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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.

OR

o 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:  000-24235

GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

TEXAS

 

75-16516431

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
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          o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 126-2 of the Exchange Act).
o Yes          x No

As of May 12, 2004, there were 2,921,928 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding.



GUARANTY BANCSHARES, INC.
INDEX TO FORM 10-Q

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Unaudited Interim Consolidated Financial Statements

 

 

Unaudited Consolidated Balance Sheets

3

 

Unaudited Consolidated Statements of Earnings

4

 

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity

5

 

Unaudited Condensed Consolidated Statements of Cash Flows

6

 

Unaudited Consolidated Statements of Comprehensive Income

7

 

Notes to Interim Consolidated Financial Statements

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

 

Item 4.

Controls and Procedures

22

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

23

 

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

23

 

Item 3.

Defaults upon Senior Securities

23

 

Item 4.

Submission of Matters to a Vote of Security Holders

23

 

Item 5.

Other Information

23

 

Item 6.

Exhibits and Reports on Form 8-K

23

 

Signatures

24

2



PART I – FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(EXCEPT PAR VALUE)

 

 

March 31,
2004

 

December 31,
2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,884

 

$

20,630

 

Interest-bearing deposits

 

 

206

 

 

186

 

 

 



 



 

     Total cash and cash equivalents

 

 

22,090

 

 

20,816

 

Interest-bearing time deposits

 

 

6,776

 

 

6,776

 

Federal funds sold

 

 

4,615

 

 

-

 

Securities available-for-sale

 

 

92,811

 

 

99,614

 

Loans held for sale

 

 

1,263

 

 

1,244

 

Loans, net of allowance for loan losses of $4,029 and $3,906

 

 

362,610

 

 

360,364

 

Premises and equipment, net

 

 

13,140

 

 

13,183

 

Other real estate

 

 

888

 

 

743

 

Accrued interest receivable

 

 

2,581

 

 

2,638

 

Goodwill

 

 

2,338

 

 

2,338

 

Other assets

 

 

9,885

 

 

9,362

 

 

 



 



 

     Total assets

 

$

518,997

 

$

517,078

 

 

 



 



 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

     Deposits

 

 

 

 

 

 

 

          Noninterest-bearing

 

$

75,865

 

$

72,202

 

          Interest-bearing

 

 

339,990

 

 

335,645

 

 

 



 



 

               Total deposits

 

 

415,855

 

 

407,847

 

Federal funds purchased

 

 

-

 

 

7,295

 

Federal Home Loan Bank advances

 

 

50,328

 

 

50,417

 

Long-term debt

 

 

10,310

 

 

10,000

 

Accrued interest and other liabilities

 

 

4,875

 

 

5,071

 

 

 



 



 

               Total liabilities

 

 

481,368

 

 

480,630

 

 

 



 



 

Shareholders’ equity

 

 

 

 

 

 

 

     Preferred stock, $5.00 par value, 15,000,000 shares authorized,
          no shares issued

 

 

-

 

 

-

 

     Common stock, $1.00 par value, 50,000,000 shares authorized,
          3,252,016 shares issued

 

 

3,252

 

 

3,252

 

Additional paid-in capital

 

 

12,801

 

 

12,801

 

Retained earnings

 

 

24,944

 

 

23,912

 

Treasury stock, 330,088 shares at cost

 

 

(3,981

)

 

(3,981

)

Accumulated other comprehensive income

 

 

613

 

 

464

 

 

 



 



 

Total shareholders’ equity

 

 

37,629

 

 

36,448

 

 

 



 



 

Total liabilities and shareholders’ equity

 

$

518,997

 

$

517,078

 

 

 



 



 

See accompanying notes to interim consolidated financial statements.

3



GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

 

 

Three Months Ended
March 31,

 

 

 

2004

 

2003

 

 

 


 


 

Interest income

 

 

 

 

 

 

 

     Loans, including fees

 

$

5,688

 

$

5,955

 

     Securities

 

 

 

 

 

 

 

          Taxable

 

 

958

 

 

1,060

 

          Nontaxable

 

 

14

 

 

14

 

     Federal funds sold

 

 

6

 

 

13

 

     Interest-bearing deposits

 

 

34

 

 

-

 

 

 



 



 

          Total interest income

 

 

6,700

 

 

7,042

 

Interest expense

 

 

 

 

 

 

 

     Deposits

 

 

1,399

 

 

2,115

 

     FHLB advances and federal funds purchased

 

 

500

 

 

465

 

     Long-term debt

 

 

251

 

 

249

 

 

 



 



 

          Total interest expense

 

 

2,150

 

 

2,829

 

 

 



 



 

          Net interest income

 

 

4,550

 

 

4,213

 

Provision for loan losses

 

 

250

 

 

375

 

 

 



 



 

          Net interest income after provision for loan losses

 

 

4,300

 

 

3,838

 

Noninterest income

 

 

 

 

 

 

 

     Service charges

 

 

724

 

 

683

 

     Realized gain on securities available-for-sale

 

 

42

 

 

141

 

     Other operating income

 

 

462

 

 

562

 

 

 



 



 

          Total noninterest income

 

 

1,228

 

 

1,386

 

Noninterest expense

 

 

 

 

 

 

 

     Employee compensation and benefits

 

 

2,476

 

 

2,339

 

     Occupancy expenses

 

 

504

 

 

495

 

     Other operating expenses

 

 

1,134

 

 

1,118

 

 

 



 



 

          Total noninterest expenses

 

 

4,114

 

 

3,952

 

 

 



 



 

          Earnings before income taxes

 

 

1,414

 

 

1,272

 

Provision for income taxes

 

 

382

 

 

237

 

 

 



 



 

          Net earnings

 

$

1,032

 

$

1,035

 

 

 



 



 

          Basic earnings per common share

 

$

0.35

 

$

0.35

 

 

 



 



 

          Diluted earnings per common share

 

$

0.35

 

$

0.35

 

 

 



 



 

See accompanying notes to interim consolidated financial statements.

