Filed Pursuant to Rule 424(b)(1)
File Number 333-88335
PROSPECTUS
400,000 Shares
[LOGO OF GUARANTY FINANCIAL CORPORATION]
Common Stock
Guaranty Financial Corporation owns and operates Guaranty Bank, which
has eight branches in the central Virginia area. We are offering 400,000 shares
of our common stock. Our common stock is traded on The Nasdaq National Market
under the symbol "GSLC." On November 16, 1999, the closing sale price for our
common stock was $9.125.
Investing in our common stock involves risks. You should read the "Risk
Factors" section beginning on page 8 before investing.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common stock or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
In addition, shares of our common stock are not deposits or accounts
and are not insured or guaranteed by the Federal Deposit Insurance Corporation
or any other governmental agency.
Underwriter's
Price to Public Commission Proceeds to Us
---------------------------------------------------
Per Share................. $ 9.00 $ 0.54 $ 8.46
Total..................... $ 3,600,000 $ 216,000 $ 3,384,000
This is a best efforts offering, which means that the underwriter is
not required to sell any specific number of shares or dollar amount of common
stock, but will use its best efforts to sell the common stock offered. We have
the right to increase the amount of common stock offered to 460,000 shares, in
which case we will pay the underwriter additional compensation.
McKinnon & Company, Inc., expects to deliver the shares on or about
November 22, 1999, subject to customary closing conditions.
McKinnon & Company, Inc.
The date of this prospectus is November 17, 1999.
[MAPS OF VIRGINIA CONTAINING BRANCH AND OFFICE LOCATIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY 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 NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
TABLE OF CONTENTS
Page
Prospectus Summary .............................................................................. 3
Recent Developments.............................................................................. 6
Summary Financial Information.................................................................... 7
Risk Factors .................................................................................... 8
Use of Proceeds ................................................................................. 10
Market for Common Stock and Dividends ........................................................... 10
Capitalization .................................................................................. 12
Business ........................................................................................ 12
Selected Historical Financial Information........................................................ 20
Management's Discussion and Analysis of Financial Condition and Results of Operations............ 21
Management ...................................................................................... 48
Description of Capital Stock .................................................................... 53
Supervision and Regulation....................................................................... 55
Underwriting .................................................................................... 58
Legal Matters ................................................................................... 58
Experts ......................................................................................... 58
Caution About Forward Looking Statements......................................................... 59
Index to Consolidated Financial Statements ...................................................... F-1
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
In this prospectus, we frequently use the terms "we" and "Guaranty" to
refer to both Guaranty Financial Corporation and Guaranty Bank, which we own. To
understand the offering fully and for a more complete description of the
offering you should read this entire document carefully, including particularly
the "Risk Factors" section.
PROSPECTUS SUMMARY
This prospectus summary calls your attention to selected information in
this document, but may not contain all the information that is important to you.
3
Our Company
Guaranty Financial Corporation is headquartered in Charlottesville,
Virginia. We own Guaranty Bank, a Virginia-chartered commercial bank. We conduct
almost all of our business through Guaranty Bank, which operates eight banking
offices in Virginia, including five in Charlottesville/Albemarle County, one in
Harrisonburg, one at Lake Monticello in Fluvanna County and one in Henrico
County, immediately west of Richmond. Since June 30, 1995 Guaranty has grown
from three to eight branch offices. We plan to open an additional branch office
in Albemarle County in early 2000.
There are some things about Guaranty that you should understand because
they distinguish us from many community banks.
o In 1996 we decided that significant growth would enhance
shareholder value in the long run. The following table
reflects our growth since June 30, 1995.
June 30,
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------- --------------- --------------- --------------------
(In thousands)
Total assets $251,914 $162,678 $130,064 $110,161 $89,461
Net loans 185,835 123,416 87,974 84,081 75,221
Deposits 193,983 128,068 99,122 74,687 52,461
o Our strategy included converting Guaranty Bank from a savings
association to a commercial bank. The Guaranty Bank conversion
to a bank charter on July 1, 1997, coincidentally, happened at
the same time as several large Virginia banks were acquired by
large out-of-state banks. Bank consolidation in our markets
allowed us to accelerate our growth.
Many borrowers and depositors who prefer not to deal with
extremely large out-of-state banks moved their business to
Guaranty. Just as important, we were able to hire several
talented bankers with loyal customers who prefer to work for
us instead of a large, bureaucratic, out-of-state institution.
For example, our head of construction lending came to Guaranty
in December, 1997 from a Richmond-based statewide bank that
had been acquired. Our construction and land development loans
increased from $18.3 million at December 31, 1997 to $59.6
million at June 30, 1999. Slightly over half these loans are
to builders and developers in the Richmond area. Most of the
remainder are in and around Charlottesville. Our head of
commercial lending and staff came to Guaranty in July, 1998
from a Charlottesville-based statewide bank that also had been
acquired. Our commercial loan portfolio grew from $6.3 million
at June 30, 1998 to $42.2 million at June 30, 1999. Our
commercial business loans are predominantly in Charlottesville
and Albemarle County.
4
o While we have enjoyed growth in assets, loans and deposits, we
also have had a substantial increase in fixed assets, branch
offices and employees.
June 30,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ---------------- ----------------- ---------------- ------------------
(Dollars in thousands)
Fixed assets $8,376 $6,437 $5,903 $3,525 $437
Branch offices 7 5 5 4 3
Full-time employees 96 77 57 52 44
As a result, our non-interest expense has increased just as
rapidly as our net interest income and we have not been as
profitable as most community banks our size.
o We intend to continue our growth strategy. Although we expect
additional increases in non-interest expense, our business
plan reflects that net interest income will increase faster
than non-interest expense. Any significant increase in our
profitability depends on this. To accomplish this, we must
continue to increase loans, while we control deposit costs and
personnel expense. We believe these goals can be achieved.
Some of our larger construction and commercial loan customers,
as well as potential commercial customers who want to bank
with Guaranty, have borrowing needs that exceed our legal
lending limit. If we sell all the common stock we are
offering, our legal lending limit will increase from
approximately $2.8 million to approximately $3.4 million.
Although this will not enable us to meet all the borrowing
needs of larger customers, it will enhance our ability to
compete with larger banks for commercial loans. We also
anticipate increased commercial business as we have completed
installation of various cash management services that will
better enable Guaranty to compete with larger banks for
commercial accounts. While we expect additional loan growth,
our business plan reflects that our loans will not continue to
grow as rapidly as in the past two years.
Our deposit costs have decreased gradually, but steadily, in
the past few years, as we have emphasized money market and
demand accounts. However, at times we have offered premium
deposit rates in order to fund loan growth. We will continue
to reduce deposit costs as market conditions and our need to
fund loans permit. Guaranty is competing for lower cost
accounts by offering new services, including debit cards and
internet banking. To control deposit costs we must increase
demand and money market accounts as a percentage of total
deposits.
Employee compensation is the largest component of our
non-interest expense. We expect continued increases in
compensation and non-interest expense, although at a much
lower rate than in the past two years. Additional employees
will be added primarily in connection with branch office
expansion. We do not plan to add any significant number of
more highly paid officers in the near future. Guaranty also is
selectively reducing staffing levels in certain areas.
Our principal executive offices are located 1658 State Farm Boulevard,
Charlottesville, Virginia 22911 and our telephone number is (804) 970-1100.
5
The Offering
We have assumed in presenting the information under this subheading
that we will not exercise our right to increase the number of shares offered.
Common Stock Offered............... 400,000 shares.
Common Stock Outstanding
After the Offering................. 1,901,727 shares, assuming we do not exercise our option to increase the
size of this offering. In addition, at June 30, 1999, there were options
outstanding to purchase 132,000 shares of common stock and subordinated
debentures convertible into 372,973 shares of common stock. The
outstanding options are exercisable at a weighted average price of $12.00.
The subordinated debentures are convertible into common stock at the
equivalent of $18.50 per share.
Use of Proceeds.................... We intend to use the net proceeds for general corporate purposes, including
providing additional equity capital to Guaranty Bank to support future
growth.
Dividends.......................... Our annualized dividend is currently $0.24 per share.
Nasdaq National
Market Symbol...................... GSLC
RECENT DEVELOPMENTS
Guaranty will incur non-recurring after-tax charges of approximately
$1.1 million in the quarter ending September 30, 1999. The charges result
primarily from the sale of approximately $13 million in long term corporate
bonds and the sale of Guaranty's mortgage loan servicing rights. As a result of
the charge, Guaranty reported a third quarter after-tax loss of approximately
$885,000. Guaranty expects to be profitable for the year ending December 31,
1999.
The bonds that were sold had a weighted average yield of 5.91% and the
proceeds were used to pay down short term borrowings with an average cost of
5.40%. As a result of the sales, the weighted average yield on Guaranty's
available for sale securities increased to 6.79% from 6.32%.
Guaranty's mortgage loan servicing rights accumulated as a by-product
of its mortgage lending business. Generally, the value of servicing rights moves
inversely with the value of interest bearing securities as market interest rates
change. Guaranty has found that the value of servicing rights is extremely
sensitive to changes in market interest rates, but tends to fall faster as
interest rates decline than increase as interest rates rise. Increases and
decreases in the value of servicing rights are treated as income or expense.
Because Guaranty cannot control or predict changes in the value of servicing
rights or the rate of amortization as loans prepay, it has decided to exit the
mortgage loan servicing business.
6
SUMMARY FINANCIAL INFORMATION
The following unaudited consolidated summary sets forth selected
financial data for Guaranty Financial Corporation and its subsidiaries for the
periods and at the dates indicated. You also should read the detailed
information and the financial statements included elsewhere in this in this
prospectus.
Six Months
Six Months Year Ended Ended Year Ended
Ended June 30, December 31, December 31 June 30,
-------------- ------------ ----------- -------------------------
1999 1998 1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Income Statement Data
Gross interest income........... $ 8,585 $ 5,368 $ 13,060 $ 9,520 $ 4,276 $ 7,617 $ 6,788 $ 6,684
Gross interest expense.......... 5,175 3,257 7,409 6,038 2,940 5,192 4,663 5,073
Net interest income............. 3,410 2,111 5,651 3,482 1,336 2,425 2,125 1,611
Provision (credit) for possible
loan losses.................... 165 95 184 122 92 57 (9) 74
Net interest income after
provision for loan losses...... 3,245 2,016 5,467 3,360 1,244 2,368 2,134 1,537
Non-interest income............. 952 1,075 1,966 1,867 462 1,107 872 126
Non-interest expense............ 3,402 2,400 5,793 3,843 1,716 2,487 2,530 2,182
Income (loss) before income taxes 795 691 1,640 1,384 (10) 988 476 (519)
Income taxes.................... 270 261 624 486 (4) 344 101 (235)
Income before cumulative effect of
change in accounting principle. 525 430 1,016 898 (6) 644 375 (284)
Cumulative effect of change in
accounting for income taxes.... - - - - (196) - - -
-------- -------- -------- -------- -------- -------- -------- ------
Net income (loss)............... $ 525 $ 430 $ 1,016 $ 898 $ (6) $ 644 $ 375 $ (480)
======== ======== ======== ======== ======== ======== ======== ======
Per Share Data (1)
Basic and diluted net income (loss) $ .35 $ .29 $ .68 $ .61 $ (.01) $ .70 $ .70 $ (.90)
(2).............................
Cash dividends.................. .12 .09 .21 .12 .05 .05 - -
Book value at period end........ 7.45 8.07 8.36 7.90 7.12 6.91 6.57 6.57
Tangible book value at period end 7.45 8.07 8.36 7.90 7.12 6.91 6.57 6.57
Period-End Balance Sheet Data
Total assets.................... $251,914 $162,678 $217,020 $130,708 $116,020 $110,161 $89,461 $88,256
Total loans..................... 185,835 123,416 162,369 99,675 81,270 84,081 75,221 77,755
Total deposits.................. 193,983 128,068 172,805 112,947 81,401 74,687 52,461 53,467
Long-term debt.................. 1,209 2,140 1,786 2,360 2,706 3,144 3,981 4,834
Shareholders' equity............ 11,193 12,125 12,554 11,860 6,576 6,349 6,016 3,531
Shares outstanding.............. 1,501,727 1,501,727 1,501,727 1,501,383 924,008 919,168 915,568 537,168
Performance Ratios
Return on average assets........ .44% .61% .63% .71% (.01%) .64% .41% (.49%)
Return on average shareholders'
equity......................... 9.14 7.99 9.68 9.11 (.11) 10.24 9.67 (12.00)
Average shareholders' equity to
average total assets........... 4.88 7.60 6.46 7.77 5.68 6.24 4.22 4.07
Net interest margin (3)......... 3.12 3.18 3.73 2.96 2.50 2.54 2.38 1.68
Asset Quality Ratios
Net charge-offs to average loans .06% .05% .09% .06% .01% .02% .00% .09%
Allowance to period-end gross loans .54 .53 .58 .93 1.02 .89 .93 .93
Allowance to non-performing loans 55.29 89.46 46.09 65.11 51.75 52.82 47.61 42.74
Nonaccrual loans to gross loans. .97 .78 .97 1.42 1.97 1.67 1.94 1.31
Nonperforming assets to gross loans
and foreclosed properties...... .97 .78 1.25 1.49 2.04 1.72 2.11 1.60
Capital and Liquidity Ratios
Risk-based
Tier 1 capital............... 8.55% 16.70% 9.19% 14.29% 11.64% 12.13% 13.31% 7.75%
Total capital................ 9.02 17.49 10.60 15.42 12.89 13.28 14.56 9.01
Leverage capital ratio.......... 7.91 11.05 9.74 9.34 5.81 6.01 6.72 4.00
Total equity to total assets.... 4.44 7.45 5.78 9.07 5.66 5.76 6.72 4.00
- -----------------------------
(1) All per share figures have been adjusted to reflect a two-for-one stock
split on January 15, 1996.
(2) Net income per share is computed using the weighted average outstanding
shares.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Corporation's net
yield on its earning assets.
7
RISK FACTORS
You should carefully consider the risk factors listed below before
investing. These risk factors may adversely affect our financial condition,
including future earnings. You should read this section together with the other
information in this prospectus.
We may not be able to maintain and manage our growth.
During the last four years, we have experienced significant growth, and
our business strategy calls for continued expansion. In particular, we intend to
use the funds raised in this offering to support anticipated increases in our
loans and deposits. Our ability to continue to grow depends, in part, upon our
ability to open new branch locations, successfully attract deposits to those
locations, and identify loan and investment opportunities. Our ability to manage
growth successfully also will depend on whether we can efficiently fund our
growth and maintain cost controls and asset quality, as well as on factors
beyond our control, such as economic conditions and interest rate trends. If we
are unable to sustain our growth, our earnings could be adversely affected. If
we grow too quickly, however, and are not able to control costs and maintain
asset quality, rapid growth could adversely affect our financial performance.
Our exposure to credit risk is increased because we focus on commercial and
construction lending.
Our loan portfolio contains a large amount of commercial loans and
construction loans. Commercial loans and construction loans are riskier than
residential real estate loans. These types of loans also are typically larger
than residential real estate loans and consumer loans. Because our loan
portfolio contains a significant number of commercial loans and construction
loans with relatively large balances, the deterioration of one or a few of these
loans may cause a significant increase in nonperforming loans. An increase in
nonperforming loans would result in a loss of earnings from these loans, an
increase in the provision for loan losses and an increase in loan charge-offs.
We maintain an allowance for loan losses based on, among other things,
historical experience, an evaluation of economic conditions, and regular reviews
of delinquencies and loan portfolio quality. We cannot assure you that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the allowance for loan losses will not be required.
Additions to the allowance for loan losses would result in a decrease in our net
income and, possibly, our capital.
A loss of senior officers would adversely affect us.
Guaranty depends heavily on fewer than 10 key officers. Many of our
customers bank with Guaranty because they have developed confidence in our
senior officers over many years. If Guaranty lost these individuals, a
substantial loss of business would be likely. Guaranty does not carry key man
life insurance on its senior officers, but has attempted to reduce its risk
through covenants not to compete.
Changes in interest rates may adversely affect our earnings and financial
condition.
Our net income depends principally upon our net interest income. Net
interest income is the difference between interest earned on loans, investments
and other interest-earning assets and the interest paid on deposits and borrowed
funds. Changes in interest rates can increase or reduce net interest income and
net income.
8
Different types of assets and liabilities may react differently, and at
different times, to changes in market interest rates. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
period, an increase in market rates of interest could reduce net interest
income. When interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could reduce net interest
income. Changes in market interest rates are affected by many factors beyond our
control, including inflation, unemployment, money supply, international events,
and events in the United States and other financial markets.
We attempt to manage risk from changes in market interest rates, in
part, by controlling the mix of interest rate sensitive assets and interest rate
sensitive liabilities. However, interest rate risk management techniques are not
exact. A rapid increase or decrease in interest rates could adversely affect our
financial performance.
Adverse conditions in our market area may have an adverse effect on us.
The majority of our business is with customers located within
Charlottesville and Albemarle County, Virginia. The businesses to whom we make
loans are small and medium sized and are dependent upon the local economy.
Adverse economic and business conditions in our market area could affect our
borrowers, their ability to repay their loans, and consequently our financial
condition and performance.
Competition with other financial institutions could adversely affect our
profitability.
We face substantial competition for loans and deposits. Competition for
loans comes principally from other banks, savings institutions, mortgage banking
companies and other lenders. Some of our competitors enjoy advantages over us
including greater financial resources, a wider geographic presence or more
accessible branch office locations, the ability to offer a wider array of
services, or more favorable pricing alternatives and lower origination and
operating costs. This competition could decrease the number and size of loans
which we make and the interest rate which we receive on these loans.
We compete for deposits with other depository institutions such as
banks, savings institutions and credit unions, as well as institutions offering
uninsured investment alternatives, including money market funds and mutual
funds. These competitors may offer higher interest rates than we do, which could
decrease the deposits that we attract or require us to increase our rates to
attract new deposits. Increased deposit competition could increase our cost of
funds and adversely affect our ability to generate the funds necessary for our
lending operations.
We must pay interest on our subordinated debentures.
In 1998 we issued $6.9 million of 7.0% convertible subordinated
debentures to Guaranty Capital Trust I, a Delaware business trust that we
control. Interest payments on the debentures total $483,000 per year, which must
be paid before we pay dividends on our common stock. We have the right to defer
interest payments on the debentures for up to 20 consecutive quarters. However,
if we elected to defer interest payments, all deferred interest, compounded at
7.0% per year, must be paid before we may pay dividends on our common stock.
Government regulation significantly affects our business.
The banking industry is extensively regulated. Banking regulations are
intended primarily to protect depositors and the federal deposit insurance
funds, not stockholders. We and our wholly-owned subsidiary, Guaranty Bank, are
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System and the Virginia State Corporation Commission. Regulatory
requirements affect
9
our lending practices, capital level, investment practices, dividend policy and
growth. Our failure to meet minimum capital requirements could result in actions
by our regulators that could adversely affect our ability to pay dividends or
otherwise adversely affect our operations.
Problems related to the Year 2000 issue could adversely affect our business.
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The failure to
correct any such programs or hardware could result in system failures or
miscalculations causing disruptions of our operations, including a temporary
inability to process transactions or engage in similar normal business
activities.
The Year 2000 issue may adversely affect the credit quality of our loan
portfolio if our customers were unable to service their bank debt due to their
own Year 2000 problems or that of their key customers or suppliers. Year 2000
problems for our suppliers may have an adverse effect on us. For example,
without electrical power and telephone communications, it would be very
difficult for us to operate.
