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GFED > SEC Filings for GFED > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for GUARANTY FEDERAL BANCSHARES INC

Form 10-Q for GUARANTY FEDERAL BANCSHARES INC


14-Nov-2012

Quarterly Report


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

General

The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank's results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank's income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company's financial condition as of September 30, 2012, and the results of operations for the three and nine months ended September 30, 2012 and 2011.


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; changes in general or local economic conditions; changes in federal or state regulations and legislation governing the operations of the Company or the Bank; and other factors set forth in reports and other documents filed by the Company with the SEC from time to time, including the risk factors described under Item 1A. of this Form 10-Q and Item 1.A of the Company's Form 10-K for the fiscal year ended December 31, 2011.

Financial Condition

The Company's total assets increased $5,077,991 (1%) from $648,505,858 as of December 31, 2011, to $653,583,849 as of September 30, 2012.

Interest-bearing deposits decreased $5,587,654 (100%) from $5,587,654 as of December 31, 2011, to $0 as of September 30, 2012. The decrease is due to maturities during the period.

Available-for-sale securities increased $17,313,121 (21%) from $81,064,878 as of December 31, 2011, to $98,377,999 as of September 30, 2012. The increase is primarily due to purchases of $53.3 million offset by sales, maturities and principal payments received of $36.0 million.

Net loans receivable decreased by $17,060,650 (4%) from $478,960,736 as of December 31, 2011, to $461,900,086 as of September 30, 2012. A portion of this decrease is due to certain payoffs and charge offs of various commercial and commercial real estate loans. During the period, commercial real estate loans decreased $29,073,504 (18%). Also, commercial loans increased $5,763,538 (6%), permanent multi-family loans increased $1,930,904 (4%), construction loans increased $363,092 (1%), loans secured by owner occupied one to four unit residential real estate increased $2,115,291 (2%) and installment loans decreased $341,983 (2%). The Company continues to focus its lending efforts in the commercial and owner occupied real estate loan categories, and to reduce its concentrations in non-owner occupied commercial real estate.

Allowance for loan losses decreased $2,136,691 (20%) from $10,613,145 as of December 31, 2011 to $8,476,454 as of September 30, 2012. The allowance decreased due to net loan charge-offs of $7,736,691 exceeding the provision for loan losses of $5,600,000 recorded during the period. Certain factors have caused the lower allowance for loan loss requirement. Despite increasing nonperforming loan balances during the fiscal year 2012, the Company has experienced a significant decline in overall loan balances as of September 30, 2012, as compared to December 31, 2011 (a decline of $19.2 million or 4%). Also, various significant specific reserves established at December 31, 2011 were charged-off during fiscal year 2012 coupled with the Company experiencing lower specific reserve requirements on newly classified nonperforming credits during the fiscal year. See further discussion under "Results of Operations - Comparison of Three and Nine Month Periods Ended September 30, 2012 and 2011 - Provision for Loan Losses." The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of September 30, 2012 and December 31, 2011 was 1.80% and 2.17%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of September 30, 2012 and December 31, 2011 was 46.3% and 62.4%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank's existing loan portfolio.

Deposits increased $8,793,655 (2%) from $484,583,665 as of December 31, 2011, to $493,377,320 as of September 30, 2012. For the nine months ended September 30, 2012, checking and savings accounts increased by $10.7 million and certificates of deposit decreased by $1.9 million. See also the discussion under "Quantitative and Qualitative Disclosure about Market Risk - Asset/Liability Management."

Stockholders' equity (including unrealized appreciation on available-for-sale securities, net of tax) decreased $4,243,762 from $54,234,847 as of December 31, 2011, to $49,991,085 as of September 30, 2012. In conjuction with the Series A Preferred Stock, the Company redeemed $5 million in principal during the second quarter ended June 30, 2012 and accrued $563,195 of dividends (5%) during the nine month period end September 30, 2012. The Company's net income during the nine month period was $461,755. On a per common share basis, stockholders' equity decreased from $14.07 as of December 31, 2011 to $14.05 as of September 30, 2012.


