form10-q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

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

For the quarter ended March 31, 2007

OR

£ 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
(IRS Employer Identification No.)
incorporation or organization)
  
   
1341 West Battlefield
  
Springfield, Missouri
65807
(Address of principal executive offices)
(Zip Code)

Telephone Number:  (417) 520-4333

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by 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 S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer £Accelerated filer £ Non-accelerated filer S

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act. Yes £ No S

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

Class
Outstanding as of May 15, 2007
Common Stock, Par Value $0.10 per share
2,888,038 Shares
 
 
 
GUARANTY FEDERAL BANCSHARES, INC.

TABLE OF CONTENTS

   
Page
     
 
Consolidated Financial Statements (Unaudited):
  
 
3
 
4
 
5
 
7
 
8
     
10
     
15
     
17
     
     
19
     
19
     
19
     
19
     
19
     
19
     
19
     
 
 
 
PART I
Item 1. Financial Statements
GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2007 (UNAUDITED) AND DECEMBER 31, 2006

ASSETS
  
3/31/07
    
12/31/06
  
Cash
   $
9,623,205
      
10,684,831
  
Interest-bearing deposits in other financial institutions
    
5,511,468
      
4,195,770
  
Cash and cash equivalents
    
15,134,673
      
14,880,601
  
Available-for-sale securities
    
7,395,561
      
7,906,321
  
Held-to-maturity securities
    
732,245
      
763,025
  
Stock in Federal Home Loan Bank, at cost
    
3,546,043
      
5,382,700
  
Mortgage loans held for sale
    
3,255,850
      
3,004,635
  
Loans receivable, net of allowance for loan losses of March 31, 2007 - $5,604,275 - December 31, 2006 - $5,783,477
    
466,621,510
      
477,264,522
  
Accrued interest receivable:
                
Loans
    
2,784,333
      
2,830,811
  
Investments
    
76,442
      
79,498
  
Prepaid expenses and other assets
    
2,865,709
      
2,955,483
  
Foreclosed assets held for sale
    
1,664,703
      
172,637
  
Premises and equipment
    
7,771,839
      
7,867,809
  
Income taxes receivable
    
20,857
      
774,469
  
Deferred income taxes
    
1,033,813
      
962,484
  
    $
512,903,578
      
524,844,995
  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
LIABILITIES
                
Deposits
   $
381,527,110
      
352,229,636
  
Federal Home Loan Bank advances
    
65,586,000
      
108,000,000
  
Securities sold under agreements to repurchase
    
1,723,501
      
1,703,221
  
Subordinated debentures
    
15,465,000
      
15,465,000
  
Advances from borrowers for taxes and insurance
    
338,524
      
222,869
  
Accrued expenses and other liabilities
    
473,366
      
441,890
  
Accrued interest payable
    
1,442,263
      
1,414,946
  
Dividend payable
    
468,609
      
468,190
  
     
467,024,373
      
479,945,752
  
STOCKHOLDERS' EQUITY
                
Common Stock:
                
$0.10 par value; authorized 10,000,000 shares; issued March 31, 2007 - 6,702,471 shares; December 31, 2006 - 6,653,527 shares
    
670,247
      
665,353
  
Additional paid-in capital
    
56,652,231
      
55,730,352
  
Unearned ESOP shares
     (1,287,930 )     (1,344,930 )
Retained earnings, substantially restricted
    
42,467,691
      
41,183,006
  
Accumulated other comprehensive income: Unrealized appreciation on available-for-sale securities, net of income taxes
    
1,231,371
      
1,534,548
  
     
99,733,610
      
97,768,329
  
                 
Treasury stock, at cost; March 31, 2007 - 3,797,976 shares; December 31, 2006 - 3,764,367 shares
     (53,854,405 )     (52,869,086 )
     
45,879,205
      
44,899,243
  
    $
512,903,578
      
524,844,995
  
 
See Notes to Condensed Consolidated Financial Statements
 
 
GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE  MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED)

