            $
            12,710
            
            
            
            87
            
            
            
            0.91
            %
            
            $
            13,093
            
            
            
            113
            
            
            
            1.15
            %Transaction
      accounts
            
            
            205,204
            
            
            
            4,329
            
            
            
            2.81
            %
            
            
            104,420
            
            
            
            1,434
            
            
            
            1.83
            %Certificates
      of deposit
            
            
            276,862
            
            
            
            7,379
            
            
            
            3.55
            %
            
            
            280,416
            
            
            
            9,300
            
            
            
            4.42
            %FHLB
      advances
            
            
            112,272
            
            
            
            2,360
            
            
            
            2.80
            %
            
            
            113,114
            
            
            
            2,371
            
            
            
            2.79
            %Securities
      sold under agreements to repurchase
            
            
            39,750
            
            
            
            673
            
            
            
            2.26
            %
            
            
            36,465
            
            
            
            735
            
            
            
            2.69
            %Subordinated
      debentures
            
            
            15,465
            
            
            
            768
            
            
            
            6.62
            %
            
            
            15,465
            
            
            
            768
            
            
            
            6.62
            %Other
      borrowed funds
            
            
            152
            
            
            
            3
            
            
            
            2.63
            %
            
            
            1,273
            
            
            
            39
            
            
            
            4.08
            %Total
      interest-bearing
            
            
            662,415
            
            
            
            15,599
            
            
            
            3.14
            %
            
            
            564,246
            
            
            
            14,760
            
            
            
            3.49
            %Noninterest-bearing
            
            
            30,541
            
            
            
            
            
            
            
            
            
            
            
            29,867Total
      liabilities
            
            
            692,956
            
            
            
            
            
            
            
            
            
            
            
            594,113Stockholders’
      equity
            
            
            52,025
            
            
            
            
            
            
            
            
            
            
            
            41,461$
            744,981
            
            
            
            
            
            
            
            
            
            
            $
            635,574Net
      earning balance
            
            $
            58,945
            
            
            
            
            
            
            
            
            
            
            $
            48,456Earning
      yield less costing rate
            
            
            
            
            
            
            
            
            
            
            1.55
            %
            
            
            
            
            
            
            
            
            
            
            2.48
            %Net
      interest income, and net yield spread on interest earning
      assets
            
            
            
            
            
            $
            9,763
            
            
            
            1.80
            %
            
            
            
            
            
            $
            12,664
            
            
            
            2.76
            %Ratio
      of interest-earning assets to interest-bearing liabilities
            
            
            
            
            
            
            109
            %
            
            
            
            
            
            
            
            
            
            
            109
            %





Results
of Operations - Comparison of Three and Nine Month Periods Ended September
30, 2009
and 2008





Net
income for the three months ended September 30, 2009 and 2008 was $574,463 and
$299,459, respectively.  Net losses of ($1,649,739) and ($1,579,963)
were recognized for the nine months ended September 30, 2009 and 2008,
respectively.





Interest
Income





Total
interest income for the three months and nine months ended September 30, 2009,
decreased $733,464 (8%) and $2,062,288 (8%), respectively, as compared to the
three months and nine months ended September 30, 2008.  For the three
month and nine month periods ended September 30, 2009 compared to the same
periods in 2008, the average yield on interest earning assets decreased 98 basis
points to 4.78% and decreased 128 basis points to 4.69%, respectively, while the
average balance of interest earning assets increased approximately $70,271,000
and $108,658,000, respectively.  The Company’s decline in the average
yield on interest earning assets is partially due to the Federal Reserve’s
significant interest rate cuts of 200 basis points since March 31,
2008.  This affected the Company’s yield on loans which are tied to
the prime rate.  Another factor that has impacted the Company’s yield
on loans is the level of nonaccrual loans which has increased to $35.5 million
as of September 30, 2009, as compared to $20.7 million as of December 31,
2008.  Also, the Company increased its investment securities and
interest-bearing deposits during the period which, because of the low rate
environment for investment yields, decreased the average yield on investment
securities by 234 basis points for the three month period and 157 basis points
for the nine month period, respectively, as compared to the same periods in
2008.