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 9/30/2012                        Three months ended 9/30/2011
                          Average                                             Average
                          Balance          Interest       Yield / Cost        Balance          Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $   486,422       $    6,385               5.27 %   $   508,620       $    6,944               5.48 %
Investment securities       101,389              422               1.67 %        89,570              711               3.18 %
Other assets                 24,756               40               0.65 %        38,547               74               0.77 %
Total
interest-earning            612,567            6,847               4.48 %       636,737            7,729               4.87 %
Noninterest-earning          42,505                                              47,245
                        $   655,072                                         $   683,982
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $    22,351               19               0.34 %   $    21,043               30               0.57 %
Transaction accounts        277,341              498               0.72 %       249,369              657               1.06 %
Certificates of
deposit                     154,280              490               1.27 %       162,343              712               1.76 %
FHLB advances                68,126              388               2.28 %        88,159              568               2.58 %
Securities sold under
agreements to
repurchase                   25,000              169               2.71 %        39,750              299               3.02 %
Subordinated
debentures                   15,465              140               3.63 %        15,465              132               3.42 %
Total
interest-bearing            562,563            1,704               1.21 %       576,129            2,398               1.67 %
Noninterest-bearing          40,908                                              52,965
Total liabilities           603,471                                             629,094
Stockholders' equity         51,601                                              54,888
                        $   655,072                                         $   683,982
Net earning balance     $    50,004                                         $    60,608
Earning yield less
costing rate                                                       3.27 %                                              3.20 %
Net interest income,
and net yield spread
on interest earning
assets                                    $    5,143               3.37 %                     $    5,331               3.36 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                      109 %                                               111 %


                                    Nine months ended 9/30/2012                             Nine months ended 9/30/2011
                        Average Balance        Interest       Yield / Cost      Average Balance        Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $        483,174      $   19,119               5.27 %   $        509,253      $   20,484               5.36 %
Investment securities             97,315           1,305               1.79 %             94,951           2,174               3.05 %
Other assets                      24,372             135               0.74 %             32,871             243               0.98 %
Total
interest-earning                 604,861          20,559               4.53 %            637,075          22,901               4.79 %
Noninterest-earning               45,166                                                  48,495
                        $        650,027                                        $        685,570
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $         22,050              64               0.39 %   $         20,190              91               0.60 %
Transaction accounts             273,921           1,594               0.78 %            252,490           1,978               1.04 %
Certificates of
deposit                          151,792           1,538               1.35 %            168,425           2,440               1.93 %
FHLB advances                     68,076           1,156               2.26 %             91,402           1,776               2.59 %
Securities sold under
agreements to
repurchase                        25,000             515               2.74 %             39,750             867               2.91 %
Subordinated
debentures                        15,465             419               3.61 %             15,465             473               4.07 %
Total
interest-bearing                 556,304           5,286               1.27 %            587,722           7,625               1.73 %
Noninterest-bearing               39,985                                                  44,009
Total liabilities                596,289                                                 631,731
Stockholders' equity              53,738                                                  53,839
                        $        650,027                                        $        685,570
Net earning balance     $         48,557                                        $         49,353
Earning yield less
costing rate                                                           3.26 %                                                  3.06 %
Net interest income,
and net yield spread
on interest earning
assets                                        $   15,273               3.36 %                         $   15,276               3.19 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                          109 %                                                   108 %

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

2012 and 2011

Net income (loss) for the three and nine months ended September 30, 2012 was ($717,088) and $461,755, respectively, compared to $1,215,630 and $2,528,134 for the three and nine months ended September 30, 2011, respectively, which represents a decrease in net income of $1,932,718 (159%) for the three month period, and a decrease in net income of $2,006,379 (82%) for the nine month period.

