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. 0-25905
March 31, 2001
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)
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 _____
As of May 1, 2001, 1,961,727 shares of Common Stock, par value $1.25
per share, were outstanding.
GUARANTY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
INDEX
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Part I. Financial Information Page No.
------------------------------ --------
Item 1 Financial Statements
Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2001 and
2000 (unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 2001
and 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2000 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
--------------------------
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
2
Part I. Financial Information
------------------------------
Item 1 Financial Statements
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($ In Thousands)
March 31 December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 16,213 $ 15,550
Investment securities
Held-to-maturity 1,165 1,200
Available for sale 26,555 17,931
Investment in FHLB stock 1,550 1,550
Loans receivable, net 194,706 201,617
Accrued interest receivable 2,086 2,079
Real estate owned 1,229 1,301
Office properties and equipment, net 9,959 9,877
Mortgage servicing rights 1,046 1,021
Other assets 1,756 1,897
------------ ------------
Total assets $ 256,265 $ 254,023
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
-----------
Deposits:
NOW/MMDA accounts $ 63,102 $ 59,465
Savings accounts 11,445 10,311
Certificates of deposit 151,405 146,952
------------ ------------
225,952 216,728
Bonds payable 764 792
Advances from Federal Home Loan Bank 6,000 14,000
Accrued interest payable 676 394
Payments by borrowers for taxes and insurance 683 264
Other liabilities 549 795
------------ ------------
Total liabilities 234,624 232,973
------------ ------------
COMMITMENTS & CONTINGENCIES
---------------------------
Convertible preferred securities 6,012 6,012
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, 1,961,727
issued and outstanding 2,452 2,452
Additional paid-in capital 8,953 8,953
Accumulated comprehensive loss (795) (1,218)
Retained earnings 5,019 4,851
------------ ------------
Total stockholders' equity 15,629 15,038
------------ ------------
Total liabilities and stockholders' equity $ 256,265 $ 254,023
============ ============
See accompanying notes to consolidated financial statements.
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended
March 31,
---------------------------
2001 2000
------------ ------------
(unaudited)
Interest income
Loans $ 4,598 $ 4,768
Investment securities 507 559
------------ ------------
Total interest income 5,105 5,327
------------ ------------
Interest expense
Deposits 2,593 2,362
Borrowings 336 657
------------ ------------
Total interest expense 2,929 3,019
------------ ------------
Net interest income 2,176 2,308
Provision for loan losses 150 130
------------ ------------
Net interest income after provision
for loan losses 2,026 2,178
Other income
Loan and deposit fees and servicing income 234 193
Gain (loss) on sale of loans and securities 175 (71)
Other 129 92
------------ ------------
Total other income 538 214
------------ ------------
Other expenses
Personnel 1,261 1,034
Occupancy 339 314
Data processing 254 255
Marketing 28 20
Deposit insurance premiums 26 59
Other 402 340
------------ ------------
Total other expenses 2,310 2,022
------------ ------------
Income before income taxes 254 370
------------ ------------
Provision for income taxes 86 126
------------ ------------
Net income $ 168 $ 244
============ ============
Basic and diluted earnings
per common share $ 0.09 $ 0.12
============ ============
See accompanying notes to consolidated financial statements.
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Three Months Ended
March 31,
---------------------------
2001 2000
------------ ------------
(unaudited)
Net Income $ 168 $ 244
------------ ------------
Other comprehensive income:
Unrealized gains on securities available for sale 641 197
Income tax expense related to items of other
comprehensive income (218) (67)
------------ ------------
Other comprehensive income, net of tax 423 130
------------ ------------
Comprehensive Income $ 591 $ 374
============ ============
See accompanying notes to consolidated financial statements
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
2001 2000
------------ ------------
(unaudited)
Operating Activities
Net Income $ 168 $ 244
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan and real estate owned losses 210 130
Depreciation and amortization 398 179
Deferred loan fees (24) (18)
Net amortization of premiums and accretion of discounts 7 (25)
Gain (loss) on sale of loans (326) 71
Originations of loans held for sale (15,333) (3,921)
Proceeds from sale of loans 15,659 3,850
Other (218) -
Changes in:
Accrued interest receivable (7) (276)
Other assets 141 1,761
Accrued interest payable 282 157
Prepayments by borrowers for taxes and insurance 419 48
Other liabilities (246) (627)
------------ ------------
Net cash provided by operating activities 1,130 1,573
------------ ------------
Investing activities
Net (increase) decrease in loans 6,812 (14,950)
Increase in originated mortgage servicing rights (230) -
Mortgage-backed securities principal repayments 35 46
Purchase of securities available for sale (8,000) -
Purchase of FHLB stock - (50)