USE OF PROCEEDS
We will receive net proceeds of approximately $3.23 million ($3.74
million if we exercise our right to increase this offering from 400,000 shares
to 460,000 shares), after deduction of expenses of the offering (estimated at
$150,000) and the underwriting discount.
We will use the net proceeds from this offering for general corporate
purposes, including providing additional equity capital to Guaranty Bank to
support continued asset growth.
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock
Our common stock is listed for quotation on the Nasdaq National Market
under the symbol GSLC. As of June 30, 1999, our common stock was held by 1,203
stockholders of record.
10
Set forth below are the high and low sale prices per share for our
common stock for each quarter of 1997 and 1998, and for 1999 through November
16, 1999, as well as the amount of cash dividends per share we declared in each
quarter.
High Low Dividend
1999
4th Quarter (through November 16, 1999) 10.75 8.00 --
3rd Quarter 11.75 10.13 .06
2nd Quarter 12.13 10.38 .06
1st Quarter 13.63 11.25 .06
1998
4th Quarter 15.00 10.75 .06
3rd Quarter 17.00 12.38 .06
2nd Quarter 17.00 15.50 .06
1st Quarter 16.75 13.75 .03
1997
4th Quarter 15.25 10.75 .03
3rd Quarter 12.75 10.00 .03
2nd Quarter 11.00 9.25 .06
1st Quarter 11.00 8.25 --
The closing sale price for our common stock on November 16, 1999, as
reported on the Nasdaq National Market was $9.125 per share.
Dividends
Substantially all of the funds available for the payment of cash
dividends are derived from Guaranty Bank. Future cash dividends will depend
primarily upon Guaranty Bank's earnings, financial condition, need for funds,
and government policies and regulations applicable to both Guaranty Bank and us.
As of June 30, 1999, the net profits of Guaranty Bank available for distribution
to us as dividends without regulatory approval were approximately $1.76 million.
We cannot pay dividends should we elect to defer interest payments on our 7.0%
convertible debentures or if we are in default of our obligations relating to
those securities. Guaranty presently intends to pay dividends for each quarter
of 1999, each in an amount of not less than $.06 per share, subject to our
financial condition. We declared cash dividends of $.06 per share on March 11,
1999, June 17, 1999, and September 16, 1999, payable to shareholders of record
on April 16, 1999, July 16, 1999 and October 15, 1999, respectively.
11
CAPITALIZATION
The following table sets forth our consolidated capitalization at June
30, 1999. This table should be read with our financial statements and related
notes included in this prospectus.
June 30, 1999
Stockholder's equity:
Common Stock, $1.25 par value, 4,000,000
shares authorized, 1,501,727 shares
issued and outstanding $1,877
Preferred Stock, $1.00, par value, 500,000
shares authorized, none issued or outstanding 0
Additional paid-in capital 5,725
Accumulated other comprehensive income (loss) (1,617)
Retained earnings 5,208
Total stockholders' equity (1) $11,193
- ------------
(1) In 1998 Guaranty issued $6.9 million in convertible subordinated
debentures, which are convertible at the holders' option into 372,973
shares of common stock at the equivalent of $18.50 per share. These
debentures are not included in stockholders' equity at this time.
BUSINESS
General
Guaranty Financial Corporation is a bank holding company headquartered
in Charlottesville, Virginia. We provide commercial and retail banking services
through our principal operating subsidiary, Guaranty Bank. At June 30, 1999, we
had total consolidated assets of $251.9 million, deposits of $194.0 million and
stockholders' equity of $11.2 million.
We operate primarily in Charlottesville, Virginia, the surrounding
County of Albemarle and the contiguous County of Fluvanna in central Virginia.
We also operate in Harrisonburg, Virginia, which is in the Shenandoah Valley.
Although we have had no office in the Richmond, Virginia area, a large
percentage of our construction loan customers are in and around Richmond. In
September 1999, we opened a branch office in suburban Henrico County,
immediately west of Richmond.
We are a community bank which provides a broad range of commercial and
retail banking services designed to meet the needs of businesses and consumers
in the communities we serve. As a community bank, we seek to provide our
customers with the technological support that banking in today's market
requires. We emphasize local decision making within our organization and provide
attentive personal service to our customers. By combining the technological
support and products and services that our customers demand with direct access
to senior management and responsive customer service, we seek
12
to foster a business and consumer banking environment that allows us to
effectively compete in our particular market with other financial institutions
of all sizes.
Strategy
Our strategy for building long term value for our shareholders is to
increase net income through continued loan growth, while controlling the cost of
our deposits and growth of non-interest expense. To achieve these goals, we plan
to take the following steps.
o Emphasize commercial banking products and services. Commercial
customers are a source of prime-based loans, low cost deposits
and fee income from cash management services. From June 30,
1998 to June 30, 1999 our commercial loan portfolio grew from
$6.3 million, to $42.2 million. At June 30, 1999 commercial
deposit accounts totaled $14.7 million, of which $8.04 million
were non-interest bearing demand deposits. At June 30, 1998,
commercial demand deposits were $2.07 million.
We have been able to increase our commercial business because
we hired a team of experienced bankers from a
Charlottesville-based statewide bank that was acquired by an
out-of-state bank in late 1997. Many customers followed this
team to Guaranty. Significant further growth in this area will
depend on geographic expansion, expanding our base of larger
business customers by addressing two competitive disadvantages
that concern them and expanding our base of small business
customers.
Our legal lending limit is below the level necessary to serve
the borrowing requirements of our larger commercial customers.
The additional capital from this offering will increase our
legal lending limit and solve most, but not all, of those
problems.
A second competitive disadvantage has been our lack of cash
management services. These issues have been addressed. Early
this year we introduced accounts for commercial customers that
automatically invest excess funds daily and afford automatic
access to lines of credit. Additionally, in September of this
year, we began to introduce a 24-hour a day internet-based
service that is designed to allow commercial customers, among
other things, to view checking accounts, initiate wire
transfers and electronic stop payment requests, directly
deposit payrolls to employee accounts, concentrate cash from
other banks into the customer's Guaranty account and pay
bills.
In October 1999 Guaranty will introduce a program specifically
designed to appeal to small businesses. These customers and
potential customers differ from our larger commercial
customers in that they demand smaller lines of credit and less
sophisticated management services. In exchange for lower fees,
this program will feature higher yielding loans and
non-interest bearing demand accounts. Guaranty's program to
attract small business customers will be staffed by three
experienced bankers. This program also is intended to allow
officers who are responsible for our larger commercial
customers to focus primarily on growing that part of our
business.
o Emphasize Construction Lending. From December 31, 1997 to June
30, 1999 our construction and land development loans have
increased from $18.3 million to $59.6 million. Our business
plan reflects a moderate increase in constructions loans. The
increase in our legal lending limit expected to result from
this offering will enable us to transact more business with
our larger construction and land development loan customers.
13
o Expand Our Branch Network. In 1998, we opened new branches in
Fluvanna County and Charlottesville. We followed this
expansion with the addition of our Henrico County office,
immediately west of Richmond, in September, 1999.
Approximately 55% of our construction and land development
loans are to builders and developers in the Richmond, Virginia
area. Our Henrico County branch office will enable us to more
effectively market deposits and other services to these
customers.
We will open an office in the Forest Lakes area of Albemarle
County, immediately north of Charlottesville in early 2000.
Forest Lakes is a 1000 unit residential development. The
immediately surrounding area includes the University of
Virginia's North Fork Research Park, which has an approved
plan for up to 3,000,000 square feet of industrial, office and
retail development.
We plan to open a second branch office in Harrisonburg,
Virginia in the third quarter of 2000. Other than the Forest
Lakes and Harrisonburg branches, we do not have firm plans to
establish any new branches. However, we will open new branches
in existing or new markets if attractive sites become
available.
o Provide New Services for Individual Customers. For many years
Guaranty has effectively marketed mortgage loans, home equity
loans and savings products. Only in recent years, however, has
Guaranty competed for other business from individuals. In
order to control deposit costs, Guaranty must continue to
increase its lower cost transaction accounts. Demand and money
market accounts, which averaged $12.8 million in 1997,
averaged $52.3 million in the six months ended June 30, 1999.
To capture more business from individuals, Guaranty has
gradually increased the array of products and services it
provides. Guaranty made debit cards available to its 6,000
demand deposit customers in September of this year and in
August introduced internet banking. This service allows
individual customers to transfer funds between accounts, pay
bills electronically and set up automatic drafts, receive
e-mail when specific checks clear or when the customer's
account goes above or below a specific balance. The program
also allows a customer to download account information into
widely used financial management programs. Guaranty has
introduced an electronic checking account designed for
customers who prefer to bank electronically. This product
provides internet banking and a debit card at no charge,
provided the customer has no more than three non-electronic
transactions per month.
In August 1999, Guaranty hired a full time trainer to improve
sales and customer retention in its branch offices. Sales
training will be in connection with a computerized customer
marketing information program that Guaranty expects to have in
place early next year. This program will provide branch
employees timely customer information and prompt employees on
a customer's propensity to purchase a particular product or
service. The customer marketing information program also will
provide market segmentation data designed to focus direct
sales efforts on customers who are likely to purchase a
particular product or service. Guaranty will offer credit
cards, beginning in the fourth quarter of this year.
14
Market Area
Guaranty is headquartered in Charlottesville, 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 largest employer. Guaranty operates eight full service
retail branches, which serve Charlottesville, Albemarle County, Fluvanna County,
Henrico County and Harrisonburg, Virginia.
Competition
Guaranty faces strong competition for loans and deposits. Competition
for loans comes primarily from commercial banks and mortgage bankers who also
make loans in Guaranty's market area. Guaranty competes for 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 for deposits from commercial
banks, money market and mutual funds, credit unions and other investment
vehicles. 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 products at
competitive rates and convenient business hours.
Many of our competitors have 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 position and
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. Guaranty is implementing a loan review process that 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 senior officers, meets as necessary to review all
applications for loans in excess of $250,000. A Directors Loan Committee, which
currently consists of five directors (any two of whom may act), approves loans
in excess of $1,000,000 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-
15
performing loans. The Directors Loan Committee also reviews lending policies
proposed by Management.
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 Guaranty 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. 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
June 30, 1999, commitments to extend credit totaled $69.2 million.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial
real estate in Guaranty's market area, including multi-family residential
buildings, commercial buildings and offices, small shopping centers and
churches. At June 30, 1999 and December 31, 1998, commercial real estate loans
aggregated $13.9 million or 7.0% and $13.3 million or 7.7%, respectively of
Guaranty's gross loans.
In its underwriting of commercial real estate, Guaranty may lend up to
100% of the secured 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 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.
One-to-Four-Family Residential Real Estate Lending
Guaranty makes loans secured by one-to-four-family residences, all of
which are 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. Guaranty makes 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
16
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.
Although, due to competitive market pressures, Guaranty does originate
fixed-rate mortgage loans, it currently underwrites and documents the majority
of such loans to permit their sale in the secondary mortgage market. At June 30,
1999, $21.0 million, or 10.63%, of Guaranty's 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 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 June 30, 1999, $48.5
million, or 24.5%, of Guaranty's 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
land development loans. At June 30, 1999, construction and land development
loans outstanding were $59.6 million, or 30.1%, of gross loans. Approximately
90% of these loans are concentrated in the Richmond and Charlottesville,
Virginia markets. The average life of a construction loan is approximately nine
months and they reprice monthly to meet the market, normally prime plus one and
one-half 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 or land 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 property as security for its construction loans and personal
guarantees from the borrower's principal owners.
17
Consumer Lending
Guaranty offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit, automobile loans, deposit account
loans, installment and demand loans, letters of credit, and home equity loans.
At June 30, 1999, Guaranty had consumer loans of $12.6 million or 6.4% of gross
loans. Such loans are generally made to customers with which Guaranty had a
pre-existing relationship. Guaranty originates all of its consumer loans in its
market area and intends to continue its consumer lending in this geographic
area. Most of our consumer loans are tied to the prime lending rate and reprice
daily.
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. Guaranty has very few unsecured consumer loans.
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.
Commercial Loans
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 monitors the
financial condition of its business borrowers. Residential mortgage loans
generally are 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 is
implementing a credit review and monitoring system to review the cash flow of
commercial borrowers. At June 30, 1999, commercial loans totaled $42.2 million,
or 21.3% of the total loan portfolio.
18
Employees
At June 30, 1999, Guaranty had the equivalent of 96 full-time employees
and five part-time employees. None of Guaranty's employees are 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.
Description of Property
As of September 1, 1999, Guaranty conducted its business from its main
office in Charlottesville, Virginia and seven branch offices. The following
table provides certain information with respect to these properties:
Date Facility Ownership and
Location Opened Leasing Arrangements
-------- ------ --------------------
Main Office:
1658 State Farm Boulevard
Charlottesville, Virginia 1996 Owned by Guaranty
Branch Offices:
Downtown Mall 1992 Lease expires in 2002, subject to Guaranty's
520 East Main Street right to renew for three additional five-year
Charlottesville, Virginia terms
Barracks Road 1994 Lease expires in 1999, subject to Guaranty's
1924 Arlington Boulevard right to renew for three additional five-year
Charlottesville, Virginia terms
West Main 1998 Lease expires in 2003, subject to Guaranty's
2211 West Main Street right to renew for two additional five-year terms.
Charlottesville, Virginia
Route 29 North & Rio Road 1985 Owned by Guaranty
1700 Seminole Trail
Charlottesville, Virginia
Harrisonburg 1997 Owned by Guaranty
1925 Reservoir Street
Harrisonburg, Virginia
Lake Monticello 1998 Owned by Guaranty
Route 53 & Turkey Sag Road
Lake Monticello, Virginia
Henrico County 1999 Owned by Guaranty
3490 Lauderdale Drive
Richmond, Virginia
19
SELECTED HISTORICAL FINANCIAL INFORMATION
The following unaudited consolidated summary sets forth selected
financial data for Guaranty and its subsidiaries for the periods and at the
dates indicated. The following summary is qualified in its entirety by the
detailed information and the financial statements included elsewhere in this
prospectus.
Six Months
Six Months Year Ended Ended Year Ended
Ended June 30, December 31, December 31 June 30,
-------------- ------------ ----------- -------------------------
1999 1998 1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Income Statement Data
Gross interest income.............. $ 8,585 $ 5,368 $ 13,060 $ 9,520 $ 4,276 $ 7,617 $ 6,788 $ 6,684
Gross interest expense............. 5,175 3,257 7,409 6,038 2,940 5,192 4,663 5,073
Net interest income................ 3,410 2,111 5,651 3,482 1,336 2,425 2,125 1,611
Provision (credit) for possible
loan losses....................... 165 95 184 122 92 57 (9) 74
Net interest income after provision
for loan losses................... 3,245 2,016 5,467 3,360 1,244 2,368 2,134 1,537
Non-interest income................ 952 1,075 1,966 1,867 462 1,107 872 126
Non-interest expense............... 3,402 2,400 5,793 3,843 1,716 2,487 2,530 2,182
Income (loss) before income taxes 795 691 1,640 1,384 (10) 988 476 (519)
Income taxes....................... 270 261 624 486 (4) 344 101 (235)
Income before cumulative effect of
change in accounting principle.... 525 430 1,016 898 (6) 644 375 (284)
Cumulative effect of change in
accounting for income taxes....... - - - - (196) - - -
-------- -------- -------- ------- ------- ------- ------- ------
Net income (loss).................. $ 525 $ 430 $ 1,016 $ 898 $ (6) $ 644 $ 375 $ (480)
======== ======== ======== ======= ======= ======= ======= ======
Per Share Data (1)
Basic and diluted net income
(loss)(2)......................... $ .35 $ .29 $ .68 $ .61 $ (.01) $ .70 $ .70 $ (.90)
Cash dividends..................... .12 .09 .21 .12 .05 .05 - -
Book value at period end........... 7.45 8.07 8.36 7.90 7.12 6.91 6.57 6.57
Tangible book value at period end.. 7.45 8.07 8.36 7.90 7.12 6.91 6.57 6.57
Period-End Balance Sheet Data
Total assets....................... $251,914 $162,678 $217,020 $130,708 $116,020 $110,161 $89,461 $88,256
Total loans........................ 185,835 123,416 162,369 99,675 81,270 84,081 75,221 77,755
Total deposits..................... 193,983 128,068 172,805 112,947 81,401 74,687 52,461 53,467
Long-term debt..................... 1,209 2,140 1,786 2,360 2,706 3,144 3,981 4,834
Shareholders' equity............... 11,193 12,125 12,554 11,860 6,576 6,349 6,016 3,531
Shares outstanding................. 1,501,727 1,501,727 1,501,727 1,501,383 924,008 919,168 915,568 537,168
Performance Ratios
Return on average assets........... .44% .61% .63% .71% (.01%) .64% .41% (.49%)
Return on average shareholders'
equity............................ 9.14 7.99 9.68 9.11 (.11) 10.24 9.67 (12.00)
Average shareholders' equity to
average total assets.............. 4.88 7.60 6.46 7.77 5.68 6.24 4.22 4.07
Net interest margin (3)............ 3.12 3.18 3.73 2.96 2.50 2.54 2.38 1.68
Asset Quality Ratios
Net charge-offs to average loans... .06% .05% .09% .06% .01% .02% .00% .09%
Allowance to period-end gross loans .54 .53 .58 .93 1.02 .89 .93 .93
Allowance to non-performing loans.. 55.29 89.46 46.09 65.11 51.75 52.82 47.61 42.74
Nonaccrual loans to gross loans.... .97 .78 .97 1.42 1.97 1.67 1.94 1.31
Nonperforming assets to gross loans
and foreclosed properties......... .97 .78 1.25 1.49 2.04 1.72 2.11 1.60
Capital and Liquidity Ratios
Risk-based
Tier 1 capital.................. 8.55% 16.70% 9.19% 14.29% 11.64% 12.13% 13.31% 7.75%
Total capital................... 9.02 17.49 10.60 15.42 12.89 13.28 14.56 9.01
Leverage capital ratio............. 7.91 11.05 9.74 9.34 5.81 6.01 6.72 4.00
Total equity to total assets....... 4.44 7.45 5.78 9.07 5.66 5.76 6.72 4.00
- -------------------
(1) All per share figures have been adjusted to reflect a two-for-one stock
split on January 15, 1996.
(2) Net income per share is computed using the weighted average outstanding
shares.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Corporation's net
yield on its earning assets.
20
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 financial position at June
30, 1999, and December 31, 1998 and 1997 and results of it's operations for the
six months ended June 30, 1999 and 1998, the years ended December 31, 1998 and
1997, the six months ended December 31, 1996 and the fiscal year ended June 30,
1996. 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. Further, there are no
agreements between Guaranty and the Federal Reserve, the Virginia State
Corporation Commission or the FDIC, nor has any 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.
Net Income
Net income for the six months ended June 30, 1999 was $525,000 ($.35
per diluted share), an increase of 22.3% when compared to earnings of $429,000
($.29 per diluted share) for the same period in 1998. Net income for the year
ended December 31, 1998 was $1,016,000, ($.68 per diluted share), a 13.3%
increase when compared to 1997 earnings of $898,000 ($.61 per diluted share).
These increased earnings where primarily a result of increased net interest
income, growth and expansion of the existing branch network, and the addition
and expansion of the commercial and construction loan departments. Increased
revenues were largely offset by additional costs relating to the expansion of
the branch network and lending departments. In addition, 1997 earnings were
affected by the one-time expenses related to the conversion to a state chartered
commercial bank.
