Edgar Filing: GUARANTY FEDERAL BANCSHARES INC

gfed20130803_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 0-23325

Guaranty Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Delaware	43-1792717
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

1341 West Battlefield
Springfield, Missouri	65807
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (417) 520-4333

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of August 1, 2013
Common Stock, Par Value $0.10 per share	2,732,431 Shares

GUARANTY FEDERAL BANCSHARES, INC.


TABLE OF CONTENTS
		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements Condensed Consolidated Financial Statements (Unaudited):
	Condensed Consolidated Statements of Financial Condition		3
	Condensed Consolidated Statements of Income		4
	Condensed Consolidated Statements of Comprehensive Income (Loss)		5
	Condensed Consolidated Statements of Stockholders’ Equity		6
	Condensed Consolidated Statements of Cash Flows		8
	Notes to Condensed Consolidated Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3. Quantitative and Qualitative Disclosures about Market Risk			35

Item 4. Controls and Procedures			36

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		37

Item 1A. Risk factors		37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3. Defaults Upon Senior Securities		37

Item 4. Mine Safety Disclosures		37

Item 5. Other Information		37

Item 6. Exhibits		37

Signatures		38

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012

ASSETS

6/30/13

12/31/12

Cash
$ 3,264,967 $ 3,360,102

Interest-bearing deposits in other financial institutions
20,590,221 38,303,303

Cash and cash equivalents
23,855,188 41,663,405

Available-for-sale securities
109,260,193 101,980,644

Held-to-maturity securities
89,213 181,042

Stock in Federal Home Loan Bank, at cost
3,147,400 3,805,500

Mortgage loans held for sale
1,296,003 2,843,757

Loans receivable, net of allowance for loan losses June 30, 2013 - $8,377,284 - December 31, 2012 - $8,740,325
459,646,868 465,531,973

Accrued interest receivable:

Loans
1,603,746 1,674,814

Investments and interest-bearing deposits
400,090 380,555

Prepaid expenses and other assets
5,933,102 6,228,173

Prepaid FDIC deposit insurance premiums
- 1,438,636

Foreclosed assets held for sale
3,896,535 4,529,727

Premises and equipment, net
11,144,196 11,286,410

Bank owned life insurance
13,852,375 13,657,480

Income taxes receivable
832,891 910,174

Deferred income taxes
5,238,914 4,319,928

$ 640,196,714 $ 660,432,218

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Deposits
$ 511,889,458 $ 500,014,715

Federal Home Loan Bank advances
52,950,000 68,050,000

Securities sold under agreements to repurchase
10,000,000 25,000,000

Subordinated debentures
15,465,000 15,465,000

Advances from borrowers for taxes and insurance
369,870 152,867

Accrued expenses and other liabilities
790,031 481,382

Accrued interest payable
270,904 399,684

591,735,263 609,563,648

COMMITMENTS AND CONTINGENCIES
- -

STOCKHOLDERS' EQUITY

Capital Stock:

Series A preferred stock, $0.01 par value; authorized 2,000,000 shares; issued and outstanding June 30, 2013 and December 31, 2012 - 12,000 shares
11,886,533 11,789,276

Common stock, $0.10 par value; authorized 10,000,000 shares; issued June 30, 2013 and December 31, 2012 - 6,783,603 and 6,781,803 shares, respectively
678,360 678,180

Common stock warrants; December 31, 2012 - 459,459 shares
- 1,377,811

Additional paid-in capital
57,587,799 58,267,529

Retained earnings, substantially restricted
41,447,428 39,324,292

Accumulated other comprehensive income (loss)

Unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes
(1,914,338 ) 800,826

109,685,782 112,237,914

Treasury stock, at cost; June 30, 2013 and December 31, 2012 - 4,051,172 and 4,056,862 shares, respectively
(61,224,331 ) (61,369,344 )

48,461,451 50,868,570

$ 640,196,714 $ 660,432,218

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)

	Three months ended						Six months ended
	6/30/2013			6/30/2012			6/30/2013			6/30/2012
Interest Income
Loans	$	5,952,456		$	6,330,157		$	11,880,846		$	12,733,995
Investment securities		466,828			471,007			899,457			883,351
Other		47,736			45,195			106,138			94,935
		6,467,020			6,846,359			12,886,441			13,712,281
Interest Expense
Deposits		731,420			1,045,994			1,492,594			2,188,790
Federal Home Loan Bank advances		307,869			383,985			676,544			767,719
Subordinated debentures		134,322			139,521			268,672			279,366
Other		107,742			162,750			271,697			346,525
		1,281,353			1,732,250			2,709,507			3,582,400
Net Interest Income		5,185,667			5,114,109			10,176,934			10,129,881
Provision for Loan Losses		250,000			2,100,000			650,000			3,000,000
Net Interest Income After
Provision for Loan Losses		4,935,667			3,014,109			9,526,934			7,129,881
Noninterest Income
Service charges		292,049			269,253			553,834			524,343
Gain on sale of investment securities		116,182			69,576			204,983			107,105
Gain on sale of loans		592,086			475,055			1,024,019			837,409
Gain on sale of state low-income housing tax credits		1,441,012			-			1,441,012			-
Loss on foreclosed assets		(75,758	)		(70,771	)		(148,103	)		(171,880	)
Other income		318,973			297,435			628,567			590,583
		2,684,544			1,040,548			3,704,312			1,887,560
Noninterest Expense
Salaries and employee benefits		2,272,746			2,281,876			4,665,108			4,616,972
Occupancy		449,764			405,014			875,893			796,488
FDIC deposit insurance premiums		141,173			210,883			283,636			427,089
Prepayment penalty on securities sold under agreements to repurchase		1,510,000			-			1,510,000			-
Data processing		184,875			142,215			354,135			274,402
Advertising		106,251			75,000			212,502			150,000
Other expense		867,528			787,864			2,056,663			1,685,409
		5,532,337			3,902,852			9,957,937			7,950,360
Income Before Income Taxes		2,087,874			151,805			3,273,309			1,067,081
Provision (Credit) for Income Taxes		520,134			(192,316	)		752,916			(111,762	)
Net Income		1,567,740			344,121			2,520,393			1,178,843
Preferred Stock Dividends and Discount Accretion		198,630			397,910			397,260			679,301
Net Income (Loss) Available to Common Shareholders	$	1,369,110		$	(53,789	)	$	2,123,133		$	499,542

Basic Income (Loss) Per Common Share	$	0.50		$	(0.02	)	$	0.78		$	0.18
Diluted Income (Loss) Per Common Share	$	0.49		$	(0.02	)	$	0.76		$	0.17

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)

	Three months ended						Six months ended
	6/30/2013			6/30/2012			6/30/2013			6/30/2012
NET INCOME	$	1,567,740		$	344,121		$	2,520,393		$	1,178,843
OTHER ITEMS OF COMPREHENSIVE INCOME (LOSS):
Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes		(3,722,649	)		292,740			(4,104,800	)		344,726
Less: Reclassification adjustment for realized gains on investment securities included in net income, before income taxes		(116,182	)		(69,576	)		(204,983	)		(107,105	)
Total other items in comprehensive income (loss)		(3,838,831	)		223,164			(4,309,783	)		237,621
Income tax expense (credits) related to other items of comprehensive income		(1,420,367	)		82,571			(1,594,619	)		87,920
Other comprehensive income (loss)		(2,418,464	)		140,593			(2,715,164	)		149,701
COMPREHENSIVE INCOME (LOSS)	$	(850,724	)	$	484,714		$	(194,771	)	$	1,328,544

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)

