EXHIBIT 13
GUARANTY FEDERAL BANCSHARES
2000 ANNUAL REPORT TO OUR SHAREHOLDERS
CONTENTS
1 Investor Information
2 President's Message
3 Selected Consolidated Financial and other Data
4 Management's Discussion and Analysis of Financial Condition and
Results of Operations
15 Consolidated Financial Statements
41 Independent Accountants' Report
42 Directors and Officers
COMMON STOCK PRICES & DIVIDENDS
The common stock of Guaranty Federal Bancshares, Inc. is traded in the over-the-
counter market and quoted on the NASDAQ National Market. As of August 28, 2000,
there were 1,894 stockholders of the 6,252,197 shares of common stock issued and
outstanding.
The Company paid cash dividends of $0.20 per share on October 15, 1999, to
shareholder's of record as of September 7, 1999, and $0.22 per share on April
14, 2000, to shareholder's of record as of March 30, 2000.
The table below reflects the range of common stock closing prices by quarter.
Fiscal Year ended
----------------------------------
June 30, 2000 June 30, 1999
--------------- ---------------
High Low High Low
Quarter ended:
June 30 $ 10.38 9.69 11.75 10.50
March 31 10.69 9.94 11.06 12.12
December 31 11.94 9.94 13.00 10.12
September 30 12.38 11.38 13.75 10.12
INVESTOR INFORMATION
- --------------------
ANNUAL MEETING OF SHAREHOLDERS: The Annual Meeting of Stockholders will be held
Wednesday, October 25, 2000, at 5:00p.m., at the offices of the Bank, 1341 West
Battlefield Street, Springfield, Missouri.
ANNUAL REPORT ON FORM 10-K: Copies of the Guaranty Federal Bancshares Form 10-K
Report to the Securities and Exchange Commission are available without charge
upon written request to: Lorene Thomas, Secretary, Guaranty Federal Bancshares,
Inc., 1341 W. Battlefield St., Springfield, MO 65807-4181. Copies are also
available via the internet: http://www.gfed.com
-------------------
TRANSFER AGENT: Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ
07016
STOCK TRADING INFORMATION: Over-the Counter Symbol: GFED
SPECIAL LEGAL COUNSEL: Manatt, Phelps & Phillips, LLP, 1501 M Street N.W.,
Suite 700, Washington, D.C. 20005
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS: Baird, Kurtz & Dobson, 901 St. Louis
St., PO Box 1190, Springfield, MO 65801-1190
SHAREHOLDER AND FINANCIAL INFORMATION: Bruce Winston, Vice President, Chief
Financial Officer 417-520-0206
GUARANTY FEDERAL BANCSHARES
PRESIDENT'S MESSAGE
Dear Shareholders,
The front cover of this report shows our new branch office on South
National Avenue in Springfield, which was just recently opened. This 3000
square foot facility (which replaces a temporary facility) will serve a growing
area of the city and is already building traffic. We invite you to stop by and
visit this new office.
This past year could best be characterized as one spent in preparation
for special events - first, the year 2000 date change, and secondly, our
software conversion to an in-house, "state-of-the-art" operating system. In
spite of these distractions from the normal operating environment, we were able
to grow assets by $28.6 million, or 9%, increase earnings 4.4% to $3.505
million, increase diluted Earnings Per Share (EPS) by 16 % from $0.60 to $0.70
per share, and pay two semiannual dividends of $0.20 and $0.22 per share. At
June 30, 2000, book value per share of common stock was $12.36.
Interest rates on time deposits in the Springfield market have
remained higher than alternative sources of funding, leading us to fund our
asset growth and repurchases of stock through advances (loans) from the Federal
Home Loan Bank. These advances have allowed us to better control the risk of
fluctuations in earnings due to shifts in interest rates. While time deposits
have decreased slightly over the past year, checking and savings deposits have
increased by 14%, and we expect continued growth in these "core" deposits.
While trying to leverage capital with growth in our market, we have
also been active in repurchasing our stock. During the fiscal year, we were
able to repurchase 741,194 shares of our stock at very attractive prices, and
help support the price through increased earnings. Asset quality underlying the
loans we make has remained very strong and is a central theme of management.
However the greatest asset of any successful organization is its
people, and I've seen more people step up to the plate and take leadership roles
this past year than at any time I can remember. I'm immensely proud of them and
the job they've done. Mr. George Hall is retiring from the Board of Directors
after thirteen years of service and deserves our thanks as well.
Fiscal 2001 is upon us, and we hope you're as excited as we are about
our future.
Sincerely,
/s/ James E. Haseltine
----------------------
James E. Haseltine
President and CEO
Guaranty Federal Bancshares, Inc.
Selected Consolidated Financial and Other Data
The following tables include certain information concerning the financial
position of Guaranty Federal Bancshares, Inc. (including consolidated data from
operations of subsidiaries) as of the dates indicated. Dollar amounts are
expressed in thousands except per share data.
Summary Statement of Income Years Ended June 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
Interest income $ 23,564 20,763 17,196 14,711 13,702
Interest expense 12,929 10,703 8,743 8,310 8,239
-------- ------- ------- ------- -------
Net interest income 10,635 10,060 8,453 6,401 5,463
Provision (credit) for loan losses 180 180 123 - (1,212)
-------- ------- ------- ------- -------
Net interest income after provision (credit)
for loan losses 10,455 9,880 8,330 6,401 6,675
Noninterest income 1,418 1,201 953 530 221
Noninterest expense 6,420 5,958 4,823 5,105 4,117
-------- ------- ------- ------- -------
Income before income taxes 5,453 5,123 4,460 1,826 2,779
Provision for income taxes 1,947 1,765 1,619 664 1,026
-------- ------- ------- ------- -------
Net income 3,506 3,358 2,841 1,162 1,753
======== ======= ======= ======= =======
Earnings per share, since conversion December 30, 1997
Basic $ 0.71 0.61 0.29 n/a n/a
======== ======= =======
Diluted $ 0.70 0.60 0.29 n/a n/a
======== ======= =======
Summary Balance Sheet As of June 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
ASSETS
Cash and cash equivalents $ 9,157 9,689 7,305 3,817 2,675
Investment securities 20,414 24,346 34,691 27,760 37,775
Loans receivable, net 296,053 264,269 206,220 158,135 135,029
Accrued interest receivable 1,826 1,757 1,604 1,312 1,381
Prepaids and other assets 7,605 5,672 2,503 1,964 1,913
Foreclosed assets 1 101 286 210 2
Premises and equipment 6,800 7,365 7,433 6,267 6,392
-------- ------- ------- ------- -------
$341,856 313,199 260,042 199,465 185,167
======== ======= ======= ======= =======
LIABILITIES
Deposits $144,607 141,137 140,975 151,246 157,008
Federal Home Loan Bank advances 136,507 104,795 45,081 18,151 -
Other liabilities 4,157 3,834 3,296 2,578 1,573
-------- ------- ------- ------- -------
285,271 249,766 189,352 171,975 158,581
STOCKHOLDERS' EQUITY
Common stock 625 624 623 3,125 3,125
Additional paid-in capital 47,921 47,366 49,017 3,687 3,556
Unearned ESOP shares (2,870) (3,100) (3,445) - -
Retained earnings 24,655 23,236 21,683 18,620 18,646
Unrealized appreciation on available-for-sale
securities, net 2,399 3,439 2,812 2,058 1,259
Treasury stock (16,145) (8.132) - - -
-------- ------- ------- ------- -------
56,585 63,433 70,690 27,490 26,586
-------- ------- ------- ------- -------
$341,856 313,199 260,042 199,465 185,167
======== ======= ======= ======= =======
Supplemental Data As of June 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
Number of full-service offices 5 5 5 4 4
Cash dividend per share $ 0.42 0.34 0.15 n/a n/a
3
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
GENERAL
Guaranty Federal Bancshares, Inc. (and with its subsidiary, the "Company")
is a Delaware corporation organized on December 30, 1997 for the purpose of
becoming the holding company of Guaranty Federal Savings Bank (the "Bank").
In April 1995, Guaranty Federal Savings & Loan Association reorganized from
a federally chartered mutual savings and loan association into a mutual holding
company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent with the
reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings bank
was chartered. In December 1997, the Company completed the conversion and
reorganization of the Bank and the former MHC by selling common stock to
depositors of the Bank and a benefit plan of the Bank. In addition, all shares
of common stock of the Bank held by public stockholders were exchanged for
shares of common stock of the Company. Per share data prior to December 30,
1997 is not presented herein, as the information would not be meaningful.
The Company's principal business consists of attracting deposits from the
general public and using such deposits to originate mortgage loans secured by
one- to four-family residences and, to a lesser extent, multi-family,
construction and commercial real estate loans and consumer and business loans.
The Company also uses these funds to purchase loans secured by one- to four-
family residences, mortgage-backed securities, US government and agency
obligations, and other permissible securities. When cash outflows exceed
inflows, the Company uses borrowings as an additional financing source.
The Company derives revenues principally from interest earned on loans and
investments and, to a lesser extent, from fees charged for services. General
economic conditions and policies of the financial institution regulatory
agencies, including the Office of Thrift Supervision ("OTS") and the Federal
Deposit Insurance Corporation ("FDIC") significantly influence the Company's
operations. Interest rates on competing investments and general market interest
rates influence the Company's cost of funds. Lending activities are affected by
the interest rates at which such financing may be offered. The Company intends
to continue to focus on programs for both one- to four-family lending and
consumer lending throughout southwestern Missouri.
FINANCIAL CONDITION
From June 30, 1999 to June 30, 2000, the Company's total assets increased
$28,656,871 (9%), liabilities increased $35,504,703 (14%), and stockholders'
equity decreased $6,847,832 (11%). The ratio of stockholders' equity to total
assets decreased from 20% to 17%.
Securities available-for-sale increased $4,694,132 (52%), from $8,951,175
as of June 30, 1999 to $13,645,307 as of June 30, 2000. The Company continues
to hold 96,000 shares of Federal Home Loan Mortgage Corporation ("FHLMC") stock
with an amortized cost of $94,000 in the securities available-for-sale category.
As of June 30, 2000, the gross unrealized gain on the stock was $3,794,000, a
decrease of $1,680,000 from the $5,474,000 unrealized gain as of June 30, 1999.
Securities held-to-maturity decreased $8,625,971 (56%), from $15,394,643 as of
June 30, 1999 to $6,768,672 as of June 30, 2000. These decreases are
attributable to repayments received during the year. Stock in the Federal Home
Loan Bank of Des Moines ("FHLB") increased in proportion to advances from the
FHLB. The Bank is required to own stock in the FHLB equal to five percent of
its borrowings.
Net loans receivable increased by $31,557,975 (12%), from $263,499,778 as
of June 30, 1999 to $295,057,753 as of June 30, 2000. During this period,
permanent loans secured by both owner and non-owner occupied one to four unit
residential real estate increased by $19,249,670, (11%), multi-family permanent
loans increased by $3,351,040 (9%), construction loans increased by $2,766,342
(7%) and permanent loans secured by commercial real estate increased $5,787,533
(28%). Loans past maturity and past due 90 days or more increased from $211,688
(0.1% of net loans) as of June 30, 1999 to $249,047
4
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
(0.1% of net loans) as of June 30, 2000. As of June 30, 2000, management
considers $4,756,870 as impaired with a related allowance for loan losses of
$728,761. Three borrowers with five loans account for $4.4 million of the
impaired loans. Three of the loans to one borrower are secured by multifamily
properties. These properties have not historically generated sufficient cash
flow to properly maintain the properties and service the debt. The second
troubled borrower is a builder having difficulty selling their homes. The homes
are now substantially complete. The third troubled borrower owns and operates
three motels. Since the loan was originated, the motels have experienced
significant competition from newly constructed motels. The borrower requested
that the amortization on the note be extended. As of June 30, 2000, each of
these five loans was current. The Bank recognizes interest income on these loans
as payments are received. Management believes should these borrowers default on
their loans, the specific loss allowance on these loans is sufficient to
liquidate the collateral without further loss.
