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GFED > SEC Filings for GFED > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for GUARANTY FEDERAL BANCSHARES INC

Form 10-Q for GUARANTY FEDERAL BANCSHARES INC


8-Aug-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 June 30, 2014, and the results of operations for the three and six months ended June 30, 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 decreased $134,959 (less than 1%) from $619,888,135 as of December 31, 2013, to $619,753,176 as of June 30, 2014.

Available-for-sale securities increased $2,721,856 (3%) from $97,692,685 as of December 31, 2013, to $100,414,541 as of June 30, 2014. The Company had purchases of $25,995,159 offset by sales, maturities and principal payments received of $25,493,804. The market rates on debt securities have improved in the first six months of 2014 resulting in a decline in unrealized losses of $2,522,940.

Net loans receivable decreased by $10,227,858 (2%) from $464,379,854 as of December 31, 2013, to $454,151,996 as of June 30, 2014. During the six month period, commercial real estate loans increased $9,228,348 (5%) and construction loans decreased $4,106,891 (9%). 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 $3,473,630 (4%) which was due to various expected payoffs and principal reductions. Permanent multi-family loans decreased $14,219,289 (31%) due to the expected payoff of one large credit. Loans secured by owner occupied one to four unit residential real estate increased $1,558,986 (2%) and installment loans decreased $228,568 (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 $1,013,191 (13%) from $7,801,600 as of December 31, 2013 to $6,788,409 as of June 30, 2014. In addition to the provision for loan loss of $525,000 recorded by the Company for the six months ended June 30, 2014, loan charge-offs of specific loans (classified as nonperforming at December 31, 2013) exceeded recoveries by $1,538,191. The Company's decline in overall loan balances during 2014 has reduced the allowance for loan loss reserve requirements. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of June 30, 2014 and December 31, 2013 was 1.47% and 1.65%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2014 and December 31, 2013 was 87.0% 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 decreased $6,166,370 (1%) from $487,318,939 as of December 31, 2013, to $481,152,569 as of June 30, 2014. For the six months ended June 30, 2014, checking and savings accounts decreased by $4,450,771 and certificates of deposit decreased by $1,715,598. 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 $7,748,527 from $50,355,233 as of December 31, 2013, to $58,103,760 as of June 30, 2014. This increase was due to several factors. First, in 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 utilized $12.0 million of the net proceeds to redeem the remaining 12,000 shares of its Series A Preferred Stock on May 7, 2014. Secondly, equity increased due to the Company's net income after preferred stock dividends and accretion of $2,282,899 for the six month period. Finally, as a result of changes in market interest rates, the Company experienced an improvement in the value of its investment portfolio. The equity portion of the Company's unrealized losses on available-for-sale securities improved by $1,589,452. On a per common share basis, stockholders' equity decreased from $14.04 as of December 31, 2013 to $13.59 as of June 30, 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 6/30/2014                        Three months ended 6/30/2013
                          Average                                             Average
                          Balance          Interest       Yield / Cost        Balance          Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $   458,046       $    5,576               4.88 %   $   466,387       $    5,952               5.12 %
Investment securities       103,058              415               1.62 %       112,567              467               1.66 %
Other assets                 29,359               46               0.63 %        29,897               48               0.64 %
Total
interest-earning            590,464            6,038               4.10 %       608,851            6,467               4.26 %
Noninterest-earning          33,598                                              39,969
                        $   624,062                                         $   648,820
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing:
Savings accounts        $    24,629               12               0.20 %   $    24,135               14               0.23 %
Transaction accounts        256,558              215               0.34 %       267,882              265               0.40 %
Certificates of
deposit                     163,598              335               0.82 %       182,772              453               0.99 %
FHLB advances                52,362              299               2.29 %        52,983              308               2.33 %
Securities sold under
agreements to
repurchase                   10,000               66               2.65 %        16,452              108               2.63 %
Subordinated
debentures                   15,465              133               3.45 %        15,465              134               3.48 %
Total
interest-bearing            522,612            1,060               0.81 %       559,688            1,281               0.92 %
Noninterest-bearing          39,020                                              38,210
Total liabilities           561,632                                             597,898
Stockholders' equity         62,430                                              50,922
                        $   624,062                                         $   648,820
Net earning balance     $    67,852                                         $    49,163
Earning yield less
costing rate                                                       3.29 %                                              3.34 %
Net interest income,
and net yield spread
on interest earning
assets                                    $    4,977               3.38 %                     $    5,186               3.42 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                      113 %                                               109 %


                                    Six months ended 6/30/2014                             Six months ended 6/30/2013
                        Average Balance       Interest       Yield / Cost      Average Balance       Interest       Yield / Cost
ASSETS
Interest-earning:
Loans                   $        457,498     $   11,444               5.04 %   $        463,050     $   11,881               5.17 %
Investment securities            103,198            873               1.71 %            108,157            899               1.68 %
Other assets                      31,359             81               0.52 %             37,515            106               0.57 %
Total
interest-earning                 592,055         12,398               4.22 %            608,722         12,886               4.27 %
Noninterest-earning               36,588                                                 41,203
                        $        628,644                                       $        649,925
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts        $         24,339             25               0.20 %   $         24,074             28               0.24 %
Transaction accounts             258,147            453               0.35 %            256,837            532               0.42 %
Certificates of
deposit                          168,455            692               0.83 %            184,234            933               1.02 %
FHLB advances                     52,528            594               2.28 %             59,508            676               2.29 %
Securities sold under
agreements to
repurchase                        10,000            131               2.65 %             20,726            272               2.64 %
Subordinated
debentures                        15,465            266               3.47 %             15,465            269               3.50 %
Total
interest-bearing                 528,934          2,161               0.82 %            560,844          2,709               0.97 %
Noninterest-bearing               40,295                                                 37,729
Total liabilities                569,229                                                598,573
Stockholders' equity              59,415                                                 51,352
                        $        628,644                                       $        649,925
Net earning balance     $         63,122                                       $         47,878
Earning yield less
costing rate                                                          3.40 %                                                 3.29 %
Net interest income,
and net yield spread
on interest earning
assets                                       $   10,236               3.49 %                        $   10,177               3.37 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                         112 %                                                  109 %

Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2014 and 2013

Net income for the three and six months ended June 30, 2014 was $1,338,683 and $2,640,109, respectively, compared to $1,567,740 and $2,520,393 for the three and six months ended June 30, 2013, respectively, which represents a decrease in net income of $229,057 (15%) for the three month period, and an increase in net income of $119,716 (5%) for the six month period.

Interest Income

Total interest income for the three and six months ended June 30, 2014 decreased $429,437 (7%) and $488,794 (4%), respectively, as compared to the three and six months ended June 30, 2013. For the three and six month periods ended June 30, 2014 compared to the same periods in 2013, the average yield on interest earning assets decreased 16 basis points to 4.10% and 5 basis points to 4.22%, while the average balance of interest earning assets decreased $18,387,000 for the three month period and decreased $16,667,000 for the six month period. For the six month period, the Company recognized approximately $335,000 of interest income on the payoff of a credit relationship that had been classified as non-accrual.

Generally, 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, 2014 decreased $221,007 (17%) and $548,264 (20%), respectively, when compared to the three and six months ended June 30, 2013. For the three and six month periods ended June 30, 2014 compared to the same periods in 2013, the average cost of interest bearing liabilities decreased 11 basis points to 0.81% and 15 basis points to 0.82%, respectively, while the average balance of interest bearing liabilities decreased $37,076,000 for the three month period and decreased $31,910,000 for the six month period when compared to the same periods 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 for the three and six months ended June 30, 2014 decreased $51,000 and $222,689, respectively, when compared to the same period in 2013.

Net Interest Income

Net interest income for the three and six months ended June 30, 2014 decreased $208,430 (4%) and increased $59,470 (1%), respectively, when compared to the same periods in 2013. For the three and six month periods ended June 30, 2014, the average balance of net interest earning assets over liabilities increased by approximately $18,689,000 and $15,244,000, respectively, when compared to the same periods in 2013. For the three and six month periods ended June 30, 2014, the net interest margin decreased 4 basis points to 3.38% and increased 12 basis points to 3.49%, respectively, when compared to the same periods 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 $325,000 and $525,000 for the three months and six months ended June 30, 2014, respectively, compared to $250,000 and $650,000 for the same periods in 2013.

Generally, the overall decrease in the provision for loan losses for the six months ended June 30, 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 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 $1,822,049 (68%) and $2,024,124 (55%) for the three months and six months ended June 30, 2014, respectively, when compared to the three months and six months ended June 30, 2013. These declines were attributable to a few factors.

First, during the second quarter of 2013, the Company recognized $1.5 million in gains on its investment portfolio and certain tax credit assets in conjunction with a structured transaction to prepay a $15 million repurchase agreement. Furthermore, gains on investment securities decreased $108,579 (93%) and $194,292 (95%) for the three months and six months ended June 30, 2014, respectively, when compared to the same periods in 2013.

Secondly, gains on sales of loans decreased $341,419 (58%) and $587,774 (57%) for the three months and six months ended June 30, 2014, respectively, when compared to the same periods in 2013. This was primarily 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.

Noninterest Expense

Noninterest expense decreased $1,649,354 (30%) and $1,730,350 (17%) for the three months and six months ended June 30, 2014 when compared to the same periods in 2013 primarily due to a $1.5 million prepayment penalty incurred on the prepayment of a repurchase agreement (further discussed above).

Salaries and employee benefits decreased $40,783 and $128,377 for the three months and six months ended June 30, 2014 when compared to the same periods in 2013 due to a decline in the overall number of staff compared to the prior year periods and a decline in mortgage commissions from reduced mortgage volume.

Provision for Income Taxes

The provision for income taxes decreased during the three and six month periods compared to the same periods in 2013 due to declines in taxable income. Furthermore, the actual effective tax rate (based on income before income taxes) also declined from 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 June 30, 2014 and December 31, 2013 was 87.0% and 49.2%, respectively. Total loans classified as substandard, doubtful or loss as of June 30, 2014, were $12.7 million or 2.04% 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.

                                                6/30/2014        12/31/2013       12/31/2012
Nonperforming loans                            $      7,806     $     15,848     $     15,331
Troubled debt restructurings                            787                -                -
Real estate acquired in settlement of loans           3,644            3,822            4,530
Total nonperforming assets                     $     12,237     $     19,670     $     19,861

Total nonperforming assets as a percentage
of total assets                                        1.97 %           3.17 %           3.01 %
Allowance for loan losses                      $      6,788     $      7,802     $      8,740
Allowance for loan losses as a percentage of
gross loans                                            1.47 %           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 $20,831,026 as of June 30, 2014 and $12,303,200 as of December 31, 2013, representing an increase of $8,527,826. 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, 2014, the Bank's Tier 1 leverage ratio was 10.93%, its Tier 1 risk-based capital ratio was 14.02% and the Bank's total risk-based capital ratio was 15.27% - 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 $15.8 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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