As filed with the Securities and Exchange Commission on January 22, 1997.
Registration No. 333-15873
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
GUARANTY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Virginia 6712 54-1786496
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
1658 State Farm Boulevard
Charlottesville, Virginia 22911
(804) 970-1100
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Thomas P. Baker
President and Chief Executive Officer
Guaranty Financial Corporation
1658 State Farm Boulevard
Charlottesville, Virginia 22911
(804) 970-1100
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies of Communications to:
Wayne A. Whitham, Jr., Esquire
R. Brian Ball, Esquire
Williams, Mullen, Christian & Dobbins
1021 East Cary Street, 16th Floor
Richmond, Virginia 23219
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________
If the delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box: [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Guaranty Financial Corporation
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Heading or Location in Prospectus of Information
Required by Items in Part I of Form S-1
Item in Form S-1 Location in Prospectus
---------------- ----------------------
1. Forepart of the Registration Statement and Facing Page; Cross Reference Sheet; Outside Front
Outside Front Cover Page of Prospectus Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Page
Prospectus
3. Summary Information; Risk Factors; and Ratio of Prospectus Summary; The Company; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Underwriting
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Underwriting
9. Description of Securities to be Registered Outside Front Cover Page; Description of Capital
Stock
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant
(a) Description of Business Prospectus Summary; Guaranty Financial
Corporation; Business
(b) Description of Property Business
(c) Legal Proceedings Business
(d) Market Price, Dividends and Related Market Price and Dividend Data
Shareholder Matters
(e) Financial Statements Financial Statements
(f) Selected Financial Data Selected Financial Data
(g) Supplementary Financial Information Not Applicable
(h) Management's Discussion and Analysis of Management's Discussion and Analysis of Financial
Financial Condition and Results of Condition and Results of Operations
Operations
(i) Changes in and Disagreements with Not Applicable
Accountants
(j) Directors and Executive Officers Management
(k) Executive Compensation Management
(l) Security Ownership of Certain Management
Beneficial
Owners and Management
(m) Certain Relationships and Related Management
Transactions
12. Disclosure of Commission Position on Description of Capital Stock
Indemnification for Securities Act Liabilities
PROSPECTUS
500,000 SHARES
[LOGO]
COMMON STOCK
Guaranty Financial Corporation, a Virginia corporation ("Guaranty")
is offering for sale 500,000 shares of its Common Stock, par value $1.25 per
share (the "Common Stock"). The Common Stock is quoted on the Nasdaq SmallCap
Market under the symbol "GSLC". On December 17, 1996, the quotation for the
Common Stock was $8.25 bid - $8.75 offered and the last reported sale price
was $8.75 per share on December 17, 1996. Guaranty reserves the right to
increase the total number of shares offered by not more than 75,000 shares.
See "Underwriting" for information regarding the factors considered in
determining the offering price.
See "Risk Factors" at page 7 for certain information that should be
considered by prospective investors.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE VIRGINIA STATE CORPORATION COMMISSION
OR ANY OTHER STATE OR FEDERAL AGENCY, NOR HAS ANY STATE OR FEDERAL
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR BY ANY OTHER STATE OR FEDERAL AGENCY.
--------------
Broker/Dealer Proceeds to
Price to Public Commission (1) Guaranty (2)(3)(4)
--------------- -------------- -------------------
Per Share..................... $ 8.50 $ 0.56 $ 7.94
Total (3)..................... $ 4,250,000 $ 280,000 $ 3,970,000
------------
<FN>
(1) Payable to McKinnon & Company, Inc. (the "Underwriter"), as selling
agent for Guaranty. Guaranty has agreed to indemnify the
Underwriter against certain civil liabilities, including liabilities
under the Securities Act of 1933.
(2) Before deducting expenses payable by Guaranty estimated at
approximately $84,000.
(3) Assumes the sale of the entire 500,000 Shares offered hereby.
(4) Guaranty reserves the right to increase the total number of shares
offered by not more than 75,000 shares. If all of such additional
shares are purchased, the total Price-to-Public, total Underwriting
Discount and total Proceeds to Guaranty will be increased to
$4,887,500, $322,000 and $4,565,500, respectively. See
"Underwriting".
</FN>
The Shares are offered by the Underwriter, as selling agent for
Guaranty, subject to prior sale, on a best efforts basis, and subject to
certain other conditions, including the right to reject any order in whole or
in part. This offering will close on or about January 29, 1997. Funds
received by the Underwriter will be deposited at, and held by, Crestar Bank
(the "Escrow Agent") in a noninterest-bearing escrow account in Richmond,
Virginia. It is expected that such funds will be released from the escrow
account and delivery of the Shares will be made on or about January 29,
1997.
McKinnon & Company, Inc.
The date of this Prospectus is January 29, 1997
[GRAPHIC: MAPS OF VIRGINIA, CHARLOTTESVILLE
AND HARRISONBURG SHOWING
LOCATIONS OF MAIN OFFICE,
EXISTING BRANCH OFFICES, AND
PROPOSED BRANCH OFFICE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF GUARANTY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
Guaranty's principal executive offices are located at 1658 State
Farm Boulevard, Charlottesville, Virginia 22911, and its telephone number is
(804) 970-1100. Guaranty is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the offices of
the Commission, at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at regional offices of the Commission at the following locations: Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511
and World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Commission maintains a Web site (address: http://www.sec.gov) that contains
reports, proxy statements and other information regarding Guaranty.
Guaranty has filed with the Commission a Registration Statement, as
amended, on Form S-1 under the Securities Act of 1933, as amended, with respect
to the Common Stock offered herein. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain items of which have
been omitted in accordance with the rules and regulations of the Commission. For
further information pertaining to Guaranty and the Common Stock offered herein,
reference is made to the Registration Statement and amendments and exhibits
thereto, which may be inspected and copied as described above.
-3-
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the detailed information and financial statements, including
notes thereto, included elsewhere in this Prospectus.
Guaranty Financial Corporation ("Guaranty") is the holding company for
Guaranty Savings and Loan, F.A. (the "Bank"), a federally chartered savings
association that is converting to a Virginia chartered bank. The Bank is 15
years old, operates four branches in the City of Charlottesville and Albemarle
County, Virginia, and plans to open a fifth branch in Harrisonburg, Virginia in
the spring of 1997. Guaranty is the only community bank or savings and loan
headquartered or operating in Charlottesville or Albemarle County. At June 30,
1996, Guaranty had grown to assets of $110.2 million, deposits of $74.7 million
and tangible stockholders' equity of $6.4 million, or $6.91 per share. In the
fiscal year ended June 30, 1996, net income increased 71.0% to $643,000 from
$376,000 in fiscal 1995 and, with 69.4% more average shares outstanding,
earnings per share were constant at $.70. The return on average assets and
average equity increased from 0.41% to 0.64% and from 9.67% to 10.24% from 1995
to 1996. At June 30, 1996, deposits were up 42.4% from June 30, 1995, and, at
June 30, 1996 the leverage ratio was 6.01% down from 6.72% at June 30, 1995. In
order to support asset and deposit growth and to facilitate approval of its
conversion from a federal thrift to a state bank, management intends to increase
its equity to asset ratio to approximately 9.00% which is more in line with
banks of similar size.
Guaranty has filed applications to convert from a federal savings
association to a Virginia-chartered bank. If such applications are approved,
Guaranty anticipates that the conversion will occur in February, 1997. Guaranty
does not anticipate that the charter conversion will have any material short
term effect on its business or results of operations. Capital requirements of
banks and savings associations are essentially the same. Guaranty's FDIC
insurance assessment would not change as the result of a charter conversion.
Guaranty would conduct this Offering to support its anticipated growth even if
it were not seeking to convert to a bank charter.
Guaranty is expanding its loan and deposit products in an effort to
improve its net interest margin. Certain of those new products, including
commercial loans and commercial checking accounts, in Guaranty's opinion, are
not considered traditional thrift products. Guaranty's strategy is that it will
be better able to market such products if it operates as a bank. Office of
Thrift Supervision ("OTS") regulations that currently govern Guaranty limit the
percentage of its assets that may be invested in commercial and consumer loans.
While Guaranty does not believe that such limits would affect its commercial and
consumer lending activities in the short run, after a charter conversion, OTS
regulations would not apply to Guaranty. As a bank, no comparable commercial or
consumer lending restrictions would apply to Guaranty.
In the past, Guaranty has been primarily a residential mortgage lender.
Recently, Guaranty has begun to offer consumer, small business, home equity and
commercial loans and has recently hired commercial and consumer loan officers.
Consumer and commercial lending involve risks that differ from those presented
by residential mortgage lending. See "Business - Credit Policies." The business
strategy in converting from a savings and loan to a commercial bank is to
increase Guaranty's net interest margin and performance ratios. In 1996, the net
interest margin was 2.54%, up from 2.38% in 1995, but still was significantly
below average bank levels.
Guaranty's special assessment in connection with recently enacted
federal legislation to recapitalize the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") was a one-time
charge against earnings of $347,000 pre-tax, $225,000 after taxes, in the
quarter ended September 30, 1996. Without the special one-time assessment,
Guaranty would have earned $192,000 or $.21 per share for the quarter ended
September 30, 1996, a 24.0% increase from the comparable quarter last year.
Assets at September 30, 1996 were $115.2 million, a 21.1% increase over the
prior year. The net interest margin increased to 2.66% for the quarter ended
September 30, 1996, up from 2.56% in the comparable quarter of the prior year.
The FDIC deposit insurance premium on SAIF insured deposits will be reduced from
the prior annual rate of $2.60 per $1,000 of deposits to a new estimated annual
rate of $.64 per $1,000 of deposits in calendar 1997. Based on deposits of
$78.656 million at September 30,
-4-
1996, this reduction would decrease insurance costs and increase annual income
by approximately $154,000 pre-tax and $102,000 after taxes. With Guaranty's
significant growth in deposits in fiscal 1996 and in anticipation of further
deposit growth from two additional branch offices opened in December and
scheduled to open in the spring of 1997, management believes future reductions
in deposit insurance assessments will offset the one-time special assessment in
less than three years.
The directors of Guaranty have agreed with the Underwriter to a
standard requirement not to sell or otherwise dispose of any shares of Common
Stock for a period of 120 days after the commencement of the Offerings without
the prior written consent of the Underwriter. It is anticipated that the
Underwriter will not give its consent to any sales or dispositions during this
period that, in its opinion, may have an adverse effect on the market price of
the Common Stock. After the expiration of the 120 day period, sales of Common
Stock by these individuals may have an adverse effect on the market price of the
Common Stock. Officers of Guaranty who are not directors have not entered into
any agreements restricting sales of their Common Stock in Guaranty. See
"Underwriting."
The Offering
Shares offered........................... A total of 500,000 Shares on a best efforts basis (the "Offering"). Guaranty
reserves the right to increase the total number of shares offered by not more
than 75,000 shares. See "Underwriting."
Common Stock............................. 919,168 shares of Common Stock outstanding at November 1, 1996; 1,419,168 after
completion of the Offering, assuming the sale of all 500,000 Shares.
Use of proceeds.......................... To support future growth of Guaranty's assets and for general corporate
purposes. See "Guaranty Financial Corporation," "Use of Proceeds" and "Risk
Factors."
Market area.............................. All existing branches of Guaranty are located within Charlottesville and
Albemarle County, Virginia. Guaranty intends to open a branch office in
Harrisonburg, Virginia in the spring of 1997. See "Risk Factors - Expansion into
New Markets."
Trading symbol........................... Guaranty is listed on the Nasdaq SmallCap Market under the symbol "GSLC." See
"Market Price and Dividend Data."
Dividends................................ Guaranty paid semi-annual dividends on its Common Stock of $0.05 per share in
June and December 1996. See "Market Price and Dividend Data," "Description of
Capital Stock" and "Business - Supervision and Regulation - Restrictions on
Capital Distributions."
Investment considerations................ Prospective investors should carefully consider certain factors before purchasing
any of the Shares offered in the Offering. See "Risk Factors."
-5-
SUMMARY FINANCIAL DATA
Three Months Ended
September 30, Year Ended June 30,
-------------------- -------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(In thousands, except ratios, per share data and shares outstanding)
Income Statement Data:
Interest Income................................... $ 2,159 $1,815 $ 7,617 $ 6,788 $ 6,684 $ 7,717 $ 8,771
Interest Expense.................................. 1,443 1,245 5,192 4,662 5,073 5,094 6,358
Net interest income............................... 716 570 2,425 2,126 1,611 2,623 2,413
Provision (credit) for loan losses................ 46 (4) 57 (9) 74 37 0
Noninterest income................................ 274 260 1,107 872 126 828 663
Noninterest expense (1)........................... 995 596 2,487 2,530 2,182 1,958 1,939
Net income (loss) (1)............................. (33) 155 $ 643 $ 376 $ (480) $ 973 $ 780
=== ======== ======== ======== ======== ========
Per Share Data:
Net Income (loss) (1)............................. $(0.04) $0.17 $ .70 $ .70 $ (0.90) $ 1.81 $ 1.45
Cash dividends.................................... - - 0.05 0.00 0.00 0.25 0.00
Dividend payout ratio (2)......................... - - 0.07 - - 0.14 -
Book value at period end.......................... 6.89 6.91 6.91 6.57 6.57 7.47 5.90
Tangible book value at period end................. 6.89 6.91 6.91 6.57 6.57 7.47 5.90
Balance Sheet Data:
Total assets...................................... $115,229 $95,114 $110,161 $ 89,461 $ 88,256 $ 92,832 $ 96,048
Loans, net........................................ 86,132 79,088 84,081 75,221 77,755 70,195 74,035
Securities........................................ 16,305 7,789 14,655 6,096 7,217 18,004 19,049
Deposits.......................................... 78,656 56,076 74,687 52,461 53,467 50,020 54,878
FHLB advances and other borrowings................ 25,420 26,925 23,604 25,050 23,950 25,750 24,025
Stockholders' equity.............................. 6,337 6,164 6,349 6,016 3,531 4,011 3,173
Shares outstanding................................ 919,168 915,568 919,168 915,568 537,168 537,168 537,168
Average shares outstanding........................ 919,168 915,568 917,668 541,768 537,168 537,168 537,168
Performance Ratios:
Return on average assets.......................... -0.03% 0.17% 0.64% 0.41% (0.49)% 1.00% .79%
Return on average equity.......................... (0.59) 2.62 10.24 9.67 (12.00) 26.31 27.97
Net interest margin (3)........................... 2.66 2.56 2.54 2.38 1.68 2.82 2.56
Asset Quality Ratios:
Allowance for loan losses to period end loans..... 0.96% 0.93% 0.94% 0.98% 0.96% 1.05% 0.91%
Allowance for loan losses to nonaccrual loans..... 54.09 43.97 54.05 48.01 85.01 79.87 134.31
Nonperforming assets to period end loans and foreclosed
properties (4)................................. 1.84 2.25 1.72 2.21 1.87 2.91 2.20
Net charge-offs (recoveries) to average loans..... 0.00 0.02 0.02 0.00 0.09 (0.03) 0.03
Capital and Liquidity Ratios:
Leverage.......................................... 5.83% 6.62% 6.01% 6.72% 4.00% 4.32% 3.30%
Risk based
Tier 1 capital................................. 11.64 12.75 12.13 13.31 7.76 9.05 7.28
Total capital.................................. 12.84 14.10 13.28 14.56 9.01 10.31 8.56
Tangible capital............................... 5.83 6.62 6.01 6.72 4.00 4.32 3.30
Average loans to average deposits................. 121.95 140.96 129.00 144.01 146.48 137.41 119.21
Average equity to average assets.................. 5.57 6.48 6.24 4.22 4.07 3.80 2.89
- ------------------------
<FN>
(1) The one-time SAIF assessment in the September 30, 1996 quarter
increased non-interest expenses by $347,000 and reduced net income by
$225,000 and earnings per share by $.25 per share. Excluding the SAIF
assessment, net income and earnings per share would have been $192,000
and $.21, respectively, for the September 30, 1996 quarter, compared
with net income of $155,000 and earnings per share of $.17 for the
September 30, 1995 quarter, increases of 24.3% and 23.5%, respectively.
(2) Guaranty paid a semi-annual cash dividend on its Common Stock of $.05
per share in June 1996, which was the first dividend paid since July
1993, when Guaranty paid a dividend of $.25 per share on its Common
Stock. Guaranty anticipates paying dividends on a semi-annual basis in
the future.
(3) Net interest income dividend by total average earnings assets.
(4) Nonperforming assets consist of nonaccrual loans, restructured loans,
and foreclosed properties. As of September 30, 1996, Guaranty had
total nonperforming assets of $1.67 million. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Loan Portfolio."
</FN>
-6-
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors relating to Guaranty
and the Common Stock offered hereby.
Conditions to Conversion to a Bank Charter
Guaranty has filed applications to convert the Bank from a
federally-chartered savings association to a Virginia-chartered, Federal Reserve
member, commercial bank. There is no assurance that the federal or state banking
regulators will approve such a charter conversion or that any such approval will
not contain conditions that would require Guaranty to substantially modify the
Bank's balance sheet or operations. In particular, Guaranty expects that
approval of such applications will be conditioned on the sale of substantially
all of the shares of Common Stock offered hereby and that the federal or state
banking regulators will require Guaranty, over time, to reduce its ratio of
loans-to-deposits, which was 109.5% at September 30, 1996. See "Business -
Supervision and Regulation - Charter Conversion."
In the past, Guaranty has been primarily a residential mortgage lender.
Recently, it began expanding its consumer lending and has increased its emphasis
on commercial real estate lending. Additionally, Guaranty has begun to offer
commercial business loans. Commercial loan and consumer loan departments have
been staffed by loan officers with prior lending experience. Consumer and
commercial lending involve risks that differ from those presented by residential
mortgage lending. See "Business Credit Policies". There can be no assurance that
Guaranty will be able to effectively manage such risks or that it will be able
to effectively compete in these areas with other lenders, many of which have
more capital, experience and established customer relationships.
Impact of New Fixed Assets, Market Expansion and Asset Growth
Until December 1996, Guaranty's operations center was located at its
Seminole Trail branch, which opened in 1983. Guaranty purchased its Seminole
Trail branch for $1.15 million in June 1996. Guaranty completed and opened a new
20,000 square foot combined operations center and fourth retail branch in the
Pantops area in east Charlottesville in December 1996 at a total cost of
approximately $2.4 million. Guaranty has purchased land in Harrisonburg,
Virginia on which it will build a fifth branch office, which is scheduled to
open in the spring of 1997. The investment in land, building and equipment for
such branch office is expected to be approximately $750,000. Investments in
fixed assets reduce Guaranty's ratio of interest earning assets to interest
bearing liabilities, which adversely affects net interest income. If Guaranty's
new branch offices do not generate significant amounts of new deposits and
loans, Guaranty's profitability will be adversely affected.
To date, no employees have been hired to staff the Harrisonburg office.
Harrisonburg is a highly competitive banking area with average bank deposits per
branch similar to the Charlottesville market. No assurances can be given that
Guaranty will be able to compete effectively in the Harrisonburg, Virginia
market with only one branch office location.
It is the intention of Guaranty's management to expand Guaranty's asset
base. In particular, Guaranty hopes to utilize the capital raised in the
Offering to increase its retail deposit base in Charlottesville and Albemarle
County, Virginia and begin operations in Harrisonburg, Virginia. Additional
capital also would increase Guaranty's legal lending limit under federal law,
which in turn would allow Guaranty to diversify its loan mix by competing more
actively in its market area for commercial real estate, business and consumer
loans, which carry higher interest rates than residential mortgage loans.
Management is expanding Guaranty's commercial and consumer loan origination
activities. See "Guaranty Financial Corporation." Guaranty's ability to manage
growth successfully will depend on its ability to maintain cost controls and
asset quality while attracting sufficient loans and deposits, as well as on
factors beyond Guaranty's control, such as economic conditions and interest rate
-7-
trends. If Guaranty grows too quickly and is not able to control costs and
maintain asset quality, Guaranty's growth could materially adversely affect its
financial performance.
Dependence on Borrowings
At September 30, 1996, Guaranty's total loans were 109.5% of its
deposits, with the difference between total loans and total deposits funded by
advances from the FHLB of Atlanta and other short term borrowings. Reliance on
short term borrowings can adversely affect an institution's ability to manage
its interest rate risk and limits its ability to respond to new loan demand.
Although the Bank will remain a member of the FHLB of Atlanta, Guaranty intends
to reduce its reliance on borrowings and its ratio of loans-to-deposits by
replacing FHLB advances from anticipated deposit growth at new and existing
offices..
Impact of Fluctuations in Interest Rates
Guaranty's results of operations are highly influenced by the level of
interest rates, changes in interest rates and other economic conditions that are
beyond the control of Guaranty, including monetary and fiscal policies of the
federal government. Guaranty is in a liability-sensitive interest rate position
in which rising interest rates are likely to adversely affect earnings because
Guaranty's liabilities will reprice faster than its assets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Sensitivity." Increases in interest rates adversely affect Guaranty by
reducing the demand for loans, while decreases in interest rates generally
stimulate mortgage lending. Interest rate increases above the interest rate caps
on Guaranty's adjustable rate loans would restrict interest income. Economic
conditions in the real estate market influence both the demand for loans and the
frequency of delinquencies and losses incurred on the sale of foreclosed real
estate.
Potential Consequences of Undersubscribed Offering
The Underwriter is selling the Shares on a best efforts basis, which
means that it may sell all, none or only some of the Shares. As there is no
minimum number of Shares which must be sold, a closing could occur even if only
a small number of Shares is sold and it is possible that expenses of the
Offering will exceed proceeds. See "Underwriting." In such event, Guaranty may
be required to pursue other methods of raising capital, including the sale of
preferred stock.
Possible Fluctuations in Stock Price
Factors such as quarterly or cyclical variations in Guaranty's
financial results, future developments concerning Guaranty or its competitors,
and developments affecting the thrift and banking industry generally, could
cause the market price of the Common Stock to fluctuate substantially.
Geographic Concentration of Loan Portfolio
The majority of Guaranty's loans are made to borrowers within
Charlottesville and Albemarle County, and adjacent areas. Accordingly,
significant deterioration in the economic condition of Charlottesville,
Albemarle County or the surrounding areas could significantly adversely affect
repayment of the loans held by Guaranty.
Competition
Guaranty's full-service retail facilities primarily serve the City of
Charlottesville and Albemarle County, Virginia. See "Business - Market Area."
Guaranty operates in a highly competitive environment in Charlottesville and
Albemarle County, competing for deposits and loans with commercial banks and
other financial institutions, including four statewide and two regional
commercial banks that possess substantially greater financial resources than
Guaranty. These institutions have significantly higher lending limits than
-8-
Guaranty and provide various services for their customers, such as trust
services, which Guaranty does not offer. In addition, there can be no assurance
that additional financial institutions with substantially greater resources than
Guaranty will not establish operations in Guaranty's service area. See "Business
- - Competition."
Governmental Regulation
Institutions such as Guaranty are subject to extensive supervision and
regulation by the OTS and the FDIC. This supervision and regulation establishes
a comprehensive framework of activities in which an institution may engage, and
are intended primarily for the protection of the SAIF and depositors. This
regulatory structure also provides the OTS and the FDIC with significant
discretion in connection with their supervisory and enforcement activities. Any
change in such regulation, whether by the OTS or the FDIC, or any new
legislation enacted by the United States Congress, could adversely affect the
thrift industry generally and the operations of Guaranty in particular. See
"Business - Supervision and Regulation."
Influence by Certain Existing Shareholders
As of the date of this Prospectus, Guaranty's directors and executive
officers own approximately 40.07% of Guaranty's outstanding Common Stock. See
"Management - Security Ownership of Management." As a result, Guaranty's
directors and executive officers, if acting together, are able to influence
significantly all matters requiring approval by the shareholders of Guaranty,
including the election of directors and, accordingly, the future course of
Guaranty. Guaranty, however, has neither solicited nor received any commitments
from its directors and executive officers to purchase shares of Common Stock in
the Offering. While it expects its directors and executive officers will
purchase such shares in the Offering, Guaranty is not aware of the number of
shares that the directors and executive officers will purchase, but anticipates
that the percentage of ownership by Management will decrease immediately
following the completion of the Offering.
USE OF PROCEEDS
If the 500,000 shares of the Common Stock described in this Prospectus
and the 75,000 additional shares for which Guaranty reserves the right to offer
are purchased, the total proceeds to Guaranty are estimated to be approximately
$4.5 million. Guaranty will invest the net proceeds from the sale of such Common
Stock in the Bank to provide additional capital, and for general banking
purposes, including loans and investments. Additional capital will enhance the
Bank's ability to grow and attract more loans and deposits. As its additional
branch offices open, Guaranty anticipates substantial growth and, although
current capital is within current federal regulatory guidelines, additional
capital is required for the Bank to support anticipated growth. Although
Guaranty would conduct the Offering to support its anticipated growth even if it
were not seeking to convert the Bank from a federal savings association to a
commercial bank, it expects that the applications that it has filed for the
conversion, if approved, will be conditioned on the sale of substantially all of
the shares offered hereby.
-9-
CAPITALIZATION
The following table sets forth the capitalization of Guaranty at
September 30, 1996. This table should be read in conjunction with the financial
statements and related notes thereto included in this Prospectus.
Stockholder's equity: September 30, 1996
------------------
Common Stock, $1.25 par value, 4,000,000
shares authorized, 919,168 shares issued
and outstanding............................. $1,148,960
Preferred Stock, $1.00, par value, 500,000
shares authorized, none issued or
outstanding................................. -0-
Capital surplus................................ 1,981,745
Unrealized loss on available for sale (258,650)
securities..................................
Retained earnings.............................. 3,464,654
---------
Total stockholders' equity..................... $6,336,709
==========
MARKET PRICE AND DIVIDEND DATA
Prior to June 29, 1995, there was no established public trading market
for the Common Stock. Before then, the Common Stock sporadically traded in a
limited number of privately negotiated transactions. The Common Stock was listed
on the Nasdaq SmallCap Market, effective June 29, 1995. See "Risk Factors." At
December 11, 1996, there were 919,168 shares of Common Stock outstanding held by
614 holders of record.
The following table lists the high and low sale prices for the Common
Stock for the periods indicated. Prices have been adjusted to reflect the two
for one stock split paid in January 1996.
High Low
July 1, 1995 - Sept. 30, 1995............... $7.38 $6.38
Oct. 1, 1995 - Dec. 31, 1995................ 7.25 7.13
Jan. 1, 1996 - March 31, 1996............... 8.50 7.25
April 1, 1996 - June 30, 1996............... 8.50 7.50
July 1, 1996 - Sept. 30, 1996............... 9.00 7.25
Oct. 1, 1996 - Dec. 17, 1996................ 9.50 8.25
Guaranty paid semi-annual cash dividends on its Common Stock of $.05
per share in June and December 1996. The June 1996 dividend was the first
dividend paid since July 1993, when Guaranty paid a dividend of $.25 per share
on its Common Stock.
At December 17, 1996, the bid and asked prices for the Common Stock
were $8.25 and $8.75, respectively, and the last sale price was $8.75. See
"Business - Supervision and Regulation - Restrictions on Capital Distributions."
-10-
GUARANTY FINANCIAL CORPORATION
Guaranty is the holding company for Guaranty Savings and Loan, F.A.