   
3/31/2007
    
3/31/2006
  
INTEREST INCOME
            
Loans
   $
9,343,445
      
7,884,788
  
Investment securities
    
97,241
      
102,007
  
Other
    
81,185
      
91,120
  
     
9,521,871
      
8,077,915
  
INTEREST EXPENSE
                
Deposits
    
3,505,416
      
2,269,292
  
Federal Home Loan Bank advances
    
1,175,193
      
1,223,422
  
Other
    
265,878
      
276,709
  
     
4,946,487
      
3,769,423
  
NET INTEREST INCOME
    
4,575,384
      
4,308,492
  
PROVISION FOR LOAN LOSSES
    
210,000
      
225,000
  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
4,365,384
      
4,083,492
  
NONINTEREST INCOME
                
Service charges
    
552,482
      
312,255
  
Late charges and other fees
    
60,953
      
91,481
  
Gain on sale of investment securities
    
192,616
      
198,424
  
Gain on sale of loans
    
292,697
      
119,573
  
Income (loss) on foreclosed assets
     (2,295 )    
68
  
Other income
    
168,977
      
100,019
  
     
1,265,430
      
821,820
  
                 
NONINTEREST EXPENSE
                
Salaries and employee benefits
    
1,742,884
      
1,443,090
  
Occupancy
    
411,753
      
317,315
  
SAIF deposit insurance premiums
    
9,665
      
10,322
  
Data processing
    
97,703
      
55,137
  
Advertising
    
99,999
      
101,735
  
Other expense
    
512,544
      
439,795
  
     
2,874,548
      
2,367,394
  
INCOME BEFORE INCOME TAXES
    
2,756,266
      
2,537,918
  
PROVISION FOR INCOME TAXES
    
1,002,726
      
973,593
  
NET INCOME
   $
1,753,540
      
1,564,325
  
                 
BASIC EARNINGS PER SHARE
   $
0.63
      
0.56
  
DILUTED EARNINGS PER SHARE
   $
0.62
      
0.54
  
 
See Notes to Condensed Consolidated Financial Statements
 
 
GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH  31, 2007 (UNAUDITED)

   
Common
Stock
    
Additional
Paid-In
Capital
    
Unearned
ESOP Shares
    
Treasury
Stock
    
Retained
Earnings
    
Accumulated Other
Comprehensive
Income
    
Total
  
Balance, January 1, 2007
   $
665,353
      
55,730,352
       (1,344,930 )     (52,869,086 )    
41,183,006
      
1,534,548
      
44,899,243
  
Comprehensive income
                                                        
Net income
    
-
      
-
      
-
      
-
      
1,753,540
      
-
      
1,753,540
  
Change in unrealized appreciation on available-for-sale securities, net of income taxes
    
-
      
-
      
-
      
-
      
-
       (303,177 )     (303,177 )
Total comprehensive income
                                                    
1,450,363
  
Dividends ($0.17 per share)
    
-
      
-
      
-
      
-
       (468,855 )    
-
       (468,855 )
Stock award plans
    
-
      
13,119
      
-
      
-
      
-
      
-
      
13,119
  
Stock options exercised
    
4,894
      
799,356
      
-
      
-
      
-
      
-
      
804,250
  
Release of ESOP shares
    
-
      
109,404
      
57,000
      
-
      
-
      
-
      
166,404
  
Treasury stock purchased
    
-
      
-
      
-
       (985,319 )    
-
      
-
       (985,319 )
Balance, March 31, 2007
   $
670,247
      
56,652,231
       (1,287,930 )     (53,854,405 )    
42,467,691
      
1,231,371
      
45,879,205
  
 
See Notes to Condensed Consolidated Financial Statements
 
 
GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH  31, 2006 (UNAUDITED)

   
Common
Stock
    
Additional
Paid-In
Capital
    
Unearned
ESOP Shares
    
Treasury
Stock
    
Retained
Earnings
    
Accumulated Other
Comprehensive
Income
    
Total
  
Balance, January 1, 2006
   $
657,135
      
53,778,686
       (1,572,930 )     (49,276,005 )    
36,533,338
      
1,971,925
      
42,092,149
  
Comprehensive income
                                                        
Net income
    
-
      
-
      
-
      
-
      
1,564,325
      
-
      
1,564,325
  
Change in unrealized appreciation on available-for-sale securities, net of income taxes of ($314,887)
    
-
      
-
      
-
      
-
      
-
       (251,767 )     (251,767 )
Total comprehensive income
                                                    
1,312,558
  
Dividends ($0.165 per share)
    
-
      
-
      
-
      
-
       (461,397 )    
-
       (461,397 )
Stock award plans
    
-
      
24,878
      
-
      
-
      
-
      
-
      
24,878
  
Stock options exercised
    
5,354
      
980,081
      
-
      
-
      
-
      
-
      
985,435
  
Release of ESOP shares
    
-
      
106,129
      
57,000
      
-
      
-
      
-
      
163,129
  
Treasury stock purchased
    
-
      
-
      
-
       (786,757 )    
-
      
-
       (786,757 )
Balance, March 31, 2006
   $
662,489
      
54,889,774
       (1,515,930 )     (50,062,762 )    
37,636,266
      
1,720,158
      
43,329,995
  
 
See Notes to Condensed Consolidated Financial Statements
 

GUARANTY FEDERAL  BANCSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED)

