-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IxDcqqBa916GhuwuQvDIirh8nushqxJqpcw39o+CaSaAHEc+fFoLpC8cqa1jrWSy /qAEJZK9VZnOF0wS3u2LWw== 0000899243-98-002117.txt : 19981116 0000899243-98-002117.hdr.sgml : 19981116 ACCESSION NUMBER: 0000899243-98-002117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GUARANTY BANCSHARES INC /TX/ CENTRAL INDEX KEY: 0001058867 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 751656431 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24235 FILM NUMBER: 98747580 BUSINESS ADDRESS: STREET 1: P O BOX 1158 CITY: MT PLEASANT STATE: TX ZIP: 75456 BUSINESS PHONE: 9035729881 MAIL ADDRESS: STREET 1: PO BOX 1158 CITY: MT PLEASANT STATE: TX ZIP: 75456 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ____________ COMMISSION FILE NUMBER: 0-24235 GUARANTY BANCSHARES, INC. (Exact name of registrant as specified in its charter) TEXAS 75-16516431 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 W. ARKANSAS MT. PLEASANT, TEXAS 75455 (Address of principal executive offices, including zip code) 903-572-9881 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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. [X]Yes [ ] No As of November 11, 1998, there were 2,898,280 shares of the registrant's Common Stock, par value $1.00 per share, outstanding. GUARANTY BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997................ 2 Consolidated Statements of Earnings for the Nine Months Ended September 30, 1998 and 1997 (unaudited). 4 Consolidated Statement of Changes in Shareholders' Equity............................................. 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (unaudited)....................................................... 6 Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 1998 and 1997 (unaudited)....................................................... 7 Notes to Interim Consolidated Financial Statements.................................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................20 PART II - OTHER INFORMATION Item 1. Legal Proceedings.......................................................................................21 Item 2. Changes in Securities and Use of Proceeds...............................................................21 Item 3. Defaults upon Senior Securities ........................................................................21 Item 4. Submission of Matters to a Vote of Security Holders.....................................................21 Item 5. Other Information.......................................................................................21 Item 6. Exhibits and Reports on Form 8-K........................................................................21 Signatures.......................................................................................................22
1 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GUARANTY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
Sept. 30, Dec. 31, 1998 1997 --------- -------- (Unaudited) ASSETS Cash and due from banks........................................ $ 10,642 $ 9,750 Federal funds sold............................................. 11,410 7,720 Securities: Available-for-sale............................................ 32,576 42,906 Held-to-maturity.............................................. 6,984 15,233 -------- -------- Total securities............................................. 39,560 58,139 -------- -------- Loans, net of allowance for loan losses of $1,488 and $1,129... 175,858 156,266 Premises and equipment, net.................................... 7,016 6,359 Accrued interest receivable.................................... 2,290 2,224 Other assets................................................... 6,461 3,699 -------- -------- Total assets.................................................. $253,237 $244,157 ======== ========
2 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing.......................... $ 38,771 $ 46,295 Interest-bearing............................. 186,101 176,666 ------- ------- Total deposits............................ 224,872 222,961 ------- ------- Borrowed funds................................ 2,000 0 Other liabilities............................. 2,864 2,943 ------- ------- Total liabilities......................... 229,736 225,904 ------- ------- Shareholders' equity: Preferred stock................................ 0 827 Common stock................................... 2,898 2,548 Additional capital............................. 9,514 5,396 Retained earnings.............................. 10,824 9,240 Accumulated other comprehensive income......... 267 242 ------- ------- 23,503 18,253 Less common stock held in treasury--at cost... 2 0 ------- ------- Total shareholders' equity................ 23,501 18,253 ------- ------- Total liabilities and shareholders' equity $253,237 $244,157 ======== ======== See accompanying Notes to Interim Consolidated Financial Statements. 3 GUARANTY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Nine months ended September 30, ------------------- 1998 1997 -------- -------- Interest income: Loans ....................................................................................... $10,699 $9,410 Securities................................................................................... 2,431 2,308 Federal funds sold and other temporary investments........................................... 517 553 ------ ------- Total interest income ..................................................................... 13,647 12,271 Interest expense............................................................................... 6,724 5,967 ------ ------- Net interest income........................................................................ 6,923 6,304 Provision for loan losses...................................................................... 490 110 ------ ------- Net interest income after provision for loan losses........................................ 6,433 6,194 ------ ------- Noninterest income: Service charges.............................................................................. 919 803 Other operating income....................................................................... 1,239 407 Realized gain on available-for-sale securities............................................... 