UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission number 0-23325
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Guaranty Federal Bancshares, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1792717
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1341 West Battlefield
Springfield, Missouri 65807
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Telephone Number: (417) 889-2494
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 1998
----- --------------------------------
Common Stock, Par Value $0.10 5,916,745 Shares
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC
Form 10-Q
TABLE OF CONTENTS
Item Page
PART I. Financial Information
1. Consolidated Financial Statements (Unaudited):
Statements of Financial Condition 3
Statements of Income 4
Statements of Cash Flow 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. Other Information
1. Legal Proceedings 20
2. Changes in Securities and Use of Proceeds 20
3. Defaults Upon Senior Securities 20
4. Submission of Matters to Vote of Security-holders 20
5. Other Information 20
6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
PART I
Item 1. Financial Statements
GUARANTY FEDERAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 (UNAUDITED) AND JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------ -------------
<S> <C> <C>
Cash $ 1,154,447 $ 846,691
Interest-bearing deposits in other financial institutions 4,198,745 6,458,232
------------ ------------
Cash and cash equivalents 5,353,192 7,304,923
Available-for-sale securities 5,311,570 4,765,021
Held-to-maturity securities 8,766,345 8,922,389
Mortgage-backed securities, held-to-maturity 10,572,092 11,948,654
Mortgage-backed securities, available-for-sale 8,905,766 9,055,658
Mortgage loans held for sale 1,382,581 805,183
Loans receivable, net 223,458,624 205,414,561
Accrued interest receivable:
Loans 1,252,297 1,188,162
Investments 119,632 252,865
Mortgage-backed securities 148,784 163,117
Prepaid expenses and other assets 3,910,653 2,503,055
Foreclosed assets held for sale 7,300 286,000
Premises and equipment 7,361,818 7,432,971
------------ ------------
$ 276,550,654 $ 260,042,559
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 134,346,556 $ 140,975,336
Federal Home Loan Bank advances 72,709,434 45,081,028
Advances from borrowers for taxes and insurance 1,309,475 870,476
Accrued expenses and other liabilities 1,657,452 513,943
Accrued interest payable 391,681 256,975
Income taxes payable 785,249 417,532
Deferred income taxes 1,215,737 1,237,171
------------ ------------
Total Liabilities 212,415,584 189,352,461
------------ ------------
STOCKHOLDERS' EQUITY
Capital Stock
Common stock, $0.10 par value; authorized
10,000,000 shares; issued 6,228,035 shares 622,804 622,804
Additional paid-in capital 46,777,412 49,016,992
Unearned ESOP shares (3,444,540) (3,444,540)
Retained earnings, substantially restricted` 21,534,374 21,682,950
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale
securities, net of income taxes of $1,718,009
and $1,651,429 at September 30, 1998 and
June 30, 1998, respectively 2,925,258 2,811,892
------------ ------------
68,415,308 70,690,098
Treasury stock, at cost - 311,290 shares (4,280,238) --
------------- ------------
Total Stockholders' Equity 64,135,070 70,690,098
------------ ------------
$ 276,550,654 $ 260,042,559
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
INTEREST INCOME
Loans $ 4,383,216 $ 3,451,331
Investment securities 84,446 97,250
Mortgage-backed securities 348,157 297,898
Other 118,070 93,023
------------- ------------
Total Interest Income 4,933,889 3,939,502
------------- ------------
INTEREST EXPENSE
Deposits 1,586,184 1,830,713
Federal Home Loan Bank advances 915,979 357,445
------------- ------------
Total Interest Expense 2,502,163 2,188,158
------------- ------------
Net Interest Income 2,431,726 1,751,344
Provision for Loan Losses 45,000 33,352
------------- ------------
Net Interest Income after
Provision for Loan Losses 2,386,726 1,717,992
------------- ------------
NONINTEREST INCOME (LOSS)
Service charges 205,900 120,895
Late charges and other fees 25,388 25,262
Gain on loans, investment
securities and mortgage-backed securities 9,750 38,131
Expense on foreclosed assets (6,170) (92)
Other income 36,040 27,270
------------- ------------
Total Noninterest Income 270,908 211,466
------------- ------------
NONINTEREST EXPENSE
Salaries and employee benefits 773,845 581,274
Occupancy 174,330 163,256
SAIF deposit insurance premiums 22,374 22,970
Data processing fees 116,318 87,312
Advertising 107,896 87,042
Other expense 215,034 178,909
------------- ------------
Total Noninterest Expense 1,409,797 1,120,763