   
3/31/2007
    
3/31/2006
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net income
   $
1,753,540
      
1,564,325
  
Items not requiring (providing) cash:
                
Deferred income taxes
    
106,728
       (165,001 )
Depreciation
    
218,551
      
155,042
  
Provision for loan losses
    
210,000
      
225,000
  
Gain on loans and investment securities
     (485,313 )     (317,997 )
Gain on sale of foreclosed assets
     (2,878 )     (1,023 )
Gain on sale of premises and equipment
    
-
       (90 )
Amortization of deferred income, premiums and discounts
    
31,635
      
74,555
  
Stock award plan expense
    
13,119
      
24,878
  
Origination of loans held for sale
     (16,874,472 )     (11,064,539 )
Proceeds from sale of loans held for sale
    
16,915,954
      
10,742,866
  
Release of ESOP shares
    
166,404
      
163,129
  
Changes in:
                
Accrued interest receivable
    
49,534
      
83,569
  
Prepaid expenses and other assets
    
89,775
       (113,560 )
Accounts payable and accrued expenses
    
58,793
      
341,489
  
Income taxes receivable
    
753,612
      
549,849
  
Net cash provided by operating activities
    
3,004,982
      
2,262,492
  
CASH FLOWS FROM INVESTING ACTIVITIES
                
Net decrease (increase) in loans
    
8,909,311
       (5,021,320 )
Principal payments on available-for-sale securities
    
34,405
      
16,107
  
Principal payments on held-to-maturity securities
    
30,780
      
41,405
  
Proceeds from maturities of available-for-sale securities
    
-
      
500,000
  
Purchase of premises and equipment
     (122,581 )     (213,877 )
Purchase of available-for-sale securities
     (500,000 )     (3,780,316 )
Proceeds from sale of available-for-sale securities
    
687,737
      
201,361
  
Redemption (purchase) of FHLB stock
    
1,836,657
       (356,000 )
Proceeds from sale of premises and equipment
    
-
      
4,540
  
Proceeds from sale of foreclosed assets
    
2,878
      
21,298
  
Net cash provided by (used in) investing activities
    
10,879,187
       (8,586,802 )
CASH FLOWS FROM FINANCING ACTIVITIES
                
Stock options exercised
    
804,250
      
985,435
  
Cash dividends paid
     (468,437 )     (458,726 )
Net increase (decrease) in demand deposits, NOW accounts and savings accounts
    
23,540,327
       (13,849,478 )
Net increase in certificates of deposit and securities sold under agreements to repurchase
    
5,777,427
      
9,028,130
  
Proceeds from FHLB advances
    
476,476,300
      
390,414,000
  
Repayments of FHLB advances
     (518,890,300 )     (389,414,000 )
Advances from borrowers for taxes and insurance
    
115,655
      
222,714
  
Treasury stock purchased
     (985,319 )     (786,757 )
Net cash used in financing activities
     (13,630,097 )     (3,858,682 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
254,072
       (10,182,992 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
14,880,601
      
20,506,478
  
CASH AND CASH EQUIVALENTS, END OF PERIOD
   $
15,134,673
      
10,323,486
  
 
See Notes to Condensed Consolidated Financial Statements
 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1:  Basis of Presentation

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

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

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2006 filed with the Securities and Exchange Commission.  The condensed consolidated statement of financial condition of the Company as of December 31, 2006, has been derived from the audited consolidated balance sheet of the Company as of that date.  Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

Note 2:  Principles of Consolidation

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

Note 3:  Benefit Plans

The Company has stock-based employee compensation plans, which are described fully in the Company’s December 31, 2006 Annual Report on Form 10-K.

The table below summarizes transactions under the Company’s stock option plans for three months ended March 31, 2007:

   
Number of shares
        
   
Incentive
Stock
Option
    
Non-
Incentive
Stock
Option
    
Weighted
Average
Exercise
Price
  
                   
Balance outstanding as of January 1, 2007
    
155,491
      
115,206
      
17.30
  
Granted
    
13,500
      
-
      
28.43
  
Exercised
     (32,944 )     (16,000 )    
13.52
  
Forfeited
    
-
      
-
      
-
  
Balance outstanding as of March 31, 2007
    
136,047
      
99,206
      
18.21
  
Options exercisable as of March 31, 2007
    
77,250
      
67,206
      
14.97
  
 
 
In December, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminated the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and, as such, results for prior periods have not been restated. Stock-based compensation expense is recognized for all stock options granted or modified after January 1, 2006.  In addition, unvested options existing at January 1, 2006, are recognized in expense over the remaining vesting period.  The fair value of all stock options has been estimated using the Black-Scholes option pricing model using various assumptions, some of which are highly subjective.
 