	Preferred Stock		Common Stock		Common Stock Warrants			Additional Paid-In Capital			Unearned ESOP Shares		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balance, January 1, 2013	$	11,789,276	$	678,180	$	1,377,811		$	58,267,529		$	-	$	(61,369,344	)	$	39,324,292		$	800,826		$	50,868,570
Net income		-		-		-			-			-		-			2,520,393			-			2,520,393
Change in unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes		-		-		-			-			-		-			-			(2,715,164	)		(2,715,164	)
Preferred stock discount accretion		97,257		-		-			-			-		-			(97,257	)		-			-
Preferred stock dividends (5%)		-		-		-			-			-		-			(300,000	)		-			(300,000	)
Common stock warrants repurchased		-		-		(1,377,811	)		(625,439	)		-		-			-			-			(2,003,250	)
Stock award plans		-		-		-			(63,520	)		-		250,795			-			-			187,275
Stock options exercised		-		180		-			9,229			-		-			-			-			9,409
Treasury stock purchased		-		-		-			-			-		(105,782	)		-			-			(105,782	)
Balance, June 30, 2013	$	11,886,533	$	678,360	$	-		$	57,587,799		$	-	$	(61,224,331	)	$	41,447,428		$	(1,914,338	)	$	48,461,451

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2012 (UNAUDITED)

	Preferred Stock			Common Stock		Common Stock Warrants		Additional Paid-In Capital			Unearned ESOP Shares			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance, January 1, 2012	$	16,425,912		$	677,980	$	1,377,811	$	58,333,614		$	(204,930	)	$	(61,623,816	)	$	38,456,991		$	791,285	$	54,234,847
Net income		-			-		-		-			-			-			1,178,843			-		1,178,843
Change in unrealized appreciation on available-for-sale securities, net of income taxes		-			-		-		-			-			-			-			149,701		149,701
Preferred stock redeemed		(5,000,000	)		-		-		-			-			-			-			-		(5,000,000	)
Preferred stock discount accretion		266,107			-		-		-			-			-			(266,107	)		-		-
Preferred stock dividends (5%)		-			-		-		-			-			-			(413,194	)		-		(413,194	)
Stock award plans		-			-		-		(100,532	)		-			280,208			-			-		179,676
Stock options exercised		-			200		-		12,188			-			-			-			-		12,388
Treasury stock purchased		-			-		-		-			-			(25,736	)		-			-		(25,736	)
Release of ESOP shares		-			-		-		(26,787	)		114,000			-			-			-		87,213
Balance, June 30, 2012	$	11,692,019		$	678,180	$	1,377,811	$	58,218,483		$	(90,930	)	$	(61,369,344	)	$	38,956,533		$	940,986	$	50,403,738

See Notes to Condensed Consolidated Financial Statements

GUARANTY FEDERAL BANCSHARES, INC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED)

	6/30/2013			6/30/2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,520,393		$	1,178,843
Items not requiring (providing) cash:
Deferred income taxes		675,633			(491,976	)
Depreciation		414,885			331,454
Provision for loan losses		650,000			3,000,000
Gain on sale of loans and investment securities		(1,229,002	)		(944,514	)
Loss on foreclosed assets held for sale		76,448			191,522
Gain on sale of state low-income housing tax credits		(1,441,012	)		-
Amortization of deferred income, premiums and discounts		274,385			319,991
Stock award plan expense		187,275			179,676
Origination of loans held for sale		(31,553,697	)		(35,836,771	)
Proceeds from sale of loans held for sale		34,000,714			37,661,818
Release of ESOP shares		-			87,213
Increase in cash surrender value of bank owned life insurance		(194,895	)		(181,776	)
Changes in:
Prepaid FDIC deposit insurance premiums		1,438,636			407,862
Accrued interest receivable		51,533			(37,764	)
Prepaid expenses and other assets		295,071			350,888
Accounts payable and accrued expenses		179,869			(23,470	)
Income taxes receivable		77,283			469,829
Net cash provided by operating activities		6,423,519			6,662,825
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans		5,081,769			3,168,345
Principal payments on held-to-maturity securities		91,829			20,359
Principal payments on available-for-sale securities		6,345,815			6,369,983
Proceeds from calls/maturities of available-for-sale securities		9,000,000			1,000,000
Purchase of premises and equipment		(272,671	)		(313,496	)
Purchase of available-for-sale securities		(44,309,342	)		(46,523,089	)
Proceeds from sale of available-for-sale securities		17,311,228			17,369,774
Proceeds from maturities of interest-bearing deposits		-			5,587,654
Redemption of Federal Home Loan Bank stock		658,100			41,400
Purchase of bank owned life insurance		-			(2,500,000	)
Proceeds from sale of state low-income housing tax credits		1,441,012			-
Proceeds from sale of foreclosed assets held for sale		828,401			2,083,622
Net cash used in investing activities		(3,823,859	)		(13,695,448	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and savings accounts		25,921,950			14,689,686
Net decrease in certificates of deposit		(14,047,207	)		(2,917,711	)
Net decrease of securities sold under agreements to repurchase		(15,000,000	)		-
Repayments of FHLB advances		(15,100,000	)		-
Stock options exercised		9,409			12,388
Redemption of preferred stock		-			(5,000,000	)
Repurchase of common stock warrants		(2,003,250	)		-
Advances from borrowers for taxes and insurance		217,003			216,149
Cash dividends paid on preferred stock		(300,000	)		(444,444	)
Treasury stock purchased		(105,782	)		(25,736	)
Net cash provided by (used in) financing activities		(20,407,877	)		6,530,332
DECREASE IN CASH AND CASH EQUIVALENTS		(17,808,217	)		(502,291	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		41,663,405			26,574,082
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	23,855,188		$	26,071,791

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Guaranty Federal Bancshares, Inc.’s (the “Company”) 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”). The results of operations for the periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated statement of financial condition of the Company as of December 31, 2012, has been derived from the audited consolidated statement of financial condition of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

Note 2: Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Guaranty Bank (the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation.

Note 3: Securities

The amortized cost and approximate fair values of securities classified as available-for-sale are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of June 30, 2013
Equity Securities	$	102,212	$	5,612	$	(21,145	)	$	86,679
Debt Securities:
U. S. government agencies		41,972,014		3,943		(1,237,109	)		40,738,848
Municipals		13,433,828		29,088		(581,823	)		12,881,093
Corporate bonds		988,754		-		(10,650	)		978,104
Government sponsored mortgage-backed securities		55,802,016		575,816		(1,802,363	)		54,575,469
	$	112,298,824	$	614,459	$	(3,653,090	)	$	109,260,193

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2012
Equity Securities	$	102,212	$	306	$	(31,604	)	$	70,914
Debt Securities:
U. S. government agencies		38,188,554		202,213		(39,706	)		38,351,061
Municipals		10,212,376		250,269		(84,456	)		10,378,189
Corporate bonds		1,839,976		67,889		-			1,907,865
Government sponsored mortgage-backed securities		50,366,374		1,304,242		(398,001	)		51,272,615
	$	100,709,492	$	1,824,919	$	(553,767	)	$	101,980,644

Maturities of available-for-sale debt securities as of June 30, 2013:

Maturities of Available for Sale
	Amortized Cost		Approximate Fair Value
1-5 years	$	11,295,468	$	11,204,750
6-10 years		36,335,467		35,033,504
Over 10 years		8,763,660		8,359,790
Government sponsored mortgage-backed securities not due on a single maturity date		55,802,016		54,575,469
	$	112,196,612	$	109,173,514

The amortized cost and approximate fair values of securities classified as held to maturity are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Approximate Fair Value
As of June 30, 2013
Debt Securities:
Government sponsored mortgage-backed securities	$	89,213	$	5,009	$	-	$	94,222

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Approximate Fair Value

As of December 31, 2012
Debt Securities:
Government sponsored mortgage-backed securities	$	181,042	$	12,440	$	-	$	193,482

Maturities of held-to-maturity securities as of June 30, 2013:

	Amortized Cost		Approximate Fair Value

Government sponsored mortgage-backedsecurities not due on a single maturity date	$	89,213	$	94,222
	$	89,213	$	94,222

The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $48,874,594 and $56,022,882 as of June 30, 2013 and December 31, 2012, respectively. The approximate fair value of pledged securities amounted to $47,753,328 and $57,384,685 as of June 30, 2013 and December 31, 2012, respectively.

