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GFED > SEC Filings for GFED > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for GUARANTY FEDERAL BANCSHARES INC

Form 10-Q for GUARANTY FEDERAL BANCSHARES INC


9-Aug-2013

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 June 30, 2013, and the results of operations for the three and six months ended June 30, 2013 and 2012.

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, 2012.


Financial Condition

The Company's total assets decreased $20,235,504 (3%) from $660,432,218 as of December 31, 2012, to $640,196,714 as of June 30, 2013.

Interest bearing deposits in other financial institutions decreased $17,713,082 (46%) from $38,303,303 as of December 31, 2012, to $20,590,221 as of June 30, 2013. The decrease is primarily due to the Company's ability to utilize available cash to paydown $30.1 million of Federal Home Loan Bank advances and securities sold under agreements to repurchase.

Available-for-sale securities increased $7,279,549 (7%) from $101,980,644 as of December 31, 2012, to $109,260,193 as of June 30, 2013. The increase is primarily due to purchases of $44.3 million offset by sales, maturities and principal payments received of $32.7 million. Also, during the second quarter of 2013, market interest rates on many debt securities increased, due to the dramatic increase in long-term Treasury rates, which in turn, caused the fair value of available-for-sale securities to decline by $4.3 million.

Net loans receivable decreased by $5,885,105 (1%) from $465,531,973 as of December 31, 2012, to $459,646,868 as of June 30, 2013. The Company experienced certain anticipated payoffs of various commercial real estate loans. During the period, commercial real estate loans decreased $4,052,178 (2%). Also, commercial loans increased $807,361 (1%), permanent multi-family loans increased $1,056,600 (2%), construction loans decreased $2,637,753 (5%), loans secured by owner occupied one to four unit residential real estate decreased $1,776,536 (2%) and installment loans increased $360,795 (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 $363,041 (4%) from $8,740,325 as of December 31, 2012 to $8,377,284 as of June 30, 2013. The allowance decreased due to net loan charge-offs of $1,013,041 exceeding provision for loan losses of $650,000 recorded during the period. Management charged off certain specific loans that had been identified and classified as impaired at December 31, 2012. See discussion under "Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2013 and 2012 - Provision for Loan Losses." The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of June 30, 2013 and December 31, 2012 was 1.79% and 1.84%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2013 and December 31, 2012 was 52.8% and 57.0%, 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 $11,874,743 (2%) from $500,014,715 as of December 31, 2012, to $511,889,458 as of June 30, 2013. For the six months ended June 30, 2013, checking and savings accounts increased by $14.0 million and certificates of deposit decreased by $2.1 million. The increase in checking and savings accounts was due to the Bank's continued efforts to increase core transaction deposits, both retail and commercial. See also the discussion under "Quantitative and Qualitative Disclosure about Market Risk - Asset/Liability Management."

Federal Home Loan Bank advances decreased $15,100,000 (22%) from $68,050,000 as of December 31, 2012, to $52,950,000 as of June 30, 2013 due to scheduled maturities during the period.

Securities sold under agreements to repurchase decreased $15,000,000 (60%) from $25,000,000 as of December 31, 2012, to $10,000,000 as of June 30, 2013 due to a prepayment of $15 million incurring a prepayment penalty of $1.5 million. The prepayment will allow the Company to significantly reduce higher cost, non-core funding liabilities on its balance sheet and eliminate future annual interest expense of approximately $390,000.


Stockholders' equity (including unrealized depreciation on available-for-sale securities, net of tax) decreased $2,407,119 from $50,868,570 as of December 31, 2012, to $48,461,451 as of June 30, 2013. This is due to a few factors. First, the Company's $2.1 million in net income after preferred stock dividends and accretion for the six month period increased stockholder's equity. However, other factors reduced stockholders' equity. In May 2013, the Company completed a $2 million repurchase of the warrant issued to the United States Department of the Treasury in 2009 as part of its Troubled Asset Relief Program's Capital Purchase Program. Also, as a result of increases in market interest rates on many debt securities during the quarter, the Company's unrealized gains (losses) on available-for-sale securities, net of income taxes, declined $2.7 million at June 30, 2013 as compared to December 31, 2012. On a per common share basis, stockholders' equity decreased from $14.34 as of December 31, 2012 to $13.39 as of June 30, 2013.

