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
September 30, 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 Offices)
(434) 970-1100
(Issuer'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 November 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
-----
Part I. Financial Information Page No.
------------------------------ --------
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and
2000 (unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended September 30, 2001
and 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
---------------------------
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part I. Financial Information
------------------------------
Item 1 Financial Statements
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 23,858 $ 15,550
Investment securities
Held-to-maturity 1,004 1,200
Available for sale 20,736 17,509
Investment in FHLB and other stocks 1,972 1,972
Loans receivable, net 173,627 201,617
Accrued interest receivable 1,457 2,079
Real estate owned 837 1,301
Office properties and equipment, net 8,321 9,707
Mortgage servicing rights - 1,021
Other assets 2,687 2,067
------------ ------------
Total assets $ 234,499 $ 254,023
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
-----------
Deposits:
Interest bearing demand $ 24,808 $ 23,585
Non-interest bearing demand 19,673 16,986
Money market accounts 21,950 18,894
Savings accounts 12,202 10,311
Certificates of deposit 132,121 146,952
------------ ------------
210,754 216,728
Bonds payable 734 792
Advances from Federal Home Loan Bank - 14,000
Accrued interest payable 109 394
Payments by borrowers for taxes and insurance 583 264
Other liabilities 426 795
------------ ------------
Total liabilities 212,606 232,973
------------ ------------
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 (589) (1,218)
Retained earnings 5,065 4,851
------------ ------------
Total stockholders' equity 15,881 15,038
------------ ------------
Total liabilities and stockholders' equity $ 234,499 $ 254,023
============ ============
See accompanying notes to consolidated financial statements
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited) (unaudited)
Interest income
Loans $ 3,629 $ 5,130 $ 12,186 $ 15,158
Investment securities 575 572 1,692 1,721
-------- -------- -------- --------
Total interest income 4,204 5,702 13,878 16,879
-------- -------- -------- --------
Interest expense
Deposits 2,167 2,729 7,342 7,783
Borrowings 161 435 668 1,717
-------- -------- -------- --------
Total interest expense 2,328 3,164 8,010 9,500
-------- -------- -------- --------
Net interest income 1,876 2,538 5,868 7,379
Provision for loan losses 75 150 300 1,355
-------- -------- -------- --------
Net interest income after provision
for loan losses 1,801 2,388 5,568 6,024
Other income
Loan and deposit fees and servicing income 137 197 546 562
Gain on sale of loans and securities 293 46 763 158
Gain on sale of branch 79 - 79 -
Other 74 157 293 395
-------- -------- -------- --------
Total other income 583 400 1,681 1,115
-------- -------- -------- --------
Other expenses
Personnel 1,226 1,046 3,637 3,140
Occupancy 336 226 1,098 673
Data processing 273 199 782 574
Marketing 47 86 164 232
Deposit insurance premiums 27 65 79 184
Other 416 512 1,165 1,436
-------- -------- -------- --------
Total other expenses 2,325 2,134 6,925 6,239
-------- -------- -------- --------
Income before income taxes 59 654 324 900
-------- -------- -------- --------
Provision for income taxes 20 222 110 306
-------- -------- -------- --------
Net income $ 39 $ 432 $ 214 $ 594
======== ======== ======== ========
Basic and diluted earnings
per common share $ 0.02 $ 0.22 $ 0.11 $ 0.30
-------- -------- -------- --------
See accompanying notes to consolidated financial statements.
