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, 2003
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 October 31, 2003, 1,991,477 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, 2003
(unaudited) and December 31, 2002 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2003 and
2002 (unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended September 30, 2003
and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis or Plan of Operation 11
Item 3 Controls and Procedures 17
Part II. Other Information
---------------------------
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures
Certifications
-2-
Part I. Financial Information
Item 1 Financial Statements
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2003 2002
-------------- ---------------
ASSETS (Unaudited)
Cash and cash equivalents $ 30,419 $ 15,392
Investment securities
Held-to-maturity 2,795 836
Available for sale 1,471 3,212
Investment in FHLB 532 947
Loans receivable, net 149,933 163,250
Accrued interest receivable 677 910
Real estate owned - 397
Office properties and equipment, net 6,338 7,443
Other assets 4,910 4,758
-------------- ---------------
Total assets $ 197,075 $ 197,145
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Interest bearing demand $ 33,168 $ 28,773
Non-interest bearing demand 29,528 24,725
Money market accounts 43,995 34,445
Savings accounts 13,407 12,812
Certificates of deposit 55,465 70,504
-------------- ---------------
175,563 171,259
Bonds payable - 360
Advances from Federal Home Loan Bank - -
Accrued interest payable 11 58
Payments by borrowers for taxes and insurance 127 127
Other liabilities 1,566 722
-------------- ---------------
Total liabilities 177,267 172,526
-------------- ---------------
Convertible preferred securities - 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, 1,991,377
issued and outstanding (1,970,677 in 2002) 2,489 2,463
Additional paid-in capital 9,206 9,034
Accumulated comprehensive loss (17) (23)
Retained earnings 8,130 7,133
-------------- ---------------
Total stockholders' equity 19,808 18,607
-------------- ---------------
Total liabilities and stockholders' equity $ 197,075 $ 197,145
============== ===============
See accompanying notes to consolidated financial statements.
-3-
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------- ------------ ------------
(unaudited) (unaudited)
Interest income
Loans $ 2,430 $ 2,891 $ 7,527 $ 8,866
Investment securities 68 260 219 1,070
------------ ------------- ------------ ------------
Total interest income 2,498 3,151 7,746 9,936
------------ ------------- ------------ ------------
Interest expense
Deposits 362 727 1,222 2,858
Borrowings 54 174 456 552
------------ ------------- ------------ ------------
Total interest expense 416 901 1,678 3,410
------------ ------------- ------------ ------------
Net interest income 2,082 2,250 6,068 6,526
Provision (credit) for loan losses (198) 25 811 75
------------ ------------- ------------ ------------
Net interest income after provision
for loan losses 2,280 2,225 5,257 6,451
Non-interest income
Mortgage banking income 504 259 1,264 726
Deposit account fees 180 181 513 553
Net gain on sale of branches 1 - 939 -
Increase in cash surrender value of life insurance 54 53 163 129
Investment sales commissions 3 40 3 104
Other 168 105 418 309
------------ ------------- ------------ ------------
Total non-interest income 910 638 3,300 1,821
------------ ------------- ------------ ------------
Non-interest expense
Personnel 1,267 1,158 3,560 3,444
Occupancy 271 282 839 853
Information services 282 275 848 853
Marketing 40 59 102 102
Deposit insurance premiums 6 8 20 56
Other 412 406 1,084 1,065
------------ ------------- ------------ ------------
Total non-interest expense 2,278 2,188 6,453 6,373
------------ ------------- ------------ ------------
Income before income taxes 912 675 2,104 1,899
------------ ------------- ------------ ------------
Provision for income taxes 293 212 661 602
------------ ------------- ------------ ------------
Net income $ 619 $ 463 $ 1,443 $ 1,297
============ ============= ============ ============
Basic earnings per common share $ 0.31 $ 0.24 $ 0.73 $ 0.66
============ ============= ============ ============
Diluted earnings per common share $ 0.31 $ 0.23 $ 0.72 $ 0.65
============ ============= ============ ============
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,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
(unaudited) (unaudited)
Net income $ 619 $ 463 $ 1,443 $ 1,297
------------ ------------ ------------ -------------
Other comprehensive income:
Unrealized gain (loss) on securities available for sale (25) 389 9 1,006
------------ ------------ ------------ -------------
Other comprehensive income (loss) , before tax (25) 389 9 1,006
Income tax expense related to items of
other comprehensive income 8 (132) (3) (343)
------------ ------------ ------------ -------------
Other comprehensive income (loss), net of tax (17) 257 6 663
------------ ------------ ------------ -------------
Comprehensive income $ 602 $ 720 $ 1,449 $ 1,960
============ ============ ============ =============
See accompanying notes to consolidated financial statements.