Stock-based compensation expense recognized for the three months ended March 31, 2007 and 2006 was $13,119 and $16,868, respectively. As of March 31, 2007, there was $197,016 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period.

Note 4: Earnings Per Share

   
For three months ended March 31, 2007
  
   
Income Available
to Stockholders
    
Average Shares
Outstanding
    
Per-share
  
Basic Earnings per Share
   $
1,753,540
      
2,760,860
      
0.63
  
Effect of Dilutive Securities: Stock Options
            
75,319
          
Diluted Earnings per Share
   $
1,753,540
      
2,836,179
      
0.62
  

   
For three months ended March 31, 2006
  
   
Income Available
to Stockholders
    
Average Shares
Outstanding
    
Per-share
  
Basic Earnings per Share
   $
1,564,325
      
2,789,500
      
0.56
  
Effect of Dilutive Securities: Stock Options
            
118,108
          
Diluted Earnings per Share
   $
1,564,325
      
2,907,608
      
0.54
  

Note 5: Other Comprehensive Income

   
3/31/2007
    
3/31/2006
  
Unrealized losses on
   $ (673,850 )     (630,930 )
available-for-sale securities
                
Less: Reclassification adjustment for
                
realized gains included in income
     (192,616 )     (198,424 )
Other comprehensive loss, before tax effect
     (481,234 )     (432,506 )
Tax benefit
     (178,057 )     (180,739 )
Other Comprehensive Loss
   $ (303,177 )     (251,767 )
 
 
Note 6: Change in Accounting Principle

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 - Accounting for Income Taxes. This interpretation addresses accounting for tax uncertainties that arise when a position that an entity takes on its tax return may be different from the position that the taxing authority may take, and provides guidance about the accounting for tax benefits associated with uncertain tax positions, classification of a liability recognized for those positions, and interim reporting considerations. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit. The provisions of FIN 48 were effective as of January 1, 2007, with any cumulative effect of the change in accounting principle recorded as an adjustment to retained earnings. The adoption of this standard did not have a material impact on the consolidated financial condition or results of operations of the Company.  The Company’s federal and state income tax returns are open and subject to examinations from the 2004 tax year and forward.
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
The primary function of the Company has been to monitor its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities.  The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses.  The following discussion reviews the Company’s financial condition as of March 31, 2007, and the results of operations for the three months ended March 31, 2007 and 2006.

The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q.  When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Such statements are subject to risks and uncertainties.  Actual results of the Company’s operations could materially differ from those forward-looking comments.  The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time, including the risk factors described under Item 1A. of the Company’s Form 10-K for the fiscal year ended December 31, 2006.
 
Financial Condition

The Company’s total assets decreased $11,941,417 from $524,844,995 as of December 31, 2006, to $512,903,578 as of March 31, 2007.

Cash and cash equivalents increased $254,072 (2%) from $14,880,601 as of December 31, 2006, to $15,134,673 as of March 31, 2007.

Securities available-for-sale decreased $510,760 (6%) from $7,906,321 as of December 31, 2006, to $7,395,561 as of March 31, 2007.  The Bank currently holds 33,600 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $32,910 in the available-for-sale category.  As of March 31, 2007, the gross unrealized gain on the FHLMC stock was $1,965,954, a decrease from $2,449,293 as of December 31, 2006.

Securities held-to-maturity decreased primarily due to principal repayments by $30,780 (4%) from $763,025 as of December 31, 2006, to $732,245 as of March 31, 2007.

Stock in Federal Home Loan Bank of Des Moines (“FHLB”) decreased by $1,836,657 (34%), due to the redemption of such stock to continue to maintain a level to meet FHLB advance requirements.

