-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AK6GSGjT4pfP/NFbvbJKwjYcWnU8zfaK9+dc3ZDN3tJUEhww90HhS9WytXH5wwRQ rOECbvuvyAWvdlz3coLSbg== 0001015402-03-003953.txt : 20030929 0001015402-03-003953.hdr.sgml : 20030929 20030929152940 ACCESSION NUMBER: 0001015402-03-003953 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GUARANTY FEDERAL BANCSHARES INC CENTRAL INDEX KEY: 0001046203 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 431792717 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23325 FILM NUMBER: 03914818 BUSINESS ADDRESS: STREET 1: 1341 WEST BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65807 BUSINESS PHONE: 4175204333 MAIL ADDRESS: STREET 1: 1341 WEST BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65807 10-K 1 mainbody.htm GUARANTY FEDERAL BANCSHARES FORM 10-K Guaranty Federal Bancshares Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2003     
 
- or -
 
o
TRANSITION 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)
 
(I.R.S. Employer Identification No.)

1341 West Battlefield, Springfield, Missouri
 
65807

 
(Address of Principal Executive Offices)
 
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.10 per share
(Title of Class)
 
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 x   NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES o  NO x

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the average bid and asked prices of the Registrant's Common Stock as quoted on the National Market of The Nasdaq Stock Market on December 31, 2002, was $37.9 million. As of September 26, 2003 there were 2,991,917 shares of the Registrant's Common Stock outstanding.    

 
     
 
 
DOCUMENTS INCORPORATED BY REFERENCE
 
1.  Portions of the Annual Report to Stockholders (the "2003 Annual Report") for the fiscal year ended June 30, 2003 (Parts I and II).
2.  Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on October 22, 2003 (Part III).
 

 
   2  
 
 
GUARANTY FEDERAL BANCSHARES, INC.

Form 10-K
 
TABLE OF CONTENTS
 

Item
 
Page
PART I
 
 
 
1.
5
 
 
 
2.
24
 
 
 
3.
24
 
 
 
4.
24
 
 
 
PART II
 
 
 
5.
23
 
 
 
6.
23
 
 
 
7
23
 
 
 
7A.
25
 
 
 
8.
25
 
 
 
9
25
 
 
 
9A.
25
 
 
 
PART III
 
 
 
10.
26
 
 
 
11.
26
 
 
 
12.
27
 
 
 
13.
27
 
 
 
14.
27
     
Signatures    
     
 
 
  3   
 

GUARANTY FEDERAL BANCSHARES, INC. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION (INCLUDING THIS ANNUAL REPORT ON FORM 10-K AND THE EXHIBITS THERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY, WHICH ARE MADE IN GOOD FAITH BY THE COMPANY PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, WORDS SUCH AS "ANTICIPATES," "ESTIMATES," "BELIEVES," "EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS.

THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE THE COMPANY'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY FROM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE COMPANY CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOA RD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, INFLATION, INTEREST RATES, MARKET AND MONETARY FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND SERVICES OF THE COMPANY AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES; THE SUCCESS OF THE COMPANY IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS AND SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING AND SAVING HABITS; AND THE SUCCESS OF THE COMPANY AT MANAGING THE RISKS RESULTING FROM THESE FACTORS.
 
THE COMPANY CAUTIONS THAT THE LISTED FACTORS ARE NOT EXCLUSIVE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT, WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY.
 
 
   4  
 
 
PART I


Business of the Company

The Company is a Delaware-chartered corporation that was created in September 1997 at the direction of Guaranty Federal Savings Bank (the "Bank"). The Company became a unitary savings and loan holding company for the Bank on December 30, 1997, in connection with a plan of conversion and reorganization involving the Bank and its then existing mutual holding company. The mutual holding company structure had been created in April 1995 at which time more than a majority of the shares of the Bank were issued to the mutual holding company and the remainder were sold in a public offering. In connection with the conversion and reorganization on December 30, 1997, the shares of the Bank held by the mutual holding company were extinguished along with the mutual holdi ng company and the shares of the Bank held by the public were exchanged for shares of the Company. Shares of the Company were issued on December 30, 1997.

On June 27, 2003, the Bank converted to a state-chartered trust company with banking powers, and the Company became a bank holding company. On this date, the name of the Bank was changed from Guaranty Federal Savings Bank to Guaranty Bank. The primary activity of the Company is to oversee its investment in the Bank. The Company engages in few other activities. For this reason, unless otherwise specified, refer ences to the Company include operations of the Bank. Further, information in a chart or table based on Bank only data is identical to or immaterially different from information that would be provided on a consolidated basis.

Business of the Bank

The Bank's principal business has been, and continues to be, attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, in both permanent and construction of one-to four-family residential mortgage loans, multi-family residential mortgage loans, commercial real estate loans, and consumer and other loans. The Bank also invests in mortgage-backed securities, U.S. Government and federal agency securities and other marketable securities. The Bank's revenues are derived principally from interest on its loans and other investments and fees charged for services provided, and the Bank’s results of operations are primarily dependent on ne t interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank's primary sources of funds are: deposits; borrowings; amortization and prepayments of loan principal; and amortizations, prepayments and maturing of mortgage-backed securities.

On December 6, 2001, the Bank completed its acquisition of the Springfield branch offices of Commercial Federal Bank. The Bank acquired approximately $15.5 million in selected consumer and home equity loans and assumed approximately $41.2 million in deposit liabilities. The Bank also assumed the leases and acquired the equipment at all but one of the branches. The acquired locations are located in Dillons Supermarkets in Springfield. The transaction increased the number of "in-store" locations from one to five and total locations from five to nine.

The Bank is regulated by the Missouri Division of Finance and its deposits are insured by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC").
 
 
  5   
 

Market Area
 
The Bank's primary market area is Greene County, which is in the southwestern corner of of Missouri and includes the city of Springfield, Missouri. There is a large regional health care presence with two large regional hospitals employing over 14,000. There also are four accredited colleges and one major university with total enrollment approaching 25,000. Part of Greene County's growth can be attributed to its proximity to Branson, Missouri, which has developed a strong tourism industry related to country music and entertainment. Branson is located 30 miles south of Springfield, and receives between five and six million tourists each year, many of whom pass through Springfield.
 
 
  6   
 
 
Lending Activities

Set forth below is selected data relating to the composition of the Bank’s loan portfolio at the dates indicated:
 
Composition of Loan Portfolio
 
 
 
 
 
 
 
 
 
 
  
As of June 30,    
   
 		  
   

2003

  

2002

  

2001

  

 2000

  

1999

  
   
 		  
 		  
 		  
 		  
 
 

 
$
 
%
 

$

 
%
 

 $ 

 
 
%
 

$ 

 
 
%

 
$
%
 
   
 
 
 
 
 
 
 
 
 
 
 
  
(Dollars in Thousands) 
Mortgage loans (includes loans held for sale):
 
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
One to four family
 
$
144,404
   
40
%
 
149,443
   
44
%
 
189,436
   
55
%
 
198,155
   
63
%
 
178,680
   
63
%
Multi-family
   
41,022
   
11
%
 
44,055
   
13
%
 
42,641
   
12
%
 
39,146
   
12
%
 
35,795
   
13
%
Construction
   
64,464
   
18
%
 
49,807
   
15
%
 
55,317
   
16
%
 
41,372
   
13
%
 
38,605
   
14
%
Commercial real estate
   
71,046
   
19
%
 
58,434
   
17
%
 
43,893
   
13
%
 
26,559
   
9
%
 
20,771
   
7
%
   
 
 
 
 
 
 
 
 
 
 
Total mortgage loans
   
320,936
   
88
%
 
301,739
   
89
%
 
331,287
   
96
%
 
305,232
   
97
%
 
273,851
   
97
%
   
 
 
 
 
 
 
 
 
 
 
Commercial business loans
   
18,967
   
5
%
 
8,358
   
2
%
 
5,511
   
1
%
 
761
   
0
%
 
544
   
0
%
Share loans
   
282
   
0
%
 
367
   
0
%
 
273
   
0
%
 
461
   
0
%
 
573
   
0
%
Automobile
   
3,438
   
1
%
 
3,395
   
1
%
 
2,260
   
1
%
 
1,941
   
1
%
 
2,016
   
1
%
Other
   
21,766
   
6
%
 
27,313
   
8
%
 
8,040
   
2
%
 
7,118
   
2
%
 
5,389
   
2
%
   
 
 
 
 
 
 
 
 
 
 
Total consumer and other loans
   
44,453
   
12
%
 
39,433
   
11
%
 
16,084
   
4
%
 
10,281
   
3
%
 
8,522
   
3
%
   
 
 
 
 
 
 
 
 
 
 
Total loans
   
365,389
   
100
%
 
341,172
   
100
%
 
347,371
   
100
%
 
315,513
   
100
%
 
282,373
   
100
%
         
       
       
       
       
 
Less:
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Loans in process
   
25,539
   
 
    
18,326
   
 
    
24,212
   
 
    
16,668
   
 
    
15,466
   
 
  
Deferred loan fees/costs, net
   
211
   
 
    
230
   
 
    
268
   
 
    
164
   
 
    
180
   
 
  
Unearned discounts
   
26
   
 
    
50
   
 
    
88
   
 
    
108
   
 
    
109
   
 
  
Allowance for loan losses
   
2,775
   
 
    
2,650
   
 
    
2,697
   
 
    
2,520
   
 
    
2,349
   
 
  
   
       
       
       
       
       
Total Loans, Net
 
$
336,838
   
 
    
319,916
   
 
    
320,106
   
 
    
296,053
   
 
    
264,269
   
 
  
   
       
       
       
       
       

The following table sets forth the dollar amount, before deductions for unearned discounts, deferred loan costs and allowance for loan losses, as of June 30, 2003 of all loans due after June 2004, which have pre-determined interest rates and which have adjustable interest rates.
 
 
  
Fixed Rates
Adjustable
Rates
Total
   
 
 
 
 
  

(Dollars in Thousands) 

One-to four-family
 
$
36,804
   
98,786
 
$
135,590
 
Multi-family
   
16,585
   
22,126
   
38,711
 
Construction
   
121
   
10,464
   
10,585
 
Commercial real estate
   
21,027
   
35,611
   
56,638
 
Consumer & other loans
   
13,259
   
15,854
   
29,113
 
   
 
 
 
Total loans (1)
 
$
87,796
 
$
182,841
 
$
270,637
 
   
 
 
 
(1)   Before deductions for unearned discounts, deferred loan fees/costs, net and allowances for loan losses.
  
 
  

The following table sets forth the maturity of the Bank's loan portfolio as of June 30, 2003. The table shows loans that have adjustable-rates as due in the period during which they contractually mature. The table does not include prepayments or scheduled principal amortization.
 
 
   7  
 
 
Loan Maturities
 
Due in One
 Year or Less
Due After One
 Through Five
 Years
Due After Five Years
Total
   
 
 
 
 
 
  
(Dollars in thousands) 
One to four family
 
$
8,804
   
9,904
   
125,686
   
144,394
 
Multi family
   
2,311
   
15,243
   
23,468
   
41,022
 
Construction
   
31,318
   
10,584
   
-
   
41,902
 
Commercial real estate
   
11,441
   
36,605
   
20,033
   
68,079
 
Consumer and other loans
   
15,339
   
9,490
   
19,624
   
44,453
 
   
 
 
 
 
Total loans (1)
 
$
69,213
   
81,826
   
188,811
   
339,850
 
   
 
 
 
 
Less:
   
 
    
 
    
 
    
 
  
Deferred loan fees/costs
   
 
    
 
    
 
    
211
 
Unearned discounts
   
 
    
 
    
 
    
26
 
Allowance for loan losses
   
 
    
 
    
 
    
2,775
 
                     
 
Loans receivable net
   
 
    
 
    
 
  
$
336,838
 
                     
 
(1) Includes mortgage loans held for sale of $9,755.
 
 
    
 
  

One- to Four-Family Mortgage Loans. The Bank offers fixed- and adjustable-rate first mortgage loans secured by one- to four-family residences in the Bank's primary lending area. Typically, such residences are single family homes that serve as the primary residence of the owner. However, there are a significant number of loans originated by the Bank which are secured by non-owner occupied properties. Loan originations are generally obtained from existing or past customers, members of the local community, referrals from attorneys, established builders, and realtors within the Bank's market area. Originated mortgage loans in the Bank's portfolio include due-on- sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent.

As of June 30, 2003, $144.4 million or 40% of the Bank’s total loan portfolio consisted of one- to four-family residential loans, of which 69% were ARM loans. The Bank currently offers ARM and balloon loans that have fixed interest rates for one to seven years. Generally, ARM loans provide for limits on the maximum interest rate adjustment ("caps") that can be made at the end of each applicable period and throughout the duration of the loan. ARM loans are originated for a term of up to 30 years on owner-occupied properties and generally up to 25 years on non-owner occupied properties. Typically, interest rate adjustments are calculated based on U.S. treasury securities adjusted to a constant maturity of one year (CMT), plus a 2.50% to 2.75% margin. Int erest rates charged on fixed-rate loans are competitively priced based on market conditions and the cost of funds existing at the time the loan is committed. The Bank's fixed-rate mortgage loans are made for terms of 15 to 30 years which are currently being sold on the secondary market.

Generally, ARM loans pose credit risks different from the risks inherent in fixed-rate loans, primarily because as interest rates rise the underlying payments of the borrower rise, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. The Bank does not originate ARM loans that provide for negative amortization.

The Bank generally originates both owner occupied and non-owner occupied one- to four-family residential mortgage loans in amounts up to 80% of the appraised value or the selling price of the mortgaged property, whichever is lower. The Bank may on occasion make loans up to 95% of appraised value or the selling price of the mortgage property, whichever is lower. However, the Bank typically requires private mortgage insurance for the excess percentage over 80% for mortgage loans with loan to value percentages over 80%.
 
 
 
  8   
 
 
Multi-Family Mortgage Loans. The Bank originates multi-family mortgage loans in its primary lending area. As of June 30, 2003, $41.0 million or 11% of the Bank's total loan portfolio consisted of multi-family residential loans. With regard to multi-family mortgage loans, the Bank generally requires personal guarantees of the principals as well as a security interest in the real estate. Multi-family mortgage loans are generally originated in amounts of up to 80% of the appraised value of the property. The majority of the Bank’s multi-family mortgage loans have been originated with adjustable rates of interest which are quoted at a spread to the Federal Home Loan Bank of Des Moines ("FHLB") advance rate for the initial fixed rate period with subsequent adjustments based on the Wall Street prime rate. The loan-to-one-borrower limitation, $9.2 million as of June 30, 2003, is the maximum the Bank will lend on a multi-family real estate loan.

Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired.

Construction Loans. As of June 30, 2003, construction loans totaled $64.5 million or 18% of the Bank's total loan portfolio. Construction loans originated by the Bank are generally secured by permanent mortgage loans for the construction of owner-occupied residential real estate or to finance speculative construction secured by residential real estate or owner-operated commercial real estate. This portfolio predominantly consists of speculative loans, i.e., loans to builders wh o are speculating that they will be able to locate a purchaser for the underlying property prior to or shortly after the time construction has been completed.

Construction loans are made to contractors who have sufficient financial strength and a proven track record, for the purpose of resale, as well as on a "pre-sold" basis. Construction loans made for the purpose of resale generally provide for interest only payments at floating rates and have terms of six months to fifteen months. Construction loans to a borrower who will occupy a home, or to a builder who has pre-sold the home, typically have loan to value ratios of up to 85%. Construction loans for speculative purposes, models, and commercial properties typically have loan to value ratios of up to 80%. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant.

Construction lending by its nature entails significant additional risks as compared with one-to four-family mortgage lending, attributable primarily to the fact that funds are advanced upon the security of the project under construction prior to its completion. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower or guarantor to repay the loan. Because of these factors, the analysis of the prospective construction loan projects require an expertise that is different in significant respects from that which is required for residential mortgage lending. The Bank has attempted to address these risks through its underwriting and const ruction monitoring procedures.

Commercial Real Estate. As of June 30, 2003, the Bank has commercial real estate loans totaling $71.0 million or 19% of the Bank's total loan portfolio. Commercial real estate loans are generally originated in amounts up to 80% of the appraised value of the mortgaged property. The majority of the Bank’s commercial real estate loans have been originated with adjustable rates of interest, the majority of which are quoted at a spread to the FHLB advance rate for the initial fixed rate period with subsequent adjustments at a spread to the Wall Street prime rate. The Bank's commercial real estate loans are generally permanent loans secured by improved proper ty such as office buildings, retail stores, small shopping centers, medical offices, motels, churches and other non-residential buildings.
 
 
   9  
 
 
To originate commercial real estate loans, the Bank generally requires a security interest in the real estate, personal guarantees of the principals, a security interest in personal property, and a standby assignment of rents and leases. The Bank has established its loan-to-one borrower limitation, which was $9.2 million as of June 30, 2003, as its maximum commercial real estate loan amount. Because of the small number of commercial real estate loans and the relationship of each borrower to the Bank, each such loan has differing terms and conditions applicable to the particular borrower.

Loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate are often dependent on successful operation or management of the properties, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by careful underwriting, requiring personal guarantees, lending only to established customers and borrowers otherwise known to the Bank, and generally restricting such loans to its primary market area.

As of June 30, 2003, the Bank’s commercial real estate loan portfolio included approximately $16.4 million in loans to develop land into residential lots. The Bank utilizes its knowledge of the local market conditions and appraisals to evaluate the development cost and estimate projected lot prices and absorption rates to assess loans on residential subdivisions. The Bank typically loans up to 80% of the appraised value over terms up to two years. Development loans generally involve a greater degree of risk than residential mortgage loans because (1) the funds are advanced upon the security of the land which has a materially lower value prior to completion of the infrastructure required of a subdivision, (2) the cash flow available for debt repayment i s a function of the sale of the individual lots, and (3) the interest required to service the debt is a function of the time required to complete the development and sell the lots.
 
Consumer and Other Lending. The Bank also offers other loans, primarily loans secured by certificates of deposit, commercial business assets, consumer loans, home equity and automobile loans. As of June 30, 2003, the Bank has such loans totaling $44.5 million or 12% of the Bank’s total loan portfolio. The Bank expects to continue to expand its consumer and commercial lending as opportunities present themselves.

Loan Approval Authority and Underwriting. All loans to borrowers with aggregate indebtedness exceeding $1.5 million must have the approval of the members of the Bank’s Loan Committee which consists of eight senior officers. The Loan Committee meets weekly to review and approve loans made within the scope of its authority.

For all loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower, a credit report is requested, income, assets, and certain other information are verified, and, if necessary, additional financial information is requested. An appraisal of the real estate intended to secure the proposed loan is generally required, which currently is performed by certified appraisers. It is the Bank's policy to obtain appropriate insurance protection on all real estate first mortgage loans. Borrowers generally must also obtain hazard insurance prior to closing. Borrowers generally are required to advance funds for certain items such as real estate taxes, flood insurance and private mortgage insurance, when applicable.

 
 
  10   
 
 
Delinquencies and Problem Assets.

Delinquent Loans . As of June 30, 2003, the Bank has six loans 90 days or more past due with a principal balance of $330,971 and thirty one loans between 30 and 89 days past due with total principal balances of $1,236,262. The Bank generally does not accrue interest on loans past due more than 90 days.

The following table sets forth the Bank's loans that were 90 days or more delinquent at the dates indicated.
 
Delinquency Summary
 
As of June 30,
   
 
  
2003
2002
2001
2000
1999
   
 
 
 
 
 
 
  

(Dollars in Thousands)

  
Loans contractually past maturity or past due 90 days or more and
 
 
    
 
    
 
  
accounted for on a non-accrual basis:
   
 
    
 
    
 
    
 
    
 
  
Mortgage Loans:
   
 
    
 
    
 
    
 
    
 
  
One- to four-family
 
$
331
   
154
   
444
   
13
   
110
 
Multi-family
   
-
   
-
   
-
   
-
   
-
 
Construction
   
-
   
-
   
1,065
   
84
   
-
 
Commercial real estate
   
-
   
-
   
668
   
-
   
-
 
   
 
 
 
 
 
 
    
331
   
154
   
2,177
   
97
   
110
 
   
 
 
 
 
 
Non-mortgage loans:
   
 
    
 
    
 
    
 
    
 
  
Commercial loans
   
-
   
-
   
109
   
-
   
-
 
Consumer and other loans
   
-
   
37
   
18
   
-
   
-
 
   
 
 
 
 
 
 
    
- 
    
37
   
127
   
-
   
-
 
   
 
 
 
 
 
Total non-accrual loans
   
331
   
191
   
2,304
   
97
   
110
 
   
 
 
 
 
 
Accruing loans which are contractually past           
maturity or past due 90 days or more:
   
 
    
 
    
 
    
 
    
 
  
Mortgage Loans:
   
 
    
 
    
 
    
 
    
 
  
One- to four-family
   
-
   
-
   
-
   
152
   
-
 
Multi-family
   
-
   
-
   
-
   
-
   
-
 
Construction
   
-
   
-
   
-
   
-
   
102
 
Commercial real estate
   
-
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
          
-
   
-
   
152
   
102
 
   
 
 
 
 
 
Non-mortgage loans:
   
-
    
 
    
 
    
 
    
 
  
Commercial loans
   
-
   
-
   
-
   
-
   
-
 
Consumer and other loans
   
-
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
     -    
-
   
-
   
-
   
-
 
   
 
 
 
 
 
Total past maturity or past due accruing loans
   
-
   
-
   
-
   
152
   
102
 
   
 
 
 
 
 
Total contractually past maturity or 90 days or more past due
 
$
331
   
191
   
2,304
   
249
   
212
 
   
 
 
 
 
 
Total contractually past maturity or 90 days or more past due as a percentage of net loans
   
0.10
%
 
0.06
%
 
0.73
%
 
0.08
%
 
0.08
%
   
 
 
 
 
 
Total contractually past maturity or 90 days or more past due as a percentage of total assets
   
0.08
%
 
0.05
%
 
0.62
%
 
0.07
%
 
0.07
%
   
 
 
 
 
 

 
  11   
 

Non-Performing Assets . Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of all interest at contractual rates is doubtful. Mortgage loans are placed on non-accrual status generally when either principal or interest is more than 90 days past due. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.

Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is deemed a foreclosed asset held for sale until such time as it is sold. When a foreclosed asset held for sale is acquired it is recorded at its estimated fair value, less estimated selling expenses. Valuations are periodically performed by management, and any subsequent decline in fair value is charged to operations.

The following table shows the principal amount of non-performing assets and the resulting impact on interest income for the periods then ended.
 
Non-Performing Assets
 
As of June 30,
   
 
    
2003

 

 
2002

 

 
2001

 

 
2000

 

 
1999
 
   
 
 
 
 
 
Non-accrual loans:
 
(Dollars in Thousands)
Mortgage loans:
   
 
    
 
    
 
    
 
    
 
  
One- to four-family
 
$
331
   
659
   
1,358
   
578
   
151
 
Multi-family
   
-
   
-
   
-
   
441
   
751
 
Construction
   
-
   
-
   
2,115
   
84
   
-
 
Commercial real estate
   
-
   
1,017
   
1,396
   
3,652
   
-
 
   
 
 
 
 
 
 
    
331
   
1,676
   
4,869
   
4,755
   
902
 
   
 
 
 
 
 
Non-mortgage loans:
   
 
    
 
    
 
    
 
    
 
  
Commercial loans
   
-
   
-
   
60
   
-
   
-
 
Consumer and other loans
   
-
   
75
   
19
   
2
   
4
 
   
 
 
 
 
 
 
     -    
75
   
79
   
2
   
4
 
   
 
 
 
 
 
Total non-accrual loans
   
331
   
1,751
   
4,948
   
4,757
   
906
 
Real estate and other assets acquired in settlement of loans
   
182
   
683
   
4
   
2
   
102
 
   
 
 
 
 
 
Non-performing loans classified as in-substance
 
 
    
 
    
 
    
 
  
foreclosures
   
-
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
Total non-performing assets
 
$
513
   
2,434
   
4,952
   
4,759
   
1,008
 
   
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
  
Total non-accrual loans as a percentage of net loans
   
0.10
%
 
0.55
%
 
1.55
%
 
1.61
%
 
0.34
%
   
 
 
 
 
 
Total non-performing assets as a percentage of total assets
   
0.13
%
 
0.65
%
 
1.32
%
 
1.39
%
 
0.32
%
   
 
 
 
 
 
Impact on interest income for the period:
   
 
    
 
    
 
    
 
    
 
  
Interest income that would have been recorded on non-accruing loans
 
$
13
   
21
   
179
   
47
   
10
 
   
 
 
 
 
 


 
  12   
 
 
Problem Assets. Federal regulations require that the Bank review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, bank examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. "Substandard assets" must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of substandard assets with the additional c haracteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations have also created a "special mention" category, described as assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. A portion of general loss allowances establishe d to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.

For management purposes, the Bank also designates certain loans for additional attention. Such loans are called "Special Mention" and have identified weaknesses that if the situation deterioriates the loans would merit a Substandard classification.

The following table shows the aggregate amounts of the Bank's classified assets as of June 30, 2003.
 
Classification of Assets
 
Special Mention
Substandard
Doubtful
Loss
   
 
 
 
 
 
 
Number 

 
Amount

 

Number 

 
Amount 

 

Number 

 

Amount 

 
Number 

 
Amount 
  
   
 
 
 
 
 
 
 
 
 
  
(Dollars in Thousands) 
Loans:
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
One- to four-family
   
14
 
$
581
   
10
 
$
927
   
-
 
$
-
   
-
 
$
-
 
Multi-family
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Construction
   
1
   
352
   
4
   
393
   
-
   
-
   
-
   
-
 
Commercial real estate
   
3
   
991
   
-
   
-
   
-
   
-
   
-
   
-
 
Land
   
-
   
-
   
1
   
121
   
-
   
-
   
-
   
-
 
Other loans
   
3
   
76
   
10
   
264
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
 
 
Total loans
   
21
   
2,000
   
25
   
1,705
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
 
 
Foreclosed assets held-for-sale:
 
 
    
 
    
 
    
 
    
 
    
 
    
 
  
One- to four-family
   
-
   
-
   
3
   
171
   
-
   
-
   
-
   
-
 
Land and other assets
   
-
   
-
   
2
   
11
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
 
 
Total foreclosed assets
   
-
   
-
   
5
   
182
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
 
 
Total
   
21
 
$
2,000
   
30
 
$
1,887
   
-
 
$
-
   
-
 
$
-
 
   
 
 
 
 
 
 
 
 

As of June 30, 2003, foreclosed assets held for sale consists of two cars and three single-family houses. Single family houses collaterize the other non-accrual loans.    
 
   13  
 
 
Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience, and other factors that warrant recognition in providing for an adequate loan loss allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and valuation of foreclosed assets held for sale. Such agencies may require the Bank to r ecognize additions to the allowance based on their judgments about information available to them at the time of their examination.

As of June 30, 2003 the Bank's total allowance for loan losses was $2.8 million or 0.76% of total loans. This allowance reflects not only management's determination to maintain an allowance for loan losses consistent with regulatory expectations for non-performing assets, but also reflects the Bank's policy of evaluating the risks inherent in its loan portfolio, and the regional economy.

For fiscal years 1999 through 2003, the Bank experienced loan charge offs in excess of recoveries, and based on the loan portfolio review discussed above, elected to add to the allowance through a provision for loan loss, as shown in the table below. Management anticipates the need to continue adding to the allowance through charges to provision for loan losses as anticipated growth in the loan portfolio or other circumstances warrant.
 
 
  14   
 
 
The following tables set forth certain information concerning the Bank's allowance for possible loan losses for the periods indicated.
 
Allowance for Loan Losses
 
Year Ended June 30,
   
 
    
2003

 

 
2002

 

 
2001

 

 
2000

 

 
1999
 
   
 
 
 
 
 
 
  

(Dollars in Thousands) 

Beginning balance
 
$
2,650
   
2,697
   
2,520
   
2,349
   
2,191
 
   
 
 
 
 
 
Gross loan charge offs
   
 
    
 
    
 
    
 
    
 
  
Mortgage Loans:
   
 
    
 
    
 
    
 
    
 
  
One- to four-family
   
(358
)
 
(52
)
 
(5
)
 
-
   
-
 
Multi-family
   
-
   
-
   
-
   
-
   
-
 
Construction
   
(11
)
 
(235
)
 
-
   
-
   
(3
)
Commercial real estate
   
-
   
(23
)
 
(115
)
 
-
   
-
 
   
 
 
 
 
 
 
    
(369
)
 
(310
)
 
(120
)
 
-
   
(3
)
   
 
 
 
 
 
Non-mortgage loans:
   
 
    
 
    
 
    
 
    
 
  
Commercial loans
   
-
   
-
   
-
   
-
   
-
 
Consumer and other loans
   
(168
)
 
(28
)
 
(13
)
 
(9
)
 
(26
)
   
 
 
 
 
 
 
    
 
    
(28
)
 
(13
)
 
(9
)
 
(26
)
   
 
 
 
 
 
Total charge offs
   
(537
)
 
(338
)
 
(133
)
 
(9
)
 
(29
)
   
 
 
 
 
 
Recoveries
   
 
    
 
    
 
    
 
    
 
  
Mortgage Loans:
   
 
    
 
    
 
    
 
    
 
  
One- to four-family
   
19
   
-
   
-
   
-
   
-
 
Multi-family
   
-
   
-
   
-
   
-
   
-
 
Construction
   
6
   
-
   
-
   
-
   
-
 
Commercial real estate
   
-
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
    
25
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
Non-mortgage loans:
   
 
    
 
    
 
    
 
    
 
  
Commercial loans
   
-
   
-
   
-
   
-
   
7
 
Consumer and other loans
   
27
   
-
   
-
   
-
   
-
 
   
 
 
 
 
 
 
    
27
   
-
   
-
   
-
   
7
 
   
 
 
 
 
 
Total recoveries
   
52
   
-
   
-
   
-
   
7
 
   
 
 
 
 
 
Net loan charge-offs
   
(485
)
 
(338
)
 
(133
)
 
(9
)
 
(22
)
Provision for loan losses charged to expense
   
610
   
291
   
310
   
180
   
180
 
   
 
 
 
 
 
Ending balance
 
$
2,775
   
2,650
   
2,697
   
2,520
   
2,349
 
   
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
  
Net charge-offs as a percentage of average loans, net
   
0.15
%
 
0.10
%
 
0.04
%
 
0.00
%
 
0.01
%
   
 
 
 
 
 
Allowance for loan losses as a percentage of average loans, net
   
0.85
%
 
0.82
%
 
0.87
%
 
0.89
%
 
1.00
%
   
 
 
 
 
 
Allowance for loan losses as a percentage of total non-performing loans
   
838
%
 
151
%
 
55
%
 
53
%
 
259
%
   
 
 
 
 
 
 
 
  15   
 
 
Allocation of Allowance for Loan Losses

The following table shows the amount of the allowance allocated to each loan category and the percent of that loan category to total loans.
 

 
  
As of June 30,
   
 
  
2003
2002
2001
2000
1999
   
 
 
 
 
 
 
  

Amount

% 

  

Amount
 

% 

  

Amount
 

% 

  

Amount
 

% 

  

Amount
 

% 

  
   
 
 
 
 
 
 
 
 
 
 
 
  
(Dollars in thousands) 
Mortgage Loans
 
$
2,442
   
88
%
$
2,358
   
89
%
$
2,562
   
95
%
$
2,439
   
97
%
$
2,341
   
100
%
Consumer and other loans
   
333
   
12
%
 
292
   
11
%
 
135
   
5
%
 
81
   
3
%
 
8
   
0
%
   
 
 
 
 
 
 
 
 
 
 
Total
 
$
2,775
   
100
%
$
2,650
   
100
%
$
2,697
   
100
%
$
2,520
   
100
%
$
2,349
   
100
%
   
 
 
 
 
 
 
 
 
 
 

Investment Activities

The investment policy of the Company, which is established by the Board of Directors and reviewed by the Investment Committee, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Bank's lending activities. The policy currently provides for held-to-maturity and available-for-sale portfolios. The Company has adopted an investment policy which strictly prohibits speculation in investment securities. The Company does not currently engage in trading investment securities and does not anticipate doing so in the future. As of June 30, 2003, the Company has investment securities with a carrying value of $15.5 million and an estimated fair value of $15.7 million. Of those securities $13.3 million, or 86%, of the Company’s investment securities portfolio are available-for-sale.

The Company has the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, trust preferred securities, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements, and sale of federal funds.
 
The following tables set forth the amortized cost and approximate fair market values of the available-for-sale securities and held-to-maturity securities:
 
Investment Securities
 
Amortized
 Cost
Gross
 Unrealized
 Gains
Gross
 Unrealized
 (Losses)
Approximate
Fair
Value
   
 
 
 
 
As of June 30, 2003
    
 
    
 
    
 
    
 
  
AVAILABLE-FOR-SALE SECURITIES:
   
 
    
 
    
 
    
 
  
Equity Securities:
   
 
    
 
    
 
    
 
  
FHLMC stock
 
$
80,294
   
4,082,846
   
-
   
4,163,140
 
Other stock
   
2,000,000
   
-
   
(324,000
)
 
1,676,000
 
Debt Securities:
   
 
    
 
    
 
    
 
  
Trust preferred securities
   
6,550,357
   
-
   
(615,889
)
 
5,934,468
 
U. S. government agencies
   
1,497,618
   
-
   
(79
)
 
1,497,539
 
HELD-TO-MATURITY SECURITIES:
   
 
    
 
    
 
    
 
  
U. S. government agencies
   
263,781
   
952
   
-
   
264,733
 
Mortgage-backed securities
   
1,987,113
   
149,541
   
-
   
2,136,654
 
   
 
 
 
 
 
  
$
12,379,163
   
4,233,339
   
(939,968
)
 
15,672,534
 
   
 
 
 
 
 
 
  16   
 
 
Investment Securities
 
Amortized
Cost
Gross
 Unrealized
Gains
Gross
 Unrealized
 (Losses)
Approximate
Fair
 Value
   
 
 
 
 
As of June 30, 2002
   
 
    
 
    
 
    
 
  
AVAILABLE-FOR-SALE SECURITIES:
   
 
    
 
    
 
    
 
  
Equity Securities:
   
 
    
 
    
 
    
 
  
FHLMC stock
 
$
80,294
   
5,044,706
   
-
   
5,125,000
 
Other stock
   
2,000,000
   
-
   
(48,000
)
 
1,952,000
 
Debt Securities:
   
 
    
 
    
 
    
 
  
Trust preferred securities
   
6,536,781
   
-
   
(316,937
)
 
6,219,844
 
U. S. government agencies
   
2,993,109
   
632
   
-
   
2,993,741
 
Mortgage-backed securities
   
174,563
   
-
   
(1,688
)
 
172,875
 
HELD-TO-MATURITY SECURITIES:
   
 
    
 
    
 
    
 
  
U. S. government agencies
   
301,139
   
3,629
   
-
   
304,768
 
Mortgage-backed securities
   
2,917,952
   
204,033
   
(5,007
)
 
3,116,978
 
   
 
 
 
 
 
  
$
15,003,838
   
5,253,000
   
(371,632
)
 
19,885,206
 
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
                           
Investment Securities
   
Amortized
Cost

 

 
Gross
Unrealized
Gains

 

 
Gross
Unrealized
(Losses)
 

 
Approximate
 Fair
Value
 
   
 
 
 
 
As of June 30, 2001
   
 
    
 
    
 
    
 
  
AVAILABLE-FOR-SALE SECURITIES:
   
 
    
 
    
 
    
 
  
Equity Securities:
   
 
    
 
    
 
    
 
  
FHLMC stock
 
$
91,063
   
6,237,587
   
-
   
6,328,650
 
Other stock
   
2,653,339
   
142,061
   
(350
)
 
2,795,050
 
Debt Securities:
   
 
    
 
    
 
    
 
  
Trust preferred securities
   
6,523,205
   
-
   
(104,405
)
 
6,418,800
 
U. S. government agencies
   
1,993,423
   
2,896
   
-
   
1,996,319
 
Mortgage-backed securities
   
1,919,871
   
-
   
(10,798
)
 
1,909,073
 
HELD-TO-MATURITY SECURITIES:
   
 
    
 
    
 
    
 
  
U. S. government agencies
   
405,369
   
3,337
   
-
   
408,706
 
Mortgage-backed securities
   
4,140,497
   
165,426
   
(13,371
)
 
4,292,552
 
   
 
 
 
 
 
  
$
17,726,767
   
6,551,307
   
(128,924
)
 
24,149,150
 
   
 
 
 
 
 
 
  17   
 
 
Composition of Investment Portfolio

The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Bank's investment securities portfolio as of June 30, 2003:

Investment Portfolio Maturities and Average Weighted Yields
 
Amortized
Cost
Weighted
Average
Yield
Approximate
Fair
Value
 
 
 
 
Due after one through five years
 
$
1,497,618
   
1.20
%
$
1,497,539
 
Due after ten years (1)
   
6,814,138
   
1.82
%
 
6,199,201
 
Equity securities not due on a single maturity date
   
2,080,294
   
0.00
%
 
5,839,140
 
Mortgage-backed securities not due on a single maturity date
   
1,987,113
   
7.68
%
 
2,136,654
 
   
 
 
 
 
  
$
12,379,163
   
2.38
%
$
15,672,534
 
   
 
 
 
(1)  Consists of government agency and trust preferred securities
 
 
    
 
  

 
  18   
 
Sources of Funds

General . The Company's primary sources of funds are deposits, borrowings, amortization and prepayments on loans and mortgage-backed securities.

Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits principally consist of fixed-term certificates, passbook savings, money market, individual retirement accounts, and NOW (checking) accounts. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, local competition, and competition from non-bank financial service providers. The Bank's deposits are typically obtained from the areas in which its offices are located. The Bank relies primarily on customer service and long-standing relationships with customers to att ract and retain these deposits.

The Bank seeks to maintain a high level of stable core deposits by providing convenient and high quality service through its offices.

Deposit Accounts Types

The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated.
 
 
  
As of June 30,
   
 
  
2003
2002
2001
   
 
  
Average
 
Percent
Average
 
Percent
Average
 
Percent
 
  
Interest
 
of Total
Interest
 
of Total
Interest
 
of Total
 
  
Rate
Amount
Deposits
Rate
Amount
Deposits
Rate
Amount
Deposits
   
 
    
(Dollars in Thousands)
NOW
   
0.31
%
$
32,806
   
14
%
 
0.79
%
$
29,386
   
13
%
 
1.49
%
$
22,612
   
13
%
Savings
   
0.80
%
 
17,458
   
7
%
 
1.65
%
 
17,770
   
8
%
 
1.98
%
 
7,578
   
4
%
Money Market
   
1.31
%
 
37,512
   
16
%
 
2.07
%
 
34,889
   
16
%
 
3.70
%
 
21,497
   
13
%
Non-interest
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
bearing demand
   
0.00
%
 
24,651
   
11
%
 
0.00
%
 
11,657
   
5
%
 
0.00
%
 
8,110
   
5
%
         
 
       
 
       
 
 
Total
   
 
    
112,427
   
48
%
 
 
    
93,702
   
42
%
 
 
    
59,797
   
35
%
         
 
       
 
       
 
 
Certificates of Deposit: (fixed-rate, fixed-term)
 
 
    
 
    
 
    
 
    
 
    
 
  
1-11 months
   
3.04
%
 
70,009
   
30
%
 
3.59
%
 
76,382
   
34
%
 
5.38
%
 
70,605
   
41
%
12-23 months
   
3.39
%
 
26,161
   
11
%
 
4.45
%
 
33,889
   
15
%
 
5.05
%
 
20,158
   
12
%
24-35 months
   
3.02
%
 
5,552
   
2
%
 
5.05
%
 
10,076
   
4
%
 
5.32
%
 
14,994
   
9
%
36-47 months
   
3.14
%
 
5,187
   
2
%
 
5.33
%
 
1,926
   
1
%
 
6.19
%
 
3,453
   
2
%
48-59 months
   
4.42
%
 
7,409
   
2
%
 
5.35
%
 
4,744
   
2
%
 
6.02
%
 
795
   
0
%
60-71 months
   
5.05
%
 
5,620
   
2
%
 
5.35
%
 
4,565
   
2
%
 
5.91
%
 
1,998
   
1
%
72-95 months
   
4.25
%
 
3,312
   
2
%
 
0.00
%
 
-
   
0
%
 
0.00
%
 
-
   
0
%
         
 
       
 
       
 
 
Total
   
 
    
123,250
   
52
%
 
 
    
131,582
   
58
%
 
 
    
112,003
   
65
%
         
 
       
 
       
 
 
Total Deposits
   
 
  
$
235,677
   
100
%
 
 
  
$
225,284
   
100
%
 
 
  
$
171,800
   
100
%
         
 
       
 
       
 
 
 
 
  19   
 
 
Maturities of Certificates of Deposit of $100,000 or More

The following table indicates the approximate amount of the Bank's certificate accounts of $100,000 or more by time remaining until maturity as of June 30, 2003.
 
 
  
As of June 30, 2003
   
 
 
  

(Dollars in Thousands)

  
Three months or less
 
$
3,095
 
Over three through six months
   
2,316
 
Over six through twelve months
   
2,721
 
Over twelve months
   
4,126
 
   
 
Total
 
$
12,258
 
   
 

Borrowings

Deposits are the primary source of funds for the Bank's lending activities and other general business purposes. However, during periods when supply of lendable funds cannot meet the demand for such loans, the FHLB System makes available, subject to compliance eligibility standards, a portion of the funds necessary through loans (advances) to its members. The following table presents certain data for Federal Home Loan Bank advances as of June 30 of each year presented.

Selected Data for Federal Home Loan Bank Advances
 
 
 
  
2003
2002
2001
   
 
 
 
 
  
(Dollars in Thousands)
Remaining maturity as of June 30:
   
 
    
 
    
 
  
Less than one year
 
$
60,323
   
13,334
   
54,401
 
One to two years
   
7,350
   
26,322
   
9,690
 
Two to three years
   
6,500
   
5,350
   
31,114
 
Three to four years
   
3,000
   
6,500
   
6,285
 
Four to five years
   
3,950
   
3,000
   
9,587
 
Over five years
   
33,496
   
56,577
   
35,580
 
   
 
 
 
Total
 
$
114,619
   
111,083
   
146,657
 
   
 
 
 
 
    
 
    
 
    
 
  
Weighted average rate as of June 30
   
4.14
%
 
5.38
%
 
5.99
%
 
    
 
    
 
    
 
  
For the year ended June 30:
   
 
    
 
    
 
  
Average balance
 
$
108,020
   
126,534
   
155,325
 
Average interest rate
   
5.22
%
 
5.56
%
 
6.21
%
 
    
 
    
 
    
 
  
Maximum outstanding as of any month end
 
$
114,619
   
144,711
   
171,006
 

Subsidiary Activity

The Bank is a subsidiary of the Company. The Bank has one service corporation subsidiary, Guaranty Financial Services of Springfield, Inc. The Bank has an investment of $22,000 in its service corporation as of June 30, 2003. The service corporation , which has been inactive since February 1, 2003, had agreements with third party providers for the sale of securities and casualty insurance products.