4



GUARANTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)

 

 

Three Months Ended
March  31,

 

 

 


 

 

 

2004

 

2003

 

 

 


 


 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

36,448

 

$

34,644

 

Net income

 

 

1,032

 

 

1,035

 

Purchases of treasury stock

 

 

-

 

 

(161

)

Change in unrealized gain (loss) on
     securities available for sale, net of tax

 

 

149

 

 

(437

)

 

 



 



 

Balance at end of period

 

$

37,629

 

$

35,081

 

 

 



 



 

See accompanying notes to interim consolidated financial statements.

5



GUARANTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

 

 

Three Months
Ended March 31,

 

 

 


 

 

 

2004

 

2003

 

 

 


 


 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

1,277

 

$

4,323

 

 

 



 



 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

     Securities available-for-sale:

 

 

 

 

 

 

 

          Purchases

 

 

(2,004

)

 

(52,359

)

          Sales

 

 

1,542

 

 

24,542

 

          Maturities, calls, and principal repayments

 

 

7,324

 

 

15,844

 

     Net increase in loans

 

 

(2,711

)

 

(3,679

)

     Purchases of premises and equipment

 

 

(226

)

 

(100

)

     Proceeds from sale of other real estate

 

 

63

 

 

161

 

     Net change in federal funds sold

 

 

(4,615

)

 

1,405

 

 

 



 



 

               Net cash used in investing activities

 

 

(627

)

 

(14,186

)

 

 



 



 

Cash flows from financing activities:

 

 

 

 

 

 

 

     Net change in deposits

 

 

8,008

 

 

1,036

 

     Net change in short-term FHLB advances

 

 

-

 

 

10,000

 

     Repayment of long-term FHLB advances

 

 

(89

)

 

(84

)

     Net change in federal funds purchased

 

 

(7,295

)

 

-

 

     Purchase of treasury stock

 

 

-

 

 

(161

)

 

 



 



 

               Net cash provided by financing activities

 

 

624

 

 

10,791

 

 

 



 



 

               Net change in cash and cash equivalents

 

 

1,274

 

 

928

 

Cash and cash equivalents at beginning of period

 

 

20,816

 

 

18,244

 

 

 



 



 

Cash and cash equivalents at end of period

 

$

22,090

 

$

19,172

 

 

 



 



 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

     Cash paid for income taxes

 

$

255

 

$

-

 

     Cash paid for interest

 

 

2,354

 

 

2,829

 

 

 

 

 

 

 

 

 

Significant non-cash transactions:

 

 

 

 

 

 

 

     Transfers from loans to real estate owned

 

$

215

 

$

763

 

     Deconsolidation of Trust I and Trust II

 

 

310

 

 

-

 

See accompanying notes to interim consolidated financial statements.

6



GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)

 

 

Three Months
Ended March 31,

 

 

 


 

 

 

2004

 

2003

 

 

 


 


 

Net earnings

 

$

1,032

 

$

1,035

 

Other comprehensive income:

 

 

 

 

 

 

 

     Unrealized gain (loss) on available for sale securities
          arising during the period

 

 

267

 

 

(521

)

     Reclassification adjustment for amounts realized on
          securities sales included in net earnings

 

 

(42

)

 

(141

)

 

 



 



 

               Net unrealized gain (loss)

 

 

225

 

 

(662

)

               Tax effect

 

 

(76

)

 

225

 

 

 



 



 

                    Total other comprehensive income (loss)

 

 

149

 

 

(437

)

 

 



 



 

Comprehensive income

 

$

1,181

 

$

598

 

 

 



 



 

See accompanying notes to interim consolidated financial statements

7



GUARANTY BANCSHARES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

NOTE 1.     BASIS OF PRESENTATION

          The accompanying unaudited consolidated financial statements include the accounts of Guaranty Bancshares, Inc. (the “Company”) and Guaranty Financial Corp., Inc., which wholly owns Guaranty Bond Bank (the “Bank”).  Guaranty Bond Bank has three wholly owned non-bank subsidiaries, Guaranty Leasing Company, Guaranty Company and GB Com, Inc. and partial interests in two non-bank subsidiaries, BSC Securities, L.C. (“BSC”) and Independent Bank Services, LC (“IBS”).  All entities combined are collectively referred to as the “Company”.  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 accounting principles generally accepted in the United States of America for a complete presentation of financial position. In the opinion of management, the accompanying unaudited consolidated financial 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 Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 17, 2004.  The Company has consistently followed the accounting policies described in the Annual Report in preparing this Form 10-Q.  Operating results for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 

          In preparation of the accompanying unaudited consolidated financial statements, management is required to make estimates and assumptions, which are based on information available at the time such estimates and assumptions are made.  These estimates and assumptions affect the amounts reported in the accompanying unaudited consolidated financial statements.  Accordingly, future results may differ if the actual amounts and events are not the same as the estimates and assumptions of management.  The collectability of loans, fair value of financial instruments, other real estate values and status of contingencies are particularly subject to change.

NOTE 2.     EARNINGS PER SHARE

          Earnings per share is computed in accordance with Statement of Financial Accounting Standards No. 128, which requires dual presentation of basic and diluted earnings per share (“EPS”) for entities with complex capital structures.  Basic EPS is based on net earnings divided by the weighted-average number of shares outstanding during the period.  Diluted EPS includes the dilutive effect of stock options granted using the treasury stock method.