Net income for the year ended December 31, 1997 was $898,000, ($.61 per
share), a 161.8% increase when compared to calendar year 1996 earnings of
$343,000 ($.37 per share). Increased earnings in 1997 were primarily a result of
an increased net interest margin and gains on the sale of loans and securities
resulting from a favorable interest rate environment during a restructuring of
the balance sheet. These increased revenues were partially offset by expenses
relating to the conversion to a state chartered commercial bank in June 1997 and
costs related to the expansion of the branch network. Calendar 1997 was
positively impacted by the first full year of operations for the combined
corporate headquarters and branch that was opened on the east side of
Charlottesville, Virginia in December 1996. Also, in May 1997, a full-service
branch was opened in Harrisonburg, Virginia.
For the six months ended December 31, 1996, the Corporation had a net
loss of $6,000 compared to earnings of $299,000 for the same period in 1995.
Income decreased during the six months ended December 31, 1996, due to a charge
of $237,000 when it restructured its investment portfolio and a one time special
assessment of $347,000 to recapitalize the Savings Association Insurance Fund
("SAIF"). In order for Guaranty to convert to a commercial bank, securities
classified as available for sale had to be reclassified as trading securities.
This resulted in a mark to market loss of $237,000 which was charged against net
income and adjusted the basis of the securities. Without these charges, Guaranty
would have reported an after tax net income of $376,000 for the six months ended
December 31, 1996.
21
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
interest earning assets.
Net interest income was $3.4 million for the six months ended June 30,
1999 compared to $2.1 million for the six months ended June 30, 1998, an
increase of 61.5%. Average loans for the six months ended June 30, 1999 were
$175.0 million, a 63% increase over the same period in 1998. Principally as a
result of reduced fee income on construction loans and reductions in the prime
lending rate in the second half of 1998, the net interest margin fell to 3.12%
for the six months ended June 30, 1999, compared to 3.73% for the year ended
December 31, 1998.
Net interest income was $5.7 million for the year ended December 31,
1998, 62.9% greater than the $3.5 million reported during the year ended
December 31, 1997. This improvement in the net interest income was primarily due
to the volume increases in the loan portfolio and interest bearing deposits with
other banks and a decline in the average cost of interest bearing liabilities.
Average loans increased 37.6% for the year ended December 31, 1998. The
average balance of the interest bearing deposits with other banks was $10.5
million during the year ended December 31, 1998 an increase of 87.3% from an
average balance of $5.6 million during the year ended December 31, 1997. The
average yield on average loans increased 60 basis points from 8.50% in 1997 to
9.15% in 1998. The yield on interest bearing deposits declined from 5.05% in
1997 to 4.87% in 1998. The cost of average total interest bearing liabilities
during the year ended December 31, 1998 declined from 5.29% in 1997 to 5.18% in
1998. The average rate paid on savings accounts declined 39 basis points from
3.36% in 1997 to 2.97% in 1998. The average rate paid on certificates of
deposits declined 9 basis points from 5.50% in 1997 to 5.41% in 1998.
Net interest income was $3.5 million for the year ended December 31,
1997, 33.9% greater than the $2.60 million reported during calendar year 1996.
This improvement in net interest income was primarily due to volume increases in
the securities and loan portfolios and to a decline in the average cost of
interest bearing liabilities. Average loans increased 9.6% for the year ended
December 31, 1997. The average balance of the securities portfolio was $22.6
million in calendar 1997, up $7.74 million, or 51.9% over calendar 1996.
Although market interest rates were in a declining trend during the year ended
December 31, 1997, the yield on average loans increased 20 basis points from
8.30% in 1996 to 8.50% in 1997. The average yield on securities declined from
7.4% in 1996 to 7.0% in 1997. Also contributing to the improvement in net
interest income for the year ended December 31, 1997 was a decline in the cost
of average total interest bearing liabilities from 5.6% in 1996 to 5.3% in 1997.
The average rate paid on interest bearing deposits decreased 7 basis points,
from 5.12% to 5.05%, and the average rate paid on certificates of deposit
declined 10 basis points from 5.60% to 5.50%. The increase in net interest
margin was achieved from both volume gains and widening spreads. The increase in
average securities was a result of loan demand not keeping pace with increases
in deposits. This trend reversed in late 1997 as a result of the expanded branch
network and additional loan demand.
Net interest income was $1.3 million for the six month period ended
December 31, 1996, 15.5% greater than the $1.2 million reported for the same
period in 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. The average balance of the securities portfolio was $17.6
million for the six month
22
period ended December 31, 1996, up 124.7% over the same period in 1995. The
average balance of the loan portfolio was $83.8 million for the six month period
ended December 31, 1996, up 7.6% over the same period in 1995. The yield on
average loans increased 4 basis points from 8.2% during the six month period
ended December 31, 1995 to 8.24% for the same period in 1996, while the yield on
securities declined 182 basis points to 7.15% for the six month period ended
December 31, 1996 from 8.97% for the same period in 1995. Also contributing to
the improved net interest margin was a 38 basis point decrease in the rate paid
on average interest bearing liabilities to 5.6% for the six month period ended
December 31, 1996 from 5.9% for the same period in 1995.
The following tables set 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.
Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest earning assets:
Securities $ 34,739 $ 1,118 6.44% $ 16,336 $ 546 6.68%
Loans 175,000 7,256 8.29% 106,823 4,571 8.56%
Interest bearing deposits
in other banks 8,914 211 4.73% 9,413 251 5.49%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets/
Total interest income 218,653 8,585 7.85% 132,572 5,368 8.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 5,070 1,941
Premises and equipment 7,829 5,898
Other assets 4,831 2,087
Less allowance for loan losses (1,025) (900)
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 16,705 9,026
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $235,358 $141,598
====================================================================================================================================
Liabilities and Stockholders' equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts $ 43,150 $ 775 3.59% $16,686 $ 221 2.65%
Savings 10,718 126 2.35% 7,861 123 3.13%
Certificates of deposit 122,649 3,179 5.18% 94,113 2,552 5.42%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 176,517 4,080 4.63% 118,660 2,896 4.88%
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other borrowings 32,852 912 5.56% 5,120 176 6.87%
Bonds payable 1,733 183 21.11% 2,307 185 16.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/total interest expense 211,102 5,175 4.90% 126,087 3,257 5.14%
- ------------------------------------------------------------------------------------------------------------------------------------
Non interest bearing liabilities:
Demand deposits 9,172 3,457
Other liabilities 3,598 1,286
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 223,872 130,830
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 11,486 10,768
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and Stockholders' equity $235,358 $141,598
====================================================================================================================================
Interest spread (1) 2.95% 2.96%
Net interest income/net interest margin (2) $3,410 3.12% $2,111 3.18%
====================================================================================================================================
(1) Interest spread is the average yield earned on earning assets, less the
average rate incurred on interest bearing liabilities.
(2) Net interest margin is net interest income, expressed as a percentage of
average earning assets.
23
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average income/ yield/ Average income/ yield/
Balance expense rate Balance expense rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest earning assets:
Securities $18,388 $1,290 7.02% $22,637 $1,590 7.02%
Loans 122,751 11,231 9.15% 89,222 7,584 8.50%
Interest bearing deposits
in other banks 10,500 539 5.13% 5,605 346 6.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets/
total interest income 151,639 13,060 8.61% 117,464 9,520 8.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 2,450 1,898
Premises and equipment 6,519 5,508
Other assets 3,001 2,624
Less allowance for loan losses (1,104) (890)
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 10,866 9,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $162,505 $126,604
====================================================================================================================================
Liabilities and
Stockholders' equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts $24,936 $862 3.46% $11,110 $289 2.60%
Savings 8,551 254 2.97% 5,654 190 3.36%
Certificates of deposit 93,615 5,068 5.41% 80,779 4,443 5.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 127,102 6,184 4.87% 97,543 4,922 5.05%
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other
borrowings 13,893 899 6.47% 14,070 804 5.71%
Bonds payable 2,142 325 15.17% 2,583 312 12.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities/total interest
expense 143,137 7,408 5.18% 114,196 6,038 5.29%
- ------------------------------------------------------------------------------------------------------------------------------------
Non interest bearing liabilities:
Demand deposits 5,338 1,658
Other liabilities 3,531 903
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 152,006 116,757
Stockholders' equity 10,499 9,847
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Stockholders' equity $162,505 $126,604
====================================================================================================================================
Interest spread (1) 3.43% 2.81%
Net interest income/net interest
Margin (2) $5,652 3.73% $3,482 2.96%
====================================================================================================================================
Six Months Ended Year Ended
December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest earning assets:
Securities $17,640 $631 7.15% $10,523 $820 7.79%
Loans 83,816 3,455 8.24% 79,885 6,442 8.06%
Interest bearing deposits
in other banks 5,257 190 7.23% 5,163 355 6.88%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets/
total interest income 106,713 4,276 8.01% 95,571 7,617 7.97%
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 1,082 2,011
Premises and equipment 4,038 1,427
Other assets 2,680 2,377
Less allowance for loan losses (826) (756)
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 6,974 5,059
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $113,687 $100,630
====================================================================================================================================
Liabilities and
Stockholders' equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts $8,765 $121 2.76% $8,927 $245 2.74%
Savings 4,870 83 3.41% 4,541 152 3.35%
Certificates of deposit 63,346 1,756 5.54% 48,460 2,735 5.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 76,981 1,960 5.09% 61,928 3,132 5.06%
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other
borrowings 25,871 745 5.76% 25,773 1,553 6.03%
Bonds payable 3,060 235 15.36% 3,520 507 14.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities/total interest
expense 105,912 2,940 5.55% 91,221 5,192 5.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Non interest bearing liabilities:
Demand deposits 1,324 1,066
Other liabilities 809 2,062
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 108,045 94,349
Stockholders' equity 5,642 6,281
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Stockholders' equity $113,687 $100,630
====================================================================================================================================
Interest spread (1) 2.46% 2.28%
Net interest income/net interest
Margin (2) $1,336 2.50% $2,425 2.54%
====================================================================================================================================
(1) Interest spread is the average yield earned on earning assets, less the
average rate incurred on interest bearing liabilities.
(2) Net interest margin is net interest income, expressed as a percentage of
average earning assets.
24
The following tables describe 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.
Six Months Ended June 30, 1999 Year Ended December 31, 1998
Compared to Compared to
Six Months Ended June 30, 1998 Year Ended December 31, 1997
Change Due To: Change Due To:
- --------------------------------------------------------------------------------------------------------------
Increase Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)
- --------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ (39) $ 611 $ 572 $ 0 $ (300) $ (300)
Loans (288) 2,973 2,685 580 3,067 3,647
Interest bearing deposits
in other banks (72) 32 (40) (58) 251 193
- --------------------------------------------------------------------------------------------------------------
Total interest income (399) 3,616 3,217 522 3,018 3,540
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts 157 397 554 96 477 573
Savings (483) 486 3 (22) 86 64
Certificates of deposit (226) 853 627 (73) 699 626
- --------------------------------------------------------------------------------------------------------------
Total interest bearing deposits (552) 1,736 1,184 1 1,262 1,263
FHLB advances and other (67) 803 736 107 (12) 95
Bonds payable 117 (119) (2) 66 (53) 13
- --------------------------------------------------------------------------------------------------------------
Total interest expense (502) 2,420 1,918 174 1,197 1,371
- --------------------------------------------------------------------------------------------------------------
Net interest income $ 103 $ 1,196 $ 1,299 $ 348 $ 1,821 $ 2,169
==============================================================================================================
Year Ended December 31, 1997 Six Months Ended December 31, 1996 Year Ended June 30, 1996
compared to compared to compared to
Year Ended December 31, 1996 Six Months Ended December 31, 1995 Year Ended June 30, 1995
Change Due To: Change Due To: Change Due To:
- ------------------------------------------------------------------------------------------------------------------------------------
Increase Increase Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities ($ 54) $ 544 $ 490 ($ 143) $ 422 $ 279 $ 226 $ 9 $ 235
Loans 163 664 827 31 231 262 545 (430) 115
Interest bearing deposits
in other banks (49) 11 (38) (39) 69 30 57 38 95
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 60 1,219 1,279 (151) 722 571 828 (383) 445
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts (13) 63 50 (2) (4) (6) (35) 9 (26)
Savings (1) 35 34 (0) 3 3 (41) 5 (36)
Certificates of deposit (59) 1,218 1,159 (132) 682 550 768 (248) 520
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits (73) 1,316 1,243 (134) 681 547 692 (234) 458
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other (10) (628) (638) (154) 43 (111) (135) 129 (6)
Bonds payable (78) (76) (154) 35 (75) (40) (28) (166) (194)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense (161) 612 451 (253) 649 396 529 (271) 258
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 221 $ 607 $ 828 $ 102 $ 73 $ 175 $ 299 ($ 112) $ 187
====================================================================================================================================
25
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, 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 June 30, 1999, Guaranty had $7.9 million more liabilities than
assets that reprice within one year or less and therefore was in a liability
- -sensitive position. A negative gap can adversely affect earnings in period of
rising interest rates. This negative position is the result of investments in
securities with a maturity of over five years coupled with fixed rate borrowings
and certificates of deposit reaching maturity in one year or less and short term
borrowings used to fund loans also maturing in one year or less.
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.
26
The following table presents the amounts of Guaranty's interest
sensitive assets and liabilities that mature or reprice in the periods
indicated.
June 30, 1999
Maturing or Repricing In:
- --------------------------------------------------------------------------------------------------------
3 Months 4-12 1-5 Over
or less Months Years 5 Years
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
Interest-sensitive assets:
Loans $ 89,483 $ 48,288 $ 32,883 $ 26,989
Investments and mortgage-backed securities(1) 1,750 2,949 2,442 29,158
Deposits at other institutions 6,743 -- -- --
- --------------------------------------------------------------------------------------------------------
Total interest-sensitive assets 97,976 51,237 35,325 56,147
- --------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets 97,976 149,213 184,538 240,685
- --------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
NOW accounts (2) -- -- -- 28,516
Money market deposit accounts 7,369 4,127 3,242 14,737
Savings accounts (3) 2,751 1,540 1,210 5,501
Certificates of deposit 13,138 90,961 20,891 --
Borrowed money 37,125 -- -- --
Convertible preferred securities -- -- -- 6,900
Bonds payable 27 83 324 775
- --------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities 60,410 96,711 25,667 56,429
- --------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive liabilities $ 60,410 $ 157,121 $ 182,788 $ 239,217
- --------------------------------------------------------------------------------------------------------
Period gap $ 37,566 $ (45,474) $ 9,658 $ (282)
Cumulative gap $ 37,566 $ (7,908) $ 1,750 $ 1,468
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 162.19% 94.97% 100.96% 100.61%
Ratio of cumulative gap to total assets 23.07% (4.86%) 1.07% .90%
========================================================================================================
(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, weighted average life
factors have been applied to savings and money market deposit accounts
Of Guaranty's commercial and construction loans with a maturity of more
than one year, approximately $3.4 million have fixed interest rates and $19.5
million have variable interest rates.
Investments
At June 30, 1999, Guaranty had $30.2 million in total available for
sale securities, an increase of 12.2% from $26.9 million at December 31, 1998.
Total available for sale securities increased 122.1% to $26.9 million at
December 31, 1998 from $11.6 million at December 31, 1997. The overall increase
in both periods was primarily a result of management's efforts to increase the
interest margin by investing money received from the increase in deposits and
proceeds from the trust preferred securities, offset by the increase in loans.
See "Recent Developments."
27
The following tables show the amortized cost and fair market value of
investment securities at the dates indicated.
June 30, June 30,
1999 1998
- -------------------------------------------------------------------------------
Cost Market Cost Market
- -------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------
Held-to-maturity
Mortgage-backed securities $ 1,419 $ 1,474 $2,327 $2,426
Other 250 250 100 100
- -------------------------------------------------------------------------------
Total held-to-maturity 1,669 1,724 2,427 2,526
- -------------------------------------------------------------------------------
Available for sale
Corporate bonds 32,329 29,857 16,415 16,346
Other 301 324 59 82
- -------------------------------------------------------------------------------
Total available for sale 32,630 30,181 16,474 16,428
- -------------------------------------------------------------------------------
Trading
U.S. Government Obligations 2,972 2,949 1,991 1,991
- -------------------------------------------------------------------------------
Total Trading 2,972 2,949 1,991 1,991
- -------------------------------------------------------------------------------
Other
Federal Home Loan Bank Stock 1,500 1,500 860 860
- -------------------------------------------------------------------------------
Total $38,771 $36,354 $21,752 $21,805
===============================================================================
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------
Cost Market Cost Market Cost Market Cost Market
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Held-to-maturity
Mortgage-backed securities $ 2,094 $ 2,187 $ 2,745 $ 2,759 $ 3,157 $ 3,349 $ 3,731 $ 3,879
Other 250 250 100 100 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 2,344 2,437 2,845 2,859 3,157 3,349 3,731 3,879
- -----------------------------------------------------------------------------------------------------------------------
Available for sale
Corporate bonds 26,463 26,581 11,415 11,474 -- -- -- --
U.S. Government Obligations 301 328 129 129 -- -- -- --
Mortgage-backed securities -- -- -- -- -- -- 9,993 9,564
- -----------------------------------------------------------------------------------------------------------------------
Total available for sale 26,764 26,909 11,544 11,603 -- -- 9,993 9,564
- -----------------------------------------------------------------------------------------------------------------------
Trading
Mortgage-backed securities -- -- -- -- 16,937 16,736 -- --
U.S. Government Obligations 1,000 1,001 1,031 1,032 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Trading 1,000 1,001 1,031 1,032 16,937 16,736 -- --
- -----------------------------------------------------------------------------------------------------------------------
Other
Federal Home Loan Bank Stock 1,300 1,300 860 860 1,360 1,360 1,360 1,360
- -----------------------------------------------------------------------------------------------------------------------
Total $31,408 $31,647 $16,280 $16,354 $21,454 $21,445 $15,084 $14,803
=======================================================================================================================
28
The following tables set forth the composition of Guaranty's investment
portfolio at the dates indicated.
June 30,
- ---------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------
Book % of Book % of
Value Total Value Total
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Investment securities:
FHLMC mortgage-backed securities $ 1,419 3.91% $ 2,327 10.72%
Corporate bonds 29,857 82.25 16,346 75.31
Treasury notes 3,199 8.82 2,091 9.63
Other 324 .89 82 .38
- ---------------------------------------------------------------------------------------------
Subtotal 34,799 95.87 20,846 96.04
Other:
FHLB stock 1,500 4.13 860 3.96
- ---------------------------------------------------------------------------------------------
Total Investment securities $36,299 100.00% $21,706 100.00%
=============================================================================================
December 31, December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Investment securities:
FHLMC mortgage-backed securities $ 2,094 6.64% $ 2,745 16.80 $ 6,819 32.08% $ 7,459 50.89%
GNMA mortgage-backed securities -- -- -- -- 11,967 56.32 5,836 39.81
Corporate bonds 26,581 84.24 11,474 70.23 -- -- -- --
Treasury notes 1,250 3.96 1,082 6.62 1,104 5.19 -- --
Other 328 1.04 100 0.61 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 30,253 95.88 15,401 94.26 19,890 93.59 13,295 90.70
Other:
FHLB stock 1,300 4.12 860 5.26 1,360 6.40 1,360 9.28
FRB Stock -- -- 72 0.44 -- -- -- --
Other -- -- 7 0.04 3 0.01 3 0.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment securities $31,553 100.00% $16,340 100.00% $21,253 100.00% $14,658 100.00%
====================================================================================================================================
Subsequent to June 30, 1999, Guaranty sold approximately $13 million of
available for sale securities, resulting in realized losses, net of tax, of
approximately $971,000.