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
Net income $ 39 $ 432 $ 214 $ 594
---------- ---------- ---------- ----------
Other comprehensive income:
Unrealized gains (losses) on securities available for sale 232 332 953 (70)
---------- ---------- ---------- ----------
Other comprehensive income (loss), before tax 232 332 953 (70)
Income tax (expense) benefit related to items of other
comprehensive income (79) (113) (324) 24
---------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax 153 219 629 (46)
---------- ---------- ---------- ----------
Comprehensive income $ 192 $ 651 $ 843 $ 548
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
2001 2000
------------ ------------
(unaudited)
Operating Activities
Net Income $ 214 $ 594
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 300 1,355
Depreciation and amortization 1,105 632
Deferred loan fees (91) 68
Net amortization of premiums and accretion of discounts 131 45
Gain on sale of loans (916) (234)
Originations of loans held for sale (48,905) (32,444)
Proceeds from sale of loans 49,821 32,200
Loss (gain) on sale of securities available for sale (3) 76
Gain on sale of Branch (79) -
Changes in:
Accrued interest receivable 622 (396)
Other assets (961) (563)
Accrued interest payable (285) (184)
Prepayments by borrowers for taxes and insurance 319 68
Other liabilities (370) (244)
------------ ------------
Net cash provided by operating activities 902 973
------------ ------------
Investing activities
Net decrease in loans 23,074 444
Mortgage-backed securities principal repayments 196 134
Purchase of securities available for sale (18,000) -
Proceeds from sale of securities available for sale 15,682 4,722
Purchase of FHLB stock - (50)
Proceeds from sale of real estate owned 757 -
Net increase (decrease) in cash from sale of branch:
Proceeds from sale of loans 4,359 -
Sale of Deposits (7,144) -
Proceeds from sale of office properties, equipment, and land 1,058 -
Purchase of other real estate - (407)
Origination of servicing rights (331) (473)
Purchase of servicing rights - (47)
Proceeds from sale of servicing rights 826 -
Proceeds from sale of office properties and equipment 33 -
Purchase of office properties and equipment (353) (363)
------------ ------------
Net cash provided by investing activities 20,157 3,960
------------ ------------
Financing activities
Net increase in deposits 1,336 13,735
Proceeds from FHLB advances 36,000 43,000
Repayment of FHLB advances (50,000) (43,000)
Decrease in securities sold under agreement to repurchase - (16,650)
Repurchase of convertible preferred securities - (53)
Dividends paid on common stock - (235)
Principal payments on bonds payable, including unapplied payments (87) (48)
------------ ------------
Net cash absorbed by financing activities (12,751) (3,251)
------------ ------------
Increase in cash and cash equivalents 8,308 1,682
Cash and cash equivalents, beginning of period 15,550 12,634
------------ ------------
Cash and cash equivalents, end of period $ 23,858 $ 14,316
============ ============
See accompanying notes to consolidated financial statements.
6
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 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 and nine months ended September 30, 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 Corporation, which
was organized to sell 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 and nine
months ended September 30, 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 comprised of the following:
September 30, December 31,
2001 2000
-------------- --------------
(In thousands)
Commercial business loans $ 63,486 $ 62,976
Mortgage loans 47,574 59,613
Interim real estate loans 40,630 54,437
Consumer loans 24,502 26,987
-------------- --------------
Total loans 176,192 204,013
Less allowance for loan loss (2,565) (2,396)
-------------- --------------
$ 173,627 $ 201,617
============== ==============
Note 5 Allowance for Loan Loss
The following is a summary of transactions in the allowance for loan loss:
September 30, December 31,
2001 2000
-------------- --------------
(In thousands)
Balance at January 1 $ 2,396 $ 1,303
Provision charged to operating expense 300 1,505
Recoveries added to the reserve 8 23
Loans charged off (139) (435)
-------------- --------------
Balance at the end of the period $ 2,565 $ 2,396
============== ==============
8
Note 6 Investments
The investment portfolio was comprised of the following:
September 30, December 31,
2001 2000
------------ ------------
(In thousands)
Held to maturity:
Mortgage-backed securities $ 754 $ 950
U.S. Government obligations 250 250
Available for sale:
Corporate Bonds 12,736 17,509
U.S. Government obligations 8,000 -
Other:
Federal Reserve Bank & other stocks 422 422
Federal Home Loan Bank stock 1,550 1,550
------------ ------------
$ 23,712 $ 20,681
============ ============
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Guaranty Financial Corporation ("the Company") is a single bank holding company
organized under Virginia law that provides financial services through its
primary operating subsidiary, Guaranty Bank. Guaranty Bank is a full service
commercial bank offering a wide range of banking and related financial services,
including time and demand deposits, as well as commercial, industrial,
residential construction, residential and commercial mortgage and consumer
loans. Guaranty Investments Corporation, a subsidiary of Guaranty Bank, provides
a full range of investment services and, through a contractual arrangement with
a third party, sells mutual funds, stocks, bonds and annuities.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of the Company. The analysis focuses on the consolidated financial statements,
the footnotes thereto, and the other financial data herein. Highlighted in the
discussion are material changes from prior reporting periods and any
identifiable trends affecting the Company. Amounts are rounded for presentation
purposes, while the percentages presented are computed based on unrounded
amounts.