 

 

Three Months
Ended March 31,

 

 

 

2004

 

2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Weighted-average common shares used in basic EPS

 

 

2,921,928

 

 

2,922,484

 

Potential dilutive common shares

 

 

43,656

 

 

28,098

 

 

 



 



 

Weighted-average common and potential dilutive
     common shares used in dilutive EPS

 

 

2,965,584

 

 

2,950,582

 

 

 



 



 

8



NOTE  3.     STOCK OPTIONS

          In 2000, the Company granted nonqualified stock options to certain executive officers of the Company and the Bank under the Company’s 1998 Stock Incentive Plan.  The grants consisted of eight-year options to purchase 89,500 shares at an exercise price of $9.30 per share.  In February 2002, the Company granted eight-year options to purchase 20,000 shares at an exercise price of $12.50 per share.  In April 2003, the Company granted options to purchase 38,000 shares at an exercise price of $15.23 per share and October 2003, the Company granted options to purchase 2,000 shares at an exercise price of $17.78 per share.  The exercise price for each of the options described herein represents the market price of the Company’s stock on the date the option was granted.  Each of the options fully vest and become exercisable in five equal installments commencing on the first anniversary of the date of grant and annually thereafter.  At March 31, 2004, options for 2,000 shares have been exercised and 853,500 options remain available for future grant under the 1998 Stock Incentive Plan.

          In accordance with accounting standard, SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123,” the Company transitioned to the fair value method of accounting for stock-based compensation during 2002 using the modified prospective method prescribed by the standard.  Under the modified prospective method, the Company began recognizing stock-based employee compensation expense from the beginning of 2002 as if the fair value method had been used to account for all employee awards granted, modified, or settled in fiscal years beginning after December 15, 1994. The fair value of options granted is determined using the Black-Scholes option valuation model. Stock-based employee compensation expense totaled approximately $22,000 and $13,000 for the three months ended March 31, 2004 and 2003, respectively.  Under the modified prospective method, no stock-based employee compensation expense is recognized for periods prior to adoption.         

          The weighted-average fair value per share of options granted during 2003 was $4.22.   The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 1.97%; expected volatility of 0.26%; risk-free interest rate of 3.20%, and an expected life of 8.00 years.  There were no options granted or exercised in the three months ended March 31, 2004.

NOTE 4.   LONG-TERM DEBT

          The Company has formed two trusts, Guaranty Capital Trust I (Trust I) and Guaranty Capital Trust II (Trust II) (collectively “Trusts”) of which the Company owns 100% of the common equity.  The Trusts were formed for the purpose of issuing trust preferred securities (“securities”) to third party investors and investing the proceeds from the sale of the securities in junior subordinated debt securities of the Company (the “debentures”).  The debentures held by each trust are the sole assets of that trust.  Distributions on the securities issued by each trust are payable semi-annually for Trust I and quarterly for Trust II at a rate per annum equal to the interest rate being earned by the Trusts on the debentures held by each trust.  The securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures.  The Company has entered into agreements, which taken collectively, fully and unconditionally guarantee the securities subject to the terms of each of the guarantees.  The debentures held by Trust I and Trust II are first redeemable, in whole or in part, by the Company on March 8, 2010 and October 30, 2012, respectively.

          In the first quarter of 2004, as a result of applying the provisions of FIN No. 46 Consolidation of Variable Interest Entities, the Company was required to deconsolidate its interest in the Trusts from its financial statements.  The deconsolidation of the net assets and results of operations of the Trusts had virtually no impact on the Company’s financial statements or liquidity position since the Company continues to be obligated to repay the debt held by the Trusts and guarantees repayment of the securities issued by the Trusts.  The consolidated debt obligation related to the Trusts increased from $10.0 million to $10.3 million upon deconsolidation with the difference representing the Company’s common ownership interest in the Trusts.

9



          The securities held by the Trusts qualify as Tier I capital for the Company under Federal Reserve Board guidelines.  As a result of the issuance of FIN 46, the Federal Reserve Board is currently evaluating whether deconsolidation of the Trusts will affect the qualification of the securities as Tier I capital.  If it is determined that the securities no longer qualify as Tier I capital, the Company would still be considered well-capitalized under prompt corrective action provisions as of March 31, 2004.  

NOTE 5.   COMMITMENTS AND CONTINGENCIES

          In the normal course of business, the Company enters into various transactions, which in accordance with accounting principles generally accepted in the United States of America, are not included in the consolidated balance sheets.  These transactions are referred to as “off-balance sheet commitments.”  The Company enters into these transactions to meet the financing needs of its customers.  These transactions include commitments to extend credit and letters of credit, which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

          The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.  Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions.  Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding.  Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses.

          Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements.  In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment.  The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table below.  If the commitment is funded, the Company would be entitled to seek recovery from the customer.  As of March 31, 2004 and December 31, 2003, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.

          Outstanding commitments and letters of credit are approximately as follows (dollars in thousands):

 

 

Contract or
Notional Amount

 

 

 


 

 

 

March 31,
2004

 

December 31,
2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

 

$

36,071

 

 

 

$

23,878

 

 

Letters of credit

 

 

 

1,686

 

 

 

 

1,491

 

 

          The Company is subject to various claims and legal actions occurring in the normal course of business.  The Company accrues for estimated losses in the accompanying financial statements for those matters where management believes the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable.  After consultation with legal counsel, management currently believes the outcome of outstanding legal proceedings, claims and litigation involving the Company will not have a material adverse effect on the Company’s business, financial condition or results of operation.

10



          In a series of transactions in 1992, 1994 and 1995, Guaranty Leasing acquired limited partnership interests in three different partnerships (collectively, the “Partnerships” or individually, a “Partnership”) engaged in the equipment leasing business.  The investments were structured by TransCapital Corporation (“TransCapital”) through various subsidiaries and controlled partnerships.

