UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No. 33-76064
March 31, 1996
GUARANTY FINANCIAL CORPORATION
Virginia 54-1786496
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 Seminole Trail, Charlottesville, VA 22901
(Address of Principal Executive Office)
(804) 974-1100
(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. Yes X No ___ (not subject to filing
requirements for the past 90 days).
As of May 8, 1996, 919,168 shares were outstanding.
GUARANTY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1996 and June 30, 1995.............................3
Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 1996 and 1995................4
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1996 and 1995..........................5
Notes to Consolidated Financial Statements.........................7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................8
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................12
Item 2 Changes in Securities............................................12
Item 3 Defaults upon Senior Securities..................................12
Item 4 Submission of Matters to a Vote of Securitiy Holders.............12
Item 5 Other Information................................................12
Item 6 Exhibits and Reports on Form 8-K.................................13
Signatures........................................................14
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands)
MARCH 31, JUNE 30,
1996 1995
ASSETS (Unaudited)
Cash and cash equivalents $6,745 $5,752
Investment securities
Held-to-maturity 3,927 4,733
Available for sale 6,740 -
Investment in FHLB stock at cost 1,360 1,360
Loans receivable, net 79,870 75,221
Accrued interest receivable
Loans 579 518
Mortgage-backed securities 96 66
Real estate owned 324 122
Office properties and equipment, net 1,585 437
Other assets 1,741 1,252
Total assets $102,967 $89,461
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $10,426 $9,938
Savings accounts 4,291 4,699
Certificates of deposit 55,428 37,824
$70,145 $52,461
Bonds payable 3,360 3,981
Advances from Federal Home Loan Bank 19,800 25,050
Securities sold under agreement to repurchase 2,793 0
Accrued interest payable 72 86
Payments by borrowers for taxes and insurance 251 306
Other liabilities 173 1,561
Total liabilities $96,594 $83,445
STOCKHOLDERS' EQUITY
Preferred stock, par value $1 per
share, 500,000 shares authorized,
none issued - -
Common stock, par value $1.25 per
share, 2,000,000 shares authorized,
919,168 issued and 457,784 shares
issued and outstanding $1,149 $1,145
Additional paid-in capital 1,978 1,971
Net unrealized gain (loss) on securities
available for sale (150) 0
Retained earnings 3,396 2,900
Total stockholders' equity $6,373 $6,016
Total liabilities and stockholders' equity $102,967 $89,461
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
(unaudited)
Interest income
Loans $1,623 $1,495 $4,816 $4,433
Mortgage-backed securities 148 158 385 375
Investment securities 129 97 384 277
Trading account assets 2 0 23 5
Total interest income 1,902 1,750 5,608 5,090
Interest expense
Deposits 806 601 2,220 1,816
Borrowings 489 555 1,620 1,629
Total interest expense 1,295 1,156 3,840 3,445
Net interest income 607 594 1,768 1,645
Provision (credit) for loan losses 15 (1) 26 (10)
Net interest income after provision
for loan losses 592 595 1,742 1,655
Other income
Loan fees and servicing income 133 144 397 403
Gain (loss) on sale of loans and securities 142 (38) 298 (65)
Service fees on checking 21 19 64 54
Other 23 23 76 69
Total other income 319 148 835 461
Other expenses
Personnel 248 319 749 877
Occupancy 75 76 229 232
Data processing 76 58 212 169
Deposit insurance premiums 48 53 149 143
Other 152 122 472 350
Total other expenses 599 628 1,811 1,771
Income before income taxes 312 115 766 345
Provision for income taxes 116 40 274 120
Net income $196 $75 $492 $225
Earnings per common share $0.21 $0.14 $0.54 $0.42
GUARANTY FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1996 and 1995
(In Thousands)
1996 1995
Operating activities
Net Income 492 225
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 26 (10)
Depreciation and amortization 69 70