The Bank increased the allowance for loan losses $170,618 (7%) in fiscal
year 2000 and $157,771 (7%) in fiscal year 1999. Loan charge-offs exceeded
recoveries by $9,382 for fiscal year 2000 and $22,229 for fiscal year 1999. The
allowance for loan losses as of June 30, 2000, was 0.85% of net loans
outstanding versus 0.89% as of June 30, 1999. As of June 30, 2000, the
allowance for loan losses was 53% of impaired loans versus 259% as of June 30,
1999.
Foreclosed assets held for sale as of June 30, 2000 includes a car carried
at the lower of cost or fair value.
Premises and equipment decreased $565,194 (8%), from $7,365,392 as of June
30, 1999 to $6,800,198 as of June 30, 2000. During fiscal year 2000, the
Company sold the excess land associated with the branch office on South
National.
Deposits increased $3,470,084 (2%), from $141,137,154 as of June 30, 1999
to $144,607,238 as of June 30, 2000. During this period core deposit accounts
increased by $6,362,295 (14%) to 37% of total deposits, while certificates of
deposit decreased by $2,892,211 (3%). The majority of this increase in checking
and money market accounts can be attributed to an aggressive marketing campaign
initiated in early 1997 designed to attract checking deposit customers. The
decrease in certificate deposits can be attributed to management's decision to
allow high cost accounts to run off and replace these funds with FHLB advances
at a lower marginal cost.
As a result of the continued increase in the loan portfolio and the
treasury stock purchases, the Company increased borrowings from the Federal Home
Loan Bank by $31,712,507 (30%) from $104,794,640 as of June 30, 1999 to
$136,507,147 as of June 30, 2000. Based on existing collateral the Bank has the
ability to borrow an additional $53,000,000 from the FHLB in the future.
Stockholders' equity (including unrealized appreciation on securities
available-for-sale, net of tax) decreased $6,847,832 (11%), from $63,433,222 as
of June 30, 1999 to $56,585,390 as of June 30, 2000. Net income for the year
exceeded cash dividends paid by $1,418,956. The Company repurchased 741,194
shares as treasury stock (13% of the outstanding shares as of June 30, 1999) at
a cost of $8,012,392 (an average price of $10.81 per share). The decrease in
unrealized appreciation on securities available-for-sale, net of tax, reduced
stockholders' equity by $1,039,879. On a per share basis, stockholders' equity
increased $0.35 (3%) from $12.01 as of June 30, 1999 to $12.36 as of June 30,
2000. On July 27, 2000, the Company announced its intention to purchase
additional treasury stock equal to ten percent of the outstanding shares.
5
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following tables show (1) the average monthly balances of various
categories of interest-earning assets and interest-bearing liabilities, (2) the
total interest earned or paid thereon, and (3) the resulting weighted average
yields and costs. In addition, the table shows the Company's rate spreads and
net yields. Average balances are based on daily balances. Tax-free income is not
material; accordingly, interest income and related average yields have not been
calculated on a tax equivalent basis. Average loan balances include non-accrual
loans. Dollar amounts are expressed in thousands.
June 30, 2000 Year Ended June 30, 2000 Year Ended June 30, 1999
------------------- -------------------------------- -------------------------------
Yield / Average Yield / Average Yield /
Balance Cost Balance Interest Cost Balance Interest Cost
------- ------- ------- -------- ------- ------- -------- -------
ASSETS
Interest-earning:
Loans $296,053 8.00% $281,901 $ 22,054 7.82% $235,322 $ 18,617 7.91%
Investment securities 15,676 7.47% 12,367 867 7.01% 24,634 1,605 6.52%
Other assets 18,863 5.20% 13,905 643 4.62% 13,808 541 3.92%
-------- ---- -------- -------- ---- -------- -------- ----
Total interest-earning 330,592 7.82% 308,173 23,564 7.65% 273,764 20,763 7.58%
---- -------- ---- -------- ----
Noninterest-earning 11,264 10,257 7,701
-------- -------- --------
$341,856 $318,430 $281,465
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts $ 8,551 2.72% $ 8,445 203 2.40% $ 8,486 206 2.43%
Transaction accounts 37,993 3.22% 35,461 1,039 2.93% 28,874 789 2.73%
Certificates of deposit 91,509 5.59% 94,358 4,909 5.20% 95,295 4,985 5.23%
FHLB advances 136,507 6.07% 114,124 6,778 5.94% 79,985 4,723 5.90%
Other borrowed funds - 0.00% - - 0.00% - - 0.00%
-------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing 274,560 5.41% 252,388 12,929 5.12% 212,640 10,703 5.03%
---- -------- ---- -------- ----
Noninterest-bearing 10,711 6,156 3,562
-------- -------- --------
Total liabilities 285,271 258,544 216,202
Stockholders' equity 56,585 59,886 65,263
-------- -------- --------
$341,856 $318,430 $281,465
======== ======== ========
Net earning balance $ 56,032 $ 55,785 $ 61,124
======== ======== ========
Earning yield less costing rate 2.41% 2.53% 2.55%
==== ==== ====
Net interest income, and
net yield spread on
interest-earning assets 3.32% $ 10,635 3.45% $ 10,060 3.67%
==== ======== ==== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities 120% 122% 129%
=== === ===
Year Ended June 30, 1998
---------------------------------
Average Yield /
Balance Interest Cost
------- -------- -------
ASSETS
Interest-earning:
Loans $177,361 $ 14,875 8.39%
Investment securities 22,123 1,529 6.91%
Other assets 17,010 792 4.66%
-------- -------- ----
Total interest-earning 216,494 17,196 7.94%
-------- ----
Noninterest-earning 11,334
--------
$227,828
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts $ 8,779 241 2.75%
Transaction accounts 21,950 616 2.81%
Certificates of deposit 110,786 6,112 5.52%
FHLB advances 27,630 1,695 6.13%
Other borrowed funds 2,897 79 2.73%
-------- -------- ----
Total interest-bearing 172,042 8,743 5.08%
-------- ----
Noninterest-bearing 6,863
--------
Total liabilities 178,905
Stockholders' equity 48,923
--------
$227,828
========
Net earning balance $ 44,452
========
Earning yield less costing rate 2.86%
====
Net interest income, and
net yield spread on
interest-earning assets $ 8,453 3.90%
======= ====
Ratio of interest-earning assets to
interest-bearing liabilities 126%
===
6
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
The following table sets forth information regarding changes in
interest income and interest expense for the periods indicated resulting from
changes in average balances and average rates shown in the previous table. For
each category of interest-earning assets and interest-bearing liabilities
information is provided with respect to changes attributable to: (i) changes in
balance (change in balance multiplied by the old rate), (ii) changes in interest
rates (change in rate multiplied by the old balance); and (iii) the combined
effect of changes in balance and interest rates (change in balance multiplied by
change in rate).
Year Ended June 30, 2000 versus 1999 Year Ended June 30, 1990 versus 1998
------------------------------------------ ------------------------------------------
Average Interest Rate & Average Interest Rate &
Balance Rate Balance Total Balance Rate Balance Total
--------- -------- --------- --------- --------- -------- --------- ---------
Interest income:
Loans $ 3,685 (207) (41) 3,437 4,861 (843) (276) 3,742
Investment securities (799) 122 (61) (738) 174 (88) (10) 76
Other assets 4 97 1 102 (149) (126) 24 (251)
--------- -------- --------- --------- --------- -------- --------- ---------
Net change in interest income 2,890 12 (101) 2,801 4,886 (1,057) (262) 3,567
--------- -------- --------- --------- --------- -------- --------- ---------
Interest expense:
Savings accounts (1) (2) - (3) (8) (28) 1 (35)
Transaction accounts 180 57 13 250 194 (16) (5) 173
Certificates of deposit (49) (27) - (76) (855) (317) 44 (1,128)
Advances 2,016 27 12 2,055 3,212 (63) (120) 3,029
Other borrowed funds - - - - (79) (79) 79 (79)
--------- -------- --------- --------- --------- -------- --------- ---------
Net change in interest expense 2,146 55 25 2,226 2,464 (503) (1) 1,960
--------- -------- --------- --------- --------- -------- --------- ---------
Change in net interest income $ 744 (43) (126) 575 2,422 (554) (261) 1,607
========= ======== ========= ========= ========= ======== ========= =========
RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED JUNE 30, 2000 AND 1999
Interest Rates. The Company charges borrowers and pays depositors
--------------
interest rates that are largely a function of the general level of interest
rates. The following table sets forth the weekly average interest rates on U.S.
Treasury securities for the twelve months ending.
U.S. Treasury Securities
Average for the Twelve Months Ended
-------------------------------------------------------
Ten-Year One-Year
Maturity Maturity Spread
---------- ---------- ----------
June 30, 2000 6.17% 5.79% 0.38%
June 30, 1999 5.10% 4.76% 0.34%
---- ---- ----
Increase in interest rates 1.07% 1.03% 0.04%
==== ==== ====
The Company's principal assets are single family home mortgage loans.
Fixed rate mortgage loans are typically priced at a spread over the ten-year
U.S. Treasury securities. The 107 basis point increase in the ten-year treasury
for fiscal year 2000 is indicative of the increase in the fixed-rates on single
family mortgage loans. As a result of this increase in the level of interest
rates after historically low rates during the twelve months ended June 30, 1999,
the number of Greene County mortgage recordings declined 4,960 (26%) from 19,445
for the twelve months ended June 30, 1999 to 14,485 for the twelve months ended
June 30, 2000. During this same period, the Bank's Greene County mortgage
filings declined 19%. As a result, the Bank's share of the market increased from
6.3% to 6.9%. In addition, borrowers no longer exhibited a clear preference for
fixed rate over adjustable mortgages.
7
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Interest Income. Total interest income increased $2,801,227 (13%) as the
---------------
average balance of interest-earning assets increased $34,409,000 (13%). The
yield on average interest earning assets increased seven basis points to 7.65%
as the Company shifted the asset mix from lower yielding investments to loans.
Interest on loans increased $3,436,708 (18%) as the average loan
receivable balance increased $46,579,000 (20%) while the average yield declined
9 basis points to 7.82%. The decline in loan yield is the result of the impact
of borrowers refinancing home loans to lower their rates during the prior fiscal
year. Interest on investment securities decreased $738,136 (46%) as the average
balance decreased $12,267,000 (50%) while the average yield increased 49 basis
points to 7.01%. To the extent possible, subject to market conditions and
competition, the Company intends to emphasize loan production and will purchase
investment securities or mortgage-backed securities only if spreads between the
asset yield and the liability cost net an arbitrage profit over a range of
potential interest rate scenarios.
Interest Expense. Total interest expense increased $2,226,036 (21%) as the
----------------
average balance of interest-bearing liabilities increased $39,748,000 (19%).
Interest expense increased more than the increase in average balances because
the average cost of interest-bearing liabilities increased by nine basis points
to 5.12%.
Interest expense on deposits increased $171,061 (3%) as the average balance
of interest costing deposits increased $5,609,000 (4%) while the average
interest rate paid to depositors declined six basis points to 4.45%. Interest
expense on deposits increased less than the average balance due to a favorable
change in the mix of deposits. The average balance of interest costing core
deposit accounts increased $6,546,000 (18%) and the average balance of
certificates of deposit decreased $937,000 (1%). The Company's principal retail
deposit continues to be the certificate of deposit. Management attempts to
price certificates so that the marginal cost of attracting deposits is equal to
the marginal cost of FHLB advances.
In order to fund the increase in assets and purchase of treasury stock, the
Company borrowed additional funds from the FHLB. The average balance of FHLB
advances increased by $34,139,000 (43%) while the average cost of those advances
increased four basis points to 5.94%. During the twelve months ended June 30,
2000, the spread between advance rates offered by the FHLB and the same maturity
US Treasury rates increased dramatically. For example, the spread between the
FHLB one-year advance and the one-year US Treasury increased 49 basis points
from 38 basis points on January 3, 2000 to 87 basis points on June 28, 2000.