22
 Table of Contents


Interest
Expense





Total
interest expense for the three months and nine months ended September 30, 2009,
increased $338,879 (7%) and $838,468 (6%), respectively, when compared to the
three months and nine months ended September 30, 2008.  For the three
month and nine month periods ended September 30, 2009 compared to the same
periods in 2008, the average cost of interest bearing liabilities decreased 7
basis points to 3.09% and 35 basis points to 3.14%, respectively, while the
average balance of interest bearing liabilities increased approximately
$57,039,000 and $98,169,000, respectively, when compared to the same periods in
2008.  The significant increase in the average balance of transaction
accounts was due to the Bank’s strong emphasis on increasing money market
accounts through an aggressive deposit campaign.  This initiative to
improve core deposit liquidity has increased the Bank’s cost of funds in the
near term and is expected to have a short term negative impact on
earnings.  Management has implemented additional marketing efforts to
obtain additional personal and commercial checking business from these money
market customers.





Net Interest
Income





Net
interest income for the three months and nine months ended September 30, 2009,
decreased $1,072,343 (24%) and $2,900,756 (23%), respectively, when compared to
the same periods in 2008. For the three and nine month periods ended September
30, 2009, the earning yield minus the costing rate spread decreased 91 and 93
basis points, respectively, when compared to the same periods in
2008.





Provision for Loan
Losses





Based on
its internal analysis and methodology, management recorded a provision for loan
losses of $670,000 and $4,950,000 for the three months and nine months ended
September 30, 2009, respectively, compared to $1,675,000 and $8,179,079 for the
same periods in 2008.  Provisions recorded for the nine months ended
September 30, 2009 are due to the Bank’s charge-offs during the year, increases
in nonperforming loans, continuing concerns over the local and national economy
and certain specific borrowers.  However, despite growing
nonperforming loan balances during the fiscal year 2009, the Company has
experienced a significant decline in overall loan balances as of September 30,
2009, as compared to December 31, 2008 (a decline of $33.7 million or
5%).  The Company has also experienced lower reserve requirements on
newly classified nonperforming credits during the quarter ended September 2009
and this is reflected in a lower provision requirement for the three months
ended September 30, 2009, as compared to the same period in 2008.





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





Noninterest
Income





Noninterest
income increased $481,474 (57%) and $1,110,648 (44%) for the three months and
nine months ended September 30, 2009, respectively, when compared to the three
months and nine months ended September 30, 2008.


23
 Table of Contents


Gains on
sales of investment securities increased $341,596 (100%) and $754,823 (772%) for
the three months and nine months ended September 30, 2009 when compared to the
same periods in 2008.  These increases were due to the Company
recognizing certain gains in its available-for-sale securities portfolio to
reduce potential credit and interest rate risk issues.  Service
charges on transaction accounts decreased by $72,971 (14%) and $137,616 (9%) for
the three months and nine months ended September 30, 2009 when compared to the
same periods in 2008, primarily due to declines in overdraft
charges.  Gain on sale of loans increased $106,570 (51%) and $417,848
(60%) for the three months and nine months ended September 30, 2009 when
compared to the same period in 2008 due to increased volume associated with the
Bank’s selling fixed rate mortgage loans.





Noninterest
Expense





Noninterest
expense increased $224,684 (7%) and $1,690,063 (18%) for the three months and
nine months ended September 30, 2009 when compared to the same periods in
2008.





Salaries
and employee benefits increased $110,479 (6%) and $310,349 (5%) for the three
months and nine months ended September 30, 2009 when compared to the same period
in 2008.  This increase was primarily due to additions in several
staff positions in the areas of commercial lending, finance and risk management
in the latter half of fiscal year 2008, partially offset by reductions in
expense incurred under the Company’s employee stock ownership plan.





FDIC
deposit insurance premiums increased $247,501 (300%) and $1,067,533 (514%) for
the three months and nine months ended September 30, 2009 when compared to the
same periods in 2008 due to the increase in premium assessments beginning in the
first quarter of 2009 and the special assessment incurred as of June 30, 2009,
that was paid on September 30, 2009 (See Note 11 to the Condensed
Consolidated Financial Statements).





Credit for Income
Taxes





The
provision (credit) for income taxes is a direct result of the Company’s taxable
income (loss) for the three months and nine months ended September 30, 2009, as
well as the prior year periods.





Nonperforming
Assets





The
allowance for loan losses is calculated based upon an evaluation of pertinent
factors underlying the various types and quality of the Bank’s existing loan
portfolio.  When making such evaluation, management considers such
factors as the repayment status of its loans, the estimated net realizable value
of the underlying collateral, borrowers’ intent (to the extent known by the
Bank) and ability to repay the loan, local economic conditions and the Bank’s
historical loss ratios.  The allowance for loan losses, as a
percentage of nonperforming loans outstanding, as of September 30, 2009 and
December 31, 2008 was 37.0% and 80.8%, respectively.  Total loans
classified as substandard, doubtful or loss as of September 30, 2009, were $52.0
million or 7.15% of total assets as compared to $47.7 million, or 7.06% of total
assets at December 31, 2008.  Management considered nonperforming and
total classified loans in evaluating the adequacy of the Bank’s allowance for
loan losses.