------------- ------------
Income before Income Taxes 1,247,837 808,695
Provision for Income Taxes 449,734 292,192
------------- ------------
NET INCOME 798,103 516,503
OTHER COMPREHENSIVE INCOME
Unrealized appreciation on available-for-sale
securities, net of income taxes of $66,580
and $8,880 for 1998 and 1997, respectively 113,366 15,120
------------- ------------
COMPREHENSIVE INCOME $ 911,469 $ 531,623
============= ============
BASIC AND DILUTED
EARNINGS PER SHARE $ 0.14 $ n/a
============= ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 798,103 $ 516,503
Items not requiring (providing) cash:
Deferred income taxes (92,984) 1,192
Depreciation 97,240 109,435
Gain on loans, investment securities
and mortgage-backed securities (9,750) (38,131)
Gain of sale of foreclosed assets (138) 0
Amortization of deferred income, premiums
and discounts 1,438 (2,318)
Provision for loan losses 45,000 33,352
Origination of loans held for sale (2,316,051) (1,832,623)
Proceeds from sale of loans held for sale 1,748,403 2,632,509
RRP/RSP expense 133,485 22,247
Changes in:
Accrued interest receivable 83,431 24,397
Prepaid expenses and other assets (1,407,598) (88,030)
Accounts payable and accrued expenses 331,536 615,276
Income taxes payable 367,717 165,913
---------- ------------
Net cash provided by (used in)
operating activities (220,168) 2,159,722
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (18,073,801) (10,502,891)
Principal payments on mortgage-backed securities,
available-for-sale 121,110 0
Principal payments on mortgage-backed securities,
held-to-maturity 1,376,562 796,912
Purchase of premises and equipment (26,087) (78,974)
Purchase of available-for-sale securities (345,176) 0
Proceeds from maturities of
held-to-maturity securities 168,369 2,090,310
Proceeds from sale of foreclosed assets 262,138 0
----------- ------------
Net cash used in investing activities (16,516,885) (7,694,643)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid 0 (687,500)
Cash dividends received on RRP stock 0 1,842
Net increase in demand deposits,
NOW accounts and savings accounts 1,507,899 3,878,115
Net decrease in certificates of deposit (8,136,679) (8,046,119)
Proceeds from FHLB advances 29,840,000 18,000,000
Repayments of FHLB advances (2,211,594) (4,009,874)
Advances from borrowers for taxes and insurance 438,999 190,162
RSP stock purchased (2,373,065) 0
Treasury stock purchased (4,280,238) 0
Stock options exercised 0 1,788
----------- -----------
Net cash provided by financing activities 14,785,322 9,328,414
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,951,731) 3,793,493
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,304,923 3,817,351
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,353,192 $ 7,610,844
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Conversion, Reorganization and Stock Issuance
Guaranty Federal Bancshares, Inc. completed the conversion from a federally
chartered mutual holding company, (formerly Guaranty Federal Bancshares, M. H.
C.) to a Delaware-chartered stock corporation on December 30, 1997. Guaranty
Federal Bancshares, Inc. exchanged 1,880,710 shares of its common stock for all
the Bank's common stock not held by Guaranty Federal Bancshares, M. H. C. This
exchange ratio was 1.931. In addition 4,340,812 shares at $10.00 per share were
sold in the stock offering, including 344,454 shares to the employee stock
ownership plan ( the "ESOP"). Costs related to the stock issuance have been
applied to reduce the gross proceeds, resulting in net proceeds from the
offering of $39.2 million. Total shares of common stock outstanding following
the offering and exchange was 6,221,522.
In April 1995 Guaranty Federal Savings and Loan Association (the
"Association") reorganized from a federally chartered mutual savings and loan
association into a federal mutual holding company, Guaranty Federal Bancshares,
M. H. C. (the "MHC"). As part of the reorganization, the Association
incorporated a de novo federally chartered stock savings bank, Guaranty Federal
Savings Bank (the "Bank") and transferred most of its assets and all its
liabilities to the Bank. The Bank issued 3,125,000 shares of its common stock
(par value $1.00) of which 972,365 shares were sold to parties other than the
MHC, thus creating a minority ownership interest in the Bank. The shares had an
initial public offering price of $8 per share, resulting in gross sales proceeds
of $7,778,920. Costs related to the stock issuance, which have been applied to
reduce the gross proceeds, were $654,388. Also $100,000 was transferred to the
MHC for the initial capitalization in connection with reorganization.
