U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number: 33-76064
GUARANTY FINANCIAL CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Virginia 54-1786496
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1658 State Farm Boulevard
Charlottesville, Virginia 22911
(Address of Principle Executive Offices)
(804) 970-1100
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 _____
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
1,499,008 shares of common stock, par value $1.25 per share,
outstanding as of July 23, 1997
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 June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 1997 and 1996 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 Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
2
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
JUNE 30, DECEMBER, 31
1997 1996
------------ ------------
ASSETS (Unaudited)
Cash and cash equivalents $12,859 $6,076
Investment securities
Held-to-maturity 2,998 3,157
Available for sale 15,693 0
Trading 1,009 16,736
Investment in FHLB stock at cost 875 1,360
Loans receivable, net 87,974 81,270
Accrued interest receivable 763 671
Real estate owned 0 51
Office properties and equipment, net 5,902 4,946
Other assets 2,018 1,753
------------ ------------
Total assets $130,091 $116,020
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $12,368 $10,300
Savings accounts 5,758 4,777
Certificates of deposit 80,996 66,324
------------ ------------
99,122 81,401
Bonds payable 2,608 2,706
Advances from Federal Home Loan Bank 15,000 17,500
Securities sold under agreement to repurchase - 6,681
Accrued interest payable 58 61
Payments by borrowers for taxes and insurance 76 106
Other liabilities 1,806 990
------------ ------------
Total liabilities 118,670 109,445
------------ ------------
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 43 -
Retained earnings 3,776 3,445
------------ ------------
Total stockholders' equity 11,421 6,575
------------ ------------
Total liabilities and stockholders' equity $130,091 $116,020
============ ============
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
1997 1996 1997 1996
----------- --------- -------- ---------
(unaudited) (unaudited)
Interest income
Loans $ 1,809 $ 1,679 $ 3,523 $ 3,302
Mortgage-backed securities 458 242 807 390
Investment securities 107 143 230 271
Trading account assets -- -- -- 2
------- ------- ------- -------
Total interest income 2,374 2,064 4,560 3,965
------- ------- ------- -------
Interest expense
Deposits 1,175 913 2,222 1,720
Borrowings 362 439 723 928
------- ------- ------- -------
Total interest expense 1,537 1,352 2,945 2,648
------- ------- ------- -------
Net interest income 837 712 1,615 1,317
Provision for loan losses 46 31 46 46
------- ------- ------- -------
Net interest income after provision
for loan losses 791 681 1,569 1,271
Other income
Loan fees and servicing income 128 123 288 257
Gain (loss) on sale of loans and securities 72 (48) 76 91
Gain on sale of purchased servicing 117 -- 117 --
Service fees on checking 36 24 62 44
Other 46 26 82 51
------- ------- ------- -------
Total other income 399 125 625 443
------- ------- ------- -------
Other expenses
Personnel 421 275 783 524
Occupancy 122 74 235 149
Data processing 86 72 180 147
Deposit insurance premiums 28 42 56 89
Other 229 120 426 272
------- ------- ------- -------
Total other expenses 886 583 1,680 1,181
------- ------- ------- -------
Income before income taxes 304 223 514 533
------- ------- ------- -------
Provision for income taxes 106 70 183 186
------- ------- ------- -------
Net income $ 198 $ 153 $ 331 $ 347
======= ======= ======= =======
Earnings per common share $ 0.13 $ 0.17 $ 0.24 $ 0.38
======= ======= ======= =======
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 and 1996
(In Thousands)
1997 1996
---- ----
(unaudited)
Operating Activities
Net Income $ 331 $ 347
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 46 46
Depreciation and amortization 151 53
Amortization of deferred loan fees 56 69
Net amortization of premiums and accretion of discounts 11 64
Loss (gain) on sale of loans (46) (178)
Originations of loans held for sale (4,570) (2,426)
Proceeds from sale of loans 4,778 2,543
Loss (gain) on sale of securities available for sale (64) (3)
(Gain) loss on trading securities 34 90
Purchase of trading securities (26,102) (48,316)
Sales of trading securities 26,086 48,226
(Gain) loss on sale of real estate owned 1 --
Changes in:
Accrued interest receivable (92) (78)
Other assets (214) (60)
Accrued interest payable (3) 25
Prepayments by borrowers for taxes and insurance (30) 50
Other liabilities 816 988
-------- --------
Net cash provided (absorbed) by operating activities 1,189 1,440