Analysis of Financial Condition
Total assets decreased 7.7% to $234.5 million at September 30, 2001, from $254.0
million at December 31, 2000. Cash and cash equivalents increased $8.3 million
or 53.4%, to $23.9 million at September 30, 2001, from $15.6 million at December
31, 2000. Net loans were $173.6 million at September 30, 2001, a decrease of
$28.0 million, or 13.9%, from net loans of $201.6 million at December 31, 2000.
The change in the loan portfolio was primarily due to a net decrease in $12.0
million of mortgage loans and $13.8 million in interim real estate loans. Total
deposits at September 30, 2001, were $210.8 million compared to $216.7 million
at December 31, 2000. No FHLB borrowings were outstanding at September 30, 2001,
compared to $14.0 million at December 31, 2000. Total stockholders' equity at
September 30, 2001, increased by $900,000 to $15.9 million from $15.0 million at
December 31, 2000.
During the third quarter of 2001, the Company sold its retail banking branch in
western Henrico County in order to concentrate its management and resources on
its core markets of Charlottesville and Harrisonburg. In addition, the Company
changed its residential mortgage loan sales process in the second quarter of
2001 to sell all newly originated fixed rate mortgage loans on a servicing
released basis. To complement this change in business strategy, the Company sold
its residential mortgage loan servicing for others portfolio in the third
quarter of 2001.
The factors causing the fluctuations in the major balance sheet categories are
further discussed in the following sections.
Loans
During the first nine months of 2001, the Company has experienced limited loan
demand for products other than residential mortgage loans. Influenced by
declining interest rates, originations of residential mortgage loans held for
sale increased to $48.9 million for the nine months ended September 30, 2001,
from $32.4 million for the same period a year ago. For the same time periods,
sales of residential mortgage loans increased to $49.8 million from $32.2
million. The Company has reduced interim real estate loans by $13.8 million in
2001 to reduce a higher than desired concentration of real estate development
and construction loans in its loan portfolio. The Company also sold $4.4 million
in commercial and consumer loans in connection with the third quarter sale of
the Henrico County retail banking branch.
10
Investments
Total investments increased by 14.7% to $23.7 million at September 30, 2001,
compared to $20.7 million at December 31, 2000. The majority of this change was
due to an increase of $3.2 million in investments available for sale. The mix of
these investments changed as investments in medium term U.S. Government agency
securities increased by $8.0 million and sales of long term corporate securities
totaled $3.9 million during the same periods. This restructuring was undertaken
in order to improve the liquidity of the portfolio.
Real Estate Owned
Real estate owned decreased to $837,000 at September 30, 2001, from $1.3 million
at December 31, 2000. The decline was due to the sale of a commercial real
estate property during the period. The remainder of real estate owned consists
of developed lots and one substantially completed residential property. No
material losses are anticipated on the ultimate sale of these properties.
Office Properties and Equipment
The Company's investment in office properties and equipment decreased to $8.3
million at September 30, 2001, from $9.7 million at December 31, 2000. This
decrease was primarily due to the sale of the Company's Henrico County retail
banking branch.
Deposits
Deposits were $210.8 million at September 30, 2001, a decrease of $6.0 million,
or 2.8%, from total deposits of $216.7 million at December 31, 2000. Without
giving effect to the branch sale transaction in which the Company transferred
$7.3 million in deposits to the buyer, deposits have increased by $1.3 million
during the first nine months of 2001. The transferred deposits included $6.7
million in certificates of deposit and $600,000 in transaction accounts. During
2001, the Company has placed a greater emphasis on attracting lower cost
transaction accounts which has resulted in an increase in transaction accounts
by $9.4 million, excluding the transferred accounts.
