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
December 31, 1996
GUARANTY FINANCIAL CORPORATION
Virginia 54-1786496
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1658 State Farm Blvd., Charlottesville, VA 22911
(Address of Principal Executive Office)
(804) 970-1100
(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 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 day days).
As of February 12, 1997, 1,499,008 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 December 31, 1996 and June 30, 1996 . . . 3
Consolidated Statements of Operations for the
Three Months and the Six Months Ended
December 31, 1996 and 1995 . . . . . 4
Consolidated Statements of Cash Flows for the
Six Months Ended December 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. . . . 9
Part II. Other Information
Item 1 Legal Proceedings . . . . . . 13
Item 2 Changes in Securities . . . . . 13
Item 3 Defaults upon Senior Securities . . . . 13
Item 4 Submission of Matters to a Vote of Security Holders . . 13
Item 5 Other Information . . . . . . 13
Item 6 Exhibits and Reports on Form 8-K . . . . 13
Signatures . . . . . . 14
2
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands)
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------
ASSETS (Unaudited)
Cash and cash equivalents $ 6,066 $ 5,431
Investment securities
Held-to-maturity 3,157 3,731
Available for sale 15,726 9,564
Trading 1,007 0
Investment in FHLB stock at cost 1,360 1,360
Loans receivable, net 81,270 84,081
Accrued interest receivable 671 712
Real estate owned 51 33
Office properties and equipment, net 4,946 3,525
Other assets 1,923 1,724
--------- ---------
Total assets $ 116,177 $ 110,161
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $ 10,300 $ 9,653
Savings accounts 4,777 4,654
Certificates of deposit 66,324 60,380
--------- ---------
$ 81,401 $ 74,687
Bonds payable 2,706 3,144
Advances from Federal Home Loan Bank 17,500 17,500
Securities sold under agreement to repurchase 6,681 6,104
Accrued interest payable 61 99
Deferred income taxes 94 0
Payments by borrowers for taxes and insurance 106 146
Other liabilities 989 2,131
--------- ---------
Total liabilities $ 109,538 $ 103,811
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1 per share, 500,000
shares authorized, none issued -- --
Common stock, par value $1.25 per share,
4,000,000 shares authorized, 924,008 and
919,168 issued and outstanding $ 1,155 $ 1,149
Additional paid-in capital 1,972 1,982
Net unrealized gain (loss) on securities
avaiable for sale (154) (279)
Retained earnings 3,666 3,498
--------- ---------
Total stockholders' equity $ 6,639 $ 6,350
--------- ---------
Total liabilities and stockholders' equity $ 116,177 $ 110,161
========= =========
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited)
Interest income
Loans $1,715 $1,640 $3,455 $3,193
Mortgage-backed securities 276 118 567 237
Investment securities 123 128 251 255
Trading account assets 3 4 3 21
------ ------ ------ ------
Total interest income $2,117 $1,890 $4,276 $3,706
------ ------ ------ ------
Interest expense
Deposits $ 992 $ 728 $1,960 $1,413
Borrowings 506 571 980 1,131
------ ------ ------ ------
Total interest expense $1,498 $1,299 $2,940 $2,544
------ ------ ------ ------
Net interest income $ 619 $ 591 $1,336 $1,162
Provision (credit) for loan losses 46 15 92 11
------ ------ ------ ------
Net interest income after provision
for loan losses $ 573 $ 576 $1,244 $1,151
Other income
Loan fees and servicing income $ 119 $ 126 $ 267 $ 271
Gain (loss) on sale of loans and securities 241 79 309 156
Service fees on checking 26 22 52 45
Other 39 27 71 43
------ ------ ------ ------
Total other income $ 425 $ 254 $ 699 $ 515
------ ------ ------ ------
Other expenses
Personnel $ 381 $ 244 $ 748 $ 649
Occupancy 71 74 132 152
Data processing 88 69 165 137
Deposit insurance premiums 47 50 101 101
BIF/SAIF premium disparity assessment -- -- 347 --
Other 133 177 223 173
------ ------ ------ ------
Total other expenses $ 720 $ 614 $1,716 $1,212
------ ------ ------ ------
Income before income taxes $ 278 $ 216 $ 227 $ 454
------ ------ ------ ------
Provision for income taxes 97 74 79 158
------ ------ ------ ------
Net income $ 181 $ 142 $ 148 $ 296
====== ====== ====== ======
Earnings per common share $ 0.20 $ 0.15 $ 0.16 $ 0.32