Net Interest Income. The Company's net interest income increased $575,191
-------------------
(6%) from $10,059,664 to $10,634,855. During the year ended June 30, 2000, the
average balance of interest-earning assets exceeded the average balance of
interest-bearing liabilities by $55,785,000, a decrease in the average net
earning balance of $5,339,000 (9%). To the extent the Company's dividends and
purchases of treasury stock exceed net income, this net earning balance will
continue to decline. The Company's spread between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
decreased by two basis points from 2.55% to 2.53%. The FHLB advance rate to US
Treasury rate spread increase has negative implications for the Bank as the
Bank's primary assets (ARMs) are indexed to the one-year US Treasury rate and
are to a significant extent funded by FHLB advances.
Provision for Loan Losses. Provisions for loan losses are charged or
-------------------------
credited to earnings to bring the total allowance to a level considered adequate
by the Company to provide for potential loan losses in the existing portfolio.
When making the assessment, the Company considers prior loss experience, volume
and type of lending, industry standards and past due loans in the Company's
portfolio. In addition, the Company considers general economic conditions and
other factors related to collectability of the Company's portfolio.
8
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
During fiscal year 2000, the Company experienced loan charge-offs in excess
of recoveries of $9,382 and based on a review as discussed above, elected to add
$180,000 to the allowance. Management anticipates the need to continue adding
to the loan loss allowance through charges to provision for loan losses based on
the anticipated growth in the loan portfolio.
Non-Interest Income. Non-interest income, which consists of service
-------------------
charges and other fees, income from foreclosed assets and gains or losses on
sale of assets, increased $217,411 (18%) from $1,200,854 to $1,418,265. This
increase is primarily due to the $232,973 (27%) increase in service charges
generated from the continued growth in the Bank's checking accounts. As of June
30, 2000, the Bank serviced 11,231 checking accounts up 1,071 (11%) from a year
earlier.
Non-Interest Expense. Non-interest expense increased $462,928 (8%), from
--------------------
$5,957,390 to $6,420,318. Salaries and employee benefits increased $368,124
(12%) due to increased staffing for the Y2K event, the pending computer system
conversion and the increased volume of customer transactions. The following
expense categories increased at approximately the same rate as total assets
(9%), occupancy $59,546 (8%), data processing $30,713 (6%), and other $99,072
(9%). The Savings Association Insurance Fund assessment declined $27,924 (33%)
as the fund reached the level prescribed by the FDIC. Advertising declined
$66,603 (15%).
Income Taxes. The change in income tax is a direct result of changes in
------------
the Company's taxable income.
Cash Dividends Paid. The Company paid cash dividends of $0.20 per share
--------------------
on October 15, 1999, to the stockholders of record as of September 7, 1999 and
$0.22 per share on April 14, 2000, to the stockholders of record as of March 30,
2000.
RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED JUNE 30, 1999 AND 1998
Interest Rates. The following table sets forth the weekly average interest
---------------
rates on U.S. Treasury securities for the twelve months ending.
U.S. Treasury Securities
Average for the Twelve Months Ended
---------------------------------------
Ten-Year One-Year
Maturity Maturity Spread
---------- ---------- --------
June 30, 1999 5.10% 4.76% 0.34%
June 30, 1998 5.84% 5.44% 0.40%
------ ------ ------
Decrease in interest rates -0.74% -0.68% -0.06%
====== ====== ======
The 74 basis point decline in the ten-year treasury for fiscal year 1999 in
addition to the 76 basis point decline in the prior year is indicative of the
decline in the fixed-rates on single family mortgage loans. As a result,
borrowers preferred fixed rate mortgages over adjustable and they took advantage
of the relatively low rates to refinance their home mortgages. As a result of
this decline in the level of interest rates, the number of mortgage recordings
in Greene County increased 1,768 (10%) from 17,677 for the twelve months ended
June 30, 1998 to 19,445 for the twelve months ended June 30, 1999. During the
same period, the Bank's Greene County mortgage filings increased 17% and the
share of the market increased from 5.9% to 6.3%.
9
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Interest Income. Total interest income increased $3,566,448 (21%) as the
---------------
average balance of interest-earning assets increased $57,270,000 (26%).
Interest income did not increase in proportion to the increase in average
balances due to a 36 basis point decline in average asset yield to 7.58%.
Interest on loans increased $3,742,094 (25%) as the average loan receivable
balance increased $57,961,000 (33%) while the average yield declined 48 basis
points to 7.91%. The decline in average loan yield is the result of borrowers
taking advantage of the historically low interest rates to refinance their home
loans.
Interest Expense. Total interest expense increased $1,959,663 (22%) as the
----------------
average balance of interest-bearing liabilities increased $40,598,000 (24%).
Interest expense increased less than the increase in average balances because
the average cost of interest-bearing liabilities declined by five basis points
to 5.03%.
Interest expense on deposit accounts decreased $989,384 (14%). The average
balance of total interest-bearing deposits decreased $8,860,000 (6%) while the
average interest rate paid to depositors declined 41 basis points to 4.51%. The
average balances of transaction accounts increased $6,924,000 (32%) while the
average balances of certificates of deposit decreased $15,491,000 (14%). The
average cost of certificates decreased 29 basis points from 5.52% to 5.23%.
During the year, start-up banks in the market area paid interest rates on
certificates of deposit well above comparable maturity treasury rates. As a
result, the Company was unable to reduce the cost of certificates in line with
the overall decline in the general level of interest rates.
In order to fund the increase in assets, the decrease in deposits, and the
purchase of treasury stock, the Company borrowed additional funds from the FHLB.
The average balance of FHLB advances increased by $52,355,000 (189%) while the
average rate paid declined 23 basis points to 5.90%. As a result, interest
expense paid for FHLB advances increased $3,028,090 (179%).
Net Interest Income. The Company's net interest income increased
-------------------
$1,606,785 (19%) from $8,452,879 to $10,702,906. During the year ended June 30,
1999, the average balance of interest-earning assets exceeded the average
balance of interest-bearing liabilities by $61,124,000, an increase in the
average net earning balance of $16,672,000 (38%) due to the net proceeds of the
December 30, 1997 offering.
Provision for Loan Losses. During fiscal year 1999, the Company
-------------------------
experienced loan charge-offs in excess of recoveries of $22,229 and based on a
review of the loan portfolio, elected to add $180,000 to the allowance.
Management anticipates the need to continue adding to loss reserves through
charges to provision for loan losses based on the anticipated growth in the loan
portfolio.
Non-Interest Income. Non-interest income, which consists of service
-------------------
charges and other fees, income from foreclosed assets and gains or losses on
sale of assets, increased $247,791 (26%) from $953,063 to $1,200,854. This
increase is primarily due to the $267,903 (44%) increase in service charges due
to continued growth in the Company's checking accounts. As of June 30, 1999,
the Bank serviced 10,160 checking accounts up 2,075 (26%) from 8,085 on June 30,
1998.
Non-Interest Expense. Non-interest expense increased $1,134,891(24%), from
--------------------
$4,822,499 to $5,957,390. Salaries and employee benefits increased $760,306
(33%) due to the operation of the South National branch for a full year and the
start-up of the Nixa Wal-Mart branch as well as the expenses related to the new
restricted stock plan and employee stock ownership plan. Data processing
expense increased $100,252 (25%) due to the new branches and the overall
increase in accounts served. Other expenses
10
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
increased $205,359 (23%) due primarily to legal fees associated with the two
special stockholder meetings held during the year and the expenses related to
the new restricted stock plan for the directors.
Income Taxes. The change in income tax is a direct result of changes in
------------
the Company's taxable income.
Cash Dividends Paid. The Company paid cash dividends of $0.16 per share
--------------------
on October 15, 1998, to the stockholders of record as of September 8, 1998. The
Company paid cash dividends of $0.18 per share on April 15, 1999, to the
stockholders of record as of March 31, 1999.
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. This matching is especially difficult
because the residential mortgage loans that comprise the majority of the Bank's
assets give the borrower the right to prepay at any time. These borrowers act
in their economic self-interest and refinance higher rate loans when rates are
low. 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, 1997, ARMs constituted 75% of the Bank's mortgage loan portfolio. However
during fiscal years 1998 and 1999, the general level of long term interest rates
dropped and borrowers opted for fixed rate mortgages. As long term interest
rates increased during fiscal year 2000, borrowers shifted their preference to
ARM loans. As of June 30, 2000, ARMs represent 59% of the loan portfolio. Of
the ARMs originated during the past three fiscal years, borrower's preferred
initial fixed rate periods of three or five years. In response to this shift in
customer preference, the Bank started a program of borrowing longer-term funds
from the FHLB. Twenty-seven percent of FHLB Advances have scheduled maturities
over five years.
The Bank is also managing interest rate risk by the origination of
construction loans. As of June 30, 2000, such loans, net of loans in process,
make up 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, 1999, the Bank's savings
accounts, checking accounts, and money market deposit accounts totaled
$46,736,183 or 33% of its total deposits. As of June 30, 2000, these accounts
totaled $53,098,478 or 37% of total deposits. The weighted average rate paid on
these accounts increased 31 basis points from 2.43% on June 30, 1999 to 2.74% on
June 30, 2000. This compares favorably with the 107 basis point increase in the
weekly average rate for the 3-month US Treasury Bill auction for the same
period. The Bank believes, based on historical experience, that a substantial
portion of such accounts represents non-interest rate sensitive, core deposits.
11
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
INTEREST RATE SENSITIVITY ANALYSIS
The following table sets forth as of June 30, 2000, the OTS estimate of
the projected changes in net portfolio value ("NPV") in the event of 100, 200,
and 300 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 of Assets
------------------------------------------- ---------------------------
in Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
- ----------------------------------------------------------------------------------------------------------------------
+300 53,481 (6,843) -11% 16.74% -1.07%
- ----------------------------------------------------------------------------------------------------------------------
+200 56,555 (3,769) -6% 17.32% -0.49%
- ----------------------------------------------------------------------------------------------------------------------
+100 58,925 (1,399) -2% 17.70% -0.11%
- ----------------------------------------------------------------------------------------------------------------------
NC 60,324 17.81%
- ----------------------------------------------------------------------------------------------------------------------
-100 60,587 263 0% 17.63% -0.18%
- ----------------------------------------------------------------------------------------------------------------------
-200 59,318 (1,006) -2% 17.07% -0.74%
- ----------------------------------------------------------------------------------------------------------------------
-300 57,585 (2,739) -5% 16.40% -1.41%
- ----------------------------------------------------------------------------------------------------------------------
This table demonstrates the impact of the borrowers ability to prepay
their loans. If interest rates fall 200 or more basis points, the impact of the
loan prepayment would out weigh the increase in net asset value and the net
portfolio value would decline.
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 constant 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.
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.
12
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required by OTS regulations to maintain minimum levels of
specified liquid assets equal to 4% of deposits and short-term borrowings. The
Bank's liquidity ratio as of June 30, 2000, was 11.3%.
The Company's principal sources of funds for investments and operations are
net income, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities, and proceeds from maturing
investment securities. The Company considers deposits and FHLB advances as
primary sources 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 $9,157,271 as of June 30, 2000. The
variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
As of June 30, 2000, the Bank had conditional commitments in the form of a
letter of credit in the amount of $12,000. Outstanding loan commitments were
$4,262,000. As of June 30, 2000, the Bank had granted unused lines of credit to
borrowers aggregating approximately $316,000 and $6,945,000 for commercial lines
and open-end consumer lines, respectively. As of June 30, 2000, the Bank had
$64,594,797 in certificates of deposit which were scheduled to mature in one
year or less. It is anticipated that the majority of these certificates will be
renewed in the normal course of operations.