FHLB Borrowings
Due to the Company's reduction in total assets and increased liquidity, it has
been able to eliminate all borrowings from the Federal Home Loan Bank ("FHLB")
at September 30, 2001. At December 31, 2000, the Company had $14.0 million in
borrowings outstanding with the FHLB. At September 30, 2001, the Company's
available but unused borrowings with the FHLB were approximately $25.6 million.
Stockholders' Equity
The Company's stockholders' equity at September 30, 2001, increased by 5.6% to
$15.9 million from $15.0 million at December 31, 2000. The primary factors for
the increase were a reduction in the mark to market loss adjustment of the
Company's available for sale investments of approximately $600,000 and the nine
month net income of $214,000.
11
Results of Operations
Net Income
The Company reported net income of $39,000 ($.02 per share) for the three months
ended September 30, 2001, compared with a net income of $432,000 ($.22 per
share) for the three months ended September 30, 2000. The primary factor in the
net income decline is the compression of the Company's net interest margin due
to the yield on earning assets falling faster than the cost of interest bearing
liabilities. Interest rates on loans tied to the prime rate and short term
investments generally decrease immediately while the cost of certificates of
deposit can only be adjusted when they mature. Net income for the nine months
ended September 30, 2001 was $214,000 ($.11 per share) as compared with $594,000
($.30 per share) for the same period in the prior year.
Net Interest Income
Net interest income decreased to $1.9 million for the three months ended
September 30, 2001, from the $2.5 million reported during the same period in
2000. For the nine months ended September 30, 2001, net interest income
decreased to $5.9 million from $7.4 million for the same period in 2000. The
compression in the net interest margin was due to a decrease in the average
amount of loans outstanding and the impact of eight prime rate decreases during
the first nine months of 2001. Because of the Company's reliance on fixed rate
certificates of deposit, prime rate decreases lowered its yield on earning
assets (especially those loans whose interest rates are indexed to prime) faster
than its cost of interest bearing deposits fell. Certificates of deposits
totaling $31.5 million with an average cost of 6.25% mature during the fourth
quarter of 2001. During the first quarter of 2002, certificates of deposit
totaling $33.3 million with an average cost of 5.32% mature. Current rates being
offered on similar certificates of deposit with a one year maturity are
approximately 2.50%. The net interest margin was 3.39% for the most recent
quarter compared with 4.19% for the same period a year ago. The following table
summarizes the factors determining net interest income (dollars in thousands).
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
-------------- -------------- -------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
Average Interest Earning Assets $ 219,909 $ 240,500 $ 228,552 $ 248,945
Average Yield 7.58% 9.41% 8.24% 9.03%
Average Interest Bearing Liabilities $ 201,203 $ 228,086 $ 212,298 $ 236,377
Average Cost 4.59% 5.51% 5.04% 5.35%
Interest Spread 3.00% 3.90% 3.20% 3.68%
Interest Margin 3.39% 4.19% 3.55% 3.95%
12
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 $75,000 and $150,000 for
the three months ended September 30, 2001 and 2000, respectively. The decrease
in the provision for the current year is correlated to the decrease in the size
of the loan portfolio and an increased level of the allowance for loan losses.
Net charge-offs for the three months ended September 30, 2001, were $87,000
compared to $22,000 for the same period a year ago. For the nine months ended
September 30, 2001, net charge-offs were $131,000, compared with $401,000 for
the same period of the prior year. At September 30, 2001, the Company had
$127,000 of loans that were 90 days or more past due. Of this total, $84,000 of
loans were considered to be non-accrual. At September 30, 2001, the allowance
for loan losses was $2.6 million or 1.46% of total loans. Management believes
that the allowance for loan losses is adequate to cover loan losses inherent in
the loan portfolio at September 30, 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.