Realized gains and losses are recorded as net securities gains. Gains on sales of securities are determined on the specific identification method. Gross gains of $204,983 and $107,105 as of June 30, 2013 and June 30, 2012, respectively, were realized from the sale of available-for-sale securities. The tax effect of these net gains was $75,844 and $39,629 as of June 30, 2013 and June 30, 2012, respectively.

The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates, or declines in stock prices of equity securities. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold the debt securities to maturity or until recovery of the unrealized loss. Should the impairment of any of these debt securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified, to the extent the loss is related to credit issues, and to other comprehensive income to the extent the decline on debt securities is related to other factors and the Company does not intend to sell the security prior to recovery of the unrealized loss.

Certain other investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2013 and December 31, 2012, was $90,687,341 and $30,121,495, respectively, which is approximately 83% and 29% of the Company’s investment portfolio. These declines primarily resulted from changes in market interest rates and failure of certain investments to meet projected earnings targets.

The following tables show gross unrealized losses and approximate fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012.

	June 30, 2013

	Less than 12 Months					12 Months or More					Total

Description of Securities	Approximate Fair Value		Unrealized Losses			Approximate Fair Value		Unrealized Losses			Approximate Fair Value		Unrealized Losses

Equity Securities	$	-	$	-		$	26,782	$	(21,145	)	$	26,782	$	(21,145	)
U. S. government agencies		38,987,008		(1,237,109	)		-		-			38,987,008		(1,237,109	)
Municipals		9,804,768		(554,210	)		525,051		(27,613	)		10,329,819		(581,823	)
Coprporate Bonds		978,104		(10,650	)		-		-			978,104		(10,650	)
Government sponsored mortgage-backed securities		40,365,628		(1,802,363	)		-		-			40,365,628		(1,802,363	)
	$	90,135,508	$	(3,604,332	)	$	551,833	$	(48,758	)	$	90,687,341	$	(3,653,090	)

	December 31, 2012


	Less than 12 Months					12 Months or More					Total
Description of Securities	Approximate Fair Value		Unrealized Losses			Approximate Fair Value		Unrealized Losses			Approximate Fair Value		Unrealized Losses

Equity Securities	$	-	$	-		$	39,930	$	(31,604	)	$	39,930	$	(31,604	)
U. S. government agencies		7,298,687		(39,706	)		-		-			7,298,687		(39,706	)
Municipals		2,648,047		(76,318	)		538,300		(8,138	)		3,186,347		(84,456	)
Government sponsored mortgage-backed securities		19,596,531		(398,001	)		-		-			19,596,531		(398,001	)
	$	29,543,265	$	(514,025	)	$	578,230	$	(39,742	)	$	30,121,495	$	(553,767	)

Note 4: Loans and Allowance for Loan Losses

Categories of loans at June 30, 2013 and December 31, 2012 include:

	June 30,			December 31,
	2013			2012
Real estate - residential mortgage:
One to four family units	$	97,605,398		$	99,381,934
Multi-family		47,461,634			46,405,034
Real estate - construction		46,279,543			48,917,296
Real estate - commercial		163,708,672			167,760,850
Commercial loans		96,034,123			95,226,762
Consumer and other loans		17,077,653			16,716,858
Total loans		468,167,023			474,408,734
Less:
Allowance for loan losses		(8,377,284	)		(8,740,325	)
Deferred loan fees/costs, net		(142,871	)		(136,436	)
Net loans	$	459,646,868		$	465,531,973

Classes of loans by aging at June 30, 2013 and December 31, 2012 were as follows:

As of June 30, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	77	$	490	$	364	$	931	$	96,674	$	97,605	$	-
Multi-family		-		-		-		-		47,462		47,462		-
Real estate - construction		549		-		216		765		45,514		46,279		-
Real estate - commercial		4,570		-		-		4,570		159,139		163,709		-
Commercial loans		7		-		2,084		2,091		93,943		96,034		-
Consumer and other loans		16		-		-		16		17,062		17,078		-
Total	$	5,219	$	490	$	2,664	$	8,373	$	459,794	$	468,167	$	-

As of December 31, 2012

30-59 Days

Past Due

60-89 Days

Past Due

Greater Than

90 Days

Total Past

Due

Current

Total Loans

Receivable

Total Loans >

90 Days and

Accruing

(In Thousands)

Real estate - residential mortgage:

One to four family units
$ 52 $ 4 $ - $ 56 $ 99,326 $ 99,382 $ -

Multi-family
- - - - 46,405 46,405 -

Real estate - construction
22 28 640 690 48,227 48,917 -

Real estate - commercial
- 352 - 352 167,409 167,761 -

Commercial loans
10 610 785 1,405 93,822 95,227 -

Consumer and other loans
57 - - 57 16,660 16,717 -

Total
$ 141 $ 994 $ 1,425 $ 2,560 $ 471,849 $ 474,409 $ -

Nonaccruing loans are summarized as follows:

	June 30,		December 31,
	2013		2012
Real estate - residential mortgage:
One to four family units	$	2,416,321	$	2,280,856
Multi-family		-		-
Real estate - construction		5,933,059		6,274,241
Real estate - commercial		3,381,121		3,663,771
Commercial loans		3,835,206		2,793,457
Consumer and other loans		285,636		318,963
Total	$	15,851,343	$	15,331,288

The following tables present the activity in the allowance for loan losses based on portfolio segment for the three months and six months ended June 30, 2013 and 2012:

Three months ended June 30, 2013	Construction			Commercial Real Estate		One to four family			Multi-family		Commercial		Consumer and Other			Unallocated			Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	2,253		$	1,911	$	1,234		$	285	$	1,460	$	275		$	694		$	8,112
Provision charged to expense		(282	)		115		66			6		542		(3	)		(194	)	$	250
Losses charged off		-			-		(74	)		-		-		(20	)		-		$	(94	)
Recoveries		28			-		3			-		63		15			-		$	109
Balance, end of period	$	1,999		$	2,026	$	1,229		$	291	$	2,065	$	267		$	500		$	8,377

Six months ended June 30, 2013	Construction			Commercial Real Estate			One to four family			Multi-family		Commercial			Consumer and Other			Unallocated		Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	2,525		$	2,517		$	1,316		$	284	$	1,689		$	255		$	154	$	8,740
Provision charged to expense		(126	)		(305	)		40			7		651			37			346	$	650
Losses charged off		(438	)		(186	)		(134	)		-		(373	)		(53	)		-	$	(1,184	)
Recoveries		38			-			7			-		98			28			-	$	171
Balance, end of period	$	1,999		$	2,026		$	1,229		$	291	$	2,065		$	267		$	500	$	8,377

Three months ended June 30, 2012	Construction			Commercial Real Estate		One to four family			Multi-family		Commercial			Consumer and Other			Unallocated			Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	3,239		$	2,620	$	1,606		$	389	$	1,816		$	387		$	917		$	10,974
Provision charged to expense		(877	)		1,736		(34	)		26		2,156			(25	)		(882	)	$	2,100
Losses charged off		-			-		-			-		(20	)		(15	)		-		$	(35	)
Recoveries		6			24		2			-		45			10			-		$	87
Balance, end of period	$	2,368		$	4,380	$	1,574		$	415	$	3,997		$	357		$	35		$	13,126