The Bank's capital position of $54,995,000 is 16.1% of total assets as of
June 30, 2000. The Bank has an excess of $47,487,000, $39,067,000, and
$35,993,000 of required regulatory levels of tangible, core, and risk-based
capital, respectively. Under current regulatory guidelines, the Bank is
classified as well capitalized.
During fiscal year 1999, the Company purchased 815,759 shares of common
stock in open market transactions with the intent to grant stock awards for
173,632 shares of common stock in accordance with the Bank's Restricted Stock
Plan and to place 642,127 shares in a treasury stock account. During fiscal
year 2000, the Company purchased 741,194 shares of common stock in open market
transactions to place in a treasury stock account. The Company intends to
monitor the common stock price and, with regulatory approval, may from time to
time initiate further treasury stock transactions in order to improve the
Company's long-term earnings per share while at the same time maintaining an
adequate level of stockholders' equity.
IMPACT OF INFLATION AND CHANGING PRICES
The Company prepared the consolidated financial statements and related data
presented herein in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
13
Guaranty Federal Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has adopted Statement of Financial
Accounting Standards ("SFAS" ) 133, "Accounting for Derivative Financial
Instruments and Hedging Activities," and SFAS 138, "Accounting for Certain
Derivative Financial Instruments and Certain Hedging Activities." SFAS 133 and
138 establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 133 and 138 are effective for fiscal years beginning
after June 15, 2000. Management presently believes the adoption of SFAS 133 and
138, which the Company expects to initially adopt in the first quarter of its
year ending June 30, 2001, will not have a material impact on the Company's
financial statements.
IMPACT OF YEAR 2000
The Company has not experienced any significant operational or financial
problems related to the Year 2000 compliance. Management believes that the Year
2000 Issue will not pose any future operational problems.
SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS
Fiscal Year 2000, Quarter ended
----------------------------------------------------------
September-99 December-99 March-00 June-00
------------ ----------- ----------- -----------
Interest income $ 5,561,794 5,732,103 6,051,628 6,218,272
Interest expense 2,984,974 3,120,809 3,300,934 3,522,225
----------- ----------- ----------- -----------
Net interest income 2,576,820 2,611,294 2,750,694 2,696,047
Provision for loan losses 45,000 45,000 45,000 45,000
Gain (loss) on loans and investment securities (14,586) 12,737 (3,185) 55,527
Other noninterest income, net 387,924 280,076 339,769 360,003
Noninterest expense 1,532,901 1,548,571 1,649,711 1,689,135
----------- ----------- ----------- -----------
Income before income taxes 1,372,257 1,310,536 1,392,567 1,377,442
Provision for income taxes 512,159 469,017 494,229 471,595
----------- ----------- ----------- -----------
Net income 860,098 841,519 898,338 905,847
=========== =========== =========== ===========
Basic earnings per share $ 0.16 0.17 0.18 0.20
=========== =========== =========== ===========
Diluted earnings per share $ 0.16 0.16 0.18 0.20
=========== =========== =========== ===========
Fiscal Year 1999, Quarter ended
----------------------------------------------------------
September-98 December-98 March-99 June-99
------------ ----------- ----------- -----------
Interest income $ 4,933,889 5,182,991 5,245,700 5,399,990
Interest expense 2,502,163 2,689,717 2,672,703 2,838,323
----------- ----------- ----------- -----------
Net interest income 2,431,726 2,493,274 2,572,997 2,561,667
Provision for loan losses 45,000 45,000 45,000 45,000
Gain on loans and investment securities 9,750 28,953 8,535 20,984
Other noninterest income, net 261,158 274,467 262,247 334,760
Noninterest expense 1,409,797 1,505,103 1,516,608 1,525,882
----------- ----------- ----------- -----------
Income before income taxes 1,247,837 1,246,591 1,282,171 1,346,529
Provision for income taxes 449,734 426,162 458,548 430,556
----------- ----------- ----------- -----------
Net income 798,103 820,429 823,623 915,973
=========== =========== =========== ===========
Basic earnings per share $ 0.14 0.15 0.15 0.17
=========== =========== =========== ===========
Diluted earnings per share $ 0.14 0.14 0.15 0.17
=========== =========== =========== ===========
14
Guaranty Federal Bancshares, Inc.
Consolidated Balance Sheets
June 30, 2000 and 1999
2000 1999
-------- --------
ASSET
Cash $ 1,906,757 1,656,648
Interest-bearing deposits in other financial institutions 7,250,514 8,032,473
------------ ------------
Cash and cash equivalents 9,157,271 9,689,121
Available-for-sale securities 13,645,307 8,951,175
Held-to-maturity securities 6,768,672 15,394,643
Stock in Federal Home Loan Bank, at cost 6,875,400 5,239,800
Mortgage loans held for sale 995,286 769,074
Loans receivable, net 295,057,753 263,499,778
Accrued interest receviable:
Loans 1,651,760 1,459,508
Investments 174,123 297,431
Prepaid expenses and other assets 728,989 432,045
Foreclosed assets held for sale 1,625 101,546
Premises and equipment 6,800,198 7,365,392
------------ ------------
$341,856,384 313,199,513
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $144,607,238 141,137,154
Federal Home Loan Bank advances 136,507,147 104,794,640
Advances from borrowers for taxes and insurance 1,384,231 1,195,545
Accrued expenses and other liabilities 828,709 499,221
Accrued interest payable 959,354 543,641
Income taxes payable 333,772 235,587
Deferred income taxes 650,543 1,360,503
------------ ------------
285,270,994 249,766,291
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock:
$0.10 par value; authorized 10,000,000 shares;
issued; 2000 - 6,250,037 shares, 1999 - 6,245,775 shares 625,004 624,578
Additional paid-in capital 47,921,681 47,366,264
Unearned ESOP shares (2,870,440) (3,100,080)
Retained earnings, substantially restricted 24,654,965 23,236,009
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities
net of income taxes; 2000 - $1,408,906, 1999 - $2,026,448 2,398,947 3,438,826
------------ ------------
72,730,157 71,565,597
Treasury stock, at cost;
2000 - 1,383,321 shares, 1999 - 642,127 shares (16,144,767) (8,132,375)
------------ ------------
56,585,390 63,433,222
------------ ------------
$341,856,384 313,199,513
============ ============
See Notes to Consolidated Financial Statements
15
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Income
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
---------- -------- ---------
INTEREST INCOME
Loans $ 22,053,599 18,616,891 14,874,797
Investment securities 866,836 1,604,972 1,528,929
Other 643,362 540,707 792,396
------------ ----------- -----------
23,563,797 20,762,570 17,196,122
------------ ----------- -----------
INTEREST EXPENSE
Deposits 6,150,961 5,979,900 6,969,284
Federal Home Loan Bank advances 6,777,981 4,723,006 1,694,916
Other -- -- 79,043
------------ ----------- -----------
12,928,942 10,702,906 8,743,243
------------ ----------- -----------
NET INTEREST INCOME 10,634,855 10,059,664 8,452,879
PROVISION FOR LOAN LOSSES 180,000 180,000 123,352
------------ ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,454,855 9,879,664 8,329,527
------------ ----------- -----------
NONINTEREST INCOME
Service charges 1,105,800 872,827 604,924
Late charges and other fees 160,639 113,490 109,200
Gain on loans and investment securities 50,493 68,222 68,867
Income on foreclosed assets 20,595 11,488 14,127
Other income 80,738 134,827 155,945
------------ ----------- -----------
1,418,265 1,200,854 953,063
------------ ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 3,418,975 3,050,85 2,290,54
Occupancy 848,641 789,095 763,135
SAIF deposit insurance premiums 56,248 84,172 92,558
Data processing 528,533 497,820 397,568
Advertising 381,600 448,203 396,803
Other expense 1,186,321 1,087,249 881,890
------------ ----------- -----------
6,420,318 5,957,390 4,822,499
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 5,452,802 5,123,128 4,460,091
PROVISION FOR INCOME TAXES 1,947,000 1,765,000 1,619,000
------------ ----------- -----------
NET INCOME 3,505,802 3,358,128 2,841,091
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized appreciation (depreciation) on
available-for-sale securities (1,039,879) 626,934 754,312
------------ ----------- -----------
COMPREHENSIVE INCOME $ 2,465,923 3,985,062 3,595,403
============ =========== ===========
BASIC EARNINGS PER SHARE $ 0.71 0.61 0.29 (1)
============ =========== ===========
DILUTED EARNINGS PER SHARE $ 0.70 0.60 0.29 (1)
============ =========== ===========
(1) Since conversion December 30, 1997
See Notes to Consolidated Financial Statements
16
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
------- ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,505,802 3,358,128 2,841,091
Items not requiring (providing) cash:
Deferred income taxes (92,418) (251,687) (22,258)
Depreciation 497,086 444,467 469,532
Provision for loan losses 180,000 180,000 123,352
Gain on loans and investment securities (50,493) (68,222) (68,867)
Loss on sale of premises and equipment 65,692 -- --
(Gain) loss on sale of foreclosed assets (21,925) 4,820 (15,231)
Amortization of deferred income,
premiums and discounts (25,646) 14,181 (77,945)
Stock award plan expense 496,320 510,286 92,407
Origination of loans held for sale (5,213,867) (10,271,583) (6,152,677)
Proceeds from sale of loans held for sale 4,999,350 10,375,914 6,364,053
Release of ESOP shares 248,626 414,385 --
Changes in:
Accrued interest receivable (68,944) (152,795) (292,583)
Prepaid expenses and other assets (517,312) (183,090) (539,181)
Accrued expenses and other liabilities 745,201 271,944 (26,754)
Income taxes payable 102,017 (158,391) 113,685
------------ ----------- ------------
Net cash provided by operating activities 4,849,489 4,488,357 2,808,624
------------ ----------- ------------
See Notes to Consolidated Financial Statements
17
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows (continued)
Years Ended June 30, 2000, 1999, and 1998
2000 1999 1998
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of loans -- (7,895,901) --
Net increase in loans (31,753,775) (50,158,557) (48,620,302)
Principal payments on held-to-maturity securities 1,936,601 3,992,371 3,881,091
Principal payments on available-for-sale securities 357,385 6,413,840 --
Purchase of available-for-sale securities (6,970,877) (520,065) (13,875,905)
Purchase of premises and equipment (759,393) (376,888) (406,548)
Proceeds from sale of premises and equipment 982,177 -- --
Proceeds from sales of available-for-sale securities 299,472 -- --
Proceeds from maturitites of held-to-maturity securities 6,700,000 1,385,715 4,345,229
Purchase of FHLB stock (1,635,600) (2,985,700) --
Proceeds from sale of foreclosed assets 153,926 30,690 317,855
------------ ------------ ------------
Net cash used in investing activities (30,690,084) (50,114,495) (54,358,580)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net -- -- 39,216,426
Stock options exercised 25,656 106,792 58,971
Cash dividends paid (2,086,846) (1,805,069) (1,621,342)
Cash dividends received on RRP Stock 11,050 13,554 15,780
Net increase in demand deposits,
NOW accounts and savings accounts 6,362,295 9,880,981 8,738,851
Net decrease in certificates of deposit (2,892,211) (9,719,163) (18,497,200)
Proceeds from FHLB advances 67,541,724 64,092,500 61,050,000
Repayments of FHLB advances (35,829,217) (4,378,888) (34,119,816)
Advances from borrowers for taxes and insurance 188,686 325,069 195,858
RSP stock purchased -- (2,373,065) --
Treasury stock purchased (8,012,392) (8,132,375) --
------------ ------------ ------------
Net cash provided by financing activities 25,308,745 48,010,336 55,037,528
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (531,850) 2,384,198 3,487,572
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 9,689,121 7,304,923 3,817,351
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 9,157,271 9,689,121 7,304,923
============ =========== ============
See Notes to Consolidated Financial Statements
18
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Change in Stockholders' Equity
Years Ended June 30, 2000, 1999 and 1998
Additional Unearned
Common Paid-In ESOP Treasury Retained
Stock Capital Shares Stock Earnings
----------- ----------- ----------- ------------ ----------
Balance, July 1, 1997 $ 3,125,000 3,687,356 -- -- 18,620,219
Net income -- -- -- -- 2,841,091
Dividends,
$0.22 per share on 3,125,000 shares -- -- -- -- (687,500)
$0.15 per share on 6,225,610 shares -- -- -- -- (933,842)
Stock award plans -- 140,416 -- -- --
Stock options exercised 672 58,299 -- -- --
Stock redeemed and stock issued in
conversion to stock ownership, net (2,502,868) 45,130,921 (3,444,540) -- --
Transfer from MHC -- -- -- -- 1,842,982
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $443,429 -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Balance, June 30, 1998 622,804 49,016,992 (3,444,540) -- 21,682,950
Net income -- -- -- -- 3,358,128
Dividends ($0.34 per share) -- -- -- -- (1,805,069)
Stock award plans -- 547,394 -- -- --
Stock purchased for stock awards (2,373,065) -- -- --
Stock options exercised 1,774 105,018 -- -- --
Release of ESOP shares -- 69,925 344,460 -- --
Treasury stock purchased -- -- -- (8,132,375) --
