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
June 30, 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 ___ (not subject to filing requirements for the
past 90 day days).
As of August 11, 1998, 1,501,383 shares were outstanding.
<PAGE>
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, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 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-
<PAGE>
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $8,185 $5,917
Investment securities
Held-to-maturity 2,327 2,846
Available for sale 16,449 11,524
Trading 1,991 1,032
Investment in FHLB stock at cost 860 860
Other investments 79 79
Loans receivable, net 122,137 99,675
Accrued interest receivable 1,394 844
Real estate owned - 65
Office properties and equipment, net 6,437 5,999
Other assets 2,437 1,867
---------- ----------
Total assets $162,296 $130,708
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $28,430 $16,037
Savings accounts 8,480 6,434
Certificates of deposit 91,158 90,476
---------- ----------
128,068 112,947
Bonds payable 2,290 2,360
Convertible trust preferred securities, net 6,367 -
Advances from Federal Home Loan Bank 10,000 -
Securities sold under agreement to repurchase 1,990 2,989
Accrued interest payable 133 58
Payments by borrowers for taxes and insurance 54 80
Other liabilities 1,229 414
---------- ----------
Total liabilities 150,131 118,848
---------- ----------
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
avaiable for sale (29) 51
Retained earnings 4,592 4,207
---------- ----------
Total stockholders' equity 12,165 11,860
---------- ----------
Total liabilities and stockholders' equity $162,296 $130,708
========== ==========
</TABLE>
3
<PAGE>
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
--------- ---------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans $ 2,511 $ 1,809 $ 4,666 $ 3,523
Mortgage-backed securities 55 458 112 807
Investment securities 390 107 686 230
-------- --------- -------- --------
Total interest income 2,956 2,374 5,464 4,560
-------- --------- -------- --------
Interest expense
Deposits 1,466 1,175 2,896 2,222
Borrowings 287 362 361 723
-------- --------- -------- --------
Total interest expense 1,753 1,537 3,257 2,945
-------- --------- -------- --------
Net interest income 1,203 837 2,207 1,615
Provision for loan losses 44 46 87 46
-------- --------- -------- --------
Net interest income after provision
for loan losses 1,159 791 2,120 1,569
Other income
Loan fees and servicing income 97 128 194 288
Gain (loss) on sale of loans and securities 129 72 524 76
Gain on sale of purchased servicing - 117 - 117
Service fees on checking 98 36 163 62
Other 51 46 99 82
-------- --------- -------- --------
Total other income 375 399 980 625
-------- --------- -------- --------
Other expenses
Personnel 591 421 1,071 783
Occupancy 236 122 485 235
Data processing 114 86 227 180
Deposit insurance premiums 11 28 11 56
Other 293 229 616 426
-------- --------- -------- --------
Total other expenses 1,245 886 2,410 1,680
-------- --------- -------- --------
Income before income taxes 289 304 690 514
-------- --------- -------- --------
Provision for income taxes 105 106 261 183
-------- --------- -------- --------
Net income $ 184 $ 198 $ 429 $ 331
======== ========= ======== ========
Earnings per common share $0.12 $0.13 $0.30 $0.24
========= ========= ======== ========
</TABLE>
4
<PAGE>
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Operating Activities
Net Income $ 429 $ 331
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 87 46
Depreciation and amortization 223 151
Amortization of deferred loan fees 88 56
Net amortization of premiums and accretion of discounts 35 11
Loss (gain) on sale of loans (514) (46)
Originations of loans held for sale 26,662 (4,570)
Proceeds from sale of loans (25,986) 4,778
Loss (gain) on sale of securities available for sale (113) (64)
(Gain) loss on trading securities 126 34
Purchase of trading securities (42,381) (26,102)
Sales of trading securities 41,296 26,086
(Gain) loss on sale of real estate owned - 1
Other, net (226) -
Changes in:
Accrued interest receivable (550) (92)
Other assets (505) (214)
Accrued interest payable 75 (3)
Prepayments by borrowers for taxes and insurance (26) (30)
Other liabilities 815 816
----------- -----------
Net cash provided (absorbed) by operating activities (465) 1,189
----------- -----------
Investing activities
Net (increase) decrease in loans (22,637) (6,870)
Mortgage-backed securities principal repayments 500 718
Proceeds from sale of securities available for sale 25,552 15,270
Purchase of securities available for sale (30,364) (15,791)
Redemption of FHLB stock - 485
Purchases of office properties and equipment (661) (1,107)
----------- -----------
Net cash provided (absorbed) by investing activities (27,610) (7,295)
----------- -----------
</TABLE>
5
<PAGE>
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
<TABLE>
<CAPTION>
<S> <C> <C>
Financing activities
Net increase (decrease) in deposits 15,121 17,721
Repayment of FHLB advances 10,000 (2,500)
Increase (decrease) in securities sold under agreement to repurchase (999) (6,681)
Proceeds from the issuance of common stock, net - 4,472
Proceeds from the issuance covertible preferred securities, net 6,400 -
Dividends paid on common stock (45) -
Principal payments on bonds payable, including unapplied payments (134) (123)
----------- -----------
Net cash provided (absorbed) by financing activities 30,343 12,889
----------- -----------
Increase (decrease) in cash and cash equivalents 2,268 6,783
----------- ------------
Cash and cash equivalents, beginning of period 5,917 6,076
----------- -----------
Cash and cash equivalents, end of period $ 8,185 $ 12,859
=========== ===========
</TABLE>
6
<PAGE>
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months ended June 30, 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, Guaranty Investments Corp., which was organized to sell
insurance annuities and other non-traditional products, and Guaranty Capital
Trust I, which was formed to issue convertible preferred securities. 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
June 30, 1998 and December 31, 1997 and the results of operations and cash flows
for the interim periods ending June 30, 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.
