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, 1997
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 ___ .
As of May 19, 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 March 31, 1997 and December 31, 1996......................... 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996......................... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996......................... 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
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands)
MARCH 31, DECEMBER 31,
1997 1996
---- ----
ASSETS (Unaudited)
Cash and cash equivalents $5,366 $6,076
Investment securities
Held-to-maturity 3,126 3,157
Available for sale 20,584 0
Trading 956 16,736
Investment in FHLB stock at cost 875 1,360
Loans receivable, net 84,852 81,270
Accrued interest receivable 735 671
Real estate owned 49 51
Office properties and equipment, net 5,179 4,946
Other assets 1,804 1,753
------------ ------------
Total assets $123,526 $116,020
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $11,672 $10,300
Savings accounts 5,209 4,777
Certificates of deposit 74,161 66,324
------------ ------------
$91,043 $81,401
Bonds payable 2,613 2,706
Advances from Federal Home Loan Bank 15,000 17,500
Securities sold under agreement to repurchase 3,140 6,681
Accrued interest payable 56 61
Payments by borrowers for taxes and insurance 299 106
Other liabilities 589 990
------------ ------------
Total liabilities $112,740 $109,445
------------ ------------
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, 1,499,008 and
924,008 issued and outstanding $1,874 $1,155
Additional paid-in capital 5,728 1,975
Net unrealized gain (loss) on securities
avaiable for sale (394) 0
Retained earnings 3,578 3,445
------------ ------------
Total stockholders' equity $10,786 $6,575
------------ ------------
Total liabilities and stockholders' equity $123,526 $116,020
============ ============
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended
March 31,
-------------------------
1997 1996
----------- ------------
(unaudited)
Interest income
Loans $ 1,714 $ 1,623
Mortgage-backed securities 347 148
Investment securities 107 129
Trading account assets 18 2
----------- ------------
Total interest income $ 2,186 $ 1,902
----------- ------------
Interest expense
Deposits $ 1,047 $ 806
Borrowings 361 489
----------- ------------
Total interest expense $ 1,408 $ 1,295
----------- ------------
Net interest income $ 778 $ 607
Provision (credit) for loan losses - 15
----------- ------------
Net interest income after provision
for loan losses $ 778 $ 592
Other income
Loan fees and servicing income $ 159 $ 133
Gain (loss) on sale of loans and securities 5 142
Service fees on checking 26 21
Other 32 23
----------- ------------
Total other income $ 222 $ 319
----------- ------------
Other expenses
Personnel $ 327 $ 248
Occupancy 91 75
Data processing 95 76
Deposit insurance premiums 28 48
Other 249 152
----------- ------------
Total other expenses $ 790 $ 599
----------- ------------
Income before income taxes $ 210 $ 312
----------- ------------
Provision for income taxes 77 116
----------- ------------
Net income $ 133 $ 196
=========== ============
Earnings per common share $ 0.10 $ 0.15
=========== ============
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
(In Thousands)
1997 1996
------------ ------------
Operating Activities
Net Income $ 133 $ 196
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses - 19
Depreciation and amortization 75 24
Amortization of deferred loan fees 15 (13)
Net amortization of premiums and accretion of discounts 3 35
Loss (gain) on sale of loans (32) (20)
Originations of loans held for sale (1,509) (2,493)
Proceeds from sale of loans 1,519 2,513
Originations of loans securitized - -
Loss (gain) on sale of mortgage-backed securities - (17)
Loss (gain) on sale of securities available for sale - 13
(Gain) loss on disposal of office properties and equipment 3 -
(Gain) loss on sale of trading securities 26 (39)
Purchase of trading securities (11,317) (25,010)
Sales of trading securities 11,342 24,971
(Gain) loss on sale of real estate owned 1 (10)
Changes in:
Accrued interest receivable (64) (41)
Other assets (51) (484)
Accrued interest payable (5) (1)
Prepayments by borrowers for taxes and insurance 193 156
Other liabilities (401) (910)
------------ ------------
Net cash provided (absorbed) by operating activities (69) (1,111)
------------ ------------
Investing activities
Net (increase) decrease in loans (3,342) (2,829)
Mortgage-backed securities principal repayments 403 226
Purchase of securities available for sale (11,593) (11,074)
Proceeds from sales of securities available for sale 6,071 8,443
Purchases of FHLB stock - (100)
Redemption of FHLB stock 485 142
Proceeds from sale of office equipment - -
Purchases of office properties and equipment (154) (43)
Disbursement on construction of office building (54) (145)
Improvement of land (22) -
------------ ------------
Net cash provided (absorbed) by investing activities (8,206) (5,380)
------------ ------------
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Financing activities
Net increase (decrease) in deposits 9,642 10,776
Repayment of FHLB advances (2,500) (6,250)
Proceeds from FHLB advances - -
Increase (decrease) in securities sold under agreement to repurchase (3,541) 2,793
Principal payments on bonds payable, including unapplied payments (508) (189)
Proceeds from issuance of stock 4,472 -
------------ ------------
Net cash provided (absorbed) by financing activities 7,565 7,130
------------ ------------
Increase (decrease) in cash and cash equivalents (710) 639
------------ ------------
Cash and cash equivalents, beginning of period 6,076 5,836
------------ ------------
Cash and cash equivalents, end of period $ 5,366 $ 6,475
============ ============
6
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months ended March
31, 1997 and 1996
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.