81 18 Realized gain on held-to-maturity securities................................................. 0 1 ------ ------- Total noninterest income................................................................... 2,239 1,229 ------ ------- Noninterest expense: Employee compensation and benefits........................................................... 3,276 2,758 Net bank premises expense.................................................................... 883 837 Other operating expenses..................................................................... 2,183 1,880 ------ ------- Total noninterest expenses................................................................. 6,342 5,475 ------ ------- Earnings before income taxes............................................................... 2,330 1,948 Provision for income taxes..................................................................... 391 200 ------ ------- Net earnings before preferred stock dividends.............................................. 1,939 1,748 Preferred stock dividends.................................................................. (37) (37) ------ ------- Net earnings available to common shareholders.............................................. $1,902 $ 1,711 ====== ======= Basic earnings per common share............................................................ $0.69 $0.67 ====== ======= Diluted earnings per common share.......................................................... $0.69 $0.67 ====== =======
See accompanying Notes to Interim Consolidated Financial Statements. 4 GUARANTY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accumulated other Total compre- Common share- Preferred Common Additional Retained hensive stock in holders' stock stock capital earnings income treasury equity ---------- ------- ---------- --------- ------- --------- --------- Balance at January 1, 1997......... $ 827 $2,548 $5,396 $ 7,480 $ 19 $(20) $16,250 Sale of treasury stock............. ---- ---- ---- ---- ---- 20 20 Dividends Preferred - $0.45 per share....... ---- ---- ---- (74) ---- ---- (74) Common - $0.22 per share.......... ---- ---- ---- (566) ---- ---- (566) Net change in unrealized gain on available-for-sale securities, net of tax of $114.... ---- ---- ---- ---- 223 ---- 223 Net earnings for the year.......... ---- ---- ---- 2,400 ---- ---- 2,400 ----- ------ ------ ------- ---- ---- ------- Balance at December 31, 1997....... $ 827 $2,548 $5,396 $ 9,240 $242 $ ---- $18,253 Purchase of treasury stock......... ---- ---- ---- ---- ---- (2) (2) Purchase of preferred stock........ (827) ---- ---- ---- ---- ---- (827) Sale of common stock............... ---- 350 4,118 ---- ---- ---- 4,468 Dividends Preferred - $0.225 per share ---- ---- ---- (37) ---- ---- (37) Common - $0.11 per share ---- ---- ---- (319) ---- ---- (319) Rounding........................... ---- ---- ---- 1 ---- ---- 1 Net change in unrealized gain on available-for-sale securities, net of tax of $13(1).......................... ---- ---- ---- ---- 25 ---- 25 Net earnings(1).................... ---- ---- ---- 1,939 ---- ---- 1,939 ----- ------ ------ ------- ---- ---- ------- Balance at September 30, 1998(1)... $ 0 $2,898 $9,514 $10,824 $267 $ (2) $23,501 ===== ====== ====== ======= ==== ==== =======
(1) Unaudited See accompanying Notes to Interim Consolidated Financial Statements. 5 GUARANTY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
Nine months ended Sept. 30, ----------------------------- 1998 1997 -------------- ------------ Cash flows from operating activities: Net earnings...................................................................... $ 1,939 $ 1,748 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation.................................................................... 409 402 Amortization of premiums, net of (accretion) of discounts on securities......... 128 3 Net realized gain on available-for-sale securities.............................. (81) (19) Gain on sale of loans........................................................... (674) 0 Provision for loan loss......................................................... 490 110 Gain on sale of premises, equipment and other real estate....................... (56) (7) Write down of ORE and repossessed assets........................................ 15 65 Proceeds from sale of loans..................................................... 1,967 0 Increase in accrued interest receivable and other assets........................ (3,360) (1,453) (Decrease) increase in accrued interest and other liabilities................... (92) 309 -------- -------- Net cash provided by operating activities.................................... 685 1,158 Cash flows from investing activities: Purchases of held-to-maturity securities.......................................... 0 (7,179) Proceeds from sales, maturities and repayments of available-for-sale securities... 13,745 3,039 Purchases of available-for-sale securities........................................ (3,419) (30,047) Proceeds from maturities and repayments of held-to-maturity securities............ 8,244 13,078 Net increase in loans............................................................. (21,375) (11,306) Purchases of premises and equipment............................................... (1,066) (1,167) Proceeds from sale of premises, equipment and other real estate................... 574 157 Net (increase) decrease in federal funds sold..................................... (3,690) 6,960 -------- -------- Net cash used by investing activities........................................ (6,987) (26,465) Cash flows from financing activities: Change in deposits................................................................ 1,911 18,266 Proceeds from borrowings.......................................................... 2,000 0 Repayment of borrowings........................................................... 0 (171) Purchase of treasury stock........................................................ (2) 0 Sale of treasury stock............................................................ 0 0 Dividends paid.................................................................... (356) (310) Redemption of preferred stock..................................................... (827) 0 Sale of common stock.............................................................. 4,468 0 -------- -------- Net cash provided from financing activities.................................. 7,194 17,785 -------- -------- Net increase (decrease) in cash and cash equivalents......................... 892 (7,522) Cash and cash equivalents at beginning of period...................................... 9,750 15,809 -------- -------- Cash and cash equivalents at end of period............................................ $ 10,642 $ 8,287 ======== ========
