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GFED > SEC Filings for GFED > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for GUARANTY FEDERAL BANCSHARES INC

Form 10-Q for GUARANTY FEDERAL BANCSHARES INC


7-Nov-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 September 30, 2013, and the results of operations for the three and nine months ended September 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 1A. of the Company's Form 10-K for the fiscal year ended December 31, 2012.

Financial Condition

The Company's total assets decreased $19,929,183 (3%) from $660,432,218 as of December 31, 2012, to $640,503,035 as of September 30, 2013.

Interest bearing deposits in other financial institutions decreased $16,376,620 (43%) from $38,303,303 as of December 31, 2012, to $21,926,683 as of September 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 $3,890,278 (4%) from $101,980,644 as of December 31, 2012, to $105,870,922 as of September 30, 2013. The increase is primarily due to purchases of $50.9 million offset by sales, maturities and principal payments received of $42.5 million. Also, after fiscal year end 2012, 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 $4.4 million.

Net loans receivable decreased by $7,045,929 (2%) from $465,531,973 as of December 31, 2012, to $458,486,044 as of September 30, 2013. The Company experienced certain anticipated payoffs of various commercial real estate loans. During the period, commercial real estate loans increased $4,094,655 (2%). Also, commercial loans increased $1,766,475 (2%), permanent multi-family loans increased $2,275,067 (5%), construction loans decreased $9,531,690 (19%), loans secured by owner occupied one to four unit residential real estate decreased $5,968,411 (6%) and installment loans increased $130,757 (1%). 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 $267,487 (3%) from $8,740,325 as of December 31, 2012 to $8,472,838 as of September 30, 2013. The allowance decreased due to net loan charge-offs of $1,117,487 exceeding provision for loan losses of $850,000 recorded during the period. The decline in the allowance is primarily due to the reduction in the reserves associated with the commercial real estate loan category. Although nonclassified and nonaccruing commercial real estate loans both increased during the nine month period, the allowance pertaining to this portfolio decreased by approximately $515,000 during the nine month period. First, the general component of the allowance declined due to reductions in the historical charge-off losses experienced over the prior year. Secondly, various specific reserves established on nonaccruing loans in the prior year were charged-off in 2013. Finally, after impairment analysis was performed, there was no specific allowance deemed necessary for one significant nonaccruing loan that was added during the third quarter of 2013.

The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of September 30, 2013 and December 31, 2012 was 1.81% and 1.84%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of September 30, 2013 and December 31, 2012 was 45.4% 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. See further discussions under "Results of Operations - Comparison of Three and Nine Month Periods Ended September 30, 2013 and 2012 - Provision for Loan Losses."


Deposits increased $10,709,265 (2%) from $500,014,715 as of December 31, 2012, to $510,723,980 as of September 30, 2013. For the nine months ended September 30, 2013, checking and savings accounts increased by $29.0 million and certificates of deposit decreased by $18.3 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 September 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 September 30, 2013 due to a prepayment of $15 million incurring a prepayment penalty of $1.5 million during the second quarter. 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 $1,204,797 (2%) from $50,868,570 as of December 31, 2012, to $49,663,773 as of September 30, 2013. This is due to a few factors. First, the Company's $3.3 million in net income after preferred stock dividends and accretion for the nine 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 nine month period, the Company's unrealized gains (losses) on available-for-sale securities, net of income taxes, declined $2.7 million at September 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 $13.81 as of September 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 9/30/2013                     Three months ended 9/30/2012
                          Average                          Yield /         Average                          Yield /
                           Balance          Interest         Cost          Balance           Interest         Cost
ASSETS
Interest-earning:
Loans                   $    468,503       $    5,866           4.97 %   $    485,063       $    6,385           5.24 %
Investment securities        110,524              453           1.63 %         99,575              422           1.69 %
Other assets                  20,046               31           0.61 %         28,639               40           0.56 %
Total
interest-earning             599,073            6,350           4.21 %        613,277            6,847           4.44 %
Noninterest-earning           35,292                                           41,795
                        $    634,365                                     $    655,072
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $     23,972               13           0.22 %   $     22,351               19           0.34 %
Transaction accounts         298,927              395           0.52 %        277,341              498           0.71 %
Certificates of
deposit                      134,598              309           0.91 %        154,280              490           1.26 %
FHLB advances                 52,950              312           2.34 %         68,126              388           2.27 %
Securities sold under
agreements to
repurchase                    10,000               66           2.62 %         25,000              169           2.69 %
Subordinated
debentures                    15,465              134           3.44 %         15,465              140           3.60 %
Total
interest-bearing             535,912            1,229           0.91 %        562,563            1,704           1.21 %
Noninterest-bearing           49,174                                           40,908
Total liabilities            585,086                                          603,471
Stockholders' equity          49,279                                           51,601
                        $    634,365                                     $    655,072
Net earning balance     $     63,161                                     $     50,714
Earning yield less
costing rate                                                    3.30 %                                           3.24 %
Net interest income,
and net yield spread
on interest earning
assets                                     $    5,121           3.39 %                      $    5,143           3.34 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                       112 %                                            109 %