(the "Bank"), a federally chartered savings association which began business in
February 1981 and is headquartered in Charlottesville, Virginia. Guaranty opened
additional branches in 1983 and 1985 in Charlottesville and Albemarle County,
Virginia. At June 30, 1996, after 15 years of operation, Guaranty had grown to
assets of $110.2 million, deposits of $74.7 million and stockholders' equity of
$6.35 million, or 5.76% of total assets. A new corporate headquarters in the
Pantops area, east of Charlottesville, which contains the operations area and a
fourth branch office opened in December 1996, and a fifth branch in
Harrisonburg, Virginia is expected to open in the spring of 1997.
Management intends to convert the Bank from a federal savings
association to a Virginia chartered, Federal Reserve member, bank. Applications
for a charter conversion have been filed with the appropriate state and federal
bank regulatory agencies. The Bank has recently begun to offer consumer loans
and government-insured and conventional small business loans. The Bank has also
recently hired experienced commercial and consumer loan officers.
In the year ended June 30, 1996, Guaranty had a 71.0% increase in net
income. Earnings per share on 69.4% more average shares outstanding in fiscal
1996 than fiscal 1995 remained constant at $.70 per share. The return on average
assets and average equity increased from .41% to .64% and from 9.67% to 10.24%
from 1995 to 1996. Core deposits increased by 42.4%; assets by 23.0% and loan
originations by 9.19% from June 30, 1995 to June 30, 1996. At June 30, 1996
total assets were $110.2 million and tangible stockholders' equity was $6.35
million, or $6.91 per share. Net income for the year ended June 30, 1996 was
$643,000.
Guaranty's net income in the year ended June 30, 1995 was $376,000 and
Guaranty experienced a loss of $480,000 in the year ended June 30, 1994. Results
of operations in fiscal 1995 and 1994 were adversely affected by a low level of
capital, which effectively precluded asset growth, and by significant amounts of
interest expense incurred as certain mortgage-backed bonds, issued in 1987, were
prepaid. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Interest Income, Interest Expense and Net Interest
Income."
In September 1996, Federal legislation was enacted to recapitalize the
Savings Association Insurance Fund ("SAIF"), of which the Bank is a member. All
depository institutions with SAIF-insured deposits paid a special assessment to
the SAIF and, beginning in the first calendar quarter of 1997, quarterly
insurance assessments on SAIF-insured deposits will be substantially reduced.
The Bank has experienced significant growth in core deposits since March 31,
1995, which is the base date for the calculation of the one-time special
assessment. As such, the Bank's assessment was a one-time charge against
earnings of $347,000 pre-tax, $225,000 after taxes, in the quarter ended
September 30, 1996. Without the special one-time assessment, Guaranty would have
earned $192,000 or $.21 per share for the quarter ended September 30, 1996, a
24.3% increase from the comparable quarter last year. Assets at September 30,
1996 were $115.2 million, a 21.1% increase over the prior year. The net interest
margin increased to 2.66% for the quarter ended September 30, 1996, up from
2.56% in the comparable quarter of the prior year. The FDIC deposit insurance
premium on SAIF insured deposits will be reduced from the prior annual rate of
$2.60 per $1,000 of deposits to a new estimated annual rate of $.64 per $1,000
of deposits in calendar 1997. Based on deposits of $78.656 million at September
30, 1996, this reduction would decrease insurance costs and increase annual
income by approximately $154,000 pre-tax and $108,000 after taxes. With
Guaranty's significant growth in deposits in fiscal 1996 and in anticipation of
further deposit growth from two additional branch offices opened in December and
scheduled to open in the spring of 1997, management believes future reductions
in deposit insurance assessments will offset the one-time special assessment in
less than three years.
Guaranty is the only independent community bank or savings and loan
association headquartered in, or even with an office in, Charlottesville or
Albemarle County, Virginia. This area had a collective population of
approximately 108,000 in 1990 according to census figures, is located in central
Virginia 110 miles southwest of
-11-
Washington, D.C. and 70 miles west of Richmond, Virginia, and includes the
University of Virginia, the area's largest employer. Guaranty operates three
full service retail branches, which serve Charlottesville and Albemarle County.
Historically, Guaranty's principal business activities have been
attracting checking and savings deposits from the general public through its
retail banking offices and originating, servicing, investing in and selling
loans secured by first mortgage liens on single-family dwellings, including
condominium units. Of Guaranty's $88.0 million of gross loans outstanding at
June 30, 1996, 80% represented residential first mortgages and 66.1% of gross
loans had adjustable interest rates.
In 1996, Guaranty began to originate commercial loans to small
businesses and has placed additional emphasis on consumer lending. Guaranty also
lends funds to retail banking customers by means of home equity and installment
loans, and originates loans secured by commercial properly and multi-family
dwellings. Guaranty invests in certain United States government and agency
obligations and other investments as permitted by applicable laws and
regulations.
Until December 1996, Guaranty's operations center was located at its
Seminole Trail branch, which opened in 1983. Guaranty completed and opened a
combined branch office and operations center in December 1996. The new facility
is located on the east side of Charlottesville in the Pantops area of Albemarle
County. The new facility contains 20,000 sq. ft., of which Guaranty occupies
15,500 sq. ft., with the remainder to be leased. In addition, Guaranty has
acquired land in Harrisonburg, Virginia to construct a fifth retail branch. It
is anticipated that the branch will open in the spring of 1997. Guaranty would
continue to operate its three current branches, including the Seminole Trail
branch. See "Risk Factors - New Fixed Assets."
Guaranty's deposit accounts of up to $100,000 are insured by the
Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC"). Guaranty is a member of the Federal Home Loan
Bank ("FHLB") of Atlanta. Guaranty is subject to the supervision, regulation and
examination of the Office of Thrift Supervision ("OTS") and the FDIC. See
"Business - Supervision and Regulation."
The directors of Guaranty have agreed with the Underwriter to a
standard requirement not to sell or otherwise dispose of any shares of Common
Stock for a period of 120 days after the commencement of the Offerings without
the prior written consent of the Underwriter. It is anticipated that the
Underwriter will not give its consent to any sales or dispositions during this
period that, in its opinion, may have an adverse effect on the market price of
the Common Stock. After the expiration of the 120 day period, sales of Common
Stock by those individuals may have an adverse effect on the market price.
Officers of Guaranty who are not directors have not entered into any agreements
restricting sales of their Common Stock in Guaranty. See "Underwriting."
Guaranty's main offices are located at 1658 State Farm Boulevard,
Charlottesville, Virginia 22911 and its telephone number is (804) 970-1100.
-12-
SELECTED FINANCIAL DATA
The year-end income statement data, the year-end balance sheet data,
and the year-end per share data regarding net income contained in the following
financial data for the five years ended June 30, 1996 are derived from the
financial statements of Guaranty. The financial statements for the fiscal years
ended June 30, 1996, 1995 and 1994 were audited by BDO Seidman, LLP, certified
public accountants. The financial data for the three months ended September 30,
1996 and 1995 are derived from unaudited Guaranty's financial statements, which
reflect in the opinion of management all adjustments, consisting only of normal
recurring expenditures, necessary for a fair presentation of the results of such
periods, adjusted as described in the notes below. The results for the three
month periods ended September 30, 1996 and 1995 are not necessarily indicative
of results for the full year or any future period. The selected financial
information should be read in conjunction with the audited financial statements
of Guaranty included elsewhere in this Prospectus.
Three Months Ended
September 30, Year Ended June 30,
------------------- ---------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(In thousands, except ratios, per share data and shares outstanding)
Income Statement Data:
Interest Income................................... $ 2,159 $1,815 $ 7,617 $ 6,788 $ 6,684 $ 7,717 $ 8,771
Interest Expense.................................. 1,443 1,245 5,192 4,662 5,073 5,094 6,358
Net interest income............................... 716 570 2,425 2,126 1,611 2,623 2,413
Provision (credit) for loan losses................ 46 (4) 57 (9) 74 37 0
Noninterest income................................ 274 260 1,107 872 126 828 663
Noninterest expense (1)........................... 995 596 2,487 2,530 2,182 1,958 1,939
Net income (loss) (1)............................. (33) 155 $ 643 $ 376 $ (480) $ 973 $ 780
======= ====== ======== ======== ======== ========= ========
Per Share Data:
Net Income (loss) (1)............................. $(0.04) $ 0.17 $ .70 $ .70 $ (0.90) $ 1.81 $ 1.45
Cash dividends.................................... - - 0.05 0.00 0.00 0.25 0.00
Dividend payout ratio (2)......................... - - 0.07 - - 0.14 -
Book value at period end.......................... 6.89 6.91 6.91 6.57 6.57 7.47 5.90
Tangible book value at period end................. 6.89 6.91 6.91 6.57 6.57 7.47 5.90
Balance Sheet Data:
Total assets...................................... $115,229 $95,114 $110,161 $ 89,461 $ 88,256 $ 92,832 $ 96,048
Loans, net........................................ 86,132 79,088 84,081 75,221 77,755 70,195 74,035
Securities........................................ 16,305 7,789 14,655 6,096 7,217 18,004 19,049
Deposits.......................................... 78,656 56,076 74,687 52,461 53,467 50,020 54,878
FHLB advances and other borrowings................ 25,420 26,925 23,604 25,050 23,950 25,750 24,025
Stockholders' equity.............................. 6,337 6,164 6,349 6,016 3,531 4,011 3,173
Shares outstanding................................ 919,168 915,568 919,168 915,568 537,168 537,168 537,168
Average shares outstanding........................ 919,168 915,568 917,668 541,768 537,168 537,168 537,168
Performance Ratios:
Return on average assets.......................... -0.03% 0.17% 0.64% 0.41% (0.49)% 1.00% .79%
Return on average equity.......................... (0.59) 2.62 10.24 9.67 (12.00) 26.31 27.97
Net interest margin (3)........................... 2.66 2.56 2.54 2.38 1.68 2.82 2.56
Asset Quality Ratios:
Allowance for loan losses to period end loans..... 0.96% 0.93% 0.94% 0.98% 0.96% 1.05% 0.91%
Allowance for loan losses to nonaccrual loans..... 54.09 43.97 54.05 48.01 85.01 79.87 134.31
Nonperforming assets to period end loans and foreclosed
properties (4)................................. 1.84 2.25 1.72 2.21 1.87 2.91 2.20
Net charge-offs (recoveries) to average loans..... 0.00 0.02 0.02 0.00 0.09 (0.03) 0.03
Capital and Liquidity Ratios:
Leverage.......................................... 5.83% 6.62% 6.01% 6.72% 4.00% 4.32% 3.30%
Risk based
Tier 1 capital................................. 11.64 12.75 12.13 13.31 7.76 9.05 7.28
Total capital.................................. 12.84 14.10 13.28 14.56 9.01 10.31 8.56
Tangible capital............................... 5.83 6.62 6.01 6.72 4.00 4.32 3.30
Average loans to average deposits................. 121.95 140.96 129.00 144.01 146.48 137.41 119.21
Average equity to average assets.................. 5.57 6.48 6.24 4.22 4.07 3.80 2.89
- ------------------------
<FN>
(1) The one-time SAIF assessment in the September 30, 1996 quarter
increased non-interest expenses by $347,000 and reduced net income by
$225,000 and earnings per share by $.25 per share. Excluding the SAIF
assessment, net income and earnings per share would have been $192,000
and $.21, respectively, for the September 30, 1996 quarter, compared
with net income of $155,000 and earnings per share of $.17 for the
September 30, 1995 quarter, increases of 24.3% and 23.5%, respectively.
(2) Guaranty paid a semi-annual cash dividend on its Common Stock of $.05
per share in June 1996, which was the first dividend paid since July
1993, when Guaranty paid a dividend of $.25 per share on its Common
Stock. Guaranty anticipates paying dividends on a semi-annual basis in
the future.
(3) Net interest income dividend by total average earnings assets.
(4) Nonperforming assets consist of nonaccrual loans, restructured loans,
and foreclosed properties. As of September 30, 1996, Guaranty had
total nonperforming assets of $1.67 million. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Loan Portfolio."
</FN>
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary discusses major components of Guaranty's
business and presents an overview of its consolidated results of operations
during the three months ended September 30, 1996 and 1995 and the fiscal years
ended June 30, 1996, 1995 and 1994, and its consolidated financial position at
such dates. This discussion should be reviewed in conjunction with the
consolidated financial statements and accompanying notes and other statistical
information presented elsewhere in this Prospectus.
Guaranty is not aware of any current recommendations by regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between Guaranty and either the OTS or the FDIC, nor has either regulatory
agency made any recommendations concerning the operations of Guaranty that could
have a material effect on its liquidity, capital resources or results of
operations.
Overview
Guaranty's performance in its fiscal year ended June 30, 1996 showed
improvement over the year ended June 30, 1995. Net income increased 71.0% in
fiscal 1996 to $643,000 compared to $376,000 in fiscal 1995. After a 69.4%
increase in average shares outstanding, following a 360,000 share public
offering completed on June 22, 1995, earnings per share were constant at $.70.
Excluding a one-time special assessment on SAIF members by the FDIC, Guaranty's
net income increased 23.9% to $192,000 for the quarter ended September 30, 1996
compared to $155,000 in the comparable prior year quarter. Due to this one-time
special assessment, Guaranty sustained a loss of $33,000 for the quarter ended
September 30, 1996. Excluding the assessment, earnings per share increased
23.5%, from $.17 in the September 30, 1995 quarter to $.21 in the September 30,
1996 quarter. Loan volume growth accelerated in the September 30, 1996 quarter,
although securities growth continued to outpace loan growth as an investment
outlet for continued strong deposit growth. The increase in net income for
fiscal 1996 reflected an increase in net interest income and non-interest
income, coupled with a decrease in non-interest expense. Net interest income
increased as a result of growth in average deposits, supporting an increase in
securities and a reduction in FHLB advances, a reduction in the rates paid on
FHLB advances and an increase in the average yields on average loans. Growth in
average loans did not keep pace with deposit or investment securities growth.
Non-interest income increased primarily from an increase in gains on the sale of
loans and securities while noninterest expenses declined, primarily from the
closing of two mortgage origination offices in Staunton and Richmond which were
not profitable. The FDIC deposit insurance premium on SAIF insured deposits will
be reduced from the prior annual rate of $2.60 per $1,000 of deposits to a new
estimated annual rate of $.64 per $1,000 of deposits in calendar 1997. Based on
deposits of $78.656 million at September 30, 1996, this reduction would decrease
deposit insurance costs and increase annual income by approximately $154,000
pre-tax and $108,000 after taxes. With Guaranty's significant growth in deposits
in fiscal 1996 and in anticipation of further deposit growth from two additional
branch offices opened in December and scheduled to open in the spring of 1997,
management believes future reductions in deposit insurance assessments will
offset the one-time special assessment in less than three years.
Return on average equity during fiscal 1996 increased to 10.24% from
9.67% for fiscal 1995. The return on average assets was 0.64% in fiscal 1996,
compared to 0.41% in fiscal 1995. Fiscal 1996 marked the first year since 1989
that Guaranty's average earning assets have increased meaningfully over the
prior fiscal year. From 1989 through fiscal 1995, due to capital constraints,
management was forced to downsize the Bank. In fiscal 1992 and 1993 under
declining interest rates, spreads widened and gains on loan sales increased,
although interest earning assets declined. In fiscal years 1994 and 1995 first
increases then decreases in the amortization of the discount associated with
Guaranty's REMIC bonds produced losses in 1994 and improvements in 1995 although
interest earning assets continued to decline or remained flat.
Average interest earning assets increased 6.9% from $89.42 million in
fiscal 1995 to $95.57 million in fiscal 1996. Total interest bearing deposits on
average increased 13.8% from $54.43 million in fiscal 1995 to $61.93 million in
-14-
fiscal 1996. Average balances of securities increased 40.2% while, on average,
loans were relatively flat, up only 2.0% from fiscal 1995 to fiscal 1996.
The net interest margin benefited from an increase in the average level
of interest earning assets and from a greater increase in the yield on interest
earning assets than the increase in the average rates paid on interest bearing
liabilities. The significant growth in interest bearing deposits coupled with a
decline in the amount and rate paid on FHLB advances and an increase in the
amount of interest earning assets, particularly securities, and an increase in
the average yields earned on loans, produced the improvement in net interest
margin. In fiscal 1996, the net interest margin was 2.54%, up from 2.38% in
fiscal 1995 and 1.68% in fiscal 1994.
Net Interest Income
Net interest income is the major component of Guaranty's earnings and
is equal to the amount by which interest income exceeds interest expense.
Earning assets consist primarily of loans and securities, while deposits and
borrowings represent the major portion of interest bearing liabilities. Changes
in the volume and mix of assets and liabilities, as well as changes in the
yields and rates paid, determine changes in net interest income. The net
interest margin is calculated by dividing net interest income by average earning
assets and represents Guaranty's net interest margin.
Net interest income was $716,000 in the quarter ended September 30,
1996, 25.6% greater than the $570,000 reported during the September 30, 1995
quarter. This improvement in net interest income was primarily due to volume
increases in the securities and loan portfolios and to a greater decline in the
average cost of interest bearing liabilities than the decline in the average
yield of interest earning assets. Although average loans increased 13.0% from
the September 30, 1995 quarter to the September 30, 1996 quarter, average loan
volume did not keep pace with securities volume increases. The average balance
of the securities portfolio was $16.252 million in the September 30, 1996
quarter, up $7.058 million, or 76.8% over the September 30, 1995 quarter. The
average balance of the loan portfolio was $86.373 million, up $9.934 million, or
13.0% over the September 30, 1995 quarter. Although market interest rates
declined in the September 30, 1996 quarter from the September 30, 1995 quarter,
the yield on average loans decreased only 6 basis points from 8.12% in 1995 to
8.06% in 1996, while the yield on securities declined 24 basis points from 8.14%
in 1995 to 7.90% in 1996. Also contributing to the improvement in net interest
income in the September 30, 1996 quarter was a decline of 46 basis points on the
cost of average total interest bearing liabilities from 5.91% in the September
30, 1995 quarter to 5.45% in the September 30, 1996 quarter. Almost all of this
decline was concentrated in the cost of FHLB advances and other borrowings,
which declined 86 basis points from 6.40% in 1995 to 5.54% in 1996, although the
average balances of such advances and borrowings were flat. All of the increase
in interest bearing liabilities, up $21.540 million, or 25.6%, was accounted for
by the increase in interest bearing deposits, particularly certificates of
deposit, which increased $22.045 million, or 55.0% on average. The average rate
paid on interest bearing deposits increased 4 basis points, from 5.05% to 5.09%,
although the average rate paid on certificates of deposit declined 22 basis
points from 5.80% to 5.58%. The increase in net interest margin was achieved
from both volume gains and widening spreads. The gains in average deposit
volumes, particularly certificates of deposit, supported an increase in
investment securities and loans while yields on interest earning assets declined
less than the average rates paid on interest bearing liabilities. The yields on
loans fell significantly less than the cost of funds while the yield on
securities also fell less than the cost of funds. The net interest margin
increased in the September 30, 1996 quarter to 2.66%, compared to 2.56% in the
September 30, 1995 quarter.
Net interest income was $2.425 million in fiscal 1996 14.1% greater
than the $2.126 million reported during fiscal 1995. This improvement in net
interest income was primarily due to volume increases in the securities
portfolio and to higher average yields on the loan portfolio. Although loans
receivable increased 11.78% from June 30, 1995 to June 30, 1996, average loan
volume did not keep pace with average securities volume increases. The average
balance of the securities portfolio was $10.523 million in fiscal 1996, up
$3.017 million, or 40.2% over fiscal 1995. The average balance of the loan
portfolio was $79.885 million in fiscal 1996, up $1.503 million, or 2.0% over
fiscal 1995. Although market interest rates declined in the last half of
calendar 1995 and first half of calendar 1996, the yield on average loans
increased
-15-
54 basis points from 7.52% in fiscal 1995 to 8.06% in fiscal 1996, while the
yield on securities declined 12 basis points to 7.79% in fiscal 1996 from 7.91%
in fiscal 1995. Also contributing to the improvement in net interest income in
fiscal 1996 was a decline in the average amount of FHLB advances and borrowings
of $1.218 million, or 4.5%, to $25.773 million in fiscal 1996, from $26.991
million in fiscal 1995, and a decline in the average rates paid on such
borrowings of 22 basis points from 6.25% in fiscal 1995 to 6.03% in fiscal 1996.
A $9.522 million, or 24.5% increase in the average balances of certificates of
deposits from $38.938 million in fiscal 1995 to $48.460 million in fiscal 1996,
more than offset a slight decline in other deposit accounts and enabled Guaranty
to reduce FHLB advances and increase balances of investment securities. The
average rate paid on interest bearing deposits increased 58 basis points to
5.06% in fiscal 1996 from 4.48% in fiscal 1995 but, with the decline in volume
and rates on FHLB advances, the average rates paid on all interest bearing
liabilities increased only 25 basis points to 5.69% in fiscal 1996 from 5.44% in
fiscal 1995. The increase in net interest margin was achieved both from volume
gains and widening spreads. The gains in average deposit volumes supported a
reduction in FHLB borrowings and an increase in investment securities while
yields on interest earning assets increased more than the average rates paid on
interest bearing liabilities. The yields on loans increased in line with the
increase in rates paid on deposits while yields on securities fell significantly
less than the decline in rates paid on FHLB advances. The net interest margin
increased in fiscal 1996 to 2.54%, compared to 2.38% in fiscal 1995.
Net interest income was $2.126 million in fiscal 1995, 32.0% greater
than the $1.611 million in fiscal 1994. The improvement in net interest income
was primarily due to a significant reduction of the amortization discount from
REMIC bonds under rising interest rates in the first half of fiscal 1995 and
slowly declining interest rates in the second half of fiscal 1995 compared with
falling interest rates in fiscal 1994 which precipitated sharply higher
repayments of REMIC bonds and faster amortization of the discount. Such bonds
were issued in 1987 and were sold at an original issue discount of $3.3 million,
which is amortized against income as mortgages that collateralize the bonds
prepay. In fiscal year 1994 under rapidly falling interest rates, Guaranty had
significant prepayments of mortgages which increased the amortization of the
discount. The average balance of interest earning assets declined 6.7% in fiscal
1995 to $89.419 million as management, due to lack of capital, was forced to
continue to downsize or restrain growth. Securities, on average, were reduced
64.1% to $7.506 million in fiscal 1995 from $20.936 million in fiscal 1994,
while loan volume on average increased 6.7% to $78.382 million in fiscal 1995.
The average yield on interest earning assets increased 62 basis points to 7.59%
in fiscal 1995, up from 6.97% in fiscal 1994. Although interest rates were
generally higher in fiscal 1995 than fiscal 1994 the rate paid on interest
bearing liabilities declined 17 basis points from 5.61% in fiscal 1994 to 5.44%
in fiscal 1995 which was entirely due to the reduction in the REMIC bonds
discount. Rates paid on the REMIC bonds payable declined 997 basis points from
22.48% in fiscal 1994 to 12.51% in fiscal 1995 and the average balance of such
bonds declined $2.557 million, or 37.4%, from $6.832 million in fiscal 1994 to
$4.275 million in fiscal 1995. The reduction in the REMIC bonds on average of
$2.557 million and an increase in interest bearing deposits on average of $4.323
million permitted management to reduce more costly FHLB advances on average
$6.566 million in fiscal 1995 from fiscal 1994. The net interest margin,
benefited from the 17 basis point decline in the cost of interest bearing
liabilities, due to reduction of amortization and interest on the REMIC bonds,
and the 62 basis point increase on average yields on interest earning assets
under rising interest rates. The net interest margin increased to 2.38% in
fiscal 1995 compared to 1.68% in fiscal 1994.
-16-
Net interest income in fiscal 1994 compared to fiscal 1993 decreased
$1.012 million, or 38.9%, to $1.611 million. This decrease in net interest
income was due primarily to an increase in pre-payments of mortgages underlying
REMIC bonds as refinancings increased under falling interest rates and
Guaranty's amortization of the REMIC bond discount was accelerated. Also
contributing to the decline in net interest income was an increase in the amount
of and average rates paid on FHLB advances and borrowings. With interest rates
falling, the yield on average earning assets declined 116 basis points in fiscal
1994 to 6.97%, including a decline of 134 basis points on securities and 118
basis points on loans. The volume of interest earning assets was relatively
unchanged from fiscal 1993. With the smaller increase in REMIC mortgage
pre-payments and the acceleration of the bond discount, management relied on
FHLB advances to maintain earning asset levels. The average rates paid on FHLB
advances increased 9 basis points to 4.77% in fiscal 1994 from fiscal 1993 and
the amortization and rates paid on REMIC bonds increased 845 basis points to
22.48% although the average balance of REMIC bonds declined $3.846 million, or
36.0%, to $6.832 in fiscal 1994 from fiscal 1993. With the significantly greater
decline in yields on earning assets compared with rates paid on interest bearing
liabilities, declining 116 basis points compared with 6 basis points, the spread
narrowed and the net interest margin declined from 2.82% in 1993 to 1.68% in
1994.
-17-
The following table sets forth average balances of total interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the average distribution of assets, liabilities, stockholders' equity
and the related income, expense, and corresponding weighted average yields and
costs.
Average Balances, Interest Income and Expenses, and Average Yields and Rates
Three Months Ended
September 30, Year Ended June 30,
----------------------------- ------------------------------
1996 1996
----------------------------- ----------------------------
Interest Interest
Average income/ Average Average income/ Average
balance(1) expense yield/rate balance(1) expense yield/rate
---------- ------- ---------- ---------- ------- ----------
(Dollars in thousands)
Assets
Interest earning assets:
Securities................... $16,252 321 7.90% $10,523 $ 820 7.79%
Loans(3)..................... 86,373 1,740 8.06% 79,885 6,442 8.06%
Interest bearing deposits in
other banks.................. 4,981 98 7.83% 5,163 355 6.88%
----- -- ----- ---
Total interest-earning assets 107,606 2,159 8.02% 95,571 7,617 7.97%
Noninterest earning assets:
Cash and due from banks...... 1,153 2,011
Purchased mortgage servicing. 876 802
Premises and equipment....... 3,702 1,427
Other assets................. 1,100 1,575
Less: Allowance for loan losses (805) (756)
---- -----
Total noninterest earning
assets..................... 5,059
-----
Total Assets............. $113,632 $100,630
======== ========
Liabilities and stockholders equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts....... $9,114 59 2.60% $8,927 $ 245 2.74%
Savings.................... 4,906 42 3.40% 4,541 152 3.35%
Certificates of deposit.... 62,117 867 5.58% 48,460 2,735 5.64%
------ --- ------ -----
Total interest bearing
deposits................. 76,137 968 5.09% 61,928 3,132 5.06%
FHLB advances and other
borrowings................... 26,550 368 5.54% 25,773 1,553 6.03%
Bonds payable................ 3,135 106 13.56% 3,520 507 14.40%
----- --- ----- ---
Total interest bearing
liabilities................ 105,822 1,443 5.45% 91,221 5,192 5.69%
Non interest bearing liabilities:
Demand deposits.............. 745 1,066
Other liabilities............ 740 2,062
----- -----
Total liabilities.......... 107,307 94,349
Stockholders equity............ 6,325 6,281
Total liabilities and
stockholders equity.... $113,632 $100,630
======== ========
Interest spread (4)............ 2.57% 2.28%
Net interest income/net
interest margin (5)............ $716 2.66% $2,425 2.54%
==== ======
- --------------------
<FN>
(1) Average balances are computed on monthly balances, and Management believes
such balances are representative of the operations of Guaranty.