See accompanying Notes to Interim Consolidated Financial Statements. 6 GUARANTY BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS) (UNAUDITED) Nine months ended September 30, ----------------- 1998 1997 ---- ---- Net earnings.................................... $ 1,939 $ 1,748 Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized gains arising during the period... 25 161 ------- ------- Comprehensive income............................ $ 1,964 $ 1,909 ======= ======= See accompanying Notes to Interim Consolidated Financial Statements. 7 GUARANTY BANCSHARES, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) (1) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Guaranty Bancshares, Inc. (collectively referred to as the Company) and its wholly-owned subsidiary Guaranty Financial Corp., Inc. which wholly owns Guaranty Bank and one non-bank subsidiary, Guaranty Company. Guaranty Bank has two non-bank subsidiaries, Guaranty Leasing Company and GB Com, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with the Company's Prospectus which is a part of the Registration Statement on Form S-1 (Registration No. 333-48959) filed with the SEC on May 11, 1998. Operating results for the nine month period ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. (2) INCOME PER COMMON SHARE Income per common share was computed based on the following: (All computations show the effects of a seven for one common shares stock split effective March 24, 1998)
For the nine months ended September 30, ------------------------ 1998 1997 ---- ---- Net earnings available to common shareholders.................. $ 1,902 $ 1,711 Weighted average common shares used in basic EPS.. 2,742,724 2,548,280 Potential dilutive common shares............................... 0 0 ---------- ---------- Weighted average common and potential dilutive common shares used in dilutive EPS ........................... 2,742,724 2,548,280 Basic earnings per common share ............................... $ 0.69 $ 0.67 ========== ========== Diluted earnings per common share ................. $ 0.69 $ 0.67 ========== ==========
8 GUARANTY BANCSHARES, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SEPTEMBER 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) COMPREHENSIVE INCOME Effective January 1, 1998, the Company has adopted Financial Accounting Standards No. 130, Reporting Comprehensive Income, which requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology which includes disclosure of certain financial information that historically has not been recognized in the calculation of net earnings. The tax effects for components of comprehensive income are as follows:
Nine months ended September 30, ------------------------------------------------------------------------- 1998 1997 --------------------------------- ------------------------------- Before Tax Net of Before Tax Net of Tax (Expense)/ Tax Tax (Expense)/ Tax Amount Benefit Amount Amount Benefit Amount --------------------------------- ------------------------------- Unrealized gains on securities arising during the period............................ $38 $(13) $25 $244 $(83) $161 --------------------------------- ------------------------------- Other comprehensive income.......... $38 $(13) $25 $244 $(83) $161 ================================= ===============================
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Guaranty Bancshares, Inc. (the "Company") is a registered bank holding company that derives substantially all of its revenues and income from the operation of its subsidiary, Guaranty Bank (the "Bank"). The Bank is a full service bank that provides a broad line of financial products and services to small and medium-sized businesses and consumers through seven banking locations in the Texas communities of Mount Pleasant (two offices), Bogata, Deport, Paris, Talco and Texarkana. The following Management's Discussion and Analysis of Financial Condition and Results of Operations may contain certain forward- looking statements regarding future financial condition, results of operations, and the Company's business operations. Such statements involve risks, uncertainties and assumptions, including, but not limited to monetary policy and general economic conditions in Texas and more specifically Northeast Texas, the actions of competitors and customers, the success of the Company in implementing its strategic plan, and the effects of regulatory restrictions imposed on banks and bank holding companies generally. Should one or more of these risks or uncertainties materialize or should these underlying assumptions prove incorrect, actual outcomes may vary materially from outcomes expected or anticipated by the Company. OVERVIEW Net earnings available to common shareholders for the nine months ended September 30, 1998, were $1.9 million or $0.69 per share compared to $1.7 million or $0.67 per share for the nine months ended September 30, 1997, an increase of 11.2%. While aided by an increase in net interest income, due to a 11.6% growth in average earning assets, the improvement in net earnings was also the result of a gain on the sale of approximately $2.0 million in principal amount of mortgage loans that were originally purchased in 1991 at a discount from the Resolution Trust Corporation("RTC"). In March 1998, the Company sold the mortgage loans at par, which resulted in a gain of $444,000, net of $230,000 in taxes expensed as a result of the sale. The Company did not have a gain from the sale of loans in the first nine months of 1997. The gain on the sale of the loans in 1998 was partially offset by an increase in the provision for loan losses from $110,000 in the first nine months of 1997 to $490,000 in the first nine