-5-
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) Nine Months Ended
September 30,
2003 2002
---------- ---------
Operating Activities (unaudited)
Net Income $ 1,443 $ 1,297
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 811 75
Provision for loss on sale of other real estate owned - 40
Depreciation and amortization 390 437
Deferred loan fees (84) (45)
Net amortization of premiums and accretion of discounts 96 361
Gain on sale of loans (1,264) (726)
Gain on sale of securities available for sale (12) (20)
Originations of loans held for sale (54,845) (32,566)
Proceeds from sale of loans 56,553 43,416
Gain on sale of other real estate owned (2) (18)
Increase in value of bank owned life insurance (163) (106)
Gain on sale of Harrisonburg branch (986) -
Changes in:
Accrued interest receivable 233 218
Other assets 120 (30)
Accrued interest payable (46) (86)
Prepayments by borrowers for taxes and insurance - 144
Other liabilities 844 (10)
---------- ---------
Net cash provided by operating activities 3,088 12,381
---------- ---------
Investing activities
Net decrease in loans 6,634 1,821
Mortgage-backed securities principal repayments 137 250
Purchase of securities held to maturity (2,500) (406)
Proceeds from maturity of securities held to maturity 400 250
Purchase of securities available for sale (1,635) -
Proceeds from sale of securities available for sale 3,261 14,162
Proceeds from redemption of FHLB stock 415 -
Proceeds from sale of real estate owned 400 500
Purchase of bank-owned life insurance - (3,000)
Net decrease in cash from sale of branch
Proceeds from sale of loans 5,446 -
Sale of deposits (9,984) -
Proceeds from sale of office properties, equipment and land 1,653 -
Proceeds from sale of office properties and equipment 30 22
Purchase of office properties and equipment (687) (423)
---------- ---------
Net cash provided (absorbed) by investing activities 3,570 13,176
---------- ---------
Financing activities
Net increase (decrease) in deposits 15,056 (28,218)
Proceeds from FHLB advances 16,000 48,000
Repayment of FHLB advances (16,000) (43,000)
Redemption of Trust Preferred Securities (6,013) -
Proceeds from issuance of common stock 197 8
Cash dividend paid on common stock (446) -
Principal payments on bonds payable, including unapplied payments (425) (299)
---------- ---------
Net cash provided (absorbed) by financing activities 8,369 (23,509)
---------- ---------
Increase in cash and cash equivalents 15,027 2,048
Cash and cash equivalents, beginning of period 15,392 12,437
---------- ---------
Cash and cash equivalents, end of period $ 30,419 $ 14,485
========== =========
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, 2003 and 2002
(unaudited)
Note 1 Principles of Presentation
The accompanying consolidated financial statements of Guaranty Financial
Corporation ("Guaranty" or the "Company") have not been audited by independent
accountants, except for the balance sheet at December 31, 2002. These financial
statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission in regard to quarterly (interim) reporting.
In management's opinion, 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
Guaranty's Annual Report on Form 10-KSB for the year ended December 31, 2002.
The results for the three and nine months ended September 30, 2003, are not
necessarily indicative of future financial results.
