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 SEPTEMBER 30, 1999MARCH 31, 2000.
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: 000-24235
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[X]Yes [ ] No
As of November 12, 1999,May 15, 2000, there were 3,250,0163,128,416 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, 1999 (unaudited) and December 31, 1998 .........................2
Consolidated Statements of Earnings for the Nine Months and Three Months
Ended September 30, 1999 and 1998 (unaudited) ...........................................................3
Consolidated Statement of Changes in Shareholders' Equity.......................................................4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited) .............................................................5
Consolidated Statements of Comprehensive Income for the Nine Months and Three Months
Ended September 30, 1999 and 1998 (unaudited) .............................................................6
Notes to Interim Consolidated Financial Statements..............................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................................22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................................23
Item 2. Changes in Securities and Use of Proceeds..........................................................................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
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets................................... 2
Consolidated Statements of Earnings........................... 3
Condensed Consolidated Statements of Changes in
Shareholders' Equity ....................................... 3
Condensed Consolidated Statements of Cash Flows............... 4
Consolidated Statements of Comprehensive Income............... 5
Notes to Interim Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 18
Item 2. Changes in Securities and Use of Proceeds...................... 18
Item 3. Defaults upon Senior Securities ............................... 18
Item 4. Submission of Matters to a Vote of Security Holders............ 18
Item 5. Other Information.............................................. 18
Item 6. Exhibits and Reports on Form 8-K............................... 18
Signatures.............................................................. 19
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks ............................. $ 12,352 $ 11,721
Federal funds sold .................................. 310 10,090
Securities:
Available-for-sale ............................... 64,347 44,305
Held-to-maturity ................................. 6,960 7,062
--------- ---------
Total securities .............................. 71,307 51,367
--------- ---------
Loans, net of allowance for loan losses of $2,483
and $1,512, respectively ............................ 241,337 184,374
Premises and equipment, net ......................... 9,872 7,032
Accrued interest receivable ......................... 2,669 2,331
Other assets ........................................ 10,019 5,991
--------- ---------
Total assets .................................. $ 347,866 $ 272,906
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing .............................. $ 55,928 $ 47,360
Interest-bearing ................................. 257,106 194,965
--------- ---------
Total deposits ................................ 313,034 242,325
--------- ---------
Borrowed funds ...................................... 3,771 3,980
Other liabilities ................................... 2,877 2,805
--------- ---------
Total liabilities ............................. 319,682 249,110
--------- ---------
Shareholders' equity:
Common stock ..................................... 3,250 2,898
Additional capital ............................... 12,659 9,494
Retained earnings ................................ 12,755 11,181
Accumulated other comprehensive income ........... (364) 223
--------- ---------
28,300 23,796
Less common stock held in treasury-at cost .......... (116) --
--------- ---------
Total shareholders' equity ....................... 28,184 23,796
--------- ---------
Total liabilities and shareholders' equity ....... $ 347,866 $ 272,906
========= =========THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
(UNAUDITED)
ASSETS
Cash and due from banks ................................................................... $ 12,468 $ 13,102
Interest bearing deposits in other banks .................................................. 80 50
--------------- ---------------
Total cash and cash equivalents ..................................................... 12,548 13,152
Federal funds sold ........................................................................ 9,155 1,140
Securities available-for-sale ............................................................. 81,292 79,761
Loans, net of allowance for loan losses of $2,549 and $2,491 .............................. 256,559 252,718
Premises and equipment, net ............................................................... 13,041 11,662
Accrued interest receivable ............................................................... 2,840 2,735
Other assets .............................................................................. 9,976 9,270
--------------- ---------------
Total assets ........................................................................ $ 385,411 $ 370,438
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing ................................................................... $ 59,130 $ 56,404
Interest-bearing ...................................................................... 279,635 272,233
--------------- ---------------
Total deposits ...................................................................... 338,765 328,637
--------------- ---------------
FHLB advances ............................................................................. 8,627 10,699
Long-term debt ............................................................................ 7,000 --
Other liabilities ......................................................................... 2,292 2,606
--------------- ---------------
Total liabilities ................................................................... 356,684 341,942
--------------- ---------------
Shareholders' equity:
Preferred stock, $5.00 par value, 15,000,000 shares authorized,
none issued ...................................................................... -- --
Common stock, $1.00 par value, 50,000,000 shares authorized,
3,250,016 issued ................................................................. 3,250 3,250
Additional capital ..................................................................... 12,659 12,659
Retained earnings ...................................................................... 14,080 13,535
Treasury stock, 17,600 shares at cost .................................................. (174) (174)
Accumulated other comprehensive income ................................................. (1,088) (774)
--------------- ---------------
Total shareholders' equity ............................................................. 28,727 28,496
--------------- ---------------
Total liabilities and shareholders' equity ............................................. $ 385,411 $ 370,438
=============== ===============
See accompanying Notes to Interim Consolidated Financial Statements.
2
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------MARCH 31,
-----------------------------------
2000 1999
1998 1999 1998
------- ------- ------- ---------------------- ---------------
Interest income:
Loans ......................................................................................................................................... $ 4,4745,317 $ 3,703 $12,288 $10,6993,881
Securities ................................................ 966 727 2,449 2,431............................................................................... 1,314 772
Federal funds sold and other temporary investments ........ 86 175 346 517
------- ------- ------- -------....................................... 44 110
--------------- ---------------
Total interest income .................................. 5,526 4,605 15,083 13,647................................................................. 6,675 4,763
Interest expense:
Deposits ................................................................................ 3,434 2,221
Other borrowed funds .................................................................... 139
--------------- ---------------
Total interest expense ............................................. 2,666 2,255 7,284 6,724
------- ------- ------- -------................................................................ 3,573 2,273
--------------- ---------------
Net interest income .................................... 2,860 2,350 7,799 6,923................................................................... 3,102 2,490
Provision for loan losses .................................... 95 60 270 490
------- ------- ------- -------................................................................... 130 105
--------------- ---------------
Net interest income after provision for loan losses .... 2,765 2,290 7,529 6,433................................... 2,972 2,385
Noninterest income:
Service charges ........................................... 493 337 1,333 919.......................................................................... 542 405
Other operating income .................................... 248 193 713 1,239
Net realized................................................................... 369 252
Realized (loss) gain (loss) on available-for-sale securities . (1) 81 11 81
------- ------- ------- -------.................................... (34) 5
--------------- ---------------
Total noninterest income ............................... 740 611 2,057 2,239
------- ------- ------- -------.............................................................. 877 662
--------------- ---------------
Noninterest expense:
Employee compensation and benefits ........................ 1,440 1,135 3,934 3,276....................................................... 1,770 1,268
Net bank premises expense ................................. 360 300 1,002 883................................................................ 417 309
Other operating expenses .................................. 807 693 2,195 2,183
------- ------- ------- -------................................................................. 932 650
--------------- ---------------
Total noninterest expenses ............................. 2,607 2,128 7,131 6,342
------- ------- ------- -------............................................................ 3,119 2,227
--------------- ---------------
Earnings before income taxes ........................... 898 773 2,455 2,330.......................................................... 730 820
Provision for income taxes ................................... 190 21 535 391.................................................................. 185 165
--------------- ---------------
Net earnings before preferred stock dividends .......... 708 752 1,920 1,939
Preferred stock dividends .............................. -- -- -- 37
------- ------- ------- -------
Net earnings available to common shareholders .................................................................................... $ 708545 $ 752 $ 1,920 $ 1,902
======= ======= ======= =======655
=============== ===============
Basic earnings per common share ............................................................................... $ 0.17 $ 0.23
$ 0.26 $ 0.65 $ 0.69
======= ======= ======= ====================== ===============
Diluted earnings per common share ........................................................................... $ 0.17 $ 0.23
=============== ===============
See accompanying Notes to Interim Consolidated Financial Statements.
GUARANTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2000 1999
--------------- ---------------
Balance at beginning of period ............................................................... $ 0.2628,496 $ 0.6523,796
Net income ................................................................................... 545 655
Change in unrealized gain/loss on
securities available for sale, net of tax ................................................ (314) (166)
--------------- ---------------
Balance at end of period ..................................................................... $ 0.69
======= ======= ======= =======28,727 $ 24,285
=============== ===============
See accompanying Notes to Interim Consolidated Financial Statements.
3
GUARANTY BANCSHARES, INC.
AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYCASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)THOUSANDS)
(UNAUDITED)
ACCUMULATED
OTHER TOTAL
COMPRE- COMMON SHARE-
PREFERRED COMMON ADDITIONAL RETAINED HENSIVE STOCK IN HOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME TREASURY EQUITY
-------- -------- -------- -------- -------- -------- --------THREE MONTHS
ENDED MARCH 31,
----------------------------------
2000 1999
--------------- ---------------
Balance at January 1, 1998 ............ 827 2,548 5,396 9,240 242Net cash provided by operating activities .................................................... 171 745
Cash flows from investing activities:
Securities available for sale:
Purchases .......................................................................... (9,727) (2,627)
Sales .............................................................................. 5,314 1,006
Maturities, calls, and principal repayments ........................................ 2,387 3,439
Securities held to maturity:
Purchases .......................................................................... -- 18,253
-------- -------- -------- -------- -------- -------- --------(708)
Maturities, calls, and principal repayments ........................................ -- 593
Net earnings for the year 1998 ........ -- -- -- 2,674 -- -- 2,674
Accumulatedincrease in loans .............................................................. (4,283) (11,219)
Purchases of premises and equipment ................................................ (1,563) (588)
Proceeds from sale of premises, equipment and other comprehensive
income -- netreal estate .................... 56 31
Net increase in federal funds sold ................................................. (8,015) (3,615)
--------------- ---------------
Net cash used by investing activities ......................................... (15,831) (13,688)
--------------- ---------------
Cash flows from financing activities:
Change in deposits ..................................................................... 10,128 11,385
Net change in unrealized
gain (loss) on available-for-sale
securities, netshort-term FHLB advances ................................................. (2,000) --
Repayment of taxlong-term FHLB advances ................................................... (72) (69)
Proceeds from issuance of $10 ....long-term debt ............................................... 7,000 --
-- -- -- (19) -- (19)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive--------------- ---------------
Net cash provided from financing activities ...................................... 15,056 11,316
--------------- ---------------
Net increase in cash and cash equivalents ........................................ (604) (1,627)
Cash and cash equivalents at beginning of period ............................................. 13,152 11,721
--------------- ---------------
Cash and cash equivalents at end of period ................................................... $ 12,548 $ 10,094
=============== ===============
Supplemental disclosures:
Cash paid for income ............ -- -- -- 2,674 (19) -- 2,655
Purchase of Treasury Stock ............ -- -- -- -- -- (2) (2)
Sale of Treasury Stock ................ -- -- -- -- -- 2 2
Redemption of Preferred Stock ......... (827) -- -- -- -- -- (827)
Sale of Common Stock .................. -- 350 4,098 -- -- -- 4,448
Dividends
Preferred - $0.23 per share ........ -- -- -- (37) -- -- (37)
Common - $0.24 per share ........... -- -- -- (696) -- -- (696)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ..........taxes .............................................................. $ --170 $ 2,898 $ 9,494 $ 11,181 $ 223 $ -- $ 23,796
======== ======== ======== ======== ======== ======== ========
Net earnings115
Cash paid for the nine months
ended September 30, 1999 ......... -- -- -- 1,920 -- -- 1,920
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax of $302 ... -- -- -- -- (587) -- (587)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income ............ -- -- -- 1,920 (587) -- 1,333
Purchase of Treasury Stock ............ -- -- -- -- -- (116) (116)
Sale of Treasury Stock ................ -- -- -- -- -- -- --
Stock issuedinterest .................................................................. 3,504 2,255
Significant non-cash transactions:
Transfers from loans to acquire First American -- 352 3,165 -- -- -- 3,517
Dividends
Common - $0.12 per share ......... -- -- -- (346) -- -- (346)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1999 (1) ..... $ -- $ 3,250 $ 12,659 $ 12,755 $ (364) (116) $ 28,184
======== ======== ======== ======== ======== ======== ========real estate owned ............................................... 132 67
(1) Unaudited
See accompanying Notes to Interim Consolidated Financial Statements.
4
GUARANTY BANCSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net earnings ...................................................................... $ 1,920 $ 1,939
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation ................................................................. 495 409
Amortization of premiums, net of (accretion) of discounts on securities ...... 181 128
Net realized gain on available-for-sale securities ........................... (11) (81)
Gain on sale of loans ........................................................ -- (674)
Provision for loan loss ...................................................... 270 490
Gain on sale of premises, equipment and other real estate .................... (11) (56)
Write down of ORE and repossessed assets ..................................... 13 15
Proceeds from sale of loans .................................................. -- 1,967
Decrease (increase) in accrued interest receivable and other assets ............... 185 (3,360)
Decrease in accrued interest and other liabilities ................................ (119) (92)
-------- --------
Net cash provided by operating activities ................................... 2,923 685
Cash flows from investing activities:
Purchases of held-to-maturity securities .......................................... (1,253) --
Proceeds from sales, maturities and repayments of available-for-sale securities ... 14,450 13,745
Purchases of available-for-sale securities ........................................ (21,824) (3,419)
Proceeds from maturities and repayments of held-to-maturity securities ............ 1,343 8,244
Net increase in loans ............................................................. (20,218) (21,375)
Purchases of premises and equipment ............................................... (2,252) (1,066)
Proceeds from sale of premises, equipment and other real estate ................... 223 574
Cash paid for acquisitions ........................................................ (3,380) --
Cash and cash equivalents from acquisitions ....................................... 1,983 --
Net decrease (increase) in federal funds sold ..................................... 16,815 (3,690)
-------- --------
Net cash used by investing activities ....................................... (14,113) (6,987)
-------- --------
Cash flows from financing activities:
Change in deposits ................................................................ 12,492 1,911
Proceeds from borrowings .......................................................... -- 2,000
Repayment of borrowings ........................................................... (209) --
Purchase of treasury stock ........................................................ (116) (2)
Dividends paid .................................................................... (346) (356)
Redemption of preferred stock ..................................................... -- (827)
Sale of common stock .............................................................. -- 4,468
-------- --------
Net cash provided by financing activities ................................... 11,821 7,194
-------- --------
Net increase in cash and cash equivalents ................................... 631 892
Cash and cash equivalents at beginning of period ........................................ 11,721 9,750
-------- --------
Cash and cash equivalents at end of period .............................................. $ 12,352 $ 10,642
======== ========
See accompanying Notes to Interim Consolidated Financial Statements.
5
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ ------- -------MARCH 31,
----------------------------------
2000 1999
1998 1999 1998
------- ------- ------- ---------------------- ---------------
Net Earnings ......................................... $ 708 $ 752 $ 1,920 $ 1,939income ................................................................................ 545 655
Other comprehensive income, net of tax:income:
Unrealized (losses) gainsgain/(loss) on securities:
Unrealized (losses) gainsavailable for sale securities
arising during the period (159) 32 (587) 25
------- ------- ------- -------......................................................... (509) (247)
Reclassification adjustment for amounts realized on
securities sales included in net income ........................................... 34 (5)
--------------- ---------------
Net unrealized gain/(loss) .................................................... (475) (252)
Tax effect .................................................................... 161 86
--------------- ---------------
Total other comprehensive income ......................................... (314) (166)
--------------- ---------------
Comprehensive income .................................income....................................................................... $ 549231 $ 784 $ 1,333 $ 1,964
======= ======= ======= =======489
=============== ===============
See accompanying Notes to Interim Consolidated Financial Statements.