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $375,019 -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Balance, June 30, 1999 624,578 47,366,264 (3,100,080) (8,132,375) 23,236,009
Net income -- -- -- -- 3,505,802
Dividends ($0.42 per share) -- -- -- -- (2,086,846)
Stock award plans -- 511,201 -- -- --
Stock options exercised 426 25,230 -- -- --
Release of ESOP shares -- 18,986 229,640 -- --
Treasury stock purchased -- -- -- (8,012,392) --
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of ($617,542) -- -- -- -- --
----------- ----------- ----------- ------------ -----------
Balance, June 30, 2000 $ 625,004 47,921,681 (2,870,440) (16,144,767) 24,654,965
=========== =========== =========== ============ ===========
Accumulated
Other
Comprehensive
Income -
-----------------
Unrealized
Appreciation
(Depreciation) on
Available-for-
Sale Securities,
Net Total
----------------- ------------
Balance, July 1, 1997 2,057,580 27,490,155
Net income -- 2,841,091
Dividends,
$0.22 per share on 3,125,000 shares -- (687,500)
$0.15 per share on 6,225,610 shares -- (933,842)
Stock award plans -- 140,416
Stock options exercised -- 58,971
Stock redeemed and stock issued in
conversion to stock ownership, net -- 39,183,513
Transfer from MHC -- 1,842,982
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $443,429 754,312 754,312
----------- ------------
Balance, June 30, 1998 2,811,892 70,690,098
Net income -- 3,358,128
Dividends ($0.34 per share) -- (1,805,069)
Stock award plans -- 547,394
Stock purchased for stock awards -- (2,373,065)
Stock options exercised -- 106,792
Release of ESOP shares -- 414,385
Treasury stock purchased -- (8,132,375)
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of $375,019 626,934 626,934
----------- ------------
Balance, June 30, 1999 3,438,826 63,433,222
Net income -- 3,505,802
Dividends ($0.42 per share) -- (2,086,846)
Stock award plans -- 511,201
Stock options exercised -- 25,656
Release of ESOP shares -- 248,626
Treasury stock purchased -- (8,012,392)
Change in unrealized appreciation on
available-for-sale securities, net of
income taxes of ($617,542) (1,039,879) (1,039,879)
----------- ------------
Balance, June 30, 2000 2,398,947 56,585,390
=========== ============
See Notes to Consolidated Financial Statements
19
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
- ------------
In April 1995, Guaranty Federal Savings & Loan Association reorganized from
a federally chartered mutual savings and loan association into a mutual holding
company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent with the
reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings bank
was chartered. The Bank issued 3,125,000 shares of common stock in connection
with the reorganization, the majority of which were owned by the MHC.
On December 30, 1997, the MHC converted to Guaranty Federal Bancshares,
Inc. (the "Company"), a Delaware-chartered stock corporation. In connection
with the conversion and reorganization, the shares of the Bank held by the
mutual holding company were extinguished along with the mutual holding company
and the shares of the Bank held by the public were exchanged for shares of the
Company. Additional shares of the Company were issued as of December 30, 1997
(see Note 15).
Nature of Operations
- --------------------
The Company operates as a unitary savings and loan holding company. The
Bank is primarily engaged in providing a full range of banking and mortgage
services to individual and corporate customers in southwest Missouri. The
Bank's subsidiary provides other services, such as insurance, annuities, and
securities brokerage. The Bank is subject to competition from other financial
institutions. The Company and the Bank are also subject to the regulation of
certain federal agencies and undergo periodic examinations by those regulatory
authorities.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiary, Guaranty Financial Services of Springfield, Inc. All significant
intercompany profits, transactions and balances have been eliminated in
consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for loan losses and the valuation of foreclosed assets held for sale, management
obtains independent appraisals for significant properties.
Management believes that the allowances for losses on loans and valuation
of foreclosed assets held for sale are adequate. While management uses
available information to recognize losses on loans and value foreclosed assets
held for sale, changes in economic conditions may necessitate revision of these
estimates in future years. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowances for losses on loans and valuation of foreclosed assets held for sale.
Such agencies may require the Bank to recognize additional losses based on their
judgments of information available to them at the time of their examination.
20
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Cash and Investments in Debt and Equity Securities
- --------------------------------------------------
Regulations require the Bank to maintain an amount equal to 4.0% of savings
deposits (net of loans on savings deposits) plus short-term borrowings in cash
and U. S. government and other approved securities.
Available-for-sale securities, which include any security for which the
Company or the Bank has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Realized gains and losses, based on
specifically identified amortized cost of the specific security, are included in
other income. Unrealized gains and losses are recorded, net of related income
tax effects, in stockholders' equity. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield method over the
period to maturity.
Held-to-maturity securities, which include any security for which the
Company or the Bank has the positive intent and ability to hold until maturity,
are carried at historical cost adjusted for amortization of premiums and
accretion of discounts. Premiums and discounts are amortized and accreted,
respectively, to interest income using the level-yield method over the period to
maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
Mortgage Loans Held for Sale
- ----------------------------
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value are
recognized as a charge to earnings at the time the decline in value occurs.
Forward commitments to sell mortgage loans are sometimes acquired to reduce
market risk on mortgage loans in the process of origination and mortgage loans
held for sale. Gains and losses resulting from sales of mortgage loans are
recognized when the respective loans are sold to investors. Gains and losses
are determined by the difference between the selling price plus the value of
retained servicing rights for loans originated after July 1, 1996, and the
carrying amount of the loans sold, net of discounts collected or paid and
considering a normal servicing rate. Fees received from borrowers to guarantee
the funding of mortgage loans held for sale and fees paid to investors to ensure
the ultimate sale of such mortgage loans are recognized as income or expense
when the loans are sold or when it becomes evident that the commitment will not
be used.
Loans
- -----
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loan Servicing
- --------------
The cost of originated mortgage-servicing rights is amortized over the
shorter of the actual or contractual loan life. Impairment of mortgage-
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated by discounting expected cash flows. For purposes of
measuring impairment, the rights are stratified based on the loan type,
remaining term to maturity, and interest rate. The key assumptions used in the
valuation include discount rates, prepayment speeds and servicing costs. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
21
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is increased by provisions charged to expense
and reduced by provisions credited to expense and loans charged off, net of
recoveries. The allowance is maintained at a level considered adequate to
provide for potential loan losses, based on the Bank's evaluation of the loan
portfolio, as well as on prevailing and anticipated economic conditions and
historical losses by loan category. General allowances have been established,
based upon the aforementioned factors, and allocated to the individual loan
categories. Allowances are accrued on specific loans evaluated for impairment
for which the basis of each loan, including accrued interest, exceeds the
discounted amount of expected future collections of interest and principal or,
alternatively, the fair value of loan collateral.
A loan is considered impaired when it is probable that the Bank will not
receive all amounts due according to the contractual terms of the loan. This
includes loans that are delinquent ninety days or more (nonaccrual loans) and
certain other loans identified by management. Accrual of interest is
discontinued, and interest accrued and unpaid is removed, at the time such
amounts are delinquent ninety days. Interest is recognized for nonaccrual loans
only upon receipt.
Foreclosed Assets Held for Sale
- -------------------------------
Assets acquired by foreclosure or in settlement of debt and held for sale
are valued at estimated fair value as of the date of foreclosure, and a related
valuation allowance is provided for estimated costs to sell the assets.
Management evaluates the value of foreclosed assets held for sale periodically
and increases the valuation allowance for any subsequent declines in fair value.
Changes in the valuation allowance and gains/losses on sales of foreclosed
assets are included in noninterest income.
Premises and Equipment
- ----------------------
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using the straight-line and accelerated
methods over the estimated useful lives of the assets.
Fee Income
- ----------
Loan origination fees, net of direct origination costs, are recognized as
income over the term of the loan using the level-yield method. Loan servicing
income represents fees earned for servicing real estate mortgage loans owned by
various investors.
Income Taxes
- ------------
Deferred tax liabilities and assets are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
Cash Equivalents
- ----------------
The Bank considers all highly liquid interest-bearing deposits in other
financial institutions with an initial maturity of three months or less to be
cash equivalents.
22
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Regulatory Matters
- ------------------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct and material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined) and of Tier I capital (as defined) to adjusted
tangible assets (as defined). Management believes, as of June 30, 2000, that the
Bank meets all capital adequacy requirements.
As of June 30, 2000, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk. Dollar
amounts are expressed in thousands.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposed Action Provisions
----------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- --------- -------- ----------- -----------
As of June 30, 2000
Stockholders' equity, and
ratio to total assets $ 54,995 16.1%
====
Unrealized appreciation on
available-for-sale securities (2,455)
--------
Tangible capital, and
ratio to adjusted total assets $ 52,540 15.6% $ 5,053 1.5%
======== ==== ======== ===
Tier 1 (core) capital, and
ratio to adjusted total assets $ 52,540 15.6% $ 13,473 4.0% $ 16,842 5.0%
======== ==== ======== === ======== ===
Tier 1 (core) capital, and
ratio to risk-weighted assets $ 52,540 22.2% $ 14,207 6.0%
======== ===
Allowance for loan losses -
Tier 2 capital 2,396
--------
Total risk-based capital, and
ratio to risk-weighted assets $ 54,936 23.2% $ 18,943 8.0% $ 23,679 10.0%
======== ==== ======== === ======== ====
Total assets $340,733
========
Adjusted total assets $336,836
========
Risk-weighted assets $236,788
========
23
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposed Action Provisions
------------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- ------- ------- -------- --------
As of June 30, 1999
Stockholders' equity, and
ratio to total assets $ 55,973 18.0%
Unrealized appreciation on
available-for-sale securities (3,417)
--------
Tangible capital, and
ratio to adjusted total assets $ 52,556 17.2% $ 4,595 1.5%
======== ==== ======== ===
Tier 1 (core) capital, and
ratio to adjusted total assets $ 52,556 17.2% $ 12,253 4.0% $ 15,316 5.0%
======== ==== ======== === ======== ===
Tier 1 (core) capital, and
ratio to risk-weighted assets $ 52,556 26.3% $ 11,956 6.0%
======== ===
Allowance for loan losses -
Tier 2 capital 2,225
--------
Total risk-based capital, and
ratio to risk-weighted assets $ 54,781 27.5% $ 15,941 8.0% $ 19,926 10.0%
======== ==== ======== === ======== ====
Total assets $311,761
========
Adjusted total assets $306,318
========
Risk-weighted assets $199,261
========
The amount of dividends that the Bank may pay is subject to various
regulatory limitations. As of June 30, 2000, approximately $3,411,000 was
available from the Bank's retained earnings, without regulatory approval, for
distribution as dividends.
Earnings Per Share
- ------------------
As more fully described in the Note 15, the Company had no operations prior
to December 30, 1997 and earnings per share information for the common stock of
the Bank prior to this date has not been presented because the information would
not be meaningful.