The accompanying consolidated financial statements include Guaranty's accounts
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 2002 financial statements have been reclassified to conform
to the year 2003 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, 2003 and 2002, have been determined by dividing net
income by the weighted average number of shares of common stock outstanding
during these periods. The following table indicates the weighted average shares
outstanding for each period.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Basic shares 1,989,092 1,962,777 1,983,965 1,962,777
Dilutive effect of stock options 20,464 22,724 18,547 21,477
Dilutive shares 2,009,556 1,985,501 2,002,512 1,984,254
================= ================== ================== ===================
-7-
Note 4 Loans
The loan portfolio is comprised of the following:
September 30, December 31,
2003 2002
----------------- ----------------
(In thousands)
Mortgage loans:
Residential $ 32,872 $ 20,119
Commercial 6,527 7,894
Construction and land loans 33,839 38,480
Total real estate loans 73,238 66,493
Commercial business loans 60,677 76,651
Consumer loans 17,875 22,238
Total loans receivable 151,790 165,382
Adjustments:
Allowance for losses (1,985) (2,242)
Deferred costs 128 110
Total loans receivable, net $ 149,933 $ 163,250
================= ================
Note 5 Allowance for Loan Loss
The following is a summary of transactions in the allowance for loan loss:
September 30, December 31,
2003 2002
------------------ ------------------
(In thousands)
Balance at January 1 $ 2,242 $ 2,512
Provision charged to expense 811 100
Recoveries added to the reserve 235 3
Loans charged-off (1,303) (373)
Balance at the end of the period $ 1,985 $ 2,242
================== ===================
-8-
Note 6 Investments
The investment portfolio was comprised of the following:
September 30, December 31,
2003 2002
----------------- -----------------
(In thousands)
Held to maturity:
Mortgage-backed securities $ 295 $ 433
U.S. Government obligations 2,500 403
Available for sale:
Corporate Bonds 1,471 3,212
Other:
Federal Home Loan Bank stock 532 947
Federal Reserve Bank & other stocks 557 422
----------------- -----------------
$ 5,355 $ 5,417
================= =================
Note 7 Trust Preferred Securities
On May 19, 2003, the Company redeemed 100% of Guaranty Capital Trust's 7%
preferred securities, resulting in a reduction in liabilities of $6.0 million
and annualized savings of $420,000 in interest expense in future periods.
Subsequent to the redemption of the preferred securities, the Bank and the
holding company remain well capitalized.
Note 8 Stock Option Plan
Guaranty has a non-compensatory stock option plan (the "Plan") designed to
provide long-term incentives to key employees. All options are exercisable upon
date of vesting.
The following table summarizes options outstanding:
Nine Months Ended Year Ended
September 30, 2003 December 31, 2002
-------------------------------------------------------------------------------------------------------------------
Weighted - Weighted -
average average
exercise exercise
Shares price Shares price
-------------------------------------------------------------------------------------------------------------------
Options outstanding at
beginning of period 76,012 $10.02 57,912 $12.07
Granted 17,500 13.47 47,500 8.59
Forfeited (5,662) 8.30 (21,500) 12.45
Exercised (20,700) 9.53 (7,900) 10.59
-------------------------------------------------------------------------------------------------------------------
Options outstanding at end
of period 67,150 10.66 76,012 10.02
-------------------------------------------------------------------------------------------------------------------
Options exercisable at end
of period 67,150 76,012
-------------------------------------------------------------------------------------------------------------------
The weighted average fair value of options granted during the nine months ended
September 30, 2003 was $3.48.
-9-
Guaranty applies Accounting Principals Board Opinion No. 25 in accounting for
stock options granted to employees. Had compensation expense been determined
based upon the fair value of the awards at the grant date and consistent with
the method under Statement of Financial Accounting Standards No. 123, Guaranty's
net earnings and net earnings per share would have been decreased to the pro
forma amounts indicated in the following table:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Net income
As reported $ 618,909 $ 1,443,316
Pro forma 618,909 1,403,139
Net income per share (basic)
As reported $ 0.31 $ 0.73
Pro forma 0.31 0.71
Net income per share (diluted)
As reported $ 0.31 $ 0.72
Pro forma 0.31 0.70
The fair value of each option granted is estimated on the date of grant using
the Black-Sholes option pricing model with the following assumptions used for
grants: a risk free interest rate range of 2.69% - 2.95%, depending on the date
of grant, for grants issued during the nine months ended September 30, 2003;
dividend yield of 2%; expected weighted average term of 5 years; and a
volatility of 30% for each of the period presented.
-10-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Guaranty is a single bank holding company organized under Virginia law that
provides financial services through its primary operating subsidiary, Guaranty
Bank (the "Bank"). The 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 the Bank, provides a full range of investment
services and, through a contractual arrangement with BI Investments Group, LLC,
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 Guaranty. 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 Guaranty. Amounts are rounded for presentation
purposes, while the percentages presented are computed based on unrounded
amounts.
Analysis of Financial Condition
Total assets decreased slightly to $197.1 million at September 30, 2003, only
$70,000 less than the balance at December 31, 2002. Cash and cash equivalents
increased $15.0 million or 97.6%, to $30.4 million at September 30, 2003, from
$15.4 million at December 31, 2002. Net loans were $149.9 million at September
30, 2003, a decrease of $13.3 million, or 8.2%, from net loans of $163.3 million
at December 31, 2002. Total deposits at September 30, 2003, were $175.6 million
compared to $171.3 million at December 31, 2002, an increase of $4.3 million.
