UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ________
COMMISSION FILE NUMBER: 0-24235
GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-16516431
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 W. ARKANSAS
MT. PLEASANT, TEXAS 75455
(Address of principal executive offices, including zip code)
903-572-9881
(Registrant's telephone number, including area code)
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.
[X] Yes [_] No
As of August 10, 1998, there were 2,898,280 shares of the registrant's Common
Stock, par value $1.00 per share, outstanding.
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997..................... 2
Consolidated Statements of Earnings for the Six Months Ended June 30, 1998 and 1997 (unaudited)....... 4
Consolidated Statement of Changes in Shareholders' Equity............................................. 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (unaudited)..................................................... 6
Consolidated Statements of Comprehensive Income for the Six Months
Ended June 30, 1998 and 1997 (unaudited)............................................................ 7
Notes to Interim Consolidated Financial Statements.................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................21
Item 2. Changes in Securities and Use of Proceeds...............................................................21
Item 3. Defaults upon Senior Securities ........................................................................21
Item 4. Submission of Matters to a Vote of Security Holders.....................................................21
Item 5. Other Information.......................................................................................21
Item 6. Exhibits and Reports on Form 8-K........................................................................21
Signatures........................................................................................................22
1
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, December 31,
1998 1997
-------- --------
(Unaudited)
ASSETS
Cash and due from banks........................................ $ 8,879 $ 9,750
Federal funds sold............................................. 11,765 7,720
Securities:
Available-for-sale........................................... 38,800 42,906
Held-to-maturity............................................. 10,654 15,233
-------- --------
Total securities........................................... 49,454 58,139
-------- --------
Loans, net of allowance for loan losses of $1,435 and $1,129... 168,465 156,266
Premises and equipment, net.................................... 6,662 6,359
Accrued interest receivable.................................... 2,323 2,224
Other assets................................................... 7,089 3,699
======== ========
Total assets............................................... $254,637 $244,157
======== ========
2
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing.......................................... $ 47,192 $ 46,295
Interest-bearing............................................. 181,091 176,666
------- -------
Total deposits............................................. 228,283 222,961
------- -------
Other liabilities.............................................. 3,637 2,943
------- -------
Total liabilities.......................................... 231,920 225,904
------- -------
Shareholders' equity:
Preferred stock.............................................. 0 827
Common stock................................................. 2,898 2,548
Additional capital........................................... 9,514 5,396
Retained earnings............................................ 10,072 9,240
Accumulated other comprehensive income....................... 235 242
------- -------
22,719 18,253
Less common stock held in treasury--at cost.................... 2 0
------- -------
Total shareholders' equity................................. 22,717 18,253
------- -------
Total liabilities and shareholders' equity.................. $254,637 $244,157
See accompanying Notes to Interim Consolidated Financial Statements.
3
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six months ended
June 30,
----------------
1998 1997
------ ------
Interest income:
Loans ................................................................ $ 6,996 $ 6,090
Securities............................................................ 1,704 1,445
Federal funds sold and other temporary investments.................... 342 430
------ ------
Total interest income............................................... 9,042 7,965
Interest expense........................................................ 4,469 3,868
------ ------
Net interest income................................................. 4,573 4,097
Provision for loan losses............................................... 430 40
------ ------
Net interest income after provision for loan losses................. 4,143 4,057
------ ------
Noninterest income:
Service charges....................................................... 582 522
Other operating income................................................ 1,046 271
------ ------
Total noninterest income............................................ 1,628 793
------ ------
Noninterest expense:
Employee compensation and benefits.................................... 2,141 1,796
Net bank premises expense............................................. 583 619
Other operating expenses.............................................. 1,490 1,215
------ ------
Total noninterest expenses.......................................... 4,214 3,630
------ ------
Earnings before income taxes........................................ 1,557 1,220
Provision for income taxes.............................................. 370 155
------ ------
Net earnings before preferred stock dividends....................... 1,187 1,065
Preferred stock dividends........................................... (37) (37)
------ ------
Net earnings available to common shareholders....................... $1,150 $1,028
====== ======
Basic earnings per common share..................................... $0.43 $0.40
====== ======
Diluted earnings per common share................................... $0.43 $0.40
====== ======
See accompanying Notes to Interim Consolidated Financial Statements.