====== ====== ====== ======
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1996 and 1995
(In Thousands)
1996 1995
---- ----
Operating Activities
Net Income 148 296
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 92 11
Depreciation and amortization 76 45
Amortization of deferred loan fees 64 13
Net amortization of premiums and accretion of discounts 85 90
Loss (gain) on sale of loans (217) (26)
Originations of loans held for sale (11,774) (4,667)
Proceeds from sale of loans 11,822 4,693
Originations of loans securitized -- (4,406)
Loss (gain) on sale of mortgage-backed securities (111) (81)
Loss (gain) on sale of securities available for sale -- (17)
(Gain) loss on disposal of office properties and equipment -- 6
(Gain) loss on sale of trading securities 18 (26)
Purchase of trading securities (36,331) (54,074)
Sales of trading securities 35,306 54,100
(Gain) loss on sale of real estate owned -- 5
(Increase) decrease in real estate owned (18) (282)
Changes in:
Accrued interest receivable 41 (50)
Other assets (130) (89)
Accrued interest payable (38) (13)
Prepayments by borrowers for taxes and insurance (40) (211)
Other liabilities (1,010) (412)
------- -------
Net cash provided (absorbed) by operating activities (2,017) (5,095)
------- -------
Investing activities
Net (increase) decrease in loans 2,753 (1,754)
Mortgage-backed securities principal repayments 776 580
Purchase of mortgage-backed securities (23,980) (10,001)
Proceeds from sale of mortgage-backed securities 17,845 10,061
Purchase of securities available for sale -- (4,003)
Proceeds from sales of securities available for sale -- 4,011
Purchases of FHLB stock -- (42)
Proceeds from sale of office equipment -- 4
Purchases of office properties and equipment (423) (105)
Disbursement on construction of office building (1,082) --
Improvement of land (3) (938)
------- -------
Net cash provided (absorbed) by investing activities (4,114) (2,187)
------- -------
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Financing activities
Net increase (decrease) in deposits 6,713 6,903
Repayment of FHLB advances (10,000) (6,000)
Proceeds from FHLB advances 10,000 7,000
Increase (decrease) in securities sold under agreement to repurchase 577 (553)
Principal payments on bonds payable, including unapplied payments (524) 15
------- -------
Net cash provided (absorbed) by financing activities 6,766 7,365
------- -------
Increase (decrease) in cash and cash equivalents 635 83
------- -------
Cash and cash equivalents, beginning of period 5,431 6,519
------- -------
Cash and cash equivalents, end of period 6,066 6,602
======= =======
6
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months ended December 31, 1996 and 1995
Note 1 Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Guaranty Financial Corporation ("the Corporation") and its wholly-owned
subsidiaries, Guaranty Bank ("the Bank"), 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 in order to make the consolidated financial statements not misleading.
All adjustments are of a normal recurring nature.
Note 3 New Accounting Pronouncements
On July 1, 1996, the Corporation adopted Statements of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"). 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. The effect of
adopting SFAS 121 was immaterial to the interim financial statements presented
herein.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") was issued. The statement is effective for fiscal years beginning after
December 15, 1995. The statement encourages, but does not require, companies to
expense the fair value of employee stock options, based on the fair value on the
date of the grant. Companies that elect to continue to follow existing
accounting rules (the intrinsic value method that often results in no
compensation results) must provide those pro forma disclosures of net income and
earnings per share which would have been had the new fair value method been
used. In addition, SFAS 123 requires all companies to make significantly more
disclosures regarding employee stock options than are currently required. The
Corporation has elected to adopt the disclosure requirements for the year ended
June 1997. Management does not expect the application of this pronouncement to
have a material effect on the financial statements.
