Guaranty Federal Bancshares (GFED) 10-Q 2004 Q2 Quarterly report

. UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter endedJune 30, 2004

OR

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission number0-23325

Guaranty Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

Telephone Number:(417) 520-4333

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

YesXNo___

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

Yes ___NoX

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

Class	Outstanding at August 10, 2004
Common Stock, Par Value $0.10	2,995,192 Shares

GUARANTY FEDERAL BANCSHARES, INC.
TABLE OF CONTENTS
Item		Page
PART I. Financial Information
1. Financial Statements Consolidated Financial Statements (Unaudited):
	Statements of Financial Condition	3
	Statements of Income	4
	Statements of Stockholders’ Equity	5
	Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
3. Quantitative and Qualitative Disclosures about Market Risk		15
4. Control and Procedures		17
PART II. Other Information
1. Legal Proceedings		18
2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		18
3. Defaults Upon Senior Securities		18
4. Submission of Matters to a Vote of Security Holders		18
5. Other Information		19
6. Exhibits and Reports on Form 8-K		19
Signatures

PART I

Item 1. Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
ASSETS	6/30/04			12/31/03
Cash	$	10,461,775			20,686,276
Interest-bearing deposits in other financial institutions		230,153			1,970,518
Cash and cash equivalents		10,691,928			22,656,794
Available-for-sale securities		14,993,857			14,863,826
Held-to-maturity securities		1,508,797			1,867,594
Stock in Federal Home Loan Bank, at cost		5,942,500			5,294,200
Mortgage loans held for sale		1,564,767			1,268,064
Loans receivable, net of allowance for loan losses of
June 30, 2004 - $4,132,755 - December 31, 2003 - $3,886,137		364,686,594			330,861,875
Accrued interest receivable:
Loans		1,285,624			1,242,683
Investments		62,895			63,045
Prepaid expenses and other assets		2,448,380			2,057,195
Foreclosed assets held for sale		103,892			5,975
Premises and equipment		6,353,608			6,576,003
	$	409,642,842			386,757,254
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits	$	258,812,782			237,130,744
Federal Home Loan Bank advances		108,086,000			108,836,948
Securities sold under agreements to repurchase		1,036,268			738,399
Advances from borrowers for taxes and insurance		772,648			259,267
Accrued expenses and other liabilities		362,175			308,497
Accrued interest payable		165,111			200,770
Dividend payable		432,899			432,513
Income taxes payable		36,317			227,495
Deferred income taxes		634,010			644,500
		370,338,210			348,779,133
STOCKHOLDERS' EQUITY
Common Stock:
$0.10 par value; authorized 10,000,000 shares;
issued; June 30, 2004 - 6,461,562 shares;
December 31, 2003 - 6,428,902 shares		646,156			642,890
Additional paid-in capital		51,850,114			51,330,202
Unearned ESOP shares		(1,914,930	)		(2,030,930	)
Retained earnings, substantially restricted		31,037,096			29,919,695
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes; June 30, 2004 - $1,614,814;
December 31, 2003 - $1,565,830		2,749,549			2,666,143
		84,367,985			82,528,000
Treasury stock, at cost; June 30, 2004 - 3,463,186 shares;
December 31, 2003 - 3,436,650 shares		(45,063,353	)		(44,549,879	)
		39,304,632			37,978,121
	$	409,642,842			386,757,254

GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
	Three months ended					Six months ended
	6/30/2004		6/30/2003			6/30/2004			6/30/2003
INTEREST INCOME
Loans	$	4,733,012		4,992,717			9,452,159			10,101,572
Investment securities		77,838		85,749			146,020			188,075
Other		61,299		108,581			115,087			201,877
		4,872,149		5,187,047			9,713,266			10,491,524
INTEREST EXPENSE
Deposits		1,108,367		1,291,158			2,262,199			2,681,270
Federal Home Loan Bank advances		825,399		1,288,122			1,720,977			2,675,271
Other		1,034		1,059			1,922			2,296
		1,934,800		2,580,339			3,985,098			5,358,837
NET INTEREST INCOME		2,937,349		2,606,708			5,728,168			5,132,687
PROVISION FOR LOAN LOSSES		225,000		150,000			413,830			405,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		2,712,349		2,456,708			5,314,338			4,727,687
NONINTEREST INCOME
Service charges		444,541		467,806			885,136			894,135
Late charges and other fees		140,200		(94,490	)		213,830			124,875
Gain on sale of investment securities		171,456		-			349,413			-
Gain on sale of loans		76,499		471,184			198,111			874,817
Income (loss) on foreclosed assets		969		(6,298	)		(5,018	)		(9,035	)
Other income		42,968		5,887			85,424			51,803
		876,633		844,089			1,726,896			1,936,595
NONINTEREST EXPENSE
Salaries and employee benefits		1,170,318		1,142,519			2,296,913			2,318,593
Occupancy		287,430		318,838			566,311			648,943
SAIF deposit insurance premiums		8,926		9,182			17,859			18,534
Data processing		107,389		85,114			225,337			192,810
Advertising		72,274		55,496			150,832			112,856
Other expense		433,056		457,536			865,137			827,927
		2,079,393		2,068,685			4,122,389			4,119,663
INCOME BEFORE INCOME TAXES		1,509,589		1,232,112			2,918,845			2,544,619
PROVISION FOR INCOME TAXES		494,797		301,176			934,677			729,000
NET INCOME	$	1,014,792		930,936			1,984,168			1,815,619
BASIC EARNINGS PER SHARE	$	0.36		0.33			0.71			0.65
DILUTED EARNINGS PER SHARE	$	0.35		0.33			0.68			0.64

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
	Common Stock	Additional Paid-In Capital	Unearned ESOP Shares	Treasury Stock	Retained Earnings	Accumulated Other Comprehensive Income	Total
Balance, January 1, 2004	$ 642,890	51,330,202	(2,030,930)	(44,549,879)	29,919,695	2,666,143	37,978,121
Comprehensive income
Net income	-	-	-	-	1,984,168	-	1,984,168
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of $48,984	-	-	-	-	-	83,406	83,406
Total comprehensive income							2,067,574
Dividends ($0.31 per share)	-	-	-	-	(866,767)	-	(866,767)
Stock award plans	-	38,126	-	-	-	-	38,126
Stock options exercised	3,266	371,537	-	-	-	-	374,803
Release of ESOP shares	-	110,249	116,000	-	-	-	226,249
Treasury stock purchased	-	-	-	(513,474)	-	-	(513,474)
Balance, June 30, 2004	$ 646,156	51,850,114	(1,914,930)	(45,063,353)	31,037,096	2,749,549	39,304,632

GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
	Common Stock	Additional Paid-In Capital	Unearned ESOP Shares	Treasury Stock	Retained Earnings	Accumulated Other Comprehensive Income	Total
Balance, January 1, 2003	$ 638,003	50,195,997	(2,281,070)	(43,193,917)	28,299,337	2,609,285	36,267,635
Net income	-	-	-	-	1,815,619	-	1,815,619
Change in unrealized appreciation
on available-for-sale securities, net
of income taxes of ($369,572)	-	-	-	-	-	(629,272)	(629,272)
Total comprehensive income							1,186,347
Dividends ($0.30 per share)	-	-	-	-	(834,172)	-	(834,172)
Stock award plans	-	360,611	-	-	-	-	360,611
Stock options exercised	3,682	439,633	-	-	-	-	443,315
Release of ESOP shares	-	69,340	124,140	-	-	-	193,480
Treasury stock purchased	-	-	-	(1,075,404)	-	-	(1,075,404)
Balance, June 30, 2003	$ 641,685	51,065,581	(2,156,930)	(44,269,321)	29,280,784	1,980,013	36,541,812