Guaranty held no Federal Home Loan Bank (the "FHLB") borrowings at September 30,
2003 or December 31, 2002. Total stockholders' equity at September 30, 2003,
increased by over $1.2 million to $19.8 million from $18.6 million at December
31, 2002.
The factors causing the fluctuations in the major balance sheet categories are
further discussed in the following sections.
Loans
Net loans receivable decreased 8.2% to $149.9 million at September 30, 2003,
from $163.3 million at December 31, 2002. Real estate loans, excluding
construction and land loans, increased $11.4 million, as the result of increased
activity in the mortgage refinance market. A $4.8 million decrease in consumer
loans, resulting from the sale of loans associated with the Harrisonburg branch,
was offset by originations and increased outstanding balances on consumer loans,
netting a $4.4 million reduction in consumer loans. Commercial business loans
decreased $16.0 million, as the result of the continued repositioning of the
loan portfolio, along with one significant charge-off during the second quarter.
During the most recent quarter, Guaranty originated and sold $21.4 million in
residential mortgage loans in the secondary market, bringing the total sold for
the year to $56.6 million. Residential mortgage loans held for sale were
$287,000 at September 30, 2003, compared to $332,000 at December 31, 2002.
Investments
Total investments declined $62,000, to $5.4 million at September 30, 2003, only
a 1.1% decrease from the investments balance at December 31, 2002. In the first
half of the year, management significantly reduced the balance in corporate
securities in order to improve liquidity without incurring investment losses.
The Company is in the process of rebuilding the portfolio with an improved focus
on liquidity, earnings and interest rate risk.
-11-
Real Estate Owned
Real estate owned decreased to zero at September 30, 2003, from $397,000 at
December 31, 2002. During the first half of 2003, Guaranty liquidated all of its
other real estate holdings, without incurring losses on the sales of the
properties.
Office Properties and Equipment
Guaranty's investment in office properties and equipment decreased to $6.3
million at September 30, 2003, from $7.4 million at December 31, 2002. This
decrease was primarily due to the sale of the Harrisonburg branch in January
2003.
Other Assets
Other assets increased to $4.9 million at September 30, 2003 from $4.8 million
at December 31, 2002. The primary reason for the increase in other assets was
the increase in prepaid taxes, relating to first quarter net income.
Deposits
Balances in deposit accounts were $175.6 million at September 30, 2003, an
increase of $4.3 million, or 2.5%, from total deposits of $171.3 million at
December 31, 2002. The sale of the deposits associated with the Harrisonburg
branch resulted in a decline of $10 million in deposits. Offsetting the decrease
associated with the sale, Guaranty has been successful in attracting low cost
deposits and money market accounts and in retaining existing relationships.
Certificates of deposit comprise 31.6% of total deposits at September 30, 2003,
compared to 41.2% at December 31, 2002.
FHLB Borrowings
Guaranty had no borrowings outstanding from the FHLB at September 30, 2003 or
December 31, 2002. At September 30, 2003, Guaranty's available but unused
borrowings with the FHLB were approximately $26 million.
Stockholders' Equity
Stockholders' equity at September 30, 2003, increased by 6.5% to $19.8 million
from $18.6 million at December 31, 2002. The primary factors for the increase
were the nine months net income of $1.4 million and the issuance of shares in
connection with open market purchases and employees exercising their stock
options, which increased capital by $197,000, offset by cash dividend payments
to shareholders of $446,000.
-12-
Results of Operations
Net Income
Guaranty reported net income of $619,000 ($.31 per diluted share) for the three
months ended September 30, 2003, compared with a net income of $463,000 ($.23
per diluted share) for the three months ended September 30, 2002. Guaranty
reported net income of $1.4 million ($.72 per diluted share) for the nine months
ended September 30, 2003, compared with a net income of $1.3 million ($.65 per
diluted share) for the nine months ended September 30, 2002.