In June 1996, the FASB issued its Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. After a transfer of financial assets, an entity
recognizes the financial and servicing assets that it controls and the
liabilities that it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. In addition, a
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange.
SFAS 125 is
7
effective for transfers and servicing of financial assets and extinguishments of
liabilities after December 31, 1996, and is to be applied prospectively.
Management does not expect the application of this pronouncement to have a
material effect on the financial statements.
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
Deposit growth during the six months ended December 31, 1996 enabled Guaranty to
increase assets. Total assets increased by $6.0 million, or 5.5%, from $110.2
million at June 30, 1996 to $116.2 million at December 31, 1996. This deposit
growth - all local funds - was primarily invested in mortgage-backed securities.
Cash and cash equivalents increased $635,000, or 11.69%, to $6.1 million at
December 31, 1996. This increase in cash was due to the combination of increased
deposits, principal payments received on investment securities, and the sale of
loans.
Investment securities, at December 31, 1996, increased by $6.6 million, or
45.0%, to $21.3 million from $14.7 June 30, 1996. However, during the six months
ended December 31, 1996, $11.8 million of loans were sold to decrease the loan
to deposit ratio. The proceeds of the sale were used to purchase higher yielding
investment securities. Included in the investment portfolio are $3.2 million of
mortgage-backed securities, classified as held to maturity, which collateralize
the bonds payable, $15.7 million of GNMA and FHLMC mortgage-backed securities
classified as available for sale, $1.0 million of United States Treasury Notes
classified as trading securities and $1.4 million of Federal Home Loan Bank
stock, recorded at cost.
The loan portfolio consists primarily of mortgage loans, the majority of which
are residential first mortgage loans. Of the $82.4 million of gross loans
outstanding at December 31, 1996, 78.4% represent residential first mortgages.
Net loans were $81.3 million at December 31, 1996, a 3.3% decrease from net
loans of $84.1 million at June 30, 1996 primarily due to the sale of fixed rate
loans totaling $11.8 million.
Real estate owned increased by $18 thousand, or 54.5%, to $51 thousand at
December 31, 1996 from $33 thousand at June 30, 1996. These assets were acquired
through foreclosure and at December 31, 1996 consisted of one property. The
property is guaranteed by FHA/VA, and no significant loss is expected.
Deposits increased by $6.7 million, or 9.0%, between June 30, 1996 and December
31, 1996. The majority of the growth was in certificates of deposit, which
increased $5.9 million at December 31, 1996. This growth - all local funds - is
a reflection of continued marketing and the opening of a new branch.
Office properties and equipment increased $1.4 million, or 40.3%, since June 30,
1996. This increase is due to the completion of the new operations center and
fourth retail branch office, which is located on the east side of
Charlottesville on Pantops mountain. The office and branch opened to the public
on December 9, 1996.
Other borrowed money increased $577 thousand, or 9.5%, while Federal Home Loan
Bank advances remainded unchanged due to a $5.0 million two year advance made in
September 1996 to extend short term borrowings to match asset maturites offset
by $5 million in repayments.
9
Results of Operations
Net Income
Guaranty reported net income of $181 thousand and $142 thousand for the three
month periods ended December 31, 1996 and 1995, respectively, and $148 thousand
and $296 thousand for the six month period ended December 31, 1996 and 1995,
respectively. The increase in the second quarter is due primarily to gains on
the sale of investment securities available for sale and loans in 1996 as
compared to 1995. The decrease in earnings during the first three month period
was due to the Federal legislation enacted in September 1996 to recapitalize the
Savings Association Insurance Fund ("SAIF"). The one-time special assessment
based on deposits of March 31, 1995 equaled $347 thousand for Guaranty.