(2) Loans Receivable are shown gross of allowance for loan losses, net of
deferred fees.
(3) Non-Accrual Loans are included in the average loan balances, and income
on such loans is recognized on a cash basis.
(4) Interest spread is the average yield earned on earning assets, less
the average rate incurred on interest bearing liabilities.
(5) Net interest margin is net interest income, expressed as a percentage
of average earning assets.
</FN>
Year Ended June 30,
-----------------------------------------------------------
1995 1994
--------------------------- ------------------------------
Interest Interest
Average income/ Average Average income/ Average
balance(1) expense yield/ balance(1) expense yield/rate
---------- -------- ------- ---------- ------- ----------
(Dollars in thousands)
Assets
Interest earning assets:
Securities................... $ 7,506 $ 594 7.91% $20,396 $1,136 6.45%
Loans(3)..................... 78,382 5,897 7.52% 73,395 5,254 7.16%
Interest bearing deposits in
other banks.................. 3,531 298 8.44% 2,056 114 5.54%
----- --- ----- ---
Total interest-earning assets 89,419 6,789 7.59% 95,847 6,684 6.97%
Noninterest earning assets:
Cash and due from banks...... 1,290 1,131
Purchased mortgage servicing. 790 692
Premises and equipment....... 415 393
Other assets................. 1,086 984
Less: Allowance for loan losses (749) (769)
----- -----
Total noninterest earning
assets..................... 2,832 2,431
----- -----
Total Assets............. $92,251 $98,278
======= =======
Liabilities and stockholders equi
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts....... $ 9,895 $ 280 2.83% $11,909 $ 331 2.78%
Savings.................... 5,596 193 3.45% 6,670 217 3.25%
Certificates of deposit.... 38,938 1,967 5.05% 31,527 1,391 4.41%
------ ----- ------ -----
Total interest bearing
deposits................. 54,429 2,440 4.48% 50,106 1,939 3.87%
FHLB advances and other
borrowings................... 26,991 1,688 6.25% 33,467 1,598 4.77%
Bonds payable................ 4,275 535 12.51% 6,832 1,536 22.48%
----- --- ----- -----
Total interest bearing
liabilities................ 85,695 4,663 5.44% 90,405 5,073 5.61%
Non interest bearing liabilities:
Demand deposits.............. 787 499
Other liabilities............ 1,880 3,376
----- -----
Total liabilities.......... 88,362 94,280
Stockholders equity............ 3,889 3,998
Total liabilities and
stockholders equity.... $92,251 $98,278
======= =======
Interest spread (4)............ 2.15% 1.36%
Net interest income/net
interest margin (5)............ $2,126 2.38% $1,611 1.68%
====== ======
- --------------------
<FN>
(1) Average balances are computed on monthly balances, and Management believes
such balances are representative of the operations of Guaranty.
(2) Loans Receivable are shown gross of allowance for loan losses, net of
deferred fees.
(3) Non-Accrual Loans are included in the average loan balances, and income
on such loans is recognized on a cash basis.
(4) Interest spread is the average yield earned on earning assets, less
the average rate incurred on interest bearing liabilities.
(5) Net interest margin is net interest income, expressed as a percentage
of average earning assets.
</FN>
-18-
The following table describes the impact on Guaranty's interest income
resulting from changes in average balances and average rates for the periods
indicated. The change in interest due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
Volume and Rate Analysis
Three Months Ended
September 30, Years Ended June 30,
--------------------------- ---------------------------------------------------------
1996 compared to 1995 1996 compared to 1995 1995 compared to 1994
---------------------------------------------------------- ---------------------------
Change Due To: Change Due To: Change Due To:
-------------- -------------- --------------
Increase Increase Increase
(Decrease) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume
---------- ---- ------ ---------- ---- ------ ---------- ---- ------
Interest income:
Securities............... $134 ($30) $164 $226 ($9) $235 ($722) $403 ($1,125)
Loans.................... 188 (48) 236 545 430 115 643 273 370
Interest bearing deposits
in other banks......... 22 (33) 55 57 (38) 95 184 78 106
-- ---- --- -- ---- -- --- -- ---
Total interest income.. 344 (111) 455 828 383 445 105 754 (649)
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts..... (4) (8) 4 (35) (9) (26) (51) (18) (33)
Savings.................. (1) (120) 119 (41) (5) (36) (24) (17) (7)
Certificates of deposits. 288 (88) 376 768 248 520 576 353 223
---- ---- ---- --- --- --- --- --- ---
Total interest bearing
deposits............. 283 (216) 499 692 234 458 501 318 183
FHLB advances and other.... (48) (223) 175 (135) (129) (6) 90 167 (77)
Bonds payable.............. (37) (41) 4 (28) 166 (194) (1,001) (547) (454)
----- ---- ----- ---- --- ----- ------- ----- -----
Total interest expense 198 (480) 678 529 271 258 (410) (62) (348)
--- ----- ---- --- --- --- ----- ---- -----
Net interest income........ $146 $369 $(223) $299 $112 $187 $515 $816 ($301)
==== ==== ====== ==== ==== ==== ==== ==== ======
Interest Sensitivity
An important element of both earnings performance and liquidity is the
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
maturing or repricing within a specific time interval. The gap can be managed by
repricing assets or liabilities, by selling investments held for sale, by
replacing an asset or liability prior to maturity, or by adjusting the interest
rate during the life of an asset or liability. Matching the amounts of assets
and liabilities repricing in the same time interval helps to hedge the risk and
minimize the impact on net income of changes in market interest rates.
Guaranty evaluates interest rate risk and then formulates guidelines
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
At September 30, 1996, Guaranty had $19.0 million more in liabilities
than assets that reprice within one year or less and therefore was in an
liability-sensitive position. A negative gap adversely impacts earnings in a
period of rising interest rates. This negative position is the result of fixed
rate borrowings and certificates of deposit reaching maturity and short term
borrowings used to fund mortgage-backed securities. As these fixed rate
-19-
borrowings mature, Guaranty intends that they will be extended to match more
closely the maturities of its assets. Guaranty also intends to increase its
prime-based lending products, which will also improve this negative position.
Guaranty has an Asset/Liability Committee ("ALCO"). The ALCO meets to
discuss deposit pricing, changes in borrowed money, investment and trading
activity, loan sale activities, liquidity levels and the overall interest
sensitivity. The actions of this committee are reported to the Board of
Directors monthly. The daily monitoring of interest rate risk, investment and
trading activity, along with any other significant transactions are managed by
the CEO with input from other ALCO members.
The following table presents the amounts of Guaranty's interest
sensitive assets and liabilities that mature or reprice in the periods
indicated.
Interest Sensitivity Analysis
September 30, 1996
Maturing or Repricing In:
---------------------------------------------------
3 Months 4-12 1-5 Over
or less Months Years 5 Years
---------- ------ ----- -------
(Dollars in thousands)
Interest-sensitive assets:
Loans..................................................... $18,492 $32,838 $2,876 $31,732
Investments and mortgage-backed securities(1)............. 1,638 838 3,958 10,094
Deposits at other institutions............................ 4,614 0 0 0
----- - - -
Total interest-sensitive assets......................... $24,744 $33,676 $6,834 $41,826
======= ======= ====== =======
Cumulative interest-sensitive assets........................ 24,744 58,420 65,254 107,080
Interest-sensitive liabilities:
NOW accounts (2).......................................... 0 0 0 7,016
Money market deposit accounts............................. 3,315 0 0 0
Savings accounts (3)...................................... 1,262 707 606 2,473
Certificates of deposit................................... 12,691 40,789 9,798 0
Borrowed money............................................ 12,920 5,500 7,000 0
Bonds payable............................................. 65 194 841 2,126
-- --- --- -----
Total interest-sensitive liabilities.................... $30,252 $47,189 $18,245 $4,599
======= ======= ======= ======
Cumulative interest-sensitive liabilities................... $30,252 $77,441 $95,686 $100,285
Period gap.................................................. $(5,508) $(13,513) $(11,411) $37,227
Cumulative gap.............................................. $(5,508) $(19,021) $(30,432) $6,795
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities.................. 81.79% 75.44% 68.20% 106.78%
Ratio of cumulative gap to total assets..................... -4.82% -16.64% -26.62% 5.94%
- --------------------
<FN>
(1) Includes Federal Home Loan Bank stock.
(2) Guaranty has found that NOW accounts are generally not sensitive
to changes in interest rates and therefore has placed such deposits
in the "over 5 years" category.
(3) In accordance with standard industry practice, decay factors have
been applied to savings accounts.
</FN>
-20-
Investments
In the year ended June 30, 1995, Guaranty adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which requires investments to be
classified as held to maturity, trading, or available for sale. Upon adoption of
SFAS 115, existing investments were classified based on Guaranty's intent.
Guaranty held no investments classified as "trading" at September 30, 1996 or at
June 30, 1996 or 1995. Since implementation of SFAS 115, no transfers between
portfolios have occurred. Investment securities classified as available for sale
are reported on a fair value basis, with any unrealized gains or losses excluded
from earnings, but reported as a separate component of stockholders' equity, net
of any related deferred income taxes. Management believes, in general, that the
available for sale classification is the most appropriate for Guaranty as it
provides the greatest flexibility in meeting interest rate risk management and
liquidity needs. At September 30, 1996, Guaranty had $3.5 million of
mortgage-backed securities classified as held to maturity, which are the
securities collateralizing the REMIC bonds issued in 1987.
Mortgage-backed securities available for sale increased in fiscal 1996
due to the rapid growth in deposits. Since loan growth was not increasing at the
rate of deposit growth, the excess funds were invested in mortgage-backed
securities.
The following table shows the amortized cost and fair market value of
investment securities and mortgage-backed securities at the dates indicated.
Investments
September 30, June 30,
------------------------------------- ----------------------------------------------------------
1996 1995 1996 1995 1994
------------- -------------- -------------- -------------- --------------
Cost Market Cost Market Cost Market Cost Market Cost Market
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
(Dollars in thousands)
Held-to-maturity
Mortgage-backed
securities................ $ 3,529 $ 3,629 $ 4,426 $ 4,555 $ 3,731 $ 3,879 $ 4,733 $ 4,887 $ 5,776 $ 5,882
Available for sale
Mortgage-backed
securities................ 11,813 11,416 2,003 2,005 9,993 9,564 0 0 0 0
Restricted
Federal Home Loan Bank
stock................. 1,360 1,360 1,360 1,360 1,360 1,360 1,360 1,360 1,438 1,438
----- ----- ----- ----- -- ----- -- ----- -- ----- -- ----- -- ----- -- -----
Total............... $16,702 $16,405 $7,789 $7,920 $15,084 $14,803 $ 6,093 $ 6,247 $ 7,214 $ 7,320
======= ======= ====== ====== ======= ======= ======= ======= ======= =======
-21-
The table below shows the weighted average expected yields, maturities
and expected principal repayments, at carrying value, of investment securities
and mortgage-backed securities at September 30, 1996:
Maturities of Investments
Maturity or Expected After One But After Five But
Principal Repayment Within One Year Within Five Years Within Ten Years After Ten Years Total
----------------- ----------------- ---------------- ---------------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(In thousands)
Held to maturity:
Mortgage-backed
securities........ $162 8.28% $799 8.28% $576 8.48% $1,993 8.55% $3,529 8.47%
Available for sale:
Mortgage-backed
securities........ $ 124 6.83% $ 588 6.83% $1,000 6.83% $9,704 6.84% $11,416 6.84%
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Total............ $ 285 7.65% $1,387 7.67% $1,576 7.43% $11,697 7.13% $14,945 7.23%
====== ====== ====== ======= =======
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
Portfolio of Investment Securities
September 30, June 30,
---------------------------------- ------------------------------------------------------
1996 1995 1996 1995 1994
-------------- --------------- --------------- --------------- ---------------
Book % of Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total Value Total
(Dollars in thousands)
Interest-bearing deposits
with banks............... $5,183 100.00% $4,572 100.00% $3,779 100.00% $4,022 100.00% 0 0.00%
Investment securities:
FHLMC mortgage-backed
securities........... 7,146 43.83% 6,429 82.54% 7,459 50.90% 4,733 77.68% 5,776 80.07%
GNMA mortgage-backed
securities........... 7,799 47.83% 0 0.00% 5,836 39.82% 0 0.00% 0 0.00%
----- ----- ----- ---- ----- ----- ----- ---- ----- ----
Subtotal............. 14,945 91.66% 6,429 82.54% 13,295 90.72% 4,733 77.68% 5,776 80.07%
------ ----- ----- ----- ------ ----- ----- ----- ----- -----
FHLB stock............... 1,360 8.34% 1,360 17.46% 1,360 9.28% 1,360 22.32% 1,438 19.93%
----- ---- ----- ----- ----- ---- ----- ----- ----- -----
Total investment in
securities and stock... $16,305 100.00% $7,789 100.00% $14,655 100.00% $6,093 100.00% $7,214 100.00%
======= ====== ====== ====== ======= ====== ====== ====== ====== ======
Loans
Guaranty's loan portfolio consists primarily of mortgage loans, the
majority of which are residential first mortgage loans. Of the $90.1 million of
gross loans outstanding at September 30, 1996, 78.0% were residential first
mortgages.
-22-
Net loans consist of total loans minus deferred loan fees and the
allowance for loan losses. Net loans were $86.1 million at September 30, 1996,
an increase of 8.91% over September 30, 1995. Net loans were $84.1 million at
June 30, 1996, an 11.78% increase over net loans of $75.2 million at June 30,
1995. Net loans decreased 3.26% in the fiscal year ended June 1995 from a
balance of $77.8 million at June 30, 1994. The average balance of total loans as
a percentage of average assets was 79.38% for the year ended June 30, 1996,
compared to 84.97% for the year ended June 30, 1995 and 74.68% for the year
ended June 30, 1994, and was 76.01% for the three months ended September 30,
1996.
The following tables set forth the composition of Guaranty's loan
portfolio in dollars and percentages at the dates indicated.
Loan Portfolio by Amount
September 30, June 30,
--------------- ------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Mortgage Loans:
Residential............ $68,874 $66,136 $62,175 $67,385 $59,845 $62,502
Commercial............. 7,437 7,670 4,508 4,251 4,155 4,617
Construction and land
loans................ 8,850 8,813 8,887 5,819 4,900 4,422
----- ----- ----- ----- ----- -----
Total real estate.... 85,161 82,619 75,570 77,455 68,900 71,541
Consumer Loans........... 5,812 5,386 4,580 3,685 4,462 4,733
Total loans
receivable......... 90,973 88,005 80,150 81,140 73,362 76,274
------ ------ ------ ------ ------ ------
Less:
Undisbursed loans in
process.............. 3,679 2,824 3,858 2,249 1,978 949
Deferred fees and
unearned discounts... 328 314 323 382 442 601
Allowance for losses... 834 786 747 754 746 689
--- --- --- --- --- ---
Total net items...... 4,841 3,924 4,928 3,385 3,166 2,239
----- ----- ----- ----- ----- -----
Total loans
receivable, net.. $86,132 $84,081 $75,222 $77,755 $70,196 $74,035
======= ======= ======= ======= ======= =======
Loan Portfolio by Percent of Gross Loans
September 30, June 30,
------------- ------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Mortgage Loans:
Residential............ 75.71% 75.15% 77.57% 83.05% 81.57% 81.94%
Commercial............. 8.17% 8.72% 5.62% 5.24% 5.66% 6.05%
Construction and land
loans................ 9.73% 10.01% 11.09% 7.17% 6.68% 5.80%
----- ------ ------ ----- ----- -----
Total real estate.... 93.61% 93.88% 94.29% 95.46% 93.92% 93.79%
Consumer Loans........... 6.39% 6.12% 5.71% 4.54% 6.08% 6.21%
----- ----- ----- ----- ----- -----
Total loans
receivable....... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= ======= =======
-23-
The following tables show the composition of Guaranty's loan portfolio
by fixed and adjustable rate at the dates indicated.
Fixed Rate and Adjustable Rate Loans by Amount
September 30, June 30,
------------- -----------------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Fixed - Rate Loans:
Real Estate
Residential........... $32,750 $28,907 $23,577 $27,796 $22,105 $26,455
Commercial............ 0 0 0 0 0 203
Construction and
land loans.......... 301 339 69 0 0 0
--- --- -- - - -
Total real estate... 33,051 29,246 23,646 27,796 22,105 26,658
------ ------ ------ ------ ------ ------
Consumer Loans............ 820 597 736 691 1,547 1,227
--- --- --- --- ----- -----
Total fixed-rate
loans............. 33,871 29,843 24,382 28,487 23,652 27,885
------ ------ ------ ------ ------ ------
Adjustable-Rate Loans:
Real Estate
Residential........... 36,124 37,229 38,598 39,590 37,740 36,046
Commercial............ 7,437 7,670 4,508 4,251 4,155 4,414
Construction and
land loans.......... 8,549 8,474 8,818 5,819 4,900 4,422
----- ----- ----- ----- ----- -----
Total real estate... 52,110 53,373 51,924 49,660 46,795 44,882
------ ------ ------ ------ ------ ------
Consumer Loans............ 4,992 4,789 3,844 2,993 2,915 3,507
----- ----- ----- ----- ----- -----
Total adjustable-rate
loans............. 57,102 58,162 55,768 52,653 49,710 48,389
------ ------ ------ ------ ------ ------
Total loans
receivable...... 90,973 88,005 80,150 81,140 73,362 76,274
------ ------ ------ ------ ------ ------
Less:
Undisbursed loans in
process............... 3,679 2,824 3,858 2,249 1,978 949
Deferred fees and
unearned discounts.... 328 314 323 382 442 601
Allowance for losses.... 834 786 747 754 746 689
--- --- --- --- --- ---
Total net items....... 4,841 3,924 4,928 3,385 3,166 2,239
----- ----- ----- ----- ----- -----
Total loans
receivable, net... $86,132 $84,081 $75,222 $77,755 $70,196 $74,035
======= ======= ======= ======= ======= =======
-24-
Fixed Rate and Adjustable Rate Loans By Percentage
September 30, June 30,
--------------- ----------------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Fixed - Rate Loans:
Real Estate
Residential........... 36.00% 32.85% 29.42% 34.26% 30.13% 34.68%
Commercial............ 0.00% 0.00% 0.00% 0.00% 0.00% 0.27%
Construction and
land loans.......... 0.33% 0.39% 0.09% 0.00% 0.00% 0.00%
----- ----- ----- ----- ----- -----
Total real estate... 36.33% 33.23% 29.50% 34.26% 30.13% 34.95%
------ ------ ------ ------ ------ ------
Consumer Loans............ 0.90% 0.68% 0.92% 0.85% 2.11% 1.61%
----- ----- ----- ----- ----- -----
Total fixed-rate
loans............. 37.23% 33.91% 30.42% 35.11% 32.24% 36.56%
------ ------ ------ ------ ------ ------
Adjustable-Rate Loans:
Real Estate
Residential........... 39.71% 42.30% 48.16% 48.79% 51.44% 47.26%
Commercial............ 8.17% 8.72% 5.62% 5.24% 5.66% 5.79%
Construction and
land loans 9.40% 9.63% 11.00% 7.17% 6.68% 5.80%
----- ----- ------ ----- ----- -----
Total real estate 57.28% 60.65% 64.78% 61.20% 63.79% 58.84%
------ ------ ------ ------ ------ ------
Consumer Loans............ 5.49% 5.44% 4.80% 3.69% 3.97% 4.60%
----- ----- ----- ----- ----- -----
Total adjustable-rate
loans............. 62.77% 66.09% 69.58% 64.89% 67.76% 63.44%
------ ------ ------ ------ ------ ------
Total loans
receivable...... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
------- ------- ------- ------- ------- -------
-25-
The following tables summarize the contractual repayment terms of gross
loans as of September 30, 1996, as well as the amount of fixed rate and variable
rate loans due after September 30, 1997. The tables have not been adjusted for
estimates of prepayments and do not reflect periodic repricing of adjustable
rate loans. Guaranty does not have any loans classified as "held for sale."
Loan Portfolio Maturity Schedule
Balance Principal Repayment Contractually Due
Outstanding in 12-Month Period Ending September 30,
----------- ---------------------------------------
September 30, 2000- 2002- 2007 and
1996 1997 1998 1999 2001 2006 Thereafter
---- ---- ---- ---- ---- ---- ----------
(In thousands)
Residential and
commercial real estate... $76,311 $ 2,310 $ 84 $ 141 $2,105 $ 3,896 $67,774
Construction............... 8,850 7,395 953 208 277 17 0
Consumer and other
loans.................... 5,812 1,637 785 1,050 2,098 242 0
----- ----- --- ----- ----- --- -
Total.................... $90,973 $11,342 $ 1,822 $ 1,399 $ 4,480 $ 4,155 $67,774
======= ======= ======= ======= ======= ======= =======
Fixed Variable
Rate Rate Total
---- ---- -----
(In thousands)
Residential and commercial real estate $37,939 $36,062 $74,001
Construction.......................... 301 1,154 1,455
Consumer and other loans.............. 807 3,368 4,175
--- ----- -----
Total............................... $39,047 $40,584 $79,631
======= ======= =======
Contractual principal repayments of loans do not necessarily reflect the
actual term of Guaranty's loan portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
enforcement of due-on-sale clauses, which gives Guaranty the right to declare a
loan immediately due and payable in the event, among other things, the borrower
sells the real property subject to the mortgage and the loan is not repaid. In
addition, certain borrowers increase their equity in the security property by
making payments in excess of those required under the terms of the mortgage.
Asset Quality
Asset quality is an important factor in the successful operation of a
financial institution. The loss of interest income and principal that may result
from nonperforming assets has an adverse effect on earnings, and the resolution
of those assets requires the use of capital and management resources. Guaranty
maintains loan monitoring policies and systems that require detailed monthly
analysis of delinquencies, nonperforming loans, nonaccrual loans and repossessed
assets. Reports of such loan and asset categories are reviewed by management and
the Board of Directors.
Federal regulations provide for the classification of loans, debt,
equity securities and other assets considered to be of lesser quality as
"substandard," "doubtful" or "loss" assets. The regulations require insured
institutions to classify their own assets and to establish prudent general
allowances for losses for assets classified "substandard" or "doubtful." For the
portion of assets classified as "loss," an institution is required to either
establish specific allowances of 100% of the amount classified or charge such
amounts off its books. Assets which
-26-
do not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess potential
weaknesses are required to be designated "special mention" by management. In
addition, the OTS may require the establishment of a general allowance for
losses based on assets classified as "substandard" and "doubtful" or based on
the general quality of the asset portfolio of an institution. In connection with
the filing of its periodic reports with the OTS and in accordance with its
classification of assets policy, Guaranty regularly reviews the loans in its
portfolio to determine whether any loans require classification in accordance
with applicable regulations. On the basis of management's review of its assets,
at September, 1996, Guaranty had classified $2.49 million of its assets as
substandard, $186,000 as loss and none as doubtful. Not all of Guaranty's assets
that have been classified are included in the table of non-performing assets set
forth below. Several of these loans are classified because of previous credit
problems but are performing.
Unless well secured and in the process of collection, Guaranty places
loans on a nonaccrual status after being delinquent greater than 90 days, or
earlier in situations in which the loans have developed inherent problems that
indicate payment of principal and interest may not be made in full. Whenever the
accrual of interest is stopped, previously accrued but uncollected interest
income is reversed. Thereafter, interest is recognized only as cash is received.
The loan is reinstated to an accrual basis after it has been brought current as
to principal and interest under the contractual terms of the loan.
The following table reflects the composition of nonperforming assets at
the dates indicated.
Nonperforming Assets
September 30, June 30,
---------------- -----------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans................................... $1,531 $1,687 $1,458 $1,556 $1,061 $934 $513
Restructured loans................................. 11 12 11 12 415 1,143 1,143
-- --- -- -- --- ----- -----
Total non-performing loans....................... $1,542 $1,699 $1,469 $1,568 $1,416 $2,077 $1,656
------ ------ ------ ------ ------ ------ ------
Foreclosed assets.................................. 130 167 41 122 0 0 0
--- --- -- --- - - -
Total non-performing assets...................... $1,672 $1,866 $1,510 $1,690 $1,476 $2,077 $1,656
------ ------ ------ ------ ------ ------ ------
Loans past due 90 or more days and accruing
interest........................................... $88 $167 $19 $1 $288 $190 $434
Non-performing loans to total loans, at period end. 1.70% 2.05% 1.67% 2.06% 1.87% 2.91% 2.20%
Non-performing assets to period end
total loans and foreclosed assets............... 1.84% 2.25% 1.72% 2.21% 1.87% 2.91% 2.20%
At September 30, 1996, Guaranty's nonaccrual loans were comprised of
one home-equity loan, 17 single-family mortgage loans and two commercial real
estate loans. Based on current market values of the properties securing these
loans, management anticipates no significant losses.
The net amount of interest income foregone during the three months
ended September 30, 1996 and fiscal years 1996, 1995 and 1994 on loans
classified as non-performing, was $20,000, $17,000, $12,000, and $15,000,
respectively. Interest income included in net income for non-performing assets
during the three months ended September 30, 1996 and fiscal year 1996 was $900
and $41,000, respectively.
As of September 30, 1996, there were $885,000 in loans with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the security properties have caused Management to have doubts
as to the ability of the borrowers to comply with present loan repayment terms
and which may result in the future inclusion of such items in the non-performing
asset categories.
-27-
Delinquent and Problem Loans
When a borrower fails to make a required payment on a loan, Guaranty
attempts to cure the delinquency by contacting the borrower. A notice is mailed
to the borrower after a payment is 17 days past due and again when the loan is
30 days past due. For most loans, if the delinquency is not cured within 60
days, Guaranty issues a notice of intent to foreclose on the property and if the
delinquency is not cured within 90 days, Guaranty may institute foreclosure
action. If foreclosed on, real property is sold at a public sale and may be
purchased by Guaranty. In most cases, deficiencies are cured promptly.
The following table sets forth information concerning delinquent
mortgage and other loans at September 30, 1996. The amounts presented represent
the total remaining principal balances of the related loans, rather that the
actual payment amounts which are overdue.
Delinquent Loans
Residential Commercial Construction
Real Estate Real Estate and Land Consumer
------------------ ------------------ ------------------ ------------------
Number Amount Number Amount Number Amount Number Amount
(Dollars in thousands)
Loans delinquent for
31-59 days........... 0 $0 - $0 0 $0 1 $19
60-89 days........... 11 1,044 - - - - 3 16
90 days and over..... 12 957 - - - - 1 29
--- --- --- --- --- --- --- ---
Total delinquent loans 23 $2,001 - $0 0 $0 5 $64
=== ====== === === === === === ===
Allowance for Losses on Loans and Real Estate
Guaranty provides valuation allowances for anticipated losses on loans
and real estate when its management determines that a significant decline in the
value of the collateral has occurred, if the value of the collateral is less
than the amount of the unpaid principal of the related loan plus estimated costs
of acquisition and sale. In addition, Guaranty also provides reserves based on
the dollar amount and type of collateral securing its loans, in order to protect
against unanticipated losses. A loss experience percentage is established for
each loan type and is reviewed annually. Each quarter, the loss percentage is
applied to the portfolio, by product type, to determine the minimum amount of
reserves required. Although management believes that it uses the best
information available to make such determinations, future adjustments to
reserves may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations.