7
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Expansion of Existing Branch Network
In June 1998, a sixth full-service banking office was opened on West Main Street
in Charlottesville, Virginia. A seventh full-service branch located at the Lake
Monticello development in Fluvanna County, Virginia is scheduled to open in
September 1998. Subject to regulatory approval, the Bank plans to open an eighth
full-service branch, the first in the Richmond metropolitan area, near the
Wellesley development in Western Henrico County in early 1999.
Expansion of the Commercial Lending Division
In June 1998, the Bank hired three commercial loan officers and one commercial
loan administrator from a recently acquired statewide bank that was
headquartered in Charlottesville, Virginia. Management anticipates, although no
assurances can be given, that this group will generate significant commercial
loans and business deposits which will benefit net interest income, net interest
margin and loan portfolio diversification.
Changes in Financial Condition
Deposit growth, proceeds from Federal Home Loan Bank (the "FHLB") advances and
net proceeds from completion of a convertible preferred securities offering in
May 1998 enabled Guaranty to increase assets. Total assets increased by $31.6
million, or 24.2%, from $130.7 million at December 31, 1997 to $162.3 million at
June 30, 1998. These proceeds were primarily invested in loans, investment-grade
corporate bonds and short-term interest earning deposit accounts.
Cash and cash equivalents increased $2.3 million, or 38.3%, to $8.2 million at
June 30, 1998 from $5.9 million at December 31, 1997. This increase in cash was
primarily due to the combination of increased deposits, proceeds from FHLB
advances, proceeds from loan sales, and the completion of a convertible
preferred securities offering in May 1998. Proceeds to the Corporation from the
offering (net of offering expenses of approximately $500,000) were approximately
$6.4 million.
Investment securities, at June 30, 1998, increased $5.4 million, or 34.9%, to
$20.8 million from $15.4 million at December 31, 1997. This increase was
primarily a result of the purchase of $4.9 million in investment-grade corporate
bonds and an increase of $1.0 million in treasury notes classified as trading
which were offset by principal payments received on mortgage-backed securities
of approximately $500 thousand. At the dates indicated, the investment portfolio
is comprised of the following:
June 30, December
1998 31, 1997
------------- -------------
Mortgage-backed securities
classified as held-to-maturity $ 2,327 $ 2,846
Corporate bonds classified
as available-for-sale 16,449 11,524
US Treasury Notes classified
as trading 1,991 1,032
------------- -------------
$ 20,767 $ 15,402
============= =============
8
<PAGE>
Net loans were $122.1 million at June 30, 1998, an increase of $22.5 million, or
22.5%, from net loans of $99.6 million at December 31, 1997. This increase was
primarily related to prime based residential construction loans, including
builder lines of credit originated by an experienced construction loan officer
hired in December 1997, located in the Bank's primary market of Central
Virginia. Balances outstanding relating to these loans increased to $35.2
million at June 30, 1998, from $11.6 million at December 31, 1997. In addition,
during the first six months of 1998, loans with a carrying value of
approximately $26.5 million were sold at a net gain of approximately $514
thousand. At June 30, 1998, loans held for sale were approximately $2.4 million.
