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, 1999
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 10, 1999, 1,501,727 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, 1999 and December 31, 1998 (unaudited) 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
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
1999 1998
---------- ----------
(Unaudited)
ASSETS
Cash and cash equivalents $11,813 $10,527
Investment securities
Held-to-maturity 1,972 2,344
Available for sale 27,204 26,638
Trading 2,944 1,000
Investment in FHLB stock, at cost 1,300 1,300
Investment in FRB stock, at cost 271 271
Loans receivable, net 175,879 162,369
Accrued interest receivable 1,739 1,651
Real estate owned 366 488
Office properties and equipment, net 7,966 7,050
Mortgage servicing rights 2,663 1,978
Other assets 1,431 1,404
---------- ----------
Total assets $235,548 $217,020
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
DDA/MMDA accounts $55,383 $45,752
Savings accounts 10,792 9,863
Certificates of deposit 122,002 117,190
---------- ----------
188,177 172,805
Bonds payable 1,818 1,786
Advances from Federal Home Loan Bank 21,000 21,000
Securities sold under agreement to repurchase 2,941 1,009
Accrued interest payable 249 125
Income Taxes Payable 264 243
Payments by borrowers for taxes and insurance 1,223 128
Other liabilities 917 470
---------- ----------
Total liabilities 216,589 197,566
---------- ----------
COMMITMENTS & CONTINGENCIES
Convertible Preferred securities 6,900 6,900
STOCKHOLDERS' EQUITY
Preferred stock, par value $1 per share, 500,000
shares authorized, none issued 0 0
Common stock, par value $1.25 per share,
4,000,000 shares authorized, 1,501,727
issued and outstanding 1,877 1,877
Additional paid-in capital 5,725 5,725
Accumulated other comprehensive income (679) 89
Retained earnings 5,136 4,863
---------- ----------
Total stockholders' equity 12,059 12,554
---------- ----------
Total liabilities and stockholders' equity $235,548 $217,020
========== ==========
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
(unaudited)
Interest income
Loans $3,328 $2,154
Investment Securities 578 354
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Total interest income 3,906 2,508
--------- ---------
Interest expense
Deposits 2,015 1,430
Borrowings 511 74
--------- ---------
Total interest expense 2,526 1,504
--------- ---------
Net interest income 1,380 1,004
Provision for loan losses 60 42
--------- ---------
Net interest income after provision
for loan losses 1,320 962
Other income
Loan fees and servicing income 88 96
Gain on sale of loans and securities 494 395
Service fees on checking 125 65
Other 87 57
--------- ---------
Total other income 794 613
--------- ---------
Other expenses
Personnel 936 481
Occupancy 215 249
Data processing 165 113
Deposit insurance premiums 3 11
Other 382 319
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Total other expenses 1,701 1,173
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Income (loss) before income taxes 413 402
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Provision (loss) for income taxes 140 153
--------- ---------
Net income (loss) $273 $249
========= =========
Basic and diluted earnings per common share $0.18 $0.17
========= =========
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Three Months Ended
March 31,
-----------------------------
1999 1998
------------ ------------
(unaudited)
Net Income $ 273 $ 249
Other comprehensive income, net of tax effect:
Unrealized gains (loss) on securities available for sale (768) (168)
------------ ------------
Comprehensive Income (loss) $(495) $ 81
============ ============
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
(unaudited)
Operating Activities
Net Income $273 $249
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 60 42
Depreciation and amortization 140 110
Amortization of deferred loan fees (31) 27
Net amortization of premiums and accretion of discounts 418 96
Loss (gain) on sale of loans (180) (233)
Originations of loans held for sale (18,217) (13,420)
Proceeds from sale of loans 18,397 13,653
Loss (gain) on sale of securities available for sale (89) (188)
(Gain) loss on trading securities 22 (23)
Purchase of trading securities (10,057) (28,405)
Sales of trading securities 7,345 29,460
Changes in:
Accrued interest receivable (88) (36)
Other assets (294) (263)
Accrued interest payable 124 (3)
Prepayments by borrowers for taxes and insurance 1,095 160
Other liabilities 469 2,503
------------ ------------
Net cash provided (absorbed) by operating activities (613) 3,729
------------ ------------
Investing activities
Net (increase) decrease in loans (13,756) 501