Six months ended June 30, 2012	Construction			Commercial Real Estate			One to four family			Multi-family		Commercial			Consumer and Other			Unallocated			Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	2,508		$	2,725		$	1,735		$	390	$	1,948		$	372		$	935		$	10,613
Provision charged to expense		(156	)		2,095			(58	)		25		1,993			1			(900	)	$	3,000
Losses charged off		-			(478	)		(108	)		-		(20	)		(34	)		-		$	(640	)
Recoveries		16			38			5			-		76			18			-		$	153
Balance, end of period	$	2,368		$	4,380		$	1,574		$	415	$	3,997		$	357		$	35		$	13,126

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2013 and December 31, 2012:

As of June 30, 2013	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
Allowance for loan losses:	(In Thousands)
Ending balance: individually evaluated for impairment	$	152	$	-	$	5	$	-	$	894	$	48	$	-	$	1,099
Ending balance: collectively evaluated for impairment	$	1,847	$	2,026	$	1,224	$	291	$	1,171	$	219	$	500	$	7,278
Loans:
Ending balance: individually evaluated for impairment	$	5,934	$	5,127	$	2,480	$	-	$	3,835	$	400	$	-	$	17,776
Ending balance: collectively evaluated for impairment	$	40,345	$	158,582	$	95,125	$	47,462	$	92,199	$	16,678	$	-	$	450,391

December 31, 2012

Construction

Commercial

Real Estate

One to four family

Multi-family

Commercial

Consumer

and Other

Unallocated

Total

Allowance for loan losses:

(In Thousands)

Ending balance: individually evaluated for impairment
$ 608 $ 180 $ 90 $ - $ 441 $ 48 $ - $ 1,367

Ending balance: collectively evaluated for impairment
$ 2,087 $ 2,167 $ 1,226 $ 284 $ 1,248 $ 207 $ 154 $ 7,373

Loans:

Ending balance: individually evaluated for impairment
$ 6,275 $ 5,673 $ 2,360 $ - $ 2,555 $ 414 $ - $ 17,277

Ending balance: collectively evaluated for impairment
$ 42,642 $ 162,088 $ 97,022 $ 46,405 $ 92,672 $ 16,303 $ - $ 457,132

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

The following table summarizes the recorded investment in impaired loans at June 30, 2013 and December 31, 2012:

	June 30, 2013						December 31, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	2,234	$	2,394	$	-	$	2,245	$	2,271	$	-
Multi-family		-		-		-		-		-		-
Real estate - construction		5,464		6,409		-		5,015		5,575		-
Real estate - commercial		5,127		5,452		-		2,430		2,755		-
Commercial loans		1,493		1,796		-		318		689		-
Consumer and other loans		118		118		-		103		103		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	246	$	246	$	5	$	115	$	130	$	90
Multi-family		-		-		-		-		-		-
Real estate - construction		470		470		152		1,260		1,260		608
Real estate - commercial		-		-		-		3,243		3,243		180
Commercial loans		2,342		2,653		894		2,237		2,237		441
Consumer and other loans		282		282		48		311		311		48
Total
Real estate - residential mortgage:
One to four family units	$	2,480	$	2,640	$	5	$	2,360	$	2,401	$	90
Multi-family		-		-		-		-		-		-
Real estate - construction		5,934		6,879		152		6,275		6,835		608
Real estate - commercial		5,127		5,452		-		5,673		5,998		180
Commercial loans		3,835		4,449		894		2,555		2,926		441
Consumer and other loans		400		400		48		414		414		48
Total	$	17,776	$	19,820	$	1,099	$	17,277	$	18,574	$	1,367

The following tables summarize average impaired loans and related interest recognized on impaired loans for the three months and six months ended June 30, 2013 and 2012:

	For the Three Months Ended				For the Three Months Ended
	June 30, 2013				June 30, 2012
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	2,164	$	1	$	1,410	$	7
Multi-family		-		-		-		-
Real estate - construction		5,320		-		3,200		-
Real estate - commercial		5,095		13		3,956		18
Commercial loans		648		-		2,403		5
Consumer and other loans		96		-		157		2
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	181	$	-	$	290	$	-
Multi-family		-		-		-		-
Real estate - construction		613		-		4,543		-
Real estate - commercial		-		-		10,803		-
Commercial loans		3,230		-		4,035		-
Consumer and other loans		305		-		265		-
Total
Real estate - residential mortgage:
One to four family units	$	2,345	$	1	$	1,700	$	7
Multi-family		-		-		-		-
Real estate - construction		5,933		-		7,743		-
Real estate - commercial		5,095		13		14,759		18
Commercial loans		3,878		-		6,438		5
Consumer and other loans		401		-		422		2
Total	$	17,652	$	14	$	31,062	$	32

	For the Six Months Ended				For the Six Months Ended
	June 30, 2013				June 30, 2012
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	2,152	$	3	$	1,409	$	12
Multi-family		-		-		-		-
Real estate - construction		5,214		-		2,093		-
Real estate - commercial		4,142		36		4,803		31
Commercial loans		646		1		2,153		11
Consumer and other loans		99		-		270		10
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	144	$	-	$	447	$	-
Multi-family		-		-		-		-
Real estate - construction		859		-		5,782		-
Real estate - commercial		1,122		-		7,158		-
Commercial loans		2,756		-		3,153		-
Consumer and other loans		339		-		265		-
Total
Real estate - residential mortgage:
One to four family units	$	2,296	$	3	$	1,856	$	12
Multi-family		-		-		-		-
Real estate - construction		6,073		-		7,875		-
Real estate - commercial		5,264		36		11,961		31
Commercial loans		3,402		1		5,306		11
Consumer and other loans		438		-		535		10
Total	$	17,473	$	40	$	27,533	$	64

At June 30, 2013, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (TDR). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

The following table summarizes, by class, loans that were newly classified as TDRs for the three months ended June 30, 2013:

	Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate - residential mortgage:
One to four family units		1	$	245,528	$	245,528
Multi-family		-		-		-
Real estate - construction		-		-		-
Real estate - commercial		-		-		-
Commercial loans		-		-		-
Consumer and other loans		-		-		-
Total		1	$	245,528	$	245,528

The following table summarizes, by type of concession, loans that were newly classified as TDRs for the three months ended June 30, 2013:

	Interest Rate		Term		Combination		Total Modification
Real estate - residential mortgage:
One to four family units	$	-	$	-	$	245,528	$	245,528
Multi-family		-		-		-		-
Real estate - construction		-		-		-		-
Real estate - commercial		-		-		-		-
Commercial loans		-		-		-		-
Consumer and other loans		-		-		-		-
Total	$	-	$	-	$	245,528	$	245,528

During the three months ended June 30, 2012, there were two new one-to-four family residential mortgage loans modified that met the definition of a troubled debt restructuring that totaled $390,898. The concession granted on these two loans was temporary interest-only payments.

The following table presents the carrying balance of TDRs as of June 30, 2013 and December 31, 2012:

	June 30,		December 31,
	2013		2012
Real estate - residential mortgage:
One to four family units	$	1,838,564	$	1,653,934
Multi-family		-		-
Real estate - construction		6,050,964		6,229,201
Real estate - commercial		5,170,591		2,246,508
Commercial loans		2,715,505		1,851,099
Consumer and other loans		-		-
Total	$	15,775,624	$	11,980,742

The Bank has allocated $267,818 and $169,538 of specific reserves to customers whose loan terms have been modified in TDR as of June 30, 2013 and December 31, 2012, respectively.

