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GFED > SEC Filings for GFED > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for GUARANTY FEDERAL BANCSHARES INC

Form 10-Q for GUARANTY FEDERAL BANCSHARES INC


9-May-2014

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 March 31, 2014, and the results of operations for the three months ended March 31, 2014 and 2013.

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 the Company's Form 10-K for the fiscal year ended December 31, 2013.

Financial Condition

The Company's total assets increased $19,192,382 (3%) from $619,888,135 as of December 31, 2013, to $639,080,517 as of March 31, 2014.

Available-for-sale securities increased $1,538,963 (2%) from $97,692,685 as of December 31, 2013, to $99,231,648 as of March 31, 2014. The Company had purchases of $11,337,265 offset by sales, maturities and principal payments received of $11,021,662. The market rates on debt securities have improved in the first quarter of 2014 resulting in a decline in unrealized losses of $1,281,850.

Net loans receivable decreased by $18,165,521 (4%) from $464,379,854 as of December 31, 2013, to $446,214,333 as of March 31, 2014. During the quarter, commercial real estate loans increased $9,320,504 (5%) and construction loans decreased $7,821,112 (18%). These changes were primarily due to one larger credit classified as construction being completed and transferred to the commercial real estate category. Also, commercial loans decreased $6,504,665 (7%) which was due to various expected payoffs and principal reductions. Permanent multi-family loans decreased $13,961,515 (30%) due to the expected payoff of one large credit. Loans secured by owner occupied one to four unit residential real estate increased $749,973 (1%) and installment loans decreased $2,133 (less than 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 $40,464 (less than 1%) from $7,801,600 as of December 31, 2013 to $7,761,135 as of March 31, 2014. In addition to the provision for loan loss of $200,000 recorded by the Company for the quarter ended March 31, 2014, loan charge-offs of specific loans (classified as nonperforming at December 31, 2013) exceeded recoveries by $240,464. The decline in the allowance is primarily due to a decline in loan balances. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of March 31, 2014 and December 31, 2013 was 1.71% and 1.65%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of March 31, 2014 and December 31, 2013 was 71.2% and 49.2%, 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 $4,081,779 (1%) from $487,318,939 as of December 31, 2013, to $491,400,718 as of March 31, 2014. For the three months ended March 31, 2014, checking and savings accounts increased by $5,541,510 and certificates of deposit decreased by $1,459,731. 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."

Stockholders' equity (including unrealized appreciation on available-for-sale securities, net of tax) increased $17,913,496 from $50,355,233 as of December 31, 2013, to $68,268,729 as of March 31, 2014. This increase was primarily due to the Compnay closing an underwritten offering of its common stock. The Company raised approximately $17,200,000 in gross proceeds by re-issuing 1,499,999 shares of its treasury stock. The Company's net income during this period was $1,301,426. In conjuction with the Series A Preferred Stock, the Company accrued $230,000 of dividends during the period. On a per common share basis, stockholders' equity decreased from $14.04 as of December 31, 2013 to $13.21 as of March 31, 2014.

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 3/31/2014                         Three Months ended 3/31/2013
                                Average                                              Average
                                Balance           Interest       Yield / Cost        Balance           Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                         $    457,080       $    5,868               5.21 %   $    459,819       $    5,928               5.23 %
Investment securities              103,285              458               1.80 %        103,721              433               1.69 %
Other assets                        33,406               35               0.42 %         45,161               58               0.52 %
Total interest-earning             593,772            6,360               4.34 %        608,702            6,419               4.28 %
Noninterest-earning                 39,716                                               42,324
                              $    633,488                                         $    651,026
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts              $     24,050               12               0.21 %   $     24,004               14               0.24 %
Transaction accounts               308,494              337               0.44 %        287,005              379               0.54 %
Certificates of deposit            124,509              258               0.84 %        144,625              368               1.03 %
FHLB and Federal Reserve
advances                            52,706              296               2.28 %         65,968              369               2.27 %
Securities sold under
agreements to repurchase            10,000               65               2.65 %         25,000              164               2.66 %
Subordinated debentures             15,465              133               3.49 %         15,465              134               3.53 %
Total interest-bearing             535,223            1,101               0.83 %        562,067            1,428               1.03 %
Noninterest-bearing                 41,726                                               37,257
Total liabilities                  576,949                                              599,323
Stockholders' equity                56,539                                               51,702
                              $    633,488                                         $    651,026
Net earning balance           $     58,549                                         $     46,635
Earning yield less costing
rate                                                                      3.51 %                                               3.25 %
Net interest income, and
net interest margin on
interest earning assets                          $    5,259               3.59 %                      $    4,991               3.33 %
Ratio of interest-earning
assets to interest-bearing
liabilities                                             111 %                                                108 %

Results of Operations - Comparison of Three Month Periods Ended March 31, 2014 and 2013

Net income for the three months ended March 31, 2014 and 2013 was $1,301,426 and $952,653, respectively, which represents an increase in earnings of $348,773 (37%).