Non-Interest Income
Non-interest income was $583,000 for the three months ended September 30, 2001,
compared with $400,000 for the same period a year ago. Fees on deposit accounts
decreased by 1.3% to $184,000 for the most recent quarter as compared to
$186,400 for the same period a year ago. Net gains on the sale of mortgage loans
and securities were $293,000 for the three months ended September 30, 2001,
compared to $46,000 in the prior year. Both the current quarterly results and
the year to date results were negatively impacted by expenses related to
mortgage loan servicing which occurred prior to the sale of the mortgage loan
servicing portfolio. A higher volume of loan payoffs accelerated the
amortization of originated mortgage loan servicing rights and negatively
impacted loan servicing income. Loan servicing revenue increased by 12.0% to
$65,900 for the most recent quarter compared to $58,900 for the same period a
year ago. However, the amortization of loan servicing rights increased to
$162,000 in the most recent quarter from $47,700 for the same period of the
prior year. During the third quarter of 2001, the Company sold its mortgage loan
servicing portfolio for approximately $876,000, which approximated the book
value of the portfolio. This sale eliminates the volatility in future earnings,
which was related to the potential impairment of the mortgage loan servicing
rights intangible asset.
13
Non-Interest Expense
Operating expenses were $2.3 million for the quarter ended September 30, 2001, a
$191,000 increase over the amount reported for the same period last year. The
increase is primarily attributable to the additional operating expenses of the
Forest Lakes branch in Albemarle County and severance expenses. For the nine
months ended September 30, 2001, other expenses increased to $6.9 million
compared to $6.2 million for the same period a year ago. This increase was also
attributable to the additional operating expenses of the Forest Lakes branch,
severance expenses related to management changes and a $51,000 loss on the sale
of a foreclosed commercial property.
The Company currently operates eight full-service banking offices. A new branch
opened in early February in northern Albemarle County. The Company consummated
the sale of its retail branch in Henrico County to Central Virginia Bank on July
13, 2001. This transaction included the assumption of approximately $7.3 million
of deposit accounts and the sale of consumer and commercial loans totaling
approximately $4.4 million. An immaterial gain on the sale was recorded in the
Company's third quarter results. There are no current plans to open or close any
additional offices.
Income Tax Expense
The Company recognized income tax expense of $20,000 for the three months ended
September 30, 2001, compared to income tax expense of $222,000 for the same
period in 2000. The Company recognized income tax expense of $110,000 for the
nine months ended September 30, 2001, compared to $306,000 for the same period
in 2000. 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. 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 September
30, 2001, total approved loan commitments outstanding were approximately $8.6
million. At the same date, commitments under unused lines of credit were
approximately $50.0 million. Certificates of deposit scheduled to mature in one
year or less at September 30, 2001, were $117.0 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.
14
The reduction in total assets has positively impacted the Company's regulatory
capital ratios. At September 30, 2001, regulatory capital was in excess of
amounts required by Federal Reserve regulations to be considered well
capitalized as shown in the following table (dollars in thousands):
Actual Actual Amount Percent Excess
Amount Percentage Required Required Amount
---------- ---------- ---------- ---------- ----------
Leverage Ratio $ 21,960 9.19% $ 9,557 4.00% $ 12,403
Tier 1 Risk Based Capital 21,960 11.96% 7,400 4.00% 14,560
Total Risk Based Capital 24,778 13.50% 14,800 8.00% 9,978
Regulatory Issues
In October 2000, the Company and it subsidiary, Guaranty Bank, entered into a
written agreement with the Federal Reserve Bank of Richmond ("FRB") and the
Bureau of Financial Institutions of the Commonwealth of Virginia ("BFI") with
respect to various operating policies and procedures. Various bank operating
policies including asset/liability management, liquidity, risk management, loan
administration and capital adequacy have been rewritten and approved by bank
regulators. 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 December 15, 2001,
payment due on its subordinated debt securities. While the FRB and the BFI have
approved all prior quarterly dividend payment requests since the written
agreement was executed, no assurances can be given that this request will be
approved.
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
nonoccurrence) of transactions and events that may be subject to circumstances
beyond the Company's control, and general economic conditions.
15
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 Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
16
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: November 14, 2001 By: /s/ William E. Doyle, Jr.
-------------------------------------
William E. Doyle, Jr.
President and Chief Executive Officer
Date: November 14, 2001 By: /s/ Thomas F. Crump
-------------------------------------
Thomas F. Crump
Senior Vice President and
Chief Financial Officer
17