There were two one to four family TDRs totaling $330,000 for which there was a payment default within twelve months following the modification during the six months ending June 30, 2013. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

Pass-This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

Special mention-This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard-This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful-This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of June 30, 2013 and December 31, 2012:

June 30, 2013	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	39,157	$	158,886	$	91,942	$	46,204	$	90,582	$	16,976	$	443,747
Special Mention		7,122		3,106		5,663		1,258		5,452		102		22,703
Substandard		5,988		5,616		3,113		-		5,097		763		20,577
Doubtful		-		1,717		-		-		-		-		1,717
Total	$	52,267	$	169,325	$	100,718	$	47,462	$	101,131	$	17,841	$	488,744

December 31, 2012	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	35,775	$	156,448	$	94,209	$	45,133	$	88,230	$	15,840	$	435,635
Special Mention		6,868		4,976		1,636		1,272		2,255		93		17,100
Substandard		5,581		6,337		3,507		-		4,742		784		20,951
Doubtful		693		-		30		-		-		-		723
Total	$	48,917	$	167,761	$	99,382	$	46,405	$	95,227	$	16,717	$	474,409

Note 5: Benefit Plans

The Company has stock-based employee compensation plans, which are described in the Company’s 2012 Annual Report on Form 10-K.

The table below summarizes transactions under the Company’s stock option plans for the six months ended June 30, 2013:

	Number of shares
	Incentive Stock Option			Non- Incentive Stock Option			Weighted Average Exercise Price

Balance outstanding as of January 1, 2013		174,500			167,000		$	16.38
Granted		-			-			-
Exercised		(1,800	)		-			5.23
Forfeited		(600	)		(2,000	)		12.97
Balance outstanding as of June 30, 2013		172,100			165,000			16.46
Options exercisable as of June 30, 2013		148,800			140,500			18.29

Stock-based compensation expense, consisting of stock options and restricted stock awards, recognized for the three months ended June 30, 2013 and 2012 was $35,461 and $37,325, respectively. Stock-based compensation expense recognized for the six months ended June 30, 2013 and 2012 was $187,275 and $179,676, respectively. As of June 30, 2013, there was $131,695 of unrecognized compensation expense related to nonvested stock options and restricted stock awards, which will be recognized over the remaining vesting period.

In January 2013 and 2012, the Company granted restricted stock to directors pursuant to the 2010 Equity Plan that was fully vested and thus, expensed in full on the date of the grant. The amount expensed was $116,032 and $110,009 for 2013 and 2012, respectively, which represents 16,576 shares of common stock at a market price of $7.00 at the date of grant in 2013 and 18,520 shares of common stock at a market price of $5.94 at the date of grant in 2012.

Note 6: Income (Loss) Per Common Share

	For three months ended June 30, 2013						For six months ended June 30, 2013
	Income Available to Common Shareholders		Average Common Shares Outstanding		Per Common Share		Income Available to Common Shareholders		Average Common Shares Outstanding		Per Common Share
Basic Income Per Common Share	$	1,369,110		2,731,727	$	0.50	$	2,123,133		2,735,533	$	0.78
Effect of Dilutive Securities				75,197						72,214
Diluted Income Per Common Share	$	1,369,110		2,806,924	$	0.49	$	2,123,133		2,807,747	$	0.76

	For three months ended June 30, 2012								For six months ended June 30, 2012
	Income Available to Common Shareholders			Common Shares Outstanding		Per Common Share			Income Available to Common Shareholders		Common Shares Outstanding		Per Common Share
Basic Income (Loss) Per Common Share	$	(53,789	)		2,712,297	$	(0.02	)	$	499,542		2,709,744	$	0.18
Effect of Dilutive Securities					164,447							156,123
Diluted Income (Loss) Per Common Share	$	(53,789	)		2,876,744	$	(0.02	)	$	499,542		2,865,867	$	0.17

Stock options to purchase 197,500 of common stock were outstanding during the three and six months ended June 30, 2013, respectively, and options to purchase 201,500 shares of common stock were outstanding during the three and six months ended June 30, 2012, respectively, but were not included in the computation of diluted income per common share because their exercise prices were greater than the average market price of the common shares. Stock warrants to purchase 459,459 shares of common stock were outstanding during the three and six months ended June 30, 2012, and were included in the computation of diluted income per common share because their exercise price was less than the average market price of the common shares during those periods.

Note 7: New Accounting Pronouncements

In January 2013, FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The update clarifies the scope of transactions that are subject to the disclosures about offsetting. The update clarifies that ordinary trade receivables and receivables are not in the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, update 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement. The update was effective for the Company January 1, 2013, and did not have a material impact on the Company’s financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The amendments in the update do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this update requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income–but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. Or, the organization may cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. The update was effective for the Company January 1, 2013, and did not have a material impact on the Company’s financial position or results of operations.

Note 8: Disclosures about Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-sale securities: Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. government agencies and government sponsored mortgage-backed securities. The Company has no Level 3 securities.

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated statements of financial condition measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012 (dollar amounts in thousands):

June 30, 2013
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Equity securities	$	87	$	-	$	-	$	87
Debt securities:
U.S. government agencies		-		40,739		-		40,739
Municipals		-		12,881		-		12,881
Corporate Bonds		-		978		-		978
Government sponsored mortgage-backed securities		-		54,575		-		54,575
Available-for-sale securities	$	87	$	109,173	$	-	$	109,260

December 31, 2012
Financial assets:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
Equity securities	$	71	$	-	$	-	$	71
Debt securities:
U.S. government agencies		-		38,351		-		38,351
Municipals		-		10,378		-		10,378
Corporate Bonds		-		1,908		-		1,908
Government sponsored mortgage-backed securities		-		51,273		-		51,273
Available-for-sale securities	$	71	$	101,910	$	-	$	101,981

The following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.

Foreclosed Assets Held for Sale: Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs. Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.

Impaired loans (Collateral Dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires the Company to obtain a current independent appraisal or observable market price of the collateral as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2013 and December 31, 2012 (dollar amounts in thousands):

Impaired loans:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
June 30, 2013	$	-	$	-	$	8,909	$	8,909

December 31, 2012	$	-	$	-	$	10,557	$	10,557

Foreclosed assets held for sale:
	Level 1 inputs		Level 2 inputs		Level 3 inputs		Total fair value
June 30, 2013	$	-	$	-	$	341	$	341

December 31, 2012	$	-	$	-	$	3,883	$	3,883

There were no transfers between valuation levels for any asset during the six months ended June 30, 2013 or 2012. If valuation techniques are deemed necessary, the Company considers those transfers to occur at the end of the period when the assets are valued.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurement (dollar amounts in thousands):

	Fair Value June 30, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans (collateral dependent)	$	7,416	Market Comparable	Discount to reflect realizable value		0%	-	100%	(	13%	)
Impaired loans	$	1,493	Discounted cash flow	Discount rate			0%		(	0%	)
Foreclosed assets held for sale	$	341	Market Comparable	Discount to reflect realizable value		0%	-	68%	(	14%	)

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated statements of financial condition at amounts other than fair value.

Cash and cash equivalents, interest-bearing deposits and Federal Home Loan Bank stock

The carrying amounts reported in the condensed consolidated statements of financial condition approximate those assets' fair value.

Held-to-maturity securities

Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances and securities sold under agreements to repurchase

The fair value of advances and securities sold under agreements to repurchase is estimated by using rates on debt with similar terms and remaining maturities.

Subordinated debentures

For these variable rate instruments, the carrying amount is a reasonable estimate of fair value. There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated debentures at an amount close to its par value.

Interest payable

The carrying amount approximates fair value.

Commitments to originate loans, letters of credit and lines of credit

The fair value of commitments to originate loans 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 and lines of credit are 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.

The following tables present estimated fair values of the Company’s financial instruments at June 30, 2013 and December 31, 2012.