The computation for earnings per share for the years ended June 30, 2000
and 1999 and for the six-month period ended June 30, 1998 (since conversion) is
as follows:
Year Ended Year Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 1998
------------- ------------- ----------------
Net Income $ 3,505,802 3,358,128 1,729,800
============= ============= ================
Average common shares outstanding 4,966,648 5,507,285 5,879,791
Effect of stock options outstanding 50,998 56,865 73,341
------------- ------------- ----------------
Average diluted shares outstanding 5,017,646 5,564,150 5,953,132
============= ============= ================
Earnings per share - basic $ 0.71 0.61 0.29
============= ============= ================
Earnings per share - diluted $ 0.70 0.60 0.29
============= ============= ================
24
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Reclassifications
- -----------------
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000
financial statements presentation. These reclassifications had no effect on net
income.
Impact of Recent Accounting Pronouncements
- ------------------------------------------
The FASB recently adopted SFAS 133, " Accounting for Derivative Financial
Instruments and Hedging Activities" and SFAS 138, " Accounting for Certain
Derivative Financial Instruments and Certain Hedging Activities." These
statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 and SFAS 138 are effective for
all fiscal quarters of fiscal years beginning after June 15, 2000, may be
adopted early for periods beginning after issuance of the Statement and may not
be applied retroactively. The Company has not adopted SFAS 133 early. Management
believes that the adoption of SFAS 133 and SFAS 138 will not have a material
impact on the Company's financial statements.
Segment Information
- -------------------
The principal business of the Company is overseeing the business of the
Bank. The Company has no significant assets other than its investment in the
Bank and certain investment securities. The banking operation is the Company's
only reportable segment. The banking segment is principally engaged in the
business of originating mortgage loans secured by one-to-four family residences
and, to a lesser extent, multi-family, construction and commercial real estate
loans and consumer loans. These loans are funded primarily through the
attraction of deposits from the general public and borrowings from the Federal
Home Loan Bank. Selected information is not presented separately for the
Company's reportable segment, as there is no material difference between that
information and the corresponding information in the consolidated financial
statements.
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair values of available-for-sale
securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains (Losses) Fair Value
------------ ----------- ------------ --------------
As of June 30, 2000
Equity Securities:
FHLMC stock $ 94,000 3,794,000 -- 3,888,000
Other stock 938,005 83,665 (172,379) 849,291
Debt Securities:
Trust preferred securities 6,509,629 143,604 -- 6,653,233
Mortgage-backed securities 2,295,819 -- (41,036) 2,254,783
---------- ---------- --------- ----------
9,837,453 4,021,269 (213,415) 13,645,307
========== ========== ========= ==========
As of June 30, 1999
Equity Securities:
FHLMC stock $ 94,000 5,474,000 -- 5,568,000
Other stock 735,762 106,973 (72,700) 770,035
Debt Securities:
Mortgage-backed securities 2,644,526 7,168 (38,554) 2,613,140
---------- ---------- --------- ----------
$3,474,288 5,588,141 (111,254) 8,951,175
========== ========== ========= ==========
25
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Maturities of available-for-sale debt securities as of June 30, 2000:
Amortized Approximate
Cost Fair Value
----------- ------------
Due after ten years $ 6,509,629 6,653,233
Mortgage-backed securities not due on a
single maturity date 2,295,819 2,254,783
----------- ----------
$ 8,805,448 8,908,016
=========== ==========
The amortized cost and approximate fair values of held-to-maturity
securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains (Losses) Fair Value
------------ ----------- ------------ --------------
As of June 30, 2000
Debt Securities:
U. S. government agencies $ 600,061 -- (19,022) 581,039
Mortgage-backed securities 6,168,611 113,477 (106,541) 6,175,547
----------- ------- -------- ---------
$ 6,768,672 113,477 (125,563) 6,756,586
=========== ======= ======== =========
As of June 30, 1999
Debt Securities:
U. S. government agencies $ 7,442,210 32 (6,800) 7,435,442
Mortgage-backed securities 7,952,433 300,020 (63,913) 8,188,540
----------- ------- -------- ----------
$15,394,643 300,052 (70,713) 15,623,982
=========== ======= ======== ==========
Maturities of held-to-maturity securities as of June 30, 2000:
Amortized Approximate
Cost Fair Value
----------- ------------
Due after ten years $ 600,061 581,039
Mortgage-backed securities not due on a
single maturity date 6,168,611 6,175,547
----------- -----------
$ 6,768,672 6,756,586
=========== ===========
Proceeds from sales of available-for-sale securities were $299,472 for the
year ended June 30, 2000, with resultant gains of $38,798. There were no sales
of available-for-sale securities for the years ended June 30, 1999 and 1998.
Included in mortgage-backed securities as of June 30, 2000 and 1999, are
certain U. S. Government agency derivative securities with an amortized cost of
$2,295,819 and $4,644,526 and an approximate fair value of $2,255,000 and
$4,606,000, respectively. The yield on these derivative securities varies with
the level of certain published interest rates, principally LIBOR.
26
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at June 30, 2000 and 1999, include:
2000 1999
------------ -----------
Real estate - residential mortgage:
One to four family units $197,159,979 177,910,309
Multi-family 39,146,401 35,795,361
Real estate - construction 41,371,479 38,605,137
Real estate - commercial 26,558,921 20,771,388
Commercial loans 761,355 543,923
Installment loans 9,059,356 7,404,534
Loans on savings accounts 461,013 573,151
------------ -----------
314,518,504 281,603,803
Undisbursed portion of loans-in-process (16,667,747) (15,465,766)
Allowance for loan losses (2,519,946) (2,349,328)
Unearned discounts (108,960) (109,040)
Deferred loan fees/costs, net (164,098) (179,891)
------------ -----------
$295,057,753 263,499,778
============ ===========
Transactions in the allowance for loan losses were as follows:
2000 1999 1998
---------- --------- ---------
Balance, beginning of year $2,349,328 2,191,557 2,177,009
Provision charged to operations 180,000 180,000 123,352
Loans charged off (9,382) (29,229) (150,649)
Recoveries - 7,000 41,845
---------- --------- ---------
Balance, end of year $2,519,946 2,349,328 2,191,557
========== ========= =========
The weighted average interest rate on loans as of June 30, 2000 and 1999
was 8.00% and 7.58%, respectively.
The Bank serviced mortgage loans for others amounting to $21,554,961,
$21,402,788, and $15,970,974 as of June 30, 2000, 1999, and 1998, respectively.
Impaired loans totaled $4,756,870 as of June 30, 2000, and $905,728 as of
June 30, 1999, with a related allowance for loan losses of $728,761 and
$136,287, respectively. As of June 30, 2000 and 1999, respectively, impaired
loans of $106,840 and $0 had no related allowance for loan losses.
Interest of $182,182, $72,078, and $111,950 was recognized on average
impaired loans of $1,458,934, $895,131 and $1,290,853 for 2000, 1999, and 1998,
respectively. Interest of $127,819, $64,827, and $96,622 was recognized on
impaired loans on a cash basis during 2000, 1999, and 1998, respectively.
27
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 4: FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale consist of the following:
2000 1999 1998
--------- --------- ---------
Foreclosed real estate and automobiles $ 1,625 101,546 286,000
Valuation allowance - - -
--------- --------- ---------
$ 1,625 101,546 286,000
========= ======= =======
NOTE 5: PREMISES AND EQUIPMENT
Major classifications of premises and equipment, stated at cost, are as
follows:
2000 1999
----------- ---------
Land $ 1,250,789 2,222,243
Buildings and improvements 5,322,303 5,361,945
Furniture, fixtures and equipment 2,158,036 1,850,224
Leasehold improvements 129,393 129,393
Automobiles 20,243 20,243
Construction in progress 505,042 --
----------- ---------
9,385,806 9,584,048
Accumulated depreciation (2,585,608) (2,218,656)
----------- ---------
$ 6,800,198 7,365,392
=========== =========
Depreciation expense was $497,086, $444,467, and $469,532 for the years
ended June 30, 2000, 1999, and 1998, respectively.
28
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 6: DEPOSITS
June 30, 2000 June 30, 1999
--------------------------------------- ----------------------------------------
Weighted Percentage Weighted Percentage
Average Rate Balance of Deposits Average Rate Balance of Deposits
------------ ------------ ----------- ------------ ------------ -----------
Core Deposits:
Demand 0.00% $ 6,553,904 4.5% 0.00% $ 4,370,785 3.1%
NOW 1.89% 20,482,551 14.2% 1.91% 18,067,755 12.8%
Money market 4.77% 17,510,651 12.1% 3.81% 15,546,291 11.0%
Passbook savings 2.72% 8,551,372 5.9% 2.23% 8,751,353 6.2%
------------ ------ ------------ ------
2.74% 53,098,478 36.7% 2.43% 46,736,183 33.1%
------------ ------ ------------ ------
Certificates:
0% - 3.99% 0.00% -- 0.0% 3.94% 662,967 0.5%
4.00% - 5.99% 5.35% 68,984,815 47.7% 4.91% 85,833,748 60.8%
6.00% - 7.99% 6.30% 22,523,945 15.6% 6.50% 7,904,256 5.6%
------------ ------ ------------ ------
5.59% 91,508,760 63.3% 5.04% 94,400,971 66.9%
------------ ------ ------------ ------
Total Deposits 5.54% $144,607,238 100.0% 4.17% $141,137,154 100.0%
============ ====== ============ ======
The aggregate amount of certificates of deposit with a minimum balance of
$100,000 was approximately $7,470,000 and $7,239,000 as of June 30, 2000 and
1999, respectively.
A summary of certificates of deposit by maturity as of June 30, 2000, is as
follows:
Fiscal year ending:
June 30, 2001 $64,594,797
June 30, 2002 17,379,019
June 30, 2003 5,157,761
June 30, 2004 1,453,508
June 30, 2005 2,865,978
Thereafter 57,697
-----------
$91,508,760
===========
A summary of interest expense on deposits is as follows:
2000 1999 1998
---------- --------- ---------
NOW and Money Market accounts $1,038,631 789,474 615,928
Savings accounts 203,154 205,362 241,176
Certificate accounts 4,940,908 5,007,616 6,131,573
Early withdrawal penalties (31,732) (22,552) (19,393)
---------- --------- ---------
$6,150,961 5,979,900 6,969,284
========== ========= =========
29
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances consist of the following:
June 30, 2000 June 30, 1999
------------- ---------------
Weighted Weighted
Average Average
Maturity Date Amount Rate Amount Rate
- ---------------- ------------- -------- ------------ --------
Fiscal Year 2000 -- -- $ 21,823,050 5.56%
Fiscal Year 2001 $ 53,673,243 6.43% 7,507,286 5.91%
Fiscal Year 2002 13,334,577 5.92% 10,334,577 5.67%
Fiscal Year 2003 3,801,792 6.06% 3,168,192 5.94%
Fiscal Year 2004 22,233,473 5.42% 22,233,473 5.42%
Fiscal Year 2005 6,412,568 6.61% 3,062,568 5.97%
------------- ------------
Thereafter 37,051,494 5.92% 36,665,494 5.90%
------------- ------------
$ 136,507,147 6.07% $104,794,640 5.71%
============= ============
As of June 30, 2000, the Bank had advances equal to $9,000,000 with a
weighted average rate of 5.56% callable on July 30, 2003 at the FHLB's option
with a maturity date of July 30, 2008. In the above table, these advances are
shown with the call date as the maturity date because at the interest rates
prevailing as of June 30, 2000, it would be to the FHLB's advantage to call
these advances. Should interest rates decline, these advances could extend to
their maturity.
The FHLB requires the Bank to maintain collateral equal to outstanding
balances of advances. For collateral purposes, the FHLB values mortgage loans
free of other pledges, liens and encumbrances at 80% of their fair value, and
investment securities free of other pledges, liens and encumbrances at 95% of
their fair value.