Loans
Net loans consist of total loans minus undisbursed loan funds, deferred
loan fees and the allowance for loan losses. Net loans were $185.8 million at
June 30, 1999, an increase of 14.45% from December 31, 1998. Net loans were
$162.4 million at December 31, 1998, an increase of 62.9% over December 31,
1997. Net loans were $99.67 million at December 31, 1997, an increase of 22.6%
over net loans at December 31, 1996.
The following table sets forth the composition of Guaranty's loan
portfolio in dollars at the dates indicated.
29
Loan Portfolio
June 30, December 31, June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage Loans:
Residential $ 69,484 $ 63,218 $ 66,369 $ 66,035 $ 67,016 $ 66,136 $ 62,175
Commercial 13,890 16,991 13,293 16,641 8,486 7,670 4,508
Construction and land loans 59,551 34,024 60,088 18,263 5,220 8,813 8,887
Total real estate 142,925 114,233 139,750 100,939 80,722 82,619 75,570
Commercial business loans 42,152 6,335 23,692 - - - -
Consumer loans 12,566 8,154 9,630 6,705 4,175 5,386 4,580
- ---------------------------------------------------------------------------------------------------------------------------
Total loans receivable 197,643 128,722 173,072 107,644 84,897 88,005 80,150
- ---------------------------------------------------------------------------------------------------------------------------
Less:
Undistributed loans in process 10,699 4,261 9,588 6,752 2,467 2,824 3,858
Deferred fees and unearned discounts 47 172 113 282 290 314 323
Allowance for losses 1,063 873 1,002 935 870 786 747
- ---------------------------------------------------------------------------------------------------------------------------
Total net items 11,809 5,306 10,703 7,969 3,627 3,924 4,928
- ---------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $185,834 $123,416 $162,369 $ 99,675 $ 81,270 $ 84,081 $ 75,222
===========================================================================================================================
The growth of our loan portfolio and the change in its composition
reflects our growth strategy and the conversion of Guaranty Bank from a savings
association to a commercial bank. At June 30, 1996, we had no commercial
business loans. Construction loans accounted for only 10.0% of gross loans,
while residential mortgage loans represented 75.2% of gross loans. In contrast,
at June 30, 1999, commercial business loans, construction loans and residential
mortgage loans, respectively, represented 21.3%, 30.1% and 35.2% of gross loans.
The dollar amount of Guaranty's residential mortgage loans has been relatively
constant since June 30, 1996. This does not reflect a decision to de-emphasize
mortgage lending. Rather, it reflects a decision in 1997 to sell all new
conforming fixed-rate mortgage loans in the secondary mortgage market.
30
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
- ----------------------------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
1999 1998 1998 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate
Residential $ 21,005 $ 19,175 $ 20,206 $ 26,514 $ 26,061 $ 28,907 $ 23,577
Commercial 2,793 3,676 3,623 - - - -
Construction and land loans - - - 37 138 339 69
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate 23,798 22,851 23,829 26,551 26,199 29,246 23,646
Commercial business loans 14,710 112 4,178 - - - -
Consumer loans 1,333 1,029 242 3,099 1,396 597 736
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed-rate loans 39,841 23,992 28,249 29,650 27,595 29,843 24,382
- ----------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
Real Estate
Residential 48,479 44,043 46,163 39,521 40,955 37,229 38,598
Commercial 11,097 13,315 9,670 16,641 8,486 7,670 4,508
Construction and land loans 59,551 34,024 60,088 18,226 5,082 8,474 8,818
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate 119,127 91,382 115,921 74,388 54,523 53,373 51,924
Commercial business loans 27,442 6,223 19,514 - - - -
Consumer loans 11,233 7,125 9,388 3,606 2,779 4,789 3,844
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustable-rate loans 157,802 104,730 144,823 77,994 57,302 58,162 55,768
Total loans receivable 197,643 128,722 173,072 107,644 84,897 88,005 80,150
- ----------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed loans in process 10,699 4,261 9,588 6,752 2,467 2,824 3,858
Deferred fees and unearned
discounts 47 172 113 282 290 314 323
Allowances for losses 1,063 873 1,002 935 870 786 747
- ----------------------------------------------------------------------------------------------------------------------------
Total 11,809 5,306 10,703 7,969 3,627 3,924 4,928
- ----------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $185,834 $123,416 $162,369 $ 99,675 $ 81,270 $ 84,081 $ 75,222
============================================================================================================================
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.
31
Asset Quality
Asset quality is an important factor in the successful operation of a
financial institution. Banking regulations require insured institutions to
classify their own assets and to establish prudent general allowances for losses
for assets classified as "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 do not currently expose Guaranty to sufficient risk to
warrant classification in one of the aforementioned categories but posses
potential weaknesses are required to be designated "special mention" by
management. On the basis of management's review of its assets, at June 30, 1999,
Guaranty had classified $2.8 million of it's assets as substandard, and none as
doubtful or loss. 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.
June 30, December 31, June 30,
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Nonaccrual loans $1,922 $ 976 $1,686 $1,436 $1,670 $1,458 $1,556
Restructured loans - - - - 11 11 12
- -----------------------------------------------------------------------------------------------------------------
Total non-performing loans 1,922 976 1,686 1,436 1,681 1,469 1,568
- -----------------------------------------------------------------------------------------------------------------
Foreclosed assets 1,020 - 488 65 51 41 122
- -----------------------------------------------------------------------------------------------------------------
Total non-performing assets $2,942 976 $2,174 $1,501 $1,732 $1,510 $1,690
=================================================================================================================
Loans past due 90 or more days and
accruing interest $ 60 $ 48 $ 106 $ 189 $ - $ 19 $ 1
Non-performing loans to total loans, at
period end 1.58% .79% 0.97% 1.42% 1.98% 1.67% 2.06%
Non-performing assets to period end
total loans and foreclosed assets 1.57% .79% 1.25% 1.49% 2.04% 1.72% 2.21%
32
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 15 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. In most cases, deficiencies are cured promptly.
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, and 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 assumptions used in making the initial
determinations.
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated.
Six Months
Six Months Ended Year Ended Ended Year Ended
June 30, December 31, December 31, June 30,
- --------------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1996 1995
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
Balance at beginning of period $1,002 $ 935 $ 935 $ 870 $ 788 $ 747 $ 754
Provision charged to operations 165 95 184 122 92 57 (10)
Charge-offs:
Real estate 107 45 120 57 10 39 -
Consumer 3 119 - - - - 1
Commercial - - - - - - -
Recoveries:
Real estate 4 7 3 - - 19 -
Consumer 2 - - - - 4 4
Commercial - - - - - - -
- --------------------------------------------------------------------------------------------------------------
Net Charge-offs 104 157 117 57 10 16 (3)
- --------------------------------------------------------------------------------------------------------------
Balance, end of period $1,063 $ 873 $1,002 $ 935 $ 870 $ 788 $ 747
==============================================================================================================
Allowance for loan losses to period
end total loans 0.57% 0.71% 0.58% 0.93% 1.06% 0.93% 0.98%
Allowance for loan losses to nonaccrual
loans 55.31% 89.45% 59.43% 67.20% 52.10% 54.05% 48.01%
Net charge-offs to average loans .06% .15% 0.10% 0.06% 0.01% 0.02% 0.00%
33
Provision for loan losses
For the six months ended June 30, 1999, the provision for loan losses
was $165,000 compared to $95,100 for the six months ended June 30, 1998. For the
year ended December 31, 1998, the provision for loan losses was $184,200,
compared to $122,000 at December 31, 1997 and $92,000 for the six month period
ended December 31, 1996. The provision for loan losses increased to $57,000 for
the year ended June 30, 1996 compared to a credit of $10,000 for the same period
ended 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.
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.
June 30, June 30,
1999 1998
----------------------------------------------------------------------------
Ratio of Ratio of
Loans to Loans to
Total Gross Total Gross
Allowance Loans Allowance Loans
----------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------
Residential real estate $ 91 35.16% $ 111 49.11%
Commercial real estate 130 7.03 212 13.20
Construction 320 30.13 261 26.43
Commercial Business 393 21.33 79 4.92
Consumer and other loans 129 6.35 112 6.34
Unallocated - - 98 -
----------------------------------------------------------------------------
Total $1,063 100.00% $ 873 100.00%
============================================================================
34
December 31, December 31, December 31,
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Gross Total Gross Total Gross
Allowance Loans Allowance Loans Allowance Loans
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------
Residential real estate $ 101 38.35% $ 477 61.35% $ 471 78.94%
Commercial real estate 144 7.68 212 15.46 179 10.00
Construction 384 34.72 52 16.97 38 6.15
Commercial business 258 13.69 - - - -
Consumer and other loans 115 5.56 43 6.22 13 4.91
Unallocated - - 151 - 169 -
- ----------------------------------------------------------------------------------------------------------
Total $1,002 100.00% $ 935 100.00% $ 870 100.00%
==========================================================================================================
June 30, June 30,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Ratio of Ratio of
Loans to Loans to
Total Gross Total Gross
Allowance Loans Allowance Loans
- --------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------
Residential real estate $ 327 75.15% $ 311 77.57%
Commercial real estate 194 8.72 220 5.63
Construction 70 10.01 86 11.09
Commercial business - - - -
Consumer and other loans 40 6.12 32 5.71
Unallocated 157 - 98 -
- --------------------------------------------------------------------------------
Total $ 788 100.00% $ 747 100.00%
================================================================================
Non-Interest Income
Guaranty's non-interest income consists primarily of loan fees and
servicing income, net gains on sale of loans and securities, and fees and
service charges on deposit accounts. The following table presents information on
the sources and amounts of non-interest income.
35
Six Months Year Ended Six Months Ended Year Ended
Ended June 30, December 31, December 31, June 30,
- ------------------------------------------------------------------------------------------------------------
Non Interest Income 1999 1998 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Gross Servicing Income $ 329 $ 217 $ 452 $ 526 $ 327 $ 672
Amortization Expense (357) (17) (169) (77) (86) (60)
Impairment Adjustment 316 - (342) - - -
Net Servicing Income 288 200 (59) 449 241 612
Gain on Sale of Loans and Securities 230 501 1,063 1,067 73 243
Service Charges on Checking 252 163 424 166 52 90
Late Charges and Other Consumer Fees 90 43 69 82 50 69
Annuity and Investment Sales 31 15 61 12 2 0
Other 60 153 408 92 44 93
- ------------------------------------------------------------------------------------------------------------
Total $ 951 $ 1,075 $ 1,966 $ 1,868 $ 462 $ 1,107
- ------------------------------------------------------------------------------------------------------------
For the six months ended June 30, 1999 and 1998, non-interest income
was $951,000 and $1.1 million, respectively. This decrease was a result of a
$271 thousand decrease in gains on the sales of loans and securities which was
partially off set by an increase in service charges on checking of $89,000. For
the year ended December 31, 1998, non-interest income was $2.0 million, compared
to $1.9 million for the year ended December 31, 1997. During 1998 there were
increased fees with the addition of the commercial loan department and service
charges on commercial checking accounts which carry higher fees and an increase
in fees on other checking accounts. These increases were offset by a market
value impairment recognized on the servicing asset for $342,000.
Loans and securities sales were a result of the continued strategy of
selling all newly originated fixed rate mortgage loans in the secondary market,
restructuring of the balance sheet to reduce interest rate risk relating to
fixed rate mortgages, and to provide liquidity to fund anticipated loan
closings.
Mortgage loan servicing is a significant business for Guaranty, and a
by-product of its residential lending business. Guaranty derives fees from
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 prepayments rates could result in increases in
mortgage loan servicing income in future periods. Impairment of MSRs 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 the 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 capitalized MSRs for a stratum exceed their fair value. At
June 30, 1999 and December 31, 1998 MSRs totaled $2,902,000 and $1,978,000,
respectively. Impairment on these rights was $26,000 and $342,000 at June 30,
1999 and December 31, 1998, respectively. See "Financial Statements - Summary of
Accounting Policies." At June 30, 1999, December 31, 1998 and 1997 loans
serviced for others totaled $222.4 million, $173.1 million and $123.8 million,
respectively. Guaranty serviced loans for others aggregating approximately
$172.8 million at December 31, 1996, and $168.4 million at June 30, 1996.
36
Guaranty sells fixed rate residential production on an individual loan
basis and securitizes the loans through the creation of Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
and Governmental National Mortgage Association ("GMNA") mortgage-backed
securities.
During the six months ended June 30, 1999 and the years ended December
31, 1998 and 1997, Guaranty sold $26.0 million, $60.3 million and $24.4 million,
respectively, of loans and securitized loans. Guaranty sold $11.8 million for
the six month period ended December 31, 1996 and $7.3 million during fiscal year
ended June 30, 1996. The sale of fixed rate product creates liquidity and an
income stream from servicing fees on loans sold.
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 $5.0 million at one time.
Trading securities are marked to market monthly. Sales of trading account
securities totaled $19.9 million, $105.9 million, $89.5 million, $35.3 million,
and $107.3 million during the six months ended June 30, 1999, the years ended
December 31, 1998 and 1997, the six month period ended December 31, 1996 and the
year ended June 30, 1996, respectively. Guaranty experienced losses of $273,000,
$302,000, $255,000 and $64,000 on such sales for the six months ended June 30,
1999, the year ended December 31, 1998, the six month period ended December 31,
1996 and the fiscal year ended June 30, 1996, respectively, and a gain of $5,000
in the year ended December 31, 1997.
Loan fees, net of loan underwriting and closing costs, are deferred and
amortized into income over the estimated remaining lives of the loans to which
they relate. Guaranty had deferred fees, net of direct underwriting costs, of
$47,000, $113,000, $283,000 and $290,000 at June 30, 1999 and December 31, 1998,
1997 and 1996, respectively.
Non-Interest Expenses
For the six months ended June 30, 1999 and 1998, non-interest expenses
were $3.4 million and $2.4 million, respectively. For the year ended December
31, 1998, non-interest expenses were $5.8 million, compared to $3.9 million for
the year ended December 31, 1997. The increases in the six months ended June 30,
1999 compared to June 30, 1998 and for the year ended December 31, 1998 compared
to December 31, 1999 was due primarily to increased costs associated with the
expanded branch network and staffing the commercial loan department. For the six
month period ended December 31, 1996, non-interest expenses were $1.7 million
compared to $1.2 million for the same period in 1995. This increase was
primarily due to the overall growth of the Corporation. Non-interest expenses
were $2.5 million for the year ended June 30, 1996.
37
Six Months Year Ended Six Months Ended Year Ended
Ended June 30, December 31, December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------------
Non Interest Expense 1999 1998 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Personnel $ 1,831 $ 1,071 $ 3,089 $ 2,011 $ 748 $ 1,014
Occupancy 449 374 783 524 132 302
Data Processing 307 226 585 422 166 257
Deposit Insurance 9 11 23 87 101 190
Marketing and Professional Fees 156 311 513 426 129 188
Other 650 407 800 373 441 536
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 3,402 $ 2,400 $ 5,793 $ 3,843 $ 1,717 $ 2,487
- ------------------------------------------------------------------------------------------------------------------------------
Income Taxes
Income tax expense for the six months ended June 30, 1999 and 1998,
were $270,000 and $261,000 respectively. The decrease in income tax expense is
primarily the result of a reallocation of state income taxes to state franchise
taxes. Income tax expense for the years ended December 31, 1998 and 1997, and
the fiscal year ended June 30, 1996 was, $624,000, $486,000, and $344,000,
respectively. The increases are a direct result of increased earnings. For the
six month period ended December 31, 1996 the Corporation reported an income tax
benefit of $3,500 due to a loss before taxes of $10,000.
Sources of Funds
Deposits
Deposits have 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.
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
businesses and brokered deposits. Guaranty's principal use of deposits is to
originate loans and fund investment securities.
At June 30, 1999, deposits were $194.0 million, an increase of 12.26%
from $172.8 million at December 31, 1998, and up 71.75% from $112.9 million at
December 31, 1997. Deposits were $81.4 million at December 31, 1996. The deposit
growth is a reflection of branch office growth, aggressive pricing, increased
marketing and bank consolidation in Guaranty's principal market. In order to
reduce the overall cost of funds and reduce the Corporation's reliance on high
cost time deposits and short term borrowings as a funding source, management
continues to direct extensive marketing efforts towards attracting lower cost
transaction accounts. However, there is no assurance that these efforts will be
successful, or if successful, will reduce the Corporations reliance on time
deposits and short term borrowings.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by Guaranty at the dates indicated.
38
June 30, December 31, June 30,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Statement savings accounts $ 11,002 $ 8,480 $ 9,863 $ 6,434 $ 4,738 $ 4,654
Demand deposit accounts 28,516 17,926 23,433 12,037 6,929 6,440
Money market accounts 29,475 10,503 22,319 4,000 3,410 3,213
30-to-180-day certificates 2,642 1,468 825 1,326 250 227
Nine-month certificates - 300 - 1,638 - -
One-to five-year fixed-rate
certificates 110,528 80,790 106,953 87,467 66,013 52,698
Eighteen-month prime rate certificates 11,820 8,601 9,412 45 61 7,455
- -----------------------------------------------------------------------------------------------------------
Total $193,983 $128,068 $172,805 $112,947 $ 81,401 $ 74,687
===========================================================================================================
The following table contains information pertaining to the average
amount and the average rate paid on each of the following deposit categories for
the periods indicated.
Six Months Ended June 30,
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
Average Average
Average Rate Average Rate
Balance Paid Balance Paid
--------------------------------------------------------------------------
(Dollars in thousands)
Noninterest bearing
Demand deposits $9,172 0.00% $3,457 0.00%
Interest bearing
DDA/Money Market 43,150 3.59% 16,686 2.65%
Savings deposits 10,718 2.35% 7,861 3.13%
Time deposits 122,649 5.18% 94,113 5.42%
--------------------------------------------------------------------------
Total deposits $185,689 4.39% $122,117 4.74%
==========================================================================
Six Months Ended Year Ended
Years Ended December 31, December 31, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Average Rate Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid Balance Paid
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Noninterest bearing
demand deposits $ 5,338 0.00% $ 1,658 0.00% $ 1,324 0.00% $ 1,066 0.00%
Interest bearing
DDA/ Money Market 24,936 3.46% 11,110 2.59% 8,765 2.76% 8,927 2.73%
Savings deposits 8,551 2.97% 5,654 3.36% 4,870 3.41% 4,541 3.25%
Time deposits 93,615 5.41% 80,779 5.51% 63,346 5.54% 48,460 5.57%
- -------------------------------------------------------------------------------------------------------------------
Total deposits $132,440 4.67% $ 99,201 4.97% $ 78,305 5.00% $ 62,994 4.91%
===================================================================================================================
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 to eliminate, the threat of disintermediation (the flow of
funds away from depository institutions such as banking 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.
39
The following table sets forth the deposit flows of Guaranty during the
periods indicated.