Other information about the Company’s business segments is contained the section captioned "Segment Information" in Note 1 to the consolidated financial statements in the 2003 Annual Report. This information is incorporated herein by reference.
 
 
  20   
 
 
Critical Accounting Policies
 
"Management’s Discussion and Analysis of Financial Condition and Results of Operations" is based upon the Company’s consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. On an on-going basis, management evaluates its estimates and judgments.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates . If actual results are different than management’s judgements and estimates, the Company’s financial results could change, and such change could be material to the Company.

Material estimates and judgments that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

The Company has identified the accounting policies for the allowance for loan losses and related significant estimates and judgments as critical to its business operations and the understanding of its results of operations. For a detailed discussion on the application of these significant estimates and judgments and our accounting policies, also see Note 1 of the c onsolidated financial statements in the 2003 Annual Report.
 
 
  21   
 
 
Financial Highlights
 
 
 
 
 
  
Year Ended June 30,
   
 
    
2003

 

 
2002

 

 
2001
 
   
 
 
 
 
    
 
    
 
    
 
  
Dividend Payout Ratio
   
48
%
 
63
%
 
61
%
 
    
 
    
 
    
 
  
Return on Average Assets
   
0.95
%
 
0.93
%
 
0.92
%
 
    
 
    
 
    
 
  
Return on Average Equity
   
9.78
%
 
7.63
%
 
6.20
%
 
    
 
    
 
    
 
  
Stockholders' Equity to Assets
   
9.37
%
 
9.40
%
 
13.42
%

Employees

Substantially, all of the activities of the Company are conducted through the Bank. As of June 30, 2003 the Company has no salaried employees.

As of September 12, 2003, the Bank has 88 full-time employees and 50 part-time employees. None of the Bank's employees are represented by a collective bargaining group. The Bank believes that its relationship with its employees is good.

Competition

The Bank experiences substantial competition both in attracting and retaining deposit accounts and in the making of mortgage and other loans.

Direct competition for savings accounts comes from other savings institutions, credit unions, regional bank and thrift holding companies, and commercial banks located in its primary market area. Significant competition for the Bank's other deposit products and services comes from money market mutual funds, brokerage firms, insurance companies, and retail stores. The primary factors in competing for loans are interest rates and loan origination fees and the range of services offered by various financial institutions. Competition for origination of real estate loans normally comes from commercial banks, savings institutions, mortgage bankers, mortgage brokers, and insurance companies.

The Bank's primary competition comprises the financial institutions near each of the Bank's offices. In the Springfield metropolitan area, where the Bank's main office and branch offices are located, primary competition consists of 25 commercial banks, 13 credit unions, and 1 savings institution.

The Bank believes it is able to compete effectively in its primary market area by offering competitive interest rates and loan fees, and a variety of deposit products, and by emphasizing personal customer service.

Regulation

Set forth below is a brief description of certain laws which relate to the regulation of the Company and the Bank. These laws, and regulations adopted under these laws, are primarily intended for the protection of the Bank’s customers and depositors and not for the benefit of the stockholders of the Company. The following description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

 
   22  
 
 
Company Regulation

General. The Company is a registered bank holding company subject to regulation and supervision of the Board of Governors of the Federal Reserve System ("FRB") under the Bank Holding Company Act of 1956 ("BHCA").
 
Capital . The FRB has adopted risk-based capital guidelines for bank holding companies. The minimum guideline for the ratio ("Risk-Based Capital Ratio") of total capital ("Total Capital") to risk-weighted assets (including certain off-balance-sheet commitments such as standby letters of credit) is 8%. At least one-half of Total Capital must be composed of Tier 1 Capital which generally consists of common shareholders' equity, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and certain nonfinancial equity investments, less goodwill and certain other intangible assets. The remainder, d enominated "Tier 2 Capital," generally consists of limited amounts of subordinated debt, qualifying hybrid capital instruments, other preferred stock, loan loss reserves and unrealized gains on certain equity securities.

In addition, the FRB has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average total assets less goodwill ("Leverage Ratio") of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 4%. The guidelines also provide that bank holding companies anticipating or experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a "tangible Tie r 1 Leverage Ratio" (after deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities.

The Bank is subject to Risk-Based and Leverage Capital Ratio requirements adopted by the FDIC, which are substantially similar to those adopted by the FRB. See "Regulation of the Bank – Prompt Corrective Action." A bank's capital classifications may affect a bank's activities. For example, under regulations adopted by the FDIC governing the receipt of brokered deposits, a bank may not lawfully accept, roll over or renew brokered deposits unless either (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC.

As of June 30, 2003, the Company and the Bank met their minimum capital adequacy guidelines, and the Bank was categorized as well capitalized. Applicable capital and ratio information is contained under the section titled "Regulatory Matters" in Note 1 to the consolidated financial statements in the 2003 Annual Report.

Dividend Restrictions and Share Repurchases . The Company’s source of cash flow (including cash flow to pay dividends to stockholders) is dividends paid to it by the Bank. The right of the Company to receive dividends or other distributions from the Bank is subject to the prior claims of creditors of the Bank, including depositors.

There are statutory and regulatory limitations on the payment of dividends to the Company by the Bank. See discussion under "Regulation of the Bank – Dividend Limitations." Future dividends will depend primarily upon the level of earnings of the Bank. Banking regulators also have the authority to prohibit banks and bank holding companies from paying a dividend if they should deem such payment to be an unsafe or unsound practice.
 
 
  23   
 
 
Unless a bank holding company is well capitalized immediately before and after the repurchase of its equity securities, is well managed and is not subject to any unresolved supervisory issues, it must notify the FRB prior to the purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration (gross consideration paid minus the gross consideration received from the sale of equity securities) paid by the Company during the preceding twelve months, is equal to 10% or more of the Company’s consolidated net worth. The FRB may disapprove of the purchase or redemption if it determines, among other things, that the proposal would constitute an unsafe or unsound business practice.

Support of Banking Subsidiaries. Under FRB policy, the Company is expected to act as a source of financial strength to the Bank and, where required, to commit resources to support the Bank. Moreover, if the Bank should become undercapitalized, the Company would be required to guarantee the Bank's compliance with its capital restoration plan in order for such plan to be accepted by the FDIC.

Acquisitions . Under the BHCA, the Company must obtain the prior approval of the FRB before it may acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. The BHCA also restricts the Company’s ability to acquire direct or indirect ownership or control of 5% or more of any class of voting shares of any nonbanking corporation. The FRB is required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy. Consideration of convenience and needs issues includes the involved institutions’ performance under the Community Reinvestment Act of 1977 (the CRA), as amended. Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with safe and sound operation to help meet the credit needs of their entire communities, including low-to-moderate income neighborhoods. Based on its most recent CRA compliance examinations, the Bank has received a "satisfactory" CRA rating.

Transactions With Affiliates. There are various legal restrictions on the extent to which a bank holding company may borrow or otherwise obtain credit from or sell assets or affiliate securities to its bank subsidiary. In general, covered transactions with a bank subsidiary must be on nonpreferential terms and cannot exceed, as to any one of the holding company or the holding company's nonbank subsidiaries, 10% of the bank's capital stock and surplus, and as to the holding company and all of its nonbank subsidiaries in the aggregate, 20% of such capital stock and surplus. Special collateral requirements also apply to covered extensions of credit.

Regulation of the Bank

General . The Bank is regulated and supervised by the Missouri Division of Finance, and its deposits are insured by the Savings Association Insurance Fund ("SAIF") of the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the FRB.

The Missouri Division of Finance, in conjunction with the FDIC, will regularly examine the Bank and provide reports to the Bank's Board of Directors on any deficiencies that are found in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents.

The Bank must file reports with the Missouri Division of Finance and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other banks or savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan lo ss reserves for regulatory purposes.

 
  24   
 
 
Insurance of Deposit Accounts. The deposit accounts held by the Bank are insured by the SAIF to a maximum of $100,000 for each insured depositor (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator.

The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system, SAIF members pay within a range of 0 cents to 27 cents per $100 of domestic deposits, depending upon the institution's risk classification. Risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0172% of insured deposits to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017.

Prompt Corrective Action. The FDIC is required to take prompt corrective action if a depository institution for which it is the regulator, including the Bank, does not meet its minimum capital requirements. A depository institution is considered to be significantly undercapitalized if it has a Total Capital Ratio of less than 6.0%; a Tier I Capital ratio of less than 3.0%; or a Leverage Ratio of less than 3.0%. An institution that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be critically undercapitalized. "Tangible e quity" includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets, with certain exceptions.

The FDIC may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. It is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. An institution may be reclassified if the FDIC determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

Safety and Soundness Standards . Federal bank regulators are required to prescribe standards, by regulations or guidelines, relating to the internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest-rate-risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and such other operational and managerial standards as the agencies may deem appropriate. The federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards, which require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

Anti-Terrorism Legislation . The USA Patriot Act of 2001 contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. U.S. financial institutions are required to adopt policies and procedures to combat money laundering and the Treasury Secretary is granted broad authority to establish regulations and to impose requirements and restrictions on financial institutions' operations.

Dividend Limitations . In the event the Bank would fail to meet federal minimum capital adequacy guidelines, its ability to pay dividends to the Company would be restricted. In addition, under Missouri law dividends paid by banks are restricted by a statutory formula, which provides for the maintenance of a surplus fund and prohibits the payment of dividends which would impair the surplus fund.

Legislative and Regulatory Initiatives

 
  25   
 
 
Proposals to change the laws governing the financial institutions industry may be introduced in the United States Congress and in state legislatures, and the various banking agencies often modify existing regulations or adopt new regulations. It cannot be determined what impact future legislation or regulations will have on the financial institutions industry generally or on the Company and the Bank.




Executive Officers of the Registrant

Set forth below is information concerning the three executive officers of the Company.

Don M. Gibson has been President and Chief Executive Officer of the Company and the Bank since January 2002. Prior to joining the Company, Mr. Gibson was a retired banking executive. From March 2000 to July 2000 Mr. Gibson was President of Sinclair National Bank, Gravette, Arkansas. Prior to that, Mr. Gibson was at Great Southern Bank, a subsidiary of Great Southern Bancorp, Inc., Springfield, Missouri, holding various positions since September 1975 with his last being Vice Chairman.

William B. Williams joined the Bank in 1995 as Executive Vice President and Chief Operating Officer. Mr. Williams has held the same positions with the Company since its formation in September 1997. Prior to joining the Bank, Mr. Williams worked as a consultant to Midland Loan Services, L.P., a commercial mortgage banker in Kansas City, Missouri. From 1987 to 1994, Mr. Williams worked for North American Savings Bank in Grandview, Missouri, most recently as Executive Vice President and Chief Financial Officer. Mr. Williams received a BSBA degree from the University of Arkansas in 1969 and after serving as an officer in the U.S. Navy, he received a MBA degree f rom Tulane University in 1974. He is a CPA.

Bruce Winston is Senior Vice President and Chief Financial Officer of the Bank. He joined the Bank in 1992. Mr. Winston has held the same positions with the Company since its formation in September 1997. Prior to joining the Bank, he served in various other capacities with two other financial institutions over a period of 20 years. He is a graduate of Southwest Missouri State University.

As of June 30, 2003, the years of age of these individuals was 59 for Mr. Gibson, 56 for Mr. Williams and 55 for Mr. Winston.


The offices of the Company are located in the main office of the Bank.

The Bank's office facilities currently consist of the main office in Springfield, Greene County, Missouri, three full-service branch offices in Springfield, four in-store branches located in the Dillons Supermarkets in Springfield and one in-store branch located in the Walmart Supercenter in Nixa, Christian County, Missouri. The Bank has a relatively new main office building, which provides the Bank with a modern office for customer services and projects a favorable image for the Bank in the local marketplace.

 
(a)  Litigation

The Company and the Bank, from time to time, may be parties to ordinary routine litigation, which arises in the normal course of business, such as claims to enforce liens, and condemnation proceedings, on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Company and the Bank. As of June 30, 2003, there were no claims or lawsuits pending or known to be contemplated against the Company or the Bank that would have had a material effect on the Company or the Bank.
 
 
  26   
 
 
(b)  Proceedings Terminated During the Fourth Quarter of the Fiscal Year Covered by This Report

Not applicable.


No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2003.


PART II


The information contained in the section captioned "Common Stock Prices and Dividends" on page 1 of the Annual Report to Stockholders of the Registrant for the fiscal year ended June 30, 2003 (the "2003 Annual Report") is incorporated herein by reference. Information under the section captioned "Cash Dividends Paid" on pages 9 and 10 of the 2003 Annual Report is incorporated herein by reference.

With respect to the equity compensation plan information required by this item, see "Item 12. Security Ownership of Certain Owners and Management and Related Stockholder Matters" in this report.


The information contained on page 3 of the 2003 Annual Report is incorporated herein by reference.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The information contained on pages 4 through 14 of the 2003 Annual Report is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information contained on pages 11 and 12 under the sections captioned "Asset/Liability Management" and "Interest Rate Sensitivity Analysis" of the 2003 Annual Report is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The financial statements set forth on pages 16 to 42 of the 2003 Annual Report and the financial information contained under the section captioned "Summary of Unaudited Quarterly Operating Results" set forth on page 15 of the 2003 Annual Report are incorporated herein by re ference.

Item 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

(a) The Company maintains disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
 
  27   
 
 
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 Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2003.

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

PART III

Item 10. Directors and Executive Officers of the Registrant

The information contained under the section captioned "First Proposal: Election of Directors" on pages 3 to 5 (excluding any information contained under the section captioned "Meetings and Committees of the Board of Directors") of the proxy statement for the Annual Meeting of Stockholders to be held on October 22, 2003 (the "Proxy Statement") is incorporated herein by reference.

Additional information required by this item is contained in the Proxy Statement under the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference and under the section captioned "Executive Officers of the Registrant" in Item 1 of this report.
 
Item 11. Executive Compensation

The information contained in the Proxy Statement under the sections captioned "Directors Compensation", "Compensation Committee Interlocks and Insider Participation", "Compensation Committee Report of Executive Compensation", "Summary Compensation Tabl e", "Employment Agreements", "Option Grants in Last Fiscal Year", "Aggregated Option/SAR Exercises In Last Fiscal Year and Fiscal Year End Option/SAR Values" and "Stock Performance Graph" is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Except as set forth below, information required by this item is contained under the section captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement and is incorporated herein by reference.

 
  28   
 
 

Equity Compensation Plan Information
 
         
  
(c)

 
Number of securities

 
remaining available

 
  (a)
(b)
for future issuance

 
Number of securities to be
Weighted-average under
under equity

 
issued upon exercise of
exercise price of
compensation plans

 
outstanding options,
outstanding options,
(excluding securities
Plan category

 
warrants and rights
warrants and rights
reflected in column (a))
 
    
   
   
 
Equity compensation plans approved by security holders
    
353,101
   
12.79
   
67,063
 
 
    
   
   
 
Equity compensation plans not approved by security holders
   
17,875
   
10.50
   
14,761
 
                     
Totals
   
370,976
   
12.68
   
81,824
 
 
 
Description of Stock Plans Not Approved by Stockholders

2000 Stock Compensation Plan . During the year ended June 30, 2000, the directors of the Company established the Stock Compensation Plan (the "2000 SCP") with both a stock award component and a stock option component. A committee of the Bank’s Board of Directors (the "Committee") administers this plan and the 2001 SCP (discussed below). Stock options awarded under the plan are considered non-qualified for f ederal income tax purposes. Officers, directors and employees of the Company and its subsidiaries are eligible under the plan. S tock awards and stock options vest at the rate of 20% per year over a five year period and become fully vested in the event of a "change in control" as defined in the plan. In addition, the price of the stock options may not be less than the market value of the Company’s common stock on the date of grant, and the stock options expire no later than ten years from the date of grant . Under the stock award component of this plan, the Comm ittee awarded 7,125 restricted shares of the Company’s common stock. As of June 30, 2003, there are 2,850 restricted shares in this plan that are not vested. There have been 17,875 options granted under this plan at an exercise price of $10.50 per share. The maximum number of shares of the Company’s common stock permitted to be awarded under this plan have been awarded.

 
  29   
 
 
2001 Stock Compensation Plan . During the year ended June 30, 2001, the directors of the Company established the Stock Compensation Plan (the "2001 SCP") with both a stock award component and a stock option component. Stock options awarded under the plan are considered non-qualified for federal income tax purposes. Officers, directors and employees of the Company and its subsidiaries are eligible under the plan. Stock awards and stock options vest at the rate of 20% per year over a five year period and become fully vested in the event of a "change in control" as defined in the plan. In addition, the price of the stock options may not be less than the market value of the Company’s common stock on the date of grant, and the stock options expire no later than ten years from the date of grant. Under the stock award component of this plan, the Committee awarded 10,239 restricted shares of the Company’s common stock. As of June 30, 2003, 8,190 of the shares in this plan are vested. No options have been granted under this plan. The maximum number of shares of the Company’s common stock permitted to be awarded under this plan is 25,000 shares .

Item 13. Certain Relationships and Related Transactions

The information required by this item is contained under the section captioned "Transactions with Certain Related Persons" in the Proxy Statement and is incorporated herein by reference.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  The following documents are filed as a part of this report:

1.  The following financial statements and the report of independent accountants included in the 2003 Annual Report are incorporated herein by reference.

Independent Accountants’ Report

Consolidated Balance Sheets as of June 30, 2003 and 2002.

Consolidated Statements of Income for the Years Ended June 30, 2003, 2002, and 2001.

Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2003, 2002, and 2001.

Consolidated Statements of Cash Flows for the Years Ended June 30, 2003, 2002, and 2001.

Notes to Consolidated Financial Statements.

2.   Financial statement schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
3.    The following exhibits are included in this Report or incorporated herein by reference:

3(i)   Certificate of Incorporation of Guaranty Federal Bancshares, Inc. (1)
3(ii)  Bylaws of Guaranty Federal Bancshares, Inc. (1)
4       Rights Agreement dated January 20, 1999 concerning the issuance of preferred sock and related rights. (2)
10.1  1994 Stock Option Plan (3)
10.2  Recognition and Retention Plan (4)
10.3  1998 Stock Option Plan (5)
10.4  Restricted Stock Plan (6)
10.5  Change in Control Severance Agreement (7)
10.6  2000 Stock Compensation Plan (7)
10.7  2001 Stock Compensation Plan (7)
 
 
 
  30   
 
 
11     Computation of per share earnings is set forth in Note 1 of the Notes to the consolidated financial statements under the section captioned "Earnings Per Share" in the 2003 Annual Report.
13     Annual Report to Stockholders for the fiscal year ended June 30, 2003 (only those portions incorporated by reference in this document are deemed "filed")
21     Subsidiaries of the Registrant ( See Item 1. Business – Subsidiary Activity)
23     Consent of BKD, LLP
31.1  Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2  Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1  CEO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002
32.2  CFO certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002

(b)  Reports on Form 8-K

1.     Filed on April 15, 2003 relating to the registrant’s earnings release for the third quarter ended March 31, 2003; and announcing shares remaining to be repurchased to complete the repurchase plan announced November 22, 2002 .

2.     Filed on June 27, 2003 relating to the registrant’s press release announcing the conversion of the Bank to a Missouri chartered trust company with banking powers, and the name change of the Bank to Guaranty Bank.
_____________________
(1)  Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (SEC File No. 0-23325) and incorporated herein by reference.
(2)  Filed as an exhibit to the Form 8A filed by Registrant on January 22, 1999 and incorporated herein by reference.
(3)  Filed as Exhibit 10.1 of the Registration Statement on Form S-1 filed by the Registrant on September 22, 1997 (SEC File No. 333-36141) and incorporated herein by reference.
(4)  Filed as Exhibit 10.2 of the Registration Statement on Form S-1 filed by the Registrant on September 22, 1997 (SEC File No. 333-36141) and incorporated herein by reference.
(5)  Filed as Exhibit A of the proxy statement for a special meeting of stockholders held on July 22, 1998 (SEC File No. 0-23325) and incorporated herein by reference.
(6)  Filed as Exhibit B of the proxy statement for a special meeting of stockholders held on July 22, 1998 (SEC File No. 0-23325) and incorporated herein by reference.
(7)  Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (SEC File No. 0-23325) and incorporated herein by reference.
 