-------- --------
Investing activities
Net (increase) decrease in loans (6,870) (7,166)
Mortgage-backed securities principal repayments 718 423
Proceeds from sale of securities available for sale 15,270 8,615
Purchase of securities available for sale (15,791) (14,050)
Redemption of FHLB stock 485 43
Purchases of office properties and equipment (1,107) (2,150)
-------- --------
Net cash provided (absorbed) by investing activities (7,295) (14,285)
-------- --------
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
1997 1996
---- ----
(unaudited)
Financing activities
Net increase (decrease) in deposits 17,721 15,321
Repayment of FHLB advances (2,500) (8,550)
Increase (decrease) in securities sold under agreement to repurchase (6,681) 6,104
Proceeds from the issuance of common stock, net 4,472 --
Principal payments on bonds payable, including unapplied payments (123) (435)
-------- --------
Net cash provided (absorbed) by financing activities 12,889 12,440
-------- --------
Increase (decrease) in cash and cash equivalents 6,783 (405)
-------- --------
Cash and cash equivalents, beginning of period 6,076 5,836
-------- --------
Cash and cash equivalents, end of period $ 12,859 $ 5,431
======== ========
Supplemental Disclosure of Non-cash Investing Activities:
On January 1, 1997, securities with a carrying value of approximately $15.8
million were transferred from the trading account to the available for sale
account.
6
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months ended June 30, 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 and other non-traditional products. 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.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Charter Conversion
Effective the close of business on June 30, 1997, Guaranty Bank, the primary
operating subsidiary of the Corporation, received final regulatory approval to
convert from a federally-chartered savings association to a Virginia-chartered,
federal reserve member commercial bank. Management believes that operating under
a commercial bank charter will better suit the Bank's business plan than will
the federal savings association charter.
Changes in Financial Condition
Deposit growth during the six months ended June 30, 1997 and the completion of a
secondary offering of common stock in January 1997 enabled Guaranty to increase
assets. Total assets increased by $14.1 million, or 12.1%, from $116.0 million
at December 31, 1996 to $130.1 million at June 30, 1997. This deposit growth -
all local funds - was primarily invested in loans and cash.
Cash and cash equivalents increased $6.8 million, or 111.6%, to $12.9 million at
June 30, 1997 from $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, the sale of loans and the completion of a secondary
offering of the Corporation's common stock in January 1997. Proceeds to the
Corporation from the offering (net of offering expenses of approximately
$280,000) were approximately $4.0 million.
Investment securities, at June 30, 1997, decreased $193 thousand, or 1%, to
$19.7 million from $19.9 million at December 31, 1996. This decrease was
primarily a result of principal repayments on mortgage-backed securities. At
December 31, 1996, as a result of a combined federal and state examination
relating to the conversion to a state chartered bank, Management reclassified
$16.7 million of mortgage backed securities from the available for sale account
to the trading account. These securities were subsequently transferred, based on
management's intent, back to the available for sale account on January 1, 1997.
Included in the investment portfolio are $3.0 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.
Due to a mandatory stock redemption in March 1997, investment in Federal Home
Loan Bank stock, a restricted security recorded at cost, decreased $485
thousand, or 35.6% from $1.4 million at December 31, 1996 to $875 thousand at
June 30, 1997.
The loan portfolio consists primarily of mortgage loans, the majority of which
are residential first mortgage loans. Of the $89.1 million of gross loans
outstanding at June 30, 1997, approximately 74% represent residential first
mortgages. Net loans were $87.9 million at June 30, 1997, an increase of $6.6
million, or 8.3%, from net loans of $81.3 million at December 31, 1996. This
increase was primarily a result of increased loan origination's due to the
general growth and expansion of the existing branch network during the past six
months, market demand and the expanded commercial and consumer lending programs
which were started in 1996. Increased origination's were partially offset by
scheduled loan payments and the sale of approximately $4.8 million of fixed rate
mortgage loans at a gain of $15 thousand.