4
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accumulated
other Total
compre- Common share-
Preferred Common Additional Retained hensive stock in holders'
stock stock capital earnings income treasury equity
---------- ------- ---------- --------- -------- --------- ---------
Balance at January 1, 1997........... $ 827 $2,548 $5,396 $ 7,480 $ 19 $(20) $16,250
Sale of treasury stock............... ---- ---- ---- ---- ---- 20 20
Dividends
Preferred - $0.45 per share...... ---- ---- ---- (74) ---- ---- (74)
Common - $0.22 per share......... ---- ---- ---- (566) ---- ---- (566)
Net change in unrealized gain
on available-for-sale
securities, net of tax of $114... ---- ---- ---- ---- 223 ---- 223
Net earnings for the year............ ---- ---- ---- 2,400 ---- ---- 2,400
--------- ------- ---------- ------- ------- -------- -------
Balance at December 31, 1997......... $ 827 $2,548 $5,396 $ 9,240 $242 $ ---- $18,253
Purchase of treasury stock........... ---- ---- ---- ---- ---- (2) (2)
Purchase of preferred stock.......... (827) ---- ---- ---- ---- ---- (827)
Sale of common stock................. ---- 350 4,118 ---- ---- ---- 4,468
Dividends
Preferred - $0.225 per share ---- ---- ---- (37) ---- ---- (37)
Common - $0.19 per share ---- ---- ---- (319) ---- ---- (319)
Rounding............................. ---- ---- ---- 1 ---- ---- 1
Net change in unrealized gain
on available-for-sale
securities, net of tax of
$3(1)............................ ---- ---- ---- ---- (7) ---- (7)
Net earnings(1)...................... ---- ---- ---- 1,187 ---- ---- 1,187
--------- ------- ---------- ------- ------- -------- -------
Balance at June 30, 1998(1).......... $ 0 $2,898 $9,514 $10,072 $235 $ (2) $22,717
========= ======= ========== ======= ======= ======== =======
(1) Unaudited
See accompanying Notes to Interim Consolidated Financial Statements.
5
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six months ended June 30,
---------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net earnings...................................................................... $ 1,187 $ 1,065
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation...................................................................... 272 266
Amortization of premiums, net of (accretion) of discounts on securities........... 85 (17)
Provision for loan loss........................................................... 430 40
Gain on sale of premises, equipment and other real estate......................... (35) (3)
Write down of ORE and repossessed assets.......................................... 15 65
Proceeds from sale of loans....................................................... 1,967 0
Increase in accrued interest receivable and other assets.......................... (3,944) (667)
Increase in accrued interest and other liabilities................................ 696 197
-------- --------
Net cash provided by operating activities.................................... 673 946
Cash flows from investing activities:
Purchases of held-to-maturity securities.......................................... 0 (7,179)
Proceeds from sales, maturities and repayments of available-for-sale securities... 7,424 1,556
Purchases of available-for-sale securities........................................ (3,408) (27,994)
Proceeds from maturities and repayments of held-to-maturity securities............ 4,574 11,016
Net increase in loans............................................................. (14,596) (6,847)
Purchases of premises and equipment............................................... (575) (987)
Proceeds from sale of premises, equipment and other real estate................... 477 6
Net (increase) decrease in federal funds sold..................................... (4,045) 15,630
-------- --------
Net cash used by investing activities........................................ (10,149) (14,799)
Cash flows from financing activities:
Change in deposits................................................................ 5,322 7,959
Repayment of borrowings........................................................... 0 (171)
Purchase of treasury stock........................................................ (2) 0
Sale of treasury stock............................................................ 0 13
Dividends paid.................................................................... (356) (310)
Redemption of preferred stock..................................................... (827) 0
Sale of common stock.............................................................. 4,468 0
-------- --------
Net cash provided from financing activities.................................. 8,605 7,491
-------- --------
Net decrease in cash and cash equivalents.................................... (871) (6,362)
Cash and cash equivalents at beginning of period...................................... 9,750 15,809
-------- --------
Cash and cash equivalents at end of period............................................ $ 8,879 $ 9,447
======== ========
See accompanying Notes to Interim Consolidated Financial Statements.
6
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Six months ended
June 30,
-------------------------
1998 1997
--------- ----------
Net earnings.......................................................................... $ 1,187 $ 1,065
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities:
Unrealized (losses) gains arising during the period................................. (7) 71
-------- --------
Comprehensive income.................................................................. $ 1,180 $ 1,136
======== ========
See accompanying Notes to Interim Consolidated Financial Statements.
