Guaranty Federal Bancshares (GFED) Reports Prelim. 1Q EPS Below Consensus

Guaranty Federal Bancshares, Inc., (NASDAQ: GFED), today announces the following preliminary results for the first quarter ended March 31, 2018.

First Quarter Highlights

Financial Condition – March 31, 2018 versus December 31, 2017

• Total assets grew $12.6 million (2%) to $807 million.
• Total gross loans increased $7.2 million (1%). The Company has experienced growth in the construction and commercial and industrial categories, offset by declines in multi-family and other commercial non-owner occupied credits.
• Total deposits increased $25.6 million (4%), primarily due to the Company’s efforts to grow commercial deposits and public funds.
• The Company reduced its reliance on wholesale funding by reducing FHLB advances by $13.7 million (15%).
• Nonperforming assets declined $464,000 (5%) to $9.8 million, which was 1.21% as a percentage of total assets.
• Tangible book value per share increased $0.12 (1%) to $17.22 at March 31, 2018.

Operating Results – First quarter ended March 31, 2018 versus the same quarter in 2017

• One-time merger costs associated with the Company’s recent acquisition (further described below), were $228,000 during the first quarter.
• Net income available to common shareholders for the quarter was $1,356,000 as compared to $1,429,000 in the first quarter of 2017. Diluted earnings per common share was $.30 for the quarter as compared to $.32 earned during the first quarter of 2017.
• Return on average assets decreased to .70% compared to 0.80% for the first quarter of 2017.
• Return on average equity decreased to 7.25% compared to 8.12% for the first quarter of 2017.
• Efficiency ratio increased to 74.50% primarily due to the Company’s investment in new facilities, equipment and technologies associated with a new state-of-the-art headquarters that also includes a modern, full-service banking center. As noted above, merger costs were another significant factor for the increase in expenses. Excluding merger costs, efficiency ratio would have been 71.40% for the quarter.

Additional Information on the Acquisition of Hometown Bancshares, Inc.

• On April 2, 2018, the Company completed its acquisition of Carthage, Missouri-based Hometown Bancshares, Inc. ("Hometown"), the parent of Hometown Bank, National Association. As a result of the transaction, Hometown Bank, National Association is now a wholly owned subsidiary of the Company. The transaction increases the Company’s total assets to approximately $989 million, based on preliminary information as of March 31, 2018.

Select Quarterly Financial Data

Below are selected financial results for the Company’s first quarter of 2018, compared to the fourth quarter of 2017 and the first quarter of 2017.

The following key issues contributed to the first quarter operating results as compared to the same quarter in 2017 and the financial condition results compared to December 31, 2017:

Interest income – Total interest income increased $1,185,000 (18%) during the quarter. The average balance of interest-earning assets increased $66.1 million (10%), while the yield on average interest earning assets increased 28 basis points to 4.32%. The increase is primarily due to higher loan balances and loan yields compared to the same quarter in 2017. The average balance of loans increased $73.1 million and the yield on loans increased 21 basis points to 4.66% for the quarter when compared to the same quarter in 2017.

Interest expense - Total interest expense increased $752,000 (64%) during the quarter. The average balance of interest-bearing liabilities increased $49.6 million (8%), while the average cost of interest-bearing liabilities increased 42 basis points to 1.23%. The increase in asset growth opportunities and liquidity pressures among most institutions in our market have created significant competitive pressures on deposit rates. To fund its asset growth and maintain prudent liquidity levels going forward, the Company will continue to utilize a cost effective mix of retail and commercial core deposits along with non-core, wholesale funding.

Provision for loan loss expense and allowance for loan losses –Based on its reserve analysis and methodology, the Company recorded a provision for loan loss expense of $225,000 during the quarter, a decrease from the $475,000 recognized during the prior year quarter. The provision for the quarter was primarily due to the increased reserves needed on growing loan balances for construction lending and various reserves on a few specific problem credits.

