UNITED STATES
SECURITIES AND EXCHANGE COMMISION
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, 1998
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 18, 1998, 1,501,383 shares of the Registrant's common stock,
par value $1.25 per share, were outstanding.
GUARANTY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
INDEX
Part I. Financial Information Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 (unaudited) 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 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)
March 31, December, 31
1998 1997
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $15,583 $5,917
Investment securities
Held-to-maturity 2,750 2,846
Available for sale 13,177 11,531
Trading - 1,032
Investment in FHLB stock, at cost 860 860
Investment in FRB stock, at cost 72 72
Loans receivable, net 99,129 99,675
Accrued interest receivable 880 844
Real estate owned 68 65
Office properties and equipment, net 6,369 6,000
Other assets 2,129 1,866
----------- -----------
Total assets $141,017 $130,708
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $19,145 $16,037
Savings accounts 8,067 6,433
Certificates of deposit 96,367 90,477
----------- -----------
123,579 112,947
Bonds payable 2,331 2,360
Securities sold under agreement to repurchase - 2,989
Accrued interest payable 55 58
Payments by borrowers for taxes and insurance 241 81
Other liabilities 2,915 412
----------- -----------
Total liabilities 129,121 118,847
----------- -----------
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, 1,501,383
issued and outstanding 1,877 1,877
Additional paid-in capital 5,725 5,725
Net unrealized gain (loss) on securities
available for sale (117) 51
Retained earnings 4,411 4,208
----------- -----------
Total stockholders' equity 11,896 11,861
----------- -----------
Total liabilities and stockholders' equity $141,017 $130,708
=========== ===========
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(unaudited)
Interest income
Loans $ 2,154 $ 1,714
Mortgage-backed securities 57 347
Other securities 297 107
Trading account assets - 18
--------- ---------
Total interest income 2,508 2,186
--------- ---------
Interest expense
Deposits 1,430 1,047
Borrowings 74 361
--------- ---------
Total interest expense 1,504 1,408
--------- ---------
Net interest income 1,004 778
Provision for loan losses 42 -
--------- ---------
Net interest income after provision
for loan losses 962 778
Other income
Loan fees and servicing income 96 159
Gain on sale of loans and securities 395 5
Service fees on checking 65 26
Other 57 32
--------- ---------
Total other income 613 222
--------- ---------
Other expenses
Personnel 481 327
Occupancy 249 91
Data processing 113 95
Deposit insurance premiums 11 28
Other 319 249
--------- ---------
Total other expenses 1,173 790
--------- ---------
Income (loss) before income taxes 402 210
--------- ---------
Provision (loss) for income taxes 153 77
--------- ---------
Net income (loss) $ 249 $ 133
========= =========
Basic and diluted earnings per common share $ 0.17 $ 0.14
========= =========
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
----------------------------
1998 1997
------------ ------------
(unaudited)
Operating Activities
Net Income $ 249 $ 133
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 42 -
Depreciation and amortization 110 75
Amortization of deferred loan fees 27 15
Net amortization of premiums and accretion of discounts 96 3
Loss (gain) on sale of loans (233) (32)
Originations of loans held for sale (13,420) (1,509)
Proceeds from sale of loans 13,653 1,519
Loss (gain) on sale of securities available for sale (188) -
(Gain) loss on trading securities (23) 26
Purchase of trading securities 29,460 (11,317)
Sales of trading securities (28,405) 11,342
(Gain) loss on sale of real estate owned - 1
Other, net - 3
Changes in:
Accrued interest receivable (36) (64)
Other assets (263) (51)
Accrued interest payable (3) (5)
Prepayments by borrowers for taxes and insurance 160 193
Other liabilities 2,503 (401)
----------- -----------
Net cash provided (absorbed) by operating activities 3,729 (69)
----------- -----------
Investing activities
Net (increase) decrease in loans 501 (3,342)
Mortgage-backed securities principal repayments 91 403
Proceeds from sale of securities available for sale 17,507 6,071
Purchase of securities available for sale (19,133) (11,593)
Redemption of FHLB stock - 485
Purchases of office property, plant and equipment (479) (230)
----------- -----------
Net cash absorbed by investing activities (1,513) (8,206)
----------- -----------
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Three Months Ended
March 31,
----------------------------
1997 1996
------------ ------------
(unaudited)
Financing activities
Net increase (decrease) in deposits 10,632 9,642
Repayment of FHLB advances - (2,500)
Decrease in securities sold under agreement to repurchase (2,989) (3,541)
Proceeds from the issuance of common stock, net - 4,472
Dividends paid (46) -
Principal payments on bonds payable, including unapplied payments (147) (508)
------------ ------------
Net cash provided by financing activities 7,450 7,565
------------ ------------
Increase (decrease) in cash and cash equivalents 9,666 (710)
------------ ------------
Cash and cash equivalents, beginning of period 5,917 6,076
------------ ------------
Cash and cash equivalents, end of period $ 15,583 $ 5,366
============ ============
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 Three Months ended March 31, 1998 and 1997
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-deposit investment traditional products.