Net Interest Income
Net interest income increased by $28 thousand, or 4.7%, to $619 thousand for the
three months ended December 31, 1996, compared to $591 thousand for the same
period in 1995. Net interest income increased by $175 thousand, or 15.1%, to
$1.34 million for the six months ended December 31, 1996 compared to $1.16
million in the same period in 1995. Average earning assets increased by $11.1
million to $106.7 million for the six months ended December 31, 1996 compared to
an increase of $1.3 million to $90.7 million for the same period in 1995. The
average rate earned also increased to 8.01% for the six months ended December
31, 1996 from 7.97% at June 30, 1996 compared to an increase to 8.17% from 7.59%
for the same period in 1995. Average interest bearing liabilities also increased
by $14.6 million to $105.8 million for the six months ended December 31, 1996
compared to an increase of $0.1 million to $85.7 million for the same period in
1995. Interest rate spread and net interest margin for December 31, 1996 and
1995 were 2.46% and 2.50%, and 2.24% and 2.56%, respectively. The majority of
this improvement in net interest income is due to the decrease in the rate paid
on borrowed money and the decrease in the rate paid on certificates of deposit.
The average rate paid on FHLB advances and other borrowings decreased 54 basis
point to 5.54% for the six months ended December 31, 1996 from 6.03%. The
average balance of certificates of deposit rose $14.9 million dollars, or 30.7%,
to $63.3 million in the six month period ending December 31, 1996 with the
average rate falling 10 basis points.
Provision for Loan Losses
Management analyzes the potential risk of loss on the Guaranty's loan portfolio,
given the loan balances and the value of the underlying collateral. The
allowance for loan losses is reviewed monthly and is based on the loan
classification system, which classifies problem loans as substandard, doubtful,
or loss. Additional provisions are added when deemed necessary by management.
Based on this evaluation, Guaranty recorded a provision of $46 thousand for the
three months ended December 31, 1996, and a provision of $15 thousand for the
same period in 1995. For the six months ended December 31, 1996, Guaranty
recorded a provision of $92 thousand. For the same six month period in 1995,
Guaranty recorded a provision of $11 thousand. As of December 31, 1996 the total
allowance for loan losses amounted to $870 thousand, of which $709 thousand was
not specifically allocated to identified problem loans.
Non-Interest Income
Non-interest income increased $171 thousand, or 67.3%, to $425 thousand for the
three months ended December 31, 1996 from $254 thousand for the same period in
1995. Non-interest income increased by $183 thousand, or 35.5%, to $699 thousand
for the six month period ended
10
December 31, 1996 compared to the same period in 1995. The increase in both
periods was due to gains on the sales of loans and investment securities held
for sale.
Non-Interest Expense
Non-interest expense increased $106 thousand, or 17.3%, to $720 thousand for the
three months ended December 31, 1996, compared to $614 thousand for the same
period in 1995. The increase in expenses for these three months is directly
connected to the opening of the fourth retail branch office and the relocation
of the corporate headquarters. Non-interest expense increased $504 thousand, or
41.6%, to $1.7 million for the six months ended December 31, 1996, compared to
$1.212 for the same period in 1995. Although additional personnel have been
hired to staff the new retail branch office that opened in December 1996, the
majority of this increase was due to the Federal legislation enacted in
September 1996 to recapitalize the Savings and Loan Assocation Insurance Fund
("SAIF"). The one-time special assessment based on deposits as of March 31, 1995
equaled $347 thousand for Guaranty.
Income Tax Expense
Guaranty recognized income tax expense of $97 thousand for the three months
ended December 31, 1996, compared to $74 thousand for the same period in 1995.
Guaranty recognized income tax expense of $79 thousand for the six months ended
December 31, 1996, compared to $158 thousand for the same period in 1995.
Because of a loss in the first quarter of fiscal 1997 due to the one-time "SAIF"
assessment, Guaranty recognized a tax benefit in that quarter.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either
through the sale of existing assets or through 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. Guaranty 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 December
31, 1996, Guaranty's liquidity ratio was 6.3%.