                               Nine months ended 9/30/2013                    Nine months ended 9/30/2012
                          Average                        Yield /         Average                        Yield /
                          Balance         Interest         Cost          Balance         Interest         Cost
ASSETS
Interest-earning:
Loans                   $   465,391      $   17,747           5.10 %   $   482,043      $   19,119           5.30 %
Investment securities       108,979           1,352           1.66 %        95,711           1,305           1.82 %
Other assets                 31,604             137           0.58 %        28,299             135           0.64 %
Total
interest-earning            605,974          19,236           4.24 %       606,053          20,559           4.53 %
Noninterest-earning          38,708                                         43,974
                        $   644,682                                    $   650,027
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $    24,037              41           0.23 %   $    22,050              64           0.39 %
Transaction accounts        294,233           1,166           0.53 %       273,921           1,594           0.78 %
Certificates of
deposit                     138,653           1,003           0.97 %       151,792           1,538           1.35 %
FHLB advances                57,253             988           2.31 %        68,076           1,156           2.27 %
Securities sold under
agreements to
repurchase                   17,088             338           2.64 %        25,000             515           2.75 %
Subordinated
debentures                   15,465             403           3.48 %        15,465             419           3.62 %
Total
interest-bearing            546,729           3,939           0.96 %       556,304           5,286           1.27 %
Noninterest-bearing          47,328                                         39,985
Total liabilities           594,057                                        596,289
Stockholders' equity         50,625                                         53,738
                        $   644,682                                    $   650,027
Net earning balance     $    59,245                                    $    49,659
Earning yield less
costing rate                                                  3.28 %                                         3.26 %
Net interest income,
and net yield spread
on interest earning
assets                                   $   15,297           3.38 %                    $   15,273           3.37 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                     111 %                                          109 %

Results of Operations - Comparison of Three and Nine Month Periods Ended September 30, 2013 and 2012

Net income for the three and nine months ended September 30, 2013 was $1,345,986 and $3,866,379, respectively, compared to $(717,088) and $461,755 for the three and nine months ended September 30, 2012, respectively, which represents an increase in net income of $2,063,074 (288%) for the three month period, and an increase in net income of $3,404,624 (737%) for the nine month period.

Interest Income

Total interest income for the three and nine months ended September 30, 2013 decreased $496,609 (7%) and $1,322,449 (6%), respectively, as compared to the three and nine months ended September 30, 2012. For the three and nine month periods ended September 30, 2013 compared to the same periods in 2012, the average yield on interest earning assets decreased 23 basis points to 4.21% and 29 basis points to 4.24%, while the average balance of interest earning assets decreased $14,204,000 for the three month period and decreased $79,000 for the nine 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 nine months ended September 30, 2013 decreased $473,476 (28%) and $1,346,369 (25%), respectively, when compared to the three and nine months ended September 30, 2012. For the three and nine month periods ended September 30, 2013 compared to the same periods in 2012, the average cost of interest bearing liabilities decreased 30 basis points to 0.91% and 31 basis points to 0.96%, respectively, while the average balance of interest bearing liabilities decreased $26,651,000 for the three month period and decreased $9,575,000 for the nine 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 nine months ended September 30, 2013 decreased $23,133 (0%) and increased $23,920 (0%), respectively, when compared to the same periods in 2012. For the three and nine month periods ended September 30, 2013, the net interest margin increased 5 basis points to 3.39% and increased 1 basis point 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 $200,000 and $850,000 for the three months and nine months ended September 30, 2013, respectively, compared to $2,600,000 and $5,600,000 for the same periods in 2012. The provision for the 2012 periods relates to additional reserves determined necessary on a large loan relationship in which a fraud scheme was uncovered. This fraud scheme related 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 of the borrower in which the Company had a security interest.