Six Months
Six Months Ended Year Ended Ended Year Ended
June 30, December 31, December 31, June 30,
----------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1996
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------------------------------
Opening balance $172,805 $112,947 $112,947 $ 81,401 $ 74,687 $ 52,461
Net deposits 17,098 12,225 53,673 26,624 4,754 19,093
Interest credited 4,080 2,896 6,185 4,922 1,960 3,133
----------------------------------------------------------------------------------------------------
Ending balance $193,983 $128,068 $172,805 $ 12,947 $ 81,401 $ 74,687
----------------------------------------------------------------------------------------------------
Net increase $ 21,178 $ 15,121 $ 59,858 $ 1,546 $ 6,714 $ 22,226
Percent increase 12.25% 13.39% 53.00% 38.75% 8.99% 42.37%
====================================================================================================
The following table indicates the amount of Guaranty's certificates of
deposits by time remaining until maturity as of June 30, 1999.
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 $10,571 $17,051 $44,477 $17,207 $ 89,306
Certificates of deposit of $100,000 or more 2,567 21,233 8,200 3,684 35,684
- ---------------------------------------------------------------------------------------------------------------
Total certificates of deposits $13,138 $38,284 $52,677 $20,891 $124,990
- ---------------------------------------------------------------------------------------------------------------
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
loans. See the Notes to Consolidated Financial Statements for information
regarding the maturities and rate structure of Guaranty's FHLB advances. At June
30, 1999, $30.0 million was outstanding to the FHLB.
Guaranty's borrowings also include securities sold under agreements to
repurchase and federal funds purchased. Securities sold under agreements to
repurchase are collateralized with mortgage-backed securities or Treasury
securities. The proceeds are used by Guaranty for general corporate purposes. At
June 30, 1999, Guaranty had $2.9 million outstanding in securities sold under
agreement to repurchase. At June 30, 1999, Guaranty had $4.2 million outstanding
in federal funds purchased.
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.
40
The following tables set forth the maximum month-end balances, average
balances and weighted average rates, of FHLB advances, securities sold under
agreements to repurchase and other borrowings for the periods indicated.
Six Months Ended
June 30,
--------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------
(Dollars in thousands)
--------------------------------------------------------------------------
Maximum Balance:
FHLB Advances $ 30,000 $10,000
Securities sold under
Agreements to repurchase 2,941 8,856
Fed funds purchased 4,188 -
--------------------------------------------------------------------------
Weighted Weighted
Average Average Average Average
Balance Rate Balance Rate
--------------------------------------------------------------------------
FHLB Advances $23,402 4.97% $3,478 6.87%
Securities sold under
Agreements to repurchase 1,852 4.52% 1,642 5.37%
Fed funds purchased 698 5.33% - -
==========================================================================
Year Ended Six Months Ended Year Ended
December 31, December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Maximum Balance:
FHLB Advances $26,000 $17,500 $22,500 $28,050
Securities sold under
Agreements to repurchase 6,856 5,867 9,957 9,930
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------
FHLB Advances $9,748 5.57% $10,956 6.18% $19,550 5.79% $22,829 6.21%
Securities sold under
agreements to repurchase 2,336 5.00% 2,007 6.33% 6,321 5.66% 3,112 5.65%
- ------------------------------------------------------------------------------------------------------------------------------
At June 30, 1999 and December 31, 1998, Guaranty had $30.0 million and
$21.0 million outstanding to the FHLB compared to no advances outstanding at
December 31, 1997 and $17.5 million at December 31, 1996.
41
The following table sets forth the balances of Guaranty's short-term
borrowings at the dates indicated.
June 30, December 31, June 30,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------
FHLB advances $30,000 $10,000 $21,000 $ - $ 7,500 $12,500
Securities sold under agreements
to repurchase 2,937 1,990 1,008 2,989 6,681 6,104
Other borrowings 4,188 - - - - -
- -----------------------------------------------------------------------------------------------------------
Total short-term borrowings $37,125 $11,990 $22,008 $ 2,989 $14,181 $18,604
===========================================================================================================
Weighted average interest rate of
short-term FHLB advances 4.97% 6.87% 5.57% 0.00% 6.35% 6.02%
Weighted average interest rate of
securities sold under agreements to
repurchase 4.52% 5.37% 5.00% 6.29% 6.50% 5.65%
Weighted average interest rate of
other borrowings 5.33% - - - - -
===========================================================================================================
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. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
provided. 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 investments,
and loan sales. While scheduled payments from the amortization of loans and
securities are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. Excess funds are invested in overnight deposits to
fund cash requirements experienced in the normal course of business. Guaranty
has been able to generate sufficient cash through its deposits as well as
borrowings.
Cash and cash equivalents were approximately $13.9 million, $10.5
million and $6.0 million at June 30, 1999, and December 31, 1998 and 1997,
respectively. For the six months ended June 30, 1999, financing activities
provided $35.4 million, primarily as a result of a net increase in deposits of
approximately $21.2 million and an increase in advances from the Federal Home
Loan Bank and other borrowings of approximately $13.2. Approximately $1.1
million was absorbed by operating activities. In addition, investing activities
absorbed approximately $30.9 million which was primarily a result of a net
increase in loans of approximately $24.3 million, net investment securities
purchases of $4.9 million, and purchases of office properties and equipment of
approximately $1.6 million.
During the year ended December 31, 1998, financing activities provided
$84.7 million primarily as a result of net advances from FHLB of $21.0 million,
net increase in deposits of approximately $59.9 million and proceeds from
issuance of convertible preferred securities of $6.9 million. Approximately
42
$596,000 was absorbed by operating activities which was primarily a result of an
increase in other assets which includes a $1.5 million increase in originated
mortgage servicing rights, and an increase in accrued interest receivable of
approximately $807,000. In addition, investing activities absorbed approximately
$79.5 million which was primarily a result of a net increase in loans of
approximately $62.7 million, net investment securities purchases of $14.7
million, and purchases of office properties and equipment of approximately $1.5
million.
During the year ended December 31, 1997, financing activities provided
$14.3 million primarily as a result of net proceeds from the issuance of common
stock of $4.4 million, and net increase in deposits of approximately $31.5
million offset by a decrease in FHLB advances of $17.5 million. Approximately
$16.0 million was provided by operating activities which was primarily a result
of net sales of trading securities of $15.7 million. In addition, investing
activities absorbed approximately $30.5 million which was primarily a result of
a net increase in loans of approximately $18.5 million, net investment
securities purchases of $11.4 million, and purchases of office properties and
equipment of approximately $1.4 million.
For the six months ended December 31, 1996, cash and cash equivalents
increased $645,000 to $6.1 million as net cash provided by investing and
financing activities exceeded the cash used in operating activities. The $2.1
million of cash provided by investing activities resulted mainly from a net
decrease in loans while the $6.7 million of cash provided by financing
activities resulted mainly from a net increase in deposits.
Guaranty uses its sources of funds primarily to meet operating needs,
to pay deposit withdrawals and fund loan commitments. At June 30, 1999, and
December 31, 1998 and 1997 total approved loan commitments were $10.7 million,
$9.6 million and $3.8 million respectively. In addition, at June 30, 1999, and
December 31, 1998 and 1997, commitments under unused lines of credit were $58.5
million, $52.3 million and $14.3 million, respectively. At December 31, 1996 and
June 30, 1996, the total approved loan commitments outstanding amounted to $3.0
million and $3.9 million, respectively. At the same dates, commitments under
unused lines of credit amounted to $6.4 million and $5.4 million. Certificates
of deposit scheduled to mature in one year or less at June 30, 1999, totaled
$104.1 million. Management believes that a significant portion of maturing
deposits will remain with Guaranty.
Management intends to fund anticipated loan closings and operating
needs during 1999 through cash on hand, brokered deposits, proceeds from the
sale of loans and securities, cash generated from operations and anticipated
increases in deposits. Current and anticipated marketing programs will be
primarily targeted at the attraction of lower cost transaction accounts.
Concurrent with the strategies employed to attract these accounts, management
plans to gradually reduce the rate paid on time deposits in comparison to the
competition. However, the pricing of time deposits will be balanced against
upcoming maturities to ensure that liquidity is not adversely impacted by a
large run off of time deposits.
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. In an effort to increase the
capital base, Guaranty's wholly-owned subsidiary Guaranty Capital Trust I issued
$6.9 million of 7.0% cumulative convertible trust preferred securities in April
1998. The proceeds, less issuance costs of approximately $276,000 were added to
the Bank's capital.
43
Guaranty and Guaranty Bank are subject to regulatory capital
requirements of the Federal Reserve. At June 30, 1999, Guaranty exceeded all
such regulatory capital requirements as shown in the following table.
June 30, 1999
Guaranty Financial Guaranty
Corporation Bank
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------
Tier 1 Capital:
Common Stock $1,877 $2,000
Capital Surplus 5,725 7,024
Cumulative Preferred Securities (2) 4,270 -
Retained Earnings 5,208 10,467
- --------------------------------------------------------------------------------------------------
Disallowed intangible assets 290 290
- --------------------------------------------------------------------------------------------------
Total Tier 1 Capital 16,790 19,201
- --------------------------------------------------------------------------------------------------
Tier 2 Capital:
Allowance for loan losses (1) 1,063 1,063
Cumulative Preferred Securities 2,630 -
- --------------------------------------------------------------------------------------------------
Total Tier 2 Capital 3,693 1,063
- --------------------------------------------------------------------------------------------------
Total Risk Based Capital 20,483 20,264
Risk Weighted Assets 217,374 224,563
Capital Ratios:
Tier 1 Risk-based 7.72% 8.55%
Total Risk-based 9.42% 9.02%
Tier 1 Capital to average adjusted total assets 6.91% 7.91%
==================================================================================================
(1) Limited to 1.25% of risk weighted assets.
(2) Limited to 1/3 of core capital.
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 June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain requirements are met, a derivative may be specifically
44
designated as a hedge and an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 and
requires application prospectively.
Subsidiary Activities
The Holding Company has two subsidiaries Guaranty Bank and Guaranty
Capital Trust I (the "Trust"). The Trust was formed on April 29, 1998 and is the
holder of Guaranty's convertible subordinated debentures in the principal amount
of $6,900,000. See Note 13 in the Consolidated Financial Statements for
information regarding the terms of the securities. The Bank has two wholly owned
subsidiaries, GMSC, Inc. ("GMSC") and Guaranty Investments Corporation ("GICO").
Guaranty sells non-deposit investment products through GICO. GICO had a net loss
of $19,000 and $17,000 for the six months ended June 30, 1999 and 1998,
respectively, and $15,800 and $27,000 for the years ended December 31, 1998 and
1997, respectively and net income of $3,000 and $1,000 for the six month period
ended December 31, 1996 and the year ended June 30, 1996, respectively.
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 bonds
discount and issuance costs are amortized against income as mortgages underlying
the bonds repay. In the fiscal years ended June 30, 1996 and 1995, with rapidly
falling interest rates, Guaranty experienced significant repayment of mortgages,
resulting in an amortization expense of $160,000 and $124,000, respectively. For
the years ended December 31, 1998 and 1997 and the six month period ended
December 31, 1996, amortization expense was $101,000, $64,000 and $39,000,
respectively. In the six months ended June 30, 1999 and 1998, such amortization
expense was $105,000 and $65,000, respectively. The amortization of the REMIC
expenses is treated as interest expense.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the change in the century. If not corrected, many
date-sensitive applications could fail or create erroneous results by or in the
year 2000. Guaranty understands the importance of having systems and equipment
operational through the year 2000 and beyond and is committed to addressing
these challenges while continuing to fulfill its obligations to its customers.
Year 2000 readiness is a major undertaking involving the review and
modification of multiple, interacting information technology systems, including
Guaranty's systems, equipment, facilities, services and products as well as
those of third parties, including vendors, service contractors, creditors,
borrowers and other financial service organizations. Certain equipment and
facilities, such as telephones, voicemail and elevators, may contain embedded
chips or microcontrollers that will need to be replaced.
Guaranty began its formal Year 2000 compliance program in 1998 to
analyze the possible application to Guaranty of the Year 2000 issue and the
development of a plan to prevent the problem from adversely affecting its
operations. Guaranty currently has a Year 2000 committee, a Year 2000
Implementation Plan and a Year 2000 Contingency Plan. Guaranty's Year 2000 plans
are subject to guidelines and recommendations promulgated by the Federal
Financial Institutions Examination Council
45
("FFIEC"). The Federal Reserve Bank of Richmond periodically reviews the status
of Guaranty's plans and progress with site visits and teleconferences.
In accordance with current FFIEC regulations, the Year 2000 plans, as
adopted and refined by Guaranty to handle Year 2000 issues, can be divided into
two principal areas:
1. Resolution of the internal aspects of the Year 2000 issue. The
focus of this area includes the effects of the Year 2000 issue
on Guaranty's technology, including computer hardware and
software systems. Guaranty's internal technology plan includes
(a) locating, listing and prioritizing the specific technology
that is potentially subject to the Year 2000 issue (referred
to as the "awareness" phase), (b) assessing the actual
exposure of such technology to the Year 2000 issue by inquiry,
research, testing and other means (the "assessment" phase),
(c) selecting the method necessary to resolve the Year 2000
issues that were identified, including replacement, upgrade,
repair or abandonment and implementing the selected resolution
method (the "renovation" phase), and (d) testing the
remediated or converted technology to determine the efficacy
of the resolutions (the "validation" phase).
2. Determination and control of the external aspects of the Year
2000 issue. The focus of this area includes (a) assessing the
potential for credit and liquidity risks within Guaranty as a
result of the investments in, loans to and deposits from our
significant customers as well as the risk of possible business
interruption by relying on vendors of goods and services whose
technology or business is affected by the Year 2000 issue, and
(b) developing contingency plans to address failures by
external parties to remediate fully any Year 2000 issues that
are material to Guaranty. Assessment of external parties is
accomplished by written and verbal inquiry, and by research to
the extent that reliable information is available.
The Year 2000 committee has spent considerable time testing both the
internal and external applications deemed as "mission critical" to daily
business operations. These applications affect Guaranty's customer information
files. The testing was completed before FFIEC's June 30, 1999 deadline to
confirm compliance with Year 2000 data processing standards deadline.
Guaranty's Year 2000 Contingency Plan, in accordance with FFIEC
regulations, sets forth in detail the procedures that Guaranty and its employees
will follow in order to handle the most reasonably likely worst case Year 2000
scenario. These procedures cover, among other concerns, how Guaranty will
continue to maintain customer records and accept banking transactions in the
event of a systems or other power or communications failure and how it will
likewise continue its daily banking operations. The contingency plan, and all
test results on Guaranty's internal and external applications, were reviewed by
the Virginia State Corporation Commission's Year 2000 examiner. The review
yielded the highest rating for Year 2000 readiness (satisfactory).
As part of the 1998 strategic plan, and in conjunction with the Year
2000 readiness plan, Guaranty upgraded its entire computer system, including
hardware and software. The changes not only make the institution better prepared
for any potential Year 2000 problems, but have also allowed Guaranty to offer
more sophisticated products, lower potential down time and increase customer
service. Total costs are approximately $325,000, with the majority of the
expenses being incurred in late 1998 and the first quarter of 1999. Included in
non-interest expense for the first six months of 1999 is $200,000 associated
with the Year 2000 issue. All of the system changes are currently fully
operational and Guaranty continually assesses the systems for full
functionality.
46
Additionally, Guaranty monitors the readiness of its vendors and larger
customers to insure that the risk to Guaranty is minimized. Currently, Guaranty
requires all credit customers with total exposure of over $1 million to fill out
a Year 2000 readiness assessment form. The progress of the answers are reported
to the Year 2000 committee on a regular basis.
Guaranty and its Year 2000 committee feel strongly that customer
education and awareness are crucial to the success of the year 2000 plans.
Notifications of the test results were sent out to customers in June 1999. In
addition, Guaranty has trained all customer contact employees on responding to
customer concerns over Y2K issues.
Guaranty believes that it has identified all of the business systems
vital to its operations and that its Year 2000 plans will result in the
continuation of Guaranty's operations to and through the Year 2000 and beyond.
However, the Year 2000 issue, and its resolution, is complex and multifaceted;
Guaranty believes that no entity can address the virtually unlimited possible
circumstances relating to year 2000 issues, including risks outside of
Guaranty's primary market area. The success of a response plan cannot be
conclusively known until the Year 2000 is reached (or an earlier date to the
extent that systems and equipment address Year 2000 date data prior to year
2000). Even with appropriate and diligent pursuit of a well-conceived response
plan, including testing procedures, there is no certainty that any company will
achieve complete success. However, Guaranty is diligently trying to ensure that
its significant systems, equipment, facilities, services and products will not
be adversely affected by the Year 2000 problem.
At this time, Guaranty believes that the most likely worst case Year
2000 scenario would not have a material effect on Guaranty's results of
operations, liquidity and financial condition for the year ending December 31,
2000. Guaranty does not foresee a material loss of revenue due to the Year 2000
problem. The Year 2000 Contingency Plan, however, is based on assessments of the
likelihood of a problematic occurrence. While considered unlikely, the failure
of Guaranty to successfully implement its Year 2000 plans, including
modifications and conversions, or to adequately assess the likelihood of various
events relating to the year 2000 issue, could have a material adverse effect on
Guaranty's results of operations and financial condition.
Additionally, there can be no assurances that the federal regulators
will not issue new regulatory requirements that require additional work by
Guaranty and, if issued, that new regulatory requirements will not increase the
cost or delay the completion of Guaranty's year 2000 plan.
The cost of the project and the date on which Guaranty plans to
complete the Year 2000 modifications are based on management's best estimates,
which are based on numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from Guaranty's plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability of personnel trained in this area, the ability of third party
vendors to correct their software and hardware, the ability of significant
customers to remedy their Year 2000 issues and similar uncertainties.
47
MANAGEMENT
The Board of Directors
The following information sets forth the names, ages, principal
occupations and business experience for all 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 Guaranty Bank. Unless
otherwise indicated, the business experience and principal occupations shown for
each nominee or incumbent director has extended five or more years.
Thomas P. Baker, 53, has been a director since 1990.
Mr. Baker has served as the President and Chief Executive Officer of
Guaranty Bank since January 1, 1990.
Henry J. Browne, 66, has been a director since 1976.
Mr. 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.
Douglas E. Caton, 56, has been a director since 1981 and has been Chairman of
Guaranty's Board of Directors since 1989.
Mr. Caton is a commercial real estate developer. He owns and controls
or manages over 3,500 apartment units throughout Virginia. Mr. Caton is
also Chief Executive Officer of Management Services Corporation, a real
estate management and development company that currently has over $35
million in construction projects in progress or planned. His other
business interests include cable television and farming. A decorated
combat veteran of the Vietnam War, Mr. Caton is a Major General, the
highest rank attainable, in the United States Army Reserve with over 32
years of service. A lawyer by background, Mr. Caton is also an active
member of the Virginia State Bar.
Jason I. Eckford, Jr., 69 was appointed to the Board of Directors on February
18, 1999.
Mr. Eckford currently owns his own financial services business in
Charlottesville, Virginia. He has over 30 years experience in the
banking industry, having served as President at First Virginia Bank -
Monticello National and Fidelity American Bank, as well as Vice
President at Virginia National Bank and NationsBank - Trust Division.
He is a graduate of the University of Virginia's School of Arts and
Sciences, as well as its School of Bank Management and the Stonier
Graduate School of Banking. He is a member of the Board of Directors of
the Charlottesville Symphony Society and the Jefferson Area Board for
the Aging. He is a past President of the Charlottesville - Albemarle
Chamber of Commerce and has served on the Boards for the Virginia
Student Aid Foundation, Farmington Country Club, Camp Holiday Trails,
and Blue Ridge Home Builders, as well as numerous other organizations.