On April 15, 1997, Guaranty Bank's conversion from a federally chartered savings
and loan institution to a state chartered bank was approved. In anticipation of
this conversion, the Board of Directors voted to change Guaranty's fiscal year
end from June 30 to December 31.
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, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). 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 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 plans to adopt the
disclosure requirements only of SFAS 123. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the Corporation.
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
7
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 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 of Corporation.
In February 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 provides a different method for calculating earnings per share than is
currently used in accordance with APB 15, "Earnings per Share." SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in earnings of an entity, similar to
fully diluted earnings per share. Management does not expect the application of
this pronouncement to have a material effect of the financial statements of the
Corporation.
Note 4 Earnings Per Share
Earnings per share is computed based on the weighted average number of shares of
common stock outstanding during each period including the assumed exercise of
dilutive stock options, and is retroactively adjusted for stock dividends and
stock splits. The weighted average number of shares outstanding for the three
months ended March 31, 1997 was 1,307,341.
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
Deposit growth and a secondary stock issue during the three months ended March
31, 1997 enabled Guaranty to increase assets. The stock offering occurred on
January 29, 1997 with 575 thousand new shares issued at a price of $8.50 per
share. After expenses relating to the stock issue, Guaranty's net proceeds were
approximately $4.5 million. Total assets increased by $7.4 million, or 6.4%,
from $116.0 million at December 31, 1996 to $123.4 million at March 31, 1997.
This deposit growth and increased equity was invested in mortgage-backed
securities and loans.
Cash and cash equivalents decreased $710 thousand, or 11.6%, to $5.4 million at
March 31, 1997. This decrease in cash was due to the combination of increased
investments, reduction of borrowed monies, and an increase in loans.
Investment securities, at March 31, 1997, increased by $4.3 million, or 20.2%,
to $25.5 million from $21.2 December 31, 1996. Approximately $15.6 million of
securities classified as trading at December 31, 1996 were reclassified as
available for sale effective January 1, 1997. The proceeds of the stock issue
were used to purchase investment securities. Included in the investment
portfolio are $3.1 million of mortgage-backed securities, classified as held to
maturity, which collateralize the bonds payable, $20.6 million of GNMA, FNMA and
FHLMC mortgage-backed securities classified as available for sale, $1.0 million
of United States Treasury Notes classified as trading securities and $875,000 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 $86.0 million of gross loans
outstanding at March 31, 1997, 75.4% represent residential first mortgages. Net
loans were $84.9 million at March 31, 1997, a 4.4% increase from net loans of
$81.3 million at December 31, 1996. A sale of fixed rate loans totaling $1.5
million also occurred during this quarter.
Real estate owned decreased by $2 thousand, or 3.9%, to $49 thousand at March
31, 1997 from $51 thousand at December 31, 1996. These assets were acquired
through foreclosure and at March 31, 1997 consisted of one property. The
property is guaranteed by FHA/VA, and no significant loss is expected.
Deposits increased by $9.6 million, or 11.8%, between December 31, 1996 and
March 31, 1997. The majority of the growth was in certificates of deposit, which
increased $7.8 million at December 31, 1996. This growth is a reflection of
continued marketing and the opening of a new branch.
Office properties and equipment increased $233,000, or 4.7%, since December 31,
1996. This increase is due primarily to the construction of a fifth retail
branch office, which is located in Harrisonburg, VA. The branch is expected to
be opened to the public in mid May.
Other borrowed money decreased $3.5 million, or 53.0%, while Federal Home Loan
Bank advances also decreased $2.5 million by the repayment of an advance which
came due in February. The repayment of the advance was made possible from the
increase in deposits.
9
Results of Operations
Net Income
Guaranty reported net income of $133 thousand and $196 thousand for the three
month periods ended March 31, 1997 and 1996, respectively. The $63 thousand, or
32.1% decrease in income for the three months ended March 31, 1997 compared to
the three months ended March 31, 1996 was due to a decrease in the gain on the
sale of loans and securities, an increase in operating expenses associated with
converting to a state chartered Bank, and personnel expenses incurred from
opening additional offices. These increased expenses were partially offset by an
increase in net interest income.