Interest Income

Total interest income for the three months and nine months ended September 30, 2012 decreased $883,075 (11%) and $2,342,406 (10%), respectively, as compared to the three months and nine months ended September 30, 2011. For the three month and nine month periods ended September 30, 2012 compared to the same periods in 2011, the average yield on interest earning assets decreased 39 basis points to 4.48% and 26 basis points to 4.53%, while the average balance of interest earning assets decreased approximately $24,170,000 and $32,214,000, respectively. The Company's decrease in the average yield on interest earning assets was primarily impacted by the average yield on investments which decreased 151 basis points to 1.67% and 126 basis points to 1.79% for the three months and nine months ended September 30, 2012, as compared to the same periods in 2011. This was primarily due to a series of investment transactions in the fourth quarter of 2011 to sell certain investment securities in order to prepay $14.75 million of repurchase agreements. The securities carried a weighted average yield of 5.00% at the time of sale. Another factor that has negatively impacted the Company's average yield on interest earning assets during the three months and nine months ended September 30, 2012 was the higher level of nonaccrual loans and declining loan balances.


Interest Expense

Total interest expense for the three months and nine months ended September 30, 2012 decreased $695,014 (29%) and $2,339,145 (31%), respectively, when compared to the three months and nine months ended September 30, 2011. For the three month and nine month periods ended September 30, 2012 compared to the same periods in 2011, the average cost of interest bearing liabilities decreased 46 basis points to 1.21% and 46 basis points to 1.27%, respectively, while the average balance of interest bearing liabilities decreased approximately $13,566,000 and $31,418,000, respectively, when compared to the same periods in 2011. The primary reason for the significant decrease in the average cost of interest bearing liabilities was the continued decline in higher cost certificates of deposits as well as reductions in the average rate paid on transaction deposit balances. Also, the Company reduced its FHLB advances and securities sold under agreements to repurchase during the latter half of 2011. As a result, interest expense on these borrowings decreased $310,822 (36%) and $971,658 (37%), respectively, for the three and nine months ended September 30, 2012 as compared to the same periods in 2011.

Net Interest Income

Net interest income for the three months and nine months ended September 30, 2012 decreased $188,061 (4%) and $3,261 (0%), respectively, when compared to the same periods in 2011. For the three and nine month periods ended September 30, 2012, the average balance of net interest earning assets decreased by approximately $10,604,000 and $796,000, respectively, less than the average balance in interest bearing liabilities decreased when compared to the same periods in 2011. For the three and nine month periods ended September 30, 2012, the net interest margin increased 1 basis point to 3.37% and 17 basis points to 3.36%, respectively, when compared to the same periods in 2011.

Provision for Loan Losses

Based on its internal analysis and methodology, management recorded a provision for loan losses of $2,600,000 and $5,600,000 for the three months and nine months ended September 30, 2012, respectively, compared to $900,000 and $2,800,000 for the same periods in 2011. The provision for the 2012 quarter relates to additional reserves determined necessary due to a change in circumstances and new information obtained on a large loan relationship in which a fraud scheme was uncovered in the second quarter. This fraud scheme relates to the borrower's investment portfolio that was a significant portion of the collateral securing the credits as well as providing liquidity to operate other business ventures in which the Company had a security interest. Based on management's analysis of the events occurring during the current quarter, the Bank recorded a charge-off on this loan relationship totaling $5.5 million. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management of the Company anticipates the need to continue increasing the allowance for loan losses through charges to the provision for loan losses if 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 decreased $619,757 (62%) and $205,295 (8%) for the three months and nine months ended September 30, 2012, respectively, when compared to the three months and nine months ended September 30, 2011.

Gains on investment securities decreased $51,738 (63%) and $60,431 (30%) for the three months and nine months ended September 30, 2012, respectively, when compared to the same periods in 2011. Service charges on transaction accounts decreased by $47,453 (14%) and $221,073 (21%) for the three months and nine months ended September 30, 2012 when compared to the same periods in 2011, due primarily to declines in overdraft charges, which is partially due to amendments to Regulation E regarding fees on debit card and ATM transactions. Gain on sale of loans increased $136,389 (37%) and $443,463 (49%) for the three months and nine months ended September 30, 2012 when compared to the same periods in 2011 due to increased volume in mortgage loan originations and sales. Losses on foreclosed assets increased by $950,460 (1146%) and $699,123 (138%) for the three months and nine months ended September 30, 2012 when compared to the same periods in 2011. The Company sold two properties for a combined loss of $350,000 and recognized write-downs on three existing foreclosed properties for $670,000 based on current estimated fair value. The Company also sold certain state low-income housing tax credits on two projects recognizing $282,000 gain on sale during the quarter. The Company did not sell any tax credit assets in 2011.