months of 1998 primarily as the result of a $26.8 million or 17.8% increase in loans during the same time period. Accordingly, after giving effect to these transactions, core earnings available to common shareholders for the period were $1.8 million or $0.67 per share for the first nine months of 1998 compared to $1.7 million or $0.67 per share for the first nine months of 1997, a 6.6% increase. The nine month period ended September 30, 1998 showed good growth. Total loans increased to $177.3 million at September 30, 1998, from $157.4 million at December 31, 1997, an increase of $19.9 million or 12.7%. Total assets were $253.2 million at September 30, 1998, compared with $244.2 million at December 31, 1997. The increase of $9.0 million in total assets resulted mainly from an increase in total deposits to $224.9 million at September 30, 1998, from $223.0 million at December 31, 1997, an increase of $1.9 million or 0.9%, new borrowings from the Federal Home Loan Bank ("FHLB") of $2.0 million and an increase in shareholders' equity of $5.2 million. Common shareholders' equity was $23.5 million at September 30, 1998, compared with $17.4 million at December 31, 1997, an increase of $6.1 million or 34.9%. This increase was due to the initial public offering proceeds of $4.5 million (net of expenses), net earnings for the period of $1.9 million less dividends paid of $356,000. 10 RESULTS OF OPERATIONS Interest Income Interest income for the nine months ended September 30, 1998, was $13.6 million, an increase of $1.4 million or 11.2% from the nine months ended September 30, 1997. The increase in interest income was due primarily to higher interest income on loans and securities. Average loans were $165.7 million for the nine months ended September 30, 1998, compared with $144.3 million for the nine months ended September 30, 1997, an increase of $21.4 million or 14.8%. Internal growth accounted for all of the $21.4 million increase in average loans. Average securities were $50.2 million for the nine months ended September 30, 1998, compared with $47.4 million for the nine months ended September 30, 1997, an increase of $2.8 million or 5.9%. Interest Expense Interest expense on deposits and other interest-bearing liabilities was $6.7 million for the nine months ended September 30, 1998, compared with $6.0 million for the nine months ended September 30, 1997, an increase of $757,000 or 12.7%. The increase in interest expense was due primarily to an increase in average interest-bearing liabilities, to $182.8 million for the nine months ended September 30, 1998, from $165.2 million for the nine months ended September 30, 1997, an increase of $17.6 million or 10.7%. In addition, the interest rate on average interest-bearing liabilities increased to 4.92% from 4.83% for the same periods. Net Interest Income Net interest income was $6.9 million for the nine months ended September 30, 1998, compared with $6.3 million for the nine months ended September 30, 1997, an increase of $619,000 or 9.8%. The increase in net interest income resulted primarily from growth in average earning assets to $228.0 million for the nine months ended September 30, 1998, from $204.4 million for the nine months ended September 30, 1997, an increase of $23.6 million or 11.6%. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change." It is also affected by changes in yields earned on interest- earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change." The following tables set forth, for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the average rate earned or paid for the nine months ended September 30, 1998 and 1997. The tables also set forth the average rate earned on total interest- earning assets, the average rate paid on total interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. 11
Nine months ended September 30, ----------------------------------------------------------------------- 1998 1997 ---- ---- Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate ----------- ---------- -------- ----------- -------- -------- ASSETS: (Dollars in thousands) Interest-earning assets: Loans.................................... $165,714 $ 10,699 8.63% $144,318 $ 9,410 8.72% Securities............................... 50,200 2,431 6.47% 47,381 2,308 6.51% Federal funds sold and other temporary investments......................... 12,124 517 5.70% 12,689 553 5.83% -------- -------- ---- -------- ------- ----- Total interest-earning assets....... 228,038 $ 13,647 8.00% 204,388 $12,271 8.03% Less allowance for loan losses................. (1,364) (1,069) -------- -------- Total interest-earning assets, net of allowance................... 226,674 203,319 Nonearning assets.............................. 23,033 19,577 -------- -------- Total assets........................ $249,707 $222,896 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing demand deposits......... $ 18,908 $ 387 2.74% $ 17,474 $ 366 2.80% Savings and money market accounts........ 39,498 1,151 3.90% 38,550 1,106 3.84% Certificates of deposit.................. 124,386 5,186 5.57% 108,911 4,482 5.50% Borrowed funds........................... 37 0 0.00% 72 6 11.15% Federal funds purchased.................. 0 0 0.00% 152 7 6.15% -------- -------- ---- -------- ------- ---- Total interest-bearing liabilities........................ 182,829 6,724 4.92% 165,159 5,967 4.83% -------- -------- ---- -------- ------- ---- Noninterest-bearing liabilities: Noninterest-bearing demand deposits...... 43,069 38,551 Other liabilities........................ 2,662 2,147 -------- -------- Total liabilities................... 228,560 205,857 Shareholders' equity........................... 21,147 17,039 -------- -------- Total liabilities and shareholders' equity............... $249,707 $222,896 ======== ======== Net interest income............................ $ 6,923 $6,304 ======== ======= Net interest spread............................ 3.08% 3.20% ==== ==== Net interest margin............................ 4.06% 4.12% ==== ====