-28-
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated.
Allowance for Loan Losses
Three Months Ended
September 30, Year Ended June 30,
------------------- ----------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period......... $788 $747 $747 $754 $746 $689 $712
Provision (credit) charged to operations 46 (4) 57 (9) 74 37 0
Charge-offs:
Real estate.......................... - 39 0 66 0 5
Consumer............................. - 0 1 0 0 18
Recoveries:
Real Estate.......................... - 4 19 0 0 0 0
Consumer............................. - 4 4 0 20 0
Net Charge-offs........................ - (4) 16 (3) 66 (20) 23
- --- -- --- -- ---- --
Balance, end of period................. $834 $747 $788 $747 $754 $746 $689
==== ==== ==== ==== ==== ==== ====
Allowance for loan losses to period
end total loans...................... 0.97% 0.94% 0.94% 0.98% 0.96% 1.05% 0.91%
Allowance for loan losses to nonaccrual 54.09% 43.97% 54.05% 48.01% 85.01% 79.87% 134.31%
loans..................................
Net charge-offs to average loans....... 0.00% -0.01% 0.02% 0.00% 0.09% -0.03% 0.03%
Provision for Loan Losses
For the three months ended September 30, 1996, the provision for loan
losses was $46,000, compared to a credit of $4,000 for the three months ended
September 30, 1995. The provision for loan losses increased to $56,700 for the
fiscal year ended June 30, 1996 from a credit of $9,000 for the fiscal year
ended June 30, 1995. Guaranty monitors its loan loss allowance monthly and makes
provisions as necessary. Management believes that the level of Guaranty's loan
loss reserve is adequate. At September 30, 1996 the total allowance for loan
losses amounted to $834,000 of which $677,000 was not specifically allocated to
identified problem loans.
The provision decreased to a credit of $9,000 for the fiscal year ended
June 30, 1995 from $74,000 for the fiscal year ended June 30, 1994. As of June
30, 1995 the total allowance for loan losses amounted to $747,000 of which
$650,000 was not specifically allocated to identified problem loans.
-29-
A breakdown of the general allowance for loan losses in dollars and
loans in each category to total loans in percentages is provided in the
following tables. Because all of these factors are subject to change, the
breakdown is not necessarily predictive of future loan losses in the indicated
categories.
Allocation of Allowance for Loan Losses
Three Months Ended
September 30, Year Ended June 30,
------------------------------------------- -------------------------------------------
1996 1995 1996 1995
--------------------- --------------------- -------------------- ---------------------
Ratio of Ratio of Ratio of Ratio of
Loans to Loans to Loans to Loans to
Total Total Total Total
Gross Gross Gross Gross
Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- -----
(Dollars in thousands)
Residential
real estate.. $375 75.71% $303 79.06% $327 75.15% $311 77.57%
Commercial
real estate.. 193 8.18 231 7.41 194 8.72 220 5.62
Construction... 61 9.73 89 9.99 70 10.01 86 11.09
Consumer and
other loans.. 48 6.39 27 3.54 40 6.12 32 5.71
-- ---- ---- -- ---- -- ----
Total..... $677 100.00% $650 100.00% $631 100.00% $649 $649
==== ======= ==== ======= ==== ======= ==== ====
Year Ended June 30,
---------------------------------------------------------------------------------------------
1994 1993 1992
----------------------------- ------------------------------ ------------------------------
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Total Total
Gross Gross Gross
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
Residential
real estate.. $300 83.05% $185 81.57% $224 81.94%
Commercial
real estate.. 253 5.24 270 5.66 266 6.05
Construction... 62 7.17 108 6.68 75 5.80
Consumer and
other loans.. 30 4.54 15 6.08 23 6.21
-- ---- -- ---- -- ----
Total..... $645 100.00% $578 100.00% $588 100.00%
==== ======= ==== ======= ==== =======
Non-Interest Income
Guaranty's non-interest income consists primarily of loan fees
and servicing income, net gains on the sale of loans and securities, loan fees
and service charges on deposit accounts. In the three months ended September 30,
1996, non-interest income totaled $274,000. Loan fees and servicing income were
$149,000, or 54.4% of non-interest income. Gains on sales of loans and
securities were $68,000, and service charges on checking accounts totaled
$25,000.
-30-
In the years ended June 30, 1996, 1995 and 1994, loan fees and
servicing income accounted for 55.10%, 74.79% and 317.31%, respectively, of
non-interest income. Gains on sales of loans and securities were 21.94% and .02%
of non-interest income in fiscal 1996 and fiscal 1995, respectively. In the year
ended June 30, 1994, Guaranty had a loss of $491,000 on sales of loans and
investments. Service charges on checking accounts were $90,000 in fiscal 1996
and $78,000 in each of the years ended June 30, 1995 and 1994.
Non-interest income in fiscal year ended June 30, 1996 was $1.11
million, an increase of $235,000 or 27% over non-interest income of $872,000 in
fiscal year 1995. Non-interest income for fiscal year ended June 30, 1995,
increased by $745,000 or 591% over fiscal year 1994.
Mortgage loan servicing is a significant business for Guaranty, and a
by-product of its residential lending business. Guaranty derives fees from
originated and purchased mortgage servicing rights ("MSRs"). Loan servicing
includes collecting and remitting loan payments, accounting for principal and
interest, holding escrow funds for payment of taxes and insurance, making
required inspections of the mortgaged premises, contacting delinquent
mortgagors, supervising foreclosures in the event of unremitted defaults and
generally administering the loans for the investors to whom they have been sold.
MSRs are intangible assets that represent the rights to service mortgage loans
and in turn to receive the service fee income associated with the mortgage
loans. MSRs are amortized against income over the estimated average lives of the
loans serviced. If loans are prepaid at rates faster than those originally
assumed, adjustments may be required to the unamortized balance, which could
result in charges to current earnings. Conversely, slower prepayment rates could
result in increases in mortgage loan servicing income in future periods. The
weighted average note rate of mortgage loans serviced for others was 7.93% at
June 30, 1996 and 8.03% at September 30, 1996. See "Financial Statements -
Summary of Accounting Policies." At September 30, 1996, loans serviced for
others totaled $166.0 million. Guaranty serviced loans for others aggregating
approximately $168.4 million at June 30, 1996, of which 70% were originated
locally, and $169.6 million at June 30, 1995, of which 67% were originated
locally. Revenues recognized from these activities amounted to $516,000 and
$550,000 in the years ended June 30, 1996 and 1995, respectively, and $128,000
in the three months ended September 30, 1996.
Guaranty serviced loans for others aggregating approximately $158.8
million at June 30, 1994, of which 62% was originated locally. Revenues
recognized from these activities amounted to $400,132 in the year ended June 30,
1994.
There is an active secondary market for most types of residential
mortgage loans originated by Guaranty. By originating loans that are eligible
for subsequent sale in the secondary mortgage market, Guaranty is able to obtain
funds which may be used for lending and investment purposes. Guaranty originates
loans for sale and for investment.
Gains from the sales of mortgage loans and securities available for
sale were $68,000 in the three months ended September 30, 1996 and were $306,000
in fiscal year 1996, compared to net losses of $24,000 in fiscal 1995 and
$491,000 in fiscal 1994. Of the 1996 gain, $161,000 was due to the early
adoption of SFAS 122, Accounting for Mortgage Servicing Rights, an Amendment to
Securities FASB Statement No. 65. The gains in fiscal year 1996 also reflect a
decline in market interest rates in the early part of the fiscal year.
Guaranty sells fixed rate residential production on an individual loan
basis and securitizes loans through the creation of Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
Government National Mortgage Association ("GNMA") mortgage-backed securities.
In the three months ended September 30, 1996, Guaranty sold $4.4
million of loans and securitized loans. Guaranty sold $12.23 million of fixed
rate mortgage loans and securitized loans during fiscal year 1996, compared to
$16.76 million in fiscal year 1995 and $30.32 million in fiscal year 1994. The
sale of fixed rate product creates liquidity and an income stream from servicing
fees on loans sold.
-31-
Guaranty also trades treasury securities in an effort to take advantage
of short term movements in market interest rates. It is Guaranty's policy not to
hold trading securities with a cost in excess of $5 million at one time. Trading
securities are marked to market monthly. Sale of trading account securities
totaled $107.28 million, $43.14 million and $73.38 million in the years ended
June 30, 1996, 1995 and 1994, respectively, and $24.0 million in the three
months ended September 30, 1996. Guaranty experienced a gain of $24,000 on such
sales in fiscal 1995, net losses of $64,000 and $168,000 in the fiscal years
ended June 30, 1996 and 1994, and a net loss of $28,000 in the three months
ended September 30, 1996.
Guaranty realizes interest and loan fee income from its lending
activities. Guaranty receives loan fees on both construction and one- to
four-family residential loans. Guaranty receives loan fees and charges related
to existing loans, which include late charges. Interest on loans and loan fees
and servicing income together comprised 81% of Guaranty's total revenues for the
year ended June 30, 1996. Income from loan fees and other fees is a volatile
source of income, varying with the volume and type of loans and commitments made
and with competitive and economic conditions.
Generally accepted accounting principles ("GAAP") allow the inclusion
of loan fees in current income to an amount limited to loan underwriting and
closing costs. The remaining deferred fees are amortized into income over the
estimated remaining lives of the loans to which they relate, using a method
which approximates level yield. Guaranty had deferred fees net of direct
underwriting costs of $314,000 and $328,000 at June 30, 1996 and September 30,
1996, respectively.
Non-Interest Expenses
For the three months ended September 30, 1996, non-interest expenses
were $996,000, compared to $596,000 in the same period last year. The $400,000
increase was due primarily to the special assessment to recapitalize the SAIF,
which was $347,000. Non-interest expenses were $2.49 million for the year ended
June 30, 1996, compared to $2.53 million for fiscal year 1995, a 2% decrease,
that resulted primarily from a reduction in personnel expense after loan
production offices in Richmond, Virginia, and Waynesboro, Virginia, were closed.
Non-interest expenses were $2.53 million for the year ended June 30,
1995, compared to $2.2 million for fiscal year 1994, an increase of 15.0%. This
increase is primarily a result of the full impact of all costs incurred this
year with respect to Guaranty's Richmond mortgage origination office, which
management closed because of unprofitability.
Income Taxes
Reported income tax expense for the year ended June 30, 1996, was
$344,000 compared to $100,000 for 1995. The increase resulted from Guaranty's
increased earnings in 1996, compared to 1995.
Reported income tax expense for the year ended June 30, 1995, was
$100,000 compared to a benefit of $235,000 for 1994. The increase was attributed
to Guaranty's increased earnings in 1995, compared to a loss in 1994.
In addition, in the year ended 1994, Guaranty took a charge of $196,000
for the cumulative effect of change in accounting for income taxes. As required
by the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting For Income Taxes," Guaranty was
required to change from the deferred method to the asset and liability method of
accounting for income taxes.
-32-
Sources of Funds
Deposits
Deposits have traditionally been the principal source of Guaranty's
funds for use in lending and for other general business purposes. In addition to
deposits, Guaranty derives funds from loan repayments, cash flows generated from
operations, which includes interest credited to deposit accounts, repurchase
agreements entered into with commercial banks and FHLB of Atlanta advances.
Contractual loan payments are a relatively stable source of funds, while deposit
inflows and outflows and the related cost of such funds have varied widely.
Borrowings may be used to compensate for reductions in deposits or
deposit-inflows at less than projected levels and have been used on a
longer-term basis to support expanded lending activities.
Guaranty attracts both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. Guaranty
offers statement savings accounts, various checking accounts, various money
market accounts, fixed-rate certificates with varying maturities, individual
retirement accounts and is expanding to provide products and services for small
businesses. Guaranty does not solicit brokered deposits.
Guaranty's principal use of deposits is to originate loans and fund
investment securities. Guaranty experienced significant deposit growth in fiscal
year 1996. Net deposits increased 42% to $74.7 million from $52.5 million at
June 30, 1995 and decreased 2% in fiscal year 1995 from $53.5 in fiscal year
1994. The deposit growth is a reflection of aggressive pricing and increased
marketing. Deposits increased 5.35% to $78.7 million at September 30, 1996 from
$74.7 million at June 30, 1996, and 40.27% from $56.1 million at September 30,
1995.
The Bank began to aggressively solicit deposit accounts in July 1995
with the one year "Opportunity C.D." This account offers a one time penalty free
withdrawal after thirty days and the ability on a one time basis to increase the
rate if there has been an increase in the rate then offered for this product.
The rate on the account was initially set slightly above local competition but
below the Bank's other alternate sources of borrowings. The Bank's local
competition, larger state and regional banks, did not alter their product menus,
thus creating a local market advantage. The deposit growth of $22 million in the
fiscal year ended June 30, 1996 and over $5 million since June 30, 1996 has
enabled the Bank to pay off higher rate, more volatile borrowings, while
increasing interest earning assets. This deposit growth, being local, is
considered by Guaranty to be relatively stable. Guaranty expects to be able to
sustain reasonable deposit growth because of the continuation of its marketing
efforts and the recent and planned expansion of its branch network.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by Guaranty at the dates indicated.
Deposits
September 30, June 30,
------------- ---------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
Statement savings accounts...................... $5,047 $4,654 $4,688 $7,610
Now accounts.................................... 7,016 6,440 5,818 6,005
Money market accounts........................... 3,315 3,213 4,131 5,392
30- to 180-day certificates..................... 231 227 324 528
One- to five-year fixed-rate certificates....... 61,112 52,698 29,987 33,932
Eighteen-month prime rate certificate........... 1,935 7,455 7,513 0
----- ----- ----- -
Total......................................... $78,656 $74,687 $52,461 $53,467
======= ======= ======= =======
-33-
The variety of deposit accounts offered by Guaranty has allowed it to
be competitive in obtaining funds and has allowed it to respond with flexibility
to, although not eliminate, the threat of disintermediation (the flow of funds
away from depository institutions such as thrift institutions into direct
investment vehicles such as government and corporate securities). The ability of
Guaranty to attract and maintain deposits, and its cost of funds, has been, and
will continue to be, significantly affected by money market conditions.
The following table sets forth the deposit flows of Guaranty during the
periods indicated.
Deposit Flows
Three Months
Ended
September 30, Year Ended June 30,
------------- --------------------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
Opening balance................. $74,687 $52,461 $53,467 $50,021
Net deposits (withdrawals)...... 3,001 19,093 (3,446) 1,507
Interest credited............... 968 3,133 2,440 1,939
--- ----- ----- -----
Ending balance.................. 78,656 74,687 52,461 53,467
Net increase (decrease)......... $3,969 $22,226 ($1,006) $3,446
Percent increase (decrease)..... 5.31% 42.37% -1.88% 6.89%
In 1995, Guaranty had a savings deposit outflow before interest
credited due to management's decision not to accept new or renewed out-of-state
jumbo certificates of deposit.
The following table indicates the amount of Guaranty's certificates of
deposits by time remaining until maturity as of September 30, 1996.
Maturities of CDs
Maturity
--------------------------------------------------------------------------
3 Months Over 3 to Over 6 to Over
or less 6 months 12 months 12 months Total
------- -------- --------- --------- -----
(Dollars in thousands)
Certificates of deposit less than
$100,000................................. $11,434 $12,626 $25,401 $8,866 $58,327
Certificates of deposit of $100,000 or
more..................................... 1,257 889 1,873 932 4,951
----- --- ----- --- -----
Total of certificates of deposits.... $12,691 $13,515 $27,274 $9,798 $63,278
======= ======= ======= ====== =======
Borrowings
As a member of the FHLB of Atlanta, Guaranty is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which may
be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe
the acceptable uses to which these advances may be put, as well as on the size
of the advances and repayment provisions. The advances are collateralized by
Guaranty's investment in Federal Home Loan Bank stock and certain mortgage
-34-
loans. See Note 8 of the Notes to Consolidated Financial Statements for
information regarding the maturities and rate structure of Guaranty's FHLB
advances.
Guaranty's borrowings also include securities sold under agreements to
repurchase, with mortgage-backed securities or Treasury securities pledged as
collateral. The proceeds are used by Guaranty for general corporate purposes. At
September 30, 1996, Guaranty had $2.9 million outstanding in securities sold
under agreement to repurchase.
Guaranty uses borrowings to supplement deposits when they are available
at a lower overall cost to Guaranty or they can be invested at a positive rate
of return.
The following table sets forth the maximum month-end balances, average
balances and weighted average rates, of FHLB advances and securities sold under
agreements to repurchase for the periods indicated.
Borrowings
Three Months Ended
September 30, Year Ended June 30,
------------------- --------------------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
Maximum Balance:
FHLB advances............... $22,500 $28,050 $28,250 $28,750
Securities sold under
agreements to repurchase.. 9,957 9,930 4,230 11,630
Weighted Weighted Weighted Weighted
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
FHLB advances................. $19,167 5.96% $22,829 6.21% $26,208 6.67% $26,017 6.63%
Securities sold under
agreements to repurchase.... 6,660 5.57% 3,112 5.65% 783 7.98% 7,201 3.85%
At September 30, 1996, Guaranty owed $22.5 million to the FHLB,
compared to $17.5 million at June 30, 1996 and $25.1 million at June 30, 1995.
The $22.5 million outstanding at September 30, 1996 carried fixed rates ranging
from 5.41% to 7.10%, with maturities in 1996, 1997 and 1998. Included in
borrowings are the REMIC bonds. At September 30, 1996, $3.5 million of bonds
remained outstanding, versus $3.7 million at June 30, 1996 and $4.7 million at
June 30, 1995, before unamortized discount.
-35-
The following table sets forth the balances of Guaranty's short-term
borrowings at the dates indicated.
Short-Term Borrowings
Three Months
Ended
September 30, Year Ended June 30,
------------- ---------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
FHLB advances..................................... $15,500 $12,500 $19,550 $13,950
Securities sold under agreements to repurchase.... 2,920 6,104 0 0
----- ----- - -
Total short-term borrowings................... $18,420 $18,604 $19,550 $13,950
======= ======= ======= =======
Weighted average interest rate of
short-term FHLB advances........................ 5.91% 6.02% 4.52% 3.24%
Weighted average interest rate of
securities sold under agreements to repurchase.. 5.57% 5.65% 0.00% 0.00%
See notes 6, 7 and 8 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial
obligations either through the sale of existing assets or the acquisition of
additional funds through asset and liability management. By regulatory
definition, liquid assets include cash, interest bearing deposits with banks,
federal funds sold, and government agency and high rated corporate securities
with maturities of five years or less. Guaranty is required to maintain liquid
assets on an average monthly basis equal to at least 5% of the sum of its total
deposits and all short term borrowings. Historically, Guaranty has maintained
its liquid assets above the minimum requirements imposed by federal regulations
and at a level believed adequate to meet requirements of normal daily
activities, repayment of maturing debt and potential deposit outflows. Cash flow
projections are regularly reviewed and updated to assure that adequate liquidity
is provided. At September 30, 1996, Guaranty's liquidity ratio (liquid assets as
a percentage of net withdrawable savings and current borrowings) was 5.48%. As a
result of Guaranty's management of liquid assets and the ability to generate
liquidity through increasing deposits, Management believes that Guaranty
maintains overall liquidity that is sufficient to satisfy its depositors'
requirements and meet its customers' credit needs.
Guaranty's primary sources of funds are deposits, borrowings, and
amortization, prepayments and maturities of outstanding loans and
mortgaged-backed securities. While scheduled payments from the amortization of
loans and mortgaged-backed securities are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. Excess funds are invested
in overnight deposits to fund cash requirements experienced in the normal course
of business. Guaranty has been able to generate sufficient cash through its
deposits as well as borrowings.
The following information should be read in conjunction with the
statements of cash flows, which appear on pages F-7 and F-8 of Guaranty's
financial statements.
Cash and cash equivalents increased $1.05 million to $6.5 million for
the quarter ended September 30, 1996, as the net cash provided by financing
activities exceeded the net cash absorbed by operating and investing activities.
The $490,000 of net cash absorbed by operating activities was primarily the
result of the SAIF
-36-
assessment. Within investing activities cash outflows consisted mainly of the
net purchase of securities available for sale of $1.9 million and a net increase
in loans of $2.1 million. The $5.6 million of net cash provided by financing
activities was primarily the result of an increase in deposits of $4.0 million
and a net increase in borrowings of $1.8 million.
Cash and cash equivalents decreased $321,000 to $5,431,000 for the
year ended June 30, 1996, as the net cash absorbed by investing activities
exceeded the net cash provided by operating and financing activities. The
$479,000 of net cash provided by operating activities primarily resulted from
$643,000 in net income. The $19.8 million of net cash provided by financing
activities was primarily the result of a net increase in deposits of $22.2
million. Within investing activities cash outflows consisted of the net purchase
of securities available for sale of $9.89 million ($28.40 million of gross
purchases less $18.51 million of payments and maturities), a net increase in
loans of $8.5 million, and an increase in premises and equipment of $3.2
million.
For the year ended June 30, 1995, cash and cash equivalents increased
$4.5 million to $5.8 million, as the net cash provided by investing and
financing activities exceeded the cash used in operating activities. The $3.7
million of net funds provided by investing activities resulted mainly from a
$2.5 million decrease in loans and $1.3 million in principal payments on held to
maturity securities. The $1.2 million of net cash provided by financing
activities resulted primarily from proceeds from the issuance of common stock of
$2.1 million.
Guaranty uses its sources of funds primarily to meet its on going
commitments, to pay deposit withdrawals and fund loan commitments. At June 30,
1996, the total approved loan commitments outstanding amounted to $3.9 million.
At the same date, commitments under unused lines of credit amounted to $5.4
million. Certificates of deposits scheduled to mature in one year or less at
June 30, 1996 totaled $51.2 million. Management believes that a significant
portion of maturing deposits will remain with Guaranty.
Capital represents funds, earned or obtained, over which financial
institutions can exercise greater control in comparison with deposits and
borrowed funds. The adequacy of Guaranty's capital is reviewed by management on
an ongoing basis with reference to size, composition, and quality of Guaranty's
resources and consistent with regulatory requirements and industry standards.
Management seeks to maintain a capital structure that will support anticipated
asset growth and absorb any potential losses.
-37-
The Bank is subject to OTS regulations requiring savings institutions
to meet the following minimum levels of regulatory capital (1) tangible capital
of at least 1.5% of total adjusted assets, (2) core capital of 3% of total
adjusted assets and (3) risk-based capital of 8% of total risk-weighted assets.
At September 30, 1996, the Bank exceeded all such regulatory capital
requirements as shown in the following table.
Capital
September 30, June 30,
-------------------------- -----------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Tier 1 Capital:
Common stock........................... $1,149 $1,144 $1,149 $1,144 $671
Capital surplus........................ 1,981 1,967 1,981 1,971 336
Retained earnings...................... 3,497 3,053 3,498 2,900 2,524
----- ----- -----
Total Tier 1 Capital................. 6,627 6,164 6,628 6,015 3,531
----- ----- -----
Tier 2 Capital:
Allowance for loan losses (1).......... 677 604 631 565 569
Allowable long-term debt............... 0 0 0 0 0
- - - - -
Total Tier 2 Capital................. 677 650 631 565 569
--- --- --- --- ---
Total risk-based Capital........... $7,304 $6,814 $7,259 $6,580 $4,100
====== ====== ====== ====== ======
Risk-weighted assets..................... $56,897 $48,343 $54,650 $45,200 $45,500
Capital Ratios:
Tier 1 Risk-based Capital ratio........ 11.64% 12.75% 12.13% 13.31% 7.76%
Total Risk-based Capital ratio......... 12.84% 14.1% 13.28% 14.56% 9.01%
Tier 1 Capital to average adjusted total
assets................................... 5.83% 6.62% 6.59% 6.52% 3.59%
- --------------------
<FN>
(1) The allowance for loan losses included in Tier 1 Capital calculation is
limited by regulation to 1.25% of Risk-weighted assets.
</FN>
Impact of Inflation and Changing Prices and Seasonality
The financial statements in this document have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation.
Accounting Rules
In March 1995, the FASB issued its Statements of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." SFAS 121 requires that
long-lived assets and certain intangibles to be held and used by an entity be
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount may not be recoverable. In addition, SFAS 121 requires
long-lived assets and certain intangibles to be disposed of to be reported at
the lower of carrying amount or fair value less cost to sell. SFAS 121 is
effective for fiscal years beginning after December 15, 1995.
-38-
Management does not expect the application of this pronouncement to have a
material effect on the financial statements of the Bank.
In May 1995, the FASB issued its Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights an
Amendment of FASB Statement No. 65." SFAS 122 requires entities that acquire
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with the servicing rights retained
should allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. In addition, SFAS 122 requires entities to assess their
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995. The Bank elected early adoption and recorded a gain of $161,000 in
fiscal year 1996 on the sale of $12.2 million mortgage loans.
In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation," was issued. The statement is effective for fiscal years beginning
after December 15, 1995. The statement encourages, but does not require,
companies to expense the fair value of employee stock options, based on the fair
value on the date of the grant. Companies that elect to continue to follow
existing accounting rules (the intrinsic value method which often results in no
compensation expense) must provide pro forma disclosures of net income and
earnings per share which would have been had the new fair value method been
used. In addition, SFAS 123 requires all companies to make significantly more
disclosures regarding employee stock options than is currently required. The
Corporation plans to adopt the disclosure requirements only of SFAS 123
effective July 1, 1997.
In June 1996, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of the Corporation.
Subsidiary Activities
The Bank has two wholly owned subsidiaries, GMSC, Inc. ("GMSC") and
Guaranty Investments Corporation ("GICO"). GMSC is a financing subsidiary
through which Guaranty formed a Real Estate Mortgage Investment Conduit
("REMIC"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Guaranty sells insurance annuities through GICO. GICO
had a net income of $1,004 for the year ended June 30, 1996.
In 1987, Guaranty formed GMSC and entered into a REMIC in order to
create liquidity. Guaranty utilized the REMIC to pool $19.9 million of fixed
rate mortgages into mortgage backed securities, which were used as collateral
for bonds sold to private investors. The bonds bore a coupon of 8% and were sold
at a discount and costs of issuance of approximately $3.3 million. The bond
discount and issuance costs are amortized against income as mortgage underlying
the bonds repay. In the fiscal years ended June 30, 1996, 1995, and 1994, with
rapidly falling interest rates, Guaranty experienced significant repayment of
mortgages, resulting in an amortization expense of $160,000, $124,000, and
$968,000, respectively. In the three months ended September 30, 1996, such
amortization expense was $31,000. The amortization of the REMIC expenses is
treated as interest expense.
-39-
BUSINESS
General
Guaranty is a Virginia corporation which was organized in 1995 for the
purpose of becoming a unitary savings and loan holding company. The Bank is a
federally chartered savings association which began business in February 1981
and is headquartered in Charlottesville, Virginia. The Bank is a member of the
Federal Home Loan Bank System ("FHLBS") and its deposits are insured by the
Savings Associations Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Office of Thrift Supervision ("OTS") serves as the
primary regulator for thrifts such as the Bank.