Note 2: Basis of Presentation
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
6
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2: Basis of Presentation, continued
Operating results for the three-month periods ended September 30,
1998 and 1997, are not necessarily indicative of the results that may be
expected for the full year. Prior to December 30, 1997, the Company engaged in
no significant business activity other than formation activities. Between
December 30, 1997 and September 30, 1998, the Company engaged in no significant
business activity other than ownership of the common stock of the Bank.
Accordingly, all consolidated financial statements for periods prior to December
30, 1997, relate solely to the Bank and Guaranty Financial Services, Inc. of
Springfield, a wholly owned subsidiary of the Bank. For further information
refer to the Company's June 30, 1998, Form 10-K which was filed with the
Securities and Exchange Commission and includes a complete set of audited
financial statements through June 30, 1998.
Note 3: Principles of Consolidation
As more fully described in Note 1, the Company is a Delaware-chartered
stock corporation organized to facilitate the conversion from the mutual holding
company form of ownership of the Bank to the stock holding company form of
ownership of the Bank and hold all of the capital stock of the Bank. In
connection with the conversion, Guaranty Federal Bancshares, M. H. C., which had
owned 69% of the common stock of the Bank, was merged with and into the Bank,
and its shares of the Bank were canceled.
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiary, Guaranty Federal Savings Bank and the
wholly-owned subsidiary of the Bank, Guaranty Financial Services of Springfield,
Inc. Significant intercompany accounts and transactions have been eliminated in
consolidation.
Note 4: Earnings Per Share
As more fully described in the preceding Notes, the Company had no
operations prior to December 30, 1997 and earnings per share information for the
common stock of the Company for the three months ended September 30, 1997 has
not been presented because the information would not be meaningful.
7
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4: Earnings Per Share,continued
For three months ended September 30, 1998
Income Shares Per-share
-------- ------ ---------
Basic EPS
Income available to common stockholders $798,103 5,683,949 $0.14
=====
Effect of Dilutive Securities
Stock options 70,265
RRP/RSP shares 19,011
--------- --------
Income available to common stockholders $798,103 5,773,225 $0.14
======== ========= =====
Options to purchase 5,000 shares and 436,347 shares of common stock at $12.63
per share and $13.44 per share, respectively were outstanding during the three
months ended September 30, 1998, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
Note 5: Benefit Plans
On October 18, 1995, the Bank's stockholders voted to approve both a
Recognition and Retention Plan ("RRP") and a Stock Option Plan ("SOP"). On July
22, 1998, the Company's stockholders voted to approve the 1998 Restricted Stock
Plan (" RSP") and 1998 Stock Option Plan ("1998 SOP"). The RRP and RSP
authorized shares to be issued to directors, officers and employees of the Bank.
As of September 30, 1998, all of the RRP and RSP shares have been purchased and
all except 9,338 shares have been awarded. The Bank is amortizing the RRP and
RSP expense over each participant's vesting period and the financial statements
reflect RRP and RSP expense of $133,485 and $22,247 for the three month periods
ended September 30, 1998 and 1997, respectively. The SOP and 1998 SOP authorized
stock options on shares to be issued to officers and employees of the Bank. As
of September 30, 1998, all options except those on 32,295 shares have been
granted. The RRP, RSP, SOP and 1998 SOP vest over a five year period. The RRP
and SOP have been adjusted to reflect the conversion, reorganization and stock
issuance described in Note 1 with all vesting periods remaining unchanged. At
September 30, 1998, there were 579,756 unexercised options that have been
granted at prices ranging from $5.83 to $13.44 per share and 213,612 RRP and RSP
shares were unvested.
Note 6: New Accounting Pronouncements
During the quarter ending September 30, 1998, the Company adopted SFAS
130, "Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components in a set of
financial statements.
8
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The accompanying Consolidated Financial Statements include the accounts
of Guaranty Federal Bancshares, Inc. (the "Company"), and all accounts of its
wholly owned subsidiary , Guaranty Federal Savings Bank (the "Bank") and all
accounts of the wholly-owned subsidiary of the Bank, Guaranty Financial Services
of Springfield, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation.