65
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(1)NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Guaranty
Bancshares, Inc. ("the Company"(the "Company") and its wholly-owned subsidiarysubsidiaries Guaranty (TX)
Capital Trust I and Guaranty Financial Corp., Inc., which wholly owns Guaranty
Bank, and one non-bank subsidiary, Guaranty Company. Guaranty Bank has three
wholly-owned non-bank subsidiaries, Guaranty Leasing Company, Guaranty Mortgage
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 Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
12, 1999.10, 2000. The Company has consistently followed the accounting policies
described in the Annual Report in preparing this Form 10-Q. Operating results
for the thirdfirst quarter ended September 30, 1999,March 31, 2000, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
(2)2000.
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect amounts reported
in the financial statements and disclosures provided; future results could
differ. The collectibility of loans, fair value of financial instruments and
status of contingencies are particularly subject to change.
NOTE 2. EARNINGS PER SHARE
The following table illustrates the computation of earnings per share
("EPS") (dollars in thousands, except share data):
THREE MONTHS
NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------MARCH 31,
---------------------------------
2000 1999
1998 1999 1998
---------- ---------- ---------- ------------------------- ---------------
(UNAUDITED)
Net earnings available to common shareholders ............................................................... $ 708545 $ 752 $ 1,920 $ 1,902655
Weighted average common shares used in basic EPS ............... 3,132,771.......................................... 3,232,416 2,898,280 2,976,444 2,742,724
Potential dilutive common shares ......................................................................................... -- --
-- --
---------- ---------- ---------- ------------------------- ---------------
Weighted average common and potential dilutive
common shares used in dilutive EPS ....................... 3,132,771.................................................. 3,232,416 2,898,280
2,976,444 2,742,724
========== ========== ========== ========================= ===============
Basic earnings per common share ........................................................................................... $ 0.17 $ 0.23
$ 0.26 $ 0.65 $ 0.69
========== ========== ========== ========================= ===============
Diluted earnings per common share ....................................................................................... $ 0.17 $ 0.23
$ 0.26 $ 0.65 $ 0.69
========== ========== ========== ========================= ===============
76
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARSNOTE 3. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
(3) COMPREHENSIVE INCOME
Effective January 1, 1998,JUNIOR SUBORDINATED
DEBENTURES
On March 23, 2000, the Company, adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requiresin a private placement, issued $7,000,000
(7,000 shares with a liquidation amount of $1,000 per security) of 10.875% Fixed
Rate Capital Trust Pass-through Securities ("TruPS") through a newly formed,
wholly-owned subsidiary, Guaranty (TX) Capital Trust I (the "Trust"). The Trust
invested the reportingtotal proceeds from the sale of comprehensive incomethe TruPS in addition10.875% Junior
Subordinated Deferrable Interest Debentures (the "Debentures") issued by the
Company. The net proceeds from the sale of the Debentures will be used to net income from operations.
Comprehensive incomebuy
back shares of the Company's stock, provide a $1.5 million additional capital
contribution to Guaranty Bank and provide for additional working capital to
support growth.
With certain exceptions, the amount of the principal and any accrued and
unpaid interest on the Debentures are subordinated in right of payment to the
prior payment in full of all senior indebtedness of the Company. The terms of
the Debentures are such that they qualify as Tier I capital under the Federal
Reserve Board's regulatory capital guidelines applicable to bank holding
companies. Interest on the Debentures is payable semi-annually on March 8 and
September 8 of each year, commencing September 8, 2000. The interest is
deferrable on a cumulative basis for up to five consecutive years following a
suspension of dividend payments on all other capital stock. No principal
payments are due until maturity on March 8, 2030.
On any March 8 or September 8 on or after March 8, 2010 and prior to
maturity, the Debentures are redeemable for cash at the option of the Company,
on at least 30 but not more inclusive financial reporting methodology,
which includes disclosurethan 60 days notice, in whole or in part, at the
redemption prices set forth in the table below, plus accrued interest to the
date of redemption.
IF REDEEMED
IF REDEEMED DURING PERCENTAGE OF DURING PERCENTAGE OF
12 MONTHS BEGINNING PRINCIPAL 12 MONTHS BEGINNING PRINCIPAL
MARCH 8, AMOUNT MARCH 31, AMOUNT
- -------------------- ------------------ ------------------ ----------------
2010 105.438% 2016 102.175%
2011 104.894% 2017 101.631%
2012 104.350% 2018 101.088%
2013 103.806% 2019 100.544%
2014 103.263% 2020 and after 100.000%
2015 102.719%
Upon the occurrence of certain financial information that historically
has not been recognizedspecial events, the Company will have the
right to call the securities at par at any time with the permission of the
Federal Reserve.
These special events include, among other things:
1. A change in the calculationlaws or regulations in the United States or any
taxing authority to the effect that the Trust becomes subject to
federal income tax and the interest paid by the Company is no
longer tax deductible.
2. A change in the law by any government agency that would make the
Trust an investment company under the Investment Company Act of
net earnings.
The tax effects for components1940.
3. A change in the law by any government agency that would cause the
Company to not be able to treat the liquidation amount of comprehensive income arethe debt
security as follows:
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
BEFORE TAX NET OF BEFORE TAX NET OF
TAX (EXPENSE) TAX TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
Unrealized (losses) gains on
securities arising during the period ........... $ (241) $ 82 $ (159) $ 48 $ (16) $ 32
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income ........................ $ (241) $ 82 $ (159) $ 48 $ (16) $ 32
========== ========== ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
BEFORE TAX NET OF BEFORE TAX NET OF
TAX (EXPENSE) TAX TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
Unrealized (losses) gains on
securities arising during the period ........... $ (889) $ 302 $ (587) $ 38 $ (13) $ 25
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income ........................ $ (889) $ 302 $ (587) $ 38 $ (13) $ 25
========== ========== ========== ========== ========== ==========
8Tier I Capital.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis includes forward-looking
statements. When used in this document, the words or phrases such as, "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "projected," or similar expressions are intended to identify
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. Factors listed above could affect the
Company's financial performance and could cause the Company's results for future
periods to differ materially from any statements expressed with respect to
future periods.
The Company does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
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 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.
Certain of the matters discussed in this Form 10-Q, that are not
historical facts, including matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
constitute forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on assumptions and involve a number of
risks and uncertainties. The important factors that could cause actual results
to differ materially from the forward-looking statements include, without
limitation:
o changes in interest rates and market prices;
o changes in the levels of loan prepayments and the resulting effects on
the value of Guaranty's loan portfolio;
o changes in local economic and business conditions which adversely
affect the Company's customers and their ability to transact profitable
business with the Company, including the ability of the Company's
borrowers to repay their loans according to their terms or a change in
the value of the related collateral;
o increased competition for deposits and loans adversely affecting rates
and terms;
o the timing, impact and other uncertainties of various strategic
alternatives that the Company considers from time to time, including
acquisitions of other depository institutions, their assets or their
liabilities on favorable terms and the Company's ability to
successfully integrate such acquisitions and enter new markets;
o increased credit risk in the Company's assets and increased operating
risk caused by a material change in commercial, consumer and/or real
estate loans as a percentage of the total loan portfolio;
o the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;
o changes in the availability of funds resulting in increased costs or
reduced liquidity;
o changes in the Company's ability to pay dividends on its common stock;
o increased asset levels and changes in the composition of assets and the
resulting impact on the Company's capital levels and regulatory
capital ratios;
o the Company's ability to acquire, operate and maintain cost effective
and efficient systems without incurring unexpectedly difficult or
expensive but necessary technological changes (including changes to
address Year 2000 data systems issues);
o the Company's ability to complete its project to assess and resolve any
Year 2000 problems on time;
o the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation
levels;
o the effects of the Internal Revenue Service's examination regarding the
Company's leveraged leasing transactions;
o changes in applicable statutes and government regulations or their
interpretations, including changes in tax requirements and tax
rates; and
o other uncertainties set forth in the Company's other public reports and
filings and public statements.