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
	6/30/2004			6/30/2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,984,168			1,815,619
Items not requiring (providing) cash:
Deferred income taxes		(59,475	)		(323,732	)
Depreciation		296,287			379,435
Provision for loan losses		413,830			405,000
Gain on loans and investment securities		(547,524	)		(874,817	)
Loss on sale of premises and equipment		3,185			37,761
Loss on sale of foreclosed assets		784			13,908
Amortization of deferred income, premiums and discounts		19,012			(18,617	)
Stock award plan expense		28,389			175,194
Origination of loans held for sale		(14,203,603	)		(42,865,440	)
Proceeds from sale of loans held for sale		14,105,011			39,251,232
Release of ESOP shares		226,249			193,480
Changes in:
Accrued interest receivable		(42,791	)		4,653
Prepaid expenses and other assets		(391,185	)		125,834
Accounts payable and accrued expenses		18,019			(280,188	)
Income taxes payable		(181,659	)		(136,398	)
Net cash provided by (used in) operating activities		1,668,697			(2,097,076	)
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(34,664,438	)		(7,999,121	)
Principal payments on held-to-maturity securities		373,090			589,471
Proceeds from maturities of available-for-sale securities		3,500,000			2,500,000
Purchase of premises and equipment		(83,077	)		(36,463	)
Proceeds from sale of premises and equipment		6,000			-
Purchase of available-for-sale securities		(3,486,891	)		(1,989,443	)
Proceeds from sale of available-for-sale securities		355,287			-
Purchase of FHLB stock		(648,300	)		-
Proceeds from sale of foreclosed assets		277,261			(61,690	)
Purchase of other investments		-			(106,000	)
Net cash used in investing activities		(34,371,068	)		(7,103,246	)
CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised		374,803			443,315
Cash dividends paid		(866,381	)		(839,188	)
Cash dividends received on RRP stock		217			1,065
Net increase in demand deposits,
NOW accounts and savings accounts		2,286,311			10,321,347
Net increase (decrease) in certificates of deposit and securities sold
under agreements to repurchase		19,693,596			(4,903,501	)
Proceeds from FHLB advances		112,000,000			109,500,000
Repayments of FHLB advances		(112,750,948	)		(99,249,398	)
Advances from borrowers for taxes and insurance		513,381			626,396
Treasury stock purchased		(513,474	)		(896,022	)
Net cash provided by financing activities		20,737,505			15,004,014
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(11,964,866	)		5,803,692
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		22,656,794			13,210,836
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	10,691,928			19,014,528

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

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

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

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2003 filed with the Securities and Exchange Commission. The condensed consolidated statement of financial condition of the Company as of December 31, 2003, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

Note 2: Principles of Consolidation

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

Note 3: Benefit Plans

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

On October 18, 1995, the Company’s stockholders voted to approve both a Recognition and Retention Plan (“RRP”) and a Stock Option Plan (“SOP”). On July 22, 1998, the Company’s stockholders voted to approve both a 1998 Restricted Stock Plan (“RSP”) and a 1998 Stock Option Plan (“1998 SOP”). The RRP and RSP authorized shares to be issued to directors, officers and employees of the Bank. On February 17, 2000, the directors of the Company established the 2000 Stock Compensation Plan (the “2000 SCP”) with both a stock award component and a stock option component. On March 22, 2001, the directors of the Company established the 2001 Stock Compensation Plan (the “2001 SCP”) with both a stock award component and a stock option component.In September of 2003 and March of 2004, the directors of the Companyauthorized theissuance of 5,000 and 25,000 stock options, respectively, as an employment inducement to new officers oftheBank pursuant to stock optionagreements. Stock options awarded underthese agreements are considered non-qualified for federal income tax purposes. On May 19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan (“2004 SOP”). The purpose of the plan is to attract and retain qualified personnel for positions of substantial responsibility. The aggregate number of shares with re spect to options issued under this plan shall not exceed 250,000 shares. To date no options have been granted under this plan.As of June 30, 2004, all of the RRP, RSP, 2000 SCP and 2001 SCP shares have been purchased and awarded. As of June 30, 2004, there are 10,366 shares that are not vested. The Company is amortizing the RRP, RSP and SCP expense over each participant’s vesting period. The Company recognized $28,389and $175,194 ofexpense under these stock award plans for the six month periods ended June 30, 2004 and 2003, respectively. The SOP, 1998 SOP, 2000 SCP and the 2001 SCP authorized stock options on shares to be issued to officers and employees of the Bank. As of June 30, 2004 all options except those on 31,824 shares have been granted. The RRP, RSP, SOP, 1998 SOP, 2000 SCP and 2001 SCP vest over a five year period. As of June 30, 2004, there were 406,262 unexe rcised options that have been granted at prices ranging from $5.83 to $19.62 per share and 292,818 of these options are exercisable.