7
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Guaranty
Bancshares, Inc. (collectively referred to as the Company) and its wholly-owned
subsidiary Guaranty Financial Corp., Inc. which wholly owns Guaranty Bank and
one non-bank subsidiary, Guaranty Company. Guaranty Bank has two non-bank
subsidiaries, Guaranty Leasing Company and GB Com, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. 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, the statements reflect all
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows of the Company on a consolidated basis, and all
such adjustments are of a normal recurring nature. These financial statements
and the notes thereto should be read in conjunction with the Company's
Prospectus which is a part of the Registration Statement on Form S-1
(Registration No. 333-48959) filed with the SEC on May 11, 1998. Operating
results for the six month period ended June 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
(2) INCOME PER COMMON SHARE
Income per common share was computed based on the following: (All
computations show the effects of a seven for one common shares stock split
effective March 24, 1998)
For the six months ended
June 30,
---------------------
1998 1997
---------- ----------
Net earnings available to common shareholders...... $ 1,150 $ 1,028
Weighted average common shares used in basic EPS . 2,664,947 2,548,280
Potential dilutive common shares................... 0 0
---------- ----------
Weighted average common and potential dilutive
common shares used in dilutive EPS ............ 2,664,947 2,548,280
Basic earnings per common share ................... $ 0.43 $ 0.40
========== ==========
Diluted earnings per common share ................. $ 0.43 $ 0.40
========== ==========
8
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company has adopted Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which requires the reporting
of comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology which includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net earnings.
The tax effects for components of comprehensive income are as follows:
Six months ended June 30,
---------------------------------------------------------------------
1998 1997
------------------------------- -----------------------------
Before Tax Net of Before Tax Net of
Tax (Expense)/ Tax Tax (Expense)/ Tax
Amount Benefit Amount Amount Benefit Amount
------------------------------- -----------------------------
Unrealized (losses) gains on
securities arising during the
period............................. $ (10) $ 3 $ (7) $ 106 $ (35) $ 71
------------------------------- -----------------------------
Other comprehensive income........... $ (10) $ 3 $ (7) $ 106 $ (35) $ 71
=============================== =============================
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Guaranty Bancshares, Inc. (the "Company") is a registered bank holding
company that derives substantially all of its revenues and income from the
operation of its subsidiary, Guaranty Bank (the "Bank"). The Bank is a full
service bank that provides a broad line of financial products and services to
small and medium-sized businesses and consumers through seven banking locations
in the Texas communities of Mount Pleasant (two offices), Bogata, Deport, Paris,
Talco and Texarkana. The following Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain certain forward-
looking statements regarding future financial condition, results of operations,
and the Company's business operations. Such statements involve risks,
uncertainties and assumptions, including, but not limited to monetary policy and
general economic conditions in Texas and more specifically Northeast Texas, the
actions of competitors and customers, the success of the Company in implementing
its strategic plan, and the effects of regulatory restrictions imposed on banks
and bank holding companies generally. Should one or more of these risks or
uncertainties materialize or should these underlying assumptions prove
incorrect, actual outcomes may vary materially from outcomes expected or
anticipated by the Company.
OVERVIEW
Net earnings available to common shareholders for the six months ended June
30, 1998 were $1.2 million or $0.43 per share compared to $1.0 million or $0.40
per share for the six months ended June 30, 1997, an increase of 11.9%. While
aided by an increase in net interest income, the improvement in net earnings was
primarily the result of a gain on the sale of approximately $2.0 million in
principal amount of mortgage loans that were originally purchased in 1991 at a
discount from the Resolution Trust Corporation("RTC"). In March of 1998, the
Company sold the mortgage loans at par, which resulted in a gain of $444,000,
net of $230,000 in taxes expensed as a result of the sale. The Company did not
have a gain from the sale of loans in the first six months of 1997. The gain on
the sale of the loans in 1998 was partially offset by an increase in the
provision for loan losses from $40,000 in the first six months of 1997 to
$430,000 in the first six months of 1998 primarily as the result of a $23.8
million or 16.3% increase in loans during the same time period. Accordingly,
after giving effect to these transactions, core earnings available to common
shareholders for the period were $1.1 million or $0.41 per share for the first
six months of 1998 compared to $1.0 million or $0.40 per share for the first six
months of 1997, a 6.6% increase.