Net amortization of premiums and accretion of discounts 125 81
Increase (decrease) in net deferred loan fees - (26)
Loss (gain) on sale of loans (44) 111
Originations of loans held for sale (7,160) (8,687)
Proceeds from sale of loans 7,206 8,576
Originations of loans securitized (4,406) (4,528)
Loss (gain) on sale of mortgage-backed securities (98) -
Loss (gain) on sale of securities available for sale (4) -
(Gain) loss on disposal of office properties and equipment 6 13
(Gain) loss on sale of trading securities 13 (21)
Purchase of trading securities (79,084) (26,965)
Sales of trading securities 79,071 26,986
(Gain) loss on sale of real estate owned (5) -
(Increase) decrease in real estate owned (202) (159)
(Gain) loss on originated mortgage servicing rights (161) -
Changes in:
Accrued interest receivable (91) (57)
Other assets (490) (292)
Accrued interest payable (14) (22)
Prepayment by borrowers for taxes and insurance (55) 176
Other liabilities (1,384) (1,854)
Net Cash provided (absorbed) by operating activities (6,190) (6,383)
Investing activities
Net (increase) decrease in loans (4,663) 3,913
Mortgage- backed securities principal repayments 806 807
Purchase of mortgage-backed securities (18,738) -
Proceeds from sale of mortgage-backed securities 16,504 -
Purchase of securities available for sale (2,003) -
Proceeds from sales of securities available for sale 2,008 -
Purchases of FHLB stock (142) (67)
Redemption of FHLB stock 142 145
Proceeds from sale of office equipment 4 -
Purchase of office properties and equipment (148) (119)
Disbursement on construction of office building (145) -
Purchase of land (938) -
Net cash provided (absorbed) by investing activities (7,313) 4,679
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Financing activities
Net increase (decrease) in deposits 17,679 (321)
Repayment of FHLB advances (12,250) (12,500)
Proceeds from FHLB advances 7,000 15,100
Increase (decrease) in securities sold under agreement to repurchase 2,793 1,894
Principal payments on bonds payable, including unapplied payments (742) (764)
Proceeds from exercised stock options 15 -
Net cash provided (absorbed) by financing activities 14,495 3,409
Increase (decrease) in cash and cash equivalents 992 1,705
Cash and cash equivalents, beginning of period 5,753 1,280
Cash and cash equivalents, end of period 6,745 2,985
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
NOTE 1 PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Guaranty Financial Corporation ("the Company") and its wholly-owned
subsidiaries, Guaranty Savings and Loan , F.A. ("the Association"), GMSC, Inc.,
which was organized as a financing subsidiary, and Guaranty Investments Corp.
which was organized to sell insurance annuities. All material intercompany
accounts and transactions have been eliminated in consolidation.
NOTE 2 BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, such
information reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of the consolidated financial statements. All
adjustments are of a normal recurring nature.
NOTE 3 NEW ACCOUNTING PRONOUNCEMENTS
On July 1, 1995, the Company adopted SFAS 114, "Accounting by Creditors for
Impairment of a Loan". SFAS 114 requires that impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate or at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. This statement has
been recently amended by SFAS 118 which allows more flexibility in the
implementation of SFAS 114. The effect of adopting SFAS 114, as amended, is
immaterial to the interim financial statements presented herein.
In March 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of". SFAS 121 requires that
long-lived assets and certain intangibles to be held and used by an entity be
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount may not be recoverable. In addition, SFAS 121 requires
long-lived assets and certain intangibles to be disposed of to be reported at
the lower of carrying amount or fair value less costs to sell. SFAS 121 is
effective for fiscal years beginning after December 15, 1995. Management does
not expect the application of this pronouncement to have a material effect on
the financial statements of the Company.