Mortgage-backed securities principal repayments 372 91
Proceeds from sale of securities available for sale 5,073 17,507
Purchase of securities available for sale (6,000) (19,133)
Redemption of FHLB stock 0 0
Purchases of office property, plant and equipment (1,056) (479)
------------ ------------
Net cash absorbed by investing activities (15,367) (1,513)
------------ ------------
6
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
(unaudited)
Financing activities
Net increase (decrease) in deposits 15,359 10,632
Repayment of FHLB advances 0 0
Increase (Decrease) in securities sold under agreement to repurchase 1,932 (2,989)
Proceeds from the issuance of common stock, net 0 0
Dividends paid 0 (46)
Principal payments on bonds payable, including unapplied payments (25) (147)
----------- ------------
Net cash provided by financing activities 17,266 7,450
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Increase (decrease) in cash and cash equivalents 1,286 9,666
----------- ------------
Cash and cash equivalents, beginning of period 10,527 5,917
----------- ------------
Cash and cash equivalents, end of period $ 11,813 $ 15,583
=========== ============
7
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months ended March 31, 1999 and 1998
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 Capital Trust I and Guaranty Bank (the "Bank"), and the
Bank's wholly-owned subsidiaries, 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, 1999 and the results of operations and cash flows for the interim
periods ending March 31, 1999 and 1998. All 1999 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.
8
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 in Henrico County in the Wellesley
development is expected to occur in early summer 1999. This office is our first
entry into the west Richmond market and will be large enough to accommodate a
regional loan group along with the retail operation.
A site has been obtained in the Forest Lakes development in Northern Albemarle
County for a full-service branch office. Regulatory approval has been granted
and a fall 1999 opening is anticipated.
Changes in Financial Condition
Total assets increased $18.5 million, or 8.5%, from $217.0 million at December
31, 1998 to $235.5 million at March 31, 1999 primarily as a result of growth in
the loan portfolio. Cash and cash equivalents increased $1.3 million, or 12.2%,
to $11.8 million at March 31, 1999 from $10.5 million at December 31, 1998.
Investment securities, at March 31, 1999, increased $2.1 million, or 7.1%, to
$32.4 million from $30.2 million at December 31, 1998. This change resulted from
of a net increase of $566 thousand in investment grade corporate bonds
classified as available for sale offset by principal payments received of $372
thousand on mortgage-backed securities classified as held to maturity, and a net
increase of $1.9 million in the trading account.
Net loans were $175.9 million at March 31, 1999, an increase of $13.5 million,
or 8.3%, from net loans of $162.4 million at December 31, 1998. During the first
quarter of 1999, 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 increase in the loan portfolio was
primarily related to new commercial loan business and increased construction and
land development loans.
At March 31, 1999, loans held for sale were approximately $3.7 million.
Other real estate owned of $366 thousand at March 31, 1999 related to two
single-family residential properties. Net proceeds from the sales of these
properties are anticipated to approximate the carrying value at March 31, 1999.
No material losses are anticipated.
Deposits increased by $15.4 million, or 8.9%, between December 31, 1998 and
March 31, 1999. This growth was comprised of a $9.6 million increase in NOW/MMDA
accounts, a $929 thousand increase in savings accounts and a $4.8 million
increase in certificates of deposit. Management plans to continue its marketing
efforts aimed at corporate customers as well as individual checking, savings and
money market accounts to attract lower cost funds and reduce reliance on
certificates of deposit as a primary funding source. However, no assurances can
be given that these strategies will be successful, or if successful, will reduce
the Bank's reliance on certificates of deposit as a primary funding source.
Office properties and equipment increased $916 thousand since December 31, 1998
due to purchases of land for two branch sites, Wellesley in Henrico County,
Virginia and Forest Lakes in Albemarle County, Virginia.
9
At March 31, 1999, $21.0 million in advances were borrowed from the Federal Home
Loan Bank. These advances are comprised entirely of daily rate credits which
reprice based on previous days Fed Funds rate.