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

	Three Months ended June 30,						Six Months ended June 30,
	2004			2003			2004			2003
Net income, as reported	$	1,014,792			930,936			1,984,168			1,815,619
Less: Total stock-based employee compensation
cost determined under the fair value-based
method, net of income taxes		(9,266	)		(44,601	)		(18,532	)		(84,462	)
Pro forma net income	$	1,005,526			886,335			1,965,636			1,731,157
Earnings per share:
Basic - as reported	$	0.36			0.33			0.71			0.65
Basic - pro forma	$	0.36			0.32			0.70			0.62
Diluted - as reported	$	0.35			0.33			0.68			0.64
Diluted - pro forma	$	0.34			0.31			0.67			0.61

Note 4: Earnings Per Share

	For three months ended June 30, 2004						For six months ended June 30, 2004
	Income Available to Stockholders		Average Shares Outstanding		Per-share		Income Available to Stockholders		Average Shares Outstanding		Per-share
Basic Earnings per Share	$	1,014,792		2,799,313	$	0.36	$	1,984,168		2,797,788	$	0.71
Effect of Dilutive Securities:
Stock Options				141,044						141,360
Diluted Earnings per Share	$	1,014,792		2,940,357	$	0.35	$	1,984,168		2,939,148	$	0.68
	For three months ended June 30, 2003						For six months ended June 30, 2003
Income Available to Stockholders				Average Shares Outstanding		Per-share		Income Available to Stockholders		Average Shares Outstanding		Per-share
Basic Earnings per Share	$	930,936		2,781,624	$	0.33	$	1,815,619		2,790,809	$	0.65
Effect of Dilutive Securities:
Stock Options				72,640						69,132
Diluted Earnings per Share	$	930,936		2,854,264	$	0.33	$	1,815,619		2,859,941	$	0.64

Note 5: Other Comprehensive Income

	6/30/2004		6/30/2003
Unrealized gains (losses) on	$	132,390		(998,844	)
available-for-sale securities
Tax expense (benefit)		48,984		(369,572	)
OTHER COMPREHENSIVE INCOME (LOSS)	$	83,406		(629,272	)

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

General

The primary function of the Company has been to monitor its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews the Company’s financial condition at June 30, 2004, and the results of operations for the three months and six months ended June 30, 2004 and 2003. In 2003 and in conjunction with the Bank’s conversion to a state-chartered trust company with banking powers, the Company decided to change i ts fiscal year end from June 30 to a calendar year end of December 31. The Company reported a six-month transition period ended December 31, 2003 in order to change to this new calendar year end.

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 c omposition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time.

Financial Condition

The Company’s total assets increased $22,885,588 (6%) from $386,757,254 as of December 31, 2003, to $409,642,842 as of June 30, 2004.

Interest-bearing deposits in other financial institutions decreased $1,740,365 (88%) from $1,970,518 as of December 31, 2003, to $230,153 as of June 30, 2004, as funds from these deposits were used to fund new loans.

Securities available-for-sale increased $130,031(1%) from $14,863,826 as of December 31, 2003, to $14,993,857 as of June 30, 2004. The Bank continues to hold 74,000 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $73,441 in the available-for-sale category. As of June 30, 2004, the gross unrealized gain on the FHLMC stock was $4,610,759, an increase from $4,587,264 as of December 31, 2003.

Securities held-to-maturity decreased primarily due to principal repayments by $358,797 (19%) from $1,867,594 as of December 31, 2003, to $1,508,797 as of June 30, 2004.

Stock in Federal Home Loan Bank of Des Moines (“FHLB”) increased by $648,300 (12%), due to the purchase of such stock necessary to meet FHLB requirements.

 Net loans receivable increased by $33,824,719 (10%) from $330,861,875 as of December 31, 2003, to $364,686,594 as of June 30, 2004. Commercial loans increased by $33,738,023 (35%) from $96,723,175 as of December 31, 2004, to $130,461,198 as of June 30, 2004. The Bank plans to continue its emphasis on commercial lending. In addition, the Bank is selling conforming loans on single family residences, while retaining the servicing rights. As a result, permanent mortgage loans secured by both owner and non-owner occupied residential real estate decreased by $7,804,988 (6%), while residential loans sold decreased by $74,505. Loans held for sale increased $296,703 (23%) to $1,564,767 at June 30, 2004, compared to $1,268,064 at December 31, 2003. The Bank continued to be active in construction len ding. Construction loans increased by $338,910 (1%) to $50,153,226 at June 30, 2004, compared to $49,814,316 at December 31, 2003.See discussion under “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.” Loan growth is anticipated to continue and represents a major part of the Bank’s planned asset growth.