Noninterest Expense

Noninterest expense increased $218,435 (6%) and $97,764 (1%) for the three months and nine months ended September 30, 2012 when compared to the same periods in 2011.

Salaries and employee benefits increased $72,597 (3%) and $233,911 (3%) for the three months and nine months ended September 30, 2012 when compared to the same periods in 2011. This increase was primarily due to additions of associates throughout 2011 in the areas of human resources, information systems and risk management, as well as normal pay raises. FDIC deposit insurance premiums decreased $109,647 (48%) and $203,078 (27%) for the three months and nine months ended September 30, 2012 when compared to the same periods in 2011 primarily due to the change in the Company's assessment base and rate structure that went into effect in 2012. The Company also experienced a significant increase in legal expenses of $226,726 (147%) and $136,420 (26%) for the three months and nine months ended September 30, 2012 when compared to the same periods in 2011. The Company recognized expenses of $221,000, of which $155,000 were legal expenses, during the third quarter in connection with a Registration Statement on Form S-1 filed with the Securities and Exchange Commission. The purpose of the filing had been to register the offering by the United States Treasury ("Treasury") in an auction of $12.0 million of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Series A Shares"). The Company had originally issued and sold to Treasury all of its authorized $17.0 million (along with a warrant to purchase 459,459 shares of the Company's Common Stock) in January 2009 as part of Treasury's Troubled Asset Relief Program's Capital Purchase Program. The Company redeemed at 100% of their liquidation value $5.0 million Series A Shares during the second quarter of 2012. Pursuant to the agreement under which the Series A Shares had been sold to Treasury, Treasury had the right to compel the Company to register the sale by Treasury of all or any portion of the Series A Shares. After the auction terminated in accordance with its terms, Treasury decided not to accept the two bids submitted offering to purchase a portion of the Series A Shares for 92% of their liquidation value. Accordingly, Treasury continues to own all of the $12.0 million Series A Shares issued and outstanding and the warrant.

Provision for Income Taxes

The decrease in the provision for income taxes for the three months and nine months ended September 30, 2012 as compared to the same periods in 2011 is primarily due to the decline in pretax income and the effect of increased utilization of federal income tax credits.


Nonperforming Assets

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank's existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers' intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank's historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of September 30, 2012 and December 31, 2011 was 46.3% and 62.4%, respectively. Total loans classified as substandard, doubtful or loss as of September 30, 2012, were $30.3 million or 4.64% of total assets as compared to $32.9 million, or 5.08% of total assets at December 31, 2011. 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 and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.

                                                      9/30/2012       12/31/2011       12/31/2010
Nonperforming loans                                  $    18,299     $     17,002     $     23,012
Real estate acquired in settlement of loans                5,843           10,012           10,540
Total nonperforming assets                           $    24,142     $     27,014     $     33,552

Total nonperforming assets as a percentage of
total assets                                                3.69 %           4.17 %           4.91 %
Allowance for loan losses                            $     8,476     $     10,613     $     13,083
Allowance for loan losses as a percentage of gross
loans                                                       1.80 %           2.17 %           2.54 %

Liquidity and Capital Resources

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

The Company's most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, 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 $38,641,763 as of September 30, 2012 and $26,574,082 as of December 31, 2011, representing an increase of $12,067,681. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.

The Bank's capital ratios are above the levels required to be considered a well-capitalized financial institution. As of September 30, 2012, the Bank's Tier 1 leverage ratio was 9.42%, its Tier 1 risk-based capital ratio was 12.50% and the Bank's total risk-based capital ratio was 13.76% - all exceeding the minimums of 5%, 6% and 10%, respectively.

With regard to the securities sold to the Treasury under the CPP, on June 13, 2012, the Company used $5,019,444 of its available cash to redeem 5,000 shares of the Company's Series A Preferred Stock held by the Treasury which included accrued and unpaid dividends of $19,444. The Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in August of 2012. The purpose of the filing had been to register the offering by the . . .

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