	June 30, 2013
	Carrying Amount		Fair Value		Hierarchy Level
Financial assets:
Cash and cash equivalents	$	23,855,188	$	23,855,188		1
Held-to-maturity securities		89,213		94,222		2
Federal Home Loan Bank stock		3,147,400		3,147,400		2
Mortgage loans held for sale		1,296,003		1,296,003		2
Loans, net		459,646,868		463,101,272		3
Interest receivable		2,003,836		2,003,836		2
Financial liabilities:
Deposits		511,889,458		503,670,848		2
Federal Home Loan Bank advances		52,950,000		54,946,144		2
Securities sold under agreements to repurchase		10,000,000		10,049,349		2
Subordinated debentures		15,465,000		15,465,000		3
Interest payable		270,904		270,904		2
Unrecognized financial instruments (net of contractual value):
Commitments to extend credit		-		-		-
Unused lines of credit		-		-		-

	December 31, 2012
	Carrying Amount		Fair Value		Hierarchy Level
Financial assets:
Cash and cash equivalents	$	41,663,405	$	41,663,405		1
Held-to-maturity securities		181,042		193,482		2
Federal Home Loan Bank stock		3,805,500		3,805,500		2
Mortgage loans held for sale		2,843,757		2,843,757		2
Loans, net		465,531,973		475,374,676		3
Interest receivable		2,055,369		2,055,369		2
Financial liabilities:
Deposits		500,014,715		500,580,070		2
Federal Home Loan Bank advances		68,050,000		72,035,160		2
Securities sold under agreements to repurchase		25,000,000		25,114,464		2
Subordinated debentures		15,465,000		15,465,000		3
Interest payable		399,684		399,684		2
Unrecognized financial instruments (net of contractual value):
Commitments to extend credit		-		-		-
Unused lines of credit		-		-		-

Note 9: Preferred Stock and Common Stock Warrants

On January 30, 2009, as part of the U.S. Department of the Treasury's Troubled Asset Relief Program's Capital Purchase Program (“CPP”), the Company entered into a Securities Purchase Agreement - Standard Terms with the United States Department of the Treasury (the "Treasury") pursuant to which the Company sold to the Treasury 17,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock") and issued a ten year warrant (the "Warrant") to purchase 459,459 shares of the Company's common stock (the "Common Stock") for $5.55 per share (the "Warrant Shares") for a total purchase price of $17.0 million (the "Transaction").

The Series A Preferred Stock qualifies as Tier 1 capital and is entitled to cumulative preferred dividends at a rate of 5% per year for the first five years, payable quarterly, and 9% thereafter. The Series A Preferred Stock has a liquidation preference of $1,000 per share, plus accrued and unpaid dividends. The failure by the Company to pay a total of six quarterly dividends, whether or not consecutive, gives the holders of the Series A Preferred Stock the right to elect two directors to the Company's board of directors.

On June 13, 2012, with regulatory approval, the Company redeemed $5 million of the Series A Preferred Stock, including accrued and unpaid dividends of $19,444. The Company may redeem additional shares of the Series A Preferred Stock for $1,000 per share, plus accrued and unpaid dividends, in whole or in part, subject to regulatory approval.

The Company entered into a Placement Agency Agreement with the Treasury on April 15, 2013 in connection with a private auction by the Treasury of the remaining 12,000 shares of Series A Preferred Stock conducted immediately thereafter. On April 29, 2013, the Treasury settled the sale of such shares of Series A Preferred Stock to the winning bidders in the private auction, consisting of six parties unrelated to the Company.

On May 8, 2013, the Company notified the Treasury of its intent to repurchase the Warrant at its fair market value. The Board of Directors of the Company had previously determined that it would be in the best interest of the Company and its stockholders to repurchase the Warrant and had also determined the Warrant’s fair market value to be $2,003,250 (the “Fair Market Value”). On May 10, 2013, the Treasury notified the Company that it had accepted the Company’s offer to repurchase the Warrant at its Fair Market Value. Accordingly, on May 15, 2013, the Company entered into a Letter Agreement with Treasury pursuant to which the Company repurchased the Warrant for $2,003,250 in cash. As a result of the aforementioned, the Warrant is no longer issued or outstanding and the Company’s participation in the CPP is completed. In addition, though the Series A Preferred Stock remains outstanding, as a result of the Treasury’s sale of the Series A Preferred stock to third-party investors on April 29, 2013, the Treasury no longer possesses any securities issued by the Company. Any repurchase or redemption of the Series A Preferred Stock by the Company would require regulatory approval.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company’s financial condition as of June 30, 2013, and the results of operations for the three and six months ended June 30, 2013 and 2012.

The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company’s operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; changes in general or local economic conditions; changes in federal or state regulations and legislation governing the operations of the Company or the Bank; and other factors set forth in reports and other documents filed by the Company with the SEC from time to time, including the risk factors described under Item 1A. of this Form 10-Q and Item 1.A of the Company’s Form 10-K for the fiscal year ended December 31, 2012.

Financial Condition

The Company’s total assets decreased $20,235,504 (3%) from $660,432,218 as of December 31, 2012, to $640,196,714 as of June 30, 2013.

Interest bearing deposits in other financial institutions decreased $17,713,082 (46%) from $38,303,303 as of December 31, 2012, to $20,590,221 as of June 30, 2013. The decrease is primarily due to the Company’s ability to utilize available cash to paydown $30.1 million of Federal Home Loan Bank advances and securities sold under agreements to repurchase.

Available-for-sale securities increased $7,279,549 (7%) from $101,980,644 as of December 31, 2012, to $109,260,193 as of June 30, 2013. The increase is primarily due to purchases of $44.3 million offset by sales, maturities and principal payments received of $32.7 million. Also, during the second quarter of 2013, market interest rates on many debt securities increased, due to the dramatic increase in long-term Treasury rates, which in turn, caused the fair value of available-for-sale securities to decline by $4.3 million.

Net loans receivable decreased by $5,885,105 (1%) from $465,531,973 as of December 31, 2012, to $459,646,868 as of June 30, 2013. The Company experienced certain anticipated payoffs of various commercial real estate loans. During the period, commercial real estate loans decreased $4,052,178 (2%). Also, commercial loans increased $807,361 (1%), permanent multi-family loans increased $1,056,600 (2%), construction loans decreased $2,637,753 (5%), loans secured by owner occupied one to four unit residential real estate decreased $1,776,536 (2%) and installment loans increased $360,795 (2%). The Company continues to focus its lending efforts in the commercial and owner occupied real estate loan categories, and to reduce its concentrations in non-owner occupied commercial real estate.

Allowance for loan losses decreased $363,041 (4%) from $8,740,325 as of December 31, 2012 to $8,377,284 as of June 30, 2013. The allowance decreased due to net loan charge-offs of $1,013,041 exceeding provision for loan losses of $650,000 recorded during the period. Management charged off certain specific loans that had been identified and classified as impaired at December 31, 2012. See discussion under “Results of Operations – Comparison of Three and Six Month Periods Ended June 30, 2013 and 2012 – Provision for Loan Losses.” The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of June 30, 2013 and December 31, 2012 was 1.79% and 1.84%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2013 and December 31, 2012 was 52.8% and 57.0%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio.

Deposits increased $11,874,743 (2%) from $500,014,715 as of December 31, 2012, to $511,889,458 as of June 30, 2013. For the six months ended June 30, 2013, checking and savings accounts increased by $14.0 million and certificates of deposit decreased by $2.1 million. The increase in checking and savings accounts was due to the Bank’s continued efforts to increase core transaction deposits, both retail and commercial. See also the discussion under “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management."

Federal Home Loan Bank advances decreased $15,100,000 (22%) from $68,050,000 as of December 31, 2012, to $52,950,000 as of June 30, 2013 due to scheduled maturities during the period.

Securities sold under agreements to repurchase decreased $15,000,000 (60%) from $25,000,000 as of December 31, 2012, to $10,000,000 as of June 30, 2013 due to a prepayment of $15 million incurring a prepayment penalty of $1.5 million. The prepayment will allow the Company to significantly reduce higher cost, non-core funding liabilities on its balance sheet and eliminate future annual interest expense of approximately $390,000.