 
   31  
 
 
 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
 		  
 		  
 
Date: September 29, 2003 By:   /s/ Don M. Gibson
 
  Don M. Gibson
  President and Chief Executive Officer 
  (Duly Authorized Representative) 
 

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 

By:
/s/ Don M. Gibson
 
By:
/s/ Tim Rosenbury
 
Don M. Gibson
 
 
Tim Rosenbury
 
President and Chief Executive Officer
 
 
Director
 
and Director
 
Date:
September 26, 2003
 
(Principal Executive Officer)
 
 
 
Date:
September 26, 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ Bruce Winston
 
By:
/s/ Gary Lipscomb
 
Bruce Winston
 
 
Gary Lipscomb
 
SVP and Chief Financial Officer
 
 
Director
 
(Principal Accounting and Financial Officer)
 
Date:
September 26, 2003
Date:
September 26, 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ Wayne V. Barnes
 
By:
/s/ Jack L. Barham
 
Wayne V. Barnes
 
 
Jack L. Barham
 
Director
 
 
Chairman of the Board and Director
Date:
September 26, 2003
 
Date:
September 26, 2003
 
 
 
 
 
 
 
 
 
 
By:
/s/ Gregory V. Ostergren
 
By:
/s/ James L.. Sivils, III
 
Gregory V. Ostergren
 
 
James L.. Sivils, III
 
Director
 
Director
Date:
September 26, 2003
 
Date:
September 26, 2003
 
 
 
 
 
 
 
 
 
 
By:
/s/ Kurt D. Hellweg
 
 
 
 
Kurt D. Hellweg
 
 
 
 
Director
 
 
 
Date:
September 26, 2003
 
 
 
 
 
  32   
 
 EX-13 3 ex13.htm EXHIBIT 13 Exhibit 13
EXHIBIT 13
CONTENTS

1
Investor Information
2
President’s Message
3
Selected Consolidated Financial and other Data
4
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Consolidated Financial Statements
43
Independent Accountants’ Report
 
COMMON STOCK PRICES & DIVIDENDS

The common stock of Guaranty Federal Bancshares, Inc. is traded in the over-the-counter market and quoted on the NASDAQ National Market. As of August 20, 2003, there were 1,690 stockholders. At that date the Company had 6,421,700 shares of common stock issued and 2,995,055 shares of common stock outstanding.

The Company paid cash dividends of $0.15 per share on October 18, 2002 to stockholders of record as of October 4, 2002, and $0.15 per share on January 24, 2003, to stockholders of record as of January 10, 2003 and $0.15 per share on April 14, 2003 to stockholders of record as of March 31, 2003. The Company declared a cash dividend of $0.15 per share on June 27, 2003, that was paid on July 15, 2003, to stockholders of record on July 1, 2003. The Company’s Board of Directors anticipates paying dividends on comparable dates in fiscal year 2004 to the payment dates in fiscal year 2003. Such future dividends, if any, will be at the discretion of the Company’s Board of Directors and will depend on, among other things, the Company’s results of operations, cash requirements and surplus, financial condition and other factors that the Company’s Board of Directors may consider relevant.

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

June 30, 2003 

  

 June 30, 2002

  
   
 
 
 
    

High 

 

 
Low

 

 
High

 

 
Low
 
Quarter ended:
   
 
    
 
    
 
    
 
  
 
    
 
    
 
    
 
    
 
  
June 30
 
$
16.40
   
15.15
   
14.35
   
13.01
 
March 31
   
15.73
   
14.90
   
14.37
   
12.65
 
December 31
   
15.75
   
13.35
   
14.73
   
12.31
 
September 30
   
14.50
   
13.81
   
14.36
   
10.72
 
 
INVESTOR INFORMATION

ANNUAL MEETING OF STOCKHOLDERS: The Annual Meeting of Stockholders will be held Wednesday, October 22, 2003 at 6:00 p.m., at the Clarion Hotel, 3333 S. Glenstone, Springfield, Missouri.

ANNUAL REPORT ON FORM 10-K: Copies of the Guaranty Federal Bancshares Form 10-K Report to the Securities and Exchange Commission are available without charge upon written request to: Lorene Thomas, Secretary, Guaranty Federal Bancshares, Inc., 1341 W. Battlefield St., Springfield, MO 65807-4181.

TRANSFER AGENT: Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016

STOCK TRADING INFORMATION: Over-the Counter Symbol: GFED

SPECIAL LEGAL COUNSEL: Blackwell Sanders Peper Martin, LLP, 901 St. Louis St., Suite 1900, Springfield, MO 65806

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS: BKD, LLP, 901 St. Louis St., PO Box 1190, Springfield, MO 65801-1190
 
STOCKHOLDER AND FINANCIAL INFORMATION: Bruce Winston, Senior Vice President, Chief Financial Officer 417-520-0206
 
 
  1  
 
 
Dear Stockholders,

As anticipated, the Company reached record high year-end levels for assets, loans, and deposits for our fiscal year ending June 30, 2003. Assets totaled $390.2 million, loans grew to $336.8 million, and deposits increased to $235.6 million. Earnings experienced a 27% annualized growth rate to $1.28 per share, and return on average shareholders’ equity increased from 7.6% in 2002 to 9.8% in 2003, also a record high.

In FY 2003, our shareholders received four quarterly dividends of $0.15 per share. Our stock price closed at $16.04 at June 30, 2003, which represented a 16% increase over the previous year-end price per share. Recently, on August 26, 2003, our stock price reached an all-time high of $17.17.

The Bank’s conversion from a federally chartered savings bank to a state chartered trust company with banking powers was completed June 27, 2003. The change was implemented to assist with our mission to become a full service commercial bank and to increase the overall value of our franchise. Our new name is "Guaranty Bank", but we are still the same people you know and trust.

Guaranty Bank is currently the leader in dollar volume of real estate recordings in Greene County in 2003. Our mortgage department continues to set the pace for real estate loan closings in Greene County, and our emphasis on commercial lending continues to be more successful than anticipated.

During the next year, we anticipate increasing our network of branch banking facilities to better serve our customers and increase our market share. In addition, we plan to continue our emphasis on technology and will be introducing check imaging to our customers, which follows our well-received on-line banking product introduced last year. The new imaging product will also allow us to process checks internally, which should generate significant savings for the bank.

Guaranty Bank has a strong 90-year banking history, but we are even more excited about our future. As we continue to expand our product lines through technology and branches, increase our operating efficiencies, and focus on exceptional customer service, we expect to continue our trend of balance sheet and earnings growth. I look forward to reporting our results to you for the next fiscal year.
 
       
    Sincerely,
   
   
Don M. Gibson
President and CEO
 
 
  2  
 
 
Guaranty Federal Bancshares, Inc.
Selected Consolidated Financial and Other Data
 

The following tables include certain information concerning the financial position of Guaranty Federal Bancshares, Inc. (including consolidated data from operations of subsidiaries) as of the dates indicated. Dollar amounts are expressed in thousands except per share data.
 
Summary Statement of Income
 
Years Ended June 30,
   
 
    
2003

 

 
2002

 

 
2001

 

 
2000

 

 
1999
 
   
 
 
 
 
 
Interest income
 
$
21,782
   
25,223
   
27,182
   
23,564
   
20,763
 
Interest expense
   
11,445
   
14,087
   
16,378
   
12,929
   
10,703
 
   
 
 
 
 
 
Net interest income
   
10,337
   
11,136
   
10,804
   
10,635
   
10,060
 
Provision for loan losses
   
610
   
291
   
310
   
180
   
180
 
   
 
 
 
 
 
Net interest income after provision
   
 
    
 
    
 
    
 
    
 
  
for loan losses
   
9,727
   
10,845
   
10,494
   
10,455
   
9,880
 
Noninterest income
   
3,688
   
3,634
   
2,103
   
1,418
   
1,201
 
Noninterest expense
   
8,179
   
8,994
   
7,621
   
6,420
   
5,958
 
   
 
 
 
 
 
Income before income taxes
   
5,236
   
5,485
   
4,976
   
5,453
   
5,123
 
Provision for income taxes
   
1,656
   
1,892
   
1,743
   
1,947
   
1,765
 
   
 
 
 
 
 
Net income
 
$
3,580
   
3,593
   
3,233
   
3,506
   
3,358
 
   
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
  
Basic
 
$
1.28
   
1.01
   
0.78
   
0.71
   
0.61
 
   
 
 
 
 
 
Diluted
 
$
1.26
   
1.00
   
0.77
   
0.70
   
0.60
 
   
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
  
     
Summary Balance Sheet
 
As of June 30,
   
 
    
2003

 

 
2002

 

 
2001

 

 
2000

 

 
1999
 
   
 
 
 
 
 
ASSETS
   
 
    
 
    
 
    
 
    
 
  
Cash and cash equivalents
 
$
19,015
   
16,964
   
10,314
   
9,157
   
9,689
 
Investment securities
   
15,522
   
19,683
   
23,994
   
20,414
   
24,346
 
Loans receivable, net
   
336,838
   
319,916
   
320,106
   
296,053
   
264,269
 
Accrued interest receivable
   
1,430
   
1,655
   
2,148
   
1,826
   
1,757
 
Prepaids and other assets
   
10,455
   
10,293
   
9,769
   
7,605
   
5,672
 
Foreclosed assets
   
182
   
683
   
4
   
1
   
101
 
Premises and equipment
   
6,709
   
7,356
   
7,758
   
6,800
   
7,365
 
   
 
 
 
 
 
 
  
$
390,151
   
376,550
   
374,093
   
341,856
   
313,199
 
   
 
 
 
 
 
LIABILITIES
   
 
    
 
    
 
    
 
    
 
  
Deposits
 
$
235,677
   
225,284
   
170,648
   
144,607
   
141,137
 
Federal Home Loan Bank advances
   
114,619
   
111,083
   
146,657
   
136,507
   
104,795
 
Other liabilities
   
3,313
   
4,748
   
6,583
   
4,157
   
3,834
 
   
 
 
 
 
 
 
    
353,609
   
341,115
   
323,888
   
285,271
   
249,766
 
 
    
 
    
 
    
 
    
 
    
 
  
Common stock
   
624
   
624
   
624
   
624
   
624
 
Additional paid-in capital
   
47,366
   
47,366
   
47,366
   
47,366
   
47,366
 
Unearned ESOP shares
   
(3,100
)
 
(3,100
)
 
(3,100
)
 
(3,100
)
 
(3,100
)
Retained earnings
   
23,236
   
23,236
   
23,236
   
23,236
   
23,236
 
Unrealized appreciation on available-for-
   
 
    
 
    
 
    
 
    
 
  
sale securities, net
   
3,439
   
3,439
   
3,439
   
3,439
   
3,439
 
Treasury stock
   
(8,132
)
 
(8,132
)
 
(8,132
)
 
(8,132
)
 
(8,132
)
   
 
 
 
 
 
STOCKHOLDERS' EQUITY
   
36,542
   
35,435
   
50,205
   
56,585
   
63,433
 
   
 
 
 
 
 
 
  
$
390,151
   
376,550
   
374,093
   
341,856
   
313,199
 
   
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
  
Supplemental Data
 
As of June 30,
   
 
    
2003

 

 
2002

 

 
2001

 

 
2000

 

 
1999
 
   
 
 
 
 
 
Number of full-service offices
   
9
   
9
   
5
   
5
   
5
 
Cash dividends per share
 
$
0.60
   
0.63
   
0.47
   
0.42
   
0.34
 

 
  3  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 

GENERAL

Guaranty Federal Bancshares, Inc. (and with its subsidiary, the "Company") is a Delaware corporation organized on December 30, 1997 for the purpose of becoming the holding company of Guaranty Federal Savings Bank.

In April 1995, Guaranty Federal Savings & Loan Association reorganized from a federally chartered mutual savings and loan association into a mutual holding company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent with the reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings bank was chartered. In December 1997, the Company completed the conversion and reorganization of the Bank and the former MHC by selling common stock to depositors of the Bank and a benefit plan of the Bank. In addition, all shares of common stock of the Bank held by public stockholders were exchanged for shares of common stock of the Company.

On December 6, 2001, the Bank completed its acquisition of the Springfield branch offices of Commercial Federal Bank. The Bank acquired approximately $15.5 million in selected consumer and home equity loans and assumed approximately $41.2 million in deposit liabilities. The Bank also assumed the leases and equipment at all but one of the branches. The acquired locations are located in Dillons Supermarkets in Springfield. The transaction increased the number of "in-store" locations from one to five and total locations from five to nine.

On June 27, 2003, the Bank converted to a state-chartered trust company with banking powers, and the Company became a one-bank holding company. The name of the Bank was changed from Guaranty Federal Savings Bank to Guaranty Bank.

The Company’s principal business consists of attracting deposits from the general public and using such deposits to originate mortgage loans secured by one- to four-family residences, multi-family, construction and commercial real estate loans and consumer and business loans. The Company also uses these funds to purchase loans secured by one- to four-family residences, mortgage-backed securities, US government and agency obligations, and other permissible securities. When cash outflows exceed inflows, the Company uses borrowings and brokered deposits as additional financing sources.

The Company derives revenues principally from interest earned on loans and investments and, to a lesser extent, from fees charged for services. General economic conditions and policies of the financial institution regulatory agencies, including the Missouri Division of Finance and the Federal Deposit Insurance Corporation ("FDIC") significantly influence the Company’s operations. Interest rates on competing investments and general market interest rates influence the Company’s cost of funds. Lending activities are affected by the interest rates at which such financing may be offered. The Company intends to focus on one- to four-family residential, consumer, and commercial real estate lending throughout southwestern Missouri.

The discussion set forth below may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this report. When used in this document, words such as "anticipates," "estimates," "believes," "expects," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company’s operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time.

FINANCIAL CONDITION

From June 30, 2002 to June 30, 2003, the Company’s total assets increased $13,600,537 (4%), liabilities increased $12,493,602 (4%), and stockholders' equity increased $1,106,935 (3%). The ratio of stockholders’ equity to total assets remained at 9% during this period.


From June 30, 2002 to June 30, 2003, securities available-for-sale decreased $3,192,313 (19%). The Company currently owns 82,000 shares of Federal Home Loan Mortgage Corporation ("FHLMC") stock with an amortized cost of $80,294 in the securities available-for-sale category. As of June 30, 2003, the gross unrealized gain on the stock is $4,082,846, a decrease of $961,860 from the gross unrealized gain at June 30, 2002. This decrease is due to the decline in the stock price of FHLMC stock from $62.50 per share as of June 30, 2002 to $50.77 per share as of June 30, 2003. From June 30, 2002 to June 30, 2003, securities held-to-maturity decreased $968,197 (30%) due to repayments received during the year. There was no change in stock in the Federal Home Loan Bank of Des Moines ("FHLB"). The Bank is required to own stock in the FHLB equal to five percent of its borrowings.
 
 
 
  4  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
From June 30, 2002 to June 30, 2003, net loans receivable increased by $10,297,302 (3%). During this period, permanent loans secured by both owner and non-owner occupied one to four unit residential real estate decreased by $11,662,684, (8%), consumer installment loans decreased $5,503,729 (18%), multi-family permanent loans decreased by $3,033,015 (7%), construction loans increased by $14,656,291 (29%), permanent loans secured by commercial real estate increased $12,612,341 (22%) and other commercial loans increased $10,608,925 (127%). During this period the Company continued to increase its emphasis on commercial lending, while selling the majority of conforming single family loan production on the secondary market. These loan sales allowed the Bank to provide customers with 30-year fixed rate mortga ges while retaining a banking relationship with the customer. As a result of these loan sales, loans serviced for others increased by $25,799,494 (28%).

From June 30, 2002 to June 30, 2003, loans past due 90 days or more increased $139,968 to $330,971 (0.1% of net loans). As of June 30, 2003, management considers loans totaling $623,856 as impaired with a related allowance for loan losses of $81,029. Single-family homes collateralize the majority of the impaired loans. The Bank recognizes interest income on impaired loans as payments are received. Management believes the loss allowances on these loans are sufficient to liquidate the collateral without further loss.

From June 30, 2002 to June 30, 2003, the allowance for loan losses increased $125,448. Loan charge-offs exceeded recoveries by $484,552 for fiscal year 2003 and $338,517 for fiscal year 2002. The allowance for loan losses as of June 30, 2003 and 2002 was 0.85% and 0.83% of net loans outstanding, respectively. As of June 30, 2003, the allowance for loan losses was 445% of impaired loans versus 151% as of June 30, 2002.

As of June 30, 2003 foreclosed assets held for sale consists of two automobiles and three single-family homes.

From June 30, 2002 to June 30, 2003, premises and equipment decreased $647,102 (9%). This decrease is primarily due to depreciation.

From June 30, 2002 to June 30, 2003, deposits increased $10,393,203 (5%). During this period core deposit accounts increased by $18,725,158 (20%) to 48% of total deposits and certificates of deposit decreased by $8,331,955 (6%). Included in the certificates of deposit total is $25,000,000 in deposits placed by brokers. Management considers brokered deposits to be an effective source of funds that cost less at the margin than increasing rates on retail deposits in our local market.

Due to historically low interest rates, the Company increased borrowings from the Federal Home Loan Bank by $3,535,731 (3%).

Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $1,106,935 (3%) to $36,541,812 as of June 30, 2003. Net income for the year exceeded cash dividends paid or declared by $1,907,849. The Company repurchased 87,286 shares as treasury stock at a cost of $1,311,174 (an average price of $15.02 per share). As of June 30, 2003, 257,469 shares remain to be repurchased under the repurchase plan announced November 22, 2002. The decrease in unrealized appreciation on securities available-for-sale, net of tax, decreased stockholders’ equity by $967,574. On a per share basis, stockholders’ equity increased $0.45 (4%) from $12.69 as of June 30, 2002 to $13.14 as of June 30, 2003.
 
 
  5  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

The following tables show (1) the average monthly balances of various categories of interest-earning assets and interest-bearing liabilities, (2) the total interest earned or paid thereon, and (3) the resulting weighted average yields and costs. In addition, the table shows the Company’s rate spreads and net yields. Average balances are based on daily balances. Tax-free income is not material; accordingly, interest income and related average yields have not been calculated on a tax equivalent basis. Average loan balances include non-accrual loans. Dollar amounts are expressed in thousands.

 
  
June 30, 2003
Year Ended June 30, 2003
Year Ended June 30, 2002
Year Ended June 30, 2001
   
   

Balance

  
Yield /
Cost
  
Average
 Balance
  
Interest 
  
Yield /
Cost
  

Average
Balance

  

Interest 

  

Yield /
 Cost

  

Average Balance

  
Interest 
  

Yield /
 Cost

  
   
 
 
 
 
 
 
 
 
 
 
 
ASSETS
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Interest-earning:
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Loans
 
$
336,838
   
5.72
%
$
326,441
 
$
20,928
   
6.41
%
$
324,796
 
$
23,876
   
7.35
%
$
309,422
 
$
25,157
   
8.13
%
Investment securities
   
9,683
   
3.04
%
 
11,103
   
419
   
3.77
%
 
14,824
   
619
   
4.18
%
 
15,237
   
1,133
   
7.44
%
Other assets
   
18,212
   
2.25
%
 
18,864
   
434
   
2.30
%
 
33,362
   
727
   
2.18
%
 
16,240
   
892
   
5.49
%
   
 
 
 
 
 
 
 
 
 
 
 
Total interest-earning
   
364,733
   
5.47
%
 
356,408
   
21,781
   
6.11
%
 
372,982
   
25,222
   
6.76
%
 
340,899
   
27,182
   
7.97
%
         
       
 
       
 
       
 
 
Noninterest-earning
   
25,418
   
 
    
19,368
   
 
    
 
    
12,833
   
 
    
 
    
11,013
   
 
    
 
  
   
       
             
             
             
 
  
$
390,151
   
 
  
$
375,776
   
 
    
 
  
$
385,815
   
 
    
 
  
$
351,912
   
 
    
 
  
   
       
             
             
             
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
LIABILITIES AND STOCKHOLDERS' EQUITY
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Interest-bearing:
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Savings accounts
 
$
17,458
   
0.80
%
$
17,390
   
221
   
1.27
%
$
13,732
   
241
   
1.76
%
$
7,677
   
199
   
2.59
%
Transaction accounts
   
70,318
   
0.85
%
 
67,614
   
814
   
1.20
%
 
54,916
   
934
   
1.70
%
 
38,927
   
1,162
   
2.99
%
Certificates of deposit
   
123,250
   
3.33
%
 
126,376
   
4,768
   
3.77
%
 
128,718
   
5,842
   
4.54
%
 
93,008
   
5,357
   
5.76
%
FHLB advances
   
114,619
   
4.14
%
 
108,020
   
5,634
   
5.22
%
 
126,534
   
7,039
   
5.56
%
 
155,325
   
9,646
   
6.21
%
Other borrowed funds
   
702
   
0.38
%
 
832
   
7
   
0.84
%
 
1,735
   
30
   
1.73
%
 
351
   
14
   
3.99
%
   
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing
   
326,347
   
2.94
%
 
320,232
   
11,444
   
3.57
%
 
325,635
   
14,086
   
4.33
%
 
295,288
   
16,378
   
5.55
%
         
       
 
       
 
       
 
 
Noninterest-bearing
   
27,262
   
 
    
18,946
   
 
    
 
    
13,060
   
 
    
 
    
4,463
   
 
    
 
  
   
       
             
             
             
Total liabilities
   
353,609
   
 
    
339,178
   
 
    
 
    
338,695
   
 
    
 
    
299,751
   
 
    
 
  
Stockholders' equity
   
36,542
   
 
    
36,598
   
 
    
 
    
47,120
   
 
    
 
    
52,161
   
 
    
 
  
   
       
             
             
             
 
  
$
390,151
   
 
  
$
375,776
   
 
    
 
  
$
385,815
   
 
    
 
  
$
351,912
   
 
    
 
  
   
       
             
             
             
Net earning balance
 
$
38,386
   
 
  
$
36,176
   
 
    
 
  
$
47,347
   
 
    
 
  
$
45,611
   
 
    
 
  
   
       
             
             
             
Earning yield less costing rate
 
2.53
%
 
 
    
 
    
2.54
%
 
 
    
 
    
2.43
%
 
 
    
 
    
2.42
%
 
             
             
             
 
Net interest income, and
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
net yield spread on
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
interest-earning assets
   
 
    
2.84
%
 
 
  
$
10,337
   
2.90
%
 
 
  
$
11,136
   
2.99
%
 
 
  
$
10,804
   
3.17
%
         
       
 
       
 
       
 
 
Ratio of interest-earning assets to
 
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
interest-bearing liabilities
   
112
%
 
 
    
111
%
 
 
    
 
    
115
%
 
 
    
 
    
115
%
 
 
    
 
  
   
       
             
             
             
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
 
 
 
  6  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations

 
The following table sets forth information regarding changes in interest income and interest expense for the periods indicated resulting from changes in average balances and average rates shown in the previous table. For each category of interest-earning assets and interest-bearing liabilities information is provided with respect to changes attributable to: (i) changes in balance (change in balance multiplied by the old rate), (ii) changes in interest rates (change in rate multiplied by the old balance); and (iii) the combined effect of changes in balance and interest rates (change in balance multiplied by change in rate).