12 The following table presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) related to outstanding balances and the volatility of interest rates. For purposes of this table, changes attributable to both rate and volume which can be segregated have been allocated. Nine months ended September 30, --------------------------------- 1998 vs. 1997 --------------------------------- Increase (Decrease) Due to ------------------- Volume Rate Total ------ ---- ----- (Dollars in thousands) Interest-earning assets: Loans.................................... $1,386 $ (97) $1,289 Securities............................... 136 (13) 123 Federal funds sold and other temporary investments............................ 98 (134) (36) ------ ----- ------ Total increase (decrease) in interest income...................... 1,620 (244) 1,376 ------ ----- ------ Interest-bearing liabilities: Interest-bearing demand deposits......... 29 (8) 21 Savings and money market accounts........ 28 17 45 Certificates of deposit.................. 645 59 704 Federal funds purchased.................. 0 (7) (7) Borrowed funds........................... 0 (6) (6) ------ ----- ------ Total increase in interest expense.............................. 702 55 757 ------ ----- ------ Increase (decrease) in net interest income.................................. $ 918 $(299) $ 619 ====== ===== ====== 13 Provision and Allowance for Loan Losses In originating loans, the Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for such loan. The Company maintains an allowance for loan losses based upon, among other things, historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectibility of loans in the Company's portfolio. In addition to unallocated allowances, specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans which are contractually past due and considering the net realizable value of the collateral for the loan. Management actively monitors the Company's asset quality and provides specific loss allowances when necessary. Loans are charged-off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations. As of September 30, 1998, the allowance for loan losses amounted to $1.5 million or 0.84% of total loans. The allowance for loan losses as a percentage of nonperforming loans was 145.03% at September 30, 1998. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectibility of loans in the Company's portfolio. The provision for loan losses for the nine months ended September 30, 1998, was $490,000 compared with $110,000 for the nine months ended September 30, 1997. The increase in the provision came primarily as a result of the growth in the loan portfolio from $150.5 million at September 30, 1997, to $177.3 million at September 30, 1998. The provision was incurred to increase the allowance for loan losses to a more appropriate level and to allow for continued loan growth. For the nine months ended September 30, 1998, net charge-offs were $131,000. 14 Set forth below is an analysis of the allowance for loan losses for the nine months ended September 30, 1998: Nine months ended Sept. 30, 1998 -------------- (Dollars in thousands) Average loans outstanding ................................. $165,714 -------- Gross loans outstanding at end of period .................. $177,346 -------- Allowance for loan losses at beginning of period .......... 1,129 Provision for loan losses ................................. 490 Charge-offs: Commercial and industrial ............................. (111) Real estate ........................................... (1) Consumer .............................................. (90) Recoveries: Commercial and industrial ............................. 28 Real estate ........................................... 8 Consumer ............................................... 35 -------- Net loan (charge-offs) recoveries .......................... (131) -------- Allowance for loan losses at end of period ................. $ 1,488 ======== Ratio of allowance to end of period loans .................. 0.84% Ratio of net charge-offs to average loans .................. 0.08% Ratio of allowance to end of period nonperforming loans .... 145.03% Noninterest Income The Company's primary sources of recurring noninterest income are service charges on deposit accounts and fee income. Excluding a $674,000 nonrecurring gain from the sale of loans, noninterest income for the nine months ended September 30, 1998 increased to $1.6 million from $1.2 million for the nine months ended September 30, 1997, an increase of $336,000 or 27.3%. The gain on sale of loans was recorded in March 1998, when the Company sold approximately $2.0 million of loans originally purchased at a discount in June 1991 from the RTC. The following table presents, for the periods indicated, the major categories of noninterest income: Nine months ended September 30, ----------------- 1998 1997 ---- ---- (Dollars in thousands) Service charges on deposit accounts... $ 919 $ 803 Fee income............................ 345 295 Fiduciary income...................... 34 29 Gain on sale of loans................. 674 0 Other noninterest income.............. 186 83 Realized gain on securities........... 81 19 ----- ----- Total noninterest income .......... $2,239 $1,229 ====== ====== 15 After excluding the nonrecurring gain on the sale of loans, the increase in noninterest income from September 30, 1997 to September 30, 1998, resulted primarily from an increase in service charges on deposit accounts and fee income due to an increase in the number of deposit accounts. Additionally, the Company's increased emphasis on fee-based services resulted in greater income from check cashing, ATM fees, appraisal fees and wire transfer fees. Noninterest Expenses Noninterest expenses totaled $6.3 million for the nine months ended September 30, 1998 compared with $5.5 million for the nine months ended September 30, 1997, an increase of $867,000 or 15.8%. The following table presents, for the periods indicated, the major categories of noninterest expenses: Nine months ended September 30, ---------------------- 1998 1997 ---- ---- (Dollars in thousands) Employee compensation and benefits.... $3,276 $2,758 ------ ------ Non-staff expenses: Net bank premises expense......... 883 837 Office and computer supplies...... 219 217 Legal and professional fees....... 273 219 Advertising....................... 183 171 Postage........................... 99 92 FDIC insurance.................... 20 17 Other............................. 1,389 1,164 ------ ------ Total non-staff expenses..... 