          Generally, in each of the transactions the Partnership became the lessee of equipment from an equipment owner (pursuant to a sale and leaseback transaction) and the sublessor of the equipment to the equipment user.  Each Partnership receives note payments from the equipment owner under a purchase money note given to purchase the equipment from that Partnership.  The Partnership makes lease payments to the equipment owner pursuant to the master lease of the equipment.  In most instances, payments under the purchase money note equal lease payments under the master lease.  Rental payments from the equipment used under these equipment subleases were sold in advance subject to existing liens for purchase of the equipment.

          The Partnership incurs a tax loss while the master lease/sublease structure is in place, primarily because deductions for rentals paid under the master lease exceed taxable interest income under the purchase money note.  Consequently, Guaranty Leasing has reported tax losses as a result of its investments in the Partnerships, which were deductible by the Company.  In November 1998, Guaranty Leasing was informed by the Internal Revenue Service (the “Service”) that it has taken the position that certain losses taken by one of the three Partnerships during 1994, 1995 and 1996 of $302,000, $410,000 and $447,000, respectively, would be disallowed.  In October 2001, Guaranty Leasing was informed by the Service that it has taken the position that certain losses taken by that Partnership during 1997 of $487,000 would also be disallowed.  In September 2002, the Company received from the Service a Notice of Final Partnership Administrative Adjustment disallowing these deductions.  Based upon the advice of counsel, the Company believes that it has correctly reported these transactions for tax purposes and that it has obtained appropriate legal, accounting and appraisal opinions and authority to support its positions.  The Company recorded and expensed the tax affect of the disallowed deductions in 2002.  On February 3, 2003, the Company filed a petition to begin the process to litigate the matter in the United States District Court for the Eastern District of Texas, (the “Texas Court”).  On October 17, 2003, the Government filed a Motion to Transfer Venue from the Texas Court to the United States District Court for the Eastern District for Virginia, (the “Virginia Court”).  On November 25, 2003, the Government filed a Motion to Stay Proceedings.  On December 18, 2003, the Texas Court issued an Order to Stay Proceedings pending the Court’s ruling on the Government’s Motion to Transfer Venue.  Any final determination with respect to the Partnership will be binding on the Company.  In addition to the ongoing litigation regarding the Partnership, the Service is currently in the process of examining the tax deductions taken for the other two Partnerships.  No determination has been made regarding the disallowance of similar deductions for these other two Partnerships.  Should the Service ultimately disallow the related tax deductions taken during the remaining years of the above partnership as well as the other two Partnerships, the Company will be required to recognize an additional maximum tax liability of approximately $3.9 million plus possible penalty and interest.  The Company is actively contesting the position of the Service in connection with this matter, and will take appropriate steps necessary to protect its legal position.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          Certain statements in this Quarterly Report on Form 10-Q include forward-looking information 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, and are subject to the “Safe Harbor” created by those sections.  When used in this document, the words “believes,” “plans,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should” or the negative of such terms and similar expressions as they relate to the Company, its customers or its management, are intended to identify forward-looking statements.  These forward-looking statements may involve known and unknown risks and uncertainties and other factors beyond the Company’s control that could cause actual results to differ materially from those in the forward-looking statements.  Such risks and uncertainties include, but are not limited to, the following factors: competitive

11



pressure in the banking industry significantly increasing; changes in the interest rate environment reducing margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets and the factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission.

GENERAL OVERVIEW

          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 Bond 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 ten banking locations in the Texas communities of Mount Pleasant (two offices), Bogata, Commerce, Deport, Paris, Pittsburg, Sulphur Springs, Talco and Texarkana.  The Company also maintains an office in Fort Stockton, Texas that limits its product offerings to loans and time deposits.

FINANCIAL OVERVIEW

          Net earnings for both the three months ended March 31, 2004 and March 31, 2003 were $1.0 million or $0.35 per share.   For the three months ended March 31, 2004 compared with the same period in 2003, noninterest income decreased $158,000 or 11.4%, noninterest expense increased $162,000 or 4.1%, and the provision for income tax increased $145,000 or 61.2%.  These changes were partially offset by an increase in net interest income of $337,000 or 8.0% and a decrease in provision for loan loss of $125,000 or 33.3%. 

          Gross loans increased to $367.9 million at March 31, 2004, from $365.5 million at December 31, 2003, an increase of $2.4 million or 0.65%.  Total assets increased to $519.0 million at March 31, 2004, compared with $517.1 million at December 31, 2003.  The increase of $1.9 million in total assets is primarily due to an increase in cash and cash equivalents, gross loans, and federal funds sold which increased $1.3 million, $2.4 million and $4.6 million, respectively, partially offset by a decrease in securities available for sale of $6.8 million.  Total deposits increased to $415.9 million at March 31, 2004 compared with $407.8 million at December 31, 2003.   This increase comes primarily from an increase in certificates of deposit of $4.8 million or 2.2%, and an increase in demand deposits of $3.7 million or 5.1%.

          Total shareholders’ equity was $37.6 million at March 31, 2004, representing an increase of $1.2 million or 3.2% from December 31, 2003.  This increase is due to the earnings for the period of $1.0 million and an increase in accumulated other comprehensive income of $149,000.

RESULTS OF OPERATIONS

Interest Income

          Interest income for the three months ended March 31, 2004 was $6.7 million, a decrease of $342,000 or 4.9% compared with the three months ended March 31, 2003.  The decrease in interest income is due primarily to the decrease in volume of average interest-earning assets from $474.9 million for the quarter ended March 31, 2003 compared to $469.1 million for the same period in 2004.  Average interest-earning assets decreased primarily due to a $13.0 million or 11.9% decrease in average securities and a $2.0 million or 44.4% decrease in average federal funds sold.  The average interest rate earned on interest-earning assets decreased from 6.01% during the three months ended March 31, 2003 to 5.73% during the three months ended March 31, 2004.