Interest Income

Total interest income for the three months ended March 31, 2014 decreased $59,357 (1%) as compared to the three months ended March 31, 2013. For the three month period ended March 31, 2014 compared to the same period in 2013, the average yield on interest earning assets increased 6 basis points to 4.34%, while the average balance of interest earning assets decreased approximately $14,930,000. Declines in loan balances and increased competition in loan pricing has significantly impacted our ability to maintain loan yield. However, for the first quarter, the Company's asset yield increased primarily due to the recognition of approximately $335,000 of interest income during the quarter on the payoff of a credit relationship that had been classified as non-accrual and the increase in yield on investment securities.


Interest Expense

Total interest expense for the three months ended March 31, 2014 decreased $327,257 (23%) when compared to the three months ended March 31, 2013. For the three month period ended March 31, 2014, the average cost of interest bearing liabilities decreased 20 basis points to 0.83%, and the average balance of interest bearing liabilities decreased approximately $26,844,000 when compared to the same period in 2013. The primary reason for the 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 2013. As a result, interest expense on these borrowings decreased $171,689 compared to the same quarter in 2013.

Net Interest Income

Net interest income for the three months ended March 31, 2014 increased $267,900 (5%) when compared to the same period in 2013. The average balance of interest earning assets increased by approximately $11,914,000 more than the average balance of interest bearing liabilities increased when comparing the three month period ended March 31, 2014 to the same period in 2013. For the three month period ended March 31, 2014, the net interest margin increased 26 basis points to 3.59% when compared to the same period in 2013.

Provision for Loan Losses

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

Based on its internal analysis and methodology, Management recorded a provision for loan losses of $200,000 for the three months ended March 31, 2014, compared to $400,000 for the same period in 2013.

Generally, the overall decrease in the provision for loan losses for the three months ended March 31, 2014 has 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. The Company has also experienced lower reserve requirements on newly classified nonperforming credits during the quarter. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management 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.

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 $202,075 (20%) for the three months ended March 31, 2014 when compared to the three months ended March 31, 2013.

Gain on sale of loans decreased $246,355 (57%) for the three months ended March 31, 2014 when compared to the same period in 2013 due to long-term interest rates increasing significantly during 2013 and into the first quarter of 2014 which dramatically reduced consumer demand for long-term secondary market mortgage loans.


Gains on investment securities for the three months ended March 31, 2014 were $3,088 compared to $88,801 during the same period in 2013. Losses on foreclosed assets were $15,783 for the quarter compared to $72,345 for the same period in 2013. Service charges on deposit accounts and debit and credit card interchange income increased a combined $56,000 during the quarter compared to the same period in 2013.

Noninterest Expense

Noninterest expense decreased $80,996 (2%) for the three months ended March 31, 2014 when compared to the three months ended March 31, 2013. The primary factor for the decrease in noninterest expense was due to a decline in the overall number of staff compared to the prior year quarter and also a decline in mortgage commissions from reduced mortgage volume, as noted above.

Provision for Income Taxes

The provision for income taxes decreased slightly during the quarter compared to the same period in 2013. However, the actual effective tax rate (based on income before income taxes) declined approximately 5% compared to the same period in 2013 primarily due to the increased utilization of state low income housing 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 March 31, 2014 and December 31, 2013 was 71.2% and 49.2%, respectively. Total loans classified as substandard, doubtful or loss as of March 31, 2014, were $13.2 million or 2.07% of total assets as compared to $16.7 million, or 2.69% of total assets at December 31, 2013. 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.

                                                3/31/2014        12/31/2013       12/31/2012
Nonperforming loans                            $     10,894     $     15,848     $     15,331
Troubled debt restructurings                            831                -                -
Real estate acquired in settlement of loans           3,901            3,822            4,530
Total nonperforming assets                     $     15,626     $     19,670     $     19,861

Total nonperforming assets as a percentage
of total assets                                        2.45 %           3.17 %           3.01 %
Allowance for loan losses                      $      7,761     $      7,802     $      8,740
Allowance for loan losses as a percentage of
gross loans                                            1.71 %           1.65 %           1.83 %

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 $49,242,713 as of March 31, 2014 and $12,303,200 as of December 31, 2013, representing an increase of $36,939,513. 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 March 31, 2014, the Bank's Tier 1 leverage ratio was 10.66%, its Tier 1 risk-based capital ratio was 13.77% and the Bank's total risk-based capital ratio was 15.02% - all exceeding the minimums of 5%, 6% and 10%, respectively.

On March 7, 2014, the Company closed an underwritten offering of its common stock. The Company raised approximately $17.2 million in gross proceeds by re-issuing 1,499,999 shares of treasury stock, which includes the full exercise of the over-allotment option granted to the underwriters of 195,652 shares, at a price to the public of $11.50 per share. Net proceeds from the sale of the shares after underwriting discounts and estimated offering expenses were approximately $15.9 million. The Company used the net proceeds from the offering to redeem the remaining 12,000 shares of the Company's Series A Preferred Stock on May 7, 2014 and intends to use the remaining net proceeds for working capital and for general corporate purposes, including potential future acquisitions.

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