3,066 2,717 ------ ------ Total noninterest expenses... $6,342 $5,475 ====== ====== Employee compensation and benefits expense for the nine months ended September 30, 1998, was $3.3 million, an increase of $518,000 or 18.8% over the $2.8 million for the same period in 1997. The increase was due primarily to normal salary increases, the staffing of a new location in Texarkana, which opened in August 1997, and additional staff at the Mt. Pleasant and Paris locations to handle customer growth. The number of full-time equivalent employees was 134 at September 30, 1998, compared with 121 at September 30, 1997, an increase of 10.7%. Non-staff expenses were $3.1 million for the nine months ended September 30, 1998, compared with $2.7 million for the same period in 1997, an increase of $349,000 or 12.8%. Net bank premises expense increased $46,000 or 5.5% to $883,000. Legal and professional fees increased $54,000 or 24.7% due primarily to independent loan review expenses and bankruptcy and litigation proceedings. The increase in advertising of $12,000 or 7.0% was due to additional advertising campaigns initiated in early 1998 as compared to the same time period of 1997. Other non-staff expenses include director fees, insurance, franchise tax, telephone expense and other miscellaneous expenses, the combination of which increased $225,000 or 19.3% to $1.4 million as of September 30, 1998. 16 Income Taxes Income tax expense increased approximately $191,000 to $391,000 for the nine months ended September 30, 1998 from $200,000 for the same period in 1997. The increase was primarily attributable to additional operating income and the gain on sale of loans in the amount of $674,000. The Company did not have a gain from the sale of loans in the first nine months of 1997. FINANCIAL CONDITION Loan Portfolio Total loans were $177.3 million at September 30, 1998, an increase of $19.9 million or 12.7% from $157.4 million at December 31, 1997. Loan growth occurred primarily in commercial loans and 1 to 4 family residential loans. Loans comprised 77.0% of total earning assets at September 30, 1998 compared with 70.5% at December 31, 1997. The following table summarizes the loan portfolio of the Company by type of loan as of September 30, 1998, and December 31, 1997:
September 30,1998 December 31, 1997 ------------------ -------------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) Commercial and industrial .................. $ 57,911 32.65% $44,772 28.45% Real estate: Construction and land development....................... 3,326 1.88 3,072 1.95 1-4 family residential ............... 45,922 25.89 41,398 26.30 Commercial mortgages ................. 42,157 23.77 42,363 26.92 Farmland.............................. 8,315 4.69 6,492 4.12 Multi-family residential.............. 368 0.21 360 0.23 Consumer.................................... 19,347 10.91 18,938 12.03 -------- ------ -------- ------ Total loans ...................... $177,346 100.00% $157,395 100.00% ======== ======= ======== ======
17 NONPERFORMING ASSETS Nonperforming assets were $1.1 million at September 30, 1998 compared with $1.9 million at December 31, 1997, reflecting continued strong asset quality and improving trends in nonperforming assets. The ratio of nonperforming assets to total loans and other real estate was 0.6% and 1.2% at September 30, 1998, and December 31, 1997, respectively. The following table presents information regarding nonperforming assets as of the dates indicated: Sept. 30, Dec. 31, 1998 1997 --------- -------- (Dollars in thousands) Nonaccrual loans.......................... $ 292 $ 298 Accruing loans 90 or more days past due... 734 918 ------ ------ Total nonperforming loans................. 1,026 1,216 Other real estate......................... 79 714 ------ ------ Total nonperforming assets................ $1,105 $1,930 ====== ====== SECURITIES Securities totaled $39.6 million at September 30, 1998, a decline of $18.5 million from $58.1 million at December 31, 1997. The decline occurred as maturing securities were used to fund loans. At September 30, 1998, securities represented 15.6% of total assets compared with 23.8% of total assets at December 31, 1997. The yield on average securities for the nine months ended September 30, 1998, was 6.47% compared with 6.51% for the same period in 1997. At September 30, 1998, securities included $3.1 million in U.S. Treasury securities, $17.7 million in U.S. Government securities, $16.6 million in mortgage-backed securities, $1.1 million in equity securities and $1.1 million in municipal securities. The average life of the securities portfolio at September 30, 1998, was approximately one year and ten months. PREMISES AND EQUIPMENT Premises and equipment totaled $7.0 million at September 30, 1998 and $6.4 million at December 31, 1997. Although the net change only shows an increase of $657,000 or 10.3%, in fixed assets, approximately $1.2 million was capitalized in the building of the new Texarkana facility while total premises and equipment decreased due to normal depreciation recorded by the Company. OTHER ASSETS On July 1, 1998, the Company entered into an incentive retirement plan (the "Plan") to provide future retirement benefits for eleven of its key senior officers. The Plan is a non-qualified plan that supplements the Company's current 401(k) Plan. Grants to the Plan will be awarded annually by the Board of Directors based on a percentage of the annual salary of each officer selected to participate in the Plan. The benefit of the Plan to each selected officer is based on the Company's annual return on equity ratio and such officer's annual salary. The total contribution to the Plan was funded with a single insurance premium of $3.1 million. The Company did not have an incentive retirement plan in 1997. 