Net Interest Income
Net interest income decreased to $2.1 million for the three months ended
September 30, 2003, from the $2.2 million reported during the same period the
prior year. The primary cause for the decline in net interest income was due to
the decline in average earning assets and lower interest rates earned on loan
balances for the most recent quarter. Average earning assets for the three
months ended September 30, 2003, were $172.0 million compared to $185.2 million
for the same period in 2002. Average loans outstanding decreased to $157.0
million from $165.2 million and average investments outstanding declined to $3.6
million from $15.0 million when comparing the three month period ended September
30, 2003 to the three month period ended September 30, 2002. For these same
periods, average certificates of deposit balances decreased by $24.1 million to
$56.8 million. The cost of interest bearing deposits declined by 104 basis
points primarily due to change in the composition of deposits as well as the
lower interest rates being paid on certificates of deposit. 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,
2003 2002 2003 2002
Average Interest Earning Assets $ 172,003 $ 185,196 $ 172,388 $ 193,438
Average Yield 5.76% 6.75% 6.01% 6.87%
Average Interest Bearing Liabilities $ 142,359 $ 162,136 $ 145,092 $ 171,702
Average Cost 1.16% 2.20% 1.55% 2.66%
Interest Spread 4.60% 4.55% 4.46% 4.21%
Interest Margin 4.80% 4.82% 4.71% 4.51%
-13-
Provision for Loan Losses
Guaranty recorded a credit of $198,000 to its loan loss provision for the three
months ended September 30, 2003 and an expense of $25,000 for the three months
ended September 30, 2002. During the second quarter of 2003, a $1.025 million
charge-off was realized as the consequence of substantial fraudulent activity by
one commercial borrower. The loss was due to fraudulent activities related to
cash and financial management by the borrower which caused the borrower to be
insolvent. The loan held by Guaranty was secured by equipment, inventory,
receivables and marketable securities. During the third quarter of 2003,
Guaranty received a partial recovery relating to this loan. Management recorded
the recovery through the allowance for loan losses. The Company's allowance for
loan losses currently equals 1.30% of the loan portfolio. The allowance for loan
losses is maintained at a level considered by management to be adequate to
absorb future loan losses currently inherent in the loan portfolio. Management
believes that the allowance for loan losses is adequate to cover loan losses
inherent in the loan portfolio at September 30, 2003, and that 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.
Guaranty charged-off $264,000 in loans during the third quarter of 2003. At
September 30, 2003, the Company had $410,000 of loans that were 90 days or more
past due and still accruing interest, compared to $119,000 at September 30,
2002. The Bank held no loans that were considered to be non-accrual as of
September 30, 2003, compared to $1.9 million as of September 30, 2002.
Non-interest Income
Non-interest income was $910,000 for the three months ended September 30, 2003,
compared to $638,000 for the same period a year ago. This change was primarily
due to increased mortgage banking income, which amounted to $504,000 for the
quarter ended September 30, 2003, compared to $259,000 for the same period a
year ago.
Fees on deposit accounts remained approximately the same at $180,000 for the
most recent quarter compared to $181,000 for the same period a year ago.
Guaranty realized $3,000 of investment sales commissions for the quarter ended
September 30, 2003, compared to $40,000 for the quarter ended September 30,
2002, due to reduced sales volume, as the investment sales function was
undergoing a management realignment during the first nine months of 2003.
Non-interest Expense
Non-interest expense was $2.3 million for the quarter ended September 30, 2003,
a $90,000 increase over the amount reported for the same period last year.
Personnel expense increased $109,000 as the result of increased commissions
relating to mortgage banking activity. This increase was offset by lower
occupancy and marketing expenses.
Income Tax Expense
Guaranty recorded income tax expense of $293,000 for the three months ended
September 30, 2003, compared to $212,000 for the same period in 2002. The net
increase in income tax expense between periods was a result of fluctuations in
the level of taxable income. Guaranty's effective tax rate is lower than the
standard corporate tax rate of 34% due to non-taxable income from bank owned
insurance.
-14-
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. While scheduled payments from the amortization of loans are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. Excess funds are invested in overnight deposits to fund cash
requirements experienced in the normal course of business. Guaranty has been
able to generate sufficient cash through its deposits as well as through its
borrowings.
Guaranty uses its sources of funds primarily to meet its on-going operating
expenses, to pay deposit withdrawals and to fund loan commitments. During the
most recent quarter, net loans decreased by approximately $8.5 million and
certificates of deposit declined by approximately $2.3 million. These decreases
were a result of strategic decisions. Guaranty has been very targeted in its
lending approach and has desired to reduce its funding reliance on certificates
of deposit. At September 30, 2003, total approved loan commitments outstanding
were approximately $7.2 million. At the same date, commitments under unused
lines of credit were approximately $49.5 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 2003, were $47.5
million. Management believes that a significant portion of maturing deposits
will remain with Guaranty. If these certificates of deposit do not remain with
Guaranty, it may have to reduce assets or seek other sources of funding that may
be at higher rates.