Purchase of servicing rights - (47)
Purchase of other real estate - -
Purchase of office properties and equipment (275) (136)
------------ ------------
Net cash provided (absorbed) by investing activities (1,658) (15,137)
------------ ------------
Financing activities
Net increase in deposits 9,224 21,159
Proceeds from FHLB advances 15,000 11,000
Repayment of FHLB advances (23,000) (6,000)
Decrease in securities sold under agreement to repurchase - (12,162)
Repurchase of convertible preferred securities - (63)
Dividends paid on common stock - (117)
Principal payments on bonds payable, including unapplied payments (33) -
------------ ------------
Net cash provided (absorbed) by financing activities 1,191 13,817
------------ ------------
Increase in cash and cash equivalents 663 253
Cash and cash equivalents, beginning of period 15,550 12,634
------------ ------------
Cash and cash equivalents, end of period $ 16,213 $ 12,887
============ ============
See accompanying notes to consolidated financial statements
6
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended March 31, 2001 and 2000
Note 1 Principles of Presentation
The accompanying consolidated financial statements of Guaranty Financial
Corporation (the "Company") have not been audited by independent accountants,
except for the balance sheet at December 31, 2000. These financial statements
have been prepared in accordance with the regulations of the Securities and
Exchange Commission in regard to quarterly (interim) reporting. In the opinion
of management, the financial information presented reflects all adjustments,
comprised only of normal recurring accruals, that are necessary for a fair
presentation of the results for the interim periods. Significant accounting
policies and accounting principles have been consistently applied in both the
interim and annual consolidated financial statements. Certain notes and the
related information have been condensed or omitted from the interim financial
statements presented in this Quarterly Report on Form 10-QSB. Therefore, these
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2000. The results for the
three months ended March 31, 2001 are not necessarily indicative of future
financial results.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Guaranty Capital Trust I and Guaranty
Bank, and Guaranty 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 products.
All material intercompany accounts and transactions have been eliminated in
consolidation.
Amounts in the year 2000 financial statements have been reclassified to conform
to the year 2001 presentation. These reclassifications had no effect on
previously reported net income.
Note 2 Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Note 3 Earnings Per Share
Basic earnings per share is based on net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share shows the dilutive effect of additional common shares issuable under stock
option plans. The basic and diluted earnings per share for the three months
ended March 31, 2001 and 2000 have been determined by dividing net income by the
weighted average number of shares of common stock outstanding during these
periods, 1,961,727. All options outstanding were anti-dilutive for each period
presented and, therefore, not included in the diluted earnings per share
calculations.
7
Note 4 Loans
The loan portfolio is composed of the following:
March 31, December 31,
2001 2000
------------ ------------
(In thousands)
Commercial business loans $ 63,420 $ 62,976
Mortgage loans 53,972 59,613
Real estate loans 53,673 54,437
Consumer loans 26,153 26,987
------------ ------------
Total loans 197,218 204,013
Less allowance for loan loss (2,512) (2,396)
------------ ------------
$ 194,706 $ 201,617
============ ============
Note 5 Allowance for Loan Loss
The following is a summary of transactions in the allowance for loan loss:
March 31, December 31,
2001 2000
------------ ------------
(In thousands)
Balance at January 1 $ 2,396 $ 1,303
Provision charged to operating expense 150 1,505
Recoveries added to the reserve 0 23
Loans charged off (34) (435)
------------ ------------
Balance at the end of the period $ 2,512 $ 2,396
============ ============
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
Total assets increased by $2.3 million to $256.3 million at March 31, 2001 from
$254.0 million at December 31, 2000. Cash and cash equivalents increased
$663,000, or 4.3%, to $16.2 million at March 31, 2001 from $15.6 million at
December 31, 2000. This increase resulted primarily from an increase of $9.3
million in deposits and a decline of $6.9 million in loans that offset an $8.6
million increase in the investment portfolio.
Investment securities at March 31, 2001 increased $8.6 million to $29.3 million
from $20.7 million at December 31, 2000. At the dates indicated, the investment
portfolio was comprised of the following:
March 31, December 31,
2001 2000
------------ ------------
Held to maturity:
Mortgage-backed securities $ 915 $ 950
U.S. Government obligations 250 250
Available for sale:
Corporate Bonds 18,133 17,508
U.S. Government obligations 8,000 -
Other:
Federal Reserve Bank & other stocks 422 422
Federal Home Loan Bank stock 1,550 1,550
------------ ------------
$ 29,270 $ 20,680
------------ ------------
Net loans were $194.7 million at March 31, 2001, a decrease of $6.9 million from
net loans of $201.6 million at December 31, 2000. The decrease in the loan
portfolio was primarily related to a $6.1 million decrease in mortgage loans.