Stockholders’ equity (including unrealized depreciation on available-for-sale securities, net of tax) decreased $2,407,119 from $50,868,570 as of December 31, 2012, to $48,461,451 as of June 30, 2013. This is due to a few factors. First, the Company’s $2.1 million in net income after preferred stock dividends and accretion for the six month period increased stockholder’s equity. However, other factors reduced stockholders’ equity. In May 2013, the Company completed a $2 million repurchase of the warrant issued to the United States Department of the Treasury in 2009 as part of its Troubled Asset Relief Program’s Capital Purchase Program. Also, as a result of increases in market interest rates on many debt securities during the quarter, the Company’s unrealized gains (losses) on available-for-sale securities, net of income taxes, declined $2.7 million at June 30, 2013 as compared to December 31, 2012. On a per common share basis, stockholders’ equity decreased from $14.34 as of December 31, 2012 to $13.39 as of June 30, 2013.

Average Balances, Interest and Average Yields

The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact net income.

The following table sets forth certain information relating to the Company’s average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.

	Three months ended 6/30/2013								Three months ended 6/30/2012
	Average Balance		Interest			Yield / Cost			Average Balance		Interest			Yield / Cost
ASSETS
Interest-earning:
Loans	$	468,024	$	5,953			5.10	%	$	478,619	$	6,330			5.30	%
Investment securities		112,890		466			1.66	%		103,286		471			1.83	%
Other assets		24,908		48			0.77	%		25,068		45			0.72	%
Total interest-earning		605,822		6,467			4.28	%		606,973		6,846			4.52	%
Noninterest-earning		43,015								44,425
	$	648,837							$	651,398
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing:
Savings accounts	$	24,134		14			0.23	%	$	22,326		22			0.40	%
Transaction accounts		303,157		392			0.52	%		281,292		528			0.75	%
Certificates of deposit		137,331		326			0.95	%		149,214		497			1.34	%
FHLB advances		52,983		307			2.32	%		68,050		384			2.26	%
Securities sold under agreements to repurchase		16,429		108			2.64	%		25,000		162			2.60	%
Subordinated debentures		15,465		135			3.50	%		15,465		139			3.61	%
Total interest-bearing		549,499		1,282			0.94	%		561,347		1,732			1.24	%
Noninterest-bearing		48,419								35,813
Total liabilities		597,918								597,160
Stockholders’ equity		50,919								54,238
	$	648,837							$	651,398
Net earning balance	$	56,323							$	45,626
Earning yield less costing rate							3.35	%							3.28	%
Net interest income, and net yield spread on interest earning assets			$	5,185			3.43	%			$	5,114			3.38	%
Ratio of interest-earning assets to interest-bearing liabilities				110	%							108	%

	Six months ended 6/30/2013								Six months ended 6/30/2012
	Average Balance		Interest			Yield / Cost			Average Balance		Interest			Yield / Cost
ASSETS
Interest-earning:
Loans	$	465,105	$	11,881			5.15	%	$	481,531	$	12,734			5.33	%
Investment securities		108,779		899			1.67	%		95,256		883			1.87	%
Other assets		33,031		106			0.65	%		24,178		95			0.79	%
Total interest-earning		606,915		12,886			4.28	%		600,965		13,712			4.60	%
Noninterest-earning		43,010								46,512
	$	649,925							$	647,477
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing:
Savings accounts	$	24,069		28			0.23	%	$	21,897		45			0.41	%
Transaction accounts		291,847		771			0.53	%		272,193		1,096			0.81	%
Certificates of deposit		140,714		694			0.99	%		150,535		1,048			1.40	%
FHLB advances		59,440		676			2.29	%		68,050		768			2.28	%
Securities sold under agreements to repurchase		20,691		272			2.65	%		25,000		346			2.79	%
Subordinated debentures		15,465		269			3.51	%		15,465		279			3.64	%
Total interest-bearing		552,226		2,710			0.99	%		553,140		3,582			1.31	%
Noninterest-bearing		46,391								39,520
Total liabilities		598,617								592,660
Stockholders’ equity		51,308								54,817
	$	649,925							$	647,477
Net earning balance	$	54,689							$	47,825
Earning yield less costing rate							3.29	%							3.29	%
Net interest income, and net yield spread on interest earning assets			$	10,176			3.38	%			$	10,130			3.40	%
Ratio of interest-earning assets to interest-bearing liabilities				110	%							109	%

Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2013 and 2012

Net income for the three and six months ended June 30, 2013 was $1,567,740 and $2,520,393, respectively, compared to $344,121 and $1,178,843 for the three and six months ended June 30, 2012, respectively, which represents an increase in net income of $1,223,619 (356%) for the three month period, and an increase in net income of $1,341,550 (114%) for the six month period.

Interest Income

Total interest income for the three and six months ended June 30, 2013 decreased $379,339 (6%) and $825,840 (6%), respectively, as compared to the three and six months ended June 30, 2012. For the three and six month periods ended June 30, 2013 compared to the same periods in 2012, the average yield on interest earning assets decreased 24 basis points to 4.28% and 32 basis points to 4.28%, while the average balance of interest earning assets decreased $1,151,000 for the three month period and increased $5,950,000 for the six month period. The Company’s decrease in the average yield on interest earning assets was primarily due to the decline in loan balances for each period compared to the prior year period. Also, strong competition is causing a reduction in rates for new credits as well as maintaining existing credit relationships.

Interest Expense

Total interest expense for the three and six months ended June 30, 2013 decreased $450,897 (26%) and $872,893 (24%), respectively, when compared to the three and six months ended June 30, 2012. For the three and six month periods ended June 30, 2013 compared to the same periods in 2012, the average cost of interest bearing liabilities decreased 30 basis points to 0.94% and 32 basis points to .99%, respectively, while the average balance of interest bearing liabilities decreased $32,893,000 for the three month period and increased $7,696,000 for the six month period when compared to the same periods in 2012. The primary reason for the significant decrease in the average cost of interest bearing liabilities was the continued decline in higher cost certificates of deposits as well as reductions in the average rate paid on transaction deposit balances. Also, the Company has reduced its FHLB advances and securities sold under agreements to repurchase during 2013.

Net Interest Income

Net interest income for the three and six months ended June 30, 2013 increased $71,558 (1%) and $47,053 (0%), respectively, when compared to the same periods in 2012. For the three and six month periods ended June 30, 2013, the average balance of net interest earning assets increased by approximately $10,697,000 and $6,864,000, respectively, less than the average balance in interest bearing liabilities decreased when compared to the same periods in 2012. For the three and six month periods ended June 30, 2013, the net interest margin increased 5 basis points to 3.35% and decreased 46 basis points to 3.38%, respectively, when compared to the same periods in 2012.

Provision for Loan Losses

Based on its internal analysis and methodology, management recorded a provision for loan losses of $250,000 and $650,000 for the three months and six months ended June 30, 2013, respectively, compared to $2,100,000 and $3,000,000 for the same periods in 2012. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management of the Company anticipates the need to continue increasing the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank’s loan portfolio increases or other circumstances warrant. Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.

Noninterest Income

Noninterest income increased $1,643,996 (158%) and $1,816,752 (96%) for the three months and six months ended June 30, 2013, respectively, when compared to the three months and six months ended June 30, 2012. This was primarily due to recognizing gains on its investment portfolio and certain tax credit assets during the periods. In May 2013, the Company sold low-income housing tax credits for a gain of $1.4 million. Gains on investment securities increased $46,606 (67%) and $97,878 (91%) for the three months and six months ended June 30, 2013, respectively, when compared to the same periods in 2012. Also, gains on sales of loans increased $117,031 (25%) and $186,610 (22%) for the three months and six months ended June 30, 2013, respectively, when compared to the same periods in 2012, due to increased volume in loan originations and sales.