Real estate owned of $65 thousand at December 31, 1997 was sold during the
second quarter of 1998. No unreserved losses were recognized on this sale. No
real estate owned was held at June 30, 1998.
Deposits were $128.1 million at June 30, 1998, an increase of $15.1 million, or
13.4%, from total deposits of $113.0 million at December 31, 1997. The majority
of this growth was in lower cost NOW/MMDA accounts, which increased $12.4
million, or 77.3%. This growth, comprised solely of local funds, is a reflection
of the combined effect of expanded marketing efforts to attract lower cost
demand deposits and the impact of recent bank consolidations on Guaranty's
primary market. As a result of the Bank's increased focus on commercial lending
and the attraction of business accounts, management plans to expand the current
product mix and marketing efforts aimed at corporate customers during the second
half of 1998. It is anticipated that sweep accounts, designed to be competitive
with larger regional banks operating in Guaranty's primary market, will be
operational in September 1998. Consequently, management anticipates a continued
reduction in the Bank's historical reliance on certificates of deposit as a
primary funding source during the remainder of 1998 and 1999. 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 $438 thousand since December 31, 1997.
This increase was primarily due to capital expenditure relating to improvements
at Corporate headquarters and leasehold improvements at the West Main Street
branch prior to opening in late June 1998.
In May 1998, $10 million was borrowed from the FHLB on a short-term basis. This
advance matures in August 1998.
Results of Operations
Net Income
Guaranty reported net income of $184 thousand and $198 thousand for the three
month periods ended June 30, 1998 and 1997, respectively, and $429 thousand and
$331 thousand for the six month periods ended June 30, 1998 and 1997,
respectively. The change in the second quarter was primarily a result of
improved net interest margin which was offset by increased operating costs
associated with the Harrisonburg branch which opened in May 1997 and the West
Main Street branch in Charlottesville which opened in June 1998. The increase in
earnings during the six month period ending June 30, 1998 compared to the same
period in 1997 was primarily a result of increased net interest income and gains
on the sale of loans and securities which were partially offset by additional
costs relating to the opening of the Harrisonburg and West Main Street branches.
Net Interest Income
Net interest income increased by $366 thousand, or 43.7%, to $1.2 million for
the three months
9
<PAGE>
ended June 30, 1998, compared to $837 thousand for the same period in 1997. Net
interest income increased by $592 thousand, or 36.7%, to $2.2 million for the
six months ended June 30, 1998 compared to $1.6 million in the same period in
1997. Net interest margin increased 49 basis points to 3.36% for the first six
months of 1998 from 2.87% during the same period in 1997. These improvements are
primarily a result of growth and improved yields on loans and reduced costs of
funds. For the six months ended June 30, 1998, the average balance and average
yield on loans was $106.8 million and 8.81%, respectively, compared to $85.3
million and 8.25% for the same period in 1997. Loan growth is primarily related
to prime based residential construction loans, including builder lines of
credit, located in the Bank's primary market of Central Virginia. Outstanding
balances relating to these loans increased to $35.2 million at June 30, 1998,
from $4.1 million at June 30, 1997. The average balance of interest bearing
liabilities increased to $126.1 million for the first six months of 1998 from
$109.4 million for the same period in 1997. However, the corresponding average
yield on interest bearing liabilities decreased 17 basis points to 5.21% from
5.38% during the same periods.
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 $44 thousand for the
three months ended June 30, 1998, and a provision of $46 thousand for the same
period in 1997. For the six month periods ended June 30, 1998 and 1997, Guaranty
recorded a provision of $87 thousand and $46 thousand, respectively. As of June
30 1998 the total allowance for loan losses was $873 thousand.
Non-Interest Income
Non-interest income was $375 thousand for the second quarter of 1998 compared to
$399 thousand for the same period in 1997. For the six months ending June 30,
1998, other income was $980 thousand, up $355 thousand from the $625 thousand
reported during the same period in 1997. This increase was primarily a result of
net gains on the sale of loans and securities of $524 thousand during the first
six months of 1998, compared to $76 thousand during the same period in 1997. In
addition, 1997 amounts were positively impacted by a one-time gain of $117
thousand on the sale of servicing located outside the Corporation's primary
market.
Non-Interest Expense
Non-interest expenses during the second quarter of 1998 were $1.2 million, a
$359 thousand increase over those incurred during the second quarter of 1997.
For the six months ending June 30, 1998, operating expenses were $2.4 million
compared to $1.7 million during the same period in 1997. These increases are
primarily attributable to the increased size of the Bank and include the costs
of opening the Harrisonburg and West Main Street branches.