8
Real estate owned of $51 thousand at December 31, 1996 was sold during the first
quarter of 1997 at a loss of approximately $1 thousand. No real estate owned was
held at June 30, 1997.
Deposits increased by $17.7 million, or 21.8%, between December 31, 1996 and
June 30, 1997. The majority of the growth was in certificates of deposit, which
increased $14.7 million, or 22.1%. This growth, comprised solely of local funds,
is a reflection of continued marketing and the opening of a new branch on the
east side of Charlottesville in December 1996.
Office properties and equipment increased $1.0 million, or 19.3%, since December
31, 1996. This increase was primarily due to the completion of the fifth retail
branch office, which is located in Harrisonburg, Virginia, and improvements to
the previously leased RIO Road branch and office building which was purchased in
June 1996. All available space within the RIO Road building was 100% leased at
June 30, 1997. The Harrisonburg branch opened to the public in May 1997.
Due to increased liquidity resulting from increased deposits and the completion
of a secondary offering of common stock, management reduced the reliance on
other borrowed funds during the second quarter of 1997. Advances from Federal
Home Loan Bank decreased $2.5 million, or 14.2%, due to a scheduled maturity in
February 1997.
Results of Operations
Net Income
Guaranty reported net income of $198 thousand and $153 thousand for the three
month periods ended June 30, 1997 and 1996, respectively, and $331 thousand and
$347 thousand for the six month periods ended June 30, 1997 and 1996,
respectively. The increase in the second quarter is due primarily to increased
net interest income and gain on sale of purchased servicing which was partially
offset by additional costs relating to the opening of the fifth retail branch in
Harrisonburg, Virginia. This branch opened to the public in May 1997. The
decrease in earnings during the six month period ending June 30, 1997 compared
to the same period in 1996 was due primarily to one-time costs relating to the
successful conversion from a federally chartered savings association to a state
chartered commercial bank which was partially offset by increased net interest
income and gain on the sale of purchased servicing.
Net Interest Income
Net interest income increased by $125 thousand, or 17.6%, to $837 thousand for
the three months ended June 30, 1997, compared to $712 thousand for the same
period in 1996. Net interest income increased by $298 thousand, or 22.6%, to
$1.62 million for the six months ended June 30, 1997 compared to $1.32 million
in the same period in 1996. Average earning assets increased by $10.2 million to
$112.0 million for the six months ended June 30, 1997, compared to an increase
of $5.8 million to $93.7 million for the same period in 1996. The average rate
earned also increased to 8.13% for the six months ended June 30, 1997 from 8.10%
at December 31, 1996. The average rate earned was 8.18% at June 30, 1996.
Average interest bearing liabilities also increased by $9.2 million to $119.9
million for the six months ended June 30, 1997 compared to an increase of $6.6
million to $92.1 million for the same period in 1996. Interest rate spread and
net interest margin for the six month periods ending June 30, 1997 and 1996 were
2.74% and 2.87%, and 2.54% and 2.64%, respectively. The majority of this
improvement in net interest income is due to the decrease in the rate paid on
borrowed money. The average rate paid on FHLB advances and other borrowings
decreased 114 basis point to 4.89% for the six months ended June 30, 1997 from
6.03% for the same period in 1996. This improvement in the average rate paid on
borrowings was partially offset by the 28 basis point increase in the average
rate paid on certificates of deposit. In addition , the average balance of
9
certificates of deposit rose $19.6 million, or 39.8%, to $63.3 million in the
six month period ending June 30, 1997 when compared to the same period in 1996.
Management expects the net interest margin to improve over the next twelve to
twenty four months as the expanded commercial and consumer lending programs,
which were begun in 1996, begin to impact the balance sheet and statement of
operations. In addition, all newly originated fixed-rate mortgage loans are sold
in the secondary market. Also, management anticipates that new commercial
deposit accounts (checking, savings, money market accounts, etc.) will become
available to new and existing customers in the third quarter of 1997. These
types of deposit accounts should reduce the Corporations reliance on more costly
borrowed money and certificates of deposits.