NOTE 8: INCOME TAXES
The Company files a consolidated federal income tax return. In computing
federal income taxes for taxable years prior to July 1, 1996, the Bank has been
allowed an 8% deduction from otherwise taxable income as a statutory bad debt
deduction, subject to limitations based on aggregate loans and savings balances.
In August 1996 this statutory bad debt deduction was repealed and is no longer
available for thrifts. In addition, bad debt reserves accumulated after 1987,
which are presently included as a component of the net deferred tax liability,
must be recaptured over a six-year period beginning in 1999. The amount of the
deferred tax liability which must be recaptured is $225,000 and $281,000 as of
June 30, 2000 and 1999, respectively.
As of June 30, 2000, and 1999, retained earnings included approximately
$5,075,000 for which no deferred income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $1,878,000 as of June 30, 2000 and 1999.
30
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
The provision for income taxes consists of:
2000 1999 1998
---------- ---------- ----------
Taxes currently payable $2,039,418 2,016,687 1,641,258
Deferred income taxes (92,418) (251,687) (22,258)
---------- ---------- ----------
$1,947,000 1,765,000 1,619,000
========== ========== ==========
The tax effects of temporary differences related to deferred taxes shown on
the June 30, 2000 and 1999, balance sheets are:
2000 1999
----------- -----------
Deferred tax assets:
Allowances for loan and foreclosed asset losses $ 932,380 869,251
Accrued com pensated absences 12,856 14,349
Unrealized loss on loans held for sale 40,964 49,237
RRP expense 204,640 217,884
Deferred loan fees/costs 60,760 66,619
----------- ----------
1,251,600 1,217,340
----------- ----------
Deferred tax liabilities:
FHLB stock dividends (206,867) (206,867)
Tax bad debt reserves in excess of base year (225,088) (281,361)
Mortgage servicing rights (61,282) (63,167)
Unrealized appreciation on available-for-sale securities (1,408,906) (2,026,448)
----------- ----------
(1,902,143) (2,577,843)
----------- ----------
Net deferred tax liability $ (650,543) (1,360,503)
=========== ==========
A reconciliation of income tax expense at the statutory rate to income tax
expense at the Company's effective rate is shown below:
2000 1999 1998
------- ------ ------
Computed at statutory rate 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State financial institution tax
ESOP 2.9% 2.9% 3.1%
Other -0.1% -2.3% 0.0%
Actual tax provision -1.1% -0.1% -0.8%
----- ----- -----
35.7% 34.5% 36.3%
===== ===== =====
State legislation provides that savings banks will be taxed based on an
annual privilege tax of 7% of net income. The privilege tax is included in
provision for income taxes.
Deferred tax liabilities decreased $617,542 for 2000 and increased $375,019
and $443,429 for 1999 and 1998, respectively, as the result of changes in
unrealized appreciation on available-for-sale securities, shown in stockholders'
equity.
31
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 9: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
- -------------------------
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate those assets' fair value.
Investment Securities
- ---------------------
Fair values for investment securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are estimated
based on quoted market prices of similar securities.
Accrued Interest Receivable
- ---------------------------
The carrying amount of accrued interest receivable approximates its fair
value.
Mortgage Loans Held for Sale
- ----------------------------
Fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics.
Loans
- -----
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans with
similar characteristics are aggregated for purposes of the calculations. The
carrying amount of accrued interest approximates its fair value.
Deposits
- --------
The fair value of demand deposits and savings accounts is the amount
payable on demand at the reporting date (i.e., their carrying amounts). The
fair value of fixed-maturity certificates of deposit is estimated using a
discounted cash flow calculation that applies the rates currently offered for
deposits of similar remaining maturities.
Accrued Interest Payable
- ------------------------
The carrying amount of accrued interest payable approximates its fair
value.
Federal Home Loan Bank Advances
- -------------------------------
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing advances.
Commitments to Extend Credit, Letters of Credit and Lines of Credit
- -------------------------------------------------------------------
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For fixed-
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
32
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves significant
judgments by management and uncertainties. Fair value is the estimated amount at
which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Because no market exists for certain of these financial instruments and because
management does not intend to sell these financial instruments, the Company does
not know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the aggregate.
June 30, 2000 June 30, 1999
-------------------------- --------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ----------- ----------- ------------
Financial assets:
Cash and cash equivalents $ 9,157,271 9,157,271 9,689,121 9,689,121
Available-for-sale securities 13,645,307 13,645,307 8,951,175 8,951,175
Held-to-maturity securities 6,768,672 6,756,586 15,394,643 15,623,982
Mortgage loans held-for-sale 995,286 995,286 769,074 769,074
Loans, net 295,057,753 297,900,000 263,499,778 276,295,000
Interest receivable 1,825,883 1,825,883 1,756,939 1,756,939
Financial liabilities:
Deposits 144,607,238 143,764,000 141,137,154 141,336,000
Federal Home Loan Bank advances 136,507,147 131,111,983 104,794,640 105,341,075
Interest payable 959,354 959,354 543,641 543,641
Unrecognized financial instruments
(net of contractual value):
Commitments to extend credit -- -- -- --
Unused lines of credit -- -- -- --
NOTE 10: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Estimates related to the allowance for loan losses are reflected in the footnote
regarding loans. Current vulnerabilities due to certain concentrations of credit
risk are discussed in the footnote on commitments and credit risk.
NOTE 11: ADDITIONAL CASH FLOW INFORMATION
2000 1999 1998
---------- ----------- -----------
Noncash Investing and Financing Activities:
Loans held for sale transferred to
loans receivable portfolio $ -- -- 4,950,891
Loans receivable transferred to foreclosed
assets held for sale 32,080 123,056 689,550
Foreclosed assets held for sale transferred
to loans receivable -- 342,000 311,500
Additional Cash Payment Information:
Interest paid 12,643,874 10,416,241 8,632,457
Income taxes paid 1,928,174 2,198,156 1,497,087
33
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 12: EMPLOYEE BENEFIT PLANS
Pension Plan
- ------------
The Bank has participated in a multi-employer pension plan covering all
employees who met minimum service requirements. As a member of a multi-employer
pension plan, disclosures of plan assets and liabilities for individual
employers are not required or practicable. Pension plan expense was $5,063 for
the year ended June 30, 1998. This plan was terminated effective December 12,
1997.
Stock Award Plans
- -----------------
The Company has established three stock award plans for the benefit of
certain directors, officers and employees of the Bank and its subsidiary. The
plans provide a proprietary interest in the Company in a manner designed to
encourage these individuals to remain with the Bank. A Committee of the Bank's
Board of Directors administers the plans. The Company accounts for the cost of
share purchases under the plans as a reduction of stockholders' equity. The
awards vest at the rate of 20% per year over a five-year period. Compensation
expense is recognized based on the Company's stock price on the date the shares
are awarded to employees.
At the annual stockholders' meeting on October 18, 1995, the Bank's
stockholders approved the Recognition and Retention Plan (the "RRP"). Following
approval of the Plan, the Bank contributed $464,643 to a separate trust to
purchase the 75,106 shares of the Company's common stock in the RRP.
At a special stockholders' meeting on July 22, 1998, the Company's
stockholders approved the Restricted Stock Plan (the "RSP"). Following approval
of the Plan, the Company contributed $2,373,065 to a separate trust to purchase
the 173,632 shares in the RSP.
During the year ended June 30, 2000, the directors of the Company
established the Stock Compensation Plan (the "2000 SCP") with both a stock award
component and a stock option component. Under the stock award component of this
plan, the Committee awarded 7,125 shares of the Company's common stock. As of
June 30, 2000, this plan has not been funded.
The Bank recognized $496,320, $510,286, and $92,407 of expense under these
stock award plans in the years ended June 30, 2000, 1999, and 1998,
respectively.
Stock Option Plans
- ------------------
The Company has established three stock option plans for the benefit of
certain directors, officers and employees of the Bank and its subsidiary. A
committee of the Company's Board of Directors administers the plans. The stock
options under these plans may be either incentive stock options or nonqualified
stock options. Incentive stock options can be granted only to participants who
are employees of the Bank or its subsidiary. The option price must not be less
than the market value of the Company stock on the date of grant. All options
expire no later than ten years from the date of grant. The options vest at the
rate of 20% per year over a five-year period.
At the annual stockholders' meeting on October 18, 1995, the Bank's
stockholders approved the 1994 Stock Option and Incentive Plan for the benefit
of certain directors, officers and employees of the Bank and its subsidiary.
Under this Plan, the Committee may grant stock options for up to 187,764 shares
of the Company's common stock.
At a special stockholders' meeting on July 22, 1998, the Company's
stockholders approved the 1998 Stock Option and Incentive Plan. Under this
plan, the Committee may grant stock options for up to 434,081 shares of the
Company's common stock.
Under the stock option component of the2000 SCP, the Committee granted
nonqualified stock options for 17,875 shares of the Company's common stock.
34
Guaranty Federal Banshares, Inc.
Notes to Consolidated Financial Statements
The table below summarizes transactions under the Company's stock option
plans:
Number of shares
--------------------------------
Non-Qualified Weighted
Incentive Options to Average
Stock Option Directors Exercise Price
-------------- -------------- --------------
Balance outstanding as of July 1, 1997, converted (1) 151,990 -- $ 6.02
Granted, in FY 1998 5,000 -- 12.63
Exercised, in FY 1998 (9,794) -- 6.02
Forfeited, in FY 1998 (3,196) -- 6.02
------------ ------------
Balance outstanding as of June 30, 1998 144,000 -- 6.25
Granted, in FY 1999 317,637 117,010 13.44
Exercised, in FY 1999 (17,740) -- 6.02
Forfeited, in FY 1999 (8,072) -- 10.35
------------ ------------
Balance outstanding as of June 30, 1999 435,825 117,010 11.86
Granted, in FY 2000 8,000 39,579 11.18
Exercised, in FY 2000 (4,262) -- 6.02
Forfeited, in FY 2000 (9,188) -- 12.67
------------ ------------
Balance outstanding as of June 30, 2000 430,375 156,589 11.83
============ ============
Options exercisable as of June 30, 2000 146,592 23,405 $ 9.81
============ ============ ==========
(1)Stock options were originally for Bank stock. This plan was converted to
Company stock at the exchange ratio of 1.931. See Note 15.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes pricing model with the following weighted-average
assumptions:
June 30, 2000 June 30, 1999 June 30, 1998
------------- ------------- -------------
Dividends per share $ 0.42 $ 0.34 $ 0.30
Risk-free interest rate 6.22% 5.88% 5.46%
Expected life of options 5 years 5 years 5 years
Weighted-average fair value of options granted during year $ 2.10 $ 2.69 $ 2.07
35
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
The following table summarizes information about stock options under the
plans outstanding as of June 30, 2000:
Number Number Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------- ----------- ----------- ----------------
$ 5.83 5,098 3,060 6.5 years
6.02 99,159 75,179 5.5 years
6.08 7,724 4,635 6.0 years
9.94 4,000 -- 9.8 years
10.25 4,000 -- 9.6 years
10.50 17,875 -- 9.6 years
11.75 5,000 -- 9.1 years
12.25 16,704 -- 9.1 years
12.63 5,000 2,000 7.7 years
13.44 422,404 85,123 8.1 years
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans, and no compensation cost has been recognized for the
plans. Had compensation cost for the plans been determined based on the fair
value at the dates using Statement of Financial Accounting Standards No. 123,
the Company's net income would have decreased by $184,117, $177,719, and $33,007
for the years ended June 30, 2000, 1999, and 1998, respectively. Earnings per
share basic and diluted would have decreased by $0.04 for the year ended June
30, 2000 and $0.03 for the year ended June 30, 1999. Earnings per share since
conversion would be unchanged for the six-months ended June 30, 1998. The
effects of applying this Statement for either recognizing compensation cost or
providing pro forma disclosures are not likely to be representative of the
effects on reported net income for future years because options vest over
several years and additional awards generally are made each year.