Allowance for loan losses increased $246,618 (6%) from $3,886,137 as of December 31, 2003 to $4,132,755 as of June 30, 2004. The allowance increased due to the provision for loan losses of $413,830 recorded during this period exceeding net loan charge-offs of $167,192 this period. Management of the Company decided to increase the allowance for loan losses by this provision for loan losses charge primarily as a result of the continued growth of the Bank’s loan portfolio, particularly its commercial loan portfolio. See discussion under“Results of Operations – Comparison of Three Month and Six Month Periods Ended June 30, 2004 and 2003 – Provision for Loan Losses.”The allowance for loan losses as of June 30, 2004 and December 31, 2003 was 1.18% and 1.17%, respectively, of average net loans outstanding. As of June 30, 2004 , the allowance for loan losses was 48% of impaired loans versus 54% as of December 31, 2003.

Premises and equipment decreased $222,395 (3%) from $6,576,003, as of December 31, 2003 to $6,353,608 as of June 30, 2004, primarily due to the depreciation recognized on these assets.

Deposits increased $21,682,038 (9%) from $237,130,744 as of December 31, 2003, to $258,812,782 as of June 30, 2004. For the six months ended June, 2004, checking and savings accounts increased by $2,286,311 (2%) while certificates of deposits increased by $19,395,728 (16%). The increase in certificates of deposit was primarily due to an increase in brokered deposits of $23,154,027 (98%) during the period. See also the discussion under“Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”

FHLB advances decreased by $750,948 (1%) from $108,836,948 as of December 31, 2003, to $108,086,000 as of June 30, 2004,due to repayment of advances exceeding new advances.

As a part of management’s review of available funding, management continually evaluates the cost of FHLB advances and the cost of the national brokered certificate of deposit market versus retail certificate of deposits in the local market. The aggregate of brokered certificate of deposits include both the cost of the interest paid to the depositor and the fee paid to the broker. At times, the all-inclusive cost of brokered certificate of deposits is less that the marginal cost of increasing local retail certificate of deposits. Management believes a combination of these three sources of funds will provide the lowest cost long-term funding.

Advances from borrowers for taxes and insurance increased $513,381 (198%) from $259,267 as of December 31, 2003, to $772,648 as of June 30, 2004 due to the timing of payment of real estate taxes.

Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $1,326,511 (3%) from $37,978,121 as of December 31, 2003, to $39,304,632 as of June 30, 2004. This increase was due to several factors.The Company’s net incomeduring this periodwas $1,984,168 which was partially offset by dividends in the amount of $434,069 ($0.155 per share) which were paid on April 14, 2004, to stockholders’ of record as of March 30, 2004 and $432,698 ($0.155 per share) which were declared prior to June 30, 2004 and paid on July 15, 2004, to st ockholders’ of record as of July 1, 2004. In addition,the increase in stockholders’ equity was further offset as the Company repurchased 26,536 shares of treasury stock at an aggregate cost of $513,474 (an average cost of $19.35 per share). As of June 30, 2004, 214,658 shares remain to be repurchased under the repurchase plan announced by the Company on November 22, 2002. On a per share basis, stockholders’ equity increased from $13.62 as of December 31, 2003 to $14.00 as of June 30, 2004.