Provision for Loan Losses
Management analyzes the potential risk of loss on 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 June 30, 1997, and a provision of $31 thousand for the same
period in 1996. For the six month periods ended June 30, 1997 and 1996, Guaranty
recorded a provision of $46 thousand. As of June 30 1997 the total allowance for
loan losses amounted to $844 thousand.
Non-Interest Income
Non-interest income increased $274 thousand, or 219.2%, to $399 thousand for the
three months ended June 30, 1997 from $125 thousand for the same period in 1996.
Non-interest income increased by $182 thousand, or 41.1%, to $625 thousand for
the six month period ended June 30, 1997 compared to the same period in 1996.
The increase in both periods was primarily due to a $117 thousand gain on the
sale of purchased servicing on loans secured by property which was outside of
the Bank's principal market area.
Non-Interest Expense
Non-interest expense increased $303 thousand, or 51.9%, to $886 thousand for the
three months ended June 30, 1997 compared to $583 thousand for the same period
in 1996. Non-interest expense increased $499 thousand, or 42.3%, to $1.7 million
for the six months ended June 30, 1997 compared to $1.2 million for the same
period in 1996. Increases in both periods was primarily due to increased costs
directly related to the opening of a combined branch and corporate headquarters
on the east side in Charlottesville in December 1996, the opening of the
Harrisonburg branch in May 1997, and one time costs associated with the
successful conversion to a state bank effective June 30, 1997.
Income Tax Expense
Guaranty recognized income tax expense of $106 thousand for the three months
ended June 30, 1997, compared to $70 thousand for the same period in 1996.
Guaranty recognized income tax expense of $183 thousand for the six months ended
June 30, 1997, compared to $186 thousand for the same period in 1996. Changes in
tax expense between periods is primarily a result of changes in the level of
taxable income.
10
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. Guaranty's primary sources of
funds are deposits, borrowings and amortization, prepayments and maturities of
outstanding loans and securities. While scheduled payments from the amortization
of loans and 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. In connection with the conversion to a state
chartered bank, Guaranty anticipates reducing its reliance on borrowings as a
source of funds.
In January 1997, the Corporation completed a secondary offering of its common
stock. Net proceeds to the Corporation from the offering were approximately $4.4
million.
Guaranty uses its sources of funds primarily to meet its on-going operating
expenses, to pay deposit withdrawals and to fund loan commitments. At June 30,
1997, the total approved loan commitments outstanding amounted to $7.2 million.
At the same date, commitments under unused lines of credit amounted to $4.1
million. Certificates of deposit scheduled to mature in one year or less at June
30, 1997 totaled $57.3 million. Management believes that a significant portion
of maturing deposits will remain with Guaranty.
At June 30, 1997, Guaranty exceeded all regulatory capital requirements as shown
in the following table.
Percent of
(Dollars in thousands) Amount Adjusted Assets
----------------------------
Tangible Capital:
Reulatory capital $11,325 9.75%
Minimum capital requirement 1,951 1.50%
Excess regulatory capital $ 9,374 8.25%
Core Capital:
Reulatory capital
Minimum capital requirement $11,325 9.75%
Excess regulatory capital 3,903 3.00%
$ 7,422 6.75%
Risk-based Capital:
Reulatory capital $12,053 21.34%
Minimum capital requirement 5,157 8.00%
Excess regulatory capital $ 6,896 13.34%
11
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:
In a report on Form 8-K dated May 14, 1997 and filed with
the Commission on May 15, 1997, the Corporation announced that
it would be changing from a fiscal year end June 30 to a
calendar year in anticipation of the conversion of its
primary operating subsidiary, Guaranty Bank, from a
federally chartered savings association to a state chartered
commercial bank. This conversion was approved effective June
30, 1997.
12
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: August 14, 1997 By: /s/ Thomas P. Baker
--------------------------------------
Thomas P. Baker
President and Chief Executive Officer
Date: August 14, 1997 By: /s/ Vincent B. McNelley
--------------------------------------
Vincent B. McNelley
Senior Vice President and Chief
Financial Officer