 
  
Year Ended June 30, 2003 versus 2002
Year Ended June 30, 2002 versus 2001
   
 
  
Average Balance
Interest Rate
Rate & Balance
Total
Average Balance
Interest Rate
Rate & Balance
Total
   
 
 
 
 
 
 
 
 
Interest income:
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Loans
 
$
121
   
(3,053
)
 
(15
)
 
(2,947
)
 
1,250
   
(2,411
)
 
(120
)
 
(1,281
)
Investment securitites
   
(155
)
 
(61
)
 
16
   
(200
)
 
(31
)
 
(497
)
 
14
   
(514
)
Other assets
   
(316
)
 
40
   
(17
)
 
(293
)
 
941
   
(538
)
 
(568
)
 
(165
)
   
 
 
 
 
 
 
 
 
Net change in interest income
   
(350
)
 
(3,074
)
 
(16
)
 
(3,440
)
 
2,160
   
(3,446
)
 
(674
)
 
(1,960
)
   
 
 
 
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Interest expense:
   
 
    
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Savings accounts
   
64
   
(67
)
 
(17
)
 
(20
)
 
157
   
(64
)
 
(51
)
 
42
 
Transaction accounts
   
216
   
(274
)
 
(62
)
 
(120
)
 
477
   
(500
)
 
(205
)
 
(228
)
Certificates of deposit
   
(106
)
 
(991
)
 
23
   
(1,074
)
 
2,057
   
(1,136
)
 
(436
)
 
485
 
Advances
   
(1,029
)
 
(430
)
 
54
   
(1,405
)
 
(1,788
)
 
(1,005
)
 
186
   
(2,607
)
Other borrowed funds
   
(16
)
 
(15
)
 
8
   
(23
)
 
55
   
(8
)
 
(31
)
 
16
 
   
 
 
 
 
 
 
 
 
Net change in interest expense
   
(871
)
 
(1,777
)
 
6
   
(2,642
)
 
958
   
(2,713
)
 
(537
)
 
(2,292
)
   
 
 
 
 
 
 
 
 
Change in net interest income
 
$
521
   
(1,297
)
 
(22
)
 
(798
)
 
1,202
   
(733
)
 
(137
)
 
332
 
   
 
 
 
 
 
 
 
 
 
 
RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED JUNE 30, 2003 AND 2002
 
 
 
  
U.S. Treasury Securities
 
  
Average for the Twelve Months Ended
   
 
    

Ten-Year Maturity 

    
One-Year Maturity
   
Spread
 
   
 
 
 
June 30, 2003
   
3.96
%
 
1.46
%
 
2.50
%
June 30, 2002
   
4.99
%
 
2.56
%
 
2.43
%
   
 
 
 
Decrease in interest rates
   
-1.03
%
 
-1.10
%
 
0.07
%
   
 
 
 
 
    
 
    
 
    
 
  

Interest Rates . The Company charges borrowers and pays depositors interest rates that are largely a function of the general level of interest rates. The following table sets forth the weekly average interest rates on U.S. Treasury securities for the twelve months ending.

Interest rates trended downward during the twelve months ended June 30, 2003. The Federal Reserve Open Market Committee reduced the discount rate 50 basis points in November 2002 and 25 basis points in June 2003. The last week in June 2003, the ten-year treasury averaged 3.42%, and the one-year treasury averaged 1.02%. The widely quoted bank prime rate fell from 4.75% to 4.00% during the twelve months ended June 30, 2003. As a result, loan customers continued to refinance their loans to lower rates.
 
 
  7  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations

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

Interest on loans decreased $2,947,361 (12%) as the average loan receivable balance increased $1,645,000 (1%) while the average yield decreased 94 basis points to 6.41%. The decrease in loan yield is the result of the combination of new loans at lower rates, repayments of higher yielding loans, and the roll down of adjustable rate loans. Interest on investment securities decreased $199,904 (32%) as the average balance decreased $3,721,000 (25%) and the average yield decreased 41 basis points to 3.77%. As long as interest rates remain at historical low levels, our customers will benefit from loan rates adjusting downward and from refinancing to fixed-rate mortgages to lock-in the rates. These adjustments and refinances will negatively impact portfolio loan yields in future quarters.

Interest Expense . Total interest expense decreased $2,642,273 (19%) as the average balance of interest-bearing liabilities decreased $5,403,000 (2%). The average cost of interest-bearing liabilities decreased 76 basis points to 3.57%.

Interest expense on deposits decreased $1,214,839 (17%) as the average balance of interest bearing deposits increased $14,014,000 (7%) while the average interest rate paid to depositors decreased 81 basis points to 2.75%. The average balance of interest bearing core deposit accounts increased $16,356,000 (24%) and the average balance of certificates of deposit decreased $2,342,000 (2%).

In order to comply with the Federal Home Loan Bank (the "FHLB") limitation of advances to 35% of assets, the Company decreased borrowings from the FHLB. The average balance of FHLB advances decreased by $18,514,000 (15%) while the average cost of those advances decreased 34 basis points to 5.22%. As of June 30, 2003, FHLB advances are 29% of total assets.

Net Interest Income . The Company’s net interest income decreased $798,439 (7%). During the year ended June 30, 2003, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $36,176,000, a decrease in the average net earning balance of $11,171,000 (24%). The Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 11 basis points from 2.43% to 2.54%.

Provision for Loan Losses . Provisions for loan losses are charged or credited to earnings to bring the total allowance to a level considered adequate by the Company to provide for potential loan losses in the existing portfolio. When making the assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and past due loans in the Company’s portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s portfolio.

During fiscal year 2003, the Company experienced loan charge-offs in excess of recoveries of $484,552 and based on a review as discussed above, elected to add $610,000 to the allowance. Management anticipates the need to continue adding to the loan loss allowance through charges to provision for loan losses based on the anticipated growth in the loan portfolio and shift in emphasis from primarily single-family to a mix of single-family and commercial loans.

Non-Interest Income . Non-interest income increased $54,493 (1%). The gain on sale of loans of $1,544,037 for fiscal year 2003 is the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. The Bank attempts to minimize risk of price changes by committing to sell loans while the loans are in the origination process. There were no profits on sale of investments for fiscal year 2003. Deposit service charges increased $223,910 (14%) due to the continued growth in the Bank’s checking accounts. These increases were partially offset by amortization expense associated with the Bank’s originated mortgage servicing rights and the recording of a loss on impairment. The amortization expense on originated mortgage servicing rights increased $295,808. A loss on impairment of these rights of $239,543 was recognized based on the Bank’s fair value assessment of such rights. There
 
 
  8  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
was no loss impairment recognized during the same periods in 2002. Decreases in fair value of these rights is primarily due to increased prepayment speeds on loans being serviced for others. The increase in prepayment speed is attributable to significant increases in refinancing in a historically low interest rate environment. In addition late charges and other fees decreased $111,088 (37%).

Non-Interest Expense . Non-interest expense decreased $813,613 (9%). Decreases in salaries and employee benefits, occupancy, advertising and data processing expense are principally attributable to the Company’s aggressive approach to lowering operating costs. In the same period one year ago the Company incurred approximately $183,000 in "one-time" costs in connection with the Commercial Federal acquisition and approximately $150,000 in legal and professional expenses in connection with the settlement of a dispute over the repurchase of the Company’s stock.

Income Taxes . The change in income tax is a direct result of changes in the Company’s taxable income.

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

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

Interest Rates . The following table sets forth the weekly average interest rates on U.S. Treasury securities for the twelve months ending.
 

 
  
U.S. Treasury Securities
 
  
Average for the Twelve Months Ended
   
 
  
Ten-Year Maturity
One-Year Maturity
Spread
   
 
 
 
June 30, 2002
   
4.99
%
 
2.56
%
 
2.43
%
June 30, 2001
   
5.45
%
 
5.10
%
 
0.35
%
   
 
 
 
Decrease in interest rates
   
-0.46
%
 
-2.54
%
 
2.08
%
   
 
 
 

From July 1, 2001 until the events of September 11, interest rates were relatively stable. In the two weeks following September 11, the one-year Treasury rate fell 83 basis points. From the week ended September 21, 2001 through the week ended June 28, 2002, the one-year treasury security traded in a range from a low of 1.99% to a high of 2.70%. These historically low interest rates encouraged borrowers to refinance their loans and thereby lower our yields. Depositors exhibited a preference for money market deposits over the certificates of deposit.

Interest Income . Total interest income decreased $1,959,665 (7%) as the average balance of interest-earning assets increased $32,083,000 (9%). The yield on average interest earning assets decreased 121 basis points to 6.76%.

Interest on loans decreased $1,281,546 (5%) as the average loan receivable balance increased $15,374,000 (5%) while the average yield decreased 78 basis points to 7.35%. The decrease in loan yield is the result of the combination of new loans at lower rates, repayments of higher yielding loans, and the roll down of adjustable rate loans. Interest on investment securities decreased $513,427 (45%) as the average balance decreased $413,000 (3%) and the average yield decreased 326 basis points to 4.18%.
 
 
 
  9  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
Interest Expense . Total interest expense decreased $2,291,358 (14%) as the average balance of interest-bearing liabilities increased $30,347,000 (10%). The average cost of interest-bearing liabilities decreased 122 basis points to 4.33%.

Interest expense on deposits increased $298,754 (4%) as the average balance of interest bearing deposits increased $57,754,000 (41%) while the average interest rate paid to depositors decreased 125 basis points to 3.56%. The average balance of interest bearing core deposit accounts increased $22,044,000 (47%) and the average balance of certificates of deposit increased $35,710,000 (38%).

In order to comply with the Federal Home Loan Bank (the "FHLB") limitation of advances to 35% of assets, the Company decreased borrowings from the FHLB. The average balance of FHLB advances decreased by $28,791,000 (19%) while the average cost of those advances decreased 65 basis points to 5.56%. As of June 30, 2002, FHLB advances are 29% of total assets.

Net Interest Income . The Company’s net interest income increased $331,693 (3%). During the year ended June 30, 2002, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $47,347,000, an increase in the average net earning balance of $1,736,000 (4%). With the treasury stock purchase in the fourth quarter of FY 2002, this net earning balance declined and as of June 30, 2002 is $36,108,000. The Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 1 basis point from 2.42% to 2.43%.

Provision for Loan Losses . Provisions for loan losses are charged or credited to earnings to bring the total allowance to a level considered adequate by the Company to provide for potential loan losses in the existing portfolio. When making the assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and past due loans in the Company’s portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s portfolio.

During fiscal year 2002, the Company experienced loan charge-offs in excess of recoveries of $338,517 and based on a review as discussed above, elected to add $291,000 to the allowance.

Non-Interest Income . Non-interest income increased $1,530,537 (73%). This increase is primarily due to the $959,354 increase in gain on sale of loans and investments. The gain on sale of loans ($786,526 for fiscal year 2002) is the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. The net gain on sale of investments ($780,741 for fiscal year 2002) is primarily a result of the sale of 11,000 shares of FHLMC stock during the twelve-month period ending June 30, 2002. Deposit service charges increased $279,754 (22%) due to the continued growth in the Bank’s checking accounts. As of June 30, 2002, the Bank services 16,286 checking accounts up 3,256 (25%) from a year earlier. Late charges and other fees increased $141,475 (89%) primarily due to approximately $146,000 in prepayment penalties collected from two commercial borrowers.

Non-Interest Expense . Non-interest expense increased $1,372,221 (18%). Increases in salaries and employee benefits, occupancy and data processing expense are principally attributable to the Company’s recent expansion through branch additions and an overall increase in accounts served. The Company incurred approximately $183,000 in "one-time" costs in connection with the Commercial Federal acquisition and approximately $150,000 in legal and professional expenses in connection with the settlement of a dispute over the repurchase of the Company’s stock.

Income Taxes . The change in income tax is a direct result of changes in the Company’s taxable income.

Cash Dividends Paid. The Company paid cash dividends of $0.25 per share on October 15, 2001, to the stockholders of record as of September 4, 2001 and $0.25 per share on April 12, 2002, to the stockholders of record as of April 1, 2002. The Company declared a cash dividend of $0.125 per share on June 27, 2002, to be paid on July 19, 2002, to stockholders of record on July 8, 2002. Effective with this dividend the Company anticipates paying dividends on a quarterly basis rather than on a semi-annual basis.

 
 
  10  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
ASSET / LIABILITY MANAGEMENT

The goal of the Bank’s asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments. Management monitors the Bank’s net interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, it offers deposit rates and loan rates that maximize net interest income. Management also attempts to fund the Bank’s assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank’s net interest income. This matching is especially difficult because the residential mortgage loans that comprise the majority of the Bank’s assets give the borr ower the right to prepay at any time. These borrowers act in their economic self-interest and refinance higher rate loans when rates are low. Since the relative spread between financial assets and liabilities is constantly changing, the Bank’s current net interest income may not be an indication of future net interest income.

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

The Bank is also managing interest rate risk by the origination of construction loans. As of June 30, 2003, such loans, net of loans in process, make up 20% of the Bank’s loan portfolio. In general, these loans have higher yields, shorter maturities, and greater interest rate sensitivity than other real estate loans.

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. As of June 30, 2002, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $93,701,835 or 41% of its total deposits. As of June 30, 2003, these accounts totaled $112,426,993 or 48% of total deposits. The weighted average rate paid on these accounts decreased 70 basis points from 1.35% on June 30, 2002 to 0.65% on June 30, 2003. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive, core deposits.

During the year ending June 30, 2004, the Bank has the option to prepay $15.9 million of FHLB advances with a remaining average life of 5.1 years and a weighted average rate of 5.84%. The current FHLB advance rate with a similar average life is 3.61%, a 223 basis point savings. Also in the year ending June 30, 2004, the FHLB has the option to call $11.0 million of advances with a weighted average rate of 5.40% and a remaining life of five years.
 
 
  11  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
INTEREST RATE SENSITIVITY ANALYSIS

The following table sets forth as of June 30, 2003, management’s estimates of the projected changes in net portfolio value ("NPV") in the event of 100, 200, and 300 basis point ("bp") instantaneous and permanent increases and a 100 basis point instantaneous and permanent decrease in market interest rates. Dollar amounts are expressed in thousands.
 
BP Change
 
Estimated Net Portfolio Value
NPV as % of PV of Assets
   
in Rates
 
$ Amount
$ Change
% Change
NPV Ratio
Change
 
 
 
 
 
 
+300
   
34,060
   
(3,043
)
 
-8
%
 
8.84
%
 
-0.57
%
+200
   
34,996
   
(2,107
)
 
-6
%
 
9.01
%
 
-0.39
%
+100
   
35,986
   
(1,117
)
 
-3
%
 
9.20
%
 
-0.21
%
   NC
   
37,103
   
 
    
 
    
9.41
%
 
 
  
-100
   
39,052
   
1,949
   
5
%
 
9.80
%
 
0.39
%


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

Management cannot predict future interest rates or their effect on the Bank’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable rate loans, which represent the Bank’s primary loan product, have an initial fixed rate period typically from one to five years and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable rate loans in the Bank’s portfolio could decrease in future periods due to refinancing activity if market interest rates remain constant or decrease in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The Bank’s Board of Directors is responsible for reviewing the asset and liability policies. The Bank’s management is responsible for administering the policies and determinations of the Board of Directors with respect to the Bank’s asset and liability goals and strategies. Management expects that the Bank’s asset and liability policies and strategies will continue as described above so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years.
 
 
 
  12  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
LIQUIDITY AND CAPITAL RESOURCES

The Company’s principal sources of funds for investments and operations are net income, deposits from its primary market area, principal and interest payments on loans and mortgage-backed securities, and proceeds from maturing investment securities. The Company considers deposits and FHLB advances as primary sources of funds.

The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $19,014,528 as of June 30, 2003. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.

As of June 30, 2003, the Bank has conditional commitments in the form of letters of credit in the amount of $1,671,000. Outstanding loan commitments are $23,835,000. The Bank has granted unused lines of credit to borrowers aggregating approximately $17,955,000 and $13,397,000 for commercial lines and open-end consumer lines, respectively. The Bank has $76,058,653 in certificates of deposit that are scheduled to mature in one year or less. Management anticipates that the majority of these certificates will renew in the normal course of operations.

Based on existing collateral as well as the FHLB’s limitation of advances to 35% of assets, the Bank has the ability to borrow an additional $21,937,000 from the FHLB, as of June 30, 2003.. The Bank plans to maintain its FHLB borrowings to a level that will provide a borrowing capacity sufficient to provide for contingencies.

The Company’s capital position of $36,542,000 is 9.4% of total assets as of June 30, 2003. The Company has an excess of $19,350,000, $22,812,000, and $15,636,000 of required regulatory levels of tangible, core, and risk-based capital, respectively. Under current regulatory guidelines, the Bank is classified as well capitalized.

During fiscal year 2002, the Company purchased 42,500 shares of common stock in open market transactions and 1,089,639 shares of common stock in private transactions to place in the treasury stock account. During fiscal year ended 2003, the Company purchased 74,240 shares of common stock in open market transactions and 13,046 from the RRP to place in the treasury account. The Company intends to monitor the common stock price and, with regulatory approval, may from time to time initiate further treasury stock transactions in order to improve the Company’s long-term earnings per share while at the same time maintaining an adequate level of stockholders’ equity.

IMPACT OF INFLATION AND CHANGING PRICES

The Company prepared the consolidated financial statements and related data presented herein in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most companies, the assets and liabilities of a financial institution are primarily monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank’s assets and liabilities are critical to the maintenance of acceptable performance levels.
 
 
 
  13  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations

 
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
 
The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. This statement is effective for contracts entered into or modified after July 1, 2003, and is not expected to have a material effect on the Company’s financial statements.

The FASB recently issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards on the classification and measurement of certain financial instruments with characteristics of both debt and equity. The Company adopted SFAS No. 150 on July 1, 2003, with no impact to the financial statements of the Company.
 