 
Net loans receivable decreased by $10,643,012 (2%) from $477,264,522 as of December 31, 2006, to $466,621,510 as of March 31, 2007.  Commercial loans decreased $15,315,556 (18%) from $82,675,514 as of December 31, 2006, to $67,359,958 as of March 31, 2007 due to several unexpected payoffs.  Commercial real estate loans increased by $2,714,608 (2%) from $155,800,918 as of December 31, 2006, to $158,515,526 as of March 31, 2007. Permanent multi-family loans decreased by $1,951,745 (4%).  The Bank continued to be active in construction lending.  Construction loans increased by $4,494,494 (5%) to $88,461,470 as of March 31, 2007, compared to $83,966,976 as of December 31, 2006. Loan growth is anticipated in future quarters and represents a major part of the Bank’s planned asset growth.

Allowance for loan losses decreased $179,202 (3%) from $5,783,477 as of December 31, 2006 to $5,604,275 as of March 31, 2007. The allowance decreased due to net loan charge-offs of $389,202 exceeding the provision for loan losses of $210,000 recorded during the period.  Management of the Company decided to record a provision for loan losses to partially offset the net charge-offs for the period and maintain the allowance at a level in accordance with management’s methodology.  See discussion under “Results of Operations – Comparison of Three Month Periods Ended March 31, 2007 and 2006 – Provision for Loan Losses.”   The allowance for loan losses as of March 31, 2007 and December 31, 2006 was 1.20% of net loans outstanding.

Deposits increased $29,297,474 (8%) from $352,229,636 as of December 31, 2006, to $381,527,110 as of March 31, 2007.  For the three months ended March 31, 2007, checking and savings accounts increased by $23,540,327 and certificates of deposits increased by $5,757,147.  The increase in checking and savings was due to the Bank’s continued emphasis on developing commercial checking business.  The increase in certificates of deposit was primarily due to the Company’s emphasis on retail customers offset by a decrease in brokered deposits.  As a result, retail certificates of deposits increased $18,254,118 (10%) during the period.  During the same period brokered certificates of deposit decreased $12,199,971 (42%).  See also the discussion under “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”

FHLB advances decreased by $42,414,000 from $108,000,000 as of December 31, 2006, to $65,586,000 as of March 31, 2007, due to repayments exceeding new advances. This was done through the funds generated from deposit growth and the decrease in net loans receivable.

Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) increased $979,962 (2%) from $44,899,243 as of December 31, 2006, to $45,879,205 as of March 31, 2007. The Company’s net income during this period was $1,753,540 which was partially offset by dividends in the amount of  $468,855 which were declared on March 22, 2007 and paid on April 13, 2007, to stockholders’ of record as of April 3, 2007.  In addition, the increase in stockholders’ equity was further offset as the Company repurchased 33,609 shares of treasury stock at an aggregate cost of $985,319 (an average cost of $29.32 per share) and a decrease in unrealized appreciation on available for sale securities, net of taxes, of $303,177 during this period.  On a per share basis, stockholders’ equity increased from $16.30 as of December 31, 2006 to $16.53 as of March 31, 2007.
 
Average Balances, Interest and Average Yields
 
The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings.  Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities.  Non-interest income, non-interest expense, and income taxes also impact net income.

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

 
   
Three Months ended 3/31/2007
    
Three Months ended 3/31/2006
  
   
Average
Balance
    
Interest
    
Yield /
Cost
    
Average
Balance
    
Interest
    
Yield /
Cost
  
ASSETS
                                    
Interest-earning:
                                    
Loans
   $
478,767
      
9,343
       7.81 %   $
444,633
      
7,885
       7.09 %
Investment securities
    
8,480
      
97
       4.59 %    
9,791
      
102
       4.17 %
Other assets
    
8,968
      
81
       3.62 %    
6,950
      
91
       5.24 %
Total interest-earning
    
496,215
      
9,522
       7.68 %    
461,374
      
8,078
       7.00 %
Noninterest-earning
    
16,803
                      
15,737
                  
    $
513,018
                     $
477,111
                  
LIABILITIES AND STOCKHOLDERS’ EQUITY               
                  
Interest-bearing:
                                                
Savings accounts
   $
14,804
      
95
       2.57 %   $
13,958
      
64
       1.83 %
Transaction accounts
    
93,044
      
653
       2.81 %    
76,139
      
351
       1.84 %
Certificates of deposit
    
225,504
      
2,757
       4.89 %    
192,408
      
1,855
       3.86 %
FHLB Advances
    
88,300
      
1,175
       5.32 %    
104,776
      
1,223
       4.67 %
Subordinated debentures
    
15,465
      
257
       6.65 %    
15,465
      
256
       6.62 %
Other borrowed funds
    
1,465
      
10
       2.73 %    
3,638
      
21
       2.31 %
Total interest-bearing
    
438,582
      
4,947
       4.51 %    
406,384
      
3,770
       3.71 %
Noninterest-bearing
    
28,237
                      
27,458
                  
Total liabilities
    
466,819
                      
433,842
                  
Stockholders’ equity
    
46,199
                      
43,269
                  
    $
513,018
                     $
477,111
                  
Net earning balance
   $
57,633
                     $
54,990
                  
Earning yield less costing rate
                     3.16 %                     3.29 %
Net interest income, and net yield spread on interest earning assets
           $
4,575
       3.69 %           $
4,308
       3.73 %
Ratio of interest-earning assets to interest-bearing liabilities
             113 %                     114 %        
 