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





9/30/2009
            
            
            12/31/2008
            
            
            12/31/2007Nonperforming
      loans
            
            $
            35,701
            
            
            $
            20,694
            
            
            $
            7,254Real
      estate acquired in settlement of loans
            
            
            5,879
            
            
            
            5,655
            
            
            
            727Total
      nonperforming assets
            
            $
            41,580
            
            
            $
            26,349
            
            
            $
            7,981Total
      nonperforming assets as a percentage of total assets
            
            
            5.72
            %
            
            
            3.90
            %
            
            
            1.41
            %Allowance
      for loan losses
            
            $
            13,220
            
            
            $
            16,728
            
            
            $
            5,963Allowance
      for loan losses as a percentage of gross loans
            
            
            2.45
            %
            
            
            2.92
            %
            
            
            1.15
            %


24
 Table of Contents


Certain
types of loans, such as option adjustable rate mortgages, Alternative A
sub-prime and interest only loans, and other types of lending deemed to possess
characteristics of ‘higher’ risk have received significant focus from banking
regulators, the federal government, the media and industry trade
groups.  A substantial portion of the nationwide increase in both past
dues and foreclosures are related to these types of products.  While
the Company has not originated these types of products, the difficulties in
these markets have adversely impacted the entire mortgage market.





Liquidity
and Capital Resources





Liquidity
refers to the ability to manage future cash flows to meet the needs of
depositors and borrowers and fund operations.  Maintaining appropriate
levels of liquidity allows the Company to have sufficient funds available for
customer demand for loans, withdrawal of deposit balances and maturities of
deposits and other liabilities.  The Company’s primary sources of
liquidity include cash and cash equivalents, customer deposits and FHLB
borrowings.  The Company also has established borrowing lines
available from the Federal Reserve Bank which is considered a secondary source
of funds.





The
Company’s most liquid assets are cash and cash equivalents, which are cash on
hand, amounts due from financial institutions, interest-bearing deposits with
other financial institutions that have an original maturity of three months or
less and other interest-bearing deposits.  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
$19,075,226 as of September 30, 2009 and $15,097,015 as of December 31, 2008,
representing an increase of $3,978,211.  The Company’s
interest-bearing deposits totaled $27,105,802 as of September 30, 2009 and $0 as
of December 31, 2008.  The variations in levels of cash and cash
equivalents are influenced by deposit flows and anticipated future deposit
flows, which are subject to, and influenced by, many factors.





The
Bank’s capital ratios are above the levels required to be considered a
well-capitalized financial institution.  As of September 30, 2009, the
Bank’s Tier 1 leverage ratio was 8.38%, its Tier 1 risk-based capital ratio was
10.96% and the Bank’s total risk-based capital ratio was 12.22% - all exceeding
the minimums of 5%, 6% and 10%, respectively.





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





Item
3.  Quantitative and Qualitative Disclosures about
Market Risk





Asset/Liability
Management





The goal
of the Bank’s asset/liability policy is to manage interest rate risk so as to
maximize net interest income over time in changing interest rate
environments.  Management monitors the Bank’s net interest spreads
(the difference between yields received on assets and paid on liabilities) and,
although constrained by market conditions, economic conditions, and prudent
underwriting standards, the Bank offers deposit rates and loan rates designed to
maximize net interest income.  Management also attempts to fund the
Bank’s assets with liabilities of a comparable duration to minimize the impact
of changing interest rates on the Bank’s net interest income.  Since
the relative spread between financial assets and liabilities is constantly
changing, the Bank’s current net interest income may not be an indication of
future net interest income.





As a part
of its asset and liability management strategy and throughout the past several
years, the Bank has continued to emphasize the origination of adjustable-rate,
one- to four-family residential loans and adjustable-rate or relatively
short-term commercial real estate, commercial business and consumer loans, while
originating fixed-rate, one- to four-family residential loans primarily for
immediate resale in the secondary market on a service-released basis. This
allows the Bank to serve the customer’s needs and retain a banking relationship
with respect to such fixed-rate residential loans, while limiting its exposure
to the risk associated with  carrying a long-term fixed-rate loan in
its loan portfolio.