 
 
  14  
 
 
Guaranty Federal Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
 
 
SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS

 
  
Fiscal Year 2003, Quarter ended
   
 
  
September-02
December-02
March-03
June-03
   
 
 
 
 
Interest income
 
$
5,746,456
   
5,543,740
   
5,304,477
   
5,187,047
 
Interest expense
   
3,120,175
   
2,965,401
   
2,778,498
   
2,580,339
 
   
 
 
 
 
Net interest income
   
2,626,281
   
2,578,339
   
2,525,979
   
2,606,708
 
Provision for loan losses
   
100,000
   
105,000
   
255,000
   
150,000
 
Gain on sale of loans and investment securities
   
224,577
   
444,643
   
403,633
   
471,184
 
Other noninterest income, net
   
638,875
   
443,639
   
688,873
   
372,905
 
Noninterest expense
   
2,026,229
   
2,033,749
   
2,050,978
   
2,069,031
 
   
 
 
 
 
Income before income taxes
   
1,363,504
   
1,327,872
   
1,312,507
   
1,231,766
 
Provision for income taxes
   
467,458
   
459,888
   
427,824
   
300,830
 
   
 
 
 
 
Net income
 
$
896,046
   
867,984
   
884,683
   
930,936
 
   
 
 
 
 
Basic earnings per share
 
$
0.32
   
0.31
   
0.32
   
0.33
 
   
 
 
 
 
Diluted earnings per share
 
$
0.32
   
0.30
   
0.31
   
0.33
 
   
 
 
 
 
     
 
  

Fiscal Year 2002, Quarter ended 

   
 
    

September-01 

 

 
December-01

 

 
March-02

 

 
June-02
 
   
 
 
 
 
Interest income
 
$
6,741,476
   
6,496,607
   
6,150,640
   
5,833,709
 
Interest expense
   
3,952,844
   
3,681,011
   
3,326,906
   
3,125,925
 
   
 
 
 
 
Net interest income
   
2,788,632
   
2,815,596
   
2,823,734
   
2,707,784
 
Provision for loan losses
   
75,000
   
75,000
   
66,000
   
75,000
 
Gain on sale of loans and investment securities
   
342,498
   
542,354
   
376,111
   
306,304
 
Other noninterest income, net
   
447,238
   
476,161
   
472,680
   
670,490
 
Noninterest expense
   
2,006,291
   
2,379,399
   
2,364,640
   
2,243,270
 
   
 
 
 
 
Income before income taxes
   
1,497,077
   
1,379,712
   
1,241,885
   
1,366,308
 
Provision for income taxes
   
527,997
   
447,024
   
424,328
   
492,651
 
   
 
 
 
 
Net income
 
$
969,080
   
932,688
   
817,557
   
873,657
 
   
 
 
 
 
Basic earnings per share
 
$
0.25
   
0.25
   
0.22
   
0.31
 
   
 
 
 
 
Diluted earnings per share
 
$
0.25
   
0.24
   
0.21
   
0.31
 
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  

 
 
  15  
 
 
Guaranty Federal Bancshares, Inc.
Consolidated Balance Sheets
June 30, 2003 and 2002
 
 
 
  
2003
2002
   
 
 
ASSETS
   
 
    
 
  
Cash
 
$
15,242,475
   
8,530,060
 
Interest-bearing deposits in other financial institutions
   
3,772,053
   
8,433,442
 
   
 
 
Cash and cash equivalents
   
19,014,528
   
16,963,502
 
Available-for-sale securities
   
13,271,147
   
16,463,460
 
Held-to-maturity securities
   
2,250,894
   
3,219,091
 
Stock in Federal Home Loan Bank, at cost
   
8,600,400
   
8,600,400
 
Mortgage loans held for sale
   
9,755,102
   
3,131,138
 
Loans receivable, net of allowance for loan losses of
   
 
    
 
  
$2,775,320 and $2,649,872 in 2003 and 2002, respectively
   
327,082,420
   
316,785,118
 
Accrued interest receivable:
   
 
    
 
  
Loans
   
1,357,434
   
1,569,260
 
Investments
   
72,691
   
85,251
 
Prepaid expenses and other assets
   
1,855,268
   
1,693,760
 
Foreclosed assets held for sale
   
182,064
   
683,329
 
Premises and equipment
   
6,708,996
   
7,356,098
 
   
 
 
 
  
$
390,150,944
   
376,550,407
 
   
 
 
 
    
 
    
 
  
LIABILITIES AND STOCKHOLDERS' EQUITY
   
 
    
 
  
 
    
 
    
 
  
LIABILITIES
   
 
    
 
  
Deposits
 
$
235,677,197
   
225,283,994
 
Federal Home Loan Bank advances
   
114,618,894
   
111,083,163
 
Securities sold under agreements to repurchase
   
702,024
   
1,093,074
 
Advances from borrowers for taxes and insurance
   
950,678
   
1,048,297
 
Accrued expenses and other liabilities
   
311,696
   
103,993
 
Accrued interest payable
   
203,237
   
759,099
 
Dividend payable
   
415,414
   
347,656
 
Income taxes payable
   
220,707
   
163,897
 
Deferred income taxes
   
509,285
   
1,232,357
 
   
 
 
 
    
353,609,132
   
341,115,530
 
   
 
 
STOCKHOLDERS' EQUITY
   
 
    
 
  
Common Stock:
   
 
    
 
  
$0.10 par value; authorized 10,000,000 shares;
   
 
    
 
  
issued; 2003 - 6,416,848 shares, 2002 - 6,365,404 shares
   
641,685
   
636,540
 
Additional paid-in capital
   
51,065,581
   
49,842,032
 
Unearned ESOP shares
   
(2,156,930
)
 
(2,406,070
)
Retained earnings, substantially restricted
   
29,280,784
   
27,372,935
 
Accumulated other comprehensive income
   
 
    
 
  
Unrealized appreciation on available-for-sale securities,
   
 
    
 
  
net of income taxes; 2003 - $1,162,865, 2002 - $1,731,122
   
1,980,013
   
2,947,587
 
   
 
 
 
    
80,811,133
   
78,393,024
 
Treasury stock, at cost;
   
 
    
 
  
2003 - 3,420,375 shares, 2002 - 3,333,089 shares
   
(44,269,321
)
 
(42,958,147
)
   
 
 
 
    
36,541,812
   
35,434,877
 
   
 
 
 
  
$
390,150,944
   
376,550,407
 
   
 
 
 
See Notes to Consolidated Financial Statements
 
 
 
  16  
 
 
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Income
Years Ended June30, 2003, 2002, and 2001
 
 

INCOME STATEMENT
 
 
 
 
 
  
2003
2002
2001
   
 
 
 
INTEREST INCOME
   
 
    
 
    
 
  
Loans
 
$
20,928,391
   
23,875,752
   
25,157,298
 
Investment securities
   
419,145
   
619,049
   
1,132,476
 
Other
   
434,184
   
727,631
   
892,323
 
   
 
 
 
 
    
21,781,720
   
25,222,432
   
27,182,097
 
   
 
 
 
INTEREST EXPENSE
   
 
    
 
    
 
  
Deposits
   
5,802,445
   
7,017,284
   
6,718,530
 
Federal Home Loan Bank advances
   
5,634,484
   
7,039,115
   
9,645,741
 
Other
   
7,484
   
30,287
   
13,773
 
   
 
 
 
 
    
11,444,413
   
14,086,686
   
16,378,044
 
   
 
 
 
NET INTEREST INCOME
   
10,337,307
   
11,135,746
   
10,804,053
 
PROVISION FOR LOAN LOSSES
   
610,000
   
291,000
   
310,000
 
   
 
 
 
NET INTEREST INCOME AFTER
   
 
    
 
    
 
  
PROVISION FOR LOAN LOSSES
   
9,727,307
   
10,844,746
   
10,494,053
 
   
 
 
 
NONINTEREST INCOME
   
 
    
 
    
 
  
Service charges
   
1,778,267
   
1,554,357
   
1,274,603
 
Late charges and other fees
   
190,113
   
301,201
   
159,726
 
Gain on sale of investment securities
   
-
   
780,741
   
198,118
 
Gain on sale of loans
   
1,544,037
   
786,526
   
409,795
 
Income (loss) on foreclosed assets
   
10,830
   
(13,369
)
 
(80,189
)
Other income
   
165,082
   
224,380
   
141,246
 
   
 
 
 
 
    
3,688,329
   
3,633,836
   
2,103,299
 
   
 
 
 
NONINTEREST EXPENSE
   
 
    
 
    
 
  
Salaries and employee benefits
   
4,557,376
   
4,610,235
   
4,088,038
 
Occupancy
   
1,322,790
   
1,324,043
   
1,024,400
 
SAIF deposit insurance premiums
   
37,950
   
35,855
   
28,724
 
Data processing
   
487,786
   
783,051
   
642,460
 
Advertising
   
217,066
   
331,446
   
392,930
 
Other expense
   
1,557,019
   
1,908,970
   
1,444,827
 
   
 
 
 
 
    
8,179,987
   
8,993,600
   
7,621,379
 
   
 
 
 
INCOME BEFORE INCOME TAXES
   
5,235,649
   
5,484,982
   
4,975,973
 
PROVISION FOR INCOME TAXES
   
1,656,000
   
1,892,000
   
1,743,000
 
   
 
 
 
NET INCOME
 
$
3,579,649
   
3,592,982
   
3,232,973
 
   
 
 
 
 
    
 
    
 
    
 
  
BASIC EARNINGS PER SHARE
 
$
1.28
   
1.01
   
0.78
 
   
 
 
 
DILUTED EARNINGS PER SHARE
 
$
1.26
   
1.00
   
0.77
 
   
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
  17  
 
 
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flow
Years Ended June30, 2003, 2002, and 2001
 

 
  
2003
2002
2001
   
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
   
 
    
 
    
 
  
Net income
 
$
3,579,649
   
3,592,982
   
3,232,973
 
Items not requiring (providing) cash:
   
 
    
 
    
 
  
Deferred income taxes
   
(154,815
)
 
211,201
   
48,395
 
Depreciation
   
783,933
   
1,020,070
   
622,855
 
Provision for loan losses
   
610,000
   
291,000
   
310,000
 
Gain on sale of loans and investment securities
   
(1,544,037
)
 
(1,567,267
)
 
(607,913
)
(Gain) loss on sale of premises and equipment
   
37,761
   
28,970
   
(2,392
)
(Gain) loss on sale of foreclosed assets
   
(12,310
)
 
1,712
   
81,481
 
Amortization of deferred income,
   
 
    
 
    
 
  
premiums and discounts
   
(99,192
)
 
(188,793
)
 
91,652
 
Stock award plan expense
   
353,004
   
401,403
   
464,032
 
Origination of loans held for sale
   
(77,775,788
)
 
(63,372,364
)
 
(38,604,806
)
Proceeds from sale of loans held for sale
   
72,695,861
   
63,890,546
   
37,147,094
 
   Release of ESOP shares
   
373,724
   
319,595
   
268,071
 
Changes in:
   
 
    
 
    
 
  
Accrued interest receivable
   
224,386
   
572,430
   
(322,870
)
Prepaid expenses and other assets
   
(55,508
)
 
(695,042
)
 
(84,105
)
Accrued expenses and other liabilities
   
(348,159
)
 
557,279
   
507,415
 
Income taxes payable
   
69,278
   
(124,777
)
 
(214,057
)
   
 
 
 
Net cash provided by (used in) operating activities
   
(1,262,213
)
 
4,938,945
   
2,937,825
 
   
 
 
 
 
    
 
    
 
    
 
  
CASH FLOWS FROM INVESTING ACTIVITIES
   
 
    
 
    
 
  
Net (increase) decrease in loans
   
(11,171,690
)
 
14,833,382
   
(25,590,545
)
Principal payments on held-to-maturity securities
   
995,693
   
1,319,992
   
2,211,435
 
Principal payments on available-for-sale securities
   
172,835
   
1,738,299
   
345,309
 
Purchase of available-for-sale securities
   
(4,968,371
)
 
(9,387,524
)
 
(4,079,079
)
Purchase of premises and equipment
   
(174,592
)
 
(500,569
)
 
(1,584,669
)
Proceeds from sale of premises and equipment
   
-
   
47,281
   
6,322
 
Proceeds from sales of available-for-sale securities
   
-
   
2,945,061
   
587,734
 
Proceeds from maturities of available-for-sale securities
   
6,500,000
   
7,000,000
   
-
 
Purchase of FHLB stock
   
-
   
-
   
(1,725,000
)
Proceeds from sale of foreclosed assets
   
801,677
   
282,423
   
2,931,555
 
Purchase of other investments
   
(106,000
)
 
(200,000
)
 
(355,656
)
Cash acquired in purchase of branches
   
-
   
25,556,972
   
-
 
   
 
 
 
Net cash provided by (used in) investing activities
   
(7,950,448
)
 
43,635,317
   
(27,252,594
)
   
 
 
 
 
See Notes to Consolidated Financial Statements
 
 
  18  
 
 
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Income (continued)
Years Ended June30, 2003, 2002, and 2001

 
  
2003
2002
2001
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
   
 
    
 
    
 
  
Stock options exercised
   
556,869
   
924,677
   
110,510
 
Cash dividends paid
   
(1,604,042
)
 
(1,823,928
)
 
(1,936,401
)
Cash dividends received on RRP Stock
   
2,387
   
2,942
   
6,652
 
Net increase in demand deposits,
   
 
    
 
    
 
  
NOW accounts and savings accounts
   
18,725,158
   
15,557,187
   
5,546,434
 
Net increase (decrease) in certificates of deposit and
   
 
    
 
    
 
  
securities sold under agreements to repurchase
   
(8,723,005
)
 
(3,940,368
)
 
21,758,276
 
Proceeds from FHLB advances
   
121,500,000
   
46,500,000
   
80,924,742
 
Repayments of FHLB advances
   
(117,964,269
)
 
(82,073,420
)
 
(70,775,306
)
Advances from borrowers for taxes and insurance
   
(97,619
)
 
(244,765
)
 
(91,169
)
Reduction of shares in RRP Trust
   
-
   
-
   
-
 
Stock purchased for stock awards
   
-
   
-
   
(85,945
)
Treasury stock purchased
   
(1,131,792
)
 
(16,826,643
)
 
(9,986,737
)
   
 
 
 
Net cash provided by (used in) financing activities
   
11,263,687
   
(41,924,318
)
 
25,471,056
 
   
 
 
 
 
    
 
    
 
    
 
  
INCREASE (DECREASE) IN CASH
   
 
    
 
    
 
  
AND CASH EQUIVALENTS
   
2,051,026
   
6,649,944
   
1,156,287
 
 
    
 
    
 
    
 
  
CASH AND CASH EQUIVALENTS,
   
 
    
 
    
 
  
BEGINNING OF YEAR
   
16,963,502
   
10,313,558
   
9,157,271
 
   
 
 
 
 
    
 
    
 
    
 
  
CASH AND CASH EQUIVALENTS,
   
 
    
 
    
 
  
END OF YEAR
 
$
19,014,528
   
16,963,502
   
10,313,558
 
   
 
 
 
 
    
 
    
 
    
 
  
Supplemental Cash Flows Information
   
 
    
 
    
 
  
 
    
 
    
 
    
 
  
Real estate acquired in settlement of loans
 
$
368,296
   
963,264
   
3,015,611
 
 
    
 
    
 
    
 
  
Interest paid
 
$
12,000,275
   
14,278,261
   
16,304,274
 
 
    
 
    
 
    
 
  
Income taxes paid
 
$
1,742,466
   
1,662,886
   
1,928,539
 
 
    
 
    
 
    
 
  
Dividend declared and unpaid
 
$
415,414
   
347,656
   
-
 
 
    
 
    
 
    
 
  
The Bank acquired the Springfield, Missouri branch
   
 
    
 
    
 
  
offices of another financial institution in 2002.
   
 
    
 
    
 
  
In conjunction with the acquisition, assets were
   
 
    
 
    
 
  
acquired and liabilities were assumed as follows:
   
 
    
 
    
 
  
 
    
 
    
 
    
 
  
Fair value of liabilities assumed
   
-
   
41,615,456
   
-
 
Fair value of assets acquired
   
-
   
(16,058,484
)
 
-
 
         
       
Cash received
   
-
   
25,556,972
   
-
 
         
       

See Notes to Consolidated Financial Statements
 
  19  
 
 
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended June30, 2003, 2002, and 2001

 
  
Common Stock
Additional
Paid-In Capital
Unearned
ESOP Shares
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income
Total
   
 
 
 
 
 
 
 
Balance, July 1, 2000
 
$
625,004
   
47,921,681
   
(2,870,440
)
 
(16,144,767
)
 
24,654,965
   
2,398,947
   
56,585,390
 
                                       
 
Comprehensive income
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Net income
   
-
   
-
   
-
   
-
   
3,232,973
   
-
   
3,232,973
 
Change in unrealized appreciation
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
on available-for-sale securitites, net
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
of income taxes of $909,880
   
-
   
-
   
-
   
-
   
-
   
1,549,256
   
1,549,256
 
                                       
 
Total comprehensive income
   
 
    
 
    
 
    
 
    
 
    
 
    
4,782,229
 
                                       
 
Dividends ($0.47 per share)
   
-
   
-
   
-
   
-
   
(1,936,401
)
 
-
   
(1,936,401
)
Stock award plans
   
-
   
468,674
   
-
   
-
   
-
   
-
   
468,674
 
Stock purchased for stock awards
   
 
    
(85,945
)
 
-
   
-
   
-
   
-
   
(85,945
)
Stock options exercised
   
1,836
   
108,674
   
-
   
-
   
-
   
-
   
110,510
 
Release of ESOP shares
   
-
   
38,431
   
229,640
   
-
   
-
   
-
   
268,071
 
Treasury stock purchased
   
-
   
-
   
-
   
(9,986,737
)
 
-
   
-
   
(9,986,737
)
   
 
 
 
 
 
 
 
Balance, June 30, 2001
   
626,840
   
48,451,515
   
(2,640,800
)
 
(26,131,504
)
 
25,951,537
   
3,948,203
   
50,205,791
 
                                       
 
Comprehensive income
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Net income
   
-
   
-
   
-
   
-
   
3,592,982
   
-
   
3,592,982
 
Change in unrealized appreciation
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
on available-for-sale securitites, net
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
of income taxes of ($587,664)
   
-
   
-
   
-
   
-
   
-
   
(1,000,616
)
 
(1,000,616
)
                                       
 
Total comprehensive income
   
 
    
 
    
 
    
 
    
 
    
 
    
2,592,366
 
                                       
 
Dividends ($0.625 per share)
   
-
   
-
   
-
   
-
   
(2,171,584
)
 
-
   
(2,171,584
)
Stock award plans
   
-
   
390,675
   
-
   
-
   
-
   
-
   
390,675
 
Stock options exercised
   
9,700
   
914,977
   
-
   
-
   
-
   
-
   
924,677
 
Release of ESOP shares
   
-
   
84,865
   
234,730
   
-
   
-
   
-
   
319,595
 
Treasury stock purchased
   
-
   
-
   
-
   
(16,826,643
)
 
-
   
-
   
(16,826,643
)
   
 
 
 
 
 
 
 
Balance, June 30, 2002
   
636,540
   
49,842,032
   
(2,406,070
)
 
(42,958,147
)
 
27,372,935
   
2,947,587
   
35,434,877
 
                                       
 
Comprehensive income
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Net income
   
-
   
-
   
-
   
-
   
3,579,649
   
-
   
3,579,649
 
Change in unrealized appreciation
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
on available-for-sale securitites, net
   
 
    
 
    
 
    
 
    
 
    
 
    
 
  
of income taxes of ($568,257)
   
-
   
-
   
-
   
-
   
-
   
(967,574
)
 
(967,574
)
                                       
 
Total comprehensive income
   
 
    
 
    
 
    
 
    
 
    
 
    
2,612,075
 
                                       
 
Dividends ($0.60 per share)
   
-
   
-
   
-
   
-
   
(1,671,800
)
 
-
   
(1,671,800
)
Stock award plans
   
-
   
547,241
   
-
   
-
   
-
   
-
   
547,241
 
Stock options exercised
   
5,145
   
551,724
   
-
   
-
   
-
   
-
   
556,869
 
Release of ESOP shares
   
-
   
124,584
   
249,140
   
-
   
-
   
-
   
373,724
 
Treasury stock purchased
   
-
   
-
   
-
   
(1,311,174
)
 
-
   
-
   
(1,311,174
)
   
 
 
 
 
 
 
 
Balance, June 30, 2003
 
$
641,685
   
51,065,581
   
(2,156,930
)
 
(44,269,321
)
 
29,280,784
   
1,980,013
   
36,541,812
 
   
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements
 
  20  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 

NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization
In April 1995, Guaranty Federal Savings & Loan Association reorganized from a federally chartered mutual savings and loan association into a mutual holding company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent with the reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings bank was chartered. The Bank issued 3,125,000 shares of common stock in connection with the reorganization, the majority of which were owned by the MHC.

On December 30, 1997, the MHC converted to Guaranty Federal Bancshares, Inc. (the "Company"), a Delaware-chartered stock corporation. In connection with the conversion and reorganization, the shares of the Bank held by the mutual holding company were extinguished along with the mutual holding company and the shares of the Bank held by the public were exchanged for 1,880,710 shares of the Company. Additional shares of the Company were sold to certain depositors of the Bank and to the trust of the employee stock ownership plan of the Bank as of December 30, 1997.

On June 27, 2003, the Bank converted to a state-chartered trust company with banking powers, and the Company became a one-bank holding company. The name of the Bank was changed from Guaranty Federal Savings Bank to Guaranty Bank.

Nature of Operations
The Company operates as a one-bank holding company. The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in southwest Missouri. The Bank’s subsidiary provides other services, such as insurance, annuities, and securities brokerage. The Bank is subject to competition from other financial institutions. The Company and the Bank are also subject to the regulation of certain federal and state agencies and receive periodic examinations by those regulatory authorities.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiary, Guaranty Financial Services of Springfield, Inc. All significant intercompany profits, transactions and balances have been eliminated in consolidation.

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties.

Investments in Debt and Equity Securities
Available-for-sale securities, which include any security for which the Company or the Bank has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the specific security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity.

Held-to-maturity securities, which include any security for which the Company or the Bank has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity.
 
 
  21  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
Interest and dividends on investments in debt and equity securities are included in income when earned.

Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward commitments to sell mortgage loans are sometimes acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price plus the value of retained servicing rights and the carrying amount of the loans sold, net of discounts collected or paid and considering a normal servicing rate. Fees received from borrowers to guarantee the funding of mortgag e loans held for sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used.

Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance.

Loan Servicing
The cost of originated mortgage-servicing rights is amortized over the shorter of the actual or contractual loan life. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated by discounting expected cash flows. For purposes of measuring impairment, the rights are stratified based on the loan type, remaining term to maturity and interest rate. The key assumptions used in the valuation include discount rates, prepayment speeds and servicing costs. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights exceeds their fair value.

Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
 
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and
 
 
  22  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
 
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated methods over the estimated useful lives of the assets.

Fee Income
Loan origination fees, net of direct origination costs, are recognized as income over the term of the loan using the level-yield method. Loan servicing income represents fees earned for servicing real estate mortgage loans owned by various investors.

Income Taxes
Deferred tax liabilities and assets are recognized for the tax effect of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

Cash Equivalents
The Company considers all highly liquid interest-bearing deposits in other financial institutions with an initial maturity of three months or less to be cash equivalents.

Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct and material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.< /FONT>

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to adjusted tangible assets (as defined). Management believes, as of June 30, 2003, that the Company and the Bank meet all capital adequacy requirements.

As of June 30, 2003, the most recent notification from the Missouri Division of Finance categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Company’s or the Bank’s category.
 
 
  23  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
The Company’s and the Bank's actual capital amounts and ratios are also presented in the table. At June 30, 2003, the Company is a one-bank holding company and, as such, subject to the capital ratios presented in the table. At June 30, 2002, the Company was a unitary savings and loan holding company and, as such, not required to disclose consolidated capital ratios. No amount was deducted from capital for interest-rate risk. Dollar amounts are expressed in thousands.
 
