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
September 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 November 23, 1998, 1,501,383 shares were outstanding.
<PAGE>
GUARANTY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
<S> <C>
Item 1 Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 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
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $16,464 $5,917
Investment securities
Held-to-maturity 2,168 2,846
Available for sale 9,700 11,524
Trading 0 1,032
Investment in FHLB stock at cost 1,040 860
Other investments 79 79
Loans receivable, net 132,101 99,675
Accrued interest receivable 1,231 844
Real estate owned 332 65
Office properties and equipment, net 6,703 5,999
Other assets 3,525 1,867
------------- ------------
Total assets $173,343 $130,708
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
NOW/MMDA accounts $42,507 $16,037
Savings accounts 9,278 6,434
Certificates of deposit 90,450 90,476
------------- ------------
142,235 112,947
Bonds payable 1,985 2,360
Convertible trust preferred securities, net 6,383 -
Advances from Federal Home Loan Bank 9,000 -
Securities sold under agreement to repurchase - 2,989
Accrued interest payable 80 58
Payments by borrowers for taxes and insurance 205 80
Other liabilities 1,198 414
------------- ------------
Total liabilities 161,086 118,848
------------- ------------
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
available for sale (27) 51
Retained earnings 4,682 4,207
------------- ------------
Total stockholders' equity 12,257 11,860
------------- ------------
Total liabilities and stockholders' equity $173,343 $130,708
============= ============
</TABLE>
3
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GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans $3,028 $1,950 $7,717 $5,472
Mortgage-backed securities 49 133 160 927
Other securities 429 368 1,116 611
---------- ---------- ---------- ----------
Total interest income 3,506 2,451 8,993 7,010
---------- ---------- ---------- ----------
Interest expense
Deposits 1,569 1,320 4,465 3,541
Borrowings 496 260 857 984
---------- ---------- ---------- ----------
Total interest expense 2,065 1,580 5,322 4,525
---------- ---------- ---------- ----------
Net interest income 1,441 871 3,671 2,485
Provision for loan losses 49 30 136 76
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 1,392 841 3,535 2,409
Other income
Loan fees and servicing income 86 92 279 319
Gain (loss) on sale of loans and securities 483 395 984 471
Gain on sale of purchased servicing - - - 117
Service fees on checking 102 39 265 160
Other 59 53 158 138
---------- ---------- ---------- ----------
Total other income 730 579 1,686 1,205
---------- ---------- ---------- ----------
Other expenses
Personnel 883 424 1,954 1,219
Occupancy 279 212 765 555
Data processing 153 108 379 275
Deposit insurance premiums - 30 11 86
Other 292 239 905 559
---------- ---------- ---------- ----------
Total other expenses 1,607 1,013 4,014 2,694
---------- ---------- ---------- ----------
Income before income taxes 515 407 1,207 920
---------- ---------- ---------- ----------
Provision for income taxes 201 141 462 324
---------- ---------- ---------- ----------
Net income $ 314 $ 266 $ 745 $ 596
========== ========== ========== ==========
Basic and diluted earnings per common share $ 0.21 $ 0.18 $ 0.50 $ 0.41
========== ========== ========== ==========
</TABLE>
4
<PAGE>
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Operating Activities
Net Income $ 745 $ 596
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 136 76
Depreciation and amortization 371 248
Gain on sale of purchased servicing - (117)
Proceeds from the sale of purchased servicing, net - 374
Amortization of deferred loan fees 139 69
Net amortization of premiums and accretion of discounts (45) 87
Loss (gain) on sale of loans (996) (182)
Originations of loans held for sale (49,952) (8,085)
Proceeds from sale of loans 50,037 8,267
Loss (gain) on sale of securities available for sale (313) (310)
(Gain) loss on trading securities 323 9
Purchase of trading securities (77,440) (42,259)
Sales of trading securities 78,149 42,250
(Gain) loss on sale of real estate owned - 2
Other, net 574 764
Changes in:
Accrued interest receivable (387) (243)
Other assets (1,925) 342
Accrued interest payable 22 4
Prepayments by borrowers for taxes and insurance 125 172
Other liabilities 784 785
------------ ------------
Net cash provided (absorbed) by operating activities 347 2,849
------------ ------------
Investing activities
Net (increase) decrease in loans (32,599) (15,185)
Mortgage-backed securities principal repayments 743 1,039
Proceeds from sale of securities available for sale 47,421 37,165
Purchase of securities available for sale (45,284) (34,921)
Purchase of FRB stock - (72)
Redemption (purchase) of FHLB stock (180) 485
Purchases of office properties and equipment (1,050) (1,258)
------------ ------------
Net cash provided (absorbed) by investing activities (30,949) (12,747)
------------ ------------
5
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GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Financing activities
Net increase (decrease) in deposits 29,288 26,721
Proceeds from FHLB advances 39,000 3,500
Repayment of FHLB advances (30,000) (15,500)
Increase (decrease) in securities sold under agreement to repurchase (2,989) (6,681)
Proceeds from the issuance of common stock, net - 4,472
Proceeds from the issuance convertible preferred securities, net 6,400 -
Dividends paid on common stock (90) -
Principal payments on bonds payable, including unapplied payments (460) (275)
------------ ------------
Net cash provided (absorbed) by financing activities 41,149 12,237
------------ ------------
Increase (decrease) in cash and cash equivalents 10,547 2,339
Cash and cash equivalents, beginning of period 5,917 6,076
------------ ------------
Cash and cash equivalents, end of period $ 16,464 $ 8,415
============ ============
</TABLE>
6
<PAGE>
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months ended September 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
September 30, 1998 and December 31, 1997 and the results of operations and cash
flows for the interim periods ending September 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 November 1998, a seventh full-service branch was opened at the Lake
Monticello development in Fluvanna County, Virginia. Subject to regulatory
approval, the Bank plans to open an eighth full-service branch, the first in the
Richmond, Virginia metropolitan area, near the Wellesley development in Western
Henrico County in June 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 $42.6
million, or 32.6%, from $130.7 million at December 31, 1997 to $173.3 million at
September 30, 1998. These proceeds were primarily invested in loans and
short-term interest earning deposit accounts.