At March 31, 2018, the allowance for loan losses of $7.1 million was 1.10% of gross loans outstanding (excluding mortgage loans held for sale), representing a decrease from the 1.12% as of December 31, 2017. Management believes the allowance for loan losses is at a sufficient level to provide for loan losses in the Bank’s existing loan portfolio.

Non-interest income – Non-interest income increased $90,000 (7%) during the quarter compared to the same quarter in 2017. This was primarily due to the Company’s increased income from sales of Small Business Administration (“SBA”) and increased service charges on deposit accounts. For the quarter, gains on sales of SBA loans increased $40,000 and service charges on deposit accounts increased $50,000.

Non-interest expense – Non-interest expenses increased $1.1 million (24%) over the prior year quarter due to a few significant factors discussed below. Generally, the Company’s expansion efforts have resulted in an increase in both compensation and occupancy expense. Management believes these investments are critical in driving long-term growth and profitability in today’s competitive environment.

Salaries and employee benefits increased $316,000 for the quarter. First, this is partially attributable to an increase of $188,000 for the Company’s increased expansion in the Joplin, Missouri market (including new mortgage producers) and increases in areas such as operations and information technology. The Company has also experienced an $87,000 increase in employee benefits for Company paid contributions into employee health savings accounts and restricted stock compensation expense due to strong Company results.

Occupancy expenses increased $284,000 for the quarter primarily due to the Company’s move to a new headquarters discussed above. Lease expense on the new facility began in January 2018 and total expense was $155,000 for the quarter. There was also an increase in furniture and equipment depreciation (which was primarily due to the new facility) of $83,000 for the quarter when compared to the same quarter in 2017.

Due to the Company’s acquisition of Hometown (as discussed above), $228,000 of merger costs were incurred during the quarter. These costs were comprised of legal and investment advisory fees.

Other expense increased $130,000 when compared to the same quarter in 2017 primarily due to an increase of $35,000 for legal expense and an increase of $28,000 for loan origination expenses.

Provision for income taxes – The decrease in the provision for income taxes for the quarter is primarily due to the reduction in taxable income and federal tax rates as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017.

Capital – At March 31, 2018, stockholders’ equity increased to $75.8 million compared to $74.9 million at December 31, 2017. Net income for the quarter exceeded dividends declared by $823,000. On a per common share basis, stockholders’ equity increased to $17.22 at March 31, 2018 as compared to $17.10 as of December 31, 2017.

From a regulatory capital standpoint, all capital ratios for the Bank remain strong and above regulatory requirements.

Asset quality – The Company’s nonperforming assets decreased to $9.8 million as of March 31, 2018 as compared to $10.2 million as of December 31, 2017. Nonperforming assets as a percentage of total assets decreased to 1.21% as of March 31, 2018 as compared to 1.28% as of December 31, 2017.

Non-Generally Accepted Accounting Principle (GAAP) Financial Measures

In addition to the GAAP financial results presented in this press release, the Company presents non-GAAP financial measures discussed below. These non-GAAP measures are provided to enhance investors’ overall understanding of the Company’s current financial performance. Additionally, Company management believes that this presentation enables meaningful comparison of financial performance in various periods. However, the non-GAAP financial results presented should not be considered a substitute for results that are presented in a manner consistent with GAAP. A limitation of the non-GAAP financial measures presented is that the adjustments concern gains, losses or expenses that the Company does expect to continue to recognize; the adjustments of these items should not be construed as an inference that these gains or expenses are unusual, infrequent or non-recurring. Therefore, Company management believes that both GAAP measures of its financial performance and the respective non-GAAP measures should be considered together.

Operating IncomeOperating income is a non-GAAP financial measure that adjusts net income for the following non-operating items:

• Gains on sales of available-for-sale securities
• Gains on sales of SBA loans
• Gains and losses on foreclosed assets held for sale
• Provision for loan loss expense
• Provision for income taxes
• Merger costs

A reconciliation of the Company’s net income to its operating income for the quarters ended March 31, 2018 and 2017 is set forth below.

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