Results of Operations - Comparison of Three Month Periods Ended March 31, 2007 and 2006
 
Net income for the three months ended March 31, 2007 was $1,753,540 as compared to $1,564,325 for the three months ended March 31, 2006, which represents an increase in earnings of $189,215 (12%) for the three month period ended March 31, 2007.

Interest Income

Total interest income for the three months ended March 31, 2007, increased $1,443,956 (18%) as compared to the three months ended March 31, 2006.  For the three month period ended March 31, 2007 compared to the same period in 2006, the average yield on interest earning assets increased 68 basis points to 7.68%, and the average balance of interest earnings assets increased approximately $34,841,000.

 
Interest Expense

Total interest expense for the three months ended March 31, 2007, increased $1,177,064 (31%) when compared to the three months ended March 31, 2006.  For the three month period ended March 31, 2007, the average cost of interest bearing liabilities increased 80 basis points to 4.51%, and the average balance of interest bearing liabilities increased approximately $32,198,000 when compared to the same period in 2006.

Net Interest Income

Net interest income for the three months ended March 31, 2007, increased $266,892 (6%) when compared to the same period in 2006. The average balance of interest earning assets increased by approximately $2,643,000 more than the average balance in interest bearing liabilities increased when comparing the three month period ended March 31, 2007 to the same period in 2006.  For the three month period ended March 31, 2007, the earning yield minus the costing rate spread decreased 13 basis points to 3.16% when compared to the same period in 2006.

Provision for Loan Losses

Based on its internal analysis and methodology, management recorded a provision for loan loss of $210,000 for the three months ended March 31, 2007, compared to $225,000 for the same period in 2006.  The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions.  Management of the Company anticipates the need to continue increasing the allowance for loan losses through charges to the provision for loan losses as anticipated growth in the Bank’s loan portfolio increases or other circumstances warrant.  Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates.  In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

Noninterest Income

Noninterest income increased $443,610 (54%) for the three months ended March 31, 2007 when compared to the three months ended March 31, 2006.

Service charges on transaction accounts increased by $240,227 (77%) during the three months ended March 31, 2007 when compared to the same period in 2006.  This is a result of an increase in the amount of insufficient funds and overdraft charges during this period when compared to the same period in 2006.  This is primarily due to the Bank’s overdraft privilege program that was implemented in the fourth quarter of 2006.

Gain on sale of loans increased $173,124 (145%) for the three months ended March 31, 2007 when compared to the same period in 2006, which was a result of an increase in the volume and yield of mortgage loans sold on the secondary market during the three months ended March 31, 2007, compared to the same period in 2006.

Other income increased $68,958 (69%) for the three months ended March 31, 2007 when compared to the same period in 2006.  This increase was primarily due to an increase in the amount of ATM fees collected during the three months ended March 31, 2007, compared to the same period in 2006.  The Bank converted to a new ATM network provider in September 2006.   The income is collected daily and recorded at gross, rather than net of expenses as was previously done prior to the conversion.  Currently, the associated expenses related to ATM services are recorded in noninterest expense under other expense.
 
 
Noninterest Expense

Noninterest expense increased $507,154 (21%) for the three months ended March 31, 2007 when compared to the three months ended March 31, 2006.

Salaries and employee benefits increased $299,794 (21%) for the three months ended March 31, 2007 when compared to the same period in 2006.  This increase was due to several factors, including additions in executive and staff positions, pay increases to existing employees and increases in employee benefit costs during the three month period ended March 31, 2007 when compared to the same period in 2006.

Occupancy expense increased $94,438 (30%) and data processing expense increased $42,566 (77%) for the three months ended March 31, 2007 when compared to the same period in 2006.  These increases were primarily due to increased depreciation and maintenance expenses relating to the Bank’s conversion to a new core processing system in 2006.