Generally, the overall decrease in the provision for loan losses for the period presented have resulted primarily from declining historic loss rates, which are used to calculate the reserve for the homogenous pool of loans, and an overall decrease in the loan portfolio. Despite growing nonperforming loan balances during the fiscal year 2013, the Company has experienced a significant decline in overall loan balances as of September 30, 2013, as compared to December 31, 2012 (a decline of $7.2 million or 2%). The Company has also experienced lower reserve requirements on newly classified nonperforming credits during the quarter ended September 30, 2013 and this is reflected in a lower provision requirement for the three and nine months ended September 30, 2013, as compared to the same period 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 may need to increase 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. See further discussions of the allowance for loan losses under "Financial Condition."

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 $499,635 (133%) and $2,316,387 (102%) for the three months and nine months ended September 30, 2013, respectively, when compared to the three months and nine months ended September 30, 2012. For the three month period, the Company experienced a reduction in losses on foreclosed assets for sale compared to the prior year quarter. Losses of $28,000 were recognized during the quarter compared to $1.0 million recognized during the prior year quarter. Offsetting this improvement was a reduction in gains on sales of loans and tax credits. The Company recognized no gains on sales of tax credits for the quarter, however, recorded gains on sales of tax credits of $282,000 during the prior year quarter. Also, due to increasing mortgage rates, fixed-rate mortgage volume declined resulting in a $244,000 reduction of income from sales of loans compared to the prior year quarter.


For the nine month period compared to the same period in 2012, the increase was primarily due to reductions in losses recognized on foreclosed assets held for sale of $1.0 million and an increase in gains on tax credit assets of $1.2 million. The Company receives federal and state tax credits in connection with purchases of investments in low-income housing limited partnerships and utilizes them to reduce annual income taxes due. The Company's investment strategy is to utilize these credits to reduce annual income taxes due and only consider a sale of the tax credits in special circumstances. Tax credits sold during the nine months ended September 30, 2013 were executed in connection with a prepayment of a repurchase agreement further discussed below.

Noninterest Expense

Noninterest expense decreased $92,527 (2%) and increased $1,915,050 (16%) for the three months and nine months ended September 30, 2013 when compared to the same periods in 2012. For the three month period, expenses declined primarily due to the reduction in legal expenses associated with problem assets. Legal expense declined $97,000 during the quarter as compared to the same quarter in 2012. For the nine month period, the increase in expense is primarily due to a $1.5 million prepayment penalty incurred on the prepayment of a repurchase agreement in May 2013. Also, another factor was a charge of $231,000 during the first quarter of 2013 relating to losses on three customer deposit accounts.

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 nine months ended September 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 September 30, 2013 and December 31, 2012 was 45.4% and 57.0%, respectively. Total loans classified as substandard, doubtful or loss as of September 30, 2013, were $22.2 million or 3.46 % 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.

                                                9/30/2013        12/31/2012       12/31/2011
Nonperforming loans                            $     18,643     $     15,331     $     17,002
Real estate acquired in settlement of loans           3,876            4,530           10,012
Total nonperforming assets                     $     22,519     $     19,861     $     27,014

Total nonperforming assets as a percentage
of total assets                                        3.52 %           3.01 %           4.17 %
Allowance for loan losses                      $      8,473     $      8,740     $     10,613
Allowance for loan losses as a percentage of
gross loans                                            1.81 %           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 $30,077,374 as of September 30, 2013 and $41,663,405 as of December 31, 2012, representing a decrease of $11,586,031. 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 September 30, 2013, the Bank's Tier 1 leverage ratio was 10.23%, its Tier 1 risk-based capital ratio was 12.88% and the Bank's total risk-based capital ratio was 14.13% - 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.

On September 27, 2013, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission to register a firm commitment public offering of its Common Stock pursuant to which the Company would raise up to $23.0 million (the "Public Offering"). The net proceeds of the offering, if . . .

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