25
 Table of Contents


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.  The Bank believes, based on
historical experience, that a substantial portion of such accounts represents
non-interest rate sensitive core deposits.





Interest Rate Sensitivity
Analysis





The
following table sets forth as of September 30, 2009 management’s estimates of
the projected changes in net portfolio value (“NPV”) in the event of 100 and 200
basis point (“bp”) instantaneous and permanent increases and decreases in market
interest rates.  Dollar amounts are expressed in
thousands.





BP
      Change
            
            
            Estimated Net Portfolio
    Value
            
            
            NPV as % of PV of Assetsin Rates
            
            
            $ Amount
            
            
            $ Change
            
            
            % Change
            
            
            NPV Ratio
            
            
            Change+200
            
            
            
            59,754
            
            
            
            (594
            )
            
            
            -1
            %
            
            
            8.35
            %
            
            
            0.09
            %+100
            
            
            
            59,982
            
            
            
            (366
            )
            
            
            -1
            %
            
            
            8.30
            %
            
            
            0.04
            %NC
            
            
            
            60,348
            
            
            
            -
            
            
            
            -
            
            
            
            8.26
            %
            
            
            --100
            
            
            
            61,086
            
            
            
            738
            
            
            
            1
            %
            
            
            8.26
            %
            
            
            0.00
            %-200
            
            
            
            63,493
            
            
            
            3,145
            
            
            
            5
            %
            
            
            8.49
            %
            
            
            0.23
            %





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.  For
further discussion of the Company’s market risk, see the Interest Rate
Sensitivity Analysis section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in the Company’s 2008
Annual Report on Form 10-K.





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,
have an initial fixed rate period typically from one to five years, and over the
remaining life of the asset changes in the interest rate are
restricted.  In addition, the proportion of adjustable-rate loans in
the Bank’s portfolio could decrease in future periods due to refinancing
activity if market interest rates remain steady in the
future.  Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate 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 (the “Board”) is responsible for reviewing the Bank’s
asset and liability policies.  The Board meets quarterly to review
interest rate risk and trends, as well as liquidity and capital ratios and
requirements.  The Bank’s management is responsible for administering
the policies and determinations of the Board with respect to the Bank’s asset
and liability goals and strategies.





Item
4T. Controls and Procedures





(a)  The
Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934 (the “Exchange Act”))that are designed to ensure that information required to be disclosed in
the Company’s Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.


26
 Table of Contents


The
Company conducted an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company’s disclosure controls and procedures.   Based on this
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of September 30, 2009.





(b)  There
have been no changes in the Company’s internal control over financial reporting during the quarter
ended September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.


27
 Table of Contents





PART
II  OTHER INFORMATION





Item
      1.
            Legal
      Proceedings


None.





Item
      1A.
            Risk
      Factors


Not
applicable.





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
      Proceeds





Issuer Purchases of Equity
Securities





The
Company has a repurchase plan which was announced on August 20,
2007.  This plan authorizes the purchase by the Company of up to
350,000 shares of the Company’s common stock.  There is no expiration
date for this plan.  There are no other repurchase plans in effect at
this time.  The Company had no repurchase activity of the Company’s
common stock during the third quarter ended September 30, 2009.





Item
      3.
            Defaults
      Upon Senior Securities


Not
applicable.





Item
      4.
            Submission
      of Matters to a Vote of Common Security
      Holders


Not
applicable.





Item
      5.
            Other
      Information


None.





Item
      6.
            Exhibits





11.
            Statement re: computation of per share earnings
      (set forth in “Note 5: Income (Loss) Per Common Share” of the Notes to
      Condensed Consolidated Financial Statement
    (unaudited))


31(i).1
            Certification of the Principal Executive Officer
      pursuant to Rule 13a -14(a) of the Exchange
  Act


31(i).2
            Certification of the Principal Financial Officer
      pursuant to Rule 13a - 14(a) of the Exchange
  Act


32.1
            CEO
      certification pursuant to 18 U.S.C. Section
      1350


32.2
            CFO
      certification pursuant to 18 U.S.C. Section
      1350


28
 Table of Contents


SIGNATURES





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





Guaranty
Federal Bancshares, Inc.






Signature
      and Title
            
            
            Date/s/ Shaun A. Burke
            
            
            November 16, 2009Shaun
      A. BurkePresident
      and Chief Executive Officer(Principal
      Executive Officer and Duly Authorized Officer)/s/ Carter Peters
            
            
            November 16, 2009Carter
      PetersExecutive
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting Officer)




29