However, because the conversion, reorganization and stock issuance of
the Company, the Bank and related entities did not occur until December 30,
1997, all results prior to that date reflect the accounts of the Bank and its
subsidiary. The Company realized approximately $39.2 million in net proceeds
from the stock issuance of which the Company provided $19.9 million to the Bank
as capital and the Company provided a loan of $3.44 million to fund the purchase
of stock for the employee stock ownership plan. Other than the loan for the
ESOP, most of the funds received have been invested in loans.
The primary function of the Company has been to monitor its investment
in the Bank, as a result, the results of operation 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 salary and benefits, occupancy
expenses and other expenses. The following discussion reviews the financial
condition at September 30, 1998, and the results of operations for the three
months ended September 30, 1998 and 1997.
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 the Form 10-Q. 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 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; and the ability to discover
and correct potential Year 2000 problem, which is discussed later.
9
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Financial Condition
The Company's total assets increased $16,508,095, or 6.3%, from
$260,042,559 as of June 30, 1998, to $276,550,654 as of September 30, 1998.
Interest-bearing deposits in other financial institutions decreased
$2,259,487, or 35.0% from $6,458,232 as of June 30, 1998, to $4,198,745 as of
September 30, 1998. This was due to funds being invested in other interest
earning assets, primarily loans.
Securities available-for-sale increased $546,549, or 11.5% from
$4,765,021 as of June 30, 1998, to $5,311,570 as of September 30, 1998,
primarily due to the purchase of various equity securities. Securities
held-to-maturity decreased due to principal repayments, by $156,044, or 1.7%,
from $8,922,389 as of June 30, 1998 to
$8,766,345 as of September 30, 1998. The Bank continues to hold 96,000 shares
of Federal Home Loan Corporation ("FHLMC") stock with a amortized cost of
$94,000 in the available-for-sale category. As of September 30, 1998, the gross
unrealized gain on the stock was $4,652,240 an increase from $4,424,000 as of
June 30, 1998.
Mortgage-backed securities, held-to-maturity, decreased $1,376,562, or
11.5%, from $11,948,654 as of June 30, 1998, to $10,572,092, as of September 30,
1998. Mortgage-backed securities, available-for-sale, decreased $149,892, or
1.7% from $9,055,658 as of June 30, 1998, to $8,905,766 as of September 30,
1998. The decrease is attributable to prepayments received on various pools of
mortgage-backed securities during the three months ending September 30, 1998.
Net loans receivable increased by $18,044,063, or 8.8%, from
$205,414,561, as of June 30, 1998, to $223,458,624, as of September 30, 1998,
and loans held-for-sale increased by $577,398, or 71.7%, from $805,183 as of
June 30, 1998 to $1,382,581 as of September 30, 1998. Growth consisted primarily
of loans secured by both owner and non-owner occupied residential real estate,
which increased by $14,096,000. Growth in loans receivable is anticipated to
continue and represents a major part of the Bank's planned assets growth.
Allowance for loan losses increased $56,693 or 2.6% from $2,191,557 as
of June 30, 1998, to $2,248,250 as of September 30, 1998. The allowance
increased due to an increase in the provision for loan losses, as well as
experiencing recoveries in excess of charge-offs for the period. The allowance
for loan losses as of September 30, 1998 and June 30, 1998 was 1.0%, and 1.1%
respectively, of net loans outstanding. As of September 30, 1998, the allowance
for loan losses was 281.4% of nonperforming loans versus 216.6% as of June 30,
1998.
10
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Financial Condition, continued
Fair value of foreclosed assets held-for-sale decreased $278,700 or
97.4% from $286,000 as of June 30, 1998, to $7,300 as of September 30, 1998.
This decrease was due to the sale of three duplexes and a partially constructed
single-family residence. These properties were sold at their book value.
Premises and equipment decreased $71,153, or 1.0%, from $7,432,971 as
of June 30, 1998, to $7,361,818 as of September 30, 1998, primarily due to the
depreciation recorded for the period ended September 30, 1998.
Deposits decreased $6,628,780, or 4.7%, from $140,975,336 as of June
30, 1998, to $134,346,556 as of September 30, 1998. For the three months ending
September 30, 1998, checking and passbook accounts increased by $1,507,899, or
4.1%, while certificates of deposits decreased by $8,136,679, or 7.8%. The
majority of this increase in checking and passbook accounts can be attributed to
an aggressive marketing campaign initiated in early 1997 designed to attract
checking deposit customers. The decrease in certificates of deposit can be
attributed to management's decision to allow high cost certificates of deposit
accounts to run off and replace these funds with FHLB advances at an overall
lower marginal cost.