Effective December 29, 1995, Guaranty acquired all of the issued and
outstanding standing shares of Common Stock of the Bank. The principal asset of
Guaranty is the outstanding stock of the Bank, its wholly owned subsidiary.
Guaranty presently has no separate operations and its business consists only of
the business of the Bank. All references to Guaranty, unless otherwise
indicated, at or before December 29, 1995, refer to the Bank and its
subsidiaries on a consolidated basis. Guaranty's Common Stock is quoted on the
National Association of Securities Dealers Automated Quotations ("NASDAQ")
System under the symbol "GSLC".
Guaranty's principal business activities are attracting checking and
savings deposits from the general public through its retail banking offices and
originating, servicing, investing in and selling loans secured by first mortgage
liens on single-family dwellings, including condominium units. Of Guaranty's
$90.1 million of gross loans outstanding at September 30, 1996, 78.0%
represented residential first mortgages. Guaranty also lends funds to retail
banking customers by means of home equity, installment loans, and, to a lesser
extent, originates loans secured by commercial property and multi-family
dwellings. Guaranty has recently begun to offer consumer loans and
government-insured and conventional small business loans. Guaranty invests in
certain United States government and agency obligations and other investments
permitted by applicable laws and regulations.
In October 1995, construction began on a combined headquarters and
retail branch located on the east side of Charlottesville in the Pantops area of
Albemarle County. At June 30, 1996, approximately $1.4 million of an estimated
$2.4 million project had been disbursed. The new facility contains 20,000 square
feet of which Guaranty occupies 15,500 sq. ft., with the remainder to be leased.
The new facility opened in December 1996. In addition, in fiscal 1996, Guaranty
purchased its Seminole Trail office, which previously had been leased. This
office contains $36.8 million in deposits and has been the headquarters of
Guaranty for the past twelve years. The building contains 11,000 square feet, in
which Guaranty will maintain a 2,500 square foot retail branch with the
remainder to be leased after the move to the new facility. Renovations of
approximately $150,000 began in October 1996 to modernize the site and make it
more attractive and accessible for tenants and customers. In addition to the new
headquarters and Seminole Trail purchase, Guaranty has purchased land at the
intersection of Neff Avenue and Reservoir Street in Harrisonburg, Virginia, for
a new retail branch. A branch application was filed with the OTS and was
approved in June 1996. It is anticipated that the branch will open in the spring
of 1997.
Guaranty's main office is located at 1658 State Farm Boulevard,
Charlottesville, Virginia 22911 and the telephone number is (804)970-1100.
Market Area
Guaranty is the only independent community banking or savings
organization headquartered in, or even with an office in, Charlottesville or
Albemarle County, Virginia. This area had a collective population of
approximately 108,000 in 1990 according to census figures, is located in central
Virginia 110 miles southwest of Washington, D.C. and 70 miles west of Richmond,
Virginia, and includes the University of Virginia, the area's
-40-
largest employer. Guaranty operates four full service retail branches, which
serve Charlottesville and Albemarle County.
Competition
Guaranty faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from commercial banks, mortgage bankers and to a lesser extent other
thrift institutions who also make loans secured by real estate located in the
Bank's market area. The Bank competes for real estate loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Guaranty faces substantial competition in attracting deposits from
commercial banks, money market and mutual funds, credit unions and other
investment vehicles. There are no other thrift institutions in Charlottesville.
The ability of Guaranty to attract and retain deposits depends on its ability to
provide an investment opportunity that satisfies the requirements of investors
as to rate of return, liquidity, risk and other factors. Guaranty competes for
these deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours, and being the only locally based thrift in
Charlottesville. In the year ended June 30, 1996, Guaranty was able to increase
its deposits significantly. Deposits grew 42% over the previous year. This
deposit growth is a reflection of aggressive pricing, increased marketing and
competitive products and services.
Within Charlottesville and Albemarle County there are four statewide
and two regional commercial banks and financial institutions with a larger
deposit base than Guaranty that compete with Guaranty. Accordingly, Guaranty
operates in a highly competitive environment, competing for deposits and loans
with commercial banks, and other financial institutions, including non-savings
and loan competitors, many of which possess substantially greater financial
resources than those available to Guaranty. Certain of these institutions have
significantly higher lending limits than Guaranty. In addition, there can be no
assurance that other financial institutions, with substantially greater
resources than Guaranty, will not establish operations in Guaranty's service
area.
Credit Policies
The principal risk associated with each of the categories of loans in
Guaranty's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased, depending on prevailing economic
conditions. In an effort to manage the risk, Guaranty's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and consumer loans varies,
based on employment levels, consumer confidence, fluctuations in the value of
real estate and other conditions that affect the ability of borrowers to repay
indebtedness. The risk associated with real estate construction loans varies,
based on the supply and demand for the type of real estate under construction.
Guaranty has written policies and procedures to help manage credit
risk. The loan portfolio is managed under a specifically defined credit process.
This process includes formulation of portfolio management strategy, guidelines
for underwriting standards and risk assessment, procedures for ongoing
identification and management of credit deterioration, and regular portfolio
reviews to establish loss exposure and to ascertain compliance with Guaranty's
policies.
Guaranty uses a Management Loan Committee and Directors Loan Committee
to approve loans. The Management Loan Committee, which consists of the President
and two additional loan underwriters, meets as necessary to review all loan
applications. A Directors Loan Committee, which currently consists of all
directors, approves loans in excess of $350,000 that have been previously
approved by the Management Loan Committee. Guaranty's President is responsible
for reporting to the Directors Loan Committee monthly on the activities of the
Management Loan Committee and on the status of various delinquent and
non-performing loans. The Directors Loan Committee also reviews lending policies
proposed by Management.
-41-
Guaranty's loan portfolio consists primarily of mortgage loans, the
majority of which are residential first mortgage loans. Of Guaranty's $90.1
million of gross loans outstanding at September 30, 1996, 78.0% represented
residential first mortgages. Guaranty also holds commercial real estate
mortgages, residential construction loans, and second mortgage home equity
loans.
Residential loan originations come primarily from walk-in customers,
real estate brokers and builders. Commercial real estate loan originations are
obtained through broker referrals, direct solicitation of developers and
continued business from customers. All completed loan applications are reviewed
by Guaranty's salaried loan officers. As part of the application process,
information is obtained concerning the income, financial condition, employment
and credit history of the applicant. If commercial real estate is involved,
information is also obtained concerning cash flow after debt service. Loan
quality is analyzed based on the Bank's experience and guidelines with respect
to credit underwriting, as well as the guidelines issued by the Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA") and other purchasers of loans, depending on the type of loan involved.
The non-conforming one- to four-family adjustable-rate mortgage loans originated
by Guaranty, however, are not readily salable in the secondary market because
they do not meet all of the secondary marketing guidelines. These loans are
evaluated by the loan committee for "overall" merit and will not exceed an 80%
loan to value ratio. Real estate is appraised by independent fee appraisers who
have been pre-approved by the Board of Directors. Loans are submitted to the
underwriting department for review. All conforming loans including HUD/FHA, VA
and applicable VHDA loans are underwritten and acted upon within loan
administration requiring two signatures of approval.
In the normal course of business, Guaranty makes various commitments
and incurs certain contingent liabilities which are disclosed but not reflected
in its annual financial statements, including commitments to extend credit. At
September 30, 1996, commitments to extend credit totaled $11.0 million.
One- to Four-Family Residential Real Estate Lending
Guaranty's primary lending program has been the origination of loans
secured by one- to four-family residences, all of which have been located in its
market area. Guaranty evaluates both the borrower's ability to make principal
and interest payments and the value of the property that will secure the loan.
Federal law permits Guaranty to make loans in amounts of up to 100% of the
appraised value of the underlying real estate. Loans are made with a loan to
value up to 95% for conventional mortgage loans and up to 100% for loans
guaranteed by either the Federal Housing Authority ("FHA") or the Veterans
Administration ("VA"). For conventional loans in excess of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75% loan to
value. In addition to fixed rate mortgage loans, Guaranty makes adjustable rate
mortgages with the primary loan indexed to the one year treasury. Generally if
the loans are not made to credit standards of FHLMC, additional fees and rate
are charged. If the loan to value exceeds 80%, private mortgage insurance is
generally secured.
In order to reduce its exposure to changes in interest rates, Guaranty
has de-emphasized the origination of 30-year fixed-rate one- to four-family
residential mortgage loans for retention in its own portfolio. For the year
ended June 30, 1996, 30.5% of all one- to four-family residential loans
originated by Guaranty had adjustable interest rates. Although, due to
competitive market pressures, the Bank does originate fixed-rate mortgage loans,
it currently underwrites and documents all such loans to permit their sale in
the secondary mortgage market. At September 30, 1996, $32.8 million, or 36.0%,
of Guaranty's one- to four-family residential mortgage loan portfolio consisted
of fixed-rate mortgage loans.
Guaranty's current one- to four-family residential adjustable-rate
mortgage loans ("ARMs") have interest rates that adjust every year, generally in
accordance with the rates on one-year U.S. Treasury Bills. Guaranty's ARMs
generally limit interest rate increases to 2% each rate adjustment period and
have an established ceiling rate at the time the loans are made of up to 6% over
the original interest rate. Borrowers are qualified at the first year
-42-
interest rate plus 2%. To compete with other lenders in its market area,
Guaranty makes one-year ARMs at interest rates which, for the first year, are
below the index rate which would otherwise apply to these loans. At September
30, 1996, $36.1 million, or 39.7%, of Guaranty's one- to four-family residential
mortgage loan portfolio consisted of ARMs. There are unquantifiable risks
resulting from potential increased costs to the borrower as a result of
repricing. It is possible, therefore, that during periods of rising interest
rates, the risk of defaults on ARMs may increase due to the upward adjustment of
interest costs to borrowers.
All one- to four-family real estate mortgage loans being originated by
Guaranty contain a "due-on-sale" clause providing that Guaranty may declare the
unpaid principal balance due and payable upon the sale of the mortgage property.
It is Guaranty's policy to enforce these due-on-sale clauses concerning
fixed-rate loans and to permit assumptions of ARMs, for a fee, by qualified
borrowers.
Guaranty requires, in connection with the origination of residential
real estate loans, title opinions and fire and casualty insurance coverage, as
well as flood insurance where appropriate, to protect Guaranty's interest. The
cost of this insurance coverage is paid by the borrower. Guaranty does require
escrows for taxes and insurance.
Construction Lending
Guaranty makes local construction loans, primarily residential and lot
loans. The construction loans are secured by the property for which the loan was
obtained. At September 30, 1996, construction and land loans outstanding were
$8.8 million, or 9.8%, of gross loans. The average life of a construction loan
is approximately nine months and they reprice daily to meet the market, normally
prime plus two percent. Because the interest charged on these loans floats with
the market, they help Guaranty in managing its interest rate risk. Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans often involve larger loan balances concentrated with
single borrowers or groups of related borrowers. Construction loans involve
additional risks attributable to the fact that loan funds are advanced upon the
security of the home under construction, which is of uncertain value prior to
the completion of construction. Thus, it is more difficult to evaluate
accurately the total loan funds required to complete a project and related
loan-to-value ratios. To minimize the risks associated with construction
lending, Guaranty limits loan amounts to 80.0% of appraised value, in addition
to its usual credit analysis of its borrowers. Guaranty also obtains a first
lien on the security property as security for its construction loans.
Commercial Real Estate Lending
Guaranty also originates commercial real estate loans. These loans are
secured by various types of commercial real estate, including multi-family
residential buildings, commercial buildings and offices, small shopping centers
and churches. At September 30, 1996, commercial real estate aggregated $7.4
million or 8.2% of Guaranty's gross loans. Guaranty's commercial real estate
loans have been made at interest rates that adjust based on yields for one-year
U.S. Treasury securities, with a 2% annual cap on rate adjustments and a 6% cap
on interest rates over the life of the loan. Beginning in September 1996, the
interests rates on commercial real estate loans, in most cases, have been tied
to the prime lending rate. Typically, Guaranty charges fees ranging from 1% to
2% on these loans. Commercial real estate loans made by Guaranty generally
amortize over 15 to 25 years and may have a call provision of 3 or 5 years.
Guaranty's commercial real estate loans are secured by properties in its market
area.
In its underwriting of commercial real estate, Guaranty may lend, under
federal regulation, up to 100% of the security property's appraised value,
although Guaranty's loan to original appraised value ratio on such properties is
80% or less in most cases. Commercial real estate lending entails significant
additional risk, compared with residential mortgage lending. Commercial real
estate loans typically involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Additionally, the payment experience
on loans
-43-
secured by income producing properties is typically dependent on the successful
operation of a business or a real estate project and thus may be subject, to a
greater extent, to adverse conditions in the real estate market or in the
economy generally. Guaranty's commercial real estate loan underwriting criteria
require an examination of debt service coverage ratios, the borrower's
creditworthiness and prior credit history and reputation, and Guaranty generally
requires personal guarantees or endorsements of borrowers. Guaranty also
carefully considers the location of the security property.
Consumer Lending
Federal thrift institutions are permitted to make both secured and
unsecured consumer loans reasonably incident to personal or household purposes.
In general, loans made under these investment powers may not exceed 30% of a
federally-chartered thrift institution's total assets.
Guaranty offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit, share loans, automobile loans,
deposit account loans, installment and demand loans, letters of credit, and home
equity loans. At September 30, 1996, Guaranty had consumer loans of $5.8 million
or 6.4% of gross loans. During fiscal year 1996, Guaranty increased its level of
consumer loans. Such loans were generally made to customers with which Guaranty
had an pre-existing relationships and were generally in amounts of under
$75,000. Guaranty originates all of its consumer loans in its market area and
intends to continue its consumer lending in this geographic area.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
lines of credit, or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loan such as Guaranty,
and a borrower may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral. Guaranty adds
general provisions to its loan loss allowance at the time the loans are
originated. Consumer loan delinquencies often increase over time as the loans
age.
The underwriting standards employed by Guaranty for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income for primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes an analysis
of the value of the security in relation to the proposed loan amount.
During fiscal year 1996, Guaranty began offering all types of consumer
loans due to its improved capital position. Generally these loans provide higher
yields than one-to-four-family mortgages.
Commercial Loans
In July 1996, Guaranty began making commercial loans to qualified small
businesses in its market area. Commercial business loans generally have a higher
degree of risk than residential mortgage loans, but have commensurately higher
yields. To manage these risks, Guaranty generally secures appropriate collateral
and carefully monitors the financial condition of its business borrowers.
Residential mortgage loans generally are
-44-
made on the basis of the borrower's ability to make repayment from his
employment and other income and are secured by real estate whose value tends to
be easily ascertainable. In contrast, commercial business loans typically are
made on the basis of the borrower's ability to make repayment from cash flow
from its business and are secured by business assets, such as commercial real
estate, accounts receivable, equipment and inventory. As a result, the
availability of funds for the repayment of commercial business loans may be
substantially dependent on the success of the business itself. Further, the
collateral for commercial business loans may depreciate over time and cannot be
appraised with as much precision as residential real estate. Guaranty has a
credit review and monitoring system to regularly review the cash flow of
commercial borrowers.
Properties
Guaranty's current principal office opened in December 1996 and is
located at 1658 State Farm Boulevard, Charlottesville, Virginia.
Guaranty has operated an office on Seminole Trail in Charlottesville
since 1983. Guaranty purchased this office in June 1996 at a cost of $1.15
million.
Guaranty has operated a branch in downtown Charlottesville since 1981,
and has operated its current Main Street location since 1992. The current lease
expires in 1997, subject to Guaranty's right to renew for three additional five
year periods under certain circumstances. Guaranty has operated a branch in
Charlottesville near the University of Virginia since 1985, including the
Arlington Boulevard branch that opened in 1994. The current lease for this
branch expires in 1999, subject to Guaranty's right to renew for three
additional five year periods.
In December 1996, Guaranty opened a new main office, operations center
and fourth retail branch in the Pantops area in Albemarle County, just east of
Charlottesville. Guaranty also has acquired land in Harrisonburg, Virginia, on
which it intends to build a fifth retail branch, which is expected to open in
the spring of 1997.
Employees
At September 30, 1996, Guaranty had the equivalent of 44 full-time
employees, and currently has 46 full-time employees. None of Guaranty's
employees is represented by any collective bargaining unit.
Legal Proceedings
In the course of its operations, Guaranty is a party to various legal
proceedings. Based upon information currently available, management believes
that such legal proceedings, in the aggregate, will not have a material adverse
effect on Guaranty's business, financial position, or results of operations.
Supervision and Regulation
General
As a federally chartered savings association, the Bank is subject to
regulation, supervision and periodic examination by the OTS and the FDIC. The
regulations of these agencies govern most aspects of Guaranty's business and
operations. The Bank's deposits are insured by the SAIF administered by the FDIC
to the maximum amount by law, which is currently $100,000 per depositor in most
cases.
The primary regulator for federal and state savings institutions is the
OTS, an office in the United States Department of the Treasury. The Director of
the OTS is responsible for the examination and supervision of all savings
institutions.
-45-
The OTS has authority to issue regulations, conduct examinations and
supervise the operations of savings institutions. The OTS regulatory scheme is
comprehensive and governs, among other things, capital requirements, equity
investments, affordable housing, liquidity, securities issuances, the form of
savings instruments issued by savings institutions, certain aspects of a savings
association's lending activities, including appraisal requirements, maximum loan
amounts, private mortgage insurance coverage, lending authority and
nondiscriminatory lending practices. OTS regulations also restrict transactions
between savings institutions and affiliated parties which are deemed to be a
conflict of interest under the regulations. In addition, the OTS's consent is
required prior to any major corporate reorganization, including a merger or
purchase or disposition of assets.
Deposit accounts of savings associations are insured by the SAIF, which
is administered by the FDIC. The FDIC administers insurance on deposits at all
federally insured institutions. It operates two subfunds: the Bank Insurance
Fund ("BIF") for institutions which paid FDIC insurance in the past; and the
SAIF for those institutions formerly insured by the Federal Savings and Loan
Insurance Corporation ("FSLIC"). The FDIC must segregate assessments, premiums
and administrative expenses between its two subfunds. As administrator of the
SAIF, the FDIC may prohibit any activity found to pose a serious risk of loss to
the insurance funds.
The Federal Home Loan Bank System
All savings associations that make long-term home mortgage loans are
required to be members of the regional Federal Home Loan Banks ("FHLBs"), which
in turn are overseen by the Federal Housing Finance Board. The Bank, as a member
of the Federal Home Loan Bank System, holds shares of capital stock in the FHLB
of Atlanta.
The Bank is authorized to apply for advances from the FHLB of Atlanta,
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses for advances as well as limitations on the size of advances. Long-term
advances may only be made by FHLBs for the purpose of providing funds for
residential housing finance. Additionally, at the time of origination or renewal
of a loan or advance, FHLBs must obtain a security interest in collateral in the
form of the following low-risk assets: whole loans, United States Government or
mortgage-backed securities, FHLB deposits, and certain real estate. At September
30, 1996, the Bank had $22.5 million in advances from the FHLB of Atlanta.
Federal Reserve System
The Board of Governors of the Federal Reserve System ("FRB") requires
savings associations to maintain reserves against their transaction accounts
(primarily NOW accounts) and non-personal time deposits. FRB regulations
generally exempt from reserve requirements the first $3.8 million in net
transaction accounts. Reserves of 3% (subject to adjustment by the FRB) must be
maintained against net transaction accounts from $3.8 to $46.8 million, and a
reserve of $1,404,000 plus 10% against that portion of total transaction
accounts in excess of $46.8 million must be maintained. The FRB regulations do
not presently require reserves to be maintained on time deposits and savings
accounts.
The balances on deposits to meet the reserve requirements imposed
by the FRB may also be used to satisfy the liquidity requirements that are
imposed by the OTS. See "-Liquidity Requirements."
Capital Requirements
OTS regulations set the minimum risk-based capital requirements at 8%
of risk-weighted assets, the minimum leverage capital requirements at 3% of
adjusted total assets and the minimum tangible capital requirements at 1.5% of
adjusted total assets.
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Under OTS regulations, total capital consists of two types of capital:
"core capital elements" and "supplementary capital elements." Core capital
consists of common and qualifying preferred shareholders' equity, minority
interests in the equity accounts of fully consolidated subsidiaries,
nonwithdrawable accounts and certain pledged deposits and certain qualifying
supervisory goodwill. Supplementary capital, with certain limitations, may
consist of the allowance for loans and lease losses (limited to 1.25% of a
savings bank's risk-weighted assets), perpetual preferred stock, term
subordinated debt and intermediate term preferred stock, certain hybrid capital
instruments, and mandatory convertible debt securities. The maximum amount of
supplemental capital that may be included in an institution's qualifying capital
is limited to 100% of core capital.
Tangible capital includes core capital less qualifying supervisory
goodwill and other intangible assets, plus purchased mortgage servicing rights.
Risk-weighted assets equal total assets plus consolidated off-balance sheet
items where each asset or item is multiplied by a risk-weight assigned by the
OTS. Off-balance sheet items are converted to on-balance sheet equivalents and
then assigned a risk-weight.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating the risk-based capital requirement. As a
result, such an institution will be required to maintain additional capital in
order to comply with the risk-based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio value exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease (with
certain minor exceptions) in interest rates. The interest rate risk component
will be calculated on a quarterly basis, as one-half of the difference between
an institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject to a two quarter "lag" time between the reporting date of the data
used to calculate an institution's interest rate risk and the effective date of
each quarter's interest rate risk component. However, in October 1994 and March
1995, the Director of the OTS indicated that it would waive the capital
deductions for institutions with a greater that "normal" risk until the OTS
publishes an appeals process, which the OTS expects will occur shortly.
Management of Guaranty does not believe that the OTS' adoption of an interest
rate risk component to the risk-based capital requirement will have an adverse
affect on Guaranty if it becomes effective in its current form.
Higher individual capital requirements may be imposed by the OTS on
savings institutions on a case-by-case basis if the OTS determines it to be
necessary or appropriate, pursuant to the regulations and guidelines issued by
the OTS for this purpose.
For a discussion of the Bank's risk-based and capital ratios, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Liquidity and Capital Resources."
Failure to Meet Capital Requirements
Federal law establishes five capital categories for insured depository
institutions: (a) Well Capitalized; (b) Adequately Capitalized; (c)
Undercapitalized; (d) Significantly Undercapitalized; and (e) Critically
Undercapitalized. Regulations, which became effective December 19, 1992, define
the relevant capital measures for the four highest capital categories to be the
ratio of total Tier 1 capital to risk-weighted assets (the total risk-based
ratio), the ratio of Tier 1 to risk-weighted assets (the Tier 1 risk-based
ratio) and the ratio of Tier 1 capital to total average assets (the leverage
ratio).
Well-Capitalized means a financial institution with a total risk-based
ratio of 10% or more, a Tier 1 risk-based ratio of 6% or more and a leverage
ratio of 5% or more, so long as the institution is not subject to an order,
written agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital
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level for any capital measure. Adequately Capitalized means a total risk-base
ratio of 8% or more, a Tier 1 risk-based ratio of 4% or more and a leverage
ratio of 4% or more (3% or more if the institution has received the highest
corporate rating in its most recent report of examination) and does not meet the
definition of a Well-Capitalized institution. Undercapitalized means a financial
institution with a total risk-based ratio of less than 8%, a Tier 1 risk-based
ratio of less than 4% or a leverage ratio of less than 4%. Significantly
Undercapitalized means a financial institution with a total risk-based ratio of
less than 6%, a Tier 1 risk-based ratio of less than 3% or a leverage ratio of
less than 3%. Critically Undercapitalized means a financial institution with a
ratio of tangible equity to total assets that is equal to or less than 2%. At
June 30, 1996, Guaranty was Well Capitalized.
Undercapitalized institutions are subject to the following mandatory
supervisory actions: (1) increase monitoring and periodic review of the
institution's efforts to restore its capital; (2)requirements that the
institution submit a capital restoration plan, which must include (a) the steps
the institution will take to become adequately capitalized, (b) the levels of
capital to be attained during each year in which the plan will be in effect, (c)
how the institution will comply with restrictions or requirements imposed on its
activities, and (d) the types and levels of activities in which the institution
will engage; (3) restrictions on growth of the institution's total assets; and
(4) limitations on the institution's ability to make any acquisition, open any
new branch offices or engage in any new line of business.
Significantly Undercapitalized institutions and Undercapitalized
institutions that fail to submit and implement adequate capital restoration
plans and subject to the four mandatory provisions applicable to
Undercapitalized institutions and, in addition, will be required to do or comply
with one or more of the following: (1) sell enough additional capital, including
voting shares, to bring the institution to an Adequately Capitalized level; (2)
restrict transactions with affiliates; (3) restrict interest rates paid on
deposits to the prevailing rates in the region where the institution is located;
(4) restrict asset growth or reduce total assets; (5) terminate, reduce or alter
any activity (including any activity conducted by a subsidiary of the
institution) determined by banking regulatory agency to pose an excessive risk
to the institution; (6) hold a new election for the institution's board of
directors; (7) dismiss directors or senior officers and/or employ new officers,
subject to agency approval; (8) cease accepting deposits from correspondent
depository institutions; (9) divest or liquidate any subsidiary that is in
danger of becoming insolvent and poses a significant risk to the institutions or
that is likely to cause significant dissipation of the institution's assets or
earnings; or (10) any Bank that controls the institution may be required to
divest itself of any affiliate of the institution (other than another depository
institution) if the federal banking agency for the holding Bank determines that
the affiliate is in danger of becoming insolvent and poses a significant risk to
the institution or is likely to cause significant dissipation of the
institution's assets or earnings.
In addition, Significantly Undercapitalized institutions are prohibited
from paying any bonus or raise to a senior executive officer without prior
agency approval. No such approval will be granted to an institution which is
required to but has failed to submit an acceptable restoration plan.
A Critically Undercapitalized institution faces even more severe
restrictions. In addition to those steps that can be taken with respect to
Significantly Undercapitalized institutions, a Critically Undercapitalized
institution must be placed in conservatorship or receivership within 90 days of
becoming Critically Undercapitalized, unless the appropriate federal banking
agency determines, with FDIC concurrence, that other action would be more
appropriate. In addition, Critically Undercapitalized institutions are
prohibited from taking a number of actions, including making payments on
subordinated debt, financing highly leveraged transactions, adopting charter or
by-laws amendments, materially changing accounting methods, or paying excessive
compensation or bonuses, without obtaining prior written regulatory approval.
The OTS must prohibit any asset growth by savings institutions not in
compliance with capital standards, except for specific growth expressly approved
according to certain guidelines. In addition, through enforcement proceedings or
otherwise, the OTS may require any savings institution not in compliance with
the minimum capital requirements to take one or more of the following corrective
actions, which include: (1) increasing the
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amount of regulatory capital to a specified level; (2) reducing interest payable
on savings account; (3) ceasing or limiting acceptance of new accounts; (4)
ceasing or limiting lending or the making of a particular type of category of
loan; (5) ceasing or limiting the purchase of loans or the making of specified
other investments; (6) limiting operational expenditures; (7) increasing liquid
assets; or (8) taking such other actions as the OTS may deem appropriate for the
safety and soundness of the institution, its depositors and investors.