12



Interest Expense

          Interest expense on deposits and other interest-bearing liabilities was $2.2 million for the three months ended March 31, 2004, compared with $2.8 million for the three months ended March 31, 2003, a decrease of $679,000 or 24.0%.  The decrease in interest expense is due primarily to the 3.1% decrease in volume of average interest-bearing liabilities from $417.1 million for the quarter ended March 31, 2003 compared to $404.3 million for the same period in 2004 combined with a decrease in rates paid on those liabilities.  The decrease in total interest average bearing liabilities is primarily due to a $17.8 million or 5.0% decrease in average deposits from $360.0 million for the three months ended March 31, 2003, compared with $342.2 million for the three months ended March 31, 2004. 

Net Interest Income

          Net interest income was $4.6 million for the three months ended March 31, 2004 compared with $4.2 million for the three months ended March 31, 2003, an increase of $337,000 or 8.0%.  The increase in net interest income resulted primarily from a decrease in average interest-bearing liabilities to $404.3 million for the three months ended March 31, 2004, from $417.1 million for the three months ended March 31, 2003, a decrease of $12.8 million or 3.1%, partially offset by a decrease in total average interest-earning assets to $469.1 million for the three months ended March 31, 2004, from $474.9 million for the three months ended March 31, 2003, a decrease of $5.9 million or 1.2%.  The net interest margin increased from 3.60% to 3.89% for the three months ended March 31, 2004 compared with the same three months period ended March 31, 2003.  This increase can be attributed to the fact that the percentage decline in average interest-earning liabilities exceeded the percentage decline in average interest-bearing assets, thereby causing the ratio of average interest-earning assets to average interest-bearing liabilities to increase.   

          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 table sets 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 three months ended March 31, 2004 and 2003, respectively.  The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, the net interest spread and the net interest margin for the same periods.  The net interest spread is the difference between the average rate earned on total interest-earning assets less the average rate paid on total interest-bearing liabilities.  The net interest margin is net interest income as a percentage of average interest-earning assets.  No tax equivalent adjustments were made and all average balances are derived from daily balances.  Nonaccruing loans have been included in the tables as loans carrying a zero yield.

13



 

 

Three Months Ended March 31,

 

 

 


 

 

 

2004

 

2003

 

 

 


 


 

 

 

Average
Outstanding
Balance

 

Interest
Earned/
Paid

 

Average
Yield/
Rate

 

Average
Outstanding
Balance

 

Interest
Earned/
Paid

 

Average
Yield/
Rate

 

 

 


 


 


 


 


 


 

 

 

(Dollars in thousands)

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Loans

 

$

363,841

 

$

5,688

 

 

6.27

%

$

361,505

 

$

5,955

 

 

6.68

%

     Securities

 

 

95,897

 

 

972

 

 

4.07

%

 

108,890

 

 

1,074

 

 

4.00

%

     Federal funds sold

 

 

2,536

 

 

6

 

 

0.95

%

 

4,509

 

 

13

 

 

1.17

%

     Interest-bearing deposits in
          other financial institutions

 

 

6,810

 

 

34

 

 

2.00

%

 

42

 

 

-

 

 

1.70

%

 

 



 



 

 

 

 



 



 



 

          Total interest-earning assets

 

 

469,084

 

 

6,700

 

 

5.73

%

 

474,946

 

 

7,042

 

 

6.01

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

 

 

(3,932

)

 

 

 

 

 

 

 

(3,666

)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Total interest-earning
               assets,  net of allowance

 

 

465,152

 

 

 

 

 

 

 

 

471,280

 

 

 

 

 

 

 

Non-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Cash and due from banks

 

 

21,083

 

 

 

 

 

 

 

 

16,339

 

 

 

 

 

 

 

     Premises and equipment

 

 

13,162

 

 

 

 

 

 

 

 

13,520

 

 

 

 

 

 

 

     Interest receivable and
          other assets

 

 

17,110

 

 

 

 

 

 

 

 

18,072

 

 

 

 

 

 

 

     Other real estate owned

 

 

813

 

 

 

 

 

 

 

 

1,569

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

517,320

 

 

 

 

 

 

 

$

520,780

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     NOW, savings, and money
          market accounts

 

$

123,405

 

$

230

 

 

0.75

%

$

115,823

 

$

262

 

 

0.92

%

     Time deposits

 

 

218,825

 

 

1,169

 

 

2.14

%

 

244,226

 

 

1,853

 

 

3.08

%

 

 



 



 

 

 

 



 



 

 

 

 

          Total interest-bearing
               deposits

 

 

342,230

 

 

1,399

 

 

1.64

%

 

360,049

 

 

2,115

 

 

2.38

%

     FHLB advances and federal funds purchased

 

 

52,011

 

 

500

 

 

3.86

%

 

47,075

 

 

465

 

 

4.01

%

     Long-term debt

 

 

10,104

 

 

251

 

 

9.96

%

 

10,000

 

 

249

 

 

10.10

%

 

 



 



 



 



 



 



 

          Total interest-bearing
               liabilities

 

 

404,345

 

$

2,150

 

 

2.13

%

 

417,124

 

$

2,829

 

 

2.75

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Demand deposits

 

 

70,936

 

 

 

 

 

 

 

 

63,984

 

 

 

 

 

 

 

     Accrued interest, taxes and
          other liabilities

 

 

4,809

 

 

 

 

 

 

 

 

4,746

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

          Total liabilities

 

 

480,090

 

 

 

 

 

 

 

 

485,854

 

 

 

 

 

 

 

Shareholders’ equity

 

 

37,230

 

 

 

 

 

 

 

 

34,926

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Total liabilities and
               shareholders’ equity

 

$

517,320

 

 

 

 

 

 

 

$

520,780

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

4,550

 

 

 

 

 

 

 

$

4,213

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.60

%

 

 

 

 

 

 

 

3.26

%

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

 

3.89

%

 

 

 

 

 

 

 