The six month period ended June 30, 1998 showed good growth. Total loans
increased to $169.9 million at June 30, 1998 from $157.4 million at December 31,
1997, an increase of $12.5 million or 7.9%. Total assets were $254.6 million at
June 30, 1998 compared with $244.2 million at December 31, 1997. The increase
in total assets resulted mainly from an increase in total deposits to $228.3
million at June 30, 1998 from $223.0 million at December 31, 1997, an increase
of $5.3 million or 2.4%, and an increase in shareholders equity of $5.3 million.
Common shareholders' equity was $22.7 million at June 30, 1998 compared with
$17.4 million at December 31, 1997, an increase of $5.3 million or 30.5%. This
increase was due to the initial public offering proceeds of $4.5 million (net of
expenses), net earnings for the period of $1.2 million less dividends paid of
$356,000, and the redemption of the preferred stock of $827,000.
10
RESULTS OF OPERATIONS
Interest Income
Interest income for the six months ended June 30, 1998 was $9.0 million, an
increase of $1.1 million or 13.5% from the six months ended June 30, 1997. The
increase in interest income was due primarily to higher interest income on loans
and securities. Average loans were $162.1 million for the six months ended June
30, 1998 compared with $142.1 million for the six months ended June 30, 1997, an
increase of $20.0 million or 14.1%. Internal growth accounted for all of the
$20.0 million increase in average loans. Average securities were $52.7 million
for the six months ended June 30, 1998 compared with $44.8 million for the six
months ended June 30, 1997, an increase of $7.9 million or 17.6%.
Interest Expense
Interest expense on deposits and other interest-bearing liabilities was
$4.5 million for the six months ended June 30, 1998 compared with $3.9 million
for the six months ended June 30, 1997, an increase of $601,000 or 15.5%. The
increase in interest expense was due primarily to an increase in average
interest-bearing liabilities, to $182.2 million for the six months ended June
30, 1998 from $163.1 million for the six months ended June 30, 1997, an increase
of $19.1 million or 11.7%. In addition, the interest rate on average interest-
bearing liabilities increased to 4.97% from 4.81% for the same periods.
Net Interest Income
Net interest income was $4.6 million for the six months ended June 30, 1998
compared with $4.1 million for the six months ended June 30, 1997, an increase
of $476,000 or 11.6%. The increase in net interest income resulted primarily
from growth in average earning assets to $226.2 million for the six months ended
June 30, 1998 from $197.0 million for the six months ended June 30, 1997, an
increase of $29.2 million or 14.8%.
The Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on interest-
earning assets and rates paid on interest-bearing deposits and other borrowed
funds, referred to as a "rate change." The following tables set forth, for each
category of interest-earning assets and interest-bearing liabilities, the
average amounts outstanding, the interest earned or paid on such amounts, and
the average rate earned or paid for the six months ended June 30, 1998 and 1997.
The tables also set forth the average rate earned on total interest-earning
assets, the average rate paid on total interest-bearing liabilities, and the net
interest margin on average total interest-earning assets for the same periods.
11
Six months ended June 30,
-----------------------------------------------------------------------
1998 1997
------------------------------------ ----------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------ -------- --------- ----------- -------- --------
ASSETS: (Dollars in thousands)
Interest-earning assets:
Loans.................................... $162,078 $6,996 8.75% $142,106 $6,090 8.69%
Securities............................... 52,685 1,704 6.56% 44,753 1,445 6.55%
Federal funds sold and other temporary
investments......................... 11,391 342 6.09% 10,169 430 8.57%
-------- ------ ------ -------- ------ ------
Total interest-earning assets....... 226,154 $9,042 8.11% 197,028 $7,965 8.20%
Less allowance for loan losses................. (1,321) (1,061)
-------- --------
Total interest-earning assets, net
of allowance................................ 224,833 195,967
Nonearning assets.............................. 23,076 24,440
-------- --------
Total assets........................ $247,909 $220,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand deposits......... $ 19,187 $ 265 2.80% $ 17,909 $ 251 2.84%
Savings and money market accounts........ 39,059 760 3.95% 38,688 737 3.86%
Certificates of deposit.................. 123,988 3,444 5.63% 106,504 2,880 5.48%
-------- ------ ------ -------- ------ ------
Total interest-bearing
liabilities......................... 182,234 4,469 4.97% 163,101 3,868 4.81%
-------- ------ ------ -------- ------ ------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...... 42,944 37,786
Other liabilities........................ 2,633 2,765
-------- --------
Total liabilities................... 227,811 203,652
Shareholders' equity........................... 20,098 16,755
-------- --------
Total liabilities and
shareholders' equity................ $247,909 $220,407
======== ========
Net interest income............................ $4,573 $4,097
====== ======
Net interest spread............................ 3.14% 3.39%
====== ======
Net interest margin............................ 4.10% 4.22%
====== ======
12
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
can be segregated have been allocated.