9
FINANCIAL OVERVIEW
Net earnings available to common shareholders for the nine months ended
September 30, 1999 were $1.9 million or $0.65 per share compared with $1.9
million or $0.69 per share for the nine months ended September 30, 1998, an
increase of $18,000 or 0.9%. The increase in net earnings was due primarily to
an increase in net interest income of $876,000 or 12.7% and a decrease in the
provision for loan losses of $220,000 or 44.9%, offset by a decrease in
noninterest income of $182,000 or 8.1% and an increase in noninterest expense of
$789,000 or 12.4%. These variances were due in part to a gain on sale in March
1998 of approximately $2.0 million in aggregate principal amount of mortgage
loans that were originally purchased in 1991 at a discount from the Resolution
Trust Corporation ("RTC"). 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 sell any loans during the first nine months of
1999. The gain on the sale of loans in 1998 was partially offset by an
additional provision for loan losses of $340,000 in March of 1998.
Net earnings available to common shareholders for the three months ended
September 30, 1999March 31, 2000 were $708,000$545,000 or $0.23$0.17 per share compared with $752,000$655,000 or $0.26$0.23
per share for the three months ended September 30, 1998,March 31, 1999, a 5.9% decrease.decrease of $110,000 or
16.8%. The decrease in net earnings was due primarily to an increase in
noninterest expensesexpense of $479,000$892,000 or 22.5%40.1%, and an increase in the provision for
the three months ended September 30, 1999 over the sameloan losses of $25,000 or 23.8%, offset by an increase in net interest income of
$612,000 or 24.6% and an increase in noninterest income of $215,000 or 32.5%.
The three-month period in 1998.
The nine-month period ended September 30, 1999March 31, 2000 showed steady growth. The
primary factors contributing to this growth include the opening of the Pittsburg
location in April 1999 and the acquisition of First American Financial
Corporation, Sulphur Springs, Texas ("First American") in September of 1999
("First American Acquisition"). TotalGross
loans increased to $243.8$259.1 million at September 30, 1999,March 31, 2000, from $185.9$255.2 million at
December 31, 1998,1999, an increase of $57.9$3.9 million or 31.2%1.5%. Total assets were $347.9$385.4
million at September 30, 1999,March 31, 2000, compared with $272.9$370.4 million at December 31, 1998.1999.
The increase of $75.0$15.0 million in total assets resulted primarily from a 29.2%the
investment of funds provided from an increase in total deposits of $10.1 million and
the issuance of the Debentures of $7.0 million - See Note 3 to $313.0the Interim
Consolidated Financial Statements. Total deposits were $338.8 million at September 30, 1999, from $242.3March
31, 2000 compared to $328.7 million at December 31, 1998,
and1999, an increase in shareholders' equity of $4.4 million.$10.1
million or 3.1%. There were no Debentures outstanding at December 31, 1999.
Total shareholders' equity was $28.2$28.7 million at September 30, 1999,March 31, 2000, compared
with $23.8$28.5 million at December 31, 1998,1999, an increase of 18.4%$231,000 or 0.81%. This
increase was due to the issuance
of common stock in connection with the First American Acquisition, net earnings for the period of $1.9 million, offset by$545,000 less a decrease in
accumulated other
comprehensive income of $587,000, dividends paid on common stock of $346,000 and
the purchase of $116,000 of treasury stock.
On September 1, 1999, the Company completed the First American
Acquisition. Pursuant to the Agreement and Plan of Reorganization dated April
23, 1999 between the Company and First American (the "Agreement"), the Company
issued an aggregate of 351,736 shares of its common stock and paid $3,379,620 in
cash to the former shareholders of First American. The shares of common stock
issued were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-4 (Registration No. 333-91881). In connection
with the First American Acquisition, First American Bank, N.A., a wholly owned
subsidiary of First American, was merged with and into the Bank. The two former
banking locations of First American Bank, N.A. located in Sulphur Springs and
Commerce, Texas are being operated as branches of the Bank. The operations of
First American Mortgage Company, a wholly owned subsidiary of First American,
are being continued by the Company under the name Guaranty Mortgage Company.
10$314,000.
8
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income for the ninethree months ended September 30, 1999March 31, 2000 was $15.1$6.7
million, an increase of $1.4$1.9 million or 10.5%40.1% compared with the ninethree months
ended September 30, 1998.March 31, 1999. The increase in interest income was due primarily to
higher interest income on loans. Average loans were $202.6$257.9 million for the nine
months ended September 30, 1999, compared with $165.7 million for the nine
months ended September 30, 1998, an increase of $36.9 million or 22.3%. Average
securities were $53.6 million for the nine months ended September 30, 1999,
compared with $50.2 million for the nine months ended September 30, 1998, an
increase of $3.4 million or 6.8%. Interest income for the three
months ended September 30, 1999 was $5.5March 31, 2000, compared with $190.7 million an increase of $921,000 or 20.0% compared
withfor the three months
ended September 30, 1998. We estimate that internal growth
accountedMarch 31, 1999, an increase of $67.2 million or 35.2%. Average securities
were $79.1 million for a significant portionthe three months ended March 31, 2000, compared with
$51.2 million for the three months ended March 31, 1999, an increase of the increase in average loans during both
the three- and nine-month periods ended September 30, 1999.$27.9
million or 54.3%.
INTEREST EXPENSE
Interest expense on deposits and other interest-bearing liabilities was
$7.3$3.6 million for the ninethree months ended September 30, 1999,March 31, 2000, compared with $6.7$2.3
million for the ninethree months ended September 30, 1998,March 31, 1999, an increase of $560,000$1.3 million
or 8.3%57.2%. The increase in interest expense was due primarily to an 18.6%a 42.0% increase
in average interest-bearing liabilities to $216.8 million for the nine months ended
September 30, 1999, from $182.8 million for the nine months ended September 30,
1998. The increase is mitigated by a decrease in average interest rates from
4.92% for the first nine months in 1998 to 4.49% for the first nine months in
1999. Interest expense was $2.7$292.1 million for the three months
ended September 30,
1999, compared with $2.3March 31, 2000, from $205.6 million for the three months ended September 30, 1998,
anMarch 31,
1999. The increase of $411,000 or 18.2%.is also due to a rise in average interest rates from 4.48%
for the three months ended March 31, 1999 to 4.92% for the first three months
ended March 31, 2000.
NET INTEREST INCOME
Net interest income was $7.8$3.1 million for the ninethree months ended September
30, 1999March 31,
2000 compared with $6.9$2.5 million for the ninethree months ended September 30,
1998,March 31, 1999, an
increase of $876,000$612,000 or 12.7%24.6%. The increase in net interest income resulted
primarily from growth in average earninginterest-earning assets to $265.8 million for
the nine months ended September 30, 1999, from $228.0 million for the nine
months ended September 30 1998, an increase of $37.8 million or 16.6%. Net
interest income was $2.9$340.2 million for
the three months ended September 30, 1999,
compared with $2.4March 31, 2000, from $250.9 million for the three months
ended September 30, 1998,March 31, 1999, an increase of $510,000$89.3 million or 21.7%35.6%.
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 three-three months ended March 31, 2000
and nine-months ended
September 30, 1999, and 1998.respectively. 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.