In May 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage
Servicing Rights an Amendment of FASB Statement No. 65". SFAS 122 requires
entities to allocate the cost of acquiring or originating mortgage loans between
the mortgage servicing rights and the loans, based on their relative fair
values, if the company sells or securitizes the loans and retains the mortgage
servicing rights. In addition, SFAS 122 requires entities to assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995, with early adoption allowed. The Company adopted SFAS 122 effective
July 1, 1995.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS 123 allows companies to continue
to account for their stock option plans in accordance with APB Opinion 25 but
encourages the adoption of a new accounting method based on the estimated fair
value of employee stock options. Companies electing not to follow the new fair
value based method are required to provide expanded footnote disclosures,
including pro forma net income and earnings per share, determined as if the
company had applied the new method. SFAS No. 123 is required to be adopted
prospectively beginning January 1, 1996. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the Company.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
Significant deposit growth during the nine months ended March 31, 1996 enabled
the Company to grow in total assets . Total assets of the Company increased by
$13.5 million, or 15.1%, from $89.5 million at June 30, 1995 to $103.0 million
at March 31, 1996. This deposit growth of all local funds, was invested in
mortgage-backed securities and in local residential mortgage loans. The Company
also purchased land for $1 million for a new operations center and fourth retail
branch.
Cash and cash equivalents increased $1.0 million, or 17.24%, to $6.7 million at
March 31, 1996.
Investment securities, at March 31, 1996, increased by $5.9 million, or 97.4%,
to $12.0 million from June 30, 1995. The increase in the investment portfolio is
a result of management investing excess cash in higher yielding securities. This
strategy has been followed to increase net interest income. Included in the
investment portfolio are $3.9 million of mortgage-backed securities, classified
as held to maturity, which collateralize the bonds payable, $6.7 million of GNMA
and FHLMC mortgage-backed securities classified as available for sale and $1.4
million of Federal Home Loan Bank stock, recorded at cost.
The loan portfolio consists primarily of residential first mortgages. Of the
$80.0 million of loans outstanding at March 31, 1996, 82.2% represent
residential first mortgages. Net loans were $79.9 million at March 31, 1996, a
6.2% increase in net loans of $75.2 million at June 30, 1995. This increase is
due to management's emphasis on growing the Company and investing in higher
yielding assets. This increase is all loans originated within the Company's
primary lending market.
Real estate owned increased by $202 thousand, or 165.2% at March 31, 1996 from
$122 thousand at June 30, 1995. These are assets acquired through foreclosure
and at March 31, 1996 consisted of two properties. Both properties have been
contracted to sell in early spring. The Company does not anticipate any
significant losses, but has $20 thousand in reserves for these types assets.
Deposits increased by $17.7 million, or 33.7% between June 30, 1995 and March
31, 1996. The deposit growth was in certificate of deposits, which increased
$17.6 million at March 31, 1996. This growth, which is all local funds, is a
reflection of increased marketing, consolidation of other financial institutions
in Charlottesville, and a favorable deposit environment.
Office properties and equipment increased $1.2 million, or 262.7% since June 30,
1995. This increase is due to the purchase of a parcel of land for a new
operations center and fourth retail branch which is located on the east side of
Charlottesville on Pantops mountain. Construction of this office has begun and
$145 thousand has been disbursed on the building which is estimated to cost $1.2
million. Completion is expected in early fall of 1996.
Other borrowed money increased $2.8 million at March 31, 1996. These funds were
used to purchase mortgage-backed securities.
Federal Home Loan Bank advances decreased $5.3 million, or 21.0%, from June 30,
1995 to March 31, 1996. The increase in deposits allowed the Company to repay
high yielding advances with lower yielding certificates of deposits.
RESULTS OF OPERATIONS
NET INCOME
The Company reported net income of $196 thousand and $75 thousand for the three
months ended March 31, 1996 and 1995, respectively, and $492 thousand and $225
thousand for the nine months ended March 31, 1996 and 1995 respectively. The
$121 thousand, or 161.3% increase in net income for the three months ended March
31, 1996 compared to the three months ended March 31, 1995 was due to a $13
thousand increase in net interest income, a $171 thousand increase in other
income from the gain on sale of loans and securities and a decrease in operating
expenses of $29,000 which was offset by a $16 thousand increase in loss reserves
and a $76 thousand increase in income tax expense.