Cash and cash equivalents increased $10.5 million, or 178.3%, to $16.5 million
at September 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
the sale of corporate bonds classified as available for sale, 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 September 30, 1998, decreased $3.8 million, or 22.9%,
to $11.87 million from $15.4 million at December 31, 1997. This decrease was
primarily a result of the sale of $1.8 million in investment-grade corporate
bonds, a decrease of $1.0 million in treasury notes classified as trading and
principal payments received on mortgage-backed securities of approximately $700
thousand. At the dates indicated, the investment portfolio is comprised of the
following:
September 30, December 31,
1998 1997
------------- ------------
Mortgage-backed securities
classified as held-to-maturity $ 2,168 $ 2,846
Corporate bonds classified
as available-for-sale 9,700 11,524
US Treasury Notes classified
as trading - 1,032
------------- ------------
$11,868 $15,402
============= ============
8
<PAGE>
Net loans were $132.1 million at September 30, 1998, an increase of $32.4
million, or 32.5%, 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 $39.0
million at September 30, 1998, from $11.6 million at December 31, 1997. In
addition, during the first nine months of 1998, loans with a carrying value of
approximately $49.9 million were sold at a net gain of approximately $1.0
million. At September 30, 1998, loans held for sale were approximately $3.0
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. At
September 30, 1998, real estate owned was comprised of one single-family
residential property located in western Albemarle. No material losses are
anticipated on the ultimate sale of this property.
Deposits were $142.2 million at September 30, 1998, an increase of $29.3
million, or 25.9%, 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
$26.5 million, or 44.2%. 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
remainder of 1998 and the first quarter of 1999. During the third quarter of
1998, the Bank added sweep accounts designed to be competitive with larger
regional banks operating in Guaranty's primary market. 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 $704 thousand since December 31, 1997.
This increase was primarily due to capital expenditure relating to improvements
at Corporate headquarters, leasehold improvements at the West Main Street branch
prior to opening in late June 1998 and construction costs relating to the Lake
Monticello branch which opened in November 1998.
At September 30, 1998, $9.0 million in advances was borrowed from the FHLB.
These advances are comprised entirely of daily rate credits which reprice based
on the previous days Fed Fund rate.
Results of Operations
Net Income
Guaranty reported net income of $314 thousand and $266 thousand for the three
month periods ended September 30, 1998 and 1997, respectively, and $745 thousand
and $596 thousand for the nine month periods ended September 30, 1998 and 1997,
respectively. These increases were 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 expansion of the retail network, residential
lending division, commercial loan department and back-office personnel.
Net Interest Income
Net interest income was $1.4 million for the quarter ended September 30, 1998,
up 65.4% from the $871 thousand earned during the same period in 1997. For the
first nine months of 1998, net
9
<PAGE>
interest income was $3.7 million, a 47.7% increase over the first nine months of
1997. Net interest margin increased 58 basis points to 3.41% for the first nine
months of 1998 from 2.83% during the same period in 1997. These improvements are
primarily a result of growth and improved yields on loans and reduced costs of
deposits. The impact of these improvements were partially offset by the interest
costs of a $6.9 million convertible preferred security offering that closed on
May 5, 1998. For the nine months ended September 30, 1998, the average balance
and average yield on loans was $115.7 million and 8.92%, respectively, compared
to $86.2 million and 8.46% 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 approximately $39 million at
September 30, 1998, from approximately $5 million at September 30, 1997. Also,
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. Management anticipates that this group will
generate significant commercial loans and business deposits which will benefit
net interest income, net interest margin and loan portfolio diversification.