 
  
 
 
 
 
To Be Well Capitalized
 
  
 
 
For Capital
Under Prompt Corrective
 
  
Actual
Adequacy Purposes
Action Provisions
   
 
    
Amount 

 

 
Ratio

 

 
Amount

 

 
Ratio

 

 
Amount

 

 
Ratio
 
   
 
 
 
 
 
 
As of June 30, 2003
   
 
    
 
    
 
    
 
    
 
    
 
  
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Tier 1 (core) capital, and
   
 
    
 
    
 
    
 
    
 
    
 
  
ratio to adjusted total assets
   
 
    
 
    
 
    
 
    
 
    
 
  
Company
 
$
34,454
   
9.1
%
$
15,104
   
4.0
%
 
n/a
   
n/a
 
   
 
 
 
 
 
 
Bank
 
$
33,931
   
9.0
%
$
15,084
   
4.0
%
$
18,855
   
5.0
%
   
 
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Tier 1 (core) capital, and
   
 
    
 
    
 
    
 
    
 
    
 
  
ratio to risk-weighted assets
   
 
    
 
    
 
    
 
    
 
    
 
  
Company
 
$
34,454
   
11.8
%
$
11,642
   
4.0
%
 
n/a
   
n/a
 
   
 
 
 
 
 
 
Bank
 
$
33,931
   
11.7
%
$
11,623
   
4.0
%
$
17,435
   
6.0
%
   
 
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Total risk-based capital, and
   
 
    
 
    
 
    
 
    
 
    
 
  
ratio to risk-weighted assets
   
 
    
 
    
 
    
 
    
 
    
 
  
Company
 
$
38,920
   
13.4
%
$
23,284
   
8.0
%
 
n/a
   
n/a
 
   
 
 
 
 
 
 
Bank
 
$
38,397
   
13.2
%
$
23,246
   
8.0
%
$
29,058
   
10.0
%
   
 
 
 
 
 
 
 
  
 
 
 
                             
 
    
 
    
 
    
 
    
 
  

To Be Well Capitalized 

 

 

 
 

 

 
 

 

For Capital 
Under Prompt Corrective
 

 
Actual  
Adequacy Purposes
Action Provisions
   
 
    
Amount  

 

 
Ratio

 

 
Amount

 

 
Ratio

 

 
Amount

 

 
Ratio
 
   
 
 
 
 
 
 
As of June 30, 2002
   
 
    
 
    
 
    
 
    
 
    
 
  
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Tangible capital, and
   
 
    
 
    
 
    
 
    
 
    
 
  
ratio to adjusted total assets
   
 
    
 
    
 
    
 
    
 
    
 
  
Bank
 
$
31,555
   
8.5
%
 
7,432
   
2.0
%
 
 
    
 
  
   
 
 
 
             
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Tier 1 (core) capital, and
   
 
    
 
    
 
    
 
    
 
    
 
  
ratio to adjusted total assets
   
 
    
 
    
 
    
 
    
 
    
 
  
Bank
 
$
31,555
   
8.5
%
$
14,863
   
4.0
%
$
18,579
   
5.0
%
   
 
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Tier 1 (core) capital, and
   
 
    
 
    
 
    
 
    
 
    
 
  
ratio to risk-weighted assets
   
 
    
 
    
 
    
 
    
 
    
 
  
Bank
 
$
31,555
   
10.8
%
$
11,654
   
4.0
%
$
17,482
   
6.0
%
   
 
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Total risk-based capital, and
   
 
    
 
    
 
    
 
    
 
    
 
  
ratio to risk-weighted assets
   
 
    
 
    
 
    
 
    
 
    
 
  
Bank
 
$
36,454
   
12.5
%
$
23,309
   
8.0
%
$
29,136
   
10.0
%
   
 
 
 
 
 
 

 
 
  24  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 

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

Earnings Per Share

The computation for earnings per share for the years ended June 30, 2003, 2002 and 2001 is as follows:
 
 
  
Year Ended
Year Ended
Year Ended
 
  
June 30, 2003
June 30, 2002
June 30, 2001
   
 
 
 
Net income
 
$
3,579,649
   
3,592,982
   
3,232,973
 
   
 
 
 
Average common shares outstanding
   
2,794,032
   
3,549,172
   
4,125,778
 
Effect of stock options outstanding
   
57,525
   
38,728
   
47,778
 
   
 
 
 
Average diluted shares outstanding
   
2,851,557
   
3,587,900
   
4,173,556
 
   
 
 
 
Earnings per share - basic
 
$
1.28
   
1.01
   
0.78
 
   
 
 
 
Earnings per share - diluted
 
$
1.26
   
1.00
   
0.77
 
   
 
 
 

Options to purchase 10,000, 15,000 and 415,949 shares of common stock were outstanding during the years ended June 30, 2003, 2002 and 2001, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

Stock Option Plans

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

 
  
Year Ended
Year Ended
Year Ended
 
  
June 30, 2003
June 30, 2002
June 30, 2001
   
 
 
 
Net income, as reported
 
$
3,579,649
   
3,592,982
   
3,232,973
 
Less: Total stock-based employee compensation
   
 
    
 
    
 
  
cost determined under the fair value-based
   
 
    
 
    
 
  
method, net of income taxes
   
(174,412
)
 
(174,142
)
 
(200,548
)
   
 
 
 
 
    
 
    
 
    
 
  
Pro forma net income
 
$
3,405,237
   
3,418,840
   
3,032,425
 
   
 
 
 
 
    
 
    
 
    
 
  
Earnings per share:
   
 
    
 
    
 
  
Basic - as reported
 
$
1.28
   
1.01
   
0.78
 
   
 
 
 
Basic - pro forma
 
$
1.22
   
0.96
   
0.73
 
   
 
 
 
Diluted - as reported
 
$
1.26
   
1.00
   
0.77
 
   
 
 
 
Diluted - pro forma
 
$
1.19
   
0.95
   
0.72
 
   
 
 
 

 
 
  25  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
Impact of Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. This statement is effective for contracts entered into or modified after July 1, 2003, and is not expected to have a material effect on the Company’s financial statements.

The FASB recently issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards on the classification and measurement of certain financial instruments with characteristics of both debt and equity. The Company adopted SFAS No. 150 on July 1, 2003, with no impact to the financial statements of the Company.

Segment Information
The principal business of the Company is overseeing the business of the Bank. The Company has no significant assets other than its investment in the Bank. The banking operation is the Company’s only reportable segment. The banking segment is principally engaged in the business of originating mortgage loans secured by one-to-four family residences and, to a lesser extent, multi-family, construction, commercial and consumer loans. These loans are funded primarily through the attraction of deposits from the general public, borrowings from the Federal Home Loan Bank and brokered deposits. Selected information is not presented separately for the Company’s reportable segment, as there is no material difference between that information and the correspond ing information in the consolidated financial statements.

Reclassifications
Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 financial statement presentation. These reclassifications had no effect on net income.

 
 
  26  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 

NOTE 2:    INVESTMENTS IN DEBT AND EQUITY SECURITIES

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

 
  
Amortized
 Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Approximate
Fair Value
   
 
 
 
 
As of June 30, 2003
   
 
    
 
    
 
    
 
  
Equity Securities:
   
 
    
 
    
 
    
 
  
FHLMC stock
 
$
80,294
   
4,082,846
   
-
   
4,163,140
 
Other stock
   
2,000,000
   
-
   
(324,000
)
 
1,676,000
 
Debt Securities:
   
 
    
 
    
 
    
 
  
Trust preferred securities
   
6,550,357
   
-
   
(615,889
)
 
5,934,468
 
U. S. government agencies
   
1,497,618
   
-
   
(79
)
 
1,497,539
 
   
 
 
 
 
 
  
$
10,128,269
   
4,082,846
   
(939,968
)
 
13,271,147
 
   
 
 
 
 
As of June 30, 2002
   
 
    
 
    
 
    
 
  
Equity Securities:
   
 
    
 
    
 
    
 
  
FHLMC stock
 
$
80,294
   
5,044,706
   
-
   
5,125,000
 
Other stock
   
2,000,000
   
-
   
(48,000
)
 
1,952,000
 
Debt Securities:
   
 
    
 
    
 
    
 
  
Trust preferred securities
   
6,536,781
   
-
   
(316,937
)
 
6,219,844
 
U. S. government agencies
   
2,993,109
   
632
   
-
   
2,993,741
 
Mortgage-backed securities
   
174,563
   
-
   
(1,688
)
 
172,875
 
   
 
 
 
 
 
  
$
11,784,747
   
5,045,338
   
(366,625
)
 
16,463,460
 
   
 
 
 
 
Held-to-maturity
   
 
    
 
    
 
    
 
  

Maturities of available-for-sale debt securities as of June 30, 2003:
 
 
  
Amortized
Cost
Approximate
Fair Value
   
 
 
Within one year
 
$
1,497,618
   
1,497,539
 
After ten years
   
6,550,357
   
5,934,468
 
   
 
 
 
  
$
8,047,975
   
7,432,007
 
   
 
 

 
 
  27  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
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 Value
   
 
 
 
 
As of June 30, 2003
   
 
    
 
    
 
    
 
  
Debt Securities:
   
 
    
 
    
 
    
 
  
U. S. government agencies
 
$
263,781
   
952
   
-
   
264,733
 
Mortgage-backed securities
   
1,987,113
   
149,541
   
-
   
2,136,654
 
   
 
 
 
 
 
  
$
2,250,894
   
150,493
   
-
   
2,401,387
 
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
As of June 30, 2002
   
 
    
 
    
 
    
 
  
Debt Securities:
   
 
    
 
    
 
    
 
  
U. S. government agencies
 
$
301,139
   
3,629
   
-
   
304,768
 
Mortgage-backed securities
   
2,917,952
   
204,033
   
(5,007
)
 
3,116,978
 
   
 
 
 
 
 
  
$
3,219,091
   
207,662
   
(5,007
)
 
3,421,746
 
   
 
 
 
 



Maturities of held-to-maturity securities as of June 30, 2003:
 
  
Amortized
Cost
Approximate
Fair Value
   
 
 
After ten years
 
$
263,781
   
264,733
 
Mortgage-backed securities not due on a
   
 
    
 
  
single maturity date
   
1,987,113
   
2,136,654
 
   
 
 
 
  
$
2,250,894
   
2,401,387
 
   
 
 

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

Proceeds from sales of available-for-sale securities were $0, $2,945,061 and $587,734 for the years ended June 30, 2003, 2002 and 2001, respectively, with resultant gains of $0, $784,557 and $198,118, and resultant losses of $3,816 in June 30, 2002. There were no losses as a result of sales for the years ended June 30, 2003 and June 30, 2001.

 
 
  28  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
NOTE 3:  LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans at June 30, 2003 and 2002, include:
 
 
  
2003
2002
   
 
 
Real estate - residential mortgage:
   
 
    
 
  
One to four family units
 
$
134,649,480
   
146,312,164
 
Multi-family
   
41,021,909
   
44,054,924
 
Real estate - construction
   
64,463,839
   
49,807,548
 
Real estate - commercial
   
71,046,133
   
58,433,792
 
Commercial loans
   
18,966,677
   
8,357,752
 
Installment loans
   
25,204,105
   
30,707,834
 
Loans on savings accounts
   
282,336
   
366,555
 
   
 
 
Total loans
   
355,634,479
   
338,040,569
 
Less:
   
 
    
 
  
Undisbursed portion of loans-in-process
   
(25,539,102
)
 
(18,325,897
)
Allowance for loan losses
   
(2,775,320
)
 
(2,649,872
)
Unearned discounts
   
(26,356
)
 
(50,070
)
Deferred loan fees/costs, net
   
(211,281
)
 
(229,612
)
   
 
 
Net loans
 
$
327,082,420
   
316,785,118
 
   
 
 

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

Interest of $198,196, $475,190, and $586,156 was recognized on average impaired loans of $661,746, $3,165,567 and $5,929,505 for 2003, 2002, and 2001, respectively. Interest of $191,040, $262,402, and $339,220 was recognized on impaired loans on a cash basis during 2003, 2002, and 2001,
respectively.

Activity in the allowance for loan losses was as follows:
 
 
  
2003
2002
2001
   
 
 
 
Balance, beginning of year
 
$
2,649,872
   
2,697,389
   
2,519,946
 
Provision charged to expense
   
610,000
   
291,000
   
310,000
 
Losses charged off net of recoveries of $52,015 for
   
 
    
 
    
 
  
2003, $482 for 2002 and $0 for 2001
   
(484,552
)
 
(338,517
)
 
(132,557
)
   
 
 
 
Balance, end of year
 
$
2,775,320
   
2,649,872
   
2,697,389
 
   
 
 
 

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

The Bank serviced mortgage loans for others amounting to $116,183,857, $90,384,363, and $51,451,459 as of June 30, 2003, 2002, and 2001, respectively. The Bank serviced commercial loans for others amounting to $1,221,432, $4,877,246 and $976,594 as of June 30, 2003, 2002 and 2001, respectively.

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

NOTE 4:  PREMISES AND EQUIPMENT

Major classifications of premises and equipment, stated at cost, are as follows:
 
 
  
2003
2002
   
 
 
Land
 
$
1,250,789
   
1,250,789
 
Buildings and improvements
   
6,303,142
   
6,287,443
 
Furniture, fixtures and equipment
   
3,645,301
   
3,701,686
 
Leasehold improvements
   
204,069
   
204,069
 
   
 
 
 
    
11,403,301
   
11,443,987
 
Less accumulated depreciation
   
(4,694,305
)
 
(4,087,889
)
   
 
 
Net premises and equipment
 
$
6,708,996
   
7,356,098
 
   
 
 

Depreciation expense was $783,933, $1,020,070, and $622,855 for the years ended June 30, 2003, 2002, and 2001, respectively.

NOTE 5:  OTHER COMPREHENSIVE INCOME (LOSS)

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

 
  
2003
2002
2001
   
 
 
 
Unrealized gains (losses) on
   
 
    
 
    
 
  
available-for-sale securities
 
$
(1,535,831
)
 
(807,538
)
 
2,657,254
 
Less: Reclassification adjustment for
   
 
    
 
    
 
  
realized (gains) losses included in income
   
-
   
(780,742
)
 
(198,118
)
   
 
 
 
Other comprehensive income (loss), before tax effect
   
(1,535,831
)
 
(1,588,280
)
 
2,459,136
 
Tax expense (benefit)
   
(568,257
)
 
(587,664
)
 
909,880
 
   
 
 
 
Other comprehensive income (loss)
 
$
(967,574
)
 
(1,000,616
)
 
1,549,256
 
   
 
 
 


 
 
  30  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
NOTE 6:  DEPOSITS

 
  
June 30, 2003
June 30, 2002
   
 
 
    

Weighted Average Rate 

 

 
Balance

 

 
Percentage of Deposits

 

 
Weighted Average Rate

 

 
Balance

 

 
Percentage of Deposits
 
   
 
 
 
 
 
 
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Demand
   
0.00
%
$
24,650,393
   
10.5
%
 
0.00
%
 
11,656,950
   
5.2
%
NOW
   
0.31
%
 
32,806,352
   
13.2
%
 
0.79
%
 
29,386,101
   
13.0
%
Money market
   
1.31
%
 
37,511,932
   
15.9
%
 
2.07
%
 
34,889,127
   
15.5
%
Passbook savings
   
0.80
%
 
17,458,316
   
7.4
%
 
1.65
%
 
17,769,657
   
7.9
%
         
 
       
 
 
 
    
0.65
%
 
112,426,993
   
47.7
%
 
1.35
%
 
93,701,835
   
41.6
%
         
 
       
 
 
Certificates:
   
 
    
 
    
 
    
 
    
 
    
 
  
0% - 3.99%
   
2.40
%
 
81,797,903
   
34.7
%
 
2.84
%
 
60,129,356
   
26.7
%
4.00% - 5.99%
   
4.98
%
 
36,483,700
   
15.5
%
 
4.86
%
 
59,760,493
   
26.5
%
6.00% - 7.99%
   
6.44
%
 
4,968,601
   
2.1
%
 
6.39
%
 
11,692,310
   
5.2
%
         
 
       
 
 
 
    
3.33
%
 
123,250,204
   
52.3
%
 
4.07
%
 
131,582,159
   
58.4
%
         
 
       
 
 
Total Deposits
   
2.05
%
$
235,677,197
   
100.0
%
 
2.95
%
 
225,283,994
   
100.0
%
         
 
       
 
 

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

A summary of certificates of deposit by maturity as of June 30, 2003, is as follows:
 
Fiscal year ending:
   
 
  
June 30, 2004
 
$
76,058,653
 
June 30, 2005
   
21,800,481
 
June 30, 2006
   
9,463,112
 
June 30, 2007
   
7,758,566
 
June 30, 2008
   
5,344,429
 
Thereafter
   
2,824,963
 
   
 
 
  
$
123,250,204
 
   
 

A summary of interest expense on deposits is as follows:
 
  
2003
2002
2001
   
 
 
 
NOW and Money Market accounts
 
$
813,619
   
934,165
   
1,162,486
 
Savings accounts
   
221,264
   
241,553
   
198,793
 
Certificate accounts
   
4,792,812
   
5,860,915
   
5,383,870
 
Early withdrawal penalties
   
(25,250
)
 
(19,349
)
 
(26,619
)
   
 
 
 
 
  
$
5,802,445
   
7,017,284
   
6,718,530
 
   
 
 
 

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

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

NOTE 7:  FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank advances consist of the following:
 
 
  
June 30, 2003
June 30, 2002
   
 		  
Maturity Date
   
Amount

 

 
Weighted Average Rate

 

 
Amount

 

 
Weighted Average Rate
 
  
 
 
 
 
Fiscal Year 2003
 
$
-
   
-
   
13,333,600
   
4.20
%
Fiscal Year 2004
   
60,322,500
   
2.79
%
 
26,322,500
   
4.68
%
Fiscal Year 2005
   
7,350,000
   
4.86
%
 
5,350,000
   
5.95
%
Fiscal Year 2006
   
6,500,000
   
5.84
%
 
6,500,000
   
5.84
%
Fiscal Year 2007
   
3,000,000
   
5.34
%
 
3,000,000
   
5.34
%
Fiscal Year 2008
   
3,950,000
   
5.91
%
 
4,250,000
   
5.91
%
Thereafter
   
33,496,394
   
5.77
%
 
52,327,063
   
5.88
%
   
       
       
 
  
$
114,618,894
   
4.14
%
$
111,083,163
   
5.38
%
   
       
       

In the year ending June 30, 2004, the Bank has the option to prepay $15.9 million of FHLB advances with a remaining average life of 5.1 years and a weighted average rate of 5.84%. The current FHLB advance rate with a similar average life is 3.61%, a 223 basis point savings. Also in the year ending June 30, 2004, the Bank had advances equal to $11,000,000 with a weighted average rate of 5.40% callable between July 30, 2003 and October 20, 2003 at the FHLB’s option with a maturity date between July 30, 2008 and October 20, 2008.

The FHLB requires the Bank to maintain collateral equal to outstanding balances of advances. For collateral purposes, the FHLB values mortgage loans free of other pledges, liens and encumbrances at 80% of their fair value, and investment securities free of other pledges, liens and encumbrances at 95% of their fair value.

 
 
  32  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements

NOTE 8:  INCOME TAXES

The Company files a consolidated federal income tax return. In computing federal income taxes for taxable years prior to July 1, 1996, the Bank has been allowed an 8% deduction from otherwise taxable income as a statutory bad debt deduction, subject to limitations based on aggregate loans and savings balances. In August 1996 this statutory bad debt deduction was repealed and is no longer available for thrifts. In addition, bad debt reserves accumulated after 1987, which are presently included as a component of the net deferred tax liability, must be recaptured over a six-year period beginning in 1999. The amount of the deferred tax liability which must be recaptured is $56,000 and $112,000 as of June 30, 2003 and 2002, respectively.
 
As of June 30, 2003, and 2002, retained earnings included approximately $5,075,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $1,878,000 as of June 30, 2003 and 2002.

The provision for income taxes consists of:

 
  
2003
2002
2001
   
 
 
 
Taxes currently payable
 
$
1,810,815
   
1,680,799
   
1,694,605
 
Deferred income taxes
   
(154,815
)
 
211,201
   
48,395
 
   
 
 
 
 
  
$
1,656,000
   
1,892,000
   
1,743,000
 
   
 
 
 

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

 
  
2003
2002
   
 
 
Deferred tax assets:
   
 
    
 
  
Allowances for loan and foreclosed asset losses
 
$
1,026,868
   
980,453
 
Accrued compensated absences and bonuses
   
21,021
   
21,267
 
Unrealized loss on loans held for sale
   
9,752
   
18,526
 
RRP expense
   
116,325
   
136,541
 
Deferred loan fees/costs
   
78,174
   
84,956
 
State tax credits
   
117,658
   
-
 
Other
   
13,790
   
4,948
 
   
 
 
 
    
1,383,588
   
1,246,691
 
   
 
 
Deferred tax liabilities:
   
 
    
 
  
FHLB stock dividends
   
(206,867
)
 
(206,867
)
Tax bad debt reserves in excess of base year
   
(56,271
)
 
(112,543
)
Mortgage servicing rights
   
(261,471
)
 
(284,816
)
Unrealized appreciation on available-for-sale securities
   
(1,162,865
)
 
(1,731,122
)
Accumulated depreciation
   
(125,532
)
 
(112,630
)
Other
   
(79,867
)
 
(31,070
)
   
 
 
 
    
(1,892,873
)
 
(2,479,048
)
   
 
 
Net deferred tax liability
 
$
(509,285
)
 
(1,232,357
)
   
 
 

 
 
  33  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
A reconciliation of income tax expense at the statutory rate to income tax expense at the Company’s effective rate is shown below:
 
 
  
2003
2002
2001
   
 
 
 
Computed at statutory rate
   
34.0
%
 
34.0
%
 
34.0
%
Increase (reduction) in taxes resulting from:
   
 
    
 
    
 
  
State financial institution tax
   
-2.4
%
 
2.0
%
 
2.3
%
ESOP
   
1.0
%
 
-0.2
%
 
0.8
%
Other
   
-1.0
%
 
-1.3
%
 
-2.1
%
   
 
 
 
Actual tax provision
   
31.6
%
 
34.5
%
 
35.0
%
   
 
 
 

Missouri law provides that banks will be taxed based on an annual privilege tax of 7% of net income. The privilege tax is included in provision for income taxes.