18 DEPOSITS At September 30, 1998, demand, money market and savings deposits accounted for approximately 43.6% of total deposits, while certificates of deposit made up 56.4% of total deposits. Noninterest-bearing demand deposits totaled $38.8 million or 17.2% of total deposits at September 30, 1998, compared with $46.3 million or 20.8% of total deposits at December 31, 1997. The average cost of deposits, including noninterest-bearing demand deposits, was 3.98% for the nine months ended September 30, 1998 compared with 3.92% for the same period in 1997. The increase in the average cost of deposits was primarily due to the increase in average interest-bearing deposits. LIQUIDITY The Company's Asset/Liability Management Policy is intended to maintain adequate liquidity for the Company. Liquidity involves the Company's ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate the Company on an ongoing basis. The Company's liquidity needs are primarily met by growth in core deposits. Although access to purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of investment opportunities, the Company does not rely on these external funding sources. The cash and federal funds sold position, supplemented by amortizing investments along with payments and maturities within the loan portfolio, have historically created an adequate liquidity position. The Company's cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash provided by operating activities was $685,000 and $1.2 million for the nine months ended September 30, 1998 and 1997, respectively. Net cash (used) by investing activities was $(7.0) million and $(26.5) million for the nine months ended September 30, 1998 and 1997, respectively. During the nine months ended September 30, 1998, the Company funded more loans and purchased fewer securities than it did in the nine months ended September 30, 1997. The Company also experienced an increase in federal funds in the nine months ended September 30, 1998 over the nine months ended September 30, 1997. Net cash provided by financing activities was $7.2 million and $17.8 million for the nine months ended September 30, 1998 and 1997, respectively. The difference was due primarily to a larger net increase in deposits of $16.4 million in 1997 over 1998 and to the sale of common stock of $4.5 million offset by the redemption of preferred stock of $827,000 during the nine months ended September 30, 1998. CAPITAL RESOURCES Total shareholders' equity as of September 30, 1998, was $23.5 million, an increase of $5.2 million or 28.8% compared with shareholders' equity of $18.3 million at December 31, 1997. The increase was due to the initial public offering proceeds of $4.5 million (net of expenses), net earnings for the period of $1.9 million less dividends paid on common and preferred stock of $356,000 and the redemption of the preferred stock of $827,000. Both the Board of Governors of the Federal Reserve System, with respect to the Company, and the Federal Deposit Insurance Corporation ("FDIC"), with respect to the Bank, have established certain minimum risk-based capital standards that apply to bank holding companies and federally insured banks, respectively. On September 30, 1998, the Company's 19 Tier 1 risk-based capital ratio, total risk-based capital ratio and leverage ratio were 12.58%, 13.38% and 9.32%, respectively. On September 30, 1998, the Bank's risk-based capital ratios remain above the levels designated as "well capitalized" under the FDIC's prompt corrective action provisions with Tier-1 risk-based capital, total risk-based capital and leverage ratios of 12.51%, 13.34% and 8.82%, respectively. YEAR 2000 COMPLIANCE General. The Year 2000 risk involves computer programs and computer software that are not able to perform without interruption into the Year 2000. If computer systems do not correctly recognize the date change from December 31, 1999 to January 1, 2000, computer applications that rely on the date field could fail or create erroneous results. Such erroneous results could affect interest, payment or due dates or cause the temporary inability to process transactions, send invoices or engage in similar normal business activities. If these issues are not addressed by the Company, its suppliers and its borrowers, there could be a material adverse impact on the Company's financial condition or results of operations. State of Readiness. The Company formally initiated its Year 2000 project and plan in August 1997 to insure that its operational and financial systems will not be adversely affected by Year 2000 problems. The Company has formed a Year 2000 project team, and the Board of Directors and management are supporting all compliance efforts and allocating the necessary resources to ensure completion. An inventory of all systems and products (including both information technology ("IT") and non-informational technology ("non-IT") systems) that could be affected by the Year 2000 date change has been developed, verified and categorized as to their importance to the Company and an assessment of all mission critical IT and mission critical non-IT systems has been completed. This assessment involved inputting test data which simulates the Year 2000 date change into such IT systems and reviewing the system output for accuracy. The Company's assessment of mission critical non-IT systems involved reviewing such systems to determine whether they were date dependent. Based on such assessment, the Company believes that none of its mission critical non-IT systems are date dependent. The software for the Company's systems is provided through service bureaus and software vendors. The Company has contacted all of its third party vendors and software providers and is requiring them to demonstrate and represent that the products provided are or will be Year 2000 compliant and has planned a program of testing compliance. The Company's item processing software provider, which performs substantially all of the Company's data processing functions, has stated that its software is Year 2000 compliant and pursuant to applicable regulatory guidelines the Company is currently producing testing scenarios to verify this assertion. In addition, the Company's compliance efforts regarding Year 2000 issues were reviewed by the FDIC in October 1998. Except as discussed above, the Company has completed the following phases of its Year 2000 plan: (i) recognizing Year 2000 issues and (ii) assessing the impact of Year 2000 issues on the Company's mission critical systems. The Company is in the process of upgrading, testing and implementing the mission- critical systems for Year 2000 compliance. Costs of Compliance. Management does not expect that the costs of bringing the Company's systems into Year 2000 compliance will have a material adverse effect on the Company's financial