Average Balances, Interest and Average Yields

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

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

	Six months ended 6/30/2004								Six months ended 6/30/2003
	Average Balance		Interest			Yield / Cost			Average Balance		Interest			Yield /Cost
ASSETS
Interest-earning:
Loans	$	348,867		9,452			5.42	%	$	329,643		10,101			6.13	%
Investment securities		10,083		146			2.90	%		10,203		188			3.69	%
Other assets		15,094		115			1.52	%		17,669		202			2.29	%
Total interest-earning		374,044		9,713			5.19	%		357,515		10,491			5.87	%
Noninterest-earning		20,089								19,592
	$	394,133							$	377,107
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing:
Savings accounts	$	17,112		67			0.78	%	$	17,270		89			1.03	%
Transaction accounts		76,323		334			0.88	%		68,237		354			1.04	%
Certificates of deposit		126,015		1,861			2.95	%		125,521		2,238			3.57	%
FHLB Advances		112,629		1,721			3.06	%		108,436		2,675			4.93	%
Other borrowed funds		835		2			0.48	%		690		2			0.58	%
Total interest-bearing		332,914		3,985			2.39	%		320,154		5,358			3.35	%
Noninterest-bearing		22,197								20,124
Total liabilities		355,111								340,278
Stockholders’ equity		39,022								36,829
	$	394,133							$	377,107
Net earning balance	$	41,130							$	37,361
Earning yield less costing rate							2.80	%							2.52	%
Net interest income, and net yield spread
on interest earning assets			$	5,728			3.06	%			$	5,133			2.87	%
Ratio of interest-earning assets to
interest-bearing liabilities				112	%							112	%

Results of Operations - Comparison of Three Month and Six Month Periods Ended June 30,

2004 and 2003

Net income for the three months and six months ended June 30, 2004 was $1,014,792 and $1,984,168, respectively, as compared to $930,936 and $1,815,619, respectively, for the three months and six months ended June 30, 2003, which represents an increase in earnings of $83,856 (9%) for the three month period, and an increase in earnings of $168,549 (9%) for the six month period.

Interest Income

Total interest income for the three months and six months ended June 30, 2004, decreased $314,898

(6%) and $778,258 (7%), respectively, as compared to the three months and six months ended June 30, 2003. For the three month and six month periods ended June 30, 2004 compared to the same periods in 2003, the average yield on interest earning assets decreased 70 basis points to 5.08% and 68 basis points to 5.19%, respectively, while the average balance of interest earning assets increased $24,980,000 and $16,529,000, respectively.

Interest Expense

Total interest expense for the three months and six months ended June 30, 2004, decreased $645,539 (25%) and $1,373,739 (26%), respectively, when compared to the three months and six months ended June 30, 2004. For the three month and six month periods ended June 30, 2004 compared to the same periods in 2003, the average cost of interest bearing liabilities decreased 96 basis points to 2.27% and 96 basis points to 2.39%, respectively, while the average balance increased $20,826,000 and $12,760,000, respectively. The Company prepaid long-term fixed rate FHLB advances during 2004, resulting in a decrease in average cost of FHLB advances of 186 basis points for the three month period and 187 basis points for the six month period ended June 30, 2004 compared to the same periods in 2003.

Net Interest Income

As a result of the interest income and interest expense for the three months and six months ended June 30, 2004 as discussed above , net interest income for the three months and six months ended June 30, 2004 increased $330,641 (13%) and $595,481 (12%), respectively, when compared to the same periods in 2003.

Provision for Loan Losses

Based primarily on the continued growth of the commercial loan portfolio, management decided to record a provision for loan losses of $225,000 and $413,830 for the three months and six months ended June 30, 2004, respectively, compared to $150,000 and $405,000 for the same periods in 2003. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential losses, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

Noninterest Income

Noninterest income increased $32,544 (4%) and decreased $209,699 (11%) for the three months and six months ended June 30, 2004, respectively, when compared to the three months and six months ended June 30, 2003. The increase for the three months ended June 30, 2004 was primarily due to increases in gain on sale of investment securities and in late charges and other fees, which were partially offset by decreases in gain on sale of loans as discussed below. The decrease for the six months ended June 30, 2004 was primarily due to decreases in gain on sale of loans, which were partially offset by increases in gain on sale of investment securities and in late charges and other fees as discussed below.

During the three months and six months ended June 30, 2004, gain on sale of investments was $171,456 and $349,413, respectively. These gains resulted from the sale of 1,000 shares of FHLMC stock each month. The sale price ranged from $56.76 per share to $63.10 per share during this period. During the same periods in 2003, there were no gains on sale of investments as no sales of shares of FHLMC occurred during these periods.