All material intercompany accounts and transactions have been eliminated in
consolidation.
Note 2 Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1998 and Decmber 31, 1997 and the results of operations and cash flows
for the interim periods ending March 31, 1998 and 1997. All 1998 interim amounts
are subject to year-end audit, and the results of operations for the interim
periods is not necessarily indicative of the results of operations to be
expected for the year.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Expansion of the Existing Branch Network
The opening of a full service branch at Lake Monticello in Fluvanna County is
expected to occur in late summer 1998. Due to customer demand, management is
arranging the installation of a temporary-mobile-bank branch at the site while
construction is in process. All bank regulatory approvals relating to this site
have been obtained.
During the first quarter of 1998, a letter of intent was issued to lease a
full-service branch at 1022 West Main Street in Charlottesville. This was
formerly a branch of Central Fidelity Bank that was closed as a result of the
recent Wachovia merger and, subject to regulatory approval, will open this
summer increasing our retail network to seven branches.
Changes in Financial Condition
Total assets increased $10.3 million, or 7.9%, from $130.7 million at December
31, 1997 to $141.0 million at March 31, 1998 primarily as a result of cash, net
of payment of $3.0 million in securities sold under agreements to repurchase,
being invested in interest bearing cash. Cash and cash equivalents increased
$9.7 million, or 163.4%, to $15.6 million at March 31, 1998 from $5.9 million at
December 31, 1997.
Investment securities, at March 31, 1998, increased $518 thousand, or 3.4%, to
$15.9 million from $15.4 million at December 31, 1997. This change resulted from
of a net increase of $1.6 million in investment grade corporate bonds classified
as held for sale offset by principal payments received of $91 thousand on
mortgage-backed securities classified as held to maturity, and a net decrease of
$1.0 million in the trading account.
Gross loans were $100.2 million at March 31, 1998 compared to $101.0 at December
31, 1997. Net loans were $99.1 million at March 31, 1998, a decrease of $600
thousand from net loans of $99.7 million at December 31, 1997. During the first
quarter of 1998, the corporation continued to underwrite substantially all fixed
rate residential mortgage loans for immediate sale in the secondary market. The
primary focus of portfolio lending continues to be prime-based construction
loans (including builder lines of credit), commercial real estate and business
loans and consumer loans which are typically priced 175 to 250 basis points
above fixed-rate residential loans. The continued sale of fixed rate residential
loans combined with the negative impact the abnormally wet weather had on
residential construction during the first quarter of 1998, resulted in loans
receivable remaining relatively flat. However, these strategies have resulted in
a change in the overall mix of the loan portfolio as documented in the following
table:
Percent of Gross Loans
---------------------------------
Loan Type 3/31/98 12/31/97
----------------------------------- --------------- --------------
Residential real estate 56.70% 65.40%
Construction and land loans 18.50% 11.50%
Commercial 18.30% 16.50%
Consumer 6.50% 6.60%
100.00% 100.00%
At March 31, 1998, loans held for sale were approximately $4.0 million. These
loans were sold in April 1998 for a gain of approximately $50 thousand.
Other real estate owned of $68 thousand and $65 thousand at March 31, 1998 and
December 31, 1997, respectively, relate to the same single family residential
property. As of the date of this
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filing, a contract for the sale of this property had been accepted. Net proceeds
are anticipated to approximate the carrying value at March 31, 1998. No material
losses are anticipated.
Deposits increased by $10.6 million, or 9.4%, between December 31, 1997 and
March 31, 1998. This growth was comprised of a $3.1 million increase in NOW/MMDA
accounts, a $1.6 million increase in savings accounts and a $5.9 million
increase in certificates of deposit. This deposit growth, all in local funds, is
a combination of the impact of recent bank mergers on the local market and
targeted marketing programs designed to attract lower cost transaction accounts.