Other expense increased $72,749 (17%) for the three months ended March 31, 2007 when compared to the same period in 2006.  This increase was primarily due to an increase in the amount of ATM expenses during the three months ended March 31, 2007, compared to the same period in 2006.  The Bank converted to a new ATM network provider in September 2006.   The expense is recorded at gross, rather than net of income earned as was previously done prior to the conversion.  Currently, the associated income related to ATM services is recorded in noninterest income.

Provision for Income Taxes

There was an increase of $29,133 (3%) in the provision for income taxes for the three months ended March 31, 2007 as compared to the same period in 2006 due to an increase in taxable income for the three months ended March 31, 2007, compared to the same period in 2006.
 
Nonperforming Assets
 
The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio.  When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios.  The Bank’s allowance for loan losses as of March 31, 2007, was $5,604,275 or 1.20% of net loans receivable.  Total loans classified as substandard, doubtful or loss as of March 31, 2007, were $6,703,147 or 1.31% of total assets.  Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank’s allowance for loan losses.

The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk.  Nonperforming assets of the Bank include nonperforming loans (nonaccruing loans) and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure.  All dollar amounts are in thousands.
 
   
3/31/2007
    
12/31/2006
    
12/31/2005
  
Nonperforming loans
   $
942
      
2,748
      
721
  
Real estate acquired in settlement of loans
    
1,665
      
173
      
27
  
Total nonperforming assets
   $
2,607
      
2,921
      
748
  
                         
Total nonperforming assets as a percentage of total assets
     0.51 %     0.56 %     0.16 %
Allowance for loan losses
   $
5,604
      
5,783
      
5,400
  
Allowance for loan losses as a percentage of net loans
     1.20 %     1.20 %     1.25 %
 
 
Liquidity and Capital Resources
 
The Bank’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from maturing investment securities and extensions of credit from FHLB.  While scheduled loan and security repayments and the maturity of short-term investments are somewhat predictable sources of funding, deposit flows are influenced by many factors, which make their cash flows difficult to anticipate.

The Bank uses its liquidity resources principally to satisfy its ongoing commitments which include funding loan commitments, funding maturing certificates of deposit as well as deposit withdrawals, maintaining liquidity, purchasing investments, and meeting operating expenses.  Management believes that anticipated cash flows and deposit growth will be adequate to meet the Bank’s liquidity needs.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Asset/Liability Management
 
The goal of the Bank’s asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments.  Management monitors the Bank’s net interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, the Bank offers deposit rates and loan rates designed to maximize net interest income.  Management also attempts to fund the Bank’s assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank’s net interest income.  Since the relative spread between financial assets and liabilities is constantly changing, the Bank’s current net interest income may not be an indication of future net interest income.

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

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity.  Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements.  The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.

Interest Rate Sensitivity Analysis

The following table sets forth as of March 31, 2007 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  100, 200 and 300 basis point instantaneous and permanent decreases 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
     $
43,574
     $
51
       0 %     8.73 %     0.19 %
+200
      
44,263
      
740
       2 %     8.80 %     0.26 %
+100
      
44,376
      
853
       2 %     8.76 %     0.22 %
  NC
      
43,523
      
-
      
-
       8.54 %    
-
  
-100
      
41,982
       (1,541 )     -4 %     8.20 %     -0.34 %
-200
      
39,897
       (3,626 )     -8 %     7.76 %     -0.79 %
-300
      
37,254
       (6,269 )     -14 %     7.21 %     -1.33 %

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

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

The Bank’s Board of Directors (the “Board”) is responsible for reviewing the Bank’s asset and liability policies.  The Board meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements.  The Bank’s management is responsible for administering the policies and determinations of the Board with respect to the Bank’s asset and liability goals and strategies.

Impact of New Accounting Pronouncements

In March 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 156, Accounting for Servicing of Financial Assets. SFAS No. 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and specifies the accounting for certain servicing assets and liabilities, such as those common to mortgage servicing activities. SFAS No. 156 requires an entity to separately recognize servicing assets and servicing liabilities and to initially measure these servicing assets and servicing liabilities at fair value at inception. It also permits an entity with a separately recognized servicing asset or servicing liability to choose either the amortization method or fair value method for subsequent measurement. Adoption of SFAS No. 156 was required for transactions beginning January 1, 2007. The adoption of this standard did not have a material impact on the consolidated financial condition or results of operations of the Company.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 - Accounting for Income Taxes. This interpretation addresses accounting for tax uncertainties that arise when a position that an entity takes on its tax return may be different from the position that the taxing authority may take, and provides guidance about the accounting for tax benefits associated with uncertain tax positions, classification of a liability recognized for those positions, and interim reporting considerations. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit. The provisions of FIN 48 were effective as of January 1, 2007, with any cumulative effect of the change in accounting principle recorded as an adjustment to retained earnings. The adoption of this standard did not have a material impact on the consolidated financial condition or results of operations of the Company.