Late charges and other fees increased $234,690 for the three months ended June 30, 2004, and increased $88,955 (71%) for the six months ended June 30, 2004, when compared to the same periods in 2003. The increase in the three months and six months ended June 30, 2004 was primarily due to a reduction in the amortization associated with the Bank’s originated mortgage servicing rights (“OMSR”) expense and a recovery of a loss on the impairment of these rights. During the three month and six month periods ended June 30, 2004, OMSR amortization expense was $62,919 and $126,123, respectively, compared to $159,949 and $277,813 during the same periods in 2003. During the three month and six month periods ended June 30, 2004, OMSR impairment loss adjustment was a recovery of $58,036 and $48,478, respectively, compared to a write down of $(159,949) and $(277,813) during the same periods in 2003. In addition, during the three month and six month periods ended June 30, 2004, the Bank collected prepayment penalties of $34,403 and $69,282, respectively, on loan payoffs, compared to $21,564 and $358,121, respectively, collected during the same periods in 2003.

Gain on sale of loans decreased $394,685 (84%) and $676,706 (77%) for the three months and six months ended June 30, 2004, respectively, when compared to the same periods in 2003, which was a result of a decrease in

mortgage refinance activity due to an increase in interest rates.

Noninterest Expense

Noninterest expense increased $10,708 (1%) and $2,726 for the three months and six months ended June 30, 2004 when compared to the three months and six months ended June 30, 2003. These small increases are attributed to the Company’s emphasis on controlling expenses. There was no significant change in any individual expense category.

Provision for Income Taxes

There was an increase of $193,621 (64%) and $205,677 (28%) in the provision for income taxes for the three months and six months ended June 30, 2004, respectively, as compared to the same periods in 2003. These increases were due to an increase in before tax income for the three months and six months ended June 30, 2004, compared to the same period in 2003.

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 Bank’s allowance for loan losses as of June 30, 2004, was $4,132,755 or 1.2% of average net loans receivable. Total assets classified as substandard, doubtful or loss as of June 30, 2004, were $8,569,269 or 2.1% of total assets. In connection with a normal regulatory examination by the Federal Deposit Insurance Corporation in February 2004, the Bank identified and reclassified a group o f approximately 150 loans secured by single family residences, totaling approximately $9.0 million, because it was deemed that the loan files relating to these loans did not contain sufficient information to effectively evaluate the credits. As of June 30, 2004, $4,765,428 of the assets classified as substandard were attributed to this group of loans. Management considered nonperforming and total classified assets in evaluating the adequacy of the Bank’s allowance for loan losses.

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

	6/30/2004			12/31/2003			12/31/2002
Nonperforming loans	$	1,062			743			396
Real estate acquired in settlement of loans		194			6			8
Total nonperforming assets	$	1,256			749			404
Total nonperforming assets as a percentage of total assets		0.32	%		0.19	%		0.11	%
Allowance for loan losses	$	4,133			3,886			2,640
Allowance for loan losses as a percentage of average net loans		1.18	%		1.17	%		0.82	%

Liquidity and Capital Resources

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

The Bank uses its liquidity resources principally to satisfy its ongoing commitments which include funding loan commitments, funding maturing certificates of deposit as well as deposit withdrawals, maintaining liquidity, purchasing investments, and meeting operating expenses. As of June 30, 2004 the Bank had approximately $26,413,000 in commitments to originate mortgage and commercial loans and $596,000 in loans-in-process on mortgage loans. These commitments will be funded through existing cash balances, cash flow from operations and, if required, FHLB advances . Management believes that anticipated cash flows and deposit growth will be adequate to meet the Bank’s liquidity needs.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management

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

As a part of its asset and liability management strategy, the Bank implemented an adjustable rate mortgage loan program beginning in the early 1980s. Throughout the past several years, the Bank has continued to emphasize the origination of adjustable-rate, one- to four-family residential loans and adjustable-rate or relatively short-term commercial real estate, commercial business and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market on a service-retained basis. This allows the Bank to serve the customer’s needs and retain a banking relationship without the risk of carrying a long-term fixed-rate loan on the books.

The Bank is also managing interest rate risk by the origination of construction loans. As of June 30, 2004, such loans made up 13.7% of the net loans receivable and continue to account for a larger portion of the Bank’s existing portfolio. In general, these loans have higher yields, shorter maturities and greater interest rate sensitivity than other real estate loans.

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. As of December 31, 2003, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $117,044,097 or 49% of its total deposits. As of June 30, 2004, these accounts totaled $119,330,407 or 46% of total deposits. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.