The $267 thousand, or 118.7%, increase in net income during the nine months
ended March 31, 1996 as compared to the nine months ended March 31, 1995, was
primarily due to a $123 thousand increase in net interest income and a $374
thousand increase in other income from the gain on sale of loans and securities
which was offset by a $36 thousand increase in loss reserves, a $40 thousand
increase in operating expenses, and a $154 thousand increase in income tax
expense.
NET INTEREST INCOME
Net interest income increased by $13 thousand or 2.0%, in the three months ended
March 31, 1996 to $607 thousand compared to $594 thousand in the same period in
1994. Net interest income increased by $123 thousand, or 7.5%, for the nine
month period ended March 31, 1996 when compared to the nine month period ended
March 31, 1995 from $1.65 million to $1.77 million. The overall balance sheet
growth combined with the fact that average interest earning assets increased by
$5.4 million and $3.5 million more than average interest bearing liabilities for
the three month and nine month period ended March 31, 1996 resulted in the
increases in the net interest margin. The Company's interest rate spread and net
interest margin were 2.19% and 2.51%, and 2.36% and 2.58%, respectively, during
the three and nine month periods ended March 31, 1996. This compares to an
interest rate spread and net interest margin of 2.42% and 2.67%, and 2.36% and
2.49%, respectively, for the three and nine month periods ended March 31, 1995.
PROVISION FOR LOAN LOSSES
Management analyzes the potential risk of loss on the Company's loan portfolio,
given the loan balances and the value of the underlying collateral. The
allowance for loan losses is reviewed quarterly and based on the loan
classification system, which classifies problem loans as substandard, doubtful,
or loss, additional provisions are added when necessary. Based on this
evaluation, the Company recorded a provision of $15 thousand for the three
months ended March 31, 1996. For the same three month period ended 1995, the
Company had a credit to the loss provision of $1 thousand due to recoveries on
loans previously expensed as a loss. For the nine month period ended March 31,
1996, the Company recorded a provision of $26 thousand. For the same nine month
period of 1995, the Company had a credit to the loss provision of $10 thousand
due to recoveries on loans previously expensed as a loss.
NON-INTEREST INCOME
Non-interest income increased $171 thousand for the three month period ended
March 31, 1996 to $319 thousand from $148 thousand for the comparable period in
1995. Non-interest income for the nine month period ended March 31, 1996,
increased by $374 thousand over the nine months ended March 31, 1995. The
increase in the three month period ended March 31, 1996 was due to the early
adoption of SFAS 122. Income of $161 thousand was recognized on $12.2 million of
loans sold since July 1995. The increase in the nine month period ended March
31, 1996 was due to gains on the sale of investment securities and loans in 1996
as compared to a loss in 1995.
NON-INTEREST EXPENSE
Non-interest expense decreased $29 thousand, or 4.6%, for the three months ended
March 31, 1996 compared to the three month period ended March 31, 1995 from $628
thousand to $599 thousand. Non-interest expense increased $40 thousand, or 2.3%,
for the nine months ended March 31, 1996 compared to the nine month period ended
March 31, 1995 from $1.771 million to $1.811 million. The decrease in the three
month period ended March 31, 1996 is due to the full impact of reduced personnel
expenses from the closed loan origination offices in Richmond and Waynesboro,
Virginia. The increase in the nine month period ended March 31, 1996 compared to
the same period last year can be attributed to increased data processing fees,
deposit insurance premiums, marketing, legal and accounting fees. The increase
in data processing, deposit insurance premiums and marketing are directly
related to the increase in deposits. Legal and accounting fees increased due to
the professional services required to operate a public company. As the Company
continues to grow, increased non-interest expense will be a by product of that
growth.
INCOME TAX EXPENSE
The Company recognized income tax expense of $116 thousand for the three months
ended March 31, 1996 compared to $40 thousand for the comparable period in 1995.