Employee Stock Ownership Plan
- -----------------------------
In conjunction with the conversion discussed in Note 15, the Bank
established an internally-leveraged Employee Stock Ownership Plan (ESOP). All
employees are eligible to participate after they attain age twenty-one and
complete twelve consecutive months of service during which they work at least
1,000 hours. The ESOP borrowed $3,444,540 from the Company and purchased 344,454
shares of the common stock of the Company. The ESOP debt is secured by shares of
the Company. The loan will be repaid from contributions to the ESOP as approved
annually by the Bank's Board of Directors. As the debt is repaid, shares are
released from collateral and allocated to employees' accounts. The shares
pledged as collateral are reported as unearned ESOP shares in the consolidated
balance sheet. When shares are released from collateral, the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings and may be paid directly
to participants or credited to their account; dividends on unallocated ESOP
shares are recorded as a reduction of the unearned ESOP shares and accrued
interest. Compensation expense is recognized ratably based on the average fair
value of shares committed to be released. Compensation expense attributed to the
ESOP was $248,742,$ 268,234, and $141,566 for the years ended June 30, 2000,
1999, and 1998, respectively. The following is a summary of ESOP shares as of
June 30, 2000:
Allocated shares 45,926
Shares committed for release 11,484
Unreleased shares 287,044
----------
Total ESOP shares 344,454
==========
Fair value of unreleased shares $2,906,321
==========
36
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Employment Agreements
- ---------------------
The Bank has entered into employment agreements with James E. Haseltine,
President and Chief Executive Officer and certain other executive officers of
the Bank. Mr. Haseltine's employment agreement covers a term of two years. The
agreements will be terminable by the Bank for "just cause" as defined in the
agreements. If the Bank terminates the employee without just cause, the
employee will be entitled to a continuation of the employee's salary from the
date of termination through the remaining term of the agreement. Mr.
Haseltine's employee agreement contains a provision stating that in the event of
the termination of employment in connection with any future change in control of
the Bank, as defined in the agreement, Mr. Haseltine will be paid in a lump sum
as amount equal to 1.99 times Mr. Haseltine's five year average annual taxable
compensation. In addition, the Bank has entered into employment agreements with
eight other officers, which will provide a severance payment upon termination
without just cause in the event of a change in control, as defined in the
agreements. The agreements may be renewed annually by the Board of Directors
upon a determination of satisfactory performance within the Board's sole
discretion.
NOTE 13: TRANSACTIONS WITH RELATED PARTIES
Certain directors and executive officers of the Company and the Bank were
customers of and had transactions with the Bank in the ordinary course of
business. As of June 30, 2000 and 1999, loans outstanding to these directors
and executive officers amounted to $550,761 and $593,762, respectively. In
management's opinion, such loans and other extensions of credit and deposits
were made in the ordinary course of business and were made on substantially the
same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons. Further, in management's
opinion, these loans did not involve more than normal risk of collectability or
present other unfavorable features.
NOTE 14: COMMITMENTS AND CREDIT RISK
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since a portion of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment, commercial real estate
and residential real estate.
As of June 30, 2000 and 1999, the Bank had outstanding commitments to
originate loans of approximately $4,262,000 and $6,593,000, respectively. The
commitments extend over varying periods of time with the majority being
disbursed within a thirty-day period. As of June 30, 2000 and 1999, commitments
of $1,601,000 and $5,071,000, respectively, were at fixed rates and $2,661,000
and $1,522,000, respectively, were at floating market rates.
Forward commitments to sell mortgage loans are obligations to deliver loans
at a specified price on or before a specified date. The Bank acquires such
commitments to reduce market risk on mortgage loans in the process of
origination and mortgage loans held for sale. As of June 30, 2000 and 1999 the
bank had approximately $1,114,000 and $0, respectively, of commitments
outstanding.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers. The Bank had outstanding letters of credit of $12,000 and $263,000
as of June 30, 2000 and 1999, respectively.
37
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's credit worthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property and equipment,
commercial real estate and residential real estate. Management uses the same
credit policies in granting lines of credit as it does for on balance sheet
instruments.
As of June 30, 2000, unused lines of credit to borrowers aggregated
approximately $580,000 for commercial lines and $8,220,000 for open-end consumer
lines. As of June 30, 1999, unused lines of credit to borrowers aggregated
approximately $316,000 for commercial lines and $6,945,000 for open-end consumer
lines.
Although the Bank grants consumer loans, the majority of its loan
originations are single or multi-family residential real estate in Springfield,
Missouri, and the surrounding area. As of June 30, 2000, the Bank had thirty-
six borrowers with balances in excess of $1,000,000 each, aggregating
$84,769,000, for which the collateral is primarily single-family and multi-
family residential rental real estate and commercial real estate. As of June
30, 1999, the Bank had thirty-one borrowers with balances in excess of
$1,000,000 each, aggregating $77,311,000, for which the collateral is primarily
single-family and multi-family residential rental real estate and commercial
real estate. Also, as of June 30, 2000 and 1999, the Bank had $27,492,000 and
$29,563,000, respectively, in construction loans to or guaranteed by builders of
primarily residential property.
NOTE 15: CONVERSION TO STOCK FORM OF OWNERSHIP
On December 30, 1997, Guaranty Federal Bancshares, Inc. completed the
conversion and reorganization of Guaranty Federal Savings Bank and its former
mutual holding company by selling 4,340,812 shares of common stock to certain
depositors of the Bank and a benefit plan of the Bank at a price of $10.00 per
share. In addition all shares of common stock of the Bank held by public
stockholders were exchanged for 1,880,710 shares of common stock of the Company
at an exchange ratio of 1.931. The only class of securities registered pursuant
to the offering was common stock, par value $0.10 per share, and all 6,221,522
shares registered were issued.
Of the 6,221,522 shares registered and issued: (1) 3,996,358 shares were
sold (at $10.00 per share), resulting in cash proceeds to the Company of
$39,963,580, (2) 344,454 shares were sold (at $10.00 per share) to the trust of
the employee stock ownership plan of the Bank (the "ESOP") and funded by a
direct loan (with proceeds used from the offering) from the Company to the
trust, an affiliate of the Company, in the amount of $3,444,540, and (3)
1,880,710 shares (minus a certain de minimus number of fractional shares for
which cash was paid) were issued in exchange for the common stock of the Bank.
The expenses for the offering were $780,067 resulting in net proceeds of
$42,628,053 of which $19,943,834 was directly contributed to the Bank, and
$22,684,219 was retained by the Company. The Company used the proceeds for
various investments, including interest-bearing advances to the Bank.
38
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
NOTE 16: CONDENSED PARENT COMPANY STATEMENTS
The condensed balance sheets as of June 30, 2000 and 1999, and statements
of income and cash flows for the years ended June 30, 2000 and 1999, and for the
six-month period December 30, 1997 to June 30, 1998, for the parent company,
Guaranty Federal Bancshares, Inc., are as follows:
Balance Sheets As of June 30,
-------------------------
2000 1999
---------- ---------
Assets
Cash $ 410,394 84,261
Due from subsidiary 21,677 5,717,734
Investment in subsidiary 54,994,864 55,972,802
Land -- 1,228,799
Available-for sale securities 849,291 770,035
Prepaid expenses and other assets 275,394 165,187
Deferred income taxes 53,885 8,380
Refundable income taxes 44,221 --
------------ ----------
$ 56,649,726 63,947,198
============ ==========
Liabilities
Accrued expenses and other liabilities $ 64,336 --
Income taxes payable -- 513,976
Stockholders' equity
Common stock 625,004 624,578
Additional paid-in capital 47,921,681 47,366,264
Unearned ESOP shares (2,870,440) (3,100,080)
Retained earnings 24,654,965 23,236,009
Unrealized appreciation on available-for-sale securities, net 2,398,947 3,438,826
Treasury stock (16,144,767) (8,132,375)
------------ ----------
$ 56,649,726 63,947,198
============ ==========
Statements of Income For the years ended Six-months ended
----------------------------------
June 30, 2000 June 30, 1999 June 30, 1998
------------- ------------- -------------
Income
Interest income:
Related party $ 372,482 922,842 734,464
Other 26,390 10,104 508
Other 20,649 -- 550
---------- --------- ---------
419,521 932,946 735,522
---------- --------- ---------
Expense
Occupancy 5,851 9,190 4,500
Other 190,403 71,061 17,355
---------- --------- ---------
196,254 80,251 21,855
---------- --------- ---------
Income before income taxes and equity in
undistributed earnings of subsidiary 223,267 852,695 713,667
Provision for income taxes 60,340 316,584 272,000
---------- --------- ---------
Income before equity
in undistributed earnings of subsidiary 162,927 536,111 441,667
Equity in undistributed earnings of subsidiary 3,342,875 2,822,017 1,288,133
---------- --------- ---------
Net income $3,505,802 3,358,128 1,729,800
========== ========= =========
39
Guaranty Federal Bancshares, Inc.
Notes to Consolidated Financial Statements
Statements of Cash Flows For the years ended Six-months ended
---------------------------------
June 30, 2000 June 30, 1999 June 30, 1998
------------- ------------- -------------
Cash Flows From Operating Activities
Net income $ 3,505,802 3,358,128 1,729,800
Items not providing cash:
Undistributed earnings of net income of subsidiary -- (2,822,017) (1,288,133)
Loss on sale of premises and equipment 18,147 -- --
Gain on sale of available-for-sale securities (38,798) -- --
Release of ESOP shares 229,640 344,460 --
Changes in:
Prepaid expenses and other assets (110,207) (165,187) --
Income taxes payable (558,197) 241,976 272,000
Accrued expenses 64,336 (7,090) 7,090
------------ ----------- -----------
Net cash provided by operating activities 3,110,723 950,270 720,757
------------ ----------- -----------
Cash Flows From Investing Activities
Investment in subsidiary -- -- (19,943,834)
Loan to ESOP -- -- (3,444,540)
Purchase of land -- -- (1,228,799)
Purchase of premises and equipment (28,870) -- --
Proceeds from sale of land 982,177 -- --
Proceeds from sale of available-for-sale securities 299,472 -- --
Purchase of available-for-sale securities (462,918) (520,065) (272,619)
Net (increase) decrease in advance to subsidiary 5,842,006 11,806,186 (17,523,918)
Distribution in excess of net income of subsidiary 657,125 -- --
------------ ----------- -----------
Net cash provided by (used in) investing activities 7,288,992 11,286,121 (42,413,710)
------------ ----------- -----------
Cash Flows From Financing Activities
Proceeds from sale of common stock, net -- -- 42,628,053
Stock options exercised 25,656 106,792 40,454
Cash dividends paid (2,086,846) (1,805,069) (933,842)
Cash dividends received on RRP shares -- -- 9,875
RSP stock purchased -- (2,373,065) --
Treasury stock purchased (8,012,392) (8,132,375) --
------------ ----------- -----------
Net cash provided by (used in) financing activities (10,073,582) (12,203,717) 41,744,540
------------ ----------- -----------
Increase in cash 326,133 32,674 51,587
Cash, beginning of period 84,261 51,587 --
------------ ----------- -----------
Cash, end of period $ 410,394 84,261 51,587
============ =========== ===========
Noncash Investing and Financing Activities
Acquisition of Guaranty Federal Savings Bank through stock
conversion $ -- -- 30,316,999
============ =========== ===========
40
Independent Accountants' Report
-------------------------------
Board of Directors
Guaranty Federal Bancshares, Inc.
Springfield, Missouri
We have audited the accompanying consolidated balance sheets of GUARANTY
FEDERAL BANCSHARES, INC. as of June 30, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2000. These
financial statements are the responsibility statements based on our audits.
We conducted our audits in accordance with general accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GUARANTY FEDERAL BANCSHARES,
INC. as of June 30, 2000 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 2000, in
conformity with generally accepted accounting principles.
/s/ Baird, Kurtz & Dobson
July 21, 2000
Springfield, Missouri