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, 2002
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, 2002, 1,962,777 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, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and
2001 (unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended September 30, 2002
and 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Controls and Procedures 16
Part II. Other Information
---------------------------
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 17
Item 3 Defaults upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications 19
2
Part I. Financial Information
------------------------------
Item 1 Financial Statements
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2002 2001
-------------- ------------
ASSETS (Unaudited)
Cash and cash equivalents $ 14,485 $ 12,437
Investment securities
Held-to-maturity 870 970
Available for sale 7,199 20,567
Investment in FHLB and other stocks 1,972 1,972
Loans receivable, net 165,351 177,579
Accrued interest receivable 1,027 1,245
Real estate owned 441 764
Office properties and equipment, net 8,066 8,110
Other assets 4,323 1,522
-------------- --------------
Total assets $ 203,734 $ 225,166
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Interest bearing demand $ 29,188 $ 25,460
Non-interest bearing demand 25,996 22,110
Money market accounts 27,698 22,394
Savings accounts 12,766 12,992
Certificates of deposit 76,766 117,676
-------------- --------------
172,414 200,632
Bonds payable 365 595
Advances from Federal Home Loan Bank 6,000 1,000
Accrued interest payable 51 137
Payments by borrowers for taxes and insurance 309 165
Other liabilities 536 546
-------------- --------------
Total liabilities 179,675 203,075
-------------- --------------
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, 1,962,777
issued and outstanding (1,961,727 in 2001) 2,453 2,452
Additional paid-in capital 8,960 8,953
Accumulated other comprehensive loss (32) (695)
Retained earnings 6,666 5,369
-------------- --------------
Total stockholders' equity 18,047 16,079
-------------- --------------
Total liabilities and stockholders' equity $ 203,734 $ 225,166
============== ==============
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,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Interest income
Loans $ 2,891 $ 3,629 $ 8,866 $ 12,184
Investment securities 260 575 1,070 1,694
------------ ------------ ------------ ------------
Total interest income 3,151 4,204 9,936 13,878
------------ ------------ ------------ ------------
Interest expense
Deposits 727 2,167 2,858 7,342
Borrowings 174 161 552 668
------------ ------------ ------------ ------------
Total interest expense 901 2,328 3,410 8,010
------------ ------------ ------------ ------------
Net interest income 2,250 1,876 6,526 5,868
Provision for loan losses 25 75 75 300
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 2,225 1,801 6,451 5,568
Non-interest income
Deposit account fees 181 184 553 565
Mortgage banking income 259 330 726 800
Investment sales commissions 40 53 104 206
Gain on sale of Investments 4 3 20 3
Other 154 43 418 201
------------ ------------ ------------ ------------
Total noninterest income 638 613 1,821 1,775
------------ ------------ ------------ ------------
Non-interest expense
Personnel 1,158 1,226 3,444 3,637
Occupancy 282 336 853 1,098
Information services 275 302 853 870
Marketing 59 49 102 166
Deposit insurance premiums 8 27 56 79
Other 406 415 1,065 1,169
------------ ------------ ------------ ------------
Total noninterest expense 2,188 2,355 6,373 7,019
------------ ------------ ------------ ------------
Income before income taxes 675 59 1,899 324
------------ ------------ ------------ ------------
Provision for income taxes 212 20 602 110
------------ ------------ ------------ ------------
Net income $ 463 $ 39 $ 1,297 $ 214
============ ============ ============ ============
Earnings per common share:
Basic $ 0.24 $ 0.02 $ 0.66 $ 0.11
============ ============ ============ ============
Diluted $ 0.23 $ 0.02 $ 0.65 $ 0.11
============ ============ ============ ============
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,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
(unaudited) (unaudited)
Net income $ 463 $ 39 $ 1,297 $ 214
------------ ------------ ------------ -------------
Other comprehensive income:
Unrealized gain on securities available for sale 389 232 1,006 953
------------ ------------ ------------ -------------
Other comprehensive income, before tax 389 232 1,006 953
Income tax expense related to items of other
comprehensive income (132) (79) (343) (324)
------------ ------------ ------------ -------------
Other comprehensive income, net of tax 257 153 663 629
------------ ------------ ------------ -------------
Comprehensive income $ 720 $ 192 $ 1,960 $ 843
============ ============ ============ =============
See accompanying notes to consolidated financial statements.