3.60

%

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

14



          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 these tables, changes attributable to both rate and volume that can be segregated have been allocated proportionately to changes due to rate and changes due to volume (dollars in thousands):

 

 


Three Months Ended March 31,

 

 

 


 

 

 

2004 vs. 2003

 

 

 


 

 

 

Increase (Decrease)
Due to

 

 

 

 

 


 

 

 

 

 

Volume

 

Rate

 

Total

 

 

 


 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

     Loans

 

$

156

 

$

(423

)

$

(267

)

     Securities

 

 

(520

)

 

418

 

 

(102

)

     Federal funds sold

 

 

(23

)

 

16

 

 

(7

)

     Interest-bearing deposits in other
          financial institutions

 

 

115

 

 

(81

)

 

34

 

 

 



 



 



 

               Total decrease in interest income

 

 

(272

)

 

(70

)

 

(342

)

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

     NOW, savings, and money market
          accounts

 

 

70

 

 

(102

)

 

(32

)

     Time deposits

 

 

(782

)

 

98

 

 

(684

)

     Other borrowed funds

 

 

198

 

 

(163

)

 

35

 

     Long-term debt

 

 

11

 

 

(9

)

 

2

 

 

 



 



 



 

               Total decrease in interest expense

 

 

(503

)

 

(176

)

 

(679

)

 

 



 



 



 

     Increase in net interest income

 

$

231

 

$

106

 

$

337

 

 

 



 



 



 

Provision for Loan Losses

          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 the industry diversification of the Company’s commercial loan portfolio, the effect of changes in the local real estate market on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral security, and the evaluation of the Company’s loan portfolio by an external loan review firm.   The provision for loan losses for the three months ended March 31, 2004, was $250,000, compared with $375,000 for the three months ended March 31, 2003, a decrease of $125,000 or 33.3%.  The decrease is partially due to the decrease in the ratio of net charge offs to average loans from .08% for the three months ended March 31, 2003 to .03% for the three months ended March 31, 2004.  Management believes the allowance for loan losses is adequate as of the dates indicated based on its assessment of the factors listed above.

15



Noninterest Income

          The following table presents, for the periods indicated, the major categories of noninterest income (dollars in thousands):

 

 

Three months ended
March 31,

 

 

 


 

 

 

2004

 

2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

724

 

$

683

 

Fee income

 

 

271

 

 

256

 

Fiduciary income

 

 

56

 

 

41

 

Other noninterest income

 

 

135

 

 

265

 

Realized gain on securities

 

 

42

 

 

141

 

 

 



 



 

     Total noninterest income

 

$

1,228

 

$

1,386

 

 

 



 



 

          As indicated above, the Company’s primary sources of recurring noninterest income are service charges on deposit accounts, fee income and other noninterest income.    Noninterest income for the three months ended March 31, 2004 decreased $158,000 or 11.4% over the same period ended March 31, 2003.  The decrease in noninterest income for the three months ending March 31, 2004 is primarily due to the decrease in gain on sale of securities realized in 2004 over 2003 and a decrease in the sale of mortgage loans into the secondary market during the same comparable quarters.  In the three months ended March 31, 2004, the Company realized a gain on sale of mortgage-backed securities of $42,000 from the sale of $1.5 million of securities compared with a gain on the sale of mortgage-backed securities of $141,000 from the sale of $24.5 million of securities during the three months ended March 31, 2003.  The Company also decreased the volume of mortgage loans it sold into the secondary market.  This activity generated noninterest income of $83,000 for the three months ended March 31, 2004 compared with $229,000 for the three months ended March 31, 2003, a decrease of $146,000 or 63.8%.  These decreases were partially offset by increases in service charges on deposit accounts and fee income of $41,000 or 6.0% and $15,000 or 5.9%, respectively, during the comparable quarters.

16



Noninterest Expenses

          The following table presents, for the periods indicated, the major categories of noninterest expenses (dollars in thousands):

 

 

Three months ended
March 31,

 

 

 


 

 

 

2004

 

2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

$

2,476

 

$

2,339

 

 

 



 



 

Non-staff expenses:

 

 

 

 

 

 

 

     Net bank premises expense

 

 

504

 

 

495

 

     Office and computer supplies

 

 

72

 

 

82

 

     Legal and professional fees

 

 

212

 

 

156

 

     Advertising

 

 

92

 

 

72

 

     Postage

 

 

51

 

 

48

 

     FDIC insurance

 

 

16

 

 

17

 

     Other

 

 

691

 

 

743

 

 

 



 



 

          Total non-staff expenses

 

 

1,638

 

 

1,613

 

 

 



 



 

          Total noninterest expenses

 

$

4,114

 

$

3,952

 

 

 



 



 

          Employee compensation and benefits expense for the three months ended March 31, 2004 increased $137,000 or 5.9% over the same period ended March 31, 2003.  The increase is due primarily to normal salary increases and an increase in employee insurance costs.  The number of full-time equivalent employees was 219 at March 31, 2004, compared with 220 at March 31, 2003.

          Non-staff expenses increased $25,000 or 1.6% over the comparable three month period in 2003.  Legal and professional expense increased by $56,000, or 35.9% for the three months primarily due to the cost incurred to contest the position the Internal Revenue Service took regarding Guaranty Leasing Partnership deductions.  Other non-staff expenses decreased $52,000 or 7.0% from $743,000 for the three months ended March 31, 2003 to $691,000 for the three months ended March 31, 2004.

Income Taxes

          Income tax expense increased $145,000 or 61.2% to $382,000 for the three months ended March 31, 2004 from $237,000 for the same period in 2003.  The increase is due primarily to a decrease in taxable deductions associated with the Company’s leasing activities.  The income stated on the consolidated statement of earnings differs from the taxable income due to tax-exempt income, the amount of non-deductible interest expense and the amount of other non-deductible expenses.