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 6/30/2013                        Three months ended 6/30/2012
                          Average                                             Average
                          Balance          Interest       Yield / Cost        Balance          Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $   468,024       $    5,953               5.10 %   $   478,619       $    6,330               5.30 %
Investment securities       112,890              466               1.66 %       103,286              471               1.83 %
Other assets                 24,908               48               0.77 %        25,068               45               0.72 %
Total
interest-earning            605,822            6,467               4.28 %       606,973            6,846               4.52 %
Noninterest-earning          43,015                                              44,425
                        $   648,837                                         $   651,398
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $    24,134               14               0.23 %   $    22,326               22               0.40 %
Transaction accounts        303,157              392               0.52 %       281,292              528               0.75 %
Certificates of
deposit                     137,331              326               0.95 %       149,214              497               1.34 %
FHLB advances                52,983              307               2.32 %        68,050              384               2.26 %
Securities sold under
agreements to
repurchase                   16,429              108               2.64 %        25,000              162               2.60 %
Subordinated
debentures                   15,465              135               3.50 %        15,465              139               3.61 %
Total
interest-bearing            549,499            1,282               0.94 %       561,347            1,732               1.24 %
Noninterest-bearing          48,419                                              35,813
Total liabilities           597,918                                             597,160
Stockholders' equity         50,919                                              54,238
                        $   648,837                                         $   651,398
Net earning balance     $    56,323                                         $    45,626
Earning yield less
costing rate                                                       3.35 %                                              3.28 %
Net interest income,
and net yield spread
on interest earning
assets                                    $    5,185               3.43 %                     $    5,114               3.38 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                      110 %                                               108 %


                                    Six months ended 6/30/2013                             Six months ended 6/30/2012
                        Average Balance       Interest       Yield / Cost      Average Balance       Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $        465,105     $   11,881               5.15 %   $        481,531     $   12,734               5.33 %
Investment securities            108,779            899               1.67 %             95,256            883               1.87 %
Other assets                      33,031            106               0.65 %             24,178             95               0.79 %
Total
interest-earning                 606,915         12,886               4.28 %            600,965         13,712               4.60 %
Noninterest-earning               43,010                                                 46,512
                        $        649,925                                       $        647,477
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $         24,069             28               0.23 %   $         21,897             45               0.41 %
Transaction accounts             291,847            771               0.53 %            272,193          1,096               0.81 %
Certificates of
deposit                          140,714            694               0.99 %            150,535          1,048               1.40 %
FHLB advances                     59,440            676               2.29 %             68,050            768               2.28 %
Securities sold under
agreements to
repurchase                        20,691            272               2.65 %             25,000            346               2.79 %
Subordinated
debentures                        15,465            269               3.51 %             15,465            279               3.64 %
Total
interest-bearing                 552,226          2,710               0.99 %            553,140          3,582               1.31 %
Noninterest-bearing               46,391                                                 39,520
Total liabilities                598,617                                                592,660
Stockholders' equity              51,308                                                 54,817
                        $        649,925                                       $        647,477
Net earning balance     $         54,689                                       $         47,825
Earning yield less
costing rate                                                          3.29 %                                                 3.29 %
Net interest income,
and net yield spread
on interest earning
assets                                       $   10,176               3.38 %                        $   10,130               3.40 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                         110 %                                                  109 %

Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2013 and 2012

Net income for the three and six months ended June 30, 2013 was $1,567,740 and $2,520,393, respectively, compared to $344,121 and $1,178,843 for the three and six months ended June 30, 2012, respectively, which represents an increase in net income of $1,223,619 (356%) for the three month period, and an increase in net income of $1,341,550 (114%) for the six month period.

Interest Income

Total interest income for the three and six months ended June 30, 2013 decreased $379,339 (6%) and $825,840 (6%), respectively, as compared to the three and six months ended June 30, 2012. For the three and six month periods ended June 30, 2013 compared to the same periods in 2012, the average yield on interest earning assets decreased 24 basis points to 4.28% and 32 basis points to 4.28%, while the average balance of interest earning assets decreased $1,151,000 for the three month period and increased $5,950,000 for the six month period. The Company's decrease in the average yield on interest earning assets was primarily due to the decline in loan balances for each period compared to the prior year period. Also, strong competition is causing a reduction in rates for new credits as well as maintaining existing credit relationships.