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
2002 2001
---- ----
(unaudited)
Operating Activities
Net Income $ 1,297 $ 214
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 75 300
Provision for loss on sale of other real estate owned 40 -
Depreciation and amortization 437 1,105
Deferred loan fees (45) (91)
Net amortization of premiums and accretion of discounts 361 131
Gain on sale of loans (726) (916)
Gain on sale of securities available for sale (20) (3)
Originations of loans held for sale (32,566) (48,905)
Proceeds from sale of loans 43,416 49,821
Gain on sale of other real estate owned (18) -
Gain on Branch - (79)
Changes in:
Accrued interest receivable 218 622
Other assets (30) (961)
Accrued interest payable (86) (285)
Prepayments by borrowers for taxes and insurance 144 319
Other liabilities (10) (370)
-------- --------
Net cash provided by operating activities 12,487 902
-------- --------
Investing activities
Net decrease in loans 1,821 23,074
Mortgage-backed securities principal repayments 250 196
Purchase of securities held to maturity (406) -
Proceeds from maturity of securities held to maturity 250 -
Purchase of securities available for sale - (18,000)
Proceeds from sale of securities available for sale 14,162 15,682
Proceeds from sale of real estate owned 500 757
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 bank-owned life insurance (3,000) -
Increase in bank-owned life insurance (106) -
Origination of servicing rights - (331)
Proceeds from sale of servicing rights - 826
Proceeds from sale of office properties and equipment 22 33
Purchase of office properties and equipment (423) (353)
-------- --------
Net cash provided by investing activities 13,070 20,157
-------- --------
Financing activities
Net increase (decrease) in deposits (28,218) 1,336
Proceeds from FHLB advances 48,000 36,000
Repayment of FHLB advances (43,000) (50,000)
Proceeds from issuance of common stock 8 -
Principal payments on bonds payable, including unapplied payments (299) (87)
-------- --------
Net cash absorbed by financing activities (23,509) (12,751)
-------- --------
Increase in cash and cash equivalents 2,048 8,308
Cash and cash equivalents, beginning of period 12,437 15,550
-------- --------
Cash and cash equivalents, end of period $ 14,485 $ 23,858
======== ========
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, 2002 and 2001
(unaudited)
Note 1 Principles of Presentation
The accompanying consolidated financial statements of Guaranty Financial
Corporation ("Guaranty") have not been audited by independent accountants,
except for the balance sheet at December 31, 2001. 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, 2001. The results for the three and nine
months ended September 30, 2002, 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 2001 financial statements have been reclassified to conform
to the year 2002 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, 2002 and 2001, 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,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Basic shares 1,962,777 1,961,727 1,962,777 1,961,727
Diluted shares 1,985,501 1,961,727 1,984,254 1,961,727
7
Note 4 Loans
The loan portfolio is comprised of the following:
September 30, December 31,
2002 2001
------------- ------------
(In thousands)
Mortgage loans:
Residential $ 24,086 $ 39,864
Commercial 9,474 16,277
Construction and land loans 37,447 36,307
--------- ---------
Total real estate loans 71,007 92,448
Commercial business loans 72,927 66,603
Consumer loans 23,872 20,973
--------- ---------
Total loans receivable 167,806 180,024
Adjustments:
Allowance for losses (2,533) (2,512)
Deferred costs 78 67
--------- ---------
Total loans receivable, net $ 165,351 $ 177,579
========= =========
Note 5 Allowance for Loan Loss
The following is a summary of transactions in the allowance for loan loss:
September 30, December 31,
2002 2001
------------- ------------
(In thousands)
Balance at January 1 $ 2,512 $ 2,396
Provision charged to operating expense 75 333
Recoveries added to the reserve 3 9
Loans charged off (57) (226)
------- -------
Balance at the end of the period $ 2,533 $ 2,512
======= =======
8
Note 6 Investments
The investment portfolio was comprised of the following:
September 30, December 31,
2002 2001
----------------- -----------------
(In thousands)
Held to maturity:
Mortgage-backed securities $ 470 $ 720
U.S. Government obligations 400 250
Available for sale:
Corporate Bonds 3,191 12,597
U.S. Government obligations 4,008 7,970
Other:
Federal Home Loan Bank stock 1,550 1,550
Federal Reserve Bank & other stocks 422 422
------------ ---------
$ 10,041 $ 23,509
============ ==========
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Guaranty Financial Corporation ("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 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 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 9.5% to $203.7 million at September 30, 2002, from $225.2
million at December 31, 2001. Cash and cash equivalents increased $2.1 million
or 16.5%, to $14.5 million at September 30, 2002, from $12.4 million at December
31, 2001. Net loans were $165.4 million at September 30, 2002, a decrease of
$12.2 million, or 6.9%, from net loans of $177.6 million at December 31, 2001.