This decrease primarily represented loans sold to the Federal Home Loan Mortgage
Corporation in the normal course of business during the quarter. The allowance
for loan losses increased to $2.5 million or 1.27% of gross loans at March 31,
2001. All other components of the loan portfolio were substantially flat for the
quarter.
Real estate owned decreased to $1.2 million outstanding at March 31, 2001 from
$1.3 million at December 31, 2000 due to a $60,000 increase in the loss
allowance on a foreclosed commercial property. This property is under contract
for sale, which should close in the second quarter of 2001. Net proceeds to the
Company are expected to be approximately $600,000. The remainder of real estate
owned consists of developed lots located within a residential subdivision. Net
proceeds are anticipated to approximate the carrying value at March 31, 2001.
Deposits were $226.0 million at March 31, 2001, an increase of $9.3 million, or
4.3%, from total deposits of $216.7 million at December 31, 2000. The deposit
growth was primarily the result of a $4.5 million increase in certificates of
deposits and a $3.6 million increase in demand accounts. This increase was a
result of overall growth and increases at the Company's two newest branches,
Forest Lakes in northern Albemarle County and Lake Monticello in Fluvanna
County.
9
At March 31, 2001, $6.0 million was borrowed from the FHLB on a short-term
basis, representing an $8.0 million decrease from the balance outstanding at
December 31, 2000. Increases in the Company's deposits allowed the Company to
decrease its borrowed money. The FHLB advances are comprised entirely of daily
rate credits that reprice based on the previous day's Fed Fund rate.
Total stockholders' equity increased to $15.6 million at March 31, 2001. This
increase was primarily due to net income of $168,000 for the three-month period
and an improved market value of available-for-sale investments that are recorded
at the lower of cost or market value. The market value of the investments
improved due to the recent declines in the prime lending rate.
Results of Operations
Net Income
The Company reported net income of $168,000 for the three months ended March 31,
2001, compared to net income of $244,000 reported for the same quarter in the
prior year. The decrease in net income was primarily due to a decline in the net
interest margin and increased other expenses that offset gains on the sale of
loans and additional deposit fee income as compared to the same period of the
prior year.
Net Interest Income
Net interest income decreased to $2.2 million for the three months ended March
31, 2001 from the $2.3 million reported during the same period in 2000. The
decrease was due to a decline in the average amount of loans outstanding during
the most recent quarter. The net interest margin was 3.79% for the three months
ended March 31, 2001, compared to 3.76% for the same period last year. The
following table summarizes the factors determining net interest income ($ in
thousands).
Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
-------------- --------------
Average Interest Earning Assets $ 232,835 $ 249,268
Avg. Yield 8.89% 8.67%
Average Interest Bearing Liabilities $ 219,188 $ 236,976
Avg. Cost 5.42% 5.16%
Interest Spread 3.48% 3.50%
Interest Margin 3.79% 3.76%
The recent decreases in the prime rate will negatively impact earnings over the
next two quarters as loan and investment yields will decline faster than the
cost of certificates of deposit.
10
Provision for Loan Losses
The Company provides valuation allowances for anticipated losses on loans when
its management determines that a significant decline in the value of the
collateral has occurred, and if the value of the collateral is less than the
amount of the unpaid principal of the related loan, plus estimated costs of
acquisition and sale. In addition, the Company provides reserves based on the
dollar amount and type of collateral securing its loans, in order to protect
against unanticipated losses. A loss experience percentage is established for
each loan type and is reviewed quarterly. Each quarter, the loss percentage is
applied to the portfolio, by product type, to determine the minimum amount of
reserves required. The Company recorded a provision of $150,000 and $130,000 for
the three months ended March 31, 2001 and 2000, respectively. The increase in
the provision for loan losses was due to management's efforts to properly
reflect the credit risk in its loan portfolio. Net charge-offs for the three
months ended March 31, 2001 were $34,000 or .02% of total loans outstanding at
March 31, 2001. At March 31, 2001, the Company had $2.1 million of loans that
were 90 days or more past due. Of this total, only $263,000 of loans was
considered to be non-accrual. At March 31, 2001 the allowance for loan losses
was $2.5 million or 1.27% of total loans. Management believes the allowance for
loan losses is adequate to cover loan losses inherent in the loan portfolio at
March 31, 2001. Loans classified as special mention, substandard, doubtful and
loss have been adequately reserved. Although management believes that it uses
the best information available to make such determinations, future adjustments
to the allowance for loan losses may be necessary, and net income could be
significantly affected, if circumstances differ substantially from assumptions
used in making the initial determinations.