Interest Expense

Total interest expense for the three and six months ended June 30, 2013 decreased $450,897 (26%) and $872,893 (24%), respectively, when compared to the three and six months ended June 30, 2012. For the three and six month periods ended June 30, 2013 compared to the same periods in 2012, the average cost of interest bearing liabilities decreased 30 basis points to 0.94% and 32 basis points to .99%, respectively, while the average balance of interest bearing liabilities decreased $32,893,000 for the three month period and increased $7,696,000 for the six month period when compared to the same periods in 2012. 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 has reduced its FHLB advances and securities sold under agreements to repurchase during 2013.

Net Interest Income

Net interest income for the three and six months ended June 30, 2013 increased $71,558 (1%) and $47,053 (0%), respectively, when compared to the same periods in 2012. For the three and six month periods ended June 30, 2013, the average balance of net interest earning assets increased by approximately $10,697,000 and $6,864,000, respectively, less than the average balance in interest bearing liabilities decreased when compared to the same periods in 2012. For the three and six month periods ended June 30, 2013, the net interest margin increased 5 basis points to 3.35% and decreased 46 basis points to 3.38%, respectively, when compared to the same periods in 2012.

Provision for Loan Losses

Based on its internal analysis and methodology, management recorded a provision for loan losses of $250,000 and $650,000 for the three months and six months ended June 30, 2013, respectively, compared to $2,100,000 and $3,000,000 for the same periods in 2012. 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 increased $1,643,996 (158%) and $1,816,752 (96%) for the three months and six months ended June 30, 2013, respectively, when compared to the three months and six months ended June 30, 2012. This was primarily due to recognizing gains on its investment portfolio and certain tax credit assets during the periods. In May 2013, the Company sold low-income housing tax credits for a gain of $1.4 million. Gains on investment securities increased $46,606 (67%) and $97,878 (91%) for the three months and six months ended June 30, 2013, respectively, when compared to the same periods in 2012. Also, gains on sales of loans increased $117,031 (25%) and $186,610 (22%) for the three months and six months ended June 30, 2013, respectively, when compared to the same periods in 2012, due to increased volume in loan originations and sales.

Noninterest Expense

Noninterest expense increased $1,629,485 (42%) and $2,007,577 (25%) for the three months and six months ended June 30, 2013 when compared to the same periods in 2012 primarily due to a $1.5 million prepayment penalty incurred on the prepayment of a repurchase agreement. Also, another factor was a charge of $231,000 during the six months ended June 30, 2013 relating to losses on three customer deposit accounts. The Company considers this a one-time charge and the Company has made a claim to its insurance carrier for a partial recovery.


Provision for Income Taxes

The increase in the provision for income taxes is a direct result of the Company's increased taxable income for the three and six months ended June 30, 2013 as compared to the same periods in 2012.

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 June 30, 2013 and December 31, 2012 was 52.8% and 57.0%, respectively. Total loans classified as substandard, doubtful or loss as of June 30, 2013, were $22.2 million or 3.48 % of total assets as compared to $21.7 million, or 3.28% of total assets at December 31, 2012. 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.

                                                6/30/2013        12/31/2012       12/31/2011
Nonperforming loans                            $     15,851     $     15,331     $     17,002
Real estate acquired in settlement of loans           3,897            4,530           10,012
Total nonperforming assets                     $     19,748     $     19,861     $     27,014

Total nonperforming assets as a percentage
of total assets                                        3.08 %           3.01 %           4.17 %
Allowance for loan losses                      $      8,377     $      8,740     $     10,613
Allowance for loan losses as a percentage of
gross loans                                            1.78 %           1.83 %           2.17 %

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 $23,855,188 as of June 30, 2013 and $41,663,405 as of December 31, 2012, representing a decrease of $17,808,217. The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments, 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 June 30, 2013, the Bank's Tier 1 leverage ratio was 9.76%, its Tier 1 risk-based capital ratio was 12.74% and the Bank's total risk-based capital ratio was 14.00% - all exceeding the minimums of 5%, 6% and 10%, respectively.


With regards to the Series A Preferred Stock, if the Company is unable to redeem the stock by January 2014, the cost of capital to the Company will increase significantly from 5% per annum ($600,000 annually) to 9% per annum ($1,080,000 annually). Depending on the Company's financial condition at the time, the increase in the annual dividend rate on the Series A Preferred Stock could have a material adverse effect on the Company's liquidity and net income available to common stockholders.

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