As a result of the decrease in deposits, and the continued increase in
loan demand, FHLB advances increased $27,628,406 or 61.3%, from $45,081,028 as
of June 30, 1998, to $72,709,434 as of September 30, 1998. As of September 30,
1998, the Bank had the ability to borrow an additional $70.0 million from the
FHLB.
Accrued expenses and other liabilities increased $1,143,509 or 222.5%
from $513,943 as of June 30, 1998, to $1,657,452 as of September 30, 1998. The
majority of this increase is due to a $0.16 per share dividend payable on
October 15, 1998 to stockholders of record September 8, 1998, totaling $946,679.
Stockholders' equity (including unrealized appreciation on securities
available-for-sale, net of tax) decreased $6,555,028, or 9.3%, from $70,690,098
as of June 30, 1998, to $64,135,070 as of September 30, 1998. This decrease was
due to several factors. In connection with the RSP, $2,373,065 was contributed
to purchase 173,632 shares of Company stock, which was accounted for as a
reduction of stockholders' equity. In addition, a total of 311,290 shares of
treasury stock were purchased in the open market at a cost of $4,280,238.
Finally, dividends in the amount of $946,679 ($0.16 per share) were declared as
discussed above. On a per share basis, stockholders' equity decreased from
$12.01 as of June 30, 1998 to $11.51 as of September 30, 1998.
11
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Results of Operations - Comparison of Three Month Periods
Ended September 30, 1998 and 1997
Net income for the three months ended September 30, 1998 was $798,103,
as compared to net income of $516,503 for the three months ended September 30,
1997 which represents a increase in earnings of $281,600, or 54.5%, for the
three month period.
Interest Income
Total interest income for the three months ended September 30, 1998,
increased $994,387 or 25.2% as compared to the three months ended September 30,
1997. For the three month period, the average yield on interest earning assets
decreased 52 basis points to 7.71% and the average balance outstanding increased
$64,541,000.
Interest Expense
Total interest expense for the three months ended September 30, 1998,
increased $314,005 or 14.4% when compared to the three months ended September
30, 1997. For the three month period, the average cost of interest bearing
liabilities decreased 4 basis points to 5.18% while the average balance
outstanding increased $25,399,000.
Net Interest Income
Net interest income for the three months ended September 30, 1998,
increased $680,382, or 38.8% when compared to the three months ended September
30, 1997. The increase in net interest income was the result of the greater
increase in interest earning assets of $64,541,000, compared to the increase in
interest bearing liabilities of $25,399,000. This difference was primarily due
to the inflow of cash from the stock conversion, which was converted to interest
earning assets, primarily in the form of loans originated by the Bank. This
resulted in an increase in net interest income even though the yield on interest
earning assets decreased by 52 basis points, compared to the decrease of 4 basis
points on interest bearing liabilities.
12
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Provision for Loan Losses
Based primarily on the continued growth of the loan portfolio,
management decided to increase the loan loss reserve through a provision for
loan loss of $45,000 for the three months ended September 30, 1998, compared to
$33,352 for the three months ended September 30, 1997. The Bank will continue to
monitor its allowance for loan losses and make future additions based on
economic and regulatory conditions. Although the Bank maintains its allowance
for loan losses at a level which it considers to be sufficient to provide for
potential losses, there can be no assurance that future 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 loss provisions.
Noninterest Income
Noninterest income increased $59,442 for the three months ended
September 30, 1998, or 28.1% compared to the three months ended September 30,
1997. The increase was primarily due to the increase in checking account
customers which has resulted in more service charge income. Service charges on
checking accounts increased $85,005 for the three months ended September 30,
1998, or 70.3% compared to the three months ended September 30, 1997.
Noninterest Expense
Noninterest expense increased $289,034 for the three months ended
September 30, 1998, or 25.8%, as compared to the three months ended September
30, 1997. In general this increase can be attributed to the overall increase in
accounts served, in addition to the added costs associated with the ESOP and RSP
that were formed in connection with the conversion.
Salaries and employee benefits increased $192,571 for the three months
ended September 30, 1998, or 33.1%, when compared to the same period in 1997.