At September 30, 2003, regulatory capital was in excess of amounts required by
Federal Reserve regulations to be considered well capitalized as shown in the
following table for Guaranty Bank:
Actual Percent Excess
Percentage Required Percentage
-------------- ----------- -------------
Leverage Ratio 10.27% 4.00% 6.27%
Tier 1 Risk Based Capital 12.56% 4.00% 8.56%
Total Risk Based Capital 13.81% 8.00%
5.81%
Contractual Obligations
The following summarizes Guaranty's contractual cash obligations and commercial
commitments, including maturing certificates of deposit, as of September 30,
2003 and the effect such obligations may have on liquidity and cash flows in
future periods.
Contractual Obligations
-------------------------------------------------------------------------------------------------------------------
Less Than 1-3 4-5 Over 5
One Year Years Years Years Total
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Certificate of deposit maturities (1) $ 47,542 $ 6,545 $ 1,369 $ 9 $ 55,465
Undisbursed credit lines 49,464 - - - 49,464
-------------------------------------------------------------------------------------------------------------------
Commitments to extend credit 7,185 - - - 7,185
Standby letters of credit 4,148 - - - 4,148
-------------------------------------------------------------------------------------------------------------------
Total obligations $108,339 $ 6,545 $ 1,369 $ 9 $116,262
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(1) Guaranty expects to retain maturing deposits or replace maturing amounts
with comparable deposits based on current market interest rates.
-15-
Regulatory Issues
The Written Agreement with the Federal Reserve Bank and the Bureau of Financial
Institutions of the Commonwealth of Virginia related to various operating
policies and procedures dated October 26, 2000, was terminated effective October
18, 2002.
Critical Accounting Policies, Estimates and Judgments
Guaranty's financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, as
well as the disclosure of contingent liabilities. Management continually
evaluates its estimates and judgments, including those related to the allowance
for loan losses and income taxes. Management bases its estimates and judgments
on historical experience and other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Management believes that, of its
significant accounting policies, the most critical accounting policies we apply
are those related to the valuation of the loan portfolio.
A variety of factors impact carrying value of the loan portfolio, including the
calculation of the allowance for loan losses, valuation of amortization of loan
fees, and deferred origination costs. The allowance for loan losses is the most
difficult and subjective judgment. The allowance is established and maintained
at a level that management believes is adequate to cover losses resulting from
the inability of borrowers to make required payments on loans. Estimates for
loan losses determined by analyzing risks associated with specific loans and the
loan portfolio, current trends in delinquencies and charge-offs, the views of
regulators, changes in the size and composition of loan portfolio and peer
comparisons. The analysis also requires consideration of the economic climate
and directions, changes in the interest rate environment, which may impact a
borrower's ability to pay, legislation impacting the banking industry and
economic conditions specific to our service area. Because the calculation of the
allowance for loan losses relies on estimates and judgments relating to
inherently uncertain events, results may differ from our estimates.
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 Guaranty's current
expectations. A variety of factors could cause Guaranty'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 Guaranty'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 Guaranty's
control, and general economic conditions.
-16-
ITEM 3. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
provide assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods required
by the Securities and Exchange Commission. As of the end of the period covered
by this report, an evaluation of the effectiveness of the design and operation
of the Company's disclosure controls and procedures was carried out under the
supervision and with the participation of management, including the Company's
Chief Executive Officer and Chief Financial Officer. Based on and as of the date
of such evaluation, the aforementioned officers concluded that the Company's
disclosure controls and procedures were effective.
The Company's management is also responsible for establishing and maintaining
adequate internal control over financial reporting. There were no changes in the
Company's internal control over financial reporting identified in connection
with the evaluation of it that occurred during the Company's last fiscal quarter
that materially affected, or are reasonably likely to materially affect,
internal control over financial reporting.
-17-
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
31.1 Rule 13a-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial
Officer.
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section
1350.
(b) Reports on Form 8-K -
The Company furnished a Current Report on Form 8-K with
the Securities and Exchange Commission on July 28, 2003.
The Form 8-K reported Items 7 and 12 and attached as an
exhibit and incorporated by reference a press release
that reported the Company's financial results for the
quarter ended June 30, 2003.
-18-
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, 2003 By: /s/ William E. Doyle, Jr.
--------------------------------------------
William E. Doyle, Jr.
President and Chief Executive Officer
Date: November 14, 2003 By: /s/ Tara Y. Harrison
--------------------------------------------
Tara Y. Harrison
Vice President and Chief Financial Officer
EXHIBIT INDEX
Number Document
------ --------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.