condition, results of operations or liquidity. The Company has budgeted $50,000 to address Year 2000 issues. As of September 30, 1998, the Company has not incurred any significant costs in relation to Year 2000. The largest potential risk to the Company concerning Year 2000 is the malfunction of its data processing system. In the event its data processing system does not function properly, the Company is prepared to perform functions manually. The Company believes it is in compliance with regulatory guidelines regarding Year 2000 compliance, including the timetable for achieving compliance. Risks Related to Third Parties. The impact of Year 2000 noncompliance by third parties with which the Company transacts business cannot be accurately gauged. The Company identified its largest dollar depositors (aggregate deposits over $100,000) and loan customers ($150,000 or more) and, based on information available to the Company, conducted a preliminary evaluation to determine which of those customers are likely to be affected by Year 2000 issues. In addition, corporate borrowers have been contacted and assessed by their respective lending officers and scored on a scale of one, two or three, with three being the least affected by Year 2000 issues. A corporate borrower which received a rating of one or two was subsequently contacted to assess Year 2000 readiness efforts. To the extent a problem is identified with respect to a customer, the Company intends to monitor the customer's progress in resolving such problem. In the event that Year 2000 noncompliance adversely affects a borrower, the Company may be required to charge-off the loan to that borrower. For a discussion of possible effects of such charge-offs, see "Contingency Plans" below. In the event that Year 2000 noncompliance causes a depositor to withdraw funds, the Company plans to maintain additional cash on hand. The Company relies on the Federal Reserve for electronic fund transfers and check clearing and understands that the Federal Reserve expects its systems to be Year 2000 compliant by the end of 1998. With respect to its borrowers, the Company includes in its loan documents a Year 2000 disclosure form and an addendum to the loan agreement in which the borrower represents and warrants its Year 2000 compliance to the Company. Contingency Plans. The Company is in the process of finalizing its contingency planning with respect to the Year 2000 date change and believes that if its own systems should fail, the Company could convert to a manual entry system for a period of up to three months without significant losses. The Company believes that any mission critical system could be recovered and operating within three to five days. In the event that the Federal Reserve is unable to handle electronic funds transfers and check clearing, the Company does not expect the impact to be material to its financial condition or results of operations as long as the Company is able to utilize an alternative funds transfer and clearing source. As part of its contingency planning, the Company has reviewed its loan customer base and the potential impact on capital of Year 2000 noncompliance. Based upon such review, using what it considers to be a reasonable worst case scenario, the Company has assumed that certain of its commercial borrowers whose businesses are most likely to be affected by Year 2000 noncompliance would be unable to repay their loans, resulting in charge- offs of loan amounts in excess of collateral values. If such were the case, the Company believes that it is unlikely that its exposure would exceed $100,000, although there are no assurances that this amount will not be substantially higher. The Company does not believe that this amount is material enough for the Company to adjust its current methodology for making provisions to the allowance for loan losses. In addition, the Company plans to maintain additional cash on hand to meet any unusual deposit withdrawal activity. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's primary market risk exposure is to changes in market interest rates. The Company's exposure to such risk is reviewed on a regular basis by the Asset Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent, and that the goal is to identify and accept the risks. The Company applies a market value ("MV") methodology to gauge its interest rate risk exposure as derived from its simulation model. Generally, MV is the discounted present value of the difference between incoming cash flows on interest-earning assets and other investments and outgoing cash flows on interest-bearing liabilities. The application of the methodology attempts to quantify interest rate risk by measuring the change in the MV that would result from a theoretical 200 basis point change in market interest rates. Both a 200 basis point increase and a 200 basis point decrease in market rates are considered. At September 30, 1998, it was estimated that the Company's MV would decrease 15.0% in the event of a 200 basis point increase in market interest rates. The Company's MV at the same date would increase 9.7% in the event of a 200 basis point decrease in market interest rates. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) Not applicable (b) Not applicable (c) Not applicable (d) 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) The following exhibit is filed with this report: Exhibit 27. Financial Data Schedule (b) No reports on Form 8-K were filed by the Company during the three months ended September 30, 1998. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GUARANTY BANCSHARES, INC. (Registrant) Date: November 13, 1998 By: /s/ Arthur B. Scharlach ----------------------------------- Arthur B. Scharlach President (Principal Executive Officer) Date: November 13, 1998 By: /s/ Clifton A. Payne ------------------------------------- Clifton A. Payne Senior Vice President and Chief Financial Officer (Principal Financial Officer) 22 EX-27 2 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 8,662 1,980 11,410 0 32,576 6,984 7,121 177,346 1,488 253,237 224,872 0 2,864 2,000 0 0 2,898 20,605 253,237 10,699 2,431 517 13,647 6,724 6,724 6,923 490 81 6,342 2,330 1,939 0 0 1,939 0.69 0.69 8.00 292 734 0 0 1,129 202 71 1,488 1,488 0 0
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