This included an increase in RRP/RSP expense of $111,238 for the three months
ended September 30, 1998, or 500.0%, when compared to the same period in 1997,
as well as the addition of $70,410 for the ESOP expense. There was no ESOP
expense for the same period in 1997. Data processing expenses increased $29,006,
or 33.2%, and advertising expense increased $20,854, or 24.0%, for the three
months ended September 30, 1998, when compared to the same period in 1997. These
increases in data processing and advertising expenses for the period were
primarily due to the increased volume of transactions handled and increased
promotional activities, respectively.
13
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Provision for Income Taxes
There was a $157,542 increase in the provision for income taxes for the
three months ended September 30, 1998, as compared to the same period in 1997.
This increase was due to the increase in before tax income for the three months
ended September 30, 1998, compared to the same period in 1997.
Nonperforming Assets
The allowance for loan losses is calculated based upon an evaluation of
pertinent factors underlying the various types and quality of the loans.
Management considers such factors as the repayment status of a loan, the
estimated net realizable value of the underlying collateral, the borrower's
intent and ability to repay the loan, local economic conditions and the Bank's
historical loss ratios. The Bank's allowance for loan losses as of September 30,
1998, was $2,248,250 or 1.0% of loans receivable. Total assets classified as
substandard or loss as of September 30, 1998, were $1,455,645 or 0.5% of total
assets. Management has considered nonperforming and total classified assets 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 (nonaccruing loans) and assets which have been
acquired as a result of foreclosure or deed-in-lieu of foreclosure.
.
9/30/98 6/30/98 6/30/97
------- ------- -------
(Dollars In Thousands)
Nonperforming loans $ 799 $ 1,012 $ 1,257
Real estate acquired in
settlement of loans 7 286 210
------- -------- -------
Total Nonperforming Assets $ 806 $ 1,298 $ 1,467
======= ======= =======
Total Nonperforming Assets
as a Percentage of Total
Assets 0.29% 0.50% .74%
Allowance for loan losses $ 2,248 $ 2,191 $ 2,177
Allowance for loan losses as a
Percentage of average loans, net 1.04% 1.24% 1.49%
14
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Asset/Liability Management
The goal of the Bank's asset/liability policy is to manage interest
rate risk so as to maximize net interest income over time in changing interest
rate environments. Management monitors the Bank's net interest spreads (the
difference between yields received on assets and paid on liabilities) and,
although constrained by market conditions, economic conditions, and prudent
underwriting standards, it offers deposit rates and loan rates that maximize net
interest income. Management also attempts to fund the Bank's assets with
liabilities of a comparable duration to minimize the impact of changing interest
rates on the Bank's net interest income. Since the relative spread between
financial assets and liabilities is constantly changing, the Bank's current net
interest income may not be an indication of future net interest income.
The Bank's initial efforts to manage interest rate risk included
implementing an adjustable rate mortgage loan ("ARM") program beginning in the
early 1980s. The ARMs have met with excellent customer acceptance. As of June
30, 1998, ARMs constituted 71.0% of the Bank's mortgage loan portfolio. However
during the first quarter of fiscal year 1999, the general level of long-term
interest rates dropped and borrowers opted for fixed rate mortgages. As of
September 30, 1998, ARMs represent 66.9% of the loan portfolio. Of the ARMs
originated during the first quarter of fiscal year 1999, borrowers preferred
initial fixed rate periods of three or five years. In response to this shift in
customer preference, the Bank has continued a program of borrowing longer-term
funds from the FHLB.
The Bank is also managing interest rate risk by the origination of
construction loans. As of September 30, 1998, such loans made up 14.9% of the
Bank's loan portfolio. In general, these loans have higher yields, shorter
maturities and greater interest rate sensitivity than other real estate loans.
The Bank constantly monitors its deposits in an effort to decrease
their interest rate sensitivity. Rates of interest paid on deposits at the Bank
are priced competitively in order to meet the Bank's asset/liability management
objectives and spread requirements. As of June 30, 1998, the Bank's savings
accounts, checking accounts, and money market deposit accounts totaled
$36,855,202 or 26.1% of its total deposits. As of September 30, 1998, these
accounts totaled $38,363,101 or 28.5% of total deposits. The Bank believes,
based on historical experience, that a substantial portion of such accounts
represents non-interest rate sensitive, core deposits.
The value of the Bank's loan portfolio will change as interest rates
change. Rising interest rates will decrease the Bank's net portfolio value,
while falling interest rates increase the value of that portfolio.