Six months ended June 30,
----------------------------
1998 vs. 1997
----------------------------
Increase (Decrease)
Due to
------------------
Volume Rate Total
------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans.................................... $ 864 $ 42 $ 906
Securities............................... 257 2 259
Federal funds sold and other temporary
investments........................... 36 (124) (88)
------ ----- ------
Total increase (decrease) in
interest income.................... 1,157 (80) 1,077
------ ----- ------
Interest-bearing liabilities:
Interest-bearing demand deposits......... 18 (4) 14
Savings and money market accounts........ 6 17 23
Certificates of deposit.................. 485 79 564
------ ----- ------
Total increase in interest
expense............................ 509 92 601
------ ----- ------
Increase (decrease) in net interest
income.................................. $ 648 $(172) $ 476
====== ===== ======
13
Provision and Allowance for Loan Losses
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The Company maintains an allowance
for loan losses based upon, among other things, historical experience, the
volume and type of lending conducted by the Company, the amount of nonperforming
assets, regulatory policies, generally accepted accounting principles, general
economic conditions, and other factors related to the collectibility of loans in
the Company's portfolio. In addition to unallocated allowances, specific
allowances are provided for individual loans when ultimate collection is
considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the collateral for the loan.
Management actively monitors the Company's asset quality and provides
specific loss allowances when necessary. Loans are charged-off against the
allowance for loan losses when appropriate. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. As of June 30, 1998, the allowance for loan losses amounted to
$1.4 million or 0.85% of total loans. The allowance for loan losses as a
percentage of nonperforming loans was 162.9% at June 30, 1998.
Provisions for loan losses are charged to income to bring the total
allowance for loan losses to a level deemed appropriate by management of the
Company based on such factors as historical experience, the volume and type of
lending conducted by the Company, the amount of nonperforming assets, regulatory
policies, generally accepted accounting principles, general economic conditions,
and other factors related to the collectibility of loans in the Company's
portfolio.
The provision for loan losses for the six months ended June 30, 1998 was
$430,000 compared with $40,000 for the six months ended June 30, 1997. The
increase in the provision came primarily as a result of the growth in the loan
portfolio from $146.1 million at June 30, 1997 to $169.9 million at June 30,
1998. The provision was incurred to increase the allowance for loan losses to a
more appropriate level and to allow for continued loan growth. For the six
months ended June 30, 1998, net charge-offs were $124,000.
14
Set forth below is an analysis of the allowance for loan losses for the
six months ended June 30, 1998:
Six months
ended
June 30, 1998
-------------
(Dollars in
thousands)
Average loans outstanding ................................. $ 162,078
---------
Gross loans outstanding at end of period .................. $ 169,900
---------
Allowance for loan losses at beginning of period .......... 1,129
Provision for loan losses ................................. 430
Charge-offs:
Commercial and industrial ............................. (89)
Real estate ........................................... (1)
Consumer .............................................. (76)
Recoveries:
Commercial and industrial ............................. 8
Real estate ........................................... 7
Consumer ............................................... 27
---------
Net loan (charge-offs) recoveries .......................... (124)
---------
Allowance for loan losses at end of period ................. $ 1,435
=========
Ratio of allowance to end of period loans .................. 0.85%
Ratio of net charge-offs to average loans .................. 0.08%
Ratio of allowance to end of period nonperforming loans .... 162.9%
Noninterest Income
The Company's primary sources of recurring noninterest income are service
charges on deposit accounts and fee income. Excluding a $674,000 nonrecurring
gain from the sale of loans, noninterest income for the six months ended June
30, 1998 increased to $954,000 from $793,000 for the six months ended June 30,
1997, an increase of $161,000 or 20.3%. The gain on sale of loans was recorded
when the Company sold approximately $2.0 million of loans originally purchased
at a discount in June of 1991 from the RTC. The following table presents, for
the periods indicated, the major categories of noninterest income:
Six months ended
June 30,
-----------------
1998 1997
------ -----
(Dollars in
thousands)
Service charges on deposit accounts......... $ 582 $ 522
Fee income.................................. 254 188
Fiduciary income............................ 23 21
Gain on sale of loans....................... 674 0
Other noninterest income.................... 95 62
------ -----
Total noninterest income .................. $1,628 $ 793
====== =====
15
After excluding the nonrecurring gain on the sale of loans, the increase in
noninterest income from June 30, 1997 to June 30, 1998, resulted primarily from
an increase in service charges on deposit accounts and fee income due to an
increase in the number of deposit accounts. Additionally, the Company's
increased emphasis on fee based services resulted in greater income from check
cashing, ATM fees, appraisal fees and wire transfer fees.