Total deposits at September 30, 2002, were $172.4 million compared to $200.6
million at December 31, 2001. FHLB borrowings were $6.0 million at September 30,
2002, compared to $1.0 million at December 31, 2001. Total stockholders' equity
at September 30, 2002, increased by $1.9 million to $18.0 million from $16.1
million at December 31, 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 2002, Guaranty continued to strategically
reposition its loan portfolio. Net loans receivable decreased by 6.9% to $165.4
million at September 30, 2002, from $177.6 million at December 31, 2001. This
change was primarily attributable to a $15.8 million reduction in residential
mortgage loans and a $6.8 million reduction in commercial mortgage loans which
offset a $6.3 million increase in commercial business loans. During the nine
months ended September 30, 2002, Guaranty originated $32.6 million in
residential mortgage loans and sold $42.7 million in residential mortgage loans
in the secondary market. Residential mortgage loans held for sale were $1.7
million at September 30, 2002, down from $14.3 million at December 31, 2001.
Other segments of the loan portfolio were relatively constant during the first
nine months of 2002.
Investments
Total investments declined by 57.3% to $10.0 million at September 30, 2002,
compared to $23.5 million at December 31, 2001. The majority of this change was
due to the sale of long term corporate bonds which reduced the Company's
interest rate and credit risk.
10
Real Estate Owned
Real estate owned decreased to $441,000 at September 30, 2002, from $764,000 at
December 31, 2001. The decline was primarily due to the sale of a residential
property during the period. The remainder of real estate owned consists of one
residential house and developed lots listed for sale. No material losses are
anticipated on the ultimate sale of these properties.
Office Properties and Equipment
Guaranty's investment in office properties and equipment remained constant at
$8.1 million for September 30, 2002, and December 31, 2001.
Other Assets
Other assets increased to $4.3 million at September 30, 2002, primarily due to
the purchase of $3.0 million of bank owned life insurance.
Deposits
The Company's continued emphasis on attracting low cost deposits and providing
full service banking relationships to its customer base resulted in demand
accounts increasing by 16.0% to $55.2 million from $47.6 million at December 31,
2001. For the same time periods, money market accounts increased by 23.7% to
$27.7 million from $22.4 million. Deposits were $172.4 million at September 30,
2002, a decrease of $28.2 million, or 14.1%, from total deposits of $200.6
million at December 31, 2001. Certificates of deposit comprise 44.5% of total
deposits at September 30, 2002, compared to 58.7% at December 31, 2001.
FHLB Borrowings
Guaranty's borrowings from the Federal Home Loan Bank ("FHLB") at September 30,
2002 increased to $6.0 million from $1.0 million at December 31, 2001. Guaranty
was able to reduce its overall cost of funds by increasing its borrowings from
the FHLB. At September 30, 2002, Guaranty's available but unused borrowings with
the FHLB were approximately $14.7 million.
Stockholders' Equity
Stockholders' equity at September 30, 2002, increased by 12.2% to $18.0 million
from $16.1 million at December 31, 2001. The primary factors for the increase
were the year to date net income of $1.3 million and $8,000 related to the
issuance of 1,050 shares for the 2002 annual retainer for outside directors, and
an increase in the market value of Guaranty's available for sale investments by
approximately $663,000.