Failure to meet OTS capital requirements can serve as a basis for
placing an institution in conservatorship or in receivership. Failure to satisfy
an individual capital ratio constitutes a legal basis for a capital directive
against an institution, which may contain those restrictions the OTS deems
appropriate. A savings institution may apply for an exemption from the
provisions of a capital directive, which must be accompanied by a capital plan
acceptable to the OTS. The OTS District Director will treat as an unsafe and
unsound practice any material failure by a savings association to comply with
any plan, regulation or written agreement undertaken to comply with these
requirements.
Restrictions on Capital Distributions
Because Guaranty conducts no business, except through the Bank,
substantially all of Guaranty's ability to pay dividends depends on dividends
received from the Bank. Savings institutions, such as the Bank, have limitations
imposed on all "capital distributions," including cash dividends, payments to
repurchase or otherwise acquire its shares, payments to shareholders or another
institution in a cash-out merger and other distributions charged against
capital. OTS regulations generally create a safe harbor for specified levels of
capital distribution by most savings institutions meeting at least their minimum
capital requirements, so long as such institutions notify the OTS and receive no
objection to the distribution from the OTS. Savings institutions which make
distribution that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distribution.
Liquidity Requirements
The OTS requires savings institution to maintain for each calendar
month an average daily balance of "liquid assets" (cash, certain time deposits,
bankers' acceptances, certain corporate obligations and specified United States
Government, state or federal agency obligations) of not less than 5% of the
average daily balance of the institution's "liquidity base" (net withdrawable
savings deposits plus short-term borrowings) during the preceding calendar
month. In addition, savings associations must maintain an average daily balance
of short-term liquid assets of not less than 1% of the average daily balance of
its liquidity base during the preceding calendar month.
For the month ending September 30, 1996, the Bank's average liquidity
ratio was 5.48%.
Investment and Lending Restrictions
Under the Home Owner's Act of 1933, as amended, the Bank is subject to
limitations on the nature and amount of some types of investments and loans it
may make. Under the regulations of the OTS, savings institutions are permitted
to invest up to 30% of assets in state housing corporations, provided that such
loans are secured by an insured first lien on improved real estate which is
insured under the National Housing Act, as amended. The ability of savings
institutions to invest in the accounts of commercial banks of other savings
institutions, and debt securities hedged with a firm forward commitment, is
limited.
Federal law imposes on savings institutions loans-to-one-borrower
limitations which are also applicable to national banks. Subject to certain
exceptions, savings institutions may lend up to 15% of the institution's
unimpaired capital and unimpaired surplus to a single borrower, plus an
additional 10% of unimpaired capital and
-49-
unimpaired surplus for loans fully secured by readily marketable collateral.
Readily marketable collateral does not include real estate.
A savings institution authorized to make loans in excess of 90% of
value on the security of real estate comprising single-family dwellings or
dwelling units for four or fewer families may do so only if such loans are
insured or guaranteed by various government agencies or if such loans comply
with real estate lending standards as set forth in written policies adopted and
maintained by the institution. The policies must establish appropriate limits
and standards for extensions of credit that are secured by liens on or interest
in real estate, or that are made for the purpose of financing permanent
improvements to real estate. This does not apply to loans to facilitate the sale
of real estate owned as a result of foreclosure, or acquired by deed in lieu of
foreclosure.
Real estate lending policies adopted by a savings and loan must, among
other things, reflect safe and sound banking practices, be appropriate to the
size, nature and scope of the operations of the institution, and be reviewed and
approved by the board of directors at least annually. The policies must
establish loan portfolio diversification standards, prudent underwriting
standards, loan administration procedures and documentation, approval and
reporting requirements to adequately monitor compliance.
Qualified Thrift Lender Test
All savings associations, including the Bank are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (which consists of total assets less intangibles, properties
used to conduct the savings association's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a monthly
average for nine out of every twelve months on a rolling basis.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an association that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the association is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company, and become subject to all restrictions on
bank holding companies. At September 30, 1996, the Bank met the test and has
always met the test since its effectiveness. See " - Holding Company
Regulation."
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions are restricted to a percentage of the association's capital.
Affiliates of Guaranty include any company which is under common control. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statues also impose restriction on
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loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Deposit Insurance
Federal law requires the FDIC to establish a risk-based assessment
system for calculating a depository institution's semi-annual deposit insurance
premiums. Under regulations adopted by the FDIC, the risk which each insured
depository institution poses to its insurance fund is determined on the basis of
capital and supervisory evaluations. For purposes of the risk-based assessment
system, insured institutions are divided into three main capital groups: Well
Capitalized, Adequately Capitalized and Undercapitalized. Each of the three
capital categories are further subdivided by three supervisory subgroups:
healthy, supervisory concern and substantial supervisory concern. Each
institution is assigned an assessment based on its placement in the resulting
nine cell matrix. Assessments range from $0.23 per $100 of deposits for healthy,
Well Capitalized institutions to $0.31 per $100 of deposits for Undercapitalized
institutions for which there is substantial supervisory concern.
This risk-based system includes factors intended to assess the
probability that the deposit insurance fund will incur a loss with respect to
the institution. In determining the probability of loss, different categories
and concentrations of assets and liabilities (both insured and uninsured,
contingent and noncontingent) and any other factors that the FDIC determines are
relevant to assessing such probability will be taken into consideration.
Guaranty's deposit insurance premium is currently $0.26 per $100 of deposits.
The Administration and Congress have resolved the premium difference
through a one-time special assessment to recapitalize the SAIF. The
recapitalization of SAIF resulted in an assessment against the Bank of
approximately $225,000 on an after tax basis, based upon deposit balances as of
March 31, 1995 and was charged to earnings in the quarter ended September 30,
1996. The Bank expects its deposit insurance premiums to be reduced from current
levels, beginning in 1997.
Holding Company Regulation
Guaranty is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, Guaranty is required to file with the
OTS and is subject to regulation and examination by the OTS. In addition, the
OTS has enforcement authority over Guaranty and its non-savings association
subsidiaries which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
relation and oversight is intended primarily for the protection of the
depositors of the Bank and not for stockholders of Guaranty.
As a unitary savings and loan holding company, Guaranty generally is
not subject to activity restrictions, provided the Bank satisfies the QTL test.
If Guaranty acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of Guaranty and any of its subsidiaries (other than the Bank or any
other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
Guaranty must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisition are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
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Charter Conversion
Guaranty and the Bank have filed applications with the Virginia State
Corporation Commission, the Board of Governors of the Federal Reserve System and
the FDIC pursuant to which the Bank would convert from a federally-chartered
savings association to a Virginia-chartered, Federal Reserve member commercial
bank. In connection with such applications, Guaranty and the Bank will be
examined by the Bureau of Financial Institutions of the Virginia State
Corporation Commission and the Federal Reserve Bank of Richmond. There can be no
assurance that such applications will be approved or, if approved, that such
applications will not include conditions that would require Guaranty to modify
substantially its balance sheet or operations. Guaranty does expect that such
applications, if approved, will be conditioned on the sale of substantially all
of the shares offered hereby. Guaranty also expects that the federal and state
banking regulators will seek a commitment from Guaranty to reduce its ratio of
loans-to-deposits, which was 109.5% at September 30, 1996. Guaranty already is
in the process of reducing such ratio and does not expect that such requirement
will materially affect its operations.
After the charter conversion, Guaranty will be subject to the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
will be subject to regulation by Federal Reserve with respect to its operations
as a bank holding company. The Bank also will be subject to regulation by the
Bureau of Financial Institutions of the Virginia State Corporation Commission,
the Federal Reserve, and the Federal Deposit Insurance Corporation. The powers
of state member banks and bank holding companies differ from those of federally
chartered savings associations. However, Guaranty does not anticipate any
material changes in its operations as a result of the changes in applicable laws
and regulations that will result from the charter conversion.
As a federally chartered savings association, the Bank may not hold
secured or unsecured loans for commercial, corporate, business or agricultural
purposes in excess of 20 percent of its assets. The sum of consumer loans and
investments in certain corporate obligations may not exceed 35 percent of the
Bank's assets. The Bank also is required to meet a qualified thrift lender test,
which generally requires the Bank to invest the majority of its assets in
mortgage loans. After a charter conversion, there would be no such limits on the
commercial and consumer lending authority of the Bank, nor would the Bank be
subject to the qualified thrift lender test. Recently, the Bank has emphasized
and expanded its small business and consumer lending programs. As its small
business and consumer lending programs evolve, the Bank expects to reduce its
reliance on permanent residential mortgage loans . While loans secured by real
estate are expected to remain an important part of the Bank's business, it
expects that in several years its loan portfolio will more closely resemble that
of a commercial bank than a thrift. Consequently, the Bank believes that
operating under a commercial bank charter will better suit the Bank's business
plan than will the federal savings association charter.
The Bank has the power to engage in certain activities through
subsidiaries, such as real estate development, that are unavailable to a Federal
Reserve member bank. However, the Bank is not engaged in any such activities and
does not view the loss of those powers as a material disadvantage of operating
under a commercial bank charter.
Recent Legislation and Regulations
For tax years beginning prior to January 1, 1996, savings banks that
met certain definitional tests and other conditions prescribed by the Internal
Revenue Code were allowed, within limitations, to deduct from taxable income an
allowance for bad debts using the "percentage of taxable income" method. Section
1616 of the Small Business Job protection Act of 1996 repealed the percentage of
taxable income method of computing bad debt reserves, and requires the recapture
into taxable income of "excess reserves", on a ratable basis over the next 6
years. Excess reserves are defined, in general, as the excess of the balance of
the tax bad debt reserve (using the percentage of taxable income method) as of
the close of the last tax year beginning before January 1, 1996 over the balance
of the reserve as of the close of the last tax year beginning before January 1,
1988. The recapture of the reserves is deferred if the Bank meets the
"residential loan requirement" exception during either or both of the first
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two years beginning after December 31, 1995. The residential loan requirement is
met, in general, if the principal amount of residential loans made by the Bank
during the year is not less than the Bank's "base amount." The base amount is
defined as the average of the principal amounts of residential loans made during
the six most recent tax years beginning before January 1, 1996.
As a result of this law change, Guaranty must recapture into taxable
income approximately $387,000 ratably over the next 6 years ($64,500 per year),
beginning with the year ending June 30, 1997. The related income tax expense
will be approximately $132,000 ($22,000 per year over the next 6 years). If the
residential loan requirement exception is met, as discussed above, the income
will be includable over the 3rd through 8th years following the year ended June
30, 1996.
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MANAGEMENT
The following information sets forth the names, ages, principal
occupations and business experience for all nominees and incumbent directors.
The date shown for first election as a director in the information below
represents the year in which the nominee or incumbent director was first elected
to the Board of Directors of Guaranty or previously to the Board of Directors of
the Bank. Unless otherwise indicated, the business experience and principal
occupations shown for each nominee or incumbent director has extended five or
more years.
Name Age Position Director Since
---- --- -------- --------------
Douglas E. Caton 54 Chairman of the Board 1981
Harry N. Lewis 69 Vice Chairman of the Board 1976
Thomas P. Baker 50 President, Chief Executive 1990
Officer and Director
Charles R. Borchardt 64 Director 1981
Henry J. Browne 64 Director 1976
Robert P. Englander 77 Director 1976
John R. Metz 59 Director 1989
James R. Sipe, Jr. 41 Director 1996
Oscar W. Smith, Jr. 66 Director 1976
Kathleen M. Focht 36 Chief Financial Officer
Rita J. Lynch 42 Vice President - Retail Operations
Donna W. Richards 33 Vice President - Mortgage Lending
Rex L. Smith 38 Vice President - Commercial Lending
Douglas E. Caton has been Chairman of Guaranty's Board of Directors
since 1989. Mr. Caton has been a commercial real estate developer and President
of Management Services Corp., a real estate management company since 1972. Mr.
Caton is a member of the Virginia State Bar and is a Major General in the United
States Army Reserve.
Harry N. Lewis has served as the Vice Chairman of Guaranty's Board of
Directors since 1976. Mr. Lewis has been President of Lewis Insurance Agency,
Inc., an insurance sales company in Charlottesville, Virginia, since July 1952.
He has served as the Vice Chairman of Guaranty's Board of Directors since 1990.
Mr. Lewis is an alumnus of the Colgate Darden Graduate School of Business
Administration and is a member of the Board of Directors of the United Way. He
is also a member of the Board of Directors of Keller & George and is the past
president of the Central Virginia Chapter of the C.P.C.U.
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Thomas P. Baker has served as the President and Chief Executive Officer
of Guaranty since January 1, 1990.
Charles R. Borchardt is an oral surgeon practicing in Charlottesville,
Virginia, and was President of Drs. Borchardt & Williams, Inc. from 1963 to
1993.
Henry J. Browne is an architect in private practice with studios in
Keswick, Virginia and Boca Grande, Florida. He was President of Browne, Eichmon,
Dalgliesh, Gilpin & Paxton, an architecture firm in Charlottesville, Virginia,
from March 1958 to April 1996. Mr. Browne is a past director of Farmington
Country Club, past president of the Virginia Chapter of the American Institute
of Architects and past president of Downtown Charlottesville, Inc.
Robert P. Englander is President of the Englander Agency, a life
insurance company in Charlottesville, Virginia. Mr. Englander has been an
insurance agent since 1949.
John R. Metz has been a pharmacist at Martha Jefferson Hospital in
Charlottesville, Virginia, since October 1967. Mr. Metz is a member of the Board
of Directors of the Virginia Pharmaceutical Association Research and Education
Foundation.
James R. Sipe, Jr. is an associate broker with Prudential Funkhouser
& Associates, a real estate sales company in Harrisonburg, Virginia.
Oscar W. Smith, Jr. is President of K-B Management Co.,
Charlottesville, Virginia. Mr. Smith is a director of Smith/Eastman, Inc. and is
the past president of the Albemarle County Rotary Club. He is a master mason and
the past president of the University of Virginia Touchdown Club.
Kathleen M. Focht, was appointed Chief Financial Officer of Guaranty
in April 1995. Ms. Focht has been Secretary and Treasurer of Guaranty since
October 1989. Ms. Focht served as Assistant Vice President and Controller of
Guaranty from 1988 until 1991, when she was promoted to Vice President and
retained her position as Controller.
Rita J. Lynch, was appointed Guaranty's Vice President of Retail
Operations in May 1995. From October 1989 until May 1995, Ms. Lynch served as
Guaranty's Manager of Retail Services.
Donna W. Richards, was appointed Guaranty's Vice President of Mortgage
Lending in April 1995. Ms. Richards has been employed by Guaranty since April
1993 and has served in the past as Manager of Loan Originations and Loan
Officer. From December 1991 to April 1993, she was a Senior Loan Processor for
Virginia Federal.
Rex L. Smith, was appointed Guaranty's Senior Vice President -
Commercial Lending, in September 1996. From March 1993 until August 1996, he was
Vice President/Senior Business Manager of Crestar Financial Corporation. From
September 1991 to March 1993, he was Division Manager/Acquisition Analyst of
Virginia Capital Group.
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Security Ownership of Management
The following table sets forth information as of December 11, 1996
regarding the number of shares of Common Stock beneficially owned by all
directors and by all directors and executive officers as a group. Beneficial
ownership includes shares, if any, held in the name of the spouse, minor
children or other relatives of the nominee living in such person's home, as well
as shares, if any, held in the name of another person under an arrangement
whereby the director or executive officer can vest title in himself at once or
at some future time.
Common Stock Percentage of
Name Beneficially Owned Class
---- ------------------ -----
Directors
Thomas P. Baker (1) 15,640 1.69%
Charles R. Borchardt 23,564 2.56
Henry J. Browne 31,662 3.44
Douglas E. Caton 252,840 27.51
Robert P. Englander 9,760 1.06
Harry N. Lewis 4,888 .53
John R. Metz 13,192 1.44
James R. Sipe, Jr. 100 .01
Oscar W. Smith, Jr. 19,234 2.09
All present executive
officers and directors
as a group (12 Persons) 371,860 40.07%
- --------------------
(1) Includes beneficial ownership of 4,000 shares issuable upon the
exercise of stock options exercisable within 60 days of December
11, 1996.
Security Ownership of Certain Beneficial Owners
Douglas E. Caton, 4 Deer Park, Earlysville, Virginia owns 252,840
shares or 27.51% of Common Stock of Guaranty. To the knowledge of Guaranty, no
other person owns 5% or more of Common Stock of Guaranty.
-56-
Executive Compensation
Summary of Cash and Certain Other Compensation
The following table shows, for the fiscal years ended June 30, 1994,
1995 and 1996, the cash compensation paid by Guaranty, as well as certain other
compensation paid or accrued for those years, to the named Executive Officer in
all capacities in which he served:
Summary Compensation Table
Annual Compensation(1)
Name and Principal Position Year Salary Bonus All Other Compensation (2)
--------------------------- ---- ------ ----- ---------------------------
Thomas P. Baker 1996 $113,700 -0- $1,137
President and 1995 113,700 -0- 1,137
Chief Executive Officer 1994 113,700 -0- 1,421
- --------------------
<FN>
(1) All benefits that might be considered of a personal nature did not exceed
the lesser of $50,000 or 10% of total annual salary and bonus for the officer
named in the table.
(2) Amounts reflect Guaranty's matching contribution under its Section 401(k)
retirement plan.
</FN>
Stock Option Grants
Guaranty's named Executive Officer was not granted stock options or
stock appreciation rights during the fiscal year ended June 30, 1996.
Option Exercises and Holdings
Set forth in the table below is information concerning each exercise of
stock options during the fiscal year ended June 30, 1996 by the named Executive
Officer and the year end value of unexercised options.
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Options/SAR Value
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs In-The-Money Options/SARs
at FY-End(#) (1) at FY-End ($) (2)
---------------- -------------------------
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------ ----------- ------------- ----------- -------------
Thomas P. Baker 3,600 11,700 14,000 -0- 41,500 -0-
- --------------------
<FN>
(1) Each of these options relates to Common Stock.
(2) These values are based on $7.50, the closing price of Common Stock on June 30, 1996.
</FN>
Directors' Fees
Directors, excluding directors who are officers of Guaranty, received
fees of $450 for each meeting of the Board of Directors attended and $300 for
each Compensation, Planning and Audit Committee meeting attended during
-57-
fiscal 1996. Mr. Caton, who is an ex officio of all Committees and devotes
additional time to Guaranty's affairs as Chairman of the Board of Directors,
received a fee of $25,200 in the fiscal year ended June 30, 1996 in lieu of any
fees for attending Board of Directors and Committee meetings.
Employment Agreements
Guaranty and Thomas P. Baker are parties to an employment agreement
that provides for Mr. Baker to serve as President and Chief Executive Officer of
Guaranty. The agreement is for a three year period ending June 30, 1997 and
provides for a base salary of $105,000, which the Board of Directors may
increase. If Mr. Baker's employment is terminated for reasons other than cause
or if substantially all of Guaranty's assets and liabilities are transferred to
another financial institution and Mr. Baker either does not become an employee
of the transferee or his employment by the transferee terminates for any reason
within six months of the transfer, he will be entitled to receive severance pay
equal to one-half of his annual base salary in effect at the time.
If termination of employment due to a change in control had occurred in
fiscal 1996, Mr. Baker would be entitled to severance payments amounting to
approximately $56,850.
Transactions with Management
Some of the directors and officers of Guaranty are at present, as in
the past, customers of Guaranty and, Guaranty has had, and expects to have in
the future, banking transactions in the ordinary course of its business with
directors, officers, principal shareholders and their associates, on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with others.
These transactions do not involve more than the normal risk of collectibility or
present other unfavorable features. The largest aggregate outstanding balance of
loans to directors, executive officers and their associates, as a group in the
fiscal year ended June 30, 1996 was approximately $491,276. Such balances
totaled $266,621 at June 30, 1996, or 4.2% of Guaranty's equity capital at that
date.
There are no legal proceedings to which any director, officer,
principal shareholder or associates is a party that would be material and
adverse to the Bank.
DESCRIPTION OF CAPITAL STOCK
Guaranty's authorized capital stock consists of 4,000,000 shares of
Common Stock, par value $1.25 per share ("Common Stock") and 500,000 shares of
preferred stock. Guaranty had 919,168 issued and outstanding shares of Common
Stock held by 614 stockholders of record, at December 11, 1996. All outstanding
shares of Common Stock are fully paid and nonassessable. Guaranty's Board of
Directors has not authorized the issuance of any class or series of preferred
stock.
Common Stock
Holders of shares of Common Stock are entitled to receive dividends
when and as declared by the Board of Directors out of funds legally available
therefor, provided, however, that the payment of dividends to holders of shares
of Common Stock is subject to the preferential dividend rights of any preferred
stock that the Board of Directors authorizes for issuance in the future.
In the event of any liquidation, dissolution or winding up of Guaranty,
the holders of Common Stock (and the holders of any class or series of stock
entitled to participate with the Common Stock in the distribution of assets)
shall be entitled to receive, in cash or in kind, the assets of Guaranty
available for distribution remaining after (i) payment or provision for payment
of Guaranty's debts and liabilities and (ii) distributions or provision for
-58-
distributions to holders of any class or series of stock having preference over
the Common Stock in the liquidation, dissolution or winding up of Guaranty.
Holders of Common Stock are entitled to one vote per share on all
matters submitted to stockholders. There are no cumulative voting rights in the
election of directors. Guaranty's stockholders do not have preemptive rights to
purchase additional shares of any class of Guaranty's capital stock. Holders of
Common Stock have no conversion or redemption rights. The shares of Common Stock
presently outstanding are, and the Common Stock to be issued in connection with
the Offerings will be when issued, fully paid and nonassessable. Registrar and
Transfer Company is the transfer agent and registrar for the Common Stock.
Preferred Stock
Guaranty's Articles of Incorporation authorize the Board of Directors
to determine the preferences, limitations and relative rights of any class or
series of preferred stock before the issuance of any shares of that class or
series. To date, Guaranty's Board of Directors has not authorized the issuance
of any class or series of preferred stock.
Limitations on Liability of Officers and Directors
Limitations on Liability. The Articles of Incorporation of Guaranty
provide that to the full extent that Virginia law permits the limitation or
elimination of the liability of directors and officers, they will not be liable
to Guaranty or its shareholders for any money damages in excess of one dollar.
At this time Virginia law does not permit any limitation of liability if a
director engages in willful misconduct or a knowing violation of the criminal
law or any federal or state securities law.
To the fullest extent permitted by Virginia law, Guaranty's Articles of
Incorporation require it to indemnify any director or officer of Guaranty who is
made a party to any proceeding because he was or is a director or officer of
Guaranty against any liability, including reasonable expenses and legal fees,
incurred in the proceeding. Under Guaranty's Articles of Incorporation,
"proceeding" is broadly defined to include pending, threatened or completed
actions of all types, including actions by or in the right of Guaranty.
Similarly, "liability" is defined to include, not only judgments, but also
settlements, penalties, fines and certain excise taxes. Guaranty's Articles of
Incorporation also provide that Guaranty may, but is not obligated to, indemnify
its other employees or agents. Guaranty must indemnify any person who is or was
serving at the written request of Guaranty as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, to the full extent provided by Virginia law. The indemnification
provisions also require Guaranty to pay reasonable expenses incurred by a
director or officer of Guaranty in a proceeding in advance of the final
disposition of any such proceeding, provided that the indemnified person
undertakes to repay Guaranty if it is ultimately determined that such person was
not entitled to indemnification. At this time, Virginia law does not permit
indemnification against willful misconduct or a knowing violation of the
criminal law.
The rights of indemnification provided in Guaranty's Articles of
Incorporation are not exclusive of any other rights which may be available under
any insurance or other agreement, by vote of shareholders or disinterested
directors or otherwise. In addition, the Articles of Incorporation authorize
Guaranty to maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of Guaranty, whether or not Guaranty would have the
power to provide indemnification to such person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
Guaranty pursuant to the foregoing provisions, Guaranty has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
-59-
UNDERWRITING
The Underwriter, McKinnon & Company, Inc., 555 Main Street, Norfolk,
Virginia, has agreed, subject to the terms and conditions contained in an
underwriting agreement with Guaranty, to sell as selling agent for Guaranty on a
best efforts basis, 500,000 Shares. Guaranty reserves the right to increase the
total number of shares offered by not more than 75,000 shares. The Underwriter
is not obligated to purchase the Shares if they are not sold to the public.
The Underwriter has informed Guaranty that it proposes to offer the
Shares as selling agent for Guaranty, subject to prior sale, when, as and if
issued by Guaranty, in part to the public at the Public Offering price, and in
part through certain selected dealers to customers of such selected dealers at
the Public Offering price, for which each selected dealer will receive a
commission of $.42 for each Share that it sells. The Underwriter reserves the
right to reject any order for the purchase of Shares through it in whole or in
part.
The Public Offering is not contingent upon the occurrence of any event
or the sale of a minimum or maximum number of Shares. Funds received by the
Underwriter from investors in the Public Offering will be deposited with and
held by the Escrow Agent in a noninterest-bearing escrow account until the
closing of the Public Offering. Closing is expected to occur on or about January
29, 1997.
Among the factors considered in determining the Offering Price were the
market price of Guaranty Common Stock, the history and the prospects for
Guaranty, its past and present earnings and trend of such earnings, the
prospects for future earnings, the current performance and prospects of the
banking and thrift industry in which it competes, the general condition of the
securities market at the time of the Public Offering, and the prices of equity
securities of comparable savings and loans and savings and loan holding
companies.
The directors of Guaranty have agreed that they will not sell, contract
to sell, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exchangeable for any shares of Common Stock for a period of
120 days after the date of the commencement of the Offerings without the prior
written consent of the Underwriter Officers of Guaranty who are not directors
have not entered into any agreements restricting sales of their Common Stock in
Guaranty. The Underwriter may from time to time be a customer of, engage in
functions with, and perform services for Guaranty in the ordinary course of
business.
Guaranty has agreed to indemnify the Underwriter against certain
liabilities, including liability under the Securities Act of 1933, as amended.
Guaranty has agreed to pay the Underwriter's legal fees, which will not exceed
$10,000, and to reimburse the Underwriter up to $1,000 for costs of
informational and due diligence meetings.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for Guaranty by Williams, Mullen, Christian & Dobbins of Richmond,
Virginia. Certain legal matters are being passed upon for the Underwriter by
Williams, Mullen, Christian & Dobbins.
-60-
EXPERTS
The financial statements and schedules included in this Prospectus and
in the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in auditing and accounting.
-61-
GUARANTY FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets as of June 30, 1996 and 1995, and
September 30, 1996 (Unaudited) F-3
Statements of Operations for the Years Ended June 30, 1996, 1995 and 1994 and
for the Three Months Ended
September 30, 1996 and 1995 (Unaudited) F-4
Statements of Stockholders' Equity for the Years Ended June 30, 1996, 1995 and
1994 and for the Three Months
Ended September 30, 1996 (Unaudited) F-6
Statements of Cash Flows for the Years Ended June 30, 1996, 1995 and 1994 and
for the Three Months Ended
September 30, 1996 and 1995 (Unaudited) F-7
Summary of Accounting Policies F-10
Notes to Consolidated Financial Statements F-20
F-1
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Guaranty Financial Corporation
Charlottesville, Virginia
We have audited the consolidated balance sheets of Guaranty Financial
Corporation and subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Guaranty Financial Corporation and subsidiary as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1996 in conformity with generally accepted
accounting principles.