Noninterest Expenses
Noninterest expenses totaled $4.2 million for the six months ended June 30, 1998
compared with $3.6 million for the six months ended June 30, 1997, an increase
of $584,000 or 16.1%. The following table presents, for the periods indicated,
the major categories of noninterest expenses:
Six months ended
June 30,
------------------
1998 1997
------ ------
(Dollars in thousands)
Employee compensation and benefits.... $2,141 $1,796
------ ------
Non-staff expenses:
Net bank premises expense......... 583 619
Office and computer supplies...... 131 142
Legal and professional fees....... 188 145
Advertising....................... 132 100
Postage........................... 67 53
FDIC insurance.................... 13 10
Other............................. 959 765
------ ------
Total non-staff expenses..... 2,073 1,834
------ ------
Total noninterest expenses... $4,214 $3,630
====== ======
Employee compensation and benefits expense for the six months ended June
30, 1998 was $2.1 million, an increase of $345,000 or 19.2% over the $1.8
million for the same period in 1997. The increase was due primarily to normal
salary increases and the staffing of a new location in Texarkana, which opened
in August of 1997, and additional staff at the Mt. Pleasant location to handle
customer growth. The number of full-time equivalent employees was 132 at June
30, 1998 compared with 113 at June 30, 1997, an increase of 16.8%.
Non-staff expenses were $2.1 million for the six months ended June 30, 1998
compared with $1.8 million for the same period in 1997, an increase of $239,000
or 13.0%. Net bank premises expense decreased $36,000 or 5.8% to $583,000.
Legal and professional fees increased $43,000 or 29.7% due primarily to
independent loan review expenses and bankruptcy and litigation proceedings. The
increase in advertising of $32,000 or 32.0% was due to additional advertising
campaigns initiated in early 1998 as compared to the same time period of 1997.
Other non-staff expenses include director fees, insurance, franchise tax,
telephone expense and other miscellaneous expenses, the combination of which
increased $194,000 or 25.3% to $959,000 as of June 30, 1998.
16
Income Taxes
Income tax expense increased approximately $215,000 to $370,000 for the
six months ended June 30, 1998 from $155,000 for the same period in 1997. The
increase was primarily attributable to the gain on sale of loans in the amount
of $674,000. The Company did not have a gain from the sale of loans in the
first six months of 1997.
FINANCIAL CONDITION
Loan Portfolio
Total loans were $169.9 million at June 30, 1998, an increase of $12.5
million or 7.9% from $157.4 million at December 31, 1997. Loan growth occurred
primarily in commercial loans, 1 to 4 family residential loans and farmland
loans. Loans comprised 73.5% of total earning assets at June 30, 1998 compared
with 70.5% at December 31, 1997.
The following table summarizes the loan portfolio of the Company by type
of loan as of June 30, 1998 and December 31, 1997:
June 30, 1998 December 31, 1997
------------------ -------------------
Amount Percent Amount Percent
------- -------- -------- --------
(Dollars in thousands)
Commercial and industrial .......$ 51,390 30.25% $ 44,772 28.45%
Real estate:
Construction and land
development........... 3,110 1.83 3,072 1.95
1-4 family residential .... 43,966 25.88 41,398 26.30
Commercial mortgages ...... 43,375 25.53 42,363 26.92
Farmland................... 8,462 4.98 6,492 4.12
Multi-family residential... 348 0.20 360 0.23
Consumer......................... 19,249 11.33 18,938 12.03
-------- ------ -------- ------
Total loans ..........$169,900 100.00% $157,395 100.00%
======== ====== ======== ------
17
NONPERFORMING ASSETS
Nonperforming assets were $1.0 million at June 30, 1998 compared with
$1.9 million at December 31, 1997, reflecting continued strong asset quality and
improving trends in nonperforming assets. The ratio of nonperforming assets to
total loans and other real estate was 0.6% and 1.2% at June 30, 1998 and
December 31, 1997, respectively.