119
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------MARCH 31,
-------------------------------------------------------------------------
2000 1999
1998
------------------------------------- ------------------------------------ ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- ----------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETSAssets
Interest-earning assets:
LoansLoans:
Commercial and industrial.............industrial ..................... $ 65,83967,823 $ 1,393 8.58%8.26% $ 50,84858,230 $ 1,066 8.50%1,163 8.10%
Agriculture ................................... 8,723 208 9.59 -- -- --
Real estate-mortgage and
construction. 128,856 2,518 7.93 100,374 2,095 8.46construction ................................ 153,937 3,084 8.06 111,495 2,206 8.02
Installment and other................. 23,935 563 9.54 21,764 542 10.10
Securities............................... 62,130 966 6.31 45,231 727 6.52other ......................... 27,447 629 9.22 20,989 501 9.68
Fees on loans ................................. 3 11
Securities .................................... 79,066 1,314 6.69 51,227 772 6.11
Federal funds sold....................... 5,458 68 5.05 11,568 175 6.14sold ............................ 3,177 44 5.61 6,936 83 4.85
Interest-bearing deposits in
other financial institutions................ 1,750 18 4.17 291 - -
----------- -------- ----------- --------institutions ................ -- -- -- 1,980 27 5.53
--------- --------- --------- ---------
Total interest-earning assets......... 287,968 5,526 7.78% 230,076 4,605 8.12%assets ................. 340,173 6,675 7.89% 250,857 4,763 7.70%
Less allowance for loan losses.............. (1,926) (1,450)
----------- -----------losses ..................... (2,479) (1,525)
--------- ---------
Total interest-earning
assets, net of allowance................. 286,042 228,626allowance ................. 337,694 249,332
Non-earning assets:
Cash &and due from banks.................... 9,914 8,495banks ........................ 12,967 8,682
Premises and equipment................... 8,600 6,884equipment ......................... 12,298 7,226
Interest receivable and
other assets..... 11,126 9,168assets ............................. 13,714 9,321
Other real estate owned..................... 159 131
----------- -----------owned ........................ 150 135
--------- ---------
Total assets........................assets ............................ $ 315,841376,823 $ 253,304
=========== ===========274,696
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW, savings, and money
market accounts..............................accounts ........................... $ 76,51893,399 $ 664 3.52%929 4.00% $ 58,72565,569 $ 513 3.54%512 3.17%
Time deposits............................ 153,444 1,943 5.14 125,184 1,742 5.64
----------- -------- ----------- --------deposits ................................. 188,150 2,505 5.36 136,085 1,709 5.09
--------- --------- --------- ---------
Total interest-bearing
deposits...... 229,962 2,607 4.60 183,909 2,255 4.97
Other borrowed funds..................... 4,174 59 5.73 109 - -
----------- -------- ----------- --------deposits ............................... 281,549 3,434 4.91 201,654 2,221 4.47
FHLB advances ................................. 9,877 120 4.89 3,995 52 5.28
Long-term debt ................................ 692 19 10.87 -- -- --
--------- --------- --------- ---------
Total interest-bearing
liabilities... 234,136 2,666 4.62% 184,018 2,255 4.97%
-------- --------liabilities ............................ 292,118 $ 3,573 4.92% 205,649 $ 2,273 4.48%
--------- ---------
Noninterest-bearing liabilities:
Demand deposits.......................... 52,336 43,318deposits ............................... 54,162 42,249
Accrued interest, taxes and
other liabilities.......................... 2,619 2,723
----------- -----------
Total liabilities.................... 289,091 230,059
Shareholders' equity........................ 26,750 23,245
----------- -----------
Total liabilities and shareholders'
equity............................ $ 315,841 $ 253,304
=========== ===========
Net interest income......................... $ 2,860 $ 2,350
======== ========
Net interest spread......................... 3.16% 3.15%
======= =======
Net interest margin......................... 4.03% 4.14%
======= =======
12
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans
Commercial and industrial............. $ 61,727 $ 3,771 8.17% $ 47,253 $ 2,969 8.40%
Real estate-mortgage and construction. 118,827 6,966 7.84 96,839 6,127 8.46
Installment and other................. 22,056 1,551 9.40 21,622 1,603 9.91
Securities............................... 53,641 2,449 6.10 50,200 2,431 6.47
Federal funds sold....................... 7,628 275 4.82 12,124 517 5.70
Interest-bearing deposits in other
financial institutions................ 1,904 71 4.99 - - -
--------- -------- -------- --------
Total interest-earning assets......... 265,783 15,083 7.59% 228,038 13,647 8.00%
-------- --------
Less allowance for loan losses.............. (1,661) (1,364)
--------- --------
Total interest-earning assets,
net of allowance................. 264,122 226,674
Non-earning assets:
Cash and due from banks.................. 9,265 8,549
Premises and equipment................... 7,912 6,539
Interest receivable and other assets..... 9,928 7,456
Other real estate owned..................... 142 489......................... 2,190 2,556
--------- ---------
Total assets......................... $ 291,369 $ 249,707
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW, savings, and money market
accounts............................... $ 70,128 $ 1,733 3.30% $ 58,406 $ 1,538 3.52%
Time deposits............................. 142,626 5,388 5.05 124,386 5,186 5.57
---------- --------liabilities ......................... 348,470 250,454
Shareholders' equity ................................ 28,353 24,242
--------- --------
Total interest-bearing deposits....... 212,754 7,121 4.48 182,792 6,724 4.92
Other borrowed funds...................... 4,013 163 5.43 37 - -
---------- -------- --------- --------
Total interest-bearing liabilities.... 216,767 7,284 4.49% 182,829 6,724 4.92%
-------- --------
Noninterest-bearing liabilities:
Demand deposits........................... 46,835 43,069
Accrued interest, taxes and other
liabilities........................... 2,627 2,662
---------- ---------
Total liabilities..................... 266,229 228,560
----------- ---------
Shareholders' equity......................... 25,140 21,147
----------- ---------
Total liabilities and
shareholders' equity.............................equity .................. $ 291,369376,823 $ 249,707
=========== =========
Net interest income............................. $ 7,799 $ 6,923274,696
========= =========
Net interest spread............................. 3.10% 3.08%
==== ====income ................................. $ 3,102 $ 2,490
========= =========
Net interest margin............................. 3.92% 4.06%
==== ====spread ................................. 2.97% 3.22%
========= =========
Net interest margin ................................. 3.67% 4.03%
========= =========
1310
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 whichthat
can be segregated have been allocated.
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------
1999 VS. 1998
-----------------------------
INCREASE (DECREASE)
DUE TO
-------------------
VOLUME RATE TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans ................................... $ 977 $ (206) $ 771
Securities .............................. 272 (33) 239
Federal funds sold ...................... (92) (15) (107)
Interest-bearing deposits in other
financial institutions ............... 18 -- 18
------- ------- -------
Total increase (decrease) in
interest income .................. 1,175 (254) 921
------- ------- -------
Interest-bearing liabilities:
NOW, savings, and money market accounts.. 155 (4) 151
Time deposits ........................... 393 (192) 201
Other borrowed funds .................... 59 -- 59
------- ------- -------
Total increase (decrease) in
interest expense ................. 607 (196) 411
------- ------- -------
Increase (decrease) in net interest
income ................................ $ 568 (58) $ 510
======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 VS. 1998
-----------------------------
INCREASE (DECREASE)
DUE TO
-------------------
VOLUME RATE TOTAL
------- ------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans ................................... $ 2,382 $ (793) $ 1,589
Securities .............................. 167 (149) 18
Federal funds sold ...................... (192) (50) (242)
Interest-bearing deposits in other
financial institutions ............... 71 -- 71
------- ------- -------
Total increase (decrease) in
interest income .................. 2,428 (992) 1,436
------- ------- -------
Interest-bearing liabilities:
NOW, savings, and money market accounts.. 309 (114) 195
Time deposits ........................... 760 (558) 202
Other borrowed funds .................... 163 -- 163
------- ------- -------
Total increase (decrease) in
interest expense ................. 1,232 (672) 560
------- ------- -------
Increase (decrease) in net interest
income ................................ $ 1,196 $ (320) $ 876
======= ======= =======
14
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2000 VS. THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------
INCREASE (DECREASE)
DUE TO
VOLUME RATE TOTAL
--------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Interest-earning assets:
Loans ........................................................ $ 1,399 $ 37 $ 1,436
Securities ................................................... 428 114 542
Federal funds sold ........................................... (45) 6 (39)
Interest-bearing deposits in other
financial institutions .................................... (27) -- (27)
--------------- --------------- ---------------
Total increase (decrease) in interest
income ....................................................... 1,755 157 1,912
--------------- --------------- ---------------
Interest-bearing liabilities:
NOW, savings, and money market
accounts .................................................. 221 196 417
Time deposits ................................................ 660 136 796
FHLB advances ................................................ 78 (10) 68
Long-term debt ............................................... 19 -- 19
--------------- --------------- ---------------
Total increase (decrease) in interest
expense ............................................ 978 322 1,300
--------------- --------------- ---------------
Increase (decrease) in net interest income ................... $ 777 $ (165) $ 612
=============== =============== ===============
11
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, the evaluation of the
Company's loan portfolio by Independent Bank Services, L.C. and the annual
examination of the Company's financial statements by its independent auditors.