Deferred tax liabilities decreased $568,257 for 2003, decreased $587,664 for 2002 and increased $909,880 for 2001, as the result of changes in unrealized appreciation on available-for-sale securities, shown in stockholders' equity.

NOTE 9:   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which method 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.
 
 
  
June 30, 2003
June 30, 2002
   
 
 
 
    
Carrying Amount  

 

 
Fair Value

 

 
Carrying Amount

 

 
Fair Value
 
   
 
 
 
 
Financial assets:
   
 
    
 
    
 
    
 
  
Cash and cash equivalents
 
$
19,014,528
   
19,014,528
 
$
16,963,502
   
16,963,502
 
Available-for-sale securities
   
13,271,147
   
13,271,147
   
16,463,460
   
16,463,460
 
Held-to-maturity securities
   
2,250,894
   
2,401,387
   
3,219,091
   
3,421,746
 
Mortgage loans held-for-sale
   
9,755,102
   
9,755,102
   
3,131,138
   
3,131,138
 
Loans, net
   
327,082,420
   
331,370,000
   
316,785,118
   
316,895,000
 
Federal Home Loan Bank stock
   
8,600,400
   
8,600,400
   
8,600,400
   
8,600,400
 
Interest receivable
   
1,430,125
   
1,430,125
   
1,654,511
   
1,654,511
 
Financial liabilities:
   
 
    
 
    
 
    
 
  
Deposits
   
235,677,197
   
237,602,000
   
225,283,994
   
225,475,675
 
Federal Home Loan Bank advances
   
114,618,894
   
116,470,000
   
111,083,163
   
117,481,000
 
Securities sold under agreements
   
 
    
 
    
 
    
 
  
to repurchase
   
702,024
   
702,024
   
1,093,074
   
1,093,074
 
Interest payable
   
203,237
   
203,237
   
759,099
   
759,099
 
Dividend payable
   
415,414
   
415,414
   
347,656
   
347,656
 
Unrecognized financial instruments
   
 
    
 
    
 
    
 
  
(net of contractual value):
   
 
    
 
    
 
    
 
  
Commitments to extend credit
   
-
   
-
   
-
   
-
 
Unused lines of credit
   
-
   
-
   
-
   
-
 

 
 
  34  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents and Federal Home Loan Bank Stock
The carrying amounts reported in the balance sheets for cash and cash equivalents approximate those assets' fair value.

Investment Securities
Fair values for investment securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities.

Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair value.

Mortgage Loans Held for Sale
Fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics are aggregated for purposes of the calculations.

Deposits
The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
 
Federal Home Loan Bank Advances
Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing advances.

Securities Sold under Agreements to Repurchase
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Accrued Interest and Dividend Payable
The carrying amounts of accrued interest payable and dividend payable approximates their fair value.

Commitments to Extend Credit, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

NOTE 10:  SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.
 
 
  35  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements


NOTE 11:  EMPLOYEE BENEFIT PLANS

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

At the annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders approved the Recognition and Retention Plan (the "RRP"). Following approval of the Plan, the Bank contributed $464,643 to a separate trust to purchase the 75,106 shares of the Company’s common stock in the RRP. As of June 30, 2003, there are 1,119 shares in this plan that are not vested.

At a special stockholders’ meeting on July 22, 1998, the Company’s stockholders approved the Restricted Stock Plan (the "RSP"). Following approval of the Plan, the Company contributed $2,373,065 to a separate trust to purchase the 173,632 shares in the RSP. As of June 30, 2003 there are 25,346 shares in this plan that are not vested.

During the year ended June 30, 2000, the directors of the Company established the Stock Compensation Plan (the "2000 SCP") with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 7,125 shares of the Company’s common stock. Following approval of the Plan, the Company contributed $85,945 to a separate trust to purchase the 7,125 shares in the SCP. As of June 30, 2003 there are 2,850 shares in this plan that are not vested.

During the year ended June 30, 2001, the directors of the Company established the Stock Compensation Plan (the "2001 SCP") with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 10,239 shares of the Company’s common stock. The shares for this plan were taken from forfeited shares in the RSP. As of June 30, 2003 there are 8,190 shares in this plan that are not vested.

The Bank recognized $353,004, $401,403 and $464,032 of expense under these stock award plans in the years ended June 30, 2003, 2002, and 2001 respectively.

Stock Option Plans
The Company has established four stock option plans for the benefit of certain directors, officers and employees of the Bank and its subsidiary. A committee of the Company’s Board of Directors administers the plans. The stock options under these plans may be either incentive stock options or nonqualified stock options. Incentive stock options can be granted only to participants who are employees of the Bank or its subsidiary. The option price must not be less than the market value of the Company stock on the date of grant. All options expire no later than ten years from the date of grant. The options vest at the rate of 20% per year over a five-year period.

At the annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders approved the 1994 Stock Option and Incentive Plan for the benefit of certain directors, officers and employees of the Bank and its subsidiary. Under this Plan, the Committee may grant stock options for up to 187,764 shares of the Company’s common stock.

At a special stockholders’ meeting on July 22, 1998, the Company’s stockholders approved the 1998 Stock Option and Incentive Plan. Under this plan, the Committee may grant stock options for up to 434,081 shares of the Company’s common stock.
 
 
ODY>
 
  36  
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
 
Under the stock option component of the 2000 SCP, the Committee granted nonqualified stock options for 17,875 shares of the Company’s common stock.

Under the stock option component of the 2001 SCP, the Committee had granted no nonqualified stock options as of June 30, 2003.

The table below summarizes transactions under the Company’s stock option plans:
 
 
  
Number of shares
 
   
     
 
  

 Incentive Stock Option 

  

 Non-Qualified Options to Directors

 

 Weighted Average Exercise Price

 
   
 
 
 
 
    
 
    
 
    
 
  
Balance outstanding as of July 1, 2000
   
430,375
   
156,589
   
11.83
 
Granted, in FY 2001
   
26,000
   
-
   
12.06
 
Exercised, in FY 2001
   
(18,357
)
 
-
   
6.02
 
Forfeited, in FY 2001
   
(29,821
)
 
(23,402
)
 
13.12
 
   
 
       
Balance outstanding as of June 30, 2001
   
408,197
   
133,187
   
11.92
 
Granted, in FY 2002
   
15,000
   
25,533
   
13.01
 
Exercised, in FY 2002
   
(97,010
)
 
-
   
9.53
 
Forfeited, in FY 2002
   
(54,850
)
 
-
   
13.24
 
   
 
       
Balance outstanding as of June 30, 2002
   
271,337
   
158,720
   
12.39
 
Granted, in FY 2003
   
10,000
   
-
   
15.31
 
Exercised, in FY 2003
   
(19,698
)
 
(31,746
)
 
10.82
 
Forfeited, in FY 2003
   
(4,277
)
 
(13,360
)
 
12.47
 
   
 
       
Balance outstanding as of June 30, 2003
   
257,362
   
113,614
   
12.68
 
   
 
       
Options exercisable as of June 30, 2003
   
186,421
   
72,001
   
12.49
 
   
 
       
 
    
 
    
 
    
 
  

The fair value of each option granted is estimated on the date of the grant using the Black-Scholes pricing model with the following weighted-average assumptions:
 
 
  
June 30, 2003
June 30, 2002
June 30, 2001
   
 
 
 
Dividends per share
 
$
0.68
 
$
0.50
 
$
0.47
 
Risk-free interest rate
   
3.00
%
 
4.54
%
 
5.24
%
Expected life of options
   
5 years
   
5 years
   
5 years
 
Weighted-average fair value of options granted during year
 
$
0.57
 
$
1.77
 
$
2.09
 
 
 
 
  37  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements

 
The following table summarizes information about stock options under the plans outstanding as of June 30, 2003:
 
Exercise Price
 
Number Outstanding
 
Number Exercisable
 
Remaining Contractual Life

 

 

 
$                5.83
 
3,823
 
3,823
 
3.5 years
6.02
 
16,249
 
16,249
 
2.5 years
6.08
 
6,547
 
6,547
 
3.0 years
9.94
 
1,600
 
-
 
6.8 years
10.25
 
4,000
 
2,400
 
6.6 years
10.50
 
17,875
 
10,725
 
6.6 years
11.05
 
2,000
 
800
 
8.0 years
12.13
 
3,000
 
1,200
 
7.7 years
12.50
 
25,533
 
5,107
 
8.1 years
12.75
 
8,000
 
3,200
 
7.6 years
13.44
 
257,349
 
205,371
 
5.1 years
13.89
 
15,000
 
3,000
 
8.6 years
15.31
 
10,000
 
-
 
9.6 years

Employee Stock Ownership Plan
The Bank sponsors an internally-leveraged Employee Stock Ownership Plan (ESOP). All employees are eligible to participate after they attain age twenty-one and complete twelve consecutive months of service during which they work at least 1,000 hours. The ESOP borrowed $3,444,540 from the Company and purchased 344,454 shares of the common stock of the Company. The ESOP debt is secured by shares of the Company. The loan will be repaid from contributions to the ESOP as approved annually by the Bank’s Board of Directors. As the debt is repaid, shares are released from collateral and allocated to employees’ accounts. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. When shares are committed for release, the shares become outstanding for earnin gs per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings and may be paid directly to participants or credited to their account; dividends are not paid on unallocated ESOP shares. Compensation expense is recognized ratably based on the average fair value of shares committed to be released. Compensation expense attributed to the ESOP was $373,724, $319,275, and $268,624 for the years ended June 30, 2003, 2002,and 2001 respectively.

The following is a summary of ESOP shares as of June 30, 2003:

Beginning ESOP shares
   
344,454
 
Released shares
   
(116,347
)
Shares committed for release
   
(12,414
)
   
 
Unreleased shares
   
215,693
 
   
 
 
    
 
  
Fair value of unreleased shares
 
$
3,459,716
 
   
 

 
 
  38  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements

 
NOTE 12:  RELATED PARTY TRANSACTIONS

Certain directors and executive officers of the Company and the Bank were customers of and had transactions with the Bank in the ordinary course of business. As of June 30, 2003 and 2002, loans outstanding to these directors and executive officers amounted to $463,323 and $302,518, respectively.

In management's opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

NOTE 13:  COMMITMENTS AND CREDIT RISK

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate.

As of June 30, 2003 and 2002, the Bank had outstanding commitments to originate loans of approximately $23,835,000 and $9,485,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period. As of June 30, 2003 and 2002, commitments of $16,397,000 and $3,910,000, respectively, were at fixed rates and $7,438,000 and $5,575,000, respectively, were at floating market rates.

Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified date. The Bank acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. As of June 30, 2003 and 2002 the Bank had approximately $13,551,000 and $4,793,000, respectively, of commitments outstanding.

Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

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

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer's credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on balance sheet instruments.

 
 
  39  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
 
As of June 30, 2003, unused lines of credit to borrowers aggregated approximately $17,955,000 for commercial lines and $13,397,000 for open-end consumer lines. As of June 30, 2002, unused lines of credit to borrowers aggregated approximately $12,472,000 for commercial lines and $11,205,000 for open-end consumer lines.

NOTE 14:  CONDENSED PARENT COMPANY STATEMENTS

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

Balance Sheets
 
As of June 30,
   
 
    
2003

 

 
2002
 
   
 
 
Assets
   
 
    
 
  
Cash
 
$
465,350
   
362,187
 
Due from subsidiary
   
9,405
   
17,484
 
Investment in subsidiary
   
36,019,229
   
34,620,317
 
Loans receivable, net
   
-
   
290,580
 
Accrued interest receivable
   
-
   
3,377
 
Prepaid expenses and other assets
   
437,385
   
418,441
 
Refundable income taxes
   
37,195
   
116,209
 
   
 
 
 
  
$
36,968,564
   
35,828,595
 
   
 
 
Liabilities
   
 
    
 
  
Accrued expenses and other liabilities
 
$
11,338
   
46,062
 
Due to holding company
   
-
   
-
 
Deferred income taxes
   
-
   
-
 
Dividend payable
   
415,414
   
347,656
 
Stockholders' equity
   
 
    
 
  
Common stock
   
641,685
   
636,540
 
Additional paid-in capital
   
51,065,581
   
49,842,032
 
Unearned ESOP shares
   
(2,156,930
)
 
(2,406,070
)
Retained earnings
   
29,280,784
   
27,372,935
 
Unrealized appreciation on available-for-sale securities, net
   
1,980,013
   
2,947,587
 
Treasury stock
   
(44,269,321
)
 
(42,958,147
)
   
 
 
 
  
$
36,968,564
   
35,828,595
 
   
 
 

 
 
  40  
 
 
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements

 
 

Income Statements
 
For the years ended
   
 
 
    

June 30, 2003 

    
June 30, 2002

 

 
June 30, 2001
 
   
 
 
 
Income
   
 
    
 
    
 
  
Dividends from subsidiary bank
 
$
1,750,468
   
17,310,694
   
11,260,000
 
Interest income:
   
 
    
 
    
 
  
Related party
   
121,542
   
163,665
   
268,602
 
Other
   
-
   
21,001
   
79,617
 
Other
   
-
   
66,138
   
8,584
 
   
 
 
 
 
    
1,872,010
   
17,561,498
   
11,616,803
 
   
 
 
 
Expense
   
 
    
 
    
 
  
Occupancy
   
2,400
   
2,400
   
2,400
 
Other
   
190,491
   
401,242
   
170,940
 
   
 
 
 
 
    
192,891
   
403,642
   
173,340
 
   
 
 
 
Income before income taxes and equity in
   
 
    
 
    
 
  
undistributed earnings of subsidiary
   
1,679,119
   
17,157,856
   
11,443,463
 
Provision (credit) for income taxes
   
(26,487
)
 
(56,739
)
 
68,108
 
   
 
 
 
Income before equity
   
 
    
 
    
 
  
in undistributed earnings of subsidiary
   
1,705,606
   
17,214,595
   
11,375,355
 
Equity in undistributed earnings of subsidiary
   
1,874,043
   
(13,621,613
)
 
(8,142,382
)
   
 
 
 
Net income
 
$
3,579,649
   
3,592,982
   
3,232,973
 
   
 
 
 

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

 

Statements of Cash Flows
 
For the years ended
   
 
    

June 30, 2003 

 

 
June 30, 2002

 

 
June 30, 2001
 
   
 
 
 
Cash Flows From Operating Activities
   
 
    
 
    
 
  
 
    
 
    
 
    
 
  
Net income
 
$
3,579,649
   
3,592,982
   
3,232,973
 
Items not requiring (providing) cash:
   
 
    
 
    
 
  
Equity in undistributed earnings of subsidiary
   
(1,874,043
)
 
-
   
-
 
Gain on sale of available-for-sale securities
   
-
   
(66,138
)
 
(8,574
)
Release of ESOP shares
   
249,140
   
234,730
   
229,640
 
Changes in:
   
 
    
 
    
 
  
Accrued interest receivable
   
3,377
   
(3,377
)
 
-
 
Prepaid expenses and other assets
   
(18,944
)
 
(67,506
)
 
(75,541
)
Income taxes payable/refundable
   
79,014
   
(67,194
)
 
(4,794
)
Accrued expenses
   
(34,724
)
 
50,642
   
(47,853
)
   
 
 
 
Net cash provided by operating activities
   
1,983,469
   
3,674,139
   
3,325,851
 
   
 
 
 
 
    
 
    
 
    
 
  
Cash Flows From Investing Activities
   
 
    
 
    
 
  
Investment in subsidiary
   
 
    
 
    
 
  
Loan to ESOP
   
-
   
-
   
-
 
Purchase of loans
   
-
   
(291,402
)
 
-
 
Net collections of loans
   
-
   
822
   
-
 
Purchase of land
   
-
   
-
   
-
 
Proceeds from sale of loans
   
290,580
   
-
   
-
 
Proceeds from sale of available-for-sale securities
   
-
   
719,476
   
395,253
 
Purchase of available-for-sale securities
   
-
   
-
   
(102,012
)
Net (increase) decrease in advance to subsidiary
   
8,079
   
(4,442
)
 
8,635
 
Distribution in excess of net income of subsidiary
   
-
   
13,621,613
   
8,142,382
 
   
 
 
 
Net cash provided by investing activities
   
298,659
   
14,046,067
   
8,444,258
 
   
 
 
 
 
    
 
    
 
    
 
  
Cash Flows From Financing Activities
   
 
    
 
    
 
  
Proceeds from sale of common stock, net
   
-
   
-
   
-
 
Stock options exercised
   
556,869
   
924,677
   
110,510
 
Cash dividends received on RRP shares
   
-
   
-
   
-
 
Cash dividends paid
   
(1,604,042
)
 
(1,823,928
)
 
(1,936,401
)
Treasury stock purchased
   
(1,131,792
)
 
(16,826,643
)
 
(9,986,737
)
   
 
 
 
Net cash used in financing activities
   
(2,178,965
)
 
(17,725,894
)
 
(11,812,628
)
   
 
 
 
 
    
 
    
 
    
 
  
Increase (decrease) in cash
   
103,163
   
(5,688
)
 
(42,519
)
 
    
 
    
 
    
 
  
Cash, beginning of year
   
362,187
   
367,875
   
410,394
 
   
 
 
 
 
    
 
    
 
    
 
  
Cash, end of year
 
$
465,350
   
362,187
   
367,875
 
   
 
 
 
 

 
  42  
 
 
 

Independent Accountants’ Report



Board of Directors
Guaranty Federal Bancshares, Inc.
Springfield, Missouri


We have audited the accompanying balance sheets of Guaranty Federal Bancshares, Inc. as of June 30, 2003 and 2002, and the related statements of income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Guaranty Federal Bancshares, Inc. as of June 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ BKD, LLP
July 24, 2003
Springfield, Missouri




 
  43  
 
 
 EX-23 4 ex23.htm CONSENT BKD, LLP Consent BKD, LLP

Exhibit 23

 

Consent of Independent Accountants



Board of Directors
Guaranty Federal Bancshares, Inc.
Springfield, Missouri


We consent to the incorporation by reference in Registration Statement Nos. 333-47241, 333-31196, 333-65544 and 333-83822 on Forms S-8 of Guaranty Federal Bancshares, Inc. of our report dated July 24, 2003, relating to the consolidated balance sheets of Guaranty Federal Bancshares, Inc. as of June 30, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2003, which report appears in the Annual Report on Form 10-K of Guaranty Federal Bancshares, Inc. for the year ended June 30, 2003.

/s/ BKD, LLP
September 25, 2003
Springfield, Missouri
EX-31.1 5 ex31-1.htm CERTIFICATION 302 Certification 302

Exhibit 31.1

Certification of the Principal Executive Officer
(Section 302 of the Sarbanes-Oxley Act of 2002)
 
I, Don M. Gibson, certify that:

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

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

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

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

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

b) [Reserved – not effective]

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
     
 
 		  
 		  
 
Date: September 26, 2003   /s/ Don M. Gibson
 
 

Don M. Gibson
President and Chief Executive Officer
(Principal Executive Officer)


 
     
 
 
 EX-31.2 6 ex31-2.htm CERTIFICATION 302 Certification 302
Exhibit 31.2

Certification of the Principal Financial Officer
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Bruce Winston, certify that:

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

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

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

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

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

b) [Reserved – not effective]

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
     
 
 		  
 		  
 
Date: September 26, 2003   /s/ Bruce Winston
 
  Bruce Winston
Chief Financial Officer

 
     
 
 
 EX-32.1 7 ex32-1.htm CERTIFICATION 906 Certification 906

Exhibit 32.1

CEO CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
 
In connection with the Annual Report of Guaranty Federal Bancshares, Inc. (the "Company") on Form 10--K for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Don M. Gibson, Chief Executive Officer (principal executive officer) of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes--Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ Don M. Gibson
Don M Gibson
Chief Executive Officer
(Principal Executive Officer)

September 26, 2003

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
 
     
 
 
 EX-32.2 8 ex32-2.htm CERTIFICATION 906 Certification 906
Exhibit 32.2
 
CFO CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*

In connection with the Annual Report of Guaranty Federal Bancshares, Inc. (the "Company") on Form 10--K for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce Winston, Chief Financial Officer (principal financial officer) of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes--Oxley Act of 2002, that:
 
(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ Bruce Winston
 
Bruce Winston
Chief Financial Officer
(Principal Financial Officer)
 
September 26, 2003

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
 
     
 
 
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