As explained in the Summary of Accounting Policies, Guaranty Financial
Corporation adopted Statement of Financial Accounting Standards No. 122 and
Statement of Financial Accounting Standards No. 109 in the years ended June 30,
1996 and 1994, respectively.
BDO Seidman, LLP
Richmond, Virginia
August 22, 1996
F-2
- --------------------------------------------------------------------------------
September 30, June 30,
------------------- -----------------------------------
1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Cash and cash equivalents $ 6,480,144 $ 5,431,483 $ 5,752,735
Investment securities (Notes 1 and 6)
Held-to-maturity 3,529,033 3,730,589 4,732,638
Available for sale 11,415,646 9,563,605 -
Investment in Federal Home Loan Bank stock at
cost (Note 8) 1,360,200 1,360,200 1,360,200
Loans receivable, net (Notes 2, 8 and 10) 86,131,346 84,081,110 75,220,673
Accrued interest receivable 725,351 711,842 584,242
Real estate owned 130,106 32,898 122,043
Deferred income taxes (Note 9) 86,284 30,000 -
Office properties and equipment, net (Note 3) 3,962,753 3,525,199 436,909
Other assets (Note 2) 1,408,327 1,693,840 1,251,543
- -----------------------------------------------------------------------------------------------------------------------------
$115,229,190 $110,160,766 $89,460,983
- -----------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Balance Sheets
September 30, June 30,
-------------------------------------
1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $ 78,655,812 $ 74,687,446 $52,460,639
Bonds payable (Notes 1 and 6) 3,005,608 3,143,844 3,980,562
Advances from Federal Home Loan Bank
(Note 8) 22,500,000 17,500,000 25,050,000
Securities sold under agreement to
repurchase (Note 1 and 7) 2,920,000 6,104,000 -
Accrued interest payable 65,202 99,297 86,279
Deferred income taxes (Note 9) - - 120,000
Prepayments by borrowers for taxes and insurance 319,224 145,730 306,346
Other liabilities 1,426,635 2,131,300 1,441,418
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 108,892,481 103,811,617 83,445,244
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11, 14 and 15)
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 12 and 13)
Preferred stock, par value $1 per share,
500,000 shares authorized, none issued - - -
Common stock, par value $1.25 per share,
4,000,000 shares authorized, 919,168,
919,168 and 915,568 shares issued and
outstanding 1,148,960 1,148,960 1,144,460
Additional paid-in capital 1,981,745 1,981,745 1,970,945
Unrealized loss on available for sale
securities (Note 1) (258,651) (279,182) -
Retained earnings - substantially restricted 3,464,655 3,497,626 2,900,334
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,336,709 6,349,149 6,015,739
- -----------------------------------------------------------------------------------------------------------------------------
$115,229,190 $110,160,766 $89,460,983
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
Three Months Ended
September 30, Year Ended June 30,
------------------- ----------------------------------
1996 1995 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Interest income
Loans $1,739,706 $1,552,845 $6,441,903 $5,897,002 $5,254,214
Mortgage-backed securities 283,458 118,305 652,639 495,620 824,082
Investment securities 136,327 127,237 498,686 383,555 554,881
Trading account assets - 17,032 23,390 12,176 50,695
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 2,159,491 1,815,419 7,616,618 6,788,353 6,683,872
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 968,313 685,642 3,132,660 2,439,585 1,939,300
Borrowings (Notes 7 and 8) 474,362 559,780 2,059,402 2,223,267 3,133,871
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,442,675 1,245,422 5,192,062 4,662,852 5,073,171
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 716,816 569,997 2,424,556 2,125,501 1,610,701
Provision (credit) for loan losses
(Note 2) 45,856 (3,944) 56,665 (9,443) 74,047
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 670,960 573,941 2,367,891 2,134,944 1,536,654
- -----------------------------------------------------------------------------------------------------------------------------
Other income
Loan fees and servicing income 148,837 138,141 610,020 651,852 400,133
Net gain (loss) on sale of loans
and securities 68,021 76,787 242,866 206 (490,706)
Service charges on checking 25,534 20,652 90,156 77,542 78,429
Other 32,007 24,347 164,090 142,034 138,244
- -----------------------------------------------------------------------------------------------------------------------------
Total other income 274,399 259,927 1,107,132 871,634 126,100
- -----------------------------------------------------------------------------------------------------------------------------
continued...
F-4
- --------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
(continued)
Three Months Ended
September 30, Year Ended June 30,
------------------- --------------------------
1996 1995 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Other expenses
Personnel (Notes 13 and 14) $294,374 $264,007 $1,013,674 $1,194,410 $ 941,866
Occupancy (Note 11) 57,804 77,982 302,139 310,114 321,456
Data processing (Note 11) 76,390 67,834 257,038 210,110 199,922
Deposit insurance premiums 53,408 50,612 190,263 195,818 172,894
BIF/SAIF premium disparity
assessments (Note 11) 346,851 - - - -
Other 167,203 135,198 724,321 619,373 545,515
- -----------------------------------------------------------------------------------------------------------------------------
Total other expenses 996,030 595,633 2,487,435 2,529,825 2,181,653
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes and cumulative effect of
change in accounting principle (50,671) 238,235 987,588 476,753 (518,899)
Provision for income taxes (Note 9) (17,700) 83,388 344,338 100,508 (234,986)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle (32,971) 154,847 643,250 376,245 (283,913)
Cumulative effect of change in
accounting for income taxes - - - - (196,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(32,971) $154,847 $ 643,250 $ 376,245 $ (479,913)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per common share
Income (loss) before cumulative
effect of change in accounting
principle $ (.04) $ .17 $ .70 $ .70 $ (.53)
Cumulative effect of change in
accounting for income taxes - - - - (.37)
- -----------------------------------------------------------------------------------------------------------------------------
$ (.04) $ .17 $ .70 $ .70 $ (.90)
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Stockholders' Equity
Unrealized
Additional Loss on Total
Common Paid-in Available for Retained Stockholders'
Stock Capital Sale Securities Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993 $ 671,460 $ 335,730 $ - $3,004,002 $4,011,192
Net loss - - - (479,913) (479,913)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 671,460 335,730 - 2,524,089 3,531,279
Stock options exercised
(Note 13) 23,000 57,200 - - 80,200
Issuance of common stock
(Note 12) 450,000 1,578,015 - - 2,028,015
Net income - - - 376,245 376,245
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 1,144,460 1,970,945 - 2,900,334 6,015,739
Stock options exercised
(Note 13) 4,500 10,800 - - 15,300
Cash dividend - - - (45,958) (45,958)
Unrealized loss on available for
sale securities (Note 1) - - (279,182) - (279,182)
Net income - - - 643,250 643,250
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 1,148,960 1,981,745 (279,182) 3,497,626 6,349,149
Unrealized loss on available
for sale securities (Note 1)
(Unaudited) - - 20,531 - 20,531
Net loss, three months ended
September 30, 1996 (Unaudited) - - - (32,971) (32,971)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996
(Unaudited) $1,148,960 $1,981,745 $(258,651) $3,464,655 $6,336,709
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
Three Months Ended
September 30, Year Ended June 30,
------------------- --------------------------------------
1996 1995 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Operating activities
Net income (loss) $ (32,971) $ 154,847 $ 643,250 $ 376,245 $ (479,913)
Adjustments to reconcile net
income (loss) to net cash
provided (absorbed) by
operating activities
Provision (credit) for loan losses 45,856 (3,944) 56,665 (9,443) 74,047
Depreciation and amortization 32,114 22,721 95,511 93,775 109,250
Amortization of deferred loan fees 30,065 27,243 (136,086) (123,528) (148,992)
Net amortization of premiums
and accretion of discounts 30,506 47,793 199,060 54,822 662,379
Loss (gain) on sale of loans (76,626) - (204,901) 60,367 (152,931)
Originations of loans held
for sale (4,363,129) - (7,203,819) (11,765,459) (23,211,491)
Proceeds from sale of loans 4,370,719 - 7,160,241 11,825,826 23,364,422
Loss (gain) on sale of
mortgage-backed securities (20,195) (42,643) - (36,418) 214,800
Originations of loans securitized - - - (5,596,082) (4,992,057)
Proceeds from sale of
mortgage-backed securities - - - 5,415,983 6,574,500
(Gain) loss on sale of securities
available for sale - - (101,685) - 155,100
(Gain) loss on disposal of office
properties and equipment - (870) (1,341) (1,806) -
Federal Home Loan Bank stock
dividends - - - - (53,600)
Loss on sale of held to
maturity securities - - - - 105,300
(Gain) loss on sale of trading
account securities 27,626 (34,144) 63,720 (24,155) 168,437
Purchases of trading account
securities (24,064,723) (24,912,731) (107,346,227) (43,113,114) (73,546,348)
Sales of trading account
securities 24,037,107 24,946,875 107,282,507 43,137,269 73,377,911
continued...
F-7
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
Three Months Ended
September 30, Year Ended June 30,
------------------- ------------------------------
1996 1995 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Operating activities (cont'd)
Changes in
Accrued interest receivable $ (13,509) $ (61,692) $ (127,600) $ (27,424) $ 44,109
Other assets 182,623 66,746 (442,298) (192,025) (310,844)
Accrued interest payable (34,095) 907 13,018 (21,951) (82,399)
Deferred income taxes (75,479) - - (87,000) (307,277)
Prepayments by borrowers
for taxes and insurance 172,726 120,797 (160,616) 181,671 (156,412)
Other liabilities (738,794) 120,533 689,882 (592,864) (531,024)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by operating activities (490,179) 452,438 479,281 (445,311) 876,967
- -----------------------------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from sales of held
to maturity securities - - - - 2,890,700
Net (increase) decrease in
loans (2,110,274) (3,870,776) (8,486,970) 2,484,824 (7,331,860)
Principal repayments on held
to maturity securities 316,518 309,604 998,457 1,260,076 6,128,157
Purchase of securities
available for sale (3,939,960) (8,081,850) (28,399,062) - (7,000,000)
Proceeds from sales of
securities available for sale 2,004,541 6,120,728 18,507,960 - 6,838,750
Purchases of FHLB stock - - - - (77,300)
Sale of FHLB stock - - - 77,300 -
Proceeds from sale of office
properties and equipment - 4,500 4,522 15,389 -
Purchases of office properties
and equipment (347,608) (15,007) (3,186,982) (152,668) (115,878)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by investing activities (4,076,783) (5,532,801) (20,562,075) 3,684,921 1,332,569
- -----------------------------------------------------------------------------------------------------------------------------
continued...
F-8
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
Three Months Ended
September 30, Year Ended June 30,
------------------- -------------------------------
1996 1995 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Financing activities
Net increase (decrease)
in deposits $3,968,366 $3,614,618 $22,226,807 $(1,006,244) $ 3,446,397
Repayment of Federal Home
Loan Bank advances - (3,000,000) (31,510,000) (15,200,000) (15,800,000)
Proceeds from Federal Home
Loan Bank advances 5,000,000 3,000,000 23,960,000 16,300,000 14,000,000
Principal payments on bonds
payable, including
unapplied payments (168,743) (298,467) (988,607) (968,556) (5,475,702)
Increase (decrease) in
securities sold under
agreements to repurchase (3,184,000) 1,875,000 6,104,000 - -
Proceeds from issuance of
common stock - - 15,300 2,108,215 -
Dividends paid - - (45,958) - -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (abosrbed)
by financing activities 5,615,623 5,191,151 19,761,542 1,233,415 (3,829,305)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 1,048,661 110,788 (321,252) 4,473,025 (1,619,769)
Cash and cash equivalents,
beginning of year 5,431,483 5,752,735 5,752,735 1,279,710 2,899,479
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $6,480,144 $5,863,523 $ 5,431,483 $ 5,752,735 $ 1,279,710
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-9
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
Nature of Business
and Regulatory
Environment
Guaranty Financial Corporation (the "Parent Company") is a unitary thrift
holding company whose principal asset is its wholly-owned subsidiary, Guaranty
Savings & Loan, F.A. (the "Savings Bank"). The Savings Bank provides a full
range of banking services to individual and corporate customers. In these
financial statements the consolidated group is referred to collectively as "the
Corporation".
The Office of Thrift Supervision ("OTS"), is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
effective January 1, 1993. FDICIA contained provisions which allow regulators to
impose prompt corrective action on undercapitalized institutions in accordance
with a categorized capital-based system.
Principles of
Consolidation
The consolidated financial statements include the accounts of Guaranty Financial
Corporation and Guaranty Savings & Loan, F.A., its wholly-owned subsidiary, and
GMSC, Inc. and Guaranty Investment Corp., wholly-owned subsidiary of the Savings
Bank. All material intercompany accounts and transactions have been eliminated
in the consolidation. Prior year accounts are reclassified when necessary to
conform to current year classifications.
Reorganization
On December 29, 1995, the Savings Bank and the Corporation consummated the
reorganization of the Savings Bank into a unitary-thrift holding company
structure whereby the Savings Bank became the wholly-owned subsidiary of the
Corporation. Each outstanding share of the common stock of the Savings Bank
became one share of the common stock of the Corporation. This transaction was
accounted for as a pooling of interests.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-10
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Investment Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". The Corporation adopted the
provisions of SFAS 115 during the year ended June 30, 1995. The adoption of this
Statement had no effect on the operations of the Corporation. SFAS 115 addresses
the accounting and reporting of investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
Investments in securities are to be classified as either held-to-maturity,
trading, or available for sale.
Investments in debt securities classified as held-to-maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts using the
level yield method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their market value below amortized cost. Investment in Federal Home
Loan Bank stock is stated at cost.
Investments in debt and equity securities classified as available-for-sale are
stated at market value with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax effect, until realized.
Investments in debt and equity securities classified as trading are stated at
market value. Unrealized holding gains and losses for trading securities are
included in the statement of operations.
Gains and losses on the sale of securities are determined using the specific
identification method.
Options
Premiums received for writing put and call options are recorded as a liability
and are taken into income if the option is closed prior to maturity or expires.
Upon exercise of the option, the premium is treated as an adjustment to the
basis of the underlying security.
Loans Held for
Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
F-11
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loans receivable consists primarily of long-term real estate loans secured by
first deeds of trust on single family residences, other residential property,
commercial property and land located primarily in the state of Virginia.
Interest income on mortgage loans is recorded when earned and is recognized
based on the level yield method. The Corporation provides an allowance for
accrued interest deemed to be uncollectible, which is netted against accrued
interest receivable in the consolidated balance sheets.
The Corporation defers loan origination and commitment fees, net of certain
direct loan origination costs, and the net deferred fees are amortized into
interest income over the lives of the related loans as yield adjustments. Any
unamortized net fees on loans fully repaid or sold are recognized as income in
the year of repayment or sale.
Sale of Loans
and Participation
in Loans
The Corporation is able to generate funds by selling loans and participations in
loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and to other
insured investors. Under participation servicing agreements, the Corporation
continues to service the loans and the participant is paid its share of
principal and interest collections.
Effective July 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing
Rights an Amendment of FASB Statement No. 65". SFAS 122 requires entities to
allocate the cost of acquiring or originating mortgage loans between the
mortgage servicing rights and the loans, based on their relative fair values, if
the bank sells or securitizes the loans and retains the mortgage servicing
rights. In addition, SFAS 122 requires entities to assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights.
F-12
- ----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Sale of Loans
and Participation
in Loans
(continued)
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
Allowance for
Possible Loan
Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan
portfolio. Management's assessment of the adequacy of the allowance is based
upon type and volume of the loan portfolio, past loan loss experience, existing
and anticipated economic conditions, and other factors which deserve current
recognition in estimating future loan losses. Additions to the allowance are
charged to operations. Loans are charged-off partially or wholly at the time
management determines collectibility is not probable. Management's assessment of
the adequacy of the allowance is subject to evaluation and adjustment by the
Corporation's regulators.
Loans are generally placed on nonaccrual status when the collection of principal
or interest is 90 days or more past due, or earlier if collection is uncertain
based upon an evaluation of the value of the underlying collateral and the
financial strength of the borrower. Loans may be reinstated to accrual status
when all payments are brought current and, in the opinion of management,
collection of the remaining balance can be reasonably expected. Loans greater
than 90 days past due may remain on accrual status if management determines it
has adequate collateral to cover the principal and interest.
Effective July 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment
of a Loan (as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures"). The effect of adopting these new
accounting standards were immaterial to the operating results of the Corporation
for the year ended June 30, 1996.
F-13
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Allowance for
Possible Loan
Losses
(continued)
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Corporation will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
performing loan may be considered impaired. The allowance for loan losses
related to loans identified as impaired is primarily based on the excess of the
loan's current outstanding principal balance over the estimated fair market
value of the related collateral. For a loan that is not collateral-dependent,
the allowance is recorded at the amount by which the outstanding principal
balance exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's original effective interest rate. Prior to 1995, the
allowance for loan losses for all loans which would have qualified as impaired
under the new accounting standards was primarily based upon the estimated fair
market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
Real Estate
Owned
Real estate acquired through foreclosure is initially recorded at the lower of
fair value, less selling costs, or the balance of the loan on the property at
date of foreclosure. Costs relating to the development and improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated fair value.
F-14
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Securities Sold
Under Agreements to
Repurchase
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability in the consolidated statements of condition. The dollar
amount of securities underlying the agreements remain in the asset accounts.
Office Properties
and Equipment
Office properties and equipment are stated at cost less accumulated depreciation
and amortization. Provisions for depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the individual
assets or the terms of the related leases, if shorter, for leasehold
improvements. Expenditures for betterments and major renewals are capitalized
and ordinary maintenance and repairs are charged to expense as incurred.
Income Taxes
During the year ended June 30, 1994, the Corporation adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
required a change from the deferred method to the asset and liabilities method
of accounting for income taxes.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Corporation has reported the cumulative effect of change in the method of
accounting for income taxes as of the beginning of the 1994 fiscal year in the
consolidated statement of operations.
For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable income" method. The cumulative bad
debt reserve, upon which no taxes have been paid, was approximately $1,086,000
at June 30, 1996.
F-15
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Income Taxes
(continued)
Section 1616 of the Small Business Job Protection Act of 1996 (the "Act")
repealed the percentage of taxable income method of computing bad debt reserve,
and requires the recapture into taxable income of "excess reserves", on a
ratable basis over the next six years. Excess reserves are defined, in general,
as the excess of the balance of the tax bad debt reserve (using the percentage
of taxable income method) as of the close of the last tax year beginning before
January 1, 1996 over the balance of the reserve as of the close of the last tax
year beginning before January 1, 1988. The recapture of the reserves is deferred
if the Corporation meets the "residential loan requirement" exception, during
either or both of the first two years beginning after December 31, 1995. The
residential loan requirement is met, in general, if the principal amount of
residential loans made by the Corporation during the year is not less than the
Corporation's "base amount". The base amount is defined as the average of the
principal amounts of residential loans made during the six most recent tax years
beginning before January 1, 1996.
As a result of the Act, the Corporation must recapture into taxable income
approximately $387,000 ratably over the next six years, beginning with the year
ending June 30, 1997. If the residential loan requirement exception is met, as
discussed above, the income will be includable over the 3rd through 8th years
following the year ended June 30, 1996.
Earnings Per Share
Earnings per share is computed based on the weighted average number of shares of
common stock outstanding during each period including the assumed exercise of
dilutive stock options, and is retroactively adjusted for stock dividends and
stock splits. The weighted average number of shares of common stock outstanding
were 917,668, 541,768 and 537,168 for the years ended June 30, 1996, 1995 and
1994, respectively, and 919,168 and 915,568 for the three months ended September
30, 1996 and 1995, respectively.
F-16
- ---------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Statement of Cash
Flows
Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $5,179,000, $4,685,000 and
$5,156,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
Interest paid was approximately $1,002,000 and $684,000 for the three month
period ended September 30, 1996 and 1995, respectively. Cash paid for income
taxes was approximately $180,000, $42,000 and $159,000 for the years ended June
30, 1996, 1995 and 1994, respectively. Cash paid for income taxes was
approximately $183,000 and $15,000 for the three month period ended September
30, 1996 and 1995, respectively. Real estate acquired in settlement of loans
during the years ended June 30, 1996 and 1995 was approximately $33,000 and
$122,000, respectively. Real estate acquired in the settlement of loans during
the three month period ended September 30, 1996 and 1995 was approximately
$97,000 and $45,000, respectively.
Reclassifications
Certain reclassifications have been made in the prior year consolidated
financial statements and notes to conform to the September 30, 1996
presentation.
New Accounting
Pronouncements
In March 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 121 requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, SFAS 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. SFAS 121 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Corporation.
F-17
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
New Accounting
Pronouncements
(continued)
In October 1995, the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation." SFAS No. 123 allows companies to continue to account for
their stock option plans in accordance with APB Opinion 25 but encourages the
adoption of a new accounting method based on the estimated fair value of
employee stock options. Companies electing not to follow the new fair value
based method are required to provide expanded footnote disclosures, including
pro forma net income and earnings per share, determined as if the company had
applied the new method. SFAS No. 123 is required to be adopted by the
Corporation prospectively beginning July 1, 1996. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the Corporation.
In June 1996, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of the Corporation.
Regulatory
Supervisory
Agreement
During May 1995, the Savings Bank entered into a Supervisory Agreement with the
OTS that required Savings Bank to take specific actions and placed limitations
on its growth. Among the actions the Savings Bank agreed to undertake were:
revise its business plan to indicate how it will increase its capital levels and
review and revise its policies related to interest rate risk, investment
activities and liquidity maintenance. In addition, the Savings Bank was required
by the agreement to obtain OTS approval prior to making any distribution to the
holders of its common stock.
F-18
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
Regulatory
Supervisory
Agreement
(continued)
On June 28, 1995, the Savings Bank completed an initial public offering of its
common stock resulting in the Corporation being considered "well capitalized"
under the prompt corrective action framework of FDICIA (Note 11).
On August 11, 1995, the Savings Bank was granted a waiver of the growth
limitations of the Supervisory Agreement allowing growth in accordance with the
Corporation's approved business plan.
On May 14, 1996, the May 1995 Supervisory Agreement with the OTS was terminated.
Interim Financial
Statements
The financial statements for the three months ended September 30, 1996 and 1995
are unaudited but, in the opinion of management, include all adjustments,
consisting of only normal recurring accruals, necessary for fair presentation of
financial position and results of operations. Results for the interim periods
are not necessarily indicative of the results for a full year.
F-19
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
1. Investment
Securities
A summary of the carrying value and estimated market value of mortgage-backed
securities is as follows:
September 30, 1996
- --------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------
Held to Maturity
Mortgage-backed
securities $ 3,529,033 $100,402 $ - $ 3,629,435
---------------------------------------------------------------------
3,529,033 100,402 - 3,629,435
---------------------------------------------------------------------
Available for Sale
Mortgage-backed
securities 11,813,571 - 397,925 11,415,646
---------------------------------------------------------------------
11,813,571 - 397,925 11,415,646
---------------------------------------------------------------------
$15,342,604 $100,402 $397,925 $15,045,081
---------------------------------------------------------------------
F-20
- --------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
1. Investment
Securities
(continued)
June 30, 1996
- -------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed
securities $ 3,730,589 $148,301 $ - $ 3,878,890
- -------------------------------------------------------------------------------------------------------
3,730,589 148,301 - 3,878,890
- -------------------------------------------------------------------------------------------------------
Available for Sale
Mortgage-backed
securities 9,992,516 - 428,911 9,563,605
- -------------------------------------------------------------------------------------------------------
9,992,516 - 428,911 9,563,605
- -------------------------------------------------------------------------------------------------------
$13,723,105 $148,301 $428,911 $13,442,495
- -------------------------------------------------------------------------------------------------------
June 30, 1995
- -------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
- -------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed
securities $4,732,638 $154,750 $ - $4,887,388
- -------------------------------------------------------------------------------------------------------
$4,732,638 $154,750 $ - $4,887,388
- -------------------------------------------------------------------------------------------------------
F-21
- ----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
1. Investment
Securities
(continued)
Proceeds from sales of securities available for sale during the years ended June
30, 1996 and 1994 were approximately $18,508,000 and $6,839,000, respectively,
and $2,005,000 and $6,121,000 for the three months ended September 30, 1996 and
1995, respectively. The Corporation had no sales of available for sale
securities during the year ending June 30, 1995. Gross gains of approximately
$101,700 and gross losses of approximately $155,100 were realized on those sales
during the years ended June 30, 1996 and 1994, respectively, and $20,195 and
$42,643 for the three months ended September 30, 1996 and 1995, respectively.
Proceeds from sales of trading securities during the years ended June 30, 1996,
1995 and 1994 were approximately $107,283,000, $43,137,000 and $73,378,000,
respectively, and $24,037,000 and $24,947,000 for the three months ended
September 30, 1996 and 1995, respectively. Gross gains of approximately
$209,000, $142,600 and $389,100 and gross losses of approximately $272,700,
$118,400 and $557,500 were realized on those sales during the years ended June
30, 1996, 1995, and 1994, and gross gains of approximately $60,000 and $55,000
and gross losses of approximately $88,000 and $20,000 were realized on those
sales for the three months ended September 30, 1996 and 1995, respectively.
At June 30, 1996 and September 30, 1996, mortgage-backed securities of
approximately $3,731,000 and $3,529,000, respectively, were pledged for bonds
payable (Note 6). At June 30, 1996 and September 30, 1996, mortgage-backed
securities classified as available for sale with a market value of approximately
$6,633,000 and $3,620,000, respectively, were pledged as collateral under
repurchase agreements (Note 7).
F-22
- ----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
2. Loans Receivable
Loans receivable are summarized as follows:
September 30, June 30,
---------------
1996 1996 1995
- ------------------------------------------------------------------------------------
Residential real estate $68,872,944 $66,137,277 $62,174,694
Commercial real estate 7,436,805 7,670,148 4,507,978
Construction and land 8,850,400 8,813,170 8,886,956
Consumer 5,811,739 5,386,104 4,579,977
- -------------------------------------------------------------------------------------
90,971,888 88,006,699 80,149,605
- -------------------------------------------------------------------------------------
Less
Undisbursed loan funds 3,678,689 2,823,774 3,858,164
Deferred loan fees 327,851 313,669 323,282
Allowance for loan losses 834,002 788,146 747,486
- -------------------------------------------------------------------------------------
4,840,542 3,925,589 4,928,932
- -------------------------------------------------------------------------------------
$86,131,346 $84,081,110 $75,220,673
- -------------------------------------------------------------------------------------
The allowance for loan losses is summarized as follows:
Balance at June 30, 1993 $745,797
Provision charged to expense 74,047
Net charge-offs or reductions (66,258)
- -------------------------------------------------------------------------
Balance at June 30, 1994 753,586
Credit to operations (9,443)
Net recoveries 3,343
- -------------------------------------------------------------------------
Balance at June 30, 1995 747,486
Provision charged to expense 56,665
Net charge-offs or reductions (16,005)
- -------------------------------------------------------------------------
Balance at June 30, 1996 788,146
Provision charged to expense 45,856
Net charge-offs or reductions -
- -------------------------------------------------------------------------
Balance at September 30, 1996 $834,002
- -------------------------------------------------------------------------
F-23
- ----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
2. Loans Receivable
(continued)
The Corporation serviced loans for others aggregating approximately $168,437,000
and $169,621,000 at June 30, 1996 and 1995, respectively, and $166,865,000 at
September 30, 1996. Mortgage servicing rights, included in other assets, was
approximately $787,000 and $721,000 at June 30, 1996 and 1995, respectively, and
$851,500 at September 30, 1996. Mortgage servicing rights of approximately
$160,000 were capitalized during the year ended June 30, 1996. No mortgage
servicing rights were capitalized during the year ended June 30, 1995.