FINANCIAL CONDITION

Loan Portfolio

          Gross loans were $367.9 million at March 31, 2004, an increase of $2.4 million or 0.7% from $365.5 million at December 31, 2003. Loan growth occurred primarily in the commercial and industrial, and in construction and land development loans, offset by decreases in consumer and commercial real estate loans.  Average loans comprised 77.6% of total average interest-earning assets at March 31, 2004 compared with 76.1% at March 31, 2003.

17



          The following table summarizes the loan portfolio of the Company by type of loan as of March 31, 2004 and December 31, 2003 (dollars in thousands):

 

 

March 31, 2004

 

December 31, 2003

 

 

 


 


 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 


 


 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

57,041

 

 

15.50

%

$

55,285

 

 

15.13

%

Agriculture

 

 

10,365

 

 

2.82

 

 

10,173

 

 

2.78

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

               Construction and land development

 

 

24,480

 

 

6.65

 

 

22,020

 

 

6.02

 

               1-4 family residential

 

 

137,027

 

 

37.25

 

 

136,717

 

 

37.40

 

               Loans, held for sale

 

 

1,263

 

 

0.34

 

 

1,244

 

 

0.34

 

               Farmland

 

 

20,269

 

 

5.51

 

 

20,267

 

 

5.54

 

               Commercial

 

 

78,762

 

 

21.41

 

 

79,953

 

 

21.88

 

               Multi-family residential

 

 

9,161

 

 

2.49

 

 

9,291

 

 

2.55

 

Consumer, net of unearned discounts

 

 

29,534

 

 

8.03

 

 

30,564

 

 

8.36

 

 

 



 



 



 



 

                         Total gross loans

 

$

367,902

 

 

100.00

%

$

365,514

 

 

100.00

%

 

 



 



 



 



 

Allowance for Loan Losses

          In originating loans, the Company recognizes that it will experience credit losses and that 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 in an amount that it believes is adequate for estimated losses in its loan portfolio.  Management determines the adequacy of the allowance through its evaluation of the loan portfolio and based on the factors set forth in “Results of Operations-Provision for Loan Losses”.  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.  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.   Loan charge-offs, net of recoveries, during the three months ended March 31, 2004 decreased $159,000 or 55.6% compared with the same period ended March 31, 2003.  At March 31, 2004 and March 31, 2003, the allowance for loan losses totaled  $4.0 million or 1.10% of gross loans and $3.8 million or 1.04% of gross loans, respectively.  The allowance for loan losses as a percentage of nonperforming loans was 121.10% and 88.42% at March 31, 2004 and 2003, respectively.

18



          Set forth below is an analysis of the allowance for loan losses for the periods indicated (dollars in thousands):

 

 

Three months ended
March 31,

 

 

 


 

 

 

2004

 

2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

Average loans outstanding

 

$

363,841

 

$

361,505

 

 

 



 



 

Gross loans outstanding at end of period

 

$

367,902

 

$

364,940

 

 

 



 



 

Allowance for loan losses at beginning of period

 

$

3,906

 

$

3,692

 

Provision for loan losses

 

 

250

 

 

375

 

Charge-offs:

 

 

 

 

 

 

 

          Commercial and industrial

 

 

(45

)

 

(230

)

          Real estate

 

 

(45

)

 

(7

)

          Consumer

 

 

(60

)

 

(72

)

Recoveries:

 

 

 

 

 

 

 

          Commercial and industrial

 

 

3

 

 

-

 

          Real estate

 

 

9

 

 

5

 

          Consumer

 

 

11

 

 

18

 

 

 



 



 

Net loan charge-offs

 

 

(127

)

 

(286

)

 

 



 



 

Allowance for loan losses at end of period

 

$

4,029

 

$

3,781

 

 

 



 



 

 

 

 

 

 

 

 

 

Ratio of allowance to end of period loans

 

 

1.10

%

 

1.04

%

Ratio of net charge-offs to average loans

 

 

0.03

%

 

0.08

%

Ratio of allowance to end of period nonperforming loans

 

 

121.10

%

 

88.42

%

Nonperforming Assets

           Nonperforming assets were $4.2 million at March 31, 2004 compared to $3.3 million at December 31, 2003.  Nonaccrual loans decreased $43,000 from $2.1 million at December 31, 2003 to $2.0 million at March 31, 2004.  This decrease is due primarily to three lines of credit being moved to repossessed assets or other real estate and one line of credit being upgraded to interest accrual.  Accruing loans 90 or more days past due increased $809,000 from $489,000 at December 31, 2003 to $1.3 million at March 31, 2004.  This increase is due primarily to four lines of credit becoming past due.  Management believes that these lines of credit are well collateralized and reserves have been established for any anticipated loss.  Other real estate increased $145,000 during the same period.  The increase is primarily the result of loans that were foreclosed on during the period totaling $215,000 and sales of properties with a carrying value of $69,592.  Management anticipates minimal losses on the total of these new nonperforming assets.

          The ratio of nonperforming assets to total loans and other real estate was 1.14% and 0.90% at March 31, 2004, and December 31, 2003, respectively.

19



           The following table presents information regarding nonperforming assets as of the dates indicated (dollars in thousands):

 

 

March 31,
2004

 

December 31,
2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

 

 

$

2,029

 

 

 

$

2,072

 

 

Accruing loans 90 or more days past due

 

 

 

1,298

 

 

 

 

489

 

 

 

 

 



 

 

 



 

 

          Total nonperforming loans

 

 

 

3,327

 

 

 

 

2,561

 

 

Other real estate

 

 

 

888

 

 

 

 

743

 

 

 

 

 



 

 

 



 

 

          Total nonperforming assets

 

 

$

4,215

 

 

 

$

3,304

 

 

 

 

 



 

 

 



 

 

Securities

          Securities totaled $92.8 million at March 31, 2004, a decrease of $6.8 million from $99.6 million at December 31, 2003.  The decrease is primarily the result of the decrease in federal funds purchased of $7.3 million during the quarter.  At March 31, 2004, securities represented 17.9% of total assets compared with 19.3% of total assets at December 31, 2003. The yield on average securities for the three months ended March 31, 2004, is 4.07% compared with 4.00% for the same period in 2003. At March 31, 2004 securities included $7.2 million in U.S. Government securities, $80.5 million in mortgage-backed securities, $3.9 million in equity securities, and $1.2 million in municipal securities. The average life of the securities portfolio at March 31, 2004 is approximately 3.47 years, however, all of the Company’s securities are classified as available-for-sale.