Income Tax Expense
Guaranty recognized income tax expense of $105 thousand for the three months
ended June 30, 1998, compared to $106 thousand for the same period in 1997.
Guaranty recognized income tax expense of $261 thousand for the six months ended
June 30, 1998, compared to $183 thousand for the same period in 1997. Changes in
tax expense between periods are primarily a result of changes in the level of
taxable income.
10
<PAGE>
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 May 1998, the Corporation issued, through a public offering,
convertible-preferred securities with a par value of $6.9 million. Net proceeds
to the Corporation from the offering were approximately $6.4 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,
1998, total approved loan commitments outstanding were approximately $15.2
million. At the same date, commitments under unused lines of credit were
approximately $25.5 million. Certificates of deposit scheduled to mature in one
year or less at June 30, 1998 were $77.3 million. Management believes that a
significant portion of maturing deposits will remain with Guaranty.
At June 30, 1998, regulatory capital was in excess of amounts required by
Federal Reserve Regulations to be considered well capitalized as shown in the
following table:
Tier 1 Capital:
Common Stock 1,877
Capital Surplus 5,725
Retained Earnings 4,592
Qualifying portion of Convertible Preferred Securities 4,055
Unrealized Loss on available for sale securities (29)
-------------
Total Tier 1 Capital 16,220
-------------
Tier 2 Capital:
Allowance for loan losses 873
Allowance for long term debt -
-------------
Total Tier 2 Capital 873
-------------
Total Risk Based Capital 17,093
=============
Risk Weighted Assets 110,337
Capital Ratios:
Tier 1 Risk-based 14.70%
Total Risk-based 15.49%
Tier 1 Capital to average adjusted total assets 11.07%
11
<PAGE>
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
On May 21, 1998, the Company's Annual Meeting of Shareholders was held
to elect one director to serve on Guaranty's Board of Directors for a term of
one year, three directors for terms of two years each, and three directors for
terms of three years each and to consider and vote on a proposal to amend
Guaranty's 1991 Incentive Plan. The results of the votes on these matters are as
follows:
(1) Election of Directors
For Withheld
--- --------
For Term Expiring in 1999
-------------------------
John B. Syer 1,110,807 6,990
For Terms Expiring in 2000
--------------------------
Douglas E. Caton 1,109,407 8,390
John R. Metz 1,109,807 7,990
James R. Sipe, Jr. 1,110,807 6,990
For Terms Expiring in 2001
--------------------------
Henry J. Browne 1,109,407 8,390
Robert P. Englander 1,109,807 7,990
Oscar W. Smith, Jr. 1,109,407 8,390
(2) Approval of 1991 Incentive Plan, as amended
<TABLE>
<CAPTION>
Broker
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
712,932 56,500 -- 11,680 336,685
</TABLE>
Item 5 Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(filed electronically only)
(b) Reports on Form 8-K -- none.
12
<PAGE>
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, 1998 By: /s/ Thomas P. Baker
------------------------------------
Thomas P. Baker
President and Chief Executive Officer
Date: August 14, 1998 By: /s/ Vincent B. McNelley
------------------------------------
Vincent B. McNelley
Senior Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7771
<INT-BEARING-DEPOSITS> 1612
<FED-FUNDS-SOLD> 414
<TRADING-ASSETS> 1991
<INVESTMENTS-HELD-FOR-SALE> 16449
<INVESTMENTS-CARRYING> 2327
<INVESTMENTS-MARKET> 2426
<LOANS> 122137
<ALLOWANCE> 873
<TOTAL-ASSETS> 162296
<DEPOSITS> 128068
<SHORT-TERM> 10000
<LIABILITIES-OTHER> 3406
<LONG-TERM> 8657
0
0
<COMMON> 1877
<OTHER-SE> 10228
<TOTAL-LIABILITIES-AND-EQUITY> 162296
<INTEREST-LOAN> 4666
<INTEREST-INVEST> 798
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5464
<INTEREST-DEPOSIT> 2896
<INTEREST-EXPENSE> 3257
<INTEREST-INCOME-NET> 2207
<LOAN-LOSSES> 87
<SECURITIES-GAINS> (13)
<EXPENSE-OTHER> 2410
<INCOME-PRETAX> 690
<INCOME-PRE-EXTRAORDINARY> 429
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 429
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 8.31
<LOANS-NON> 976
<LOANS-PAST> 47
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 934
<CHARGE-OFFS> 148
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 873
<ALLOWANCE-DOMESTIC> 873
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