11
Results of Operations
Net Income
Guaranty reported net income of $463,000 ($.23 per diluted share) for the three
months ended September 30, 2002, compared with a net income of $39,000 ($.02 per
diluted share) for the three months ended September 30, 2001. The increase in
the net income was primarily due to the combination of increased net interest
income, reduced operating expenses and a lower provision for loan loss. Net
Income of $1.3 million for the nine months ended September 30, 2002 was an
improvement over the $214,000 reported for the same period a year ago.
Net Interest Income
Net interest income increased to $2.3 million for the three months ended
September 30, 2002, from the $1.8 million reported during the same period in
2001. The primary cause for the increase in net interest income was a decline in
the average cost of interest bearing liabilities which more than offset a
decline in the average balance and average yield of interest earning assets for
the most recent quarter. For these same periods, the cost of interest bearing
liabilities declined by 239 basis points to 2.20%. The primary cause of this
decline was a 258 basis point decline in the cost of certificates of deposit
which reflected the downward trend in interest rates during this time period.
For the same time periods, the yield on loans decreased by 100 basis points to
6.94%, primarily due to the impact of prime rate reductions throughout 2001 on
adjustable rate loans. The net interest margin increased to 4.82% for the most
recent quarter from 3.39% for the same period a year ago. Average earning assets
for the three months ended September 30, 2002, were $185.2 million compared to
$219.9 million for the same period in 2001. Average loans outstanding declined
by $16.1 million to $165.3 million and average investment securities declined by
$13.5 million to $15.0 million. For the same periods, average certificates of
deposit decreased by $55.9 million to $80.9 million. 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,
2002 2001 2002 2001
------------------ ------------------ ----------------- ------------------
Avg. Interest Earning Assets $185,196 $219,909 $193,438 $228,552
Average Yield 6.75% 7.58% 6.87% 8.12%
Avg. Interest Bearing Liabilities $162,136 $201,203 $171,702 $212,299
Average Cost 2.20% 4.59% 2.66% 5.04%
Net Interest Spread 4.55% 3.00% 4.21% 3.07%
Net Interest Margin 4.82% 3.39% 4.51% 3.43%
12
Provision for Loan Losses
Guaranty recorded a provision of $25,000 and $75,000 for the three months ended
September 30, 2002 and 2001, respectively. The decrease in the provision for the
current year resulted from the decrease in the size of the loan portfolio and
the increased level of the allowance for loan losses as a percentage of total
loans. 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's assessment of the adequacy of the allowance is
based upon type and volume of the loan portfolio, past loan loss experience,
existing and anticipated economic conditions, and other factors that deserve
current recognition in estimating future loan losses. Management's assessment of
the adequacy of the allowance is subject to evaluation and adjustment by
Guaranty's regulators.
There were loan charge-offs for the three months ended September 30, 2002 of
$10,000, compared to $87,000 for the same period a year ago. At September 30,
2002, Guaranty had $119,000 of loans that were 90 days or more past due, while
loans totaling $1.9 million were considered to be non-accrual. At September 30,
2002, the allowance for loan losses was $2.5 million or 1.51% 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, 2002, 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.
Non-interest Income
Non-interest income was $638,000 for the three months ended September 30, 2002,
compared with $613,000 for the same period a year ago. This change was primarily
due to a decrease in mortgage banking income to $259,000 for the most recent
quarter compared to $330,000 for the same period a year ago. During 2001
Guaranty changed its mortgage banking business model to sell all residential
fixed rate mortgage loans on a servicing released basis. In addition, Guaranty
sold its mortgage loan servicing rights related to mortgage loans serviced for
others. The revised mortgage banking business model eliminates the secondary
market interest rate risk through simultaneously locking a mortgage loan rate
with the borrower and a correspondent investor at the same time. The 2001 sale
of existing mortgage servicing rights and the continued sale of mortgage loans
on a servicing released basis eliminated the valuation volatility associated
with retained servicing rights.