15
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Interest Rate Sensitivity Analysis
The following table sets forth as of June 30, 1998 (the most recent
available), OTS estimate of the projected changes in net portfolio value ("NPV")
in the event of 100, 200, 300, and 400 basis point ("bp") instantaneous and
permanent increases and decreases in market interest rates. Dollar amounts are
expressed in thousands.
BP Change Estimated Net Portfolio Value NPV as % of PV Assets
in Rates $ Amount $ Change % Change NPV Ratio BP Change
- ---------- -------- -------- -------- --------- ---------
+400 bp $ 49,632 $ (7,222) -13% 20.4% -122 bp
+300 52,616 (4,238) -7% 21.2% -48 bp
+200 54,977 (1,877) -3% 21.7% 0 bp
+100 56,440 (414) -1% 21.8% +18 bp
NC 56,854 21.7%
- -100 56,296 (558) -1% 21.2% -48 bp
- -200 54,719 (2,135) -4% 20.4% -131 bp
- -300 53,423 (3,431) -6% 19.6% -206 bp
- -400 52,107 (4,747) -8% 18.8% -283 bp
Computations of prospective effects of hypothetical interest rate
changes are calculated by the OTS from data provided by the Bank and are based
on numerous assumptions, including relative levels of market interest rates,
loan repayments and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Management cannot predict future interest rates or their effect on the
Bank's NPV in the future. Certain shortcomings are inherent in the method of
analysis presented in the computation of NPV. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in differing degrees to changes in market interest rates.
Additionally, certain assets, such as adjustable rate loans, which represent the
Bank's primary loan product, have an initial fixed rate period typically from
one to five years and over the remaining life of the asset changes in the
interest rate are restricted. In addition, the proportion of adjustable rate
loans in the Bank's portfolio could decrease in future periods due to
refinancing activity if market interest rates remain or decrease in the future.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels could deviate significantly from those assumed in the table.
Finally, the ability of many borrowers to service their adjustable-rate debt may
decrease in the event of an interest rate increase.
16
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Interest Rate Sensitivity Analysis, continued
The Bank's Board of Directors is responsible for reviewing the asset
and liability policies. The Board meets quarterly to review interest rate risk
and trends, as well as liquidity and capital ratios and requirements. The Bank's
management is responsible for administering the policies and determinations of
the Board of Directors with respect to the Bank's asset and liability goals and
strategies. Management expects that the Bank's asset and liability policies and
strategies will continue as described above so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and
interest payments on loans, and securities and extensions of credit from the
Federal Home Loan Bank of Des Moines. While scheduled loan and security
repayments and the maturity of short-term investments are somewhat predictable
sources of funding, deposit flows are influenced by many factors which make
their cash flows difficult to anticipate. Office of Thrift Supervision
regulations require the Bank to maintain cash and eligible investments in an
amount equal to at least 4% of customer accounts and short-term borrowings to
assure its ability to meet demands for withdrawals and repayment of short-term
borrowings. As of September 30, 1998, the Bank's liquidity ratio was 17.6%,
which exceeded the minimum regulatory requirement.
The Bank uses its liquidity resources principally to satisfy its
ongoing commitments which include funding loan commitments, funding maturing
certificates of deposit as well as deposit withdrawals, maintaining liquidity,
purchasing investments, and meeting operating expenses. At September 30, 1998,
the Bank had approximately $4,568,000 in commitments to originate mortgage loans
and $14,785,000 in loans-in-process on mortgage loans. These commitments will be
funded through existing cash balances, cash flow from operations and, if
required, FHLB advances . Management believes that anticipated cash flows and
deposit growth will be adequate to meet the Bank's liquidity needs.
17
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Impact of Year 2000
Rapid and accurate data processing is essential to the Bank's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the year 2000 as the year 1900 or as the year 1980
and incorrectly attempt to compute payments, interest, delinquency and other
data. The Bank has been evaluating both information technology (computer
systems) and non-information technology systems (e.g., telephone systems, vault
timers, security systems and elevator controls). We have evaluated our risk in
three areas: (1) our own computers, (2) computers of others used by our
borrowers, depositors, and business partners, and (3) computers of others who
provide us with data processing services.
Our own computers. The Bank expects to spend approximately $190,000
($137,000 for hardware, $38,000 for software and $15,000 in consulting fees)
through June 30, 1999 to upgrade our computer systems. These upgrades are
expected to eliminate the Year 2000 risk in our computers. We do not expect to
have material costs to address this risk area after December 31, 1998. As of
September 30, 1998, the Bank has spent approximately $25,500 ($22,500 for
hardware and $3,000 for software) to fix Year 2000 problems. We expect to be
Year 2000 compliant in this risk area by June 30, 1999.