The provision for loan losses for the ninethree months ended September 30,
1999,March 31, 2000, was
$270,000$130,000 compared with $490,000$105,000 for the ninethree months ended September
30, 1998, a decreaseMarch 31, 1999, an
increase of $220,000$25,000 or 44.9%23.8%. The 1998 provision included an
extraordinary charge to the provision of $340,000 made in order to bringManagement believes increasing the allowance for
loan losses to a level management deemed appropriate based on its
current methodology. The provision for loan losses for the three months ended
September 30, 1999, was $95,000 compared with $60,000 for the three months ended
September 30, 1998, an increase of $35,000 or 58.3%.is prudent as total loans, particularly commercial, construction,
and consumer loans, increase.
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 in March 1998, noninterestNoninterest income for the ninethree
months ended September 30, 1999March 31, 2000 increased to $2.1 million$877,000 from $1.6
million$662,000 for the ninethree
months ended September 30, 1998,March 31, 1999, an increase of $492,000$215,000 or 31.4%32.5%. 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. After excluding the nonrecurring gain on the sale of
loans, the increase in
noninterest income for the ninethree months ended September
30, 1999,March 31, 2000, resulted primarily
from an increase in service charges on deposit accounts due to an increase in
the number of deposit accounts. Additionally, otherfee income increased from $117,000
for the three months ended March 31, 1999 to $192,000 for the three months ended
March 31, 2000. The increase was primarily due to fee income from the Cash Flow
Manager program initiated in September 1999 and additional legal fee income
generated from the Company's internal legal counsel. Other noninterest income
increased $121,000$34,000 during the same period due primarily due to additional earnings
generated from the key man life insurance policies that were purchasedhave been in place since
July 1998.
Noninterest income was $740,000 for the three months ended September 30, 1999
compared with $611,000 for the three months ended September 30, 1998, an
increase of $129,000 or 21.1%. The increase in noninterest income for the three
months ended September 30, 1998 was primarily due to an increase in service
charges on deposit accounts.
The following table presents, for the periods indicated, the major
categories of noninterest income:income (dollars in thousands):
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ---------------MARCH 31,
------------------------
2000 1999
1998 1999 1998
------ ------ ------ ------
(Dollars in thousands)---------- ----------
(UNAUDITED)
Service charges on deposit accounts ... 493......... $ 337 $1,333542 $ 919405
Fee income ............................ 128 91 359 345.................................. 192 117
Fiduciary income .................................................. 25 17 11 47 34
Gain on sale of loans ................. -- -- -- 674
Other noninterest income .............. 103 91 307 186.................... 152 118
Realized (loss) gain on securities .......................... (1) 81 11 81
------ ------ ------ ------................. (34) 5
---------- ----------
Total noninterest income ...................... $ 740877 $ 611 $2,057 $2,239
====== ====== ====== ======
15662
========== ==========
12
NONINTEREST EXPENSES
Noninterest expenses totaled $7.1 million for the nine months ended
September 30, 1999 compared with $6.3 million for the nine months ended
September 30, 1998, an increase of $789,000 or 12.4%. Noninterest expense
totaled $2.6$3.1 million for the three months ended September 30, 1999March
31, 2000 compared with $2.1$2.2 million for the three months ended September 30, 1998,March 31, 1999,
an increase of $479,000$892,000 or 22.5%40.1%. The following table presents, for the periods
indicated, the major categories of noninterest expenses:expenses (dollars in thousands):
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------MARCH 31,
-----------------------
2000 1999
1998 1999 1998
------ ------ ------ ------
(DOLLARS IN THOUSANDS)---------- ----------
(UNAUDITED)
Employee compensation and
benefits ........ $1,440 $1,135 $3,934 $3,276
------ ------ ------ ------................................ $ 1,770 $ 1,268
---------- ----------
Non-staff expenses:
Net bank premises expense .............. 360 300 1,002 883417 309
Office and computer supplies ........... 84 88 229 219102 51
Legal and professional fees ............ 122 85 349 27371 101
Advertising ............................ 46 51 135 18369 42
Postage ................................ 33 32 100 9939 34
FDIC insurance ......................... 9 7 22 2016
Other .................................. 513 430 1,360 1,389
------ ------ ------ ------635 415
---------- ----------
Total non-staff expenses ............ 1,167 993 3,197 3,066
------ ------ ------ ------1,349 959
---------- ----------
Total noninterest
expenses .......... $2,607 $2,128 $7,131 $6,342
====== ====== ====== ======.......................... $ 3,119 $ 2,227
========== ==========
Employee compensation and benefits expense for the ninethree months ended
September 30, 1999March 31, 2000 was $3.9$1.8 million, an increase of $658,000$502,000 or 20.1%39.6% compared with
$3.3$1.3 million for the same period in 1998. For the three months ended
September 30, 1999, employee compensation and benefits expense increased
$305,000 or 26.9%.1999. The increase for both the three- and nine-month periodsthree-month
period ended September 30, 1999March 31, 2000 was due primarily to normal salary increases and
additional staff placement in the Texarkana, Mt. Pleasant, and Paris locations
to handle customer growth and the recently opened Pittsburg, Sulphur Springs,
and Commerce locations. The number of full-time equivalent employees was 178.0189.0
at September
30, 1999,March 31, 2000, compared with 133.5135.5 at September 30, 1998,March 31, 1999, an increase of 33.3%39.5%.
Non-staff expenses were $3.2$1.3 million for the ninethree months ended September
30, 1999,March 31,
2000, compared with $3.1 million$959,000 for the same period in 1998,1999, an increase of
$131,000$390,000 or 4.3%40.7%. Net bank premises expense increased $119,000$108,000 or 13.5%35.0% during
the same period to $1.0 million$417,000 due to construction and remodeling projects and the
addition of the Pittsburg, Sulphur
Springs and Commerce locations. For the three months ended September 30, 1999,new Operations Center in Mt. Pleasant, Texas.
Other non-staff expenses increased $174,000$220,000 or 17.5%53.0% to $1.2 million from $1.0 million$635,000 as of
March 31, 2000. The primary reason for this increase is the same periodaddition of new
locations which, among other expenses, resulted in 1998. Thean increase was primarily attributed to additional
legalof $18,000 in
director fees, an increase of $36,000 in supplies expense, an increase of
$23,000 in ATM and professional fees related to the First American Acquisitiondebit card expenses, and increased depreciation cost.
16an increase of $37,000 in
amortization of goodwill.
13
INCOME TAXES
Income tax expense increased approximately $144,000$20,000 to $535,000$185,000 for the ninethree months
ended September 30, 1999March 31, 2000 from $391,000$165,000 for the same period in 1998.1999. The increase is
primarily a result of higher earnings before income taxes and
fewer taxabletax deductions available from the Company's
leveraged leasing activities. In addition, the Company recorded a gain on sale of loans of
$674,000 during the first three months of 1998 creating an additional tax
expense in 1998, which the Company did not have in 1999. 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 expense.