Gross gains and gross losses on the sale of loans totalling approximately
$205,000 and $0, $51,000 and $112,000, $203,000 and $50,000, were realized for
the years ended June 30, 1996, 1995 and 1994, respectively, and $91,500 and
$15,000 for the three months ended September 30, 1996. There were no loans
classified as held for sale at June 30, 1996 and 1995 and September 30, 1996.
The following information relates to the Corporation's impaired loans which
includes troubled debt restructurings that meet the definition of impaired
loans:
September 30, June 30,
1996 1996
- ------------------------------------------------------------------------------------------
Impaired loans with a specific allowance $491,000 $493,000
Impaired loans with no specific allowance - -
- ------------------------------------------------------------------------------------------
Total impaired loans $491,000 $493,000
- ------------------------------------------------------------------------------------------
Total allowance related to impaired loans $120,000 $123,000
Average balance of impaired loans for the period 492,000 496,000
Interest income on impaired loans for the period
recorded on a cash basis - -
F-24
- ---------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
3. Office Properties
and Equipment
Office properties and equipment are summarized as follows:
September 30, June 30,
---------------
1996 1996 1995
--------------------------------------------------------------------
Land $1,876,175 $1,873,386 $ -
Building and leasehold improvements 1,781,342 1,388,741 305,574
Furniture and fixtures 327,662 288,575 365,773
Equipment 697,281 661,020 637,998
--------------------------------------------------------------------
4,682,460 4,211,722 1,309,345
Less accumulated depreciation
and amortization 719,707 686,523 872,436
--------------------------------------------------------------------
Net office properties and equipment $3,962,753 $3,525,199 $ 436,909
--------------------------------------------------------------------
Commitments for the construction of a new operations center and branch were
approximately $924,000 at June 30, 1996.
4. Deposits
Deposits are summarized as follows:
September 30, 1996
- ---------------------------------------------------------------------------------------------
Amount Percent
- ---------------------------------------------------------------------------------------------
Passbook, statement savings and interest
checking accounts
Non-interest bearing $ 1,350,654 1.7%
2.00 to 3.00% 5,664,335 7.2
3.01 to 4.00% 8,362,820 10.6
--------------------------------------------------------------------------------------------
15,377,809 19.5
- ---------------------------------------------------------------------------------------------
Certificates:
0 to 4.00% 270,870 0.3
4.01 to 5.00% 767,969 1.0
5.01 to 6.00% 55,965,865 71.2
6.01 to 7.00% 6,273,299 8.0
- ---------------------------------------------------------------------------------------------
63,278,003 80.5
- ---------------------------------------------------------------------------------------------
$78,655,812 100%
- ---------------------------------------------------------------------------------------------
F-25
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
4. Deposits
(continued)
June 30, 1996 1995
- --------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------
Passbook, statement savings
and interest checking
accounts
Non-interest bearing $ 1,349,508 1.8% $ 805,902 1.5%
2.00 to 3.00% 5,094,991 6.8 5,011,503 9.6
3.01 to 4.00% 7,862,504 10.5 8,819,035 16.8
- --------------------------------------------------------------------------------------------------------
14,307,003 19.1 14,636,440 27.9
- --------------------------------------------------------------------------------------------------------
Certificates:
0 to 4.00% 135,997 .2 53,341 .1
4.01 to 5.00% 192,804 .3 7,076,118 13.5
5.01 to 6.00% 55,491,113 74.3 18,868,053 36.0
6.01 to 7.00% 4,560,529 6.1 11,826,687 22.5
- --------------------------------------------------------------------------------------------------------
60,380,443 80.9 37,824,199 72.1
- --------------------------------------------------------------------------------------------------------
$74,687,446 100.0% $52,460,639 100.0%
- --------------------------------------------------------------------------------------------------------
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $4,606,000 and $1,432,000 at June 30,
1996 and 1995, respectively, and $4,951,000 at September 30, 1996.
Scheduled maturities of certificates are as follows:
September 30, June 30,
---------------
1996 1996 1995
----------------------------------------------------------------
Within one year $53,480,007 $51,209,732 $27,682,073
One to two years 5,893,025 5,191,895 8,189,909
Two to three years 1,276,774 1,129,936 957,106
Three to four years 1,116,669 1,212,076 419,047
Five years and thereafter 1,511,528 1,636,804 576,064
----------------------------------------------------------------
$63,278,003 $60,380,44 $37,824,199
----------------------------------------------------------------
F-26
- ----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
5. Fair Value of
Financial
Instruments
The estimated fair values of the Corporation's financial instruments are as
follows:
Period Ended Year Ended
September 30, 1996 June 30, 1996
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and short-term
investments $ 6,480,144 $ 6,480,144 $ 5,431,483 $5,431,000
Securities 14,944,679 15,045,081 13,294,194 13,442,000
Loans, net of allowance
for loan losses 86,131,346 85,413,164 84,081,110 82,710,000
Financial liabilities
Deposits 78,655,812 78,619,798 74,687,446 74,590,000
Advances from Federal
Home Loan Bank 22,500,000 22,500,000 17,500,000 17,500,000
Securities sold under
agreement to
repurchase 2,920,000 2,920,000 6,104,000 6,104,000
Bonds payable 3,005,608 N/A 3,143,844 N/A
Notional Fair
Amount Value
- --------------------------------------------------------------------------------------------------------------------
Unrecognized financial
instruments
Commitments to
extend credit $5,820,822 $5,821,000 $3,884,850 $3,885,000
Forward commitments
to purchase
mortgage-backed
securities 4,050,000 3,922,551 5,795,000 5,822,000
F-27
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
5. Fair Value of
Financial
Instruments
(continued)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loan receivables
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
For advances that mature within one year of the balance sheet date, carrying
value is considered a reasonable estimate of fair value.
The fair values of all other advances are estimated using discounted cash flow
analysis based on the Corporation's current incremental borrowing rate for
similar types of advances.
F-28
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
5. Fair Value of
Financial
Instruments
(continued)
Securities sold under agreement to repurchase
Fixed-coupon reverse repurchase agreements are treated as short-term financings.
The carrying value is considered a reasonable estimate of fair value.
Bonds payable
Due to the nature and terms (Note 6) of the bonds payable held by GMSC, Inc.
at June 30, 1996, it was not deemed practicable to estimate the fair value.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases.
Forward Commitments to purchase mortgage-backed securities
Fair values are based on quoted market prices or dealer quotes.
F-29
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
6. Bonds Payable
In October 1987, GMSC, Inc. issued serial bonds ("the Bonds") collateralized by
mortgage-backed securities which are treated as a real estate mortgage
investment conduit ("REMIC") under the Internal Revenue Code of 1986 for federal
tax purposes. The Bonds are secured by an indenture between GMSC, Inc. and the
Bank of New York, acting as trustee for the bondholders. The Bonds are
summarized as follows:
September 30, June 30,
---------------
1996 1996 1995
- --------------------------------------------------------------------------------------------------
Serial Bonds
Class A-2, maturing January 20,
2012, at 8.0% $1,359,853 $1,556,846 $2,778,641
Class A-3, maturing January 20,
2019, at 8.0% 2,399,867 2,352,811 2,173,634
Unapplied payments (219,142) (200,337) (254,348)
- --------------------------------------------------------------------------------------------------
3,540,578 3,709,320 4,697,927
Less unamortized discount (534,970) (565,476) (717,365)
- --------------------------------------------------------------------------------------------------
$3,005,608 $3,143,844 $3,980,562
-------------------------------------------------------------------------------------------------
The Bonds are repaid in conjunction with the net cash flow from the
mortgage-backed securities together with the reinvestment income thereon. As a
result, the actual life of the Bonds is less than their stated maturities.
Interest is paid as incurred on the Class A-2 Bonds and is accrued and added to
the principal amount due on the Class A-3 Bonds. The indenture also provides for
the establishment of two trust accounts to insure the timely payment of
interest, debt maturities, trustee and accounting fees and other expenses. The
account established for payment of trustee and accounting fees is included in
cash on the statement of condition. The account established for payment of
interest and debt maturities is netted with cash and bonds payable on the
statement of condition.
F-30
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
7. Securities Sold
Under Agreements
to Repurchase
The following is a summary of certain information regarding the Savings Bank's
repurchase agreements:
Three Months Ended Year Ended
September 30, June 30,
1996 1996 1995
--------------------------------------------------------
Balance at end of period $2,920,000 $6,104,000 $ -
Weighted average interest rate
at end of period 5.57% 5.65% -
Average amount outstanding
during the period $6,660,333 $3,111,583 $ 782,500
Maximum amount outstanding
at any month end during the
period $9,957,000 $9,930,000 $4,230,000
8. Advances From
Federal Home
Loan Bank
Advances from the Federal Home Loan Bank are summarized as follows:
Due in Year Ending Due in Year Ending
September 30, June 30,
- ------------------------------------ ------------------------------------
1997 $15,500,000 1996 $ -
1998 7,000,000 1997 12,500,000
- ------------------------------------ 1998 5,000,000
$22,500,000 ------------------------------------
- ------------------------------------ $17,500,000
------------------------------------
The weighted average interest rate of these advances was 5.93% and 6.67% at June
30, 1996 and 1995, respectively, and 5.96% at September 30, 1996. The advances
are collateralized by investment in Federal Home Loan Bank stock and certain
mortgage loans with an unpaid balance of approximately $35,097,000 and
$31,756,000 at June 30, 1996 and September 30, 1996, respectively.
F-31
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
8. Advances From
Federal Home
Loan Bank
(continued)
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
Three Months Ended
September 30, Year Ending June 30,
1996 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Maximum amount
outstanding
during the
period $22,500,000 $28,050,000 $28,250,000 $28,750,000
- ---------------------------------------------------------------------------------------------------------------
Average amount
outstanding
during the period $19,166,166 $22,829,000 $26,208,000 $26,017,000
- ---------------------------------------------------------------------------------------------------------------
Average interest
rate during the
period 5.96% 6.21% 6.67% 6.63%
- ---------------------------------------------------------------------------------------------------------------
9. Income Taxes
The provision for income taxes as presented in the consolidated statements of
operations for the years ended June 30, 1996, 1995 and 1994, and the three
months ended September 30, 1996 and 1995 is as follows:
Three Months Ended September 30, 1996 1995
- -----------------------------------------------------------------------
Currently payable (benefit $(17,700) $83,388
Deferred income tax expense (benefit) - -
- -----------------------------------------------------------------------
$(17,700) $83,388
- -----------------------------------------------------------------------
F-32
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
9. Income Taxes
(continued)
Year Ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------
Currently payable $344,338 $187,885 $ 16,200
Deferred income tax expense (benefit) - (87,377) (251,186)
- -------------------------------------------------------------------------------------------
$344,338 $100,508 $(234,986)
- -------------------------------------------------------------------------------------------
A reconciliation of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
Three Months Ended September 30, 1996 1995
- --------------------------------------------------------------------------------------
Tax expense (benefit) at statutory rate $(17,228) $81,000
Adjustments
Effect of state taxes (2,027) 9,529
Other 1,555 (7,141)
- --------------------------------------------------------------------------------------
$(17,700) $83,388
- --------------------------------------------------------------------------------------
Year Ended June 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
Tax expense (benefit) at statutory rate $335,780 $162,096 $(176,426)
Adjustments
Effect of state taxes 39,504 18,880 (20,860)
Other (30,946) (80,468) (37,700)
- -----------------------------------------------------------------------------------------------------
$344,338 $100,508 $(234,986)
- -----------------------------------------------------------------------------------------------------
F-33
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
9. Income Taxes
(continued)
The components of deferred income taxes are as follows:
September 30, June 30,
---------------
1996 1996 1995
- ---------------------------------------------------------------------------------------
Deferred tax asset
Bad debt reserves $152,000 $152,000 $169,000
Deferred loan fees 70,000 70,000 123,000
Excess servicing 48,000 48,000 68,000
Available for sale securities 98,139 150,000 -
Other 173,145 65,000 18,000
- ---------------------------------------------------------------------------------------
Total deferred tax asset 541,284 485,000 378,000
- ---------------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 230,000 230,000 277,000
FHLB stock 187,000 187,000 187,000
Other 38,000 38,000 34,000
- ---------------------------------------------------------------------------------------
Total deferred tax liability 455,000 455,000 498,000
- ---------------------------------------------------------------------------------------
Net deferred tax liability (asset) $(86,284) $(30,000) $120,000
- ---------------------------------------------------------------------------------------
10. Related Party
Transactions
In the course of business, the Corporation makes loans to directors, officers
and other related parties. These loans are made on substantially the same terms
as those prevailing at the time for comparable transactions with the other
borrowers.
The following is a summary of loan transactions with directors, officers and
other related parties:
September 30, June 30,
---------------
1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Balance, at the beginning of period $266,621 $291,124 $615,267
Loans to former officers and other
related parties - - (233,270)
Additional loans 10,682 197,741 -
Loan reductions (1,153) (222,244) (90,873)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, at end of year $276,150 $266,621 $291,124
- -----------------------------------------------------------------------------------------------------------------------------
F-34
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
11. Commitments
and
Contingencies
Continuing uncertainty exists as to the sufficiency of the Federal Deposit
Insurance Corporation's ("FDIC") Savings Association Insurance Fund ("SAIF").
Legislators and thrift regulators are considering alternative methods of
strengthening this fund. Virtually all of the existing proposals will require
additional funding from the thrifts whose deposits are insured by the FDIC.
Possible future increases in FDIC insurance costs for the Savings Bank cannot be
estimated.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of September 30, 1996. Based on the
Company's deposits as of March 31, 1995, the date for measuring the amount of
the special assessment pursuant to the Act, the Company will pay a special
assessment of approximately $347,000 to capitalize the SAIF. The FDIC is
expected to lower the premium for deposit insurance to a level necessary to
maintain the SAIF at its required reserve level; however, the range of premiums
has not been determined.
The Corporation leases office space under operating leases expiring at various
dates through December 1998 and has a contract for the performance of data
processing services whose initial term expires in May 1999 and requires minimum
payments of $8,100 per month. Future minimum rental and data processing payments
required that have initial or remaining noncancelable terms in excess of one
year as of June 30, 1996, are as follows:
Amount
------------------------------
Data
Year Ending June 30, Leases Processing
- --------------------------------------------------------------------------------
1997 $40,698 $ 97,200
1998 25,655 97,200
1999 22,956 89,100
2000 5,763 -
- --------------------------------------------------------------------------------
$95,072 $283,500
-------------------------------------------------------------------------------
F-35
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
11. Commitments
and
Contingencies
(continued)
Total rental expense amounted to approximately $168,000, $187,000 and $180,000
for the years ended June 30, 1996, 1995 and 1994, respectively, and $11,682 and
$46,524 for the periods ended September 30, 1996 and 1995, respectively. Total
data processing expense amounted to approximately $257,000, $210,000 and
$199,900 for the years ended June 30, 1996, 1995 and 1994, respectively, and
$70,511 and $62,259 for the periods ended September 30, 1996 and 1995,
respectively.
The Corporation is defendant in various lawsuits incidental to its business.
Management is of the opinion that its financial position will not be materially
affected by the ultimate resolution of any litigation pending or threatened.
12. Stockholders'
Equity
On June 28, 1995, the Corporation completed an initial public offering of its
common stock through the sale of 180,000 shares of common stock at a price of
$13.00 per share. Proceeds to the Corporation from the offering (net of offering
expenses of approximately $312,000) were approximately $2,028,000.
On November 30, 1995, the Board of Directors declared a two-for-one stock split
to be distributed on January 31, 1996, to all shareholders of record as of
January 15, 1996.
Savings institutions must maintain specific capital standards that are no less
stringent than the capital standards applicable to national banks. The OTS
regulations currently have three capital standards including (i) a tangible
capital requirement, (ii) a core capital requirement, and (iii) a risk-based
capital requirement. The tangible capital standard requires savings institutions
to maintain tangible capital of not less than 1.5% of adjusted total assets. The
core capital standard requires a savings institution to maintain core capital of
not less than 3.0% of adjusted total assets. The risk-based capital standard
requires risk-based capital of not less than 8.0% of risk-weighted assets.
At September 30, 1996, the Savings Bank met all three regulatory capital
requirements applicable to it under Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") and was considered "well capitalized" under the
prompt corrective action framework of FDICIA.
F-36
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
12. Stockholders'
Equity
(continued)
The following table presents the Savings Bank's regulatory capital levels at
September 30, 1996 and June 30, 1996, relative to the OTS requirements
applicable at that date:
Amount Percent Actual Actual Excess
September 30, 1996 Required Required Amount Percent Amount
- ------------------------------------------------------------------------------------------------------------------
Tangible capital $1,728,000 1.50% $6,627,000 5.75% $4,899,000
Core capital 3,457,000 3.00 6,627,000 5.75 3,170,000
Risk-based capital 4,552,000 8.00 7,304,000 12.84 2,752,000
Amount Percent Actual Actual Excess
June 30, 1996 Required Required Amount Percent Amount
- ------------------------------------------------------------------------------------------------------------------
Tangible capital $1,655,000 1.50% $6,628,000 6.01% $4,973,000
Core capital 3,309,000 3.00 6,628,000 6.01 3,319,000
Risk-based capital 4,372,000 8.00 7,259,000 13.28 2,887,000
The Corporation may not declare or pay a cash dividend, or repurchase any of its
capital stock if the effect thereof would cause the net worth of the Corporation
to be reduced below the net worth requirement imposed by federal regulations.
13. Stock Option
Plan
The Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to key employees.
The following table summarizes vested options outstanding:
Three Months Ended September 30, 1996
- --------------------------------------------------------------------------------
Option Price
- --------------------------------------------------------------------------------
Outstanding at beginning of
period $4.25 - 4.75 $14,000
Options vested during period - -
Options exercised during period - -
- --------------------------------------------------------------------------------
Outstanding at end of period $4.25 - 4.75 $14,000
- --------------------------------------------------------------------------------
F-37
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
13. Stock Option
Plan
(continued)
Year Ending June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
Option Price
- --------------------------------------------------------------------------------
Outstanding at beginning of
year $4.25 13,600 24,000 16,000
Options vested during year 4.25 - 4.75 4,000 8,000 8,000
Options exercised during year 4.25 - 4.75 (3,600) (18,400) -
- --------------------------------------------------------------------------------
Outstanding at end of year $4.25 - 4.75 14,000 13,600 24,000
- --------------------------------------------------------------------------------
14. Employee Benefit
Plans
Effective February 16, 1989, the Corporation adopted a 401(k) profit-sharing
plan in which all employees are eligible to participate after one year of
service and are at least twenty-one years of age. Participants may elect to
contribute a percentage of their compensation to the plan. The Corporation may
make contributions to the plan at its discretion. Corporation contributions are
allocated to employee accounts using a systematic formula based on participant
compensation. The Corporation contributed approximately $4,600, $5,800 and
$4,700 to the plan for the years ended June 30, 1996, 1995 and 1994,
respectively, and $2,800 and $1,200 for the periods ended September 30, 1996 and
1995, respectively.
15. Financial
Instruments With
Off-Balance-Sheet
Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, options written and
purchased, forward commitments to purchase mortgage-backed securities and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statement of condition. The contract or notional amounts of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual notional
amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. For options purchased, the contract or notional amounts do not
represent exposure to credit loss.
F-38
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
15. Financial
Instruments With
Off-Balance-Sheet
Risk
(continued)
Unless noted otherwise, the Corporation does not require collateral or other
security to support financial instruments with credit risk.
Contract
Notional Amount
September 30, 1996 June 30, 1996
- --------------------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit $11,022,000 $9,300,000
Standby letters of credit written 218,000 218,000
Financial instruments whose contract
amount represent interest rate risk
Forward commitment to purchase
mortgage-backed securities $ 4,050,000 $5,795,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Substantially all of the Corporation's loan activity was with customers located
in Charlottesville, Virginia and surrounding counties, with approximately 81% of
the loans collateralized by one to four family residential properties.
F-39
- ---------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
16. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
Condensed financial information is shown for the parent company only as follows:
Condensed Statements of Financial Condition
September 30, June 30,
1996 1996
- --------------------------------------------------------------------------------------------
Assets
Investment in the Savings Bank, at equity $6,637,797 $6,693,752
Cash 10,000 10,000
Prepaid expenses and other assets 52,429 68,979
- --------------------------------------------------------------------------------------------
$6,700,226 $6,772,731
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities $ 104,866 $ 144,400
- --------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 1,148,960 1,148,960
Additional paid-in capital 1,981,745 1,981,745
Retained earnings 3,464,655 3,497,626
- --------------------------------------------------------------------------------------------
Total stockholders' equity 6,595,360 6,628,331
- --------------------------------------------------------------------------------------------
$6,700,226 $6,772,731
- --------------------------------------------------------------------------------------------
F-40
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
16. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
(continued)
Condensed financial information is shown for the parent company only as follows:
Condensed Statements of Operations
Three Months Ended Year Ended
September 30, June 30,
1996 1996
- ----------------------------------------------------------------------------------------------
Income
Dividends received from Savings Bank $ - $ 10,000
- -----------------------------------------------------------------------------------------------------------
Total income - 10,000
- -----------------------------------------------------------------------------------------------------------
Noninterest expenses (15,664) (41,463)
- -----------------------------------------------------------------------------------------------------------
Loss before income tax benefit and
equity in undistributed net income
of the Savings Bank (15,664) (31,463)
Income tax benefit 4,300 12,000
- -----------------------------------------------------------------------------------------------------------
Loss before equity in undistributed
net income of the Savings Bank (11,364) (19,463)
Equity in undistributed net income
of the Savings Bank (21,607) 662,713
- -----------------------------------------------------------------------------------------------------------
Net income $(32,971) $643,250
- -----------------------------------------------------------------------------------------------------------
F-41
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(Information as of September 30, 1996 and for the
Three Months Ended September 30, 1996 and 1995 is Unaudited)
(continued)
16. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
(continued)
Condensed Statements of Cash Flows
Three Months Ended Year Ended
September 30, June 30,
1996 1996
- -----------------------------------------------------------------------------------------------------
Operating activities
Net income $(32,971) $643,250
Adjustments
Equity in income of the Savings Bank 21,607 (672,713)
(Increase) decrease in prepaid and
other assets 16,550 (68,979)
Increase in other liabilities (39,145) 144,400
Other 33,959 -
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities - 45,958
- -----------------------------------------------------------------------------------------------------------
Investing activities
Dividends received from Savings Bank - 10,000
- -----------------------------------------------------------------------------------------------------------
Net cash provided by investing
activities - 10,000
- -----------------------------------------------------------------------------------------------------------
Financing activities
Cash dividends paid on common stock - (45,958)
- -----------------------------------------------------------------------------------------------------------
Net cash absorbed by financing
activities - (45,958)
- -----------------------------------------------------------------------------------------------------------
Increase in cash - 10,000
Cash, beginning of year 10,000 -
- -----------------------------------------------------------------------------------------------------------
Cash, end of year $ 10,000 $ 10,000
- -----------------------------------------------------------------------------------------------------------
F-42
No person has been authorized in connection with
this offering to give any information or to make any
representation not contained in this Prospectus and, if GUARANTY
given or made, such information or representation must FINANCIAL CORPORATION
not be relied upon as having been authorized by Guaranty
or the Underwriter. This Prospectus does not constitute
an offer of any securities other than the Common Stock to
which it relates or an offer to sell, or a solicitation
of an offer to buy, in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in
such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any 500,000 Shares
circumstances, create any implication that there has been Common Stock
no change in the affairs of Guaranty since the date
hereof or that the information contained or incorporated
by reference herein is correct as of any time subsequent
to its date.
--------------------------
TABLE OF CONTENTS ________________
Page PROSPECTUS
Available Information...................... 3 ________________
Prospectus Summary......................... 4
Summary Financial Data..................... 6
Risk Factors............................... 7
Use of Proceeds............................ 9
Capitalization............................. 10 McKinnon & Company, Inc.
Market Price and Dividend Data............. 10
Guaranty Financial Corporation............. 11
Selected Financial Data.................... 13
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ................ 14
Business................................... 40
Management................................. 54
Description of Capital Stock............... 58
Underwriting............................... 60 January 23, 1997
Legal Matters.............................. 60
Experts.................................... 61
Index to Financial Statements.............. F-1
------------------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of
Charlottesville, Commonwealth of Virginia, on January 22, 1997.
GUARANTY FINANCIAL CORPORATION
By: /s/ Thomas P. Baker
---------------------------------------
Thomas P. Baker
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas P. Baker President, Chief Executive Officer January 22, 1997
- ------------------------------------ and Director
Thomas P. Baker (Principal Executive Officer)
/s/ Kathleen M. Focht Chief Financial Officer, Vice January 22, 1997
- ------------------------------------ President, and Secretary/Treasurer
Kathleen M. Focht (Principal Financial and Accounting
Officer)
* Chairman of the Board
- ------------------------------------
Douglas E. Caton
* Vice Chairman of the Board
- ------------------------------------
Harry N. Lewis
* Director
- ------------------------------------
Charles R. Borchardt
* Director
- ------------------------------------
Henry J. Browne
* Director
- ------------------------------------
Robert P. Englander
* Director
- ------------------------------------
John R. Metz
* Director
- ------------------------------------
James R. Sipe, Jr.
* Director
- ------------------------------------
Oscar W. Smith, Jr.
* Thomas P. Baker, by signing his name hereto, signs this document on
behalf of each of the persons indicated by an asterisk above pursuant to powers
of attorney duly executed by such persons and previously filed as part of this
Registration Statement.
Date: January 22, 1997 /s/ Thomas P. Baker
---------------------------------
Thomas P. Baker
Attorney-in-Fact
Exhibit Index
Number Description
*1 Form of Underwriting Agreement.
*3.1 Amended and Restated Articles of Incorporation of Guaranty Financial Corporation, attached as
Exhibit B to the Proxy Statement/Prospectus filed as part of the Registrant's Registration
Statement on Form S-4, as amended, Registration No. 33-76064, incorporated herein by reference.
*3.2 Bylaws of Guaranty Financial Corporation, attached as Exhibit C to the Proxy
Statement/Prospectus filed as part of the Registrant's Registration Statement on Form S-4, as
amended, Registration No. 33-76064, incorporated herein by reference.
*4 Form of Specimen Stock Certificate.
*5 Opinion of Williams, Mullen, Christian & Dobbins.
*10.1 Guaranty Savings and Loan, F.A. 1991 Incentive Plan, attached as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-4, as amended, Registration No. 33-76064,
incorporated herein by reference.
*10.2 Amended and Restated Employment Agreement between Guaranty Savings and Loan, F.A. and Thomas P.
Baker dated July 1, 1991, attached as Exhibit 10.2 to the Registrant's Registration Statement
on Form S-4, as amended, Registration No. 33-76064, incorporated herein by reference.
*21 Subsidiary of the Corporation.
*23.1 Consent of Williams, Mullen, Christian & Dobbins (included in Exhibit 5).
*23.2 Consent of BDO Seidman, LLP.
*24 Powers of Attorney (included on Signature Page).
* Filed previously.