Results of Operations
Net Income
Guaranty reported net income of $273 thousand and $249 thousand for the three
month periods ended March 31, 1999 and 1998, 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.
Net Interest Income
Net interest income increased by $376 thousand, or 37.5%, to $1.4 million for
the three months ended March 31, 1999, compared to $1.0 million for the same
period in 1998. Average earning assets increased to $211.0 million for the three
months ended March 31, 1999, compared to an average balance of $124.0 million
for the same period in 1998. The average rate earned was 7.82% for the three
months ended March 31, 1999 compared to 8.20% for the same period of 1998.
Interest rate spread and net interest margin for the three month periods ending
March 31, 1999 and 1998 were 2.80% and 2.98%, and 3.05% and 3.28%, 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 $60 thousand for the
three months ended March 31, 1999 compared with a provision of $42 thousand for
the same period in 1998. As of March 31, 1999, the total allowance for loan
losses was $1.0 million.
Non-Interest Income
Non-interest income was $794 thousand for the first quarter of 1999 compared to
$613 thousand for the same period in 1998. This increase was primarily due to
gains on loan sales and increases in service fees on deposit accounts.
Non-Interest Expense
Non-interest expense increased $528 thousand, or 45.0%, to $1.7 million for the
three months ended March 31, 1999 compared to $1.2 million for the same period
in 1998. This increase was primarily due to the overall growth of the bank and
the resulting increase in personnel costs.
Income Tax Expense
Guaranty recognized income tax expense of $140 thousand for the three months
ended March 31, 1999, compared to $153 thousand for the same period in 1998.
This change in tax expense between periods is primarily a result of a
reallocation of state income taxes to state franchise taxes.
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.
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,
1999, the total approved loan commitments outstanding amounted to $10.0 million.
At the same date, commitments under unused lines of credit amounted to $42.4
million. Certificates of deposit scheduled to mature in one year or less at
March 31, 1999 totaled $98.4 million. Management believes that a significant
portion of maturing deposits will remain with Guaranty.
The Corporation and the Bank are subject to Federal Reserve regulations,
including the Bank Holding Company Act. At March 31, 1999, the Corporation
exceeded all applicable regulatory capital requirements as shown in the
following table.
Tier 1 Risk-based 6.50%
Total Risk-based 7.05%
Tier 1 Capital to average adjusted total assets 9.78%
Year 2000 Project
The Year 2000 ("Y2K") issue relates to whether computer systems will properly
recognize and process date sensitive information on and after January 1, 2000.
Systems that do not properly recognize such information could generate erroneous
data or fail. The Bank is heavily dependent on computer systems in the conduct
of substantially all of its business activities.
The Corporation has both a Y2K Committee and a Y2K Plan that were established
and adopted in 1998. The Plan, as recommended by the Federal Financial
Institutions Examination Council, is based on five phases: Awareness,
Assessment, Renovation, Validation and Implementation. The Corporation continues
in the Validation phase, or testing phase, which was scheduled for completion by
April 1999. As of this report date, all testing has not been completed. The
process is ongoing and should be completed in the third quarter. In the event
that any of its mission critical computer systems fail to meet the Y2K
requirements, or if other systems that the Bank depends upon for automated
processing of ongoing transactions, such as electrical or data transmission,
fail, the Bank is required by Federal regulators to develop and test a
comprehensive contingency plan. The contingency plan is currently being
developed and should be completed by September 1999.
Successful and timely completion of the Y2K project is based on management's
best estimates derived from various assumptions of future events, which are
inherently uncertain, including the testing of results of the core processing
system maintained by a third party service bureau, and readiness of all vendors,
suppliers and customers. No assurance can be given that the Plan will be
successfully completed by the Year 2000, in which case the Corporation could
incur data processing delays, mistakes or failures. These delays, mistakes or
failures could have a significant adverse impact on the financial statements of
the Corporation.
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 11, 1999 By: /s/ Thomas P. Baker
---------------------------
Thomas P. Baker
President, CEO and Director
By: /s/ L. Ben Johnson
---------------------------
L. Ben Johnson
Vice President & Controller