Robert P. Englander, 79, has been a director since 1976.
Mr. Englander is President of the Englander Agency, a life insurance
company in Charlottesville, Virginia. Mr. Englander has been an
insurance agent since 1949.
48
Harry N. Lewis, 71, has been a director and 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.
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.
John R. Metz, 61, has been a director since 1980.
Mr. Metz is a pharmacist at Martha Jefferson Hospital in
Charlottesville, Virginia. He is a member of the Board of Directors of
the Virginia Pharmaceutical Association Research and Education
Foundation and is past President of Hospice of the Piedmont. Mr. Metz
is retired from the Virginia Air National Guard and U.S. Air Force with
the rank of Brigadier General.
James R. Sipe, Jr., 43, has been a director since 1996.
Mr. Sipe is an associate broker with Prudential Funkhouser &
Associates, a real estate sales company in Harrisonburg, Virginia. He
is a graduate of Richmond College and the T.C. Williams School of Law
at the University of Richmond. He is active in numerous civic
organizations and currently serves as Chairman of the Board of Trustees
of Hunter McGuire School.
Oscar W. Smith, Jr., 68, has been a director since 1976.
Mr. Smith is President of K-B Management Co. in Charlottesville,
Virginia. He was formerly Vice President and General Manager of a large
petroleum distribution facility for many years. He has served as
President of the Albemarle Rotary Club and the University of Virginia
Touchdown Club and is a master mason.
John B. Syer, 59 was appointed to the Board of Directors on March 1, 1998.
Mr. Syer has been the Executive Director of the University of Virginia
Alumni Association and UVA Fund since 1994. Mr. Syer was formerly the
owner and Chief Executive Officer of S&N Transportation in Norfolk,
Virginia, President and Chief Operating Officer of Essex Financial
Group, Inc. and its affiliates in Norfolk, Virginia, and Managing
Partner of Home Health of Tidewater.
Meetings of the Board of Directors are held regularly each month, and
there is also an organizational meeting following the conclusion of the Annual
Meeting of Shareholders. The Board of Directors held 13 meetings in the year
ended December 31, 1998. For the year ended December 31, 1998, none of
Guaranty's directors attended fewer than 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings of
committees on which the respective directors served.
The Board of Directors has a Loan Committee, an Audit Committee, a
Compensation Committee and a Building Committee.
The Loan Committee consists of all directors. The duties of this
committee are to review actions of the Management Loan Committee and the Asset
Management Committee. It also acts on loans in amounts that exceed the
Management Loan Committee's authority.
The Audit Committee consists of Mr. Metz, as Chairman, and Messrs.
Caton, Englander and Syer. The Audit Committee is responsible for the selection
and recommendation of the independent
49
accounting firm for the annual audit and to establish, and assure the adherence
to, a system of internal controls. It reviews and accepts the reports of
Guaranty's independent auditors and federal examiners. The Audit Committee met
two times during the year ended December 31, 1998.
The Compensation Committee, which reviews senior management's
performance and compensation, and reviews and sets guidelines for compensation
of all employees, consists of Mr. Englander, Chairman, and Messrs. Browne,
Lewis, Metz, Smith and Syer. The Compensation Committee met two times during the
year ended December 31, 1998.
The Building Committee, formerly the Planning Committee, reviews
proposed improvements to existing facilities and proposed new facilities and
consists of Mr. Browne, Chairman, and Messrs. Englander, Sipe and Smith. The
Building Committee met one time in the year ended December 31, 1998.
Security Ownership of Management
The following table sets forth information as of September 1, 1999,
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 individual 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
Name Beneficially Owned Percentage of Class
---- ------------------ -------------------
Thomas P. Baker (1) 17,463 1.03%
Henry J. Browne 34,062 2.27%
Douglas E. Caton 299,100 19.90%
Jason I. Eckford, Jr. 500 *
Robert P. Englander 11,600 *
Harry N. Lewis 7,288 *
John R. Metz 15,553 1.03%
James R. Sipe, Jr. 3,100 *
Oscar W. Smith, Jr. 21,653 1.44%
John B. Syer 1,000 *
All present executive
officers and directors
as a group (12 Persons) 432,642 28.02%
____________________
* Percentage of ownership is less than one percent of the outstanding shares
of Common Stock.
(1) Includes beneficial ownership of shares issuable upon the exercise of stock
options exercisable within 60 days of September 1, 1999.
Security Ownership of Certain Beneficial Owners
Douglas E. Caton, 4 Deer Park, Earlysville, Virginia, beneficially owns
299,100 shares of Guaranty common stock, or 19.9% of the shares issued and
outstanding.
Ferguson, Andrews Investment Advisers, Inc., 2560 Ivy Road,
Charlottesville, Virginia 22903 beneficially owns 77,500 shares of Guaranty
common stock, or 5.2% of the shares issued and outstanding.
50
Executive Officers Who Are Not Directors
Donna W. Richards, 36, was appointed Senior Vice President of Real
Estate 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 a Loan
Officer. From December 1991 to April 1993, she was a Senior Loan Processor for
Virginia Federal.
Rex L. Smith, III, 41, has been Senior Vice President - Retail
Operations since February 1998 and was Senior Vice President - Commercial from
September 1996 to February 1997. Between March 1997 and January 1998, Mr. Smith
was a Vice President with Central Fidelity National Bank. From March 1993 until
August 1996, he was Vice President/Senior Business Manager of Crestar Financial
Corporation.
Executive Compensation
Summary of Cash and Certain Other Compensation
The following table shows, for the fiscal years ended December 31,
1998, and 1997, the six months ended December 31, 1996, and the fiscal year
ended June 30, 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
Long Term
Annual Compensation Compensation
------------------- ------------
Name and Other Annual All Other
Principal Position Year Salary ($) Bonus ($) Compensation ($) Compensation ($)(1)
------------------ ---- ---------- --------- ---------------- -------------------
Thomas P. Baker 1998 122,600 3,000 * 2,930
President and Chief 1997 115,200 3,252 * 2,869
Executive Officer 1996 (2) 56,850 - * 568
1996 (3) 113,700 - * 1,137
______________________
* All benefits that might be considered of a personal nature did not exceed
the lesser of $50,000 or 10% of total annual salary and bonus for the
officer named in the table.
(1) Amounts reflect Guaranty's matching contribution under its Section 401(k)
retirement plan.
(2) Six months ended December 31, 1996.
(3) Fiscal year ended June 30, 1996.
Stock Option Grants
In the year ended December 31, 1998, no stock options were granted to
Mr. Baker.
51
Option Exercises and Holdings
In the year ended December 31, 1998, no stock options were exercised by
Mr. Baker. The following table sets forth the amount and value of stock options
held by Mr. Baker as of December 31, 1998.
Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year End (#)(1) at Fiscal Year End ($)(2)
---------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Thomas P. Baker 4,000 6,000 2,250 -0-
___________________
(1) Each of these options relates to shares of Common Stock.
(2) These values are based on $13.125, the closing price of one share of Common
Stock on December 31, 1998.
Directors' Fees
Directors, excluding directors who are officers of Guaranty, received
fees of $550 for each meeting of the Board of Directors attended and $300 for
each Compensation, Planning and Audit Committee meeting attended during fiscal
1998. Mr. Caton, who is an ex officio member of all Committees and devotes
additional time to Guaranty's affairs as Chairman of the Board of Directors,
received a fee of $32,500 in the fiscal year ended December 31, 1998, 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,
entered into in February 1999, that provides for Mr. Baker to serve as President
and Chief Executive Officer of Guaranty. The agreement is for a period ending
February 23, 2004, and provides for a base salary of $150,000, which the Board
of Directors may increase. If Mr. Baker's employment is terminated for reasons
other than cause, he will be entitled to receive severance pay equal to his
annual base salary in effect at the time.
If termination of employment due to a change in control had occurred in
fiscal 1998, Mr. Baker would have been entitled to severance payments amounting
to approximately $122,600. Under the employment agreement entered into in
February 1999, if his employment terminates for any reason within 120 days of a
change in control, Mr. Baker will be entitled to severance payments
approximately equal to 299% of his average cash compensation for the five years
that precede the change in control.
52
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 December 31, 1998, was approximately $1,124,292. Such balances
totaled $1,124,292 at December 31, 1998, or 9.0% of Guaranty's equity capital at
that date.
There are no legal proceedings to which any director, officer,
principal shareholder or associate is a party that would be material and adverse
to Guaranty.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Guaranty's directors and executive officers, and any
persons who own more than 10% of Common Stock, to file with the Securities and
Exchange Commission ("SEC") reports of ownership and changes in ownership of
common stock. Officers and directors are required by SEC regulation to furnish
Guaranty with copies of all Section 16(a) forms that they file. Based solely on
review of the copies of such reports furnished to Guaranty or written
representation that no other reports were required, Guaranty believes that,
during fiscal year 1998, all filing requirements applicable to its officers and
directors were complied with.
DESCRIPTION OF CAPITAL STOCK
Guaranty's authorized capital stock consists of 4,000,000 shares of
common stock, par value $1.25 per share and 500,000 shares of preferred stock.
Guaranty had 1,501,727 issued and outstanding shares of common stock held by
1,203 stockholders of record, at June 30, 1999. 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
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
53
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 offering 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 requests 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.
54
SUPERVISION AND REGULATION
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework applicable to Guaranty and
Guaranty Bank. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport
to be complete and are qualified in their entirety by reference to applicable
laws and regulations.
As a bank holding company, Guaranty is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the "BHCA") and the examination
and reporting requirements of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may
not directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any additional bank or merge
or consolidate with another bank holding company without the prior approval of
the Federal Reserve Board. The BHCA also generally limits the activities of a
bank holding company to that of banking, managing or controlling banks, or any
other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
As a state-chartered bank, Guaranty Bank is subject to regulation,
supervision and examination by the Virginia State Corporation Commission's
Bureau of Financial Institutions (the "Virginia SCC"). Guaranty Bank is also
subject to regulation, supervision and examination by the Federal Reserve Board
and the Federal Deposit Insurance Corporation (the "FDIC"). State and federal
law also govern the activities in which Guaranty Bank may engage, the
investments it may make and the aggregate amount of loans that may be granted to
one borrower. Various consumer and compliance laws and regulations also affect
Guaranty Bank's operations.
The earnings of Guaranty are affected by general economic conditions,
management policies and the legislative and governmental actions of various
regulatory authorities, including those referred to above. The following
description summarizes some of the state and federal laws to which Guaranty and
Guaranty Bank are subject.
The Virginia SCC and the Federal Reserve Bank of Richmond conduct
regular examinations of Guaranty Bank, reviewing such matters as the adequacy of
loan loss reserves, quality of loans and investments, management practices,
compliance with laws, and other aspects of their operations. In addition to
these regular examinations, Guaranty Bank must furnish the Virginia SCC and the
Federal Reserve with periodic reports containing a full and accurate statement
of its affairs. Supervision, regulation and examination of banks by these
agencies are intended primarily for the protection of depositors rather than
shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of Guaranty Bank are insured by the FDIC up to the limits set forth
under applicable law. The deposits of Guaranty Bank are subject to the deposit
insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the
55
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period from six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could result
in termination of the Bank's deposit insurance.
Capital. The Federal Reserve Board has issued risk-based and leverage
capital guidelines applicable to banking organizations they supervise. Under the
risk-based capital requirements, Guaranty and the Bank are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit), of 8%. At least half of the total capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital"). At June 30, 1999,
Guaranty's Tier 1 capital and total capital ratios were 7.72% and 9.42%,
respectively.
In addition, each of the Federal bank regulatory agencies have
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for banks and bank
holding companies that meet certain specified criteria. All other banks and bank
holding companies will generally be required to maintain a leverage ratio of at
least 100 basis points above the stated minimum. Guaranty's Tier 1 leverage
ratio at June 30, 1999 was 6.91%.
The risk-based capital standards of the Federal Reserve Board
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The Federal Reserve Board also has
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so otherwise. In addition, the "cross-guarantee" provisions of Federal
law require insured depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by either the SAIF or
the BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provision if it determines that a waiver is in the
best interests of the SAIF or the BIF or both. The FDIC's claim for
reimbursement is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institution.
The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institution in question is well-capitalized, adequately capitalized,
56
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law. As of December 31, 1998, Guaranty and the Bank were
classified as well-capitalized.
State regulatory authorities also have broad enforcement powers over
the Bank, including the power to impose fines and other civil and criminal
penalties, and to appoint a receiver in order to conserve the assets of any such
institution for the benefit of depositors and other creditors.
Payment of Dividends. Guaranty is a legal entity separate and distinct
from Guaranty Bank. Virtually all of the revenues of Guaranty result from
dividends paid to Guaranty by Guaranty Bank. Guaranty Bank also is subject to
state laws that limit the amount of dividends it can pay. In addition, both
Guaranty and the Bank are subject to various general regulatory policies
relating to the payment of dividends, including requirements to maintain
adequate capital above regulatory minimums. The Federal Reserve Board has
indicated, as a general rule, that banking organizations should pay dividends
only if the organization's net income available to common shareholders over the
past year has been sufficient to fund fully the dividends and the prospective
rate of earnings retention appears consistent with the organization's capital
needs, asset quality and overall financial condition. Guaranty does not expect
that any of these laws, regulations or policies will materially impact the
ability of Guaranty Bank to pay dividends.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are also applicable to Guaranty Bank. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility. To the best knowledge of the Bank, it is meeting
its obligations under the CRA. Guaranty Bank's CRA rating is "satisfactory."
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, banks headquartered in one state were
authorized to merge with a bank headquartered in another state, as long as
neither of the states has opted out of such interstate merger authority prior to
such date. States were authorized to enact laws permitting such interstate bank
merger transactions prior to June 1, 1997, as well as authorizing a bank to
establish "de novo" interstate branches. Virginia enacted early "opt in" laws,
permitting interstate bank merger transactions. Once a bank has established
branches in a state through an interstate merger transaction, the bank may
establish and acquire additional branches at any location in the state where a
bank headquartered in that state could have established or acquired branches
under applicable Federal or state law.
Economic and Monetary Policies. The operations of Guaranty are affected
not only by general economic conditions, but also by the economic and monetary
policies of various regulatory authorities. In particular, the Federal Reserve
regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
57
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 and us, to sell, as selling agent, on a best efforts
basis, up to 400,000 shares of common stock. We have, however, reserved the
right to increase the number of shares by not more than 60,000. The underwriter
is not obligated to purchase the capital securities if they are not sold to the
public.
The underwriter has informed us that it proposes to sell the common
stock as selling agent for us, subject to prior sale, when, as and if issued by
us, in part to the public at the public offering price set forth on the cover
page of this prospectus and, in part, through certain selected dealers, who are
members of the National Association of Securities Dealers, Inc., to customers of
such selected dealers at such public offering price, for which each selected
dealer will receive a commission of $0.45, for each share that it sells. The
underwriter reserves the right to reject any order for the purchase of common
stock 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 of common stock. Funds
received by the underwriter from investors in the public offering will be
deposited with and held by the escrow agent in a non-interest bearing account
until the closing of the public offering. Closing is expected to occur on or
about November 22, 1999.
The underwriting agreement provides that we will indemnify the
underwriter against certain liabilities, including liabilities under the
Securities Act or contribute to payments the underwriter may be required to make
in respect thereof.
We have been advised by the underwriter that it may make a market in
the common stock. The underwriter, however, is not obligated to make a market in
the common stock. It also may discontinue any market making at any time without
notice.
The underwriter provides or has provided investment banking services to
us from time to time in the ordinary course of business.
LEGAL MATTERS
The validity of the shares of our common stock offered and certain
other legal matters will be passed upon by the law firm of Williams, Mullen,
Clark & Dobbins.
EXPERTS
The consolidated financial statements included in this prospectus and
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 report appearing elsewhere herein and in the registration statement, and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
58
CAUTION ABOUT FORWARD LOOKING STATEMENTS
We make forward looking statements in this prospectus that are subject
to risks and uncertainties. These forward looking statements include statements
regarding profitability, liquidity, allowance for loan losses, interest rate
sensitivity, market risk, Year 2000 compliance, and financial and other goals.
The words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends" or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant
uncertainties because they are based upon or are affected by factors including:
o Continued levels of loan quality and origination volume;
o Interest rate fluctuations and other economic conditions;
o Competition in product offerings and product pricing;
o Implementation of Year 2000 technology changes by us and our
vendors and suppliers;
o Continued relationships with major customers;
o Future laws and regulations; and
o Other factors, including those matters discussed in the "Risk
Factors" section and the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" section of
this prospectus.
Because of these uncertainties, our actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, our past results of operations do not necessarily
indicate our future results.
59
GUARANTY FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets as of December 31, 1998 and 1997 and June 30, 1999 (Unaudited) F-3
Statements of Operations for the years ended December 31, 1998 and 1997, June
30, 1996, the six months ended December 31, 1996, and for the six months
ended June 30, 1999 and 1998 (unaudited) F-4
Statements of Comprehensive Income (Loss) for the years ended December 31,
1998 and 1997, June 30, 1996, the six months ended December 31, 1996, and
for the six months ended June 30, 1999 and 1998 (unaudited) F-6
Statements of Stockholders' Equity for the years ended December 31, 1998 and
1997, June 30, 1996, the six months ended December 31, 1996, and for the
six months ended June 30, 1999 (unaudited) F-7
Statements of Cash Flows for the years ended December 31, 1998 and 1997, June
30, 1996, and the six months ended December 31, 1996, and for the six months
ended June 30, 1999 and 1998 (unaudited) F-8
Summary of Accounting Policies F-11
Notes to Consolidated Financial Statements F-17
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 subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income (loss), and cash flows for the years ended December 31, 1998 and 1997,
the six months ended December 31, 1996, and for the year 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 subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
ended December 31, 1998 and 1997, the six months ended December 31, 1996, and
the year 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 year ended June 30,
1996.