Noninterest Expense

Noninterest expense increased $1,629,485 (42%) and $2,007,577 (25%) for the three months and six months ended June 30, 2013 when compared to the same periods in 2012 primarily due to a $1.5 million prepayment penalty incurred on the prepayment of a repurchase agreement. Also, another factor was a charge of $231,000 during the six months ended June 30, 2013 relating to losses on three customer deposit accounts. The Company considers this a one-time charge and the Company has made a claim to its insurance carrier for a partial recovery.

Provision for Income Taxes

The increase in the provision for income taxes is a direct result of the Company’s increased taxable income for the three and six months ended June 30, 2013 as compared to the same periods in 2012.

Nonperforming Assets

The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2013 and December 31, 2012 was 52.8% and 57.0%, respectively. Total loans classified as substandard, doubtful or loss as of June 30, 2013, were $22.2 million or 3.48 % of total assets as compared to $21.7 million, or 3.28% of total assets at December 31, 2012. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank’s allowance for loan losses.

The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank include nonperforming loans and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.

	6/30/2013			12/31/2012			12/31/2011
Nonperforming loans	$	15,851		$	15,331		$	17,002
Real estate acquired in settlement of loans		3,897			4,530			10,012
Total nonperforming assets	$	19,748		$	19,861		$	27,014

Total nonperforming assets as a percentage of total assets		3.08	%		3.01	%		4.17	%
Allowance for loan losses	$	8,377		$	8,740		$	10,613
Allowance for loan losses as a percentage of gross loans		1.78	%		1.83	%		2.17	%

Liquidity and Capital Resources

Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and Federal Home Loan Bank of Des Moines borrowings. The Company also has established borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.

The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $23,855,188 as of June 30, 2013 and $41,663,405 as of December 31, 2012, representing a decrease of $17,808,217. The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments, deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.

The Bank’s capital ratios are above the levels required to be considered a well-capitalized financial institution. As of June 30, 2013, the Bank’s Tier 1 leverage ratio was 9.76%, its Tier 1 risk-based capital ratio was 12.74% and the Bank’s total risk-based capital ratio was 14.00% - all exceeding the minimums of 5%, 6% and 10%, respectively.

With regards to the Series A Preferred Stock, if the Company is unable to redeem the stock by January 2014, the cost of capital to the Company will increase significantly from 5% per annum ($600,000 annually) to 9% per annum ($1,080,000 annually). Depending on the Company’s financial condition at the time, the increase in the annual dividend rate on the Series A Preferred Stock could have a material adverse effect on the Company’s liquidity and net income available to common stockholders.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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, the Bank offers deposit rates and loan rates designed to maximize net interest income. Management also attempts to fund the Bank’s assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank’s net interest income. Since the relative spread between financial assets and liabilities is constantly changing, the Bank’s current net interest income may not be an indication of future net interest income.

As a part of its asset and liability management strategy and throughout the past several years, the Bank has continued to emphasize the origination of short-term commercial real estate, commercial business and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market.

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. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.

Interest Rate Sensitivity Analysis

The following table sets forth as of June 30, 2013 management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100 and 200 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
+200			58,854		(1,028	)		-2	%		9.42	%		0.13	%
+100			59,072		(810	)		-1	%		9.32	%		0.03	%
NC			59,882		-			-			9.29	%		-
	-100		61,081		1,199			2	%		9.29	%		0.00	%
	-200		66,050		6,168			10	%		9.86	%		0.57	%

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank’s loans and deposits, 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. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity Analysis Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2012 Annual Report on Form 10-K.

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, 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 steady 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 (the “Board”) is responsible for reviewing the Bank’s asset and liability management 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 with respect to the Bank’s asset and liability goals and strategies.

Item 4. Controls and Procedures

(a) The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013.

(b) There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the Company’s repurchase activity regarding its common stock during the Company’s second quarter ended June 30, 2013.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2013 to April 30, 2013	1,172	$ 9.72	1,172	175,512
May 1, 2013 to May 31, 2013	888	$ 9.91	888	174,624
June 1, 2013 to June 30, 2013	-	-	-	174,624
Total	2,060	$ 9.80	2,060

(1)	The Company has a repurchase plan which was announced on August 20, 2007. This plan authorizes the purchase by the Company of up to 350,000 shares of the Company’s common stock. There is no expiration date for this plan. There are no other repurchase plans in effect at this time.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

	11.	Statement re: computation of per share earnings (set forth in “Note 6: Income (Loss) Per Common Share” of the Notes to Condensed Consolidated Financial Statement (unaudited))
	31.1	Certification of the Principal Executive Officer pursuant to Rule 13a -14(a) of the Exchange Act
	31.2	Certification of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the Exchange Act
	32.1	CEO certification pursuant to 18 U.S.C. Section 1350
	32.2	CFO certification pursuant to 18 U.S.C. Section 1350

101

The following materials from Guaranty Federal Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Financial Condition (unaudited), (ii) Condensed Consolidated Statements of Income (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (unaudited), (iv) Condensed Consolidated Statement of Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited), and (vi) related notes.**

**Pursuant to Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Guaranty Federal Bancshares, Inc.

	Signature and Title		Date

	/s/ Shaun A. Burke		August 9, 2013
	Shaun A. Burke
	President and Chief Executive Officer
	(Principal Executive Officer and Duly Authorized Officer)


	/s/ Carter Peters		August 9, 2013
	Carter Peters
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

ASSETS	6/30/13			12/31/12
Cash	$	3,264,967		$	3,360,102
Interest-bearing deposits in other financial institutions		20,590,221			38,303,303
Cash and cash equivalents		23,855,188			41,663,405
Available-for-sale securities		109,260,193			101,980,644
Held-to-maturity securities		89,213			181,042
Stock in Federal Home Loan Bank, at cost		3,147,400			3,805,500
Mortgage loans held for sale		1,296,003			2,843,757
Loans receivable, net of allowance for loan losses June 30, 2013 - $8,377,284 - December 31, 2012 - $8,740,325		459,646,868			465,531,973
Accrued interest receivable:
Loans		1,603,746			1,674,814
Investments and interest-bearing deposits		400,090			380,555
Prepaid expenses and other assets		5,933,102			6,228,173
Prepaid FDIC deposit insurance premiums		-			1,438,636
Foreclosed assets held for sale		3,896,535			4,529,727
Premises and equipment, net		11,144,196			11,286,410
Bank owned life insurance		13,852,375			13,657,480
Income taxes receivable		832,891			910,174
Deferred income taxes		5,238,914			4,319,928
	$	640,196,714		$	660,432,218

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits	$	511,889,458		$	500,014,715
Federal Home Loan Bank advances		52,950,000			68,050,000
Securities sold under agreements to repurchase		10,000,000			25,000,000
Subordinated debentures		15,465,000			15,465,000
Advances from borrowers for taxes and insurance		369,870			152,867
Accrued expenses and other liabilities		790,031			481,382
Accrued interest payable		270,904			399,684
		591,735,263			609,563,648

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS' EQUITY
Capital Stock:
Series A preferred stock, $0.01 par value; authorized 2,000,000 shares; issued and outstanding June 30, 2013 and December 31, 2012 - 12,000 shares		11,886,533			11,789,276
Common stock, $0.10 par value; authorized 10,000,000 shares; issued June 30, 2013 and December 31, 2012 - 6,783,603 and 6,781,803 shares, respectively		678,360			678,180
Common stock warrants; December 31, 2012 - 459,459 shares		-			1,377,811
Additional paid-in capital		57,587,799			58,267,529
Retained earnings, substantially restricted		41,447,428			39,324,292
Accumulated other comprehensive income (loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes		(1,914,338	)		800,826
		109,685,782			112,237,914
Treasury stock, at cost; June 30, 2013 and December 31, 2012 - 4,051,172 and 4,056,862 shares, respectively		(61,224,331	)		(61,369,344	)
		48,461,451			50,868,570
	$	640,196,714		$	660,432,218