Other Income
Total other income for the three months ended March 31, 2001 was $538,000,
compared to $214,000 for the same period in 2000. Deposit fees increased to
$179,000 for the current quarter from the $137,000 reported for the same quarter
of the prior year. Net gains on loan sales resulted in income of $326,000 for
the current quarter, while the same period in the prior year included net losses
of $32,000 due to declining mortgage interest rates. While the declining
mortgage interest rates had a positive impact on loan sale gains, the market
valuation of originated mortgage servicing rights was negatively impacted. Total
other income included a $151,000 writedown of originated mortgage servicing
rights in the current quarter, compared to a $39,000 writedown in the same
period of the prior year.
Other Expense
Other expenses during the three months ended March 31, 2001 were $2.3 million, a
$288,000 increase over those incurred during the same quarter of 2000. The
increase is primarily attributable to the additional operating expenses of the
Forest Lakes branch in Albemarle County, severance accruals for former employees
of $165,000 and a $60,000 additional loss provision on a foreclosed commercial
property.
The Company currently operates nine full-service banking offices. The ninth
branch opened in early February in northern Albemarle County. There are no
current plans to open any additional offices. The Company has entered into a
definitive purchase and assumption agreement with Central Virginia Bank to sell
its branch office in Henrico County. This transaction, which remains subject to
regulatory approval, includes the assumption of deposit accounts and an option
by Central Virginia Bank to acquire selected consumer and commercial loans. No
material gain or loss is expected as a result of this sale. Closing is expected
to occur in mid-summer 2001.
Income Tax Expense
The Company recognized income tax expense of $86,000 for the three months ended
March 31, 2001, compared to $126,000 for the same period in 2000. Changes in tax
expense between the two quarters are primarily a result of changes in the level
of taxable income. Effective income tax rates were 34.0% for all periods
presented.
11
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. The Company'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.
The Company has been able to generate sufficient cash through its deposits as
well as through its borrowings.
The Company 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,
2001, total approved loan commitments outstanding were approximately $10.9
million. At the same date, commitments under unused lines of credit were
approximately $56.6 million. Certificates of deposit scheduled to mature in one
year or less at March 31, 2001 were $129.4 million. Management believes that a
significant portion of maturing deposits will remain with the Company. If these
certificates of deposit do not remain with the Company, it will have to seek
other sources of funding that may be at higher rates or reduce assets.
At March 31, 2001, regulatory capital was in excess of amounts required by
Federal Reserve regulations to be considered well capitalized as shown by the
following:
Tier 1 risk based capital ratio 10.87%
Total risk based capital ratio 12.39%
Tier 1 leverage ratio 8.60%
The Company's capital structure ensures that it has the necessary resources to
protect against risk inherent in its business.
Regulatory Issues
In October 2000, the Company and it subsidiary, Guaranty Bank, entered into a
written agreement with the Federal Reserve Bank of Richmond and the Bureau of
Financial Institutions of the Commonwealth of Virginia with respect to various
operating policies and procedures. Various bank operating policies including
asset/liability management, liquidity, risk management, loan administration and
capital adequacy will be submitted to the bank regulators for review and
approval. The Company is restricted from paying future dividends or incurring
any debt at the parent company level without prior regulatory approval. In
addition, Guaranty Bank is prohibited from paying intercompany dividends to the
Company without prior regulatory approval. Absent this intercompany dividend,
the Company does not have sufficient resources to make the payments due on its
outstanding subordinated debt securities. The Company and Guaranty Bank have
requested regulatory approval for an intercompany dividend in an amount
sufficient to make the June 15, 2001 payment due on its subordinated debt
securities.
12
Forward Looking Statements
Certain statements in this quarterly report on Form 10-QSB may include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are generally identified by the use
of words such as "believe", "expect", "anticipate", "should", "planned",
"estimated", and "potential". These statements are based on the Company's
current expectations. A variety of factors could cause the Company's actual
results to differ materially from the anticipated results or other expectations
expressed in such forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development, and results of the
Company's business include interest rate movements, competition from both
financial and non-financial institutions, the timing and occurrence (or
nonoccurence) of transactions and events that may be subject to circumstances
beyond the Company's control, and general economic conditions.
13
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
14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: May 14, 2001 By: /s/ Richard L. Saunders
----------------------------------
Richard L. Saunders
Senior Vice President and
Interim Chief Executive Officer
Date: May 14, 2001 By: /s/Thomas F. Crump
----------------------------------
Thomas F. Crump
Senior Vice President and
Chief Financial Officer
15