BDO Seidman, LLP
Richmond, Virginia
January 29, 1999
F-2
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
June 30, ------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Cash and cash equivalents (including interest bearing
deposits of approximately $6,743,000 and $1,561,000) $ 13,942,987 $ 10,526,732 $ 5,916,504
Investment securities (Note 1)
Held-to-maturity 1,669,291 2,343,827 2,845,560
Available for sale 30,180,903 26,909,320 11,602,908
Trading 2,949,300 1,000,000 1,032,188
Investment in Federal Home Loan Bank stock, at
cost (Note 8) 1,500,000 1,300,000 860,100
Loans receivable, net (Notes 2 and 11) 185,834,517 162,369,285 99,674,549
Accrued interest receivable 1,733,250 1,650,876 844,212
Real estate owned 1,020,935 488,273 64,985
Office properties and equipment, net (Note 3) 8,375,799 7,049,982 5,999,778
Mortgage servicing rights (Note 2) 2,902,121 1,978,000 904,383
Other assets (Note 10) 1,804,964 1,403,511 963,310
- ------------------------------------------------------------------------------------------------------------------------------------
$251,914,067 $217,019,806 $130,708,477
====================================================================================================================================
Guaranty Financial Corporation
and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
June 30, ------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $193,982,911 $172,805,284 $112,947,012
Bonds payable (Notes 1 and 6) 1,208,827 1,785,754 2,360,083
Advances from Federal Home Loan Bank (Note 8) 30,000,000 21,000,000 -
Securities sold under agreement to repurchase (Notes 1 and 7) 2,937,140 1,008,750 2,989,000
Other borrowings (Note 9) 4,188,000 - -
Accrued interest payable 125,013 124,826 58,404
Income taxes payable (Note 10) 33,756 242,649 181,100
Prepayments by borrowers for taxes and insurance 638,346 128,133 80,824
Other liabilities 707,343 470,139 231,900
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 233,821,336 197,565,535 118,848,323
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 12, 13, 15 and 17)
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Securities (Note 13) 6,900,000 6,900,000 -
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 14 and 15)
Preferred stock, par value $1 per share, 500,000 shares
authorized, none issued - - -
Common stock, par value $1.25 per share, 4,000,000 shares
authorized, 1,501,727 and 1,501,383 (1997) shares
issued and outstanding 1,877,159 1,877,159 1,876,729
Additional paid-in capital 5,724,524 5,724,524 5,724,954
Accumulated other comprehensive income (loss) (1,617,008) 89,625 50,971
Retained earnings - substantially restricted 5,208,056 4,862,963 4,207,500
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,192,731 12,554,271 11,860,154
- ------------------------------------------------------------------------------------------------------------------------------------
$251,914,067 $217,019,806 $130,708,477
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Operations
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, December 31, June 30,
-------------------- -------------------- ------------ --------
1999 1998 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Interest income
Loans $7,256,571 $4,570,562 $11,230,838 $7,584,732 $3,454,559 $6,441,903
Mortgage-backed securities 74,185 111,637 207,406 1,045,831 564,079 652,639
Investment securities 1,254,864 686,049 1,622,022 889,245 257,744 522,076
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 8,585,620 5,368,248 13,060,266 9,519,808 4,276,382 7,616,618
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 4,079,504 2,895,850 6,184,500 4,922,258 1,960,029 3,132,660
Borrowings 1,095,829 361,418 1,224,475 1,116,152 979,936 2,059,402
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,175,333 3,257,268 7,408,975 6,038,410 2,939,965 5,192,062
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,410,287 2,110,980 5,651,291 3,481,398 1,336,417 2,424,556
Provision for loan losses
(Note 2) 165,000 95,137 184,200 122,320 91,850 56,665
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,245,287 2,015,843 5,467,091 3,359,078 1,244,567 2,367,891
- ------------------------------------------------------------------------------------------------------------------------------------
Other income
Loan fees and servicing income 287,546 312,513 231,878 456,515 266,505 610,020
Net gain on sale of loans
and securities 229,814 500,849 1,062,670 1,067,348 72,547 242,866
Service charges on checking 251,656 162,797 424,415 166,072 52,058 90,156
Other 182,480 98,732 247,240 177,837 70,977 164,090
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 951,496 1,074,891 1,966,203 1,867,772 462,087 1,107,132
- ------------------------------------------------------------------------------------------------------------------------------------
continued...
F-4
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Operations
(continued)
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, December 31, June 30,
-------------------- -------------------- ------------ --------
1999 1998 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Other expenses
Personnel $1,831,199 $1,071,357 $3,089,212 $2,010,794 $ 748,083 $1,013,674
Occupancy (Note 12) 449,422 373,908 783,473 523,502 131,593 302,139
Data processing (Note 12) 307,449 226,551 585,282 422,851 165,548 257,038
BIF/SAIF premium disparity
assessment - - - - 346,851 -
Deposit insurance premiums 9,251 11,363 23,182 87,298 100,908 190,263
Other 804,453 716,785 1,311,666 798,650 223,553 724,321
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 3,401,774 2,399,964 5,792,815 3,843,095 1,716,536 2,487,435
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 795,009 690,770 1,640,479 1,383,755 (9,882) 987,588
Provision for income taxes
(Note 10) 269,710 261,300 624,200 486,040 (3,500) 344,338
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 525,299 $ 429,470 $1,016,279 $ 897,715 $ (6,382) $ 643,250
====================================================================================================================================
Basic and Diluted Earnings
(Loss) Per Share $ .35 $ .29 $ .68 $ .61 $ (.01) $ .70
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, December 31, June 30,
-------------------- -------------------- ------------ --------
1999 1998 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net income (loss) $ 525,299 $429,470 $1,016,279 $897,715 $ (6,382) $643,250
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains
(losses) arising during
period (2,473,366) (66,919) (19,865) 82,211 - (450,293)
Less: reclassification
adjustment for gains
(losses) included in
net income 112,442 62,226 (82,211) - (450,293) -
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income
(loss), before tax (2,585,808) (129,145) 62,346 82,211 450,293 (450,293)
Income tax (expense) benefit
related to items of other
comprehensive income 879,175 49,075 (23,692) (31,240) (171,111) 171,111
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
net of tax (1,706,633) (80,070) 38,654 50,971 279,182 (279,182)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(1,181,334) $349,400 $1,054,933 $948,686 $272,800 $364,068
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholders'
Stock Capital Income (Loss) Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $1,148,960 $1,981,745 $ (279,182) $3,497,626 $ 6,349,149
Cash dividend - - - (46,200) (46,200)
Accumulated other comprehensive
income - - 279,182 - 279,182
Stock options exercised (Note 14) 12,500 32,000 - - 44,500
Repurchase of common stock (6,450) (38,050) - - (44,500)
Net loss - - - (6,382) (6,382)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,155,010 1,975,695 - 3,445,044 6,575,749
Issuance of common stock (Note 13) 718,750 3,752,228 - - 4,470,978
Cash dividend - - - (135,259) (135,259)
Accumulated other comprehensive
income - - 50,971 - 50,971
Stock options exercised (Note 14) 5,000 14,520 - - 19,520
Repurchase of common stock (2,031) (17,489) - - (19,520)
Net income - - - 897,715 897,715
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,876,729 5,724,954 50,971 4,207,500 11,860,154
Cash dividend - - - (360,816) (360,816)
Accumulated other comprehensive
income - - 38,654 - 38,654
Stock options exercised (Note 14) 2,500 21,500 - - 24,000
Repurchase of common stock (2,070) (21,930) - - (24,000)
Net income - - - 1,016,279 1,016,279
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,877,159 5,724,524 89,625 4,862,963 12,554,271
Cash dividend - - - (180,206) (180,206)
Accumulated other comprehensive
income (loss) - - (1,706,633) - (1,706,633)
Net income - - - 525,299 525,299
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999
(Unaudited) $1,877,159 $5,724,524 $(1,617,008) $5,208,056 $11,192,731
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, December 31, June 30,
-------------------- -------------------- ------------ --------
1999 1998 1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Operating activities
Net income (loss) $ 525,299 $ 429,470 $ 1,016,279 $ 897,715 $ (6,382) $ 643,250
Adjustments to reconcile net
income (loss) to net cash
provided (absorbed) by
operating activities
Provision for loan losses 165,000 95,137 184,200 122,320 91,850 56,665
Depreciation and
amortization 328,074 200,747 487,073 354,005 76,160 95,511
Amortization of deferred
loan fees 134,180 (88,270) (529,287) (89,564) (63,841) (136,086)
Net amortization of
premiums and accretion
of discounts 165,208 114,844 194,913 64,154 84,606 199,060
Gain on sale of loans (350,415) (513,861) (1,328,575) (518,736) (216,537) (204,901)
Originations of loans
held for sale (25,687,335) (29,570,071) (58,985,227) (24,280,323) (11,773,561) (7,203,819)
Proceeds from sale of loans 26,037,750 30,083,932 60,313,802 24,799,059 11,822,300 7,160,241
(Gain) loss on sale of
mortgage-backed
securities (63,125) (15,000) 201,715 (236,761) (111,039) -
Purchase of mortgage
backed securities (36,264,151) (7,950,625) (35,874,372) (24,754,127) (23,980,081) -
Proceeds from sale of
mortgage-backed
securities 36,371,405 7,965,625 35,672,657 24,990,888 17,844,790 -
Gain on sale of securities
available for sale (88,959) (113,100) (579,797) (147,433) - (101,685)
(Gain) loss on disposal
of office properties
and equipment 5,657 6,316 6,316 - - (1,341)
(Gain) loss on sale of
trading account
securities 272,685 141,113 301,869 (5,520) 255,030 63,720
Purchases of trading
account securities (22,207,210) (34,572,324) (106,204,637) (73,838,893) (36,330,973) (107,346,227)
Sales of trading
account securities 19,941,096 33,472,774 105,934,956 89,548,520 35,305,544 107,282,507
continued...
F-8
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, December 31, June 30,
-------------------- -------------------- ------------ --------
1999 1998 1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Operating activities (cont'd)
Changes in
Accrued interest
receivable $ (82,374) $ (549,883) $ (806,664) $ (173,001) $ 40,631 $ (127,600)
Other assets (847,380) 160,189 (1,014,818) (115,936) (24,917) (442,298)
Accrued interest payable 187 74,133 66,422 (15,698) (38,308) 13,018
Income taxes (208,893) 298,650 61,549 214,100 (3,000) -
Prepayments by borrowers
for taxes and insurance 510,213 (71,543) 47,309 (25,077) (39,829) (160,616)
Other liabilities 237,204 607,458 238,239 (777,389) (1,141,898) 689,882
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by operating activities (1,105,884) 205,711 (596,078) 16,012,303 (8,209,455) 479,281
- -----------------------------------------------------------------------------------------------------------------------------------
Investing activities
Net (increase) decrease
in loans (24,297,074) (23,683,802) (62,772,937) (18,451,153) 2,880,494 (8,486,970)
Repayments on held to
maturity securities 672,117 416,733 555,607 309,815 776,007 998,457
Purchase of held to
maturity securities - - (150,000) - - -
Purchase of securities
available for sale (9,236,724) (24,543,136) (69,486,875) (33,334,183) - (28,399,062)
Proceeds from sales of
securities available
for sale 4,289,342 19,702,509 54,798,914 21,929,679 - 18,507,960
Sale of FHLB stock - - - 500,100 - -
Purchase of FHLB stock (200,000) - (439,900) - - -
Purchase of servicing rights (514,945) - (499,000) - - -
Proceeds from sale of office
properties and equipment - - - - - 4,522
Purchases of office
properties and equipment (1,622,797) (626,638) (1,543,593) (1,407,630) (1,515,180) (3,186,982)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by investing activities (30,910,081) (28,734,334) (79,537,784) (30,453,372) 2,141,321 (20,562,075)
- -----------------------------------------------------------------------------------------------------------------------------------
continued...
F-9
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, December 31, June 30,
-------------------- -------------------- ------------ --------
1999 1998 1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Financing activities
Net increase in deposits $21,177,627 $15,120,904 $59,858,272 $ 31,545,941 $ 6,713,625 $ 22,226,807
Repayment of Federal Home
Loan Bank advances - - (39,000,000) (21,000,000) (10,000,000) (31,510,000)
Proceeds from Federal Home
Loan Bank advances 9,000,000 10,000,000 60,000,000 3,500,000 10,000,000 23,960,000
Payments on bonds
payable, including
unapplied payments (681,591) (285,379) (673,116) (408,402) (531,459) (988,607)
Increase (decrease) in
securities sold under
agreements to repurchase 1,928,390 (999,000) (1,980,250) (3,692,000) 577,000 6,104,000
Proceeds from other
borrowings 4,188,000 - - - - -
Proceeds from issuance of
convertible preferred
securities - 6,900,000 6,900,000 - - -
Proceeds from issuance of
common stock - - - 4,470,978 - 15,300
Dividends paid (180,206) (89,660) (360,816) (135,259) (46,200) (45,958)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided
by financing activities 35,432,220 30,646,865 84,744,090 14,281,258 6,712,966 19,761,542
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 3,416,255 2,118,242 4,610,228 (159,811) 644,832 (321,252)
Cash and cash equivalents,
beginning of period 10,526,732 5,916,504 5,916,504 6,076,315 5,431,483 5,752,735
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $13,942,987 $ 8,034,746 $10,526,732 $ 5,916,504 $6,076,315 $ 5,431,483
===================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
Nature of Business and Regulatory Environment
Guaranty Financial Corporation (the "Parent Company") is a bank holding company
whose principal asset is its wholly-owned subsidiary, Guaranty Bank (the
"Bank"). The 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".
At June 30, 1997, the Bank was converted from a federal savings association to a
Virginia chartered Federal Reserve member bank. As a result, the Corporation
changed their year end from June 30, to December 31.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specific authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by financial
institutions that pose a serious threat to the Bank Insurance Fund ("BIF").
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on Savings Association Insurance Fund
("SAIF") members to capitalize the SAIF to a designated reserve level. Prior to
the Bank's conversion to a state chartered bank, it was a member of SAIF and
therefore, subject to the SAIF special assessment. Based on the Bank's deposits
as of March 31, 1995, the date for measuring the special assessment, the Bank
was assessed approximately $347,000 during the six months ended December 31,
1996.
Principles of Consolidation
The consolidated financial statements include the accounts of Guaranty Financial
Corporation, its wholly-owned subsidiaries, Guaranty Capital Trust I and
Guaranty Bank, and the Bank's wholly-owned subsidiaries, GMSC, Inc. and Guaranty
Investment Corp. All material intercompany accounts and transactions have been
eliminated in the consolidation.
Reorganization
On December 29, 1995, the Bank and the Parent Company consummated the
reorganization of the Bank into a unitary-thrift holding company structure
whereby the Bank became the wholly-owned subsidiary of the Parent Company. Each
outstanding share of the common stock of the Bank became one share of the common
stock of the Parent Company. 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-11
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
Investment Securities
Investments in securities are classified as either held-to-maturity, trading, or
available for sale, according to management's intent and ability.
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.
The Corporation had approximately $0, $1,080,000 and $9,200,000 of loans held
for sale at June 30, 1999, December 31, 1998 and 1997, respectively. The
estimated market value of these loans exceeded their carrying cost.
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, construction 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.
F-12
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
Loans Receivable (continued)
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.
The Corporation adopted Statement of Financial Accounting Standards No. 122
("SFAS 122"), "Accounting for Mortgage Servicing Rights an Amendment of FASB
Statement No. 65" on July 1, 1995. 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.
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. At June 30, 1999 and
December 31, 1998, an impairment of approximately $126,000 and $342,000,
respectively, was recognized on those rights.
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.
F-13
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
Allowance for Possible Loan Losses (continued)
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.
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, less selling costs.
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
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
F-14
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
Income Taxes (continued)
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 $295,000 at
December 31, 1998.
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 $354,000 ratably over the next six years, beginning December 31,
1998, since the Corporation met the residential loan requirement exemption for
the period ended December 31, 1997.
Basic and Diluted Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity. The
weighted average number of shares of common stock outstanding were 1,501,604 and
1,466,843 for the years ended December 31, 1998 and 1997, respectively, 920,681
for the six month period ended December 31, 1996; 917,668 for the year ended
June 30, 1996, and 1,501,727 and 1,501,481 for the six months ended June 30,
1999 and 1998, respectively.
Statements of Cash Flows
Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $7,343,000 and $6,060,000
for the years ended December 31, 1998 and 1997, respectively, $2,978,000 for the
six month period ended December 31, 1996, $5,179,000 for the year ended June 30,
1996, and $5,176,000 and $3,331,000 for the six month period ended June 30, 1999
and 1998, respectively. Cash paid for income taxes was approximately $656,000
and $350,000 for the years ended December 31, 1998 and 1997, respectively,
$277,000 for the six month period ended December 31, 1996, $180,000 for the year
ended June 30, 1996, and $360,000 for the six month periods ended June 30, 1999
and 1998. There was no real estate acquired in settlement of loans for the six
month period ended December 31, 1996, and approximately $488,000, $64,000 and
$33,000 for the years ended December 31, 1998 and 1997, and June 30, 1996, and
$1,021,000 and $0 for the six month period ended June 30, 1999 and 1998,
respectively.
F-15
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
Reclassifications
Certain reclassifications have been made in the prior period consolidated
financial statements and notes to conform to the December 31, 1998 presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain requirements are met, a derivative may be specifically designated as a
hedge and an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 and
requires application prospectively.
F-16
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
1. Investment Securities
A summary of the carrying value and estimated market value of investment
securities is as follows:
June 30, 1999
- --------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 1,419,291 $54,472 $ - $ 1,473,763
Other 250,000 - - 250,000
- ---------------------------------------------------------------------------------------------------------------------
1,669,291 54,472 - 1,723,763
- ---------------------------------------------------------------------------------------------------------------------
Available for sale
Corporate bonds 32,329,478 - 2,472,349 29,857,129
Other 301,437 22,337 - 323,774
- ---------------------------------------------------------------------------------------------------------------------
32,630,915 22,337 2,472,349 30,180,903
- ---------------------------------------------------------------------------------------------------------------------
$34,300,206 $76,809 $2,472,349 $31,904,666
=====================================================================================================================
Subsequent to June 30, 1999, the Bank sold approximately $13 million of
available for sale securities resulting in realized losses, net of tax, of
approximately $971,000.
F-17
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
1. Investment Securities (continued)
December 31, 1998
- --------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 2,093,827 $ 93,173 $ - $ 2,187,000
Other 250,000 - - 250,000
- --------------------------------------------------------------------------------------------------------------------
2,343,827 93,173 - 2,437,000
- --------------------------------------------------------------------------------------------------------------------
Available for sale
Corporate bonds 26,463,324 279,136 161,491 26,580,969
Other 301,438 26,913 - 328,351
- --------------------------------------------------------------------------------------------------------------------
26,764,762 306,049 161,491 26,909,320
- --------------------------------------------------------------------------------------------------------------------
$29,108,589 $399,222 $161,491 $29,346,320
====================================================================================================================
F-18
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
1. Investment Securities (continued)
December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 2,745,560 $13,440 $ - $ 2,759,000
Other 100,000 - - 100,000
- ---------------------------------------------------------------------------------------------------------------------
2,845,560 13,440 - 2,859,000
- ---------------------------------------------------------------------------------------------------------------------
Available for sale
Bonds 11,415,793 66,590 8,444 11,473,939
US Government obligations 128,836 133 - 128,969
- ---------------------------------------------------------------------------------------------------------------------
11,544,629 66,723 8,444 11,602,908
- ---------------------------------------------------------------------------------------------------------------------
$14,390,189 $80,163 $8,444 $14,461,908
=====================================================================================================================
The amortized cost and estimated market value of available for sale and held to
maturity securities at June 30, 1999 by maturity is as follows:
Estimated
Amortized Market
Cost Value
- ---------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 1,419,291 $ 1,473,763
Other 250,000 250,000
- ---------------------------------------------------------------------------------------------------------------------
1,669,291 1,723,763
- ---------------------------------------------------------------------------------------------------------------------
Available for Sale
Due in one through five years 2,526,271 2,442,505
Due after five years 30,104,644 27,738,398
- ---------------------------------------------------------------------------------------------------------------------
32,630,915 30,180,903
- ---------------------------------------------------------------------------------------------------------------------
$34,300,206 $31,904,666
=====================================================================================================================
F-19
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
1. Investment Securities (continued)
The Corporation had gross gains from the sale of available for sale securities
of approximately $579,800, $147,400 and $101,700 during the years ended December
31, 1998 and 1997, and June 30, 1996, respectively. The Corporation had gross
gains from the sale of available for sale securities of approximately $89,000
and $113,000 during the six months ended June 30, 1999 and 1998, respectively.
The Corporation had no sales of available for sale securities during the period
ended December 31, 1996.