Other Assets

          Other assets totaled $9.9 million at March 31, 2004 compared with $9.4 million at December 31, 2003, an increase of $523,000 or 5.6%.  This increase resulted primarily from the recording of additional cash value of key-man life insurance that the Company owns.

Deposits

          At March 31, 2004, demand, money market and savings deposits account for approximately 46.9% of total deposits, while certificates of deposit make up 53.1% of total deposits. Total deposits increased $8.0 million or 2.0% from December 31, 2003 to March 31, 2004.  This increase comes primarily from an increase in certificates of deposit of $4.8 million or 2.2% due to the Company offering of competitive yields on these deposits.  Noninterest-bearing demand deposits totaled $75.9 million or 18.2% of total deposits at March 31, 2004, compared with $72.2 million or 17.7% of total deposits at December 31, 2003. The average cost of deposits, including noninterest-bearing demand deposits, is 1.36% for the three months ended March 31, 2004 compared with 2.02% for the same period in 2003.

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 a continuing 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 continually 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, has historically created an adequate liquidity position.

20



          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.  As summarized in the unaudited condensed consolidated statements of cash flows, the most significant transactions which affected the Company’s level of cash and cash equivalents, cash flows, and liquidity during the first three months of 2004 are the net change in deposits of $8.0 million, the maturities, calls, and principal repayments of securities totaling $7.3 million, the net change in federal funds purchased of $7.3 million, the net change in federal funds sold of $4.6 million and the net increase in loans of $2.7 million.

Commitments, Contingency and Off Balance Sheet Items

          The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes.  Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions.  Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding.  Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses.

          Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements.  In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment.  The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table below.  If the commitment is funded, the Company would be entitled to seek recovery from the customer.  As of March 31, 2004 and December 31, 2003, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.

          Outstanding commitments and letters of credit are approximately as follows (dollars in thousands):

 

 


Contract or
Notional Amount

 

 

 


 

 

 

March 31,
2004

 

December 31,
2003

 

 

 


 


 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

 

36,071

 

 

 

$

23,878

 

 

Letters of credit

 

 

 

1,686

 

 

 

 

1,491

 

 

Capital Resources

          Both the Board of Governors of the Federal Reserve System (“Federal Reserve”), 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.  As of March 31, 2004, the Company’s Tier 1 risk-based capital, total risk-based capital and leverage capital ratios are 12.49%, 13.60%, and 8.76%, respectively.  As of March 31, 2004, the Bank’s risk-based capital ratios remain above the levels required for the Bank to be designated as “well capitalized” by the FDIC with Tier 1 risk-based capital, total risk-based capital and leverage capital ratios of 12.02%, 13.14%, and 8.39%, respectively. 

          In the first quarter of 2004, as a result of applying the provisions of FIN 46, the Company was required to deconsolidate its interest in the Trusts from its financial statement.  The impact of this deconsolidation was considered

21



immaterial to the Company’s consolidated financial statements.  In July 2003, the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the long-term debt in Tier I capital for regulatory purposes, subject to specified limits, until notice is given to the contrary.  If it is determined that the securities no longer qualify as Tier I capital, the Company would still be considered well-capitalized under prompt corrective action provisions as of March 31, 2004.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

          There have been no material changes in the market risk information disclosed in the Company’s Form 10-K for the year ended December 31, 2003.  See Form 10-K, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

ITEM 4.  CONTROLS AND PROCEDURES

          (a)  Evaluation of Disclosure Controls and Procedures

          As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported to the Company’s management within the time periods specified in Securities and Exchange Commission rules and forms. 

          (b)  Changes in internal control over financial reporting

          There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

22



PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

          The Company is subject to various claims and legal actions occurring in the normal course of business. The Company accrues for estimated losses in the accompanying financial statements for those matters where management believes the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable.  After consultation with legal counsel, management currently believes the outcome of outstanding legal proceedings, claims and litigation involving the Company will not have a material adverse effect on the Company’s business, financial condition or results of operations.

ITEM 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASE OF EQUITY SECURITIES

                 None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

                 None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                 None

ITEM 5.  OTHER INFORMATION

                 None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

                 (a)      Exhibits –  The following exhibits are filed as a part of this Quarterly Report on Form 10Q:

 

Exhibit Number

 

Description of Exhibit

 


 


 

31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

                 (b)  Reports on Form 8-K

 

          The Company filed a Current Report under Item 12 of Form 8-K on March 5, 2004 to announce the release of the Company’s earnings for the fourth quarter and year ended December 31, 2003.

23



SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     GUARANTY BANCSHARES, INC.

 

     (Registrant)

 

 

Date:  May 12, 2004

  By:  /s/ Arthur B. Scharlach, Jr.

 


 

 

  Arthur B. Scharlach, Jr.
  President
  (Principal Executive Officer)

 

 

 

Date:  May 12, 2004

  By:  /s/ Clifton A. Payne

 


 

 

  Clifton A. Payne
  Senior Vice President and Chief
  Financial Officer
  (Principal Financial Officer)

24



Index to Exhibits

Exhibit Number

 

               Description of Exhibit


 


31.1  

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2  

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1  

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2  

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

25