Income tax expense was $190,000 for the three
months ended September 30, 1999 compared with $21,000 for the three months ended
September 30, 1998, an increase of $169,000. The increase is primarily a result
of fewer taxable deductions available from the Company's leveraged leasing
activities and the effect of selling other real estate at a loss during the
three-month period ended September 30, 1998.
FINANCIAL CONDITION
LOAN PORTFOLIO
TotalGross loans were $243.8$259.1 million at September 30, 1999,March 31, 2000, an increase of $57.9$3.9
million or 31.2%1.5% from $185.9$255.2 million at December 31, 1998.1999. Loan growth occurred
primarily in 1- 41-4 family residential loans, consumernon-residential and commercialnon-farmland
loans, and construction and land development loans. Loans comprised 77.2%74.1% of
total earninginterest-earning assets at September 30, 1999March 31, 2000 compared with 74.5%75.9% at December
31, 1998.1999.
The following table summarizes the loan portfolio of the Company by
type of loan as of September 30, 1999March 31, 2000 and December 31, 1998:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------
(Dollars in thousands)
Commercial and industrial ............ $ 69,662 28.57% $ 59,241 31.86%
Real estate:
Construction and land
development .................... 6,633 2.72 3,130 1.68
1-4 family residential ........... 80,699 33.10 48,376 26.02
Commercial mortgages ............. 48,986 20.09 47,977 25.81
Farmland ......................... 8,051 3.30 7,258 3.90
Multi-family residential ......... 3,176 1.30 844 0.45
Consumer ............................. 26,613 10.92 19,060 10.28
-------- -------- -------- ------
Total loans ...................... $243,820 100.00% $185,886 100.00%
======== ======== ======== ======1999:
(DOLLARS IN THOUSANDS)
----------------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
--------------------------------- ---------------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------------- --------------- --------------- ---------------
(UNAUDITED)
Commercial and industrial ................... $ 57,890 22.34% $ 61,153 23.96%
Agriculture ................................. 8,528 3.29 9,102 3.57
Real estate:
Construction and land ............. 9,188 3.55 7,926 3.11
1-4 family residential ............ 87,755 33.87 83,777 32.83
Farmland .......................... 7,831 3.02 7,976 3.13
Non-residential and non-farmland. . 56,387 21.76 52,303 20.49
Multi-family residential .......... 4,525 1.75 6,239 2.44
Consumer .................................... 27,004 10.42 26,733 10.47
--------------- --------------- --------------- ---------------
Total loans ............. $ 259,108 100.00% $ 255,209 100.00%
=============== =============== =============== ===============
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Company recognizes that it will experience
credit losses 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 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. 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 17
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
14
if economic conditions differ from the assumptions used in making the initial
determinations. As of September 30,At March 31, 2000, and December 31, 1999, the allowance for loan
losses amounted tototaled $2.5 million or 1.02%0.98% of total loans compared with $1.5
million or 0.81% of total loans at December 31, 1998.gross loans. The allowance for loan
losses as a percentage of nonperforming loans was 130.55%140.29% at September 30, 1999.March 31, 2000.
Set forth below is an analysis of the allowance for loan losses for the
periods indicated:
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
Average loans outstanding ...................... $ 202,610 $ 169,754
========= =========
Gross loans outstanding at end of period ....... $ 243,820 $ 185,886
========= =========
Allowance for loan losses at beginning of
period ...... ........................... 1,512 1,129
Provision for loan losses ...................... 270 540
Balance acquired with First American
Acquisition ................................ 846 --
Charge-offs:
Commercial and industrial ............ (54) (113)
Real estate .......................... (2) (14)
Consumer ............................. (184) (149)
Recoveries:
Commercial and industrial ............ 41 33
Real estate .......................... 25 26
Consumer ............................. 29 60
--------- ---------
Net loan (charge-offs) recoveries .............. (145) (157)
--------- ---------
Allowance for loan losses at beginning of
period ..................................... $ 2,483 $ 1,512
========= =========
Ratio of allowance to end of period loans ...... 1.02% 0.81%
Ratio of net charge-offs to average loans ...... 0.07% 0.09%
Ratio of allowance to end of period
nonperforming loans ........................ 130.55% 130.80%
18indicated (dollars in thousands):
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
(UNAUDITED)
Average loans outstanding ................................................................. $ 257,930 $ 213,737
=============== ===============
Gross loans outstanding at end of period .................................................. $ 259,108 $ 255,209
=============== ===============
Allowance for loan losses at beginning of period .......................................... 2,491 1,512
Provision for loan losses ................................................................. 130 310
Balance acquired with First American Acquisition .......................................... 846
Charge-offs:
Commercial and industrial ....................................................... (82) (64)
Real estate ..................................................................... (21) (2)
Consumer ........................................................................ (25) (267)
Recoveries:
Commercial and industrial ....................................................... 22 65
Real estate ..................................................................... 8 42
Consumer ........................................................................ 26 49
--------------- ---------------
Net loan (charge-offs) recoveries ......................................................... (72) (177)
--------------- ---------------
Allowance for loan losses at end of period ................................................ $ 2,549 $ 2,491
=============== ===============
Ratio of allowance to end of period loans ................................................. 0.98% 0.98%
Ratio of net charge-offs to average loans ................................................. 0.03% 0.08%
Ratio of allowance to end of period nonperforming loans ................................... 140.29% 244.94%
15
NONPERFORMING ASSETS
Nonperforming assets were $2.1$2.0 million at September 30, 1999March 31, 2000 compared with
$1.3$1.1 million at December 31, 1998, reflecting continued strong asset
quality.1999. Four lines of credit totaling $1.3 million
were added to nonaccrual loans during the quarter ended March 31, 2000, while
three lines of credit were removed totaling $560,000. 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
0.85%0.76% and 0.67%0.43% at September 30, 1999,March 31, 2000, and December 31, 1998,1999, respectively.
The following table presents information regarding nonperforming assets
as of the dates indicated:
SEPTEMBER 30,indicated (dollars in thousands):
MARCH 31, DECEMBER 31,
2000 1999
1998
------------- ------------
(Dollars in thousands)--------------- ---------------
(UNAUDITED)
Nonaccrual loans ............................... $1,337.......................... $ 2901,185 $ 443
Accruing loans 90 or more days past due ........ 565 866
------ ------... 632 574
--------------- ---------------
Total nonperforming loans ................... 1,902 1,156....... 1,817 1,017
Other real estate .............................. 175 97
------ ------......................... 157 79
--------------- ---------------
Total nonperforming assets .................. $2,077 $1,253
====== ======...... $ 1,974 $ 1,096
=============== ===============
SECURITIES
Securities totaled $71.3$81.3 million at September 30, 1999,March 31, 2000, an increase of $19.9$1.5
million from $51.4$79.8 million at December 31, 1998. The increase is primarily
attributable to the addition of $13.4 million of securities acquired in
connection with the First American Acquisition and the purchase of additional
securities to invest the excess cash of First American.1999. At September 30, 1999,March 31, 2000, securities
represented 20.5%21.1% of total assets compared with 18.8%21.5% of total assets at
December 31, 1998.1999. The yield on average securities for the ninethree months ended
September 30, 1999,March 31, 2000, was 6.10%6.69% compared with 6.47%6.11% for the same period in 1998.1999. At
September 30, 1999,March 31, 2000, securities included $1.2 million in U.S. Treasury
securities, $26.7$27.9 million in U.S. Government securities,
$39.2$29.9 million in mortgage-backed securities, $1.4$16.6 million in collateralized
mortgage obligations, $1.6 million in equity securities, and $2.9$5.3 million in
municipal securities. The average life of the securities portfolio at September 30, 1999,March 31,
2000, was approximately threefive years.