Guaranty'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 mortgage-backed
securities are relatively predictable sources of funds, deposit 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. Guaranty
has been able to generate sufficient cash through its deposits as well as
through its borrowings.
Guaranty uses its sources of funds primarily to meet its on-going operating
expenses, to pay deposit withdrawals and to fund loan commitments. At December
31, 1996, the total approved loan commitments outstanding amounted to $3.0
million. At the same date, commitments under unused lines of credit amounted to
$6.4 million. Certificates of deposit scheduled to mature in one year or less at
December 31, 1996 totaled $57.3 million. Management believes that a significant
portion of maturing deposits will remain with Guaranty.
Guaranty is subject to OTS regulations requiring savings institutions to meet
the following minimum levels of regulatory capital (1) tangible capital of at
least 1.5% of total adjusted assets,
11
(2) core capital of 3% of total adjusted assets and (3) risk-based capital of 8%
of total risk-weighted assets. At December 31, 1996, Guaranty exceeded all such
regulatory capital requirements as shown in the following table.
Percent of
(Dollars in thousands) Amount Adjusted Assets
- --------------------------------------------------------------------------
Tangible Capital:
Regulatory capital $6,793 5.85%
Minimum capital requirement 1,743 1.50%
- --------------------------------------------------------------------------
Excess regulatory capital $5,050 4.35%
- --------------------------------------------------------------------------
Core Capital:
Regulatory capital $6,793 5.85%
Minimum capital requirement 3,485 3.00%
- --------------------------------------------------------------------------
Excess regulatory capital $3,308 2.85%
- --------------------------------------------------------------------------
Risk-based Capital:
Regulatory capital $7,499 13.28%
Minimum capital requirement 4,519 8.00%
- --------------------------------------------------------------------------
Excess regulatory capital $2,980 5.28%
- --------------------------------------------------------------------------
12
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
The Annual Meeting of Shareholders of Guaranty
Financial Corporation was held December 11, 1996 in Charlottesville, Virginia
for the purposes of electing four individuals to the Board of Directors and
ammending Guaranty's 1991 Incentive Plan (the "Plan"). Proxies for the meeting
were solicited pursuant to Regulation 14(a) of the Securities and Exchange Act
of 1934, as amended.
There was no solicitation in opposition to management's nominees to the Board of
Directors as listed in the proxy statement, and all of such nominees were
elected with the following vote:
Shares Shares Shares
voted for withheld not voted Total
-----------------------------------------------------
For 3 - Year Term
Thomas P. Baker 468,728 3,180 447,260 919,168
Charles R. Borchardt 467,928 3,980 447,260 919,168
Harry N. Lewis 468,828 3,080 447,260 919,168
For 1 - Year Term
James R. Sipe, Jr 468,828 3,080 447,260 919,168
There were no abstentions or broker non-votes in the election of directors.
In addition, Guaranty's shareholders voted on a proposal to amend the Plan. The
Plan initially authorized the issuance of up to 50,000 shares of Common Stock.
Options to purchase 36,000 shares have been granted and 14,000 shares remain
available for grants and awards under the Plan. The Plan, as amended, reserves
111,000 shares, increasing the shares available for new grants under the Plan
from 14,000 to 75,000 shares. To date, none of the options have been exercised.
The Plan, as amended, was approved with 295,762 shares voting for, 46,280 shares
voting against, 6,814 shares abstaining, and 123,052 shares counting as broker
non-votes, and 447,260 shares did not vote.
Item 5 Other Information
None.
Item 6 Exhibits and Reports on 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
13
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: February 12, 1997 By:/s/ Thomas P. Baker
-------------------------------------
Thomas P. Baker
President and Chief Executive Officer
Date: February 12, 1997 By:/s/ Kathleen M. Focht
-------------------------------------
Kathleen M. Focht
Vice President, Secretary, Treasurer,
and Chief Financial Officer
14