The following table presents information regarding nonperforming assets
as of the dates indicated:
June 30, December 31,
1998 1997
---------- ---------
(Dollars in thousands)
Nonaccrual loans.......................... $ 196 $ 298
Accruing loans 90 or more days past due... $ 685 $ 918
------ ------
Total nonperforming loans................. 881 1,216
Other real estate......................... 155 714
------ ------
Total nonperforming assets................ $1,036 $1,930
====== ======
SECURITIES
Securities totaled $49.4 million at June 30, 1998, a decline of $8.7
million from $58.1 million at December 31, 1997. The decline occurred as
maturing securities were used to fund loans. At June 30, 1998, securities
represented 19.4% of total assets compared with 23.8% of total assets at
December 31, 1997. The yield on average securities for the six months ended June
30, 1998 was 6.56% compared with 6.55% for the same period in 1997. At June 30,
1998, securities included $8.2 million in U.S. Treasury securities, $20.6
million in U.S. Government securities, $18.4 million in mortgage-backed
securities, $1.1 million in equity securities and $1.1 million in municipal
securities. The average life of the securities portfolio at June 30, 1998 was
approximately two years and five months.
PREMISES AND EQUIPMENT
Premises and equipment totaled $6.7 million at June 30, 1998 and $6.4
million at December 31, 1997 an increase of $303,000 or 4.8%. Although the net
change shows only a slight increase in fixed assets, some assets were
capitalized during the period and normal depreciation was recorded.
OTHER ASSETS
On July 1, 1998, the Company entered into an incentive retirement plan to
provide future retirement benefits for eleven of its key senior officers. The
plan is a non-qualified plan that supplements its current 401(K) Plan. The plan
will be provided by the Board of Directors on a yearly grant based on a
percentage of salary as each selected officer's contribution. The benefit of
the plan is based on the Company's annual ROE. The total contribution of the
plan was funded with a single insurance premium of $3.1 million. The Company
did not have an incentive retirement plan in 1997.
DEPOSITS
At June 30, 1998, demand, money market and savings deposits accounted for
approximately 45.4% of total deposits, while certificates
18
of deposit made up 54.6% of total deposits. Noninterest-bearing demand deposits
totaled $47.2 million or 20.7% of total deposits at June 30, 1998 compared with
$46.3 million or 20.8% of total deposits at December 31, 1997. The average cost
of deposits, including noninterest-bearing demand deposits, was 4.00% for the
six months ended June 30, 1998 compared with 3.88% for the same period in 1997.
The increase in the average cost of deposits was primarily due to the increased
share of interest-bearing deposits.
LIQUIDITY
The Company's Asset/Liability Management Policy is intended to maintain
adequate liquidity for the Company. Liquidity involves the Company's ability to
raise funds to support asset growth or reduce assets to meet deposit withdrawals
and other payment obligations, to maintain reserve requirements and otherwise to
operate the Company on an ongoing basis. The Company's liquidity needs are
primarily met by growth in core deposits. Although access to purchased funds
from correspondent banks is available and has been utilized on occasion to take
advantage of investment opportunities, the Company does not rely on these
external funding sources. The cash and federal funds sold position,
supplemented by amortizing investments along with payments and maturities within
the loan portfolio, have historically created an adequate liquidity position.
The Company's cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided by operating activities was
$673,000 and $946,000 for the six months ended June 30, 1998 and 1997,
respectively.
Net cash (used) by investing activities was $(10.1) million and $(14.8)
million for the six months ended June 30, 1998 and 1997, respectively. During
the six months ended June 30, 1998, the Company funded more loans than it
received in maturing investments. The Company also experienced an increase in
federal funds in the six months ended June 30, 1998 over the six months ended
June 30, 1997.
Net cash provided by financing activities was $8.6 million and $7.5
million for the six months ended June 30, 1998 and 1997, respectively. The
difference was due primarily to the sale of common stock of $4.5 million offset
by the redemption of preferred stock of $827,000 during the six months ended
June 30, 1998.
CAPITAL RESOURCES
Total shareholders' equity as of June 30, 1998 was $22.7 million, an
increase of $4.4 million or 24.5% compared with shareholders' equity of $18.3
million at December 31, 1997. The increase was due to the initial public
offering proceeds of $4.5 million (net of expenses), net earnings for the period
of $1.2 million less dividends paid on common and preferred stock of $356,000
and the redemption of the preferred stock of $827,000.