Interest Rate Sensitivity Analysis

The following table sets forth as of June 30, 2004 management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100, 200, and 300 basis point (“bp”) instantaneous and permanent increases and a 100 basis point instantaneous and permanent decrease in market interest rates. Dollar amounts are expressed in thousands.

BP Change	Estimated Net Portfolio Value								NPV as % of PV of Assets
in Rates	$ Amount		$ Change			% Change			NPV Ratio			Change
+300	$	38,239	$	(262	)		-1	%		9.47	%		0.14	%
+200		39,216		715			2	%		9.62	%		0.29	%
+100		39,414		913			2	%		9.60	%		0.28	%
NC		38,501		-			-			9.33	%		-
-100		37,582		(919	)		-2	%		9.05	%		-0.28	%

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

Management cannot predict future interest rates or their effect on the Bank’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable rate loans 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 sig nificantly 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 4. Controls and Procedures

(a) The Company maintains disclosure controls and procedures(as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (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 theSecurities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures wereeffectiveas of June 30, 2004.

(b) There have been nochanges in the Company’s internalcontrol over financial reporting during the quarter ended June 30, 2004 that have materially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

PART II

Item 1.Legal Proceedings

None.

Item 2.Changes in Securities and Use of Proceeds, Use of Proceeds and Issuer Purchases of Equity

Securities

The following table summarizes the repurchase activity of the Company’s common stock during the Company’s second quarter ended June 30, 2004.

ISSUER PURCHASE OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2004 to April 30, 2004		4,871		19.34		4,871		220,758
May 1, 2004 to May 31, 2004		4,400		19.34		4,400		216,358
June 1, 2004 to June 30, 2004		1,700		19.47		1,700		214,658
Total		10,971				10,971		214,658

(1)The Company has a repurchase plan which was announced on November 22, 2002. This plan authorizes the purchase by the Company of 300,000 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.

Item 3.Defaults Upon Senior Securities

Not applicable.

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

The annual meeting of stockholders of the registrant was held on May 19, 2004. At the meeting the stockholders elected Jack L. Barham, Don M. Gibson and Tim Rosenbury to three-year terms as directors of the Company and Shaun A. Burke to a two-year term as director of the Company, while, Wayne V. Barnes, Gregory V. Ostergren, Kurt D. Hellweg, Gary Lipscomb and James L. Sivils, III, continue to serve as directors. Also at that meeting, BKD, LLP was ratified as the company’s independent auditors. In addition, stockholders voted to approve the 2004 Stock Option Plan.

The results of voting are shown for each matter considered.

Director election:

Nominee	Votes For		Votes Withheld
Jack L. Barham		2,495,804		144,931
Don M. Gibson		2,551,861		88,874
Tim Rosenbury		2,555,077		85,658
Shaun A. Burke		2,551,314		89,421
Auditor Ratification
Votes for		2,615,866
Votes against		24,410
Abstentions		459
2004 Stock Option Plan
Votes for		1,432,144
Votes against		216,219
Abstentions		126,176

Item 5.Other Information

None.

Item 6.Exhibits and Reports on Form 8-K

 a)List of Exhibits

3(ii)Bylaws as amended

11. Statement recomputation of per share earnings (set forth in “Note 4: Earnings Per Share” of

the Notes to condensed financial statements (unaudited))

31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-

Oxley Act of 2002

31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-

Oxley Act of 2002

32.1CEO certification pursuant to18 U.S.C. Section 1350, as adopted pursuant toSection 906 of

the Sarbanes-Oxley Act of 2002

32.2CFO certification pursuant to18 U.S.C. Section 1350, as adopted pursuant toSection 906 of

the Sarbanes-Oxley Act of 2002

b)Reports on Form 8-K

1.Furnished on July 15, 2004 relating to the Company’s earnings release for the second quarter endedJune 30, 2004, and announcing the shares of common stockremaining to be repurchased under the Company’s repurchase plan.

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 TitleDate

/s/ Don M. GibsonAugust  10, 2004

Don M. Gibson

President and Chief Executive Officer

(Principal Executive Officer and Duly Authorized Officer)

/s/ Bruce WinstonAugust 10, 2004

Bruce Winston

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)