The Company recognized income tax expense of $274 thousand for the nine months
ended March 31, 1996 compared to $120 thousand for the same period in 1995. This
increase reflects the increase in the Company's net income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet present and future financial obligations either
through the sale of existing assets or the acquisition of additional funds
through asset and liability management. By regulatory definition, liquid assets
include cash, interest bearing deposits with banks, federal funds sold, and
government agency and high rated corporate securities with maturities of five
years or less. The Company is required to maintain liquid assets on an average
monthly basis equal to at least 5% of its liquidity base. Liquidity base is
further defined as total deposits plus all short term borrowings. At March 31,
1996, the Company's liquidity ratio was 10.09%.
The Company's primary sources of funds are deposits, borrowings, and
amortization, prepayments and maturities of outstanding loans and
mortgage-backed securities. While scheduled payments from the amortization of
loans and mortgaged-backed securities are relatively predictable sources of
funds, deposits flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. Excess funds are invested
in overnight deposits to fund cash requirements experienced in the normal course
of business. The Company has been able to generate sufficient cash through its
deposits as well as borrowings.
The Company uses its sources of funds primarily to meet its on going
commitments, to pay deposit withdrawals, and fund loan commitments. At March 31,
1996, the total approved loan commitments outstanding amounted to $3.3 million.
At the same date, commitments under unused lines of credit amounted to $6.2
million. Certificates of deposits scheduled to mature in one year or less at
March 31, 1996 totaled $46.7 million. Management believes that a significant
portion of maturing deposits will remain with the Company.
Due to a disparity in the capitalization of federal deposit insurance funds, the
FDIC has lowered the insurance premium for members of the Bank Insurance Fund
("BIF") to a range of between 0.04% and 0.31% of assessable deposits while
maintaining the current range of between 0.23% and 0.31% of assessable deposits
for members of the Savings Association Insurance Fund ("SAIF"). Other proposals
under consideration for addressing this disparity include a possible one-time
assessment on assessable deposits of approximately 0.75% to 0.90% on SAIF
members sufficient to recapitalize SAIF to a level that would approach that of
BIF. While there can be no assurance that these or any other proposals will be
effected, a reduction in insurance premiums for BIF members has temporarily
placed SAIF members, such as the Company, at a material competitive disadvantage
to BIF members. A one-time assessment could have a material impact on the
Company's results of operations for the current year but an immaterial effect on
the overall capital of the Company.
At March 31, 1996, the Company's capital position exceeded all regulatory
minimums to be classified as a "well capitalized" institution. However,
primarily because of the need for additional capital, the Company entered into a
supervisory agreement with the OTS in May 1995 which required, among other
things, that a business plan be filed detailing management's intent to increase
the overall capital position. Following the agreement, $2.03 million of common
stock was issued on June 28, 1995. Since then, the OTS has indicated in an
examination performed in late 1995 that the Company is in substantial compliance
with the supervisory agreement. The Company has requested to be released from
the agreement.
The following table shows the Company's capital ratio as of March 31, 1996, and
the minimum ratios currently required by the OTS.
March Regulatory
1996 Minimum
--------------------
Tier 1 Risk-based capital 12.62% 4.00%
Total Risk-based capital 13.76% 8.00%
Leverage ratio 6.34% 3.00%
Stockholders' equity to total assets 6.34% N/A
Shareholders of record as of January 15, 1996 received additional shares on
January 31, 1996 from the two (2) for one (1) stock split.
8
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not Applicable
ITEM 2 CHANGES IN SECURITIES
Not Applicable
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 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
Registrant filed one report on Form 8-K during the quarter ended March 31, 1996,
on January 16, 1996, which reported the formation of a one-bank holding company
structure, the registration of the Registrant as a successor registrant pursuant
to Rule 12g-3 under the Exchange Act, and a two-for-one stock split.
9
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: May 8, 1996 By:/s/ THOMAS P. BAKER
-------------------
Thomas P. Baker
President and Chief Executive
Officer
Date: May 8, 1996 By:/s/ KATHLEEN M. FOCHT
---------------------
Kathleen M. Focht
Vice President, Secretary,
Treasurer, and Chief Financial
Officer
10