PREMISES AND EQUIPMENT
Premises and equipment totaled $9.9$13.0 million at September 30, 1999March 31, 2000 and $7.0$11.7
million at December 31, 1998.1999. The net change reflects an increase of $2.9$1.3
million or 40.4%11.8%, in fixed assets. The increase is primarily due to the
opening
of acapitalized construction cost incurred for the Mt. Pleasant Operations Center,
the new full-service bank location in Pittsburg, Texas, and major remodeling
projects in the purchase of additional land
in Paris,Sulphur Springs, Commerce, and Mt. Pleasant, Texas for potential future bank expansion, and the addition of the
premises and equipment received in connection with the First American
Acquisition.locations.
OTHER ASSETS
On July 1, 1998, the Company invested $3.1 million in single insurance
premium policies, which insure the lives of certain senior officers of the
Company. As of September 30,March 31, 2000, and December 31, 1999, the net surrender values
of these policies totaled $3.5$3.9 million. 19Goodwill recorded in connection with the
First American Acquisition in September 1999, the Deport Acquisition in 1992 and
the Bogata Acquisition in 1993 totaled $3.1 million at March 31, 2000, and at
December 31, 1999.
16
DEPOSITS
At September 30, 1999,March 31, 2000, demand, money market and savings deposits accounted for
approximately 45.3%45.0% of total deposits, while certificates of deposit made up
54.7%55.0% of total deposits. Noninterest-bearing demand deposits totaled $55.9$59.1
million or 17.9%17.5% of total deposits at September 30, 1999,March 31, 2000, compared with $47.4$56.4
million or 19.5%17.2% of total deposits at December 31, 1998.1999. The average cost of
deposits, including noninterest-bearing demand deposits, was 3.67%4.11% for the ninethree
months ended September 30, 1999March 31, 2000 compared with 3.98%3.69% for the same period in 1998. The decrease in the average cost of deposits was primarily due to the
lower interest rate environment during the first nine months in 1999 compared to
the same period in 1998.1999.
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 fundingexternal-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.
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
$2.9 million and $685,000 for the nine months ended September 30, 1999 and 1998,
respectively. The increase was due primarily to the salary retention premiums
paid on executive officers of $3.1 millionAs summarized in the first nine monthsCondensed Consolidated
Statements of 1998
offset byCash Flow, the proceeds frommost significant transactions which affected the
saleCompany's level of loans of $2.0 million during the same
period. The Company did not pay any retention premiums or sell any loanscash and cash equivalents, cash flows, and liquidity during
the first nine monthsquarter of 1999.
Net cash (used) by investing activities was $(14.1) million and $(7.0)
million for2000 were the nine months ended September 30, 1999 and 1998, respectively. The
increase is primarily due to annet increase in federal funds sold of $8.0
million, the amountnet increase in loans of investment$4.3 million, securities purchased andpurchases of $9.7
million, securities sales of $5.3 million, the payment of $3.4 million in connection with the First American
Acquisition.
Net cash provided by financing activities was $11.8 million and $7.2
million for the nine months ended September 30, 1999 and 1998, respectively. The
difference was due primarily to a larger net increase in deposits of $12.5 in
1999 as compared to a net increase of $1.9$10.1
million, in 1998, offset byand proceeds from borrowings in 1998the issuance of $2.0 million and the salelong-term debt of common stock in 1998 of
$4.5$7.0 million.
CAPITAL RESOURCES
Total shareholders' equity as of September 30, 1999,March 31, 2000, was $28.2$28.7 million, an
increase of $4.4 million$231,000 or 18.4%0.81% compared with shareholders' equity of $23.8$28.5
million at December 31, 1998. The1999. This increase was due to the issuance of common
stock in connection with the First American Acquisition, net earnings for the period
of $1.9 million, offset by the$545,000 less a decrease in accumulated other
comprehensive income of $587,000, dividends paid on common stock of $346,000 and
the purchase of treasury stock of $116,000.
20
$314,000.
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 September 30, 1999,March 31, 2000, the Company's Tier 1
risk-based capital, total risk-based capital and leverage capital ratios were
10.22%12.38%, 11.24%13.34%, and 8.59%8.65%, respectively. As of September 30, 1999,March 31, 2000, 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 9.52%9.27%, 10.52%10.23%, and
7.97%6.52%, 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 READINESSPREPAREDNESS
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 bysuccessfully completed 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 the Company
has tested the hardware and software to verify these assertions. In addition,
the Company's compliance efforts regarding Year 2000 issues were reviewed by the
FDIC in January 1999.
The Company has completed the following phases of its Year 2000 plan: (i)
recognizing Year 2000 issues, (ii) assessing the impact of Year 2000 issues on
the Company's mission critical systems, (iii) upgrading systems as necessary to
resolve the Year 2000 issues which have been identified, and (iv) developing a
business resumption contingency plan.
COSTS OF COMPLIANCE Management does not expect that the cost 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, 1999, the Company has not incurredchangeover without any
significant costs in relation to Year
2000. The largest potential internal 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.
21
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 borrowers, the Company may
be required to charge-off the loan to such borrowers. For a discussion of
possible effects of such charge-offs, see "--Contingency Plans" below. In the
event that Year 2000 noncompliance causes depositors 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 has certified its systems to be Year 2000 compliant and
continues to test product upgrades. With respect to its borrowers, the Company
includesproblems 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 has finalized its contingency plans with
respect to the Year 2000 date change for each mission critical system and the
Company's core business processes. The Company believes that if its own system
should fail, it could convert tohas confirmed normal
business operations across all products and markets on a manual entry system for a period up to three
months without significant losses. The Company furthersustained basis.
While management 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 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, problems associated with
non-compliant third parties could still occur. Management will continue to
monitor all business processes and relationships with third parties during 2000
to ensure that its exposure would exceed $100,000, although there are no
assurances that this amount will not be substantially higher. Management does
not believe that this amount is material enough for the Companyall processes continue 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.function properly.
17
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, 1998.1999. See
Form 10-K, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Sensitivity and Liquidity."
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicableNone
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicableNone
(b) Not applicableNone
(c) Not applicableNone
(d) Not applicableNone
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicableNone
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicableNone
ITEM 5. OTHER INFORMATION
Not applicableNone
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed with this report:
Exhibit 27.- 11, Statement regarding computation of earnings per
share. Exhibit - 27, Financial Data Scheduleschedule.
(b) Reports on Form 8-K.
On September 8, 1999,8-K
Form 8-K was filed on January 25, 2000. Under Item 4, changes in
Registrant's Certifying Accountant, the Company filed a current report on Form
8-K under Item 5announced the
dismissal of Form 8-K announcingArnold, Walker, Arnold & Co., P.C. as its independent
auditors effective upon the completion of the First
American Acquisition.audit of the
Company's 1999 financial statements. Additionally, the Company
announced the engagement of Fisk & Robinson, P.C. to serve as the
Company's independent auditors for the 2000 financial statements.
Form 8-K/A was filed on February 25, 2000. The Company amended the
prior Form 8-K filed on January 25, 2000 to report February 23,
2000 as the effective date of dismissal of Arnold, Walker, Arnold &
Co., P.C. as the Company's independent auditors.
18
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: NovemberMay 15, 19992000 By: /S//s/ ARTHUR B. SCHARLACH
JR.-------------------------------
Arthur B. Scharlach, Jr.
President
(Principal Executive Officer)
Date: NovemberMay 15, 19992000 By: /S//s/ CLIFTON A. PAYNE
-------------------------------
Clifton A. Payne
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
2419
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
10 Amended and Restated Declaration of Trust -
Guaranty (TX) Trust I - Dated as of March
23, 2000 23
11 Statement regarding computation Reference is hereby made
of earnings per share to Note 2 of Notes to
Interim Consolidated
Financial Statements on
page 6 hereof.
27 Financial Data Schedule 21
20