Fees on deposit accounts decreased by 1.6% to $181,000 for the most recent
quarter compared to $184,000 for the same period a year ago. The decline was due
to the price reduction of certain consumer and small business account fees in
order to increase the competitiveness of those accounts. Investment sales
commissions decreased to $40,000 for the three months ended September 30, 2002,
compared to $53,000 for the same period a year ago due to reduced sales volume.
The current quarter included a $53,000 increase in the cash surrender value of
bank owned life insurance related to policies purchased in the first quarter of
2002.
13
Non-interest Expense
Non-interest expense was $2.2 million for the quarter ended September 30, 2002,
a $167,000 decrease over the amount reported for the same period last year. The
decrease is primarily attributable to the right sizing of administrative
functions and the elimination of personnel and occupancy expenses due to the
sale of a retail banking office in the suburban Richmond market in July 2001.
The expenses related to the suburban Richmond retail banking office were
included in the 2001 financial statements until July 2001 when the sale
transaction was consummated. The most recent quarter included a $30,000 charge
related to impaired assets in the relocation of the Company's Downtown
Charlottesville branch.
Income Tax Expense
Guaranty recognized income tax expense of $212,000 for the three months ended
September 30, 2002, compared to income tax expense of $20,000 for the same
period in 2001. The effective tax rate for the most recent quarter was 31.4%
compared to 33.9% for the same period a year ago. The lower effective tax rate
for the most recent quarter was due to an increase in non-taxable income from
bank owned insurance. The net increase in income tax expense between periods was
a result of increases in the level of taxable income.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either
through the sale of existing assets or through the acquisition of additional
funds through asset and liability management. Guaranty's primary sources of
funds are deposits, borrowings and amortization, prepayments and maturities of
outstanding loans and securities. While scheduled payments from the amortization
of loans and securities are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. Excess funds are invested in overnight
deposits to fund cash requirements experienced in the normal course of business.
Guaranty has been able to generate sufficient cash through its deposits as well
as through its borrowings.
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, total loans declined by approximately $2.5 million and
certificates of deposit declined by approximately $12.9 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, 2002, total approved loan commitments outstanding
were approximately $5.0 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 September 30, 2002, were $65.3
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 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 Guaranty's regulatory
capital ratios. At September 30, 2002, 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 $ 24,093 11.75% $ 8,204 4.00% $ 15,889
Tier 1 Risk Based Capital 24,093 14.29% 4.00% 17,350
Total Risk Based Capital 26,205 15.54% 13,486 8.00% 12,719
Regulatory Issues
In October 2000, Guaranty and the 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. Under the terms of the agreement, Guaranty was restricted from
paying future dividends or incurring any debt at the parent company level
without prior regulatory approval. In addition, the Bank was prohibited from
paying intercompany dividends to Guaranty without prior regulatory approval.
This agreement was terminated, and as a result the restriction and the
prohibition described above were lifted, effective October 18, 2002.
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.
15
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. Within the 90 day period prior to the
filing of 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.
Internal Controls
The Company maintains internal accounting controls that are designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and properly recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles or any other criteria applicable to
such statements. There were no significant changes to the Company's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of the most recent evaluation by the Chief Executive
Officer and Chief Financial Officer.
16
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
99.1 Statement of Chief Executive Officer and
Chief Financial Officer Pursuant to 18
U.S.C. ss. 1350
(b) Reports on Form 8-K - None
17
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, 2002 By: /s/ William E. Doyle, Jr.
--------------------------------------
William E. Doyle, Jr.
President and Chief Executive Officer
Date: November 14, 2002 By: /s/ Thomas F. Crump
--------------------------------------
Thomas F. Crump
Senior Vice President and Chief
Financial Officer
18
CERTIFICATIONS
--------------
I, William E. Doyle, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Guaranty
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
19
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ William E. Doyle, Jr.
William E. Doyle, Jr.
President and Chief Executive Officer
20
CERTIFICATIONS
--------------
I, Thomas F. Crump, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Guaranty
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
21
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Thomas F. Crump
Thomas F. Crump
Senior Vice President and
Chief Financial Officer
Exhibit Index
Exhibit No.
99.1 Certification Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350
99.2 Certification Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350
22