Computers of others used by borrowers, depositors, and business
partners. The Bank has evaluated most of our material borrowers and depositors
and does not believe that the Year 2000 problem should, on an aggregate basis,
impact their ability to make payments or deposits to the Bank. We believe that
most of our residential customers are not dependent on their home computers for
income and that none of our commercial customers are so large that a Year 2000
problem would render them unable to collect revenue or rent and, in turn,
continue to do business with the Bank. We have solicited our material business
partners regarding their Year 2000 readiness and are currently evaluating their
responses.
Computers of others who provide us with data processing services. This
risk is primarily focused on one third-party service bureau that provides all of
the Bank's core data processing. This service bureau advises that it has
completed program changes required for Year 2000 processing. If these program
changes are not correct before the year 2000, the Bank would likely experience
significant delays, mistakes, or failures. These delays, mistakes, or failures
could have a significant impact on the Bank's financial condition and results of
operations.
18
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
Impact of Year 2000, continued
Contingency Plan. The Bank is monitoring our service bureau to evaluate
whether our data processing system will fail. We are serving as a "proxy" Year
2000 test site for other financial institutions on the same system. Such tests
are scheduled to end before October 31, 1998. After our experience with these
tests, we will develop a contingency plan including a range of alternatives
depending on the results of the tests. The alternatives could range from
shifting to a compliant system to back-up for unforeseen contingencies on our
current system. We currently utilize many spreadsheet programs to compute and
store data. Should our core system fail, we will enter deposit and loan
transactions in spreadsheets in order to conduct business until the core system
is corrected. If this labor-intensive approach is necessary, management and our
employees will become much less efficient. However, we believe that we would be
able to operate in this manner until our existing service bureau, or their
replacement, is able to again provide data processing services. If very few
financial institution service bureaus are operating in the year 2000, our
replacement costs, assuming we could negotiate an agreement, could be material.
19
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
PART II
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Common Stockholders
A special meeting of stockholders was held on July 22, 1998 to
consider two benefit plans. At the meeting, stockholders approved the
Guaranty Federal Bancshares, Inc. 1998 Stock Option Plan by a vote of
3,375,805 shares for, 819,786 shares against, 63,992 shares
abstaining, with 13,731 broker non-votes. Stockholders also approved
the Guaranty Federal Savings Bank Restricted Stock Plan by a vote of
3,268,072 shares for, 930,887 shares against, 73,355 shares
abstaining, with no broker non-votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None.
b) Reports on Form 8-K
None.
20
<PAGE>
GUARANTY FEDERAL BANCSHARES, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Guaranty Federal Bancshares, Inc.
Signatures Date
---------- ----
\S\ James E. Haseltine November 12, 1998
- -------------------------------------- ----------------------------------
James E. Haseltine
President and Chief Executive Officer
(Principal Executive Officer)
\S\ Bruce Winston November 12, 1998
- -------------------------------------- ----------------------------------
Bruce Winston
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,154
<INT-BEARING-DEPOSITS> 4,199
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,217
<INVESTMENTS-CARRYING> 19,338
<INVESTMENTS-MARKET> 0
<LOANS> 227,089
<ALLOWANCE> 2,248
<TOTAL-ASSETS> 276,551
<DEPOSITS> 134,347
<SHORT-TERM> 72,709
<LIABILITIES-OTHER> 5,360
<LONG-TERM> 0
0
0
<COMMON> 623
<OTHER-SE> 63,512
<TOTAL-LIABILITIES-AND-EQUITY> 276,551
<INTEREST-LOAN> 4,383
<INTEREST-INVEST> 433
<INTEREST-OTHER> 118
<INTEREST-TOTAL> 4,934
<INTEREST-DEPOSIT> 1,586
<INTEREST-EXPENSE> 2,502
<INTEREST-INCOME-NET> 2,432
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 1,410
<INCOME-PRETAX> 1,248
<INCOME-PRE-EXTRAORDINARY> 1,248
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 798
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> 3.80
<LOANS-NON> 620
<LOANS-PAST> 23
<LOANS-TROUBLED> 799
<LOANS-PROBLEM> 799
<ALLOWANCE-OPEN> 2,192
<CHARGE-OFFS> 20
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,248
<ALLOWANCE-DOMESTIC> 2,248
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