In February 1998, a senior officer was recruited from an acquired statewide bank
to manage and reorganize the branch network. The primary focus will be to
improve installment lending programs and reduce the Corporation's historical
reliance on higher cost time deposits through the attraction and retention of
lower cost demand accounts. However, no assurances can be made that these
programs will be successful, or if successful, will reduce the Corporation's
historical reliance on Time Deposits as a primary funding source.
Office properties and equipment increased $369 thousand, or 6.1%, since December
31, 1997 due to capital improvements to existing facilities.
A portion of the net funds received due to deposit growth and loan sales was
used to payoff all short term borrowings during the first quarter of 1998.
Results of Operations
Net Income
Guaranty reported net income of $249 thousand and $133 thousand for the three
month periods ended March 31, 1998 and 1997, respectively. This increase was due
primarily to increased net interest income and gains on the sale of loans and
securities which were partially offset by additional costs relating to the
overall growth of the Corporation, the majority of which relates to the opening
of the fifth retail branch in Harrisonburg, Virginia. This branch opened to the
public in May 1997.
Net Interest Income
Net interest income increased by $226 thousand, or 29.1%, to $1.0 million for
the three months ended March 31, 1998, compared to $778 thousand for the same
period in 1997. Average earning assets increased to $124.0 million for the three
months ended March 31, 1998, compared to an average balance of $108.4 for the
same period in 1997. The average rate earned also increased to 8.20% for the
three months ended March 31, 1998 from 8.07% for the same period of 1997.
Interest rate spread and net interest margin for the three month periods ending
March 31, 1998 and 1997 were 3.05% and 3.28%, and 2.46% and 2.75%, respectively.
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 $42 thousand for the
three months ended March 31, 1998 compared with no additional provision being
recorded during the first quarter of 1997.
9
Non-Interest Income
Non-interest income increased $391 thousand to $613 thousand for the three
months ended March 31, 1998 from $222 thousand for the same period in 1997. The
increase was primarily due to an increase of $390 in gains on the sale of loans
and securities. Increases in service fees and other income for the first quarter
of 1998 compared to the same period in 1997 were offset by a decrease in
servicing income. Based on management's analysis that the costs exceeded the
benefits derived from the servicing revenue, all purchased servicing on loans
secured by property outside of the Corporation's current market was sold during
the second half of 1997.
Non-Interest Expense
Non-interest expense increased $383 thousand, or 48.5%, to $1.2 million for the
three months ended March 31, 1998 compared to $790 thousand for the same period
in 1997. This increase was primarily due to the overall growth of the bank, the
opening of the Harrisonburg branch in May 1997 and the hiring of three senior
officers in July 1997 (Senior Vice President and CFO), December 1997 (Vice
President - Residential Construction Lending) and February 1998 (Senior Vice
President - Retail Services and Commercial Lending).
Income Tax Expense
Guaranty recognized income tax expense of $153 thousand for the three months
ended March 31, 1998, compared to $77 thousand for the same period in 1997. This
change in tax expense between periods is primarily a result of changes in the
level of taxable income.
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.
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.
On May 5, 1998, the Corporation closed a $6.9 million offering of Convertible
Preferred Securities. Net proceeds of $6.4 million were invested in Guaranty
Bank as a contribution of capital.
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,
1998, the total approved loan commitments outstanding amounted to $12.1 million.
At the same date, commitments under unused lines of credit amounted to $16.1
million. Certificates of deposit scheduled to mature in one year or less at
March 31, 1998 totaled $82.1 million. Management believes that a significant
portion of maturing deposits will remain with Guaranty.
10
The Corporation and the Bank are subject to Federal Reserve regulations,
including the Bank Holding Company Act. At March 31, 1998, the Corporation
exceeded all applicable regulatory capital requirements as shown in the
following table.
Tier 1 Risk-based 13.72%
Total Risk-based 14.69%
Tier 1 Capital to average adjusted total assets 9.64%
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 - None
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: May 20, 1998 By: /s/ Vincent B. McNelley
--------------------------------
Vincent B. McNelley
Senior Vice President and
Chief Financial Officer
(as principal financial officer
and on behalf of the registrant)
13