 
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 was issued to provide guidance on how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires an entity to quantify misstatements using both a balance sheet and an income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of the relevant quantitative and qualitative factors. SAB No. 108 was effective beginning January 1, 2007.  The adoption of this standard did not have a material impact on the consolidated financial condition or results of operations of the Company.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, and does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in generally accepted accounting principles. SFAS No. 157 emphasizes that fair value is a market-based measurement based on an exchange transaction between market participants in which an entity sells an asset or transfers a liability. SFAS No. 157 also establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value assumptions as the lowest level. The Statement is to be effective for financial statements issued for fiscal years beginning after November 15, 2007, with early adoption permitted. The Company is evaluating this Statement to determine the impact, if any, on certain of its financial assets and liabilities.  

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides companies with the option to report selected financial assets and liabilities at fair value. Under the option, any changes in fair value would be included in earnings. This Statement seeks to reduce both complexity in accounting and volatility in earnings caused by differences in the existing accounting rules. Existing accounting principles use different measurement attributes for different assets and liabilities, which can lead to earnings volatility. This Statement helps to mitigate this type of accounting-induced volatility by enabling companies to achieve a more consistent accounting for changes in the fair value of related assets and liabilities without having to apply complex hedge accounting provisions. Under this Statement, entities may measure at fair value financial assets and liabilities selected on a contract-by-contract basis. They would be required to display those values separately from those measured under different attributes on the face of the statement of financial condition. Furthermore, companies must provide additional information that would help investors and other users of financial statements to more easily understand the effect on earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with earlier application permitted if the Company makes this election during its first quarter of fiscal year 2007. If the Company adopts SFAS No. 159 early, it must also adopt SFAS No. 157 simultaneously. The Company did not elect to adopt this Statement early and is currently evaluating the provisions of the Statement to determine the impact, if any, on certain of its financial assets and liabilities.

Item 4. Controls and Procedures

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

 
The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures.   Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2007.

(b)  There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
PART II

Item 1.
Legal Proceedings
None.

Item 1A.
Risk Factors
Not applicable.

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

The following table summarizes the repurchase activity of the Company’s common stock during the Company’s first quarter ended March 31, 2007.

ISSUER PURCHASES OF EQUITY SECURITIES

Period
  
(a) Total Number of
Shares Purchased
    
(b) Average Price
Paid per Share
    
(c) Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs (1)
    
(d) Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
  
January 1, 2007 to January 31, 2007
    
1,350
     $
29.39
      
1,350
      
162,127
  
February 1, 2007 to February 28, 2007
    
19,259
     $
29.31
      
19,259
      
142,868
  
March 1, 2007 to March 31, 2007
    
13,000
     $
29.32
      
13,000
      
129,868
  
Total
    
33,609
     $
29.32
      
33,609
          
 
 
(1)
The Company has a repurchase plan which was announced on July 25, 2006.  This plan authorizes the purchase by the Company of up to 250,000 shares of the Company’s common stock.  There is no expiration date for this plan.  There are no other repurchase plans in effect at this time.

Item 3.
Defaults Upon Senior Securities
Not applicable.

Item 4.
Submission of Matters to a Vote of Common Security Holders
Not applicable.

Item 5.
Other Information
None.

Item 6.
Exhibits

 
11.
Statement re computation of per share earnings (set forth in “Note 4: Earnings Per Share” of the Notes to Condensed Consolidated Financial Statements (unaudited))
Certification of the Principal Executive Officer pursuant to Rule 13a -14(a) of the Exchange Act
Certification of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the Exchange Act
 
CEO certification pursuant to 18 U.S.C. Section 1350
 
CFO certification pursuant to 18 U.S.C. Section 1350
 
 
SIGNATURES

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

 
Guaranty Federal Bancshares, Inc. 
  
 
      
       
 
Signature and Title
  
Date
       
 
/s/ Shaun A. Burke
  
May 15, 2007
 
Shaun A. Burke
    
 
President and Chief Executive Officer 
  
 
(Principal Executive Officer and Duly Authorized Officer) 
  
       
       
 
/s/ Carter Peters
  
May 15, 2007
 
Carter Peters
    
 
Executive Vice President and Chief Financial Officer 
  
 
(Principal Financial and Accounting Officer) 
  
 
 
20