Both the Board of Governors of the Federal Reserve System, with respect to
the Company, and the Federal Deposit Insurance Corporation, with respect to the
Bank, have established certain minimum risk-based capital standards that apply
to bank holding companies and federally insured banks, respectively. The
Company's risk-based capital ratios remain above the levels designated as "well
capitalized" on June 30, 1998, with Tier 1 capital, total risk-based capital and
leverage capital ratios of 12.56%, 13.36% and 9.07%, respectively. The Bank's
risk-based capital ratios remain above the levels designated as "well
capitalized" on June 30, 1998, with Tier-1 capital, total risk-based capital and
leverage capital ratios of 12.65%, 13.49% and 8.74%, respectively.
19
YEAR 2000
The Company established a Year 2000 Task Force in September 1997 to ensure
there will be no material adverse effect on customers or disruption to business
operations as a result of a failure of the Company or third parties to properly
process any data on or after January 1, 2000. The project plan consists of five
phases - Awareness, Assessment, Renovation, Validation and Implementation. The
Awareness and Assessment phases are complete and the Renovation and Validation
phases are currently in process and on schedule. The inventory of systems has
been performed and the risk assessment and prioritizing of those systems is
complete. The Company does not utilize any in-house developed software. All
software utilized has been provided by established software companies who retain
the responsibility for Year 2000 compliance. These respective vendors have been
contacted and requested to provide the current compliance status of their
respective software and hardware systems. Their responses are being actively
monitored and testing schedules are being developed and deployed based on the
responses. It is anticipated that the validation phase will be complete by late
1998 or the first quarter 1999. Incremental costs for causing computer
applications to be Year 2000 compliant are presently estimated to be immaterial.
The Company is currently conducting thorough internal testing of all third party
hardware and software systems in an attempt to ensure Year 2000 compliance. The
Company is also developing detailed contingency plans in the event of any system
failure associated with Year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in market
interest rates. The Company's exposure to such risk is reviewed on a regular
basis by the Asset Liability Committee. Interest rate risk is the potential of
economic losses due to future interest rate changes. These economic losses can
be reflected as a loss of future net interest income and/or a loss of current
fair market values. The objective is to measure the effect on net interest
income and to adjust the balance sheet to minimize the inherent risk while at
the same time maximizing income. Management realizes certain risks are
inherent, and that the goal is to identify and accept the risks.
The Company applies a market value ("MV") methodology to gauge its interest
rate risk exposure as derived from its simulation model. Generally, MV is the
discounted present value of the difference between incoming cash flows on
interest-earning assets and other investments and outgoing cash flows on
interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk by measuring the change in the MV that would result
from a theoretical 200 basis point change in market interest rates. Both a 200
basis point increase and a 200 basis point decrease in market rates are
considered.
At June 30, 1998, it was estimated that the Company's MV would decrease
16.7% in the event of a 200 basis point increase in market interest rates. The
Company's MV at the same date would increase 11.4% in the event of a 200 basis
point decrease in market interest rates.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Use of Proceeds
Use of Proceeds
The effective date of the Registration Statement for which use of proceeds
information is being disclosed herein was May 13, 1998 and the SEC file number
assigned to the Registration Statement was 333-48959. The offering (the
"Offering") to which the Registration Statement related commenced on May 6, 1998
and has been terminated following the sale of all securities registered. The
managing underwriter for the Offering was Hoefer & Arnett, Incorporated. The
class of securities registered by the Registration Statement was the Company's
Common Stock, par value $1.00 per share.
For the account of the Company, the number of shares of Common Stock
registered and sold was 350,000 and the aggregate offering price of such shares
was $4,987,500.
In connection with the Offering, the Company incurred expenses of $314,213
for underwriter's discounts and other expenses of $204,900, resulting in total
expenses of $519,113. No Offering expenses were paid to an affiliate of the
Company.
The net proceeds of the Offering to the Company were $4,468,387, of which
the Company used $864,507 for redemption of the Company's Series A Preferred
Stock, which was completed on June 30, 1998, and $3,603,880 for working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed with this report:
Exhibit 27. Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the six
months ended June 30, 1998.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUARANTY BANCSHARES, INC.
(Registrant)
Date: August 10, 1998 By: /s/ Arthur B. Scharlach
---------------------------------
Arthur B. Scharlach
President
(Principal Executive Officer)
Date: August 10, 1998 By: /s/ Clifton A. Payne
---------------------------------
Clifton A. Payne
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
22