The average balance of interest bearing deposits increased to $122.1 million for
the first nine months of 1998 from $93.4 million for the same period in 1997.
However, the corresponding average rate paid on these deposits decreased 16
basis points to 4.89% from 5.05% during the same periods. In addition, the
average balance of non-interest bearing deposits increased to $4.4 million
during the nine months ending September 30, 1998, from $1.6 million during the
same period in 1997.
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 $49 thousand for the
nine months ended September 30 1998, and a provision of $30 thousand for the
same period in 1997. For the nine-month periods ended September 30, 1998 and
1997, Guaranty recorded a provision of $136 thousand and $76 thousand,
respectively. As of September 30 1998 the total allowance for loan losses was
$957 thousand.
Non-Interest Income
Non-interest income was $730 thousand for the third quarter 1998 compared to
$579 thousand for the same period in 1997. For the nine months ending September
30, 1998, non-interest income was $1.7 million, up $481 thousand from the $1.2
million reported during the same period in 1997. This increase was primarily a
result of net gains on the sale of loans and securities of $984 thousand during
the first nine months of 1998, compared to $471 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 servicing located outside the Corporation's primary
market.
Non-Interest Expense
Operating expenses during the third quarter of 1998 were $1.6 million, a $594
thousand increase over those incurred during the third quarter of 1997. For the
nine months ending September 30, 1998, operating expenses were $4.0 million
compared to $2.7 million during the same period in 1997. These increases are
primarily attributable to the increased size of the Bank and expansion of the
residential and commercial lending divisions.
10
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Income Tax Expense
Guaranty recognized income tax expense of $201 thousand for the three months
ended September 30, 1998, compared to $141 thousand for the same period in 1997.
Guaranty recognized income tax expense of $462 thousand for the nine months
ended September 30, 1998, compared to $324 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.
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 September
30, 1998, total approved loan commitments outstanding were approximately $17.7
million. At the same date, commitments under unused lines of credit were
approximately $40.8 million. Certificates of deposit scheduled to mature in one
year or less at September 30, 1998 were $54.7 million. Management believes that
a significant portion of maturing deposits will remain with Guaranty.
At September 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 risk based 8.22%
Total risk based 8.71%
Tier 1 to average adjusted total assets 10.48%
Year 2000 Project
The Year 2000 presents problems for businesses that are dependent on computer
hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology was developed
utilizing two digit years rather than four digit years (example: 97 instead of
1997). Technology utilizing two digit years most likely will not be able
11
<PAGE>
to distinguish the year 2000 from 1900, and therefore may shut down or perform
miscalculations and comparisons as much as 100 years off.
Guaranty, in conjunction with its outside service bureau, has developed a plan
to address Year 2000 exposure surrounding Guaranty's computer and data
processing systems. Since early 1997, Guaranty has been updating its systems
hardware to be Year 2000 compliant. The next step involves testing system
software, half of such testing was completed as of September 30, 1998, and it is
estimated that the process will cost approximately $25,000 to complete. In
conjunction with this testing, Guaranty plans to test its other systems that are
not related to the service bureau. Management anticipates Guaranty will be Year
2000 compliant, thus satisfying all regulatory requirements.
12
<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
Not Applicable
Item 5 Other Information
Not Applicable
Item 6 Exhibits and Reports on 8-K
Not Applicable
13
<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: November 23, 1998 By: /s/ Thomas P. Baker
------------------------------------
Thomas P. Baker
President and Chief Executive Officer
Date: November 23, 1998 By: /s/ Vincent B. McNelley
------------------------------------
Vincent B. McNelley
Senior Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,341
<INT-BEARING-DEPOSITS> 10,625
<FED-FUNDS-SOLD> 498
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,719
<INVESTMENTS-CARRYING> 2,269
<INVESTMENTS-MARKET> 2,274
<LOANS> 133,058
<ALLOWANCE> 957
<TOTAL-ASSETS> 173,343
<DEPOSITS> 142,235
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 1,483
<LONG-TERM> 6,383
0
0
<COMMON> 1,877
<OTHER-SE> 10,380
<TOTAL-LIABILITIES-AND-EQUITY> 173,343
<INTEREST-LOAN> 7,717
<INTEREST-INVEST> 1,276
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,993
<INTEREST-DEPOSIT> 4,465
<INTEREST-EXPENSE> 5,322
<INTEREST-INCOME-NET> 3,671
<LOAN-LOSSES> 136
<SECURITIES-GAINS> 984
<EXPENSE-OTHER> 4,014
<INCOME-PRETAX> 1,207
<INCOME-PRE-EXTRAORDINARY> 1,207
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 745
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 8.34
<LOANS-NON> 620
<LOANS-PAST> 113
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 934
<CHARGE-OFFS> 232
<RECOVERIES> 119
<ALLOWANCE-CLOSE> 957
<ALLOWANCE-DOMESTIC> 855
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 102
</TABLE>