Net Interest Income
Net interest income increased by $171 thousand, or 28.2%, to $778 thousand for
the three months ended March 31, 1997, compared to $607 thousand for the same
period in 1996. Average earning assets increased to $108.4 million for the three
months ended March 31, 1997 compared to an average of $106.7 million for the six
months ended December 31, 1996. The average rate earned also increased to 8.07%
for the three months ended March 31, 1997 from 8.01% at December 31, 1996.
Average interest bearing liabilities remained stable. The average rates paid on
liabilities was 5.32% compared to 5.71% for the three months ended March 31,
1997 and 1996, respectively. Interest rate spread and net interest margin for
March 31, 1997 and December 31, 1996 were 2.75% and 2.46%, and 2.87% and 2.50%,
respectively. The majority of the improvement in net interest income is due to
the decrease in the rate paid on bonds payable and the decrease in the rate paid
on certificates of deposit. The average rate paid on bonds decreased 483 basis
points to 10.53% for the three months ended March 31, 1997 from 15.36%. The
average balance of certificates of deposit rose $7.0 million dollars, or 11.1%,
to $70.4 million in the three month period ending March 31, 1997 with the
average rate falling 16 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 no additional provision for loan
losses in the three months ended March 31, 1997, and a provision of $15 thousand
for the same period in 1996. As of March 31, 1997 the total allowance for loan
losses amounted to $854 thousand, of which $698 thousand was not specifically
allocated to identified problem loans.
Non-Interest Income
Non-interest income decreased $97 thousand, or 30.4%, to $222 thousand for the
three months ended March 31, 1997 from $319 thousand for the same period in 1996
The decrease in this period was primarily due to a $137,000 decrease in income
from the investment portfolio during the three months ended March 31, 1997
compared to the same period in 1996. Additionally, loan fees and servicing
income increased by $26 thousand to $159 thousand, while other income increased
from $23 thousand to $32 thousand for the three months ended March 31, 1997
compared to the same period in 1996.
10
Non-Interest Expense
Non-interest expense increased $191 thousand, or 31.9%, to $790 thousand for the
three months ended March 31, 1997, compared to $599 thousand for the same period
in 1996. The increase in expenses for these three months is primarily due to
expenses associated with converting the Bank from a federally chartered savings
and loan to a state chartered bank, as well as increased personnel costs
associated with the opening of additional branches.
Income Tax Expense
Guaranty recognized income tax expense of $77 thousand for the three months
ended March 31 1997 compared to $116 thousand for the comparable period in 1996.
This reflects the decrease in Guaranty's income.
Liquidity and Capital Resources
On January 29, 1997, Guaranty increased its capital with a secondary offering of
common stock. Guaranty issued 575 thousands shares of common stock at an
offering price of $8.50 per share. Net proceeds to Guaranty from this stock
issue were approximately $4.5 million dollars.
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 March 31,
1997, Guaranty's liquidity ratio was 5.7%.
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 March 31,
1997, the total approved loan commitments outstanding amounted to $6.2 million.
At the same date, commitments under unused lines of credit amounted to $7.5
million. Certificates of deposit scheduled to mature in one year or less at
March 31, 1997 totaled $65.5 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, (2) core capital of 3% of total adjusted
assets and (3) risk-based capital of 8% of total risk-weighted assets. At March
31, 1997, Guaranty exceeded all such regulatory capital requirements as shown in
the following table.
11
Percent of
(Dollars in thousands) Amount Adjusted Assets
- ------------------------------------------------------------------------------
Tangible Capital:
Regulatory capital $11,180 9.06%
Minimum capital requirement 1,849 1.50%
- ------------------------------------------------------------------------------
Excess regulatory capital $9,331 7.56%
- ------------------------------------------------------------------------------
Core Capital:
Regulatory capital $11,180 9.06%
Minimum capital requirement 3,697 3.00%
- ------------------------------------------------------------------------------
Excess regulatory capital $7,483 6.06%
- ------------------------------------------------------------------------------
Risk-based Capital:
Regulatory capital $11,878 21.03%
Minimum capital requirement 4,817 8.00%
- ------------------------------------------------------------------------------
Excess regulatory capital $7,217 13.03%
- ------------------------------------------------------------------------------
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
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 - 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: May 19, 1997 By: /s/ Thomas P. Baker
-------------------------------------
Thomas P. Baker
President and Chief Executive Officer
Date: May 19, 1997 By: /s/ Kathleen M. Focht
-------------------------------------
Kathleen M. Focht
Vice President, Secretary, Treasurer,
and Chief Financial Officer