Gross gains from the sale of trading securities of approximately $162,000 and
$134,000 and gross losses of approximately $464,000 and $128,000 were realized
during the year ended December 31, 1998 and 1997, respectively. Gross gains of
approximately $9,900 and gross losses of approximately $265,000 were realized on
those sales for the six months ended December 31, 1996. Gross gains of
approximately $209,000 and gross losses of approximately $272,700 were realized
on those sales during the year ended June 30, 1996. Gross gains of approximately
$43,000 and gross losses of approximately $316,000 was realized on those sales
during the six months ended June 30, 1999. Gross gains of approximately $34,000
and gross losses of approximately $160,000 was realized on those sales during
the six months ended June 30, 1998.
Gross gains from the sale of mortgage-backed securities of approximately $0 and
$237,000 were realized for the years ended December 31, 1998 and 1997,
respectively, and $111,000, were realized on those sales for the six months
ended December 31, 1996. Gross losses on the sales of mortgage-backed securities
were $202,000 and $0 for the years ended December 31, 1998 and 1997 and $0 for
the six months ended December 31, 1996. The Corporation had no sales of mortgage
backed securities during the year ended June 30, 1996. Gross gains and gross
losses of approximately $144,000 and $81,000 were realized on those sales for
the six months ended June 30, 1999 and gross gains of approximately $15,000 were
realized on those sales for the six months ended June 30, 1998.
Mortgage backed securities of approximately $1,419,000, $2,094,000 and
$2,838,000 at June 30, 1999, December 31, 1998 and 1997, respectively, were
pledged for bonds payable (Note 6). At June 30, 1999 and December 31, 1998 and
1997 investment securities with a market value of approximately $2,937,000,
$1,008,000 and $3,141,000, respectively, were pledged as collateral under
repurchase agreements (Note 7).
F-20
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
2. Loans Receivable
Loans receivable are summarized as follows:
December 31,
June 30, ------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Residential real estate $ 69,483,765 $ 66,369,418 $ 66,035,224
Commercial real estate 56,042,401 36,985,202 16,641,057
Construction and land 59,550,842 60,088,110 18,263,062
Consumer 12,566,390 9,629,551 6,705,023
- --------------------------------------------------------------------------------------------------------------------
197,643,398 173,072,281 107,644,366
- --------------------------------------------------------------------------------------------------------------------
Less
Undisbursed loan funds 10,699,160 9,587,873 6,752,222
Deferred loan fees 47,103 112,809 282,618
Allowance for loan losses 1,062,618 1,002,314 934,977
- --------------------------------------------------------------------------------------------------------------------
11,808,881 10,702,996 7,969,817
- --------------------------------------------------------------------------------------------------------------------
$185,834,517 $162,369,285 $ 99,674,549
====================================================================================================================
The allowance for loan losses is summarized as follows:
Balance at June 30, 1995 $ 747,486
Provision charged to expense 56,665
Net charge-offs (16,005)
------------------------------------------------------------
Balance at June 30, 1996 788,146
Provision charged to expense 91,850
Net charge-offs (10,145)
------------------------------------------------------------
Balance at December 31, 1996 869,851
Provision charged to expense 122,320
Net charge-offs (57,194)
------------------------------------------------------------
Balance at December 31, 1997 934,977
Provision charged to expense 184,200
Net charge-offs (116,863)
------------------------------------------------------------
Balance at December 31, 1998 1,002,314
Provision charged to expense 165,000
Net charge-offs (104,696)
------------------------------------------------------------
Balance at June 30, 1999 $1,062,618
============================================================
F-21
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
2. Loans Receivable (continued)
The Corporation serviced loans for others aggregating approximately $173,147,000
and $123,834,000 at December 31, 1998 and 1997, respectively, and $222,387,000
at June 30, 1999. Mortgage servicing rights were approximately $1,978,000 and
$904,000 at December 31, 1998 and 1997, respectively, and $2,902,000 at June 30,
1999. Mortgage servicing rights of approximately $1,584,000 and $507,000 were
capitalized during the periods ended December 31, 1998 and 1997 and $961,000 at
June 30, 1999.
Gross gains and gross losses on the sale of loans totaling approximately
$1,374,000 and $46,000, and $520,000 and $1,000 were realized during the years
ended December 31, 1998 and 1997, respectively, $283,000 and $67,000 during the
six months ended December 31, 1996, $205,000 and $0, for the year ended June 30,
1996, and $352,000 and $2,000 and $524,000 and $10,000 for the six months ended
June 30, 1999 and 1998, respectively.
At June 30, 1999, December 31, 1998 and 1997, the Corporation had no loans that
were considered as impaired.
3. Office Properties and Equipment
Office properties and equipment are summarized as follows:
December 31,
June 30, ------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Land $2,960,027 $2,127,055 $1,910,922
Building and leasehold improvements 3,975,958 3,691,488 3,084,362
Furniture and fixtures 1,140,248 1,052,840 823,234
Equipment 1,766,768 1,479,974 1,147,688
Automobiles 129,743 59,598 55,362
- --------------------------------------------------------------------------------------------------------
9,972,744 8,410,955 7,021,568
Less accumulated depreciation
and amortization 1,596,945 1,360,973 1,021,790
- --------------------------------------------------------------------------------------------------------
Net office properties and equipment $8,375,799 $7,049,982 $5,999,778
========================================================================================================
F-22
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
4. Deposits
Deposits are summarized as follows:
June 30, 1999 Amount Percent
- --------------------------------------------------------------------------------------------------------------
Passbook, statement savings and interest checking accounts
Non-interest bearing $ 17,974,829 9.3%
1.00 to 2.00% 17,036,004 8.8
2.01 to 3.00% 10,997,371 5.7
3.01 to 4.00% 6,203,015 3.2
4.01 to 5.00% - -
5.01 to 6.00% 16,781,217 8.6
- --------------------------------------------------------------------------------------------------------------
68,992,436 35.6
- --------------------------------------------------------------------------------------------------------------
Certificates:
0 to 5.00% 39,772,675 20.5
5.01 to 6.00% 85,217,800 43.9
- --------------------------------------------------------------------------------------------------------------
124,990,475 64.4
- --------------------------------------------------------------------------------------------------------------
$193,982,911 100.0%
==============================================================================================================
F-23
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
4. Deposits (continued)
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------------------
Passbook, statement savings and
interest checking accounts
Non-interest bearing $ 8,408,737 4.9% $2,771,114 2.5%
1.00 to 2.00% 9,304,150 5.4 8,318,148 7.4
2.01 to 3.00% 15,582,682 9.0 953,976 .8
3.01 to 4.00% 5,638,171 3.3 6,433,351 5.7
4.01 to 5.00% - - 3,994,110 3.5
5.01 to 6.00% 16,681,267 9.7 - -
- -------------------------------------------------------------------------------------------------------------------
55,615,007 32.3 22,470,699 19.9
- -------------------------------------------------------------------------------------------------------------------
Certificates:
0 to 5.00% 42,020,778 24.3 65,962 .1
5.01 to 6.00% 69,883,330 40.4 75,747,649 67.1
6.01 to 7.00% 5,286,169 3.0 14,662,702 12.9
- -------------------------------------------------------------------------------------------------------------------
117,190,277 67.7 90,476,313 80.1
- -------------------------------------------------------------------------------------------------------------------
$172,805,284 100.0% $112,947,012 100.0%
===================================================================================================================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $29,640,000 and $11,108,000 at December 31, 1998 and
1997, respectively, and $35,684,000 at June 30, 1999.
F-24
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
4. Deposits (continued)
Scheduled maturities of certificates are as follows:
June 30,
--------------------------------------
2000 $ 104,098,934
2001 15,626,404
2002 1,654,043
2003 2,858,074
2004 and thereafter 753,020
--------------------------------------
$124,990,475
======================================
5. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments are as
follows:
December 31,
----------------------------------
June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and short-term
investments $13,942,987 $13,943,000 $10,526,732 $10,527,000 $ 5,916,504 $ 5,917,000
Securities 34,799,494 34,853,966 30,253,147 30,346,000 15,566,382 15,587,000
Loans, net of allowance
for loan losses 185,834,517 186,174,935 162,369,285 163,090,000 99,674,549 100,595,000
Financial liabilities
Deposits 193,982,911 194,202,000 172,805,284 173,825,000 112,947,012 113,117,000
Advances from Federal
Home Loan Bank 30,000,000 30,000,000 21,000,000 21,000,000 - -
Securities sold under
agreement to
repurchase 2,937,140 2,937,000 1,008,750 1,009,000 2,989,000 2,989,000
Bonds payable 1,208,827 N/A 1,785,754 N/A 2,360,083 N/A
Other borrowings 4,188,000 4,188,000 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
F-25
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
5. Fair Value of Financial Instruments (continued)
December 31,
-----------------------------------
June 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Notional Fair Notional Fair Notional Fair
Amount Value Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
Unrecognized financial
instruments
Commitments to
extend credit $69,156,000 $69,156,000 $61,917,000 $61,917,000 $18,145,000 $18,145,000
Forward commitments
to purchase
mortgage-backed
securities - - 10,000,000 10,000,000 - -
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.
F-26
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
5. Fair Value of Financial Instruments (continued)
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.
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
December 31, 1998 and 1997 and June 30, 1999, 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-27
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
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:
December 31,
June 30, ------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Serial Bonds
Class A-2, maturing January 20, 2012, at 8.0% $ - $ - $ 285,701
Class A-3, maturing January 20, 2019, at 8.0% 1,707,647 2,169,815 2,649,648
Unapplied payments (283,687) (66,683) (159,100)
- ----------------------------------------------------------------------------------------------------------------------
1,423,960 2,103,132 2,776,249
Less unamortized discount (215,133) (317,378) (416,166)
- ----------------------------------------------------------------------------------------------------------------------
$1,208,827 $1,785,754 $2,360,083
======================================================================================================================
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.
7. Securities Sold Under Agreements to Repurchase
The following is a summary of certain information regarding the Bank's
repurchase agreements:
Year Ended
Six Months Ended December 31,
June 30, ------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period $2,937,140 $1,008,750 $2,989,000
Weighted average interest rate at end of period 4.52% 5.00% 6.29%
Average amount outstanding during the period $1,852,000 $2,336,294 $2,006,792
Maximum amount outstanding at any month end during the
period $2,941,000 $6,856,060 $5,867,000
F-28
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
8. Advances From Federal Home Loan Bank
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
Year Ended
Six Months Ended December 31,
June 30, ------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Maximum amount outstanding during the period $30,000,000 $26,000,000 $17,500,000
===========================================================================================================================
Average amount outstanding during the period $23,402,000 $ 9,748,000 $10,956,000
===========================================================================================================================
Average interest rate during the period 4.97% 5.57% 6.23%
===========================================================================================================================
9. Other Borrowings
Information related to Federal Funds Purchased:
Year Ended
Six Months Ended December 31,
June 30, ------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Maximum amount outstanding during the period $4,188,000 $ - $ -
===========================================================================================================================
Average amount outstanding during the period $ 698,000 $ - $ -
===========================================================================================================================
Average interest rate during the period 5.33% - -
===========================================================================================================================
F-29
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
10. Income Taxes
The provision for income taxes as presented in the consolidated statements of
operations are as follows:
Six Months Six Months
Ended Year Ended Ended Year Ended
June 30, December 31, December 31, June 30,
1999 1998 1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Current income tax $269,710 $261,300 $624,200 $458,040 $(3,500) $344,338
Deferred income tax - - - 28,000 - -
- ------------------------------------------------------------------------------------------------------------------------------------
$269,710 $261,300 $624,200 $486,040 $(3,500) $344,338
====================================================================================================================================
Reconciliations of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
Six Months Six Months
Ended Year Ended Ended Year Ended
June 30, December 31, December 31, June 30,
1999 1998 1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Tax expense at statutory
rate $270,300 $234,860 $557,800 $470,477 $(3,360) $335,780
Adjustments
Effect of state taxes - - - 55,350 (395) 39,504
Other (590) 26,440 66,400 (39,787) 255 (30,946)
- -----------------------------------------------------------------------------------------------------------------------------------
$269,710 $261,300 $624,200 $486,040 $(3,500) $344,338
====================================================================================================================================
F-30
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
10. Income Taxes (continued)
The components of deferred income taxes which are included in "other assets" in
the consolidated balance sheets are as follows:
December 31,
June 30, ------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Deferred tax asset
Bad debt reserves $ 271,000 $241,000 $243,000
Deferred loan fees 26,000 30,000 43,000
Servicing rights 9,000 116,000 16,000
Investment securities 883,000 - -
Other 124,000 143,000 60,000
- ----------------------------------------------------------------------------------------------------
Total deferred tax asset 1,313,000 530,000 362,000
- ----------------------------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 110,000 133,000 185,000
FHLB stock 167,000 167,000 118,000
Fixed Assets 92,000 84,000 42,000
Investment securities - 90,000 -
Other - - 12,000
- ----------------------------------------------------------------------------------------------------
Total deferred tax liability 369,000 474,000 357,000
- ----------------------------------------------------------------------------------------------------
Net deferred tax asset $ 944,000 $ 56,000 $ 5,000
====================================================================================================
11. Related Party Transactions
In the normal 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:
December 31,
June 30, ------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
Balance at the beginning of year $ 975,000 $293,000 $276,000
Additional loans 434,000 856,000 19,000
Loan reductions (6,000) (174,000) (2,000)
- ----------------------------------------------------------------------------------------------------
Balance at end of period $1,403,000 $975,000 $293,000
====================================================================================================
F-31
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
12. Commitments and Contingencies
The Corporation leases office space under operating leases expiring at various
dates through 2002 and has a contract for the performance of data processing
services whose initial term expired in February 2004 and requires minimum
payments of $25,800 per month. Future minimum rental and data processing
payments required that have initial or remaining noncancelable terms in excess
of one year as of December 31, 1998, are as follows:
Amount
-------------------------------
Data
Year Ending December 31, Leases Processing
- --------------------------------------------------------------------------------
1999 $ 82,366 $ 40,500
2000 63,156 309,600
2001 63,156 309,600
2002 56,436 309,600
Thereafter 21,498 309,600
- --------------------------------------------------------------------------------
$286,612 $1,278,900
================================================================================
Total rental expense amounted to approximately $70,000 and $47,000 for the years
ended December 31, 1998 and 1997, respectively, and $23,000 for the six months
ended December 31, 1996, $168,000 for the year ended June 30, 1996, and $46,000
and $24,000 for periods ended June 30, 1999 and 1998, respectively. Total data
processing expense amounted to approximately $585,000 and $423,000 for the years
ended December 31, 1998 and 1997, respectively, $170,000 for the six months
ended December 31, 1996, $257,000 for the year ended June 30, 1996, and $307,000
and $226,000 for periods ended June 30, 1999 and 1998, respectively.
The Corporation is a 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 pending or threatened litigation.
13. Convertible Preferred Stock
On April 29, 1998, the Corporation formed Guaranty Capital Trust I (the
"Trust"), a wholly owned subsidiary. The Trust issued 276,000 shares of 7.0%
cumulative preferred securities maturing May 5, 2028 with an option to call on
or after April 29, 2003 (call price of $18.50 per share) for $6,900,000.
Conversion of the preferred securities into the corporations stock may occur at
any time prior to maturity. The Trust also issued 8,537 shares of convertible
common stock for $213,425. The Corporation purchased all shares of the common
stock. The proceeds from the sale of the preferred securities were utilized to
purchase from the Corporation junior subordinated debt securities (guaranteed by
the Bank), of $7,113,425 bearing interest of 7.0% and maturing May 5, 2028. All
intercompany interest and equity was eliminated in consolidation.
F-32
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
14. Stockholders' Equity
On January 23, 1997, the Corporation completed a secondary offering of its
common stock through the sale of 575,000 shares of common stock at a price of
$8.50 per share. Proceeds to the Corporation from the offering (net of offering
expenses of approximately $416,000) were approximately $4,471,000.
The following table represents the Bank's regulatory capital levels relative to
the Federal Reserve requirements.
Amount Percent Actual Actual Excess
June 30, 1999 Required Required Amount Percent Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 8,983,000 4.00% $19,201,000 8.55% $10,218,000
Total risk based capital 17,965,000 8.00 20,264,000 9.02 2,999,000
Amount Percent Actual Actual Excess
December 31, 1998 Required Required Amount Percent Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 7,246,000 4.00% $16,645,000 9.19% $9,399,000
Total risk based capital 14,492,000 8.00 17,647,000 9.74 3,155,000
Amount Percent Actual Actual Excess
December 31, 1997 Required Required Amount Percent Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 3,306,000 4.00% $11,758,000 14.22% $8,452,000
Total risk based capital 6,613,000 8.00 12,693,000 15.53 6,080,000
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.
Proceeds from the Trust Preferred Securities were contributed to capital of the
Bank, to the extent allowable, and are included in the calculation of regulatory
capital.
F-33
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
15. Stock Option Plan
The Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to key employees. All options are exercisable upon
date of vesting.
The following table summarizes options outstanding:
June 30, December 31,
------------------------------ ------------------------------
Period Ending 1999 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted - Weighted - Weighted - Weighted -
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding
at beginning of
period 88,000 $15.86 71,200 $15.25 71,200 $15.25 4,000 $ 4.88
Granted 44,500 12.00 - - 37,500 15.86 72,000 15.25
Forfeited - - (11,200) 15.32 (18,700) 16.03 (800) 12.00
Exercised - - (2,000) 12.00 (2,000) 12.00 (4,000) 4.88
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding
at end of period 132,500 $13.66 58,000 15.35 88,000 $15.86 71,200 $15.25
====================================================================================================================================
Options exercisable
at end of period 89,700 22,200 24,200 11,240
====================================================================================================================================
The weighted average fair value of options granted during the years ended
December 31, 1998 and 1997 was $4.85 and $1.14, respectively. The weighted
average fair value of options granted during the period ended June 30, 1999 was
$3.17.
F-34
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
15. Stock Option Plan (continued)
Six Months
Ending Year Ending
December 31, 1996 June 30, 1996
- -------------------------------------------------------------------------------------------------------------------------
Weighted - Weighted -
average average
exercise exercise
Shares price Shares price
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding at
beginning of period 14,000 $4.75 17,600 $4.65
Granted - - - -
Forfeited - - - -
Exercised (10,000) 4.70 (3,600) 4.25
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding at end
of period 4,000 $4.88 14,000 $4.75
=========================================================================================================================
Options exercisable at end
of period 4,000 14,000
=========================================================================================================================
The Corporation applies Accounting Principals Board Opinion No. 25 in accounting
for stock options granted to employees. Had compensation expense been determined
based upon the fair value of the awards at the grant date and consistent with
the method under Statement of Financial Accounting Standards 123, the
Corporation's net earnings and net earnings per share for the years ended
December 31, 1998 and 1997, and six months ended June 30, 1999 and 1998 would
have been decreased to the pro forma amounts indicated in the following table:
Year Ended
Six Months Ended December 31,
June 30, ---------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Net income
As reported $525,299 $1,016,279 $897,715
Pro forma 432,196 896,242 844,363
Net income per share (basic and diluted)
As reported $ .35 $ .68 $ 0.61
Pro forma .29 .60 0.58
F-35
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
15. Stock Option Plan (continued)
There were no options granted for the six months ended June 30, 1998 and the six
months ended December 31, 1996, and for the year ended June 30, 1996, therefore
there are no pro forma effects on net income and net income per share.
The fair value of each option granted is estimated on the date of grant using
the Black-Sholes option pricing model with the following assumptions used for
grants for the six months ended June 30, 1999: a risk free interest rate of
5.18%, dividend yield of .50%, expected weighted average term of 8.00 years, and
a volatility of 20.00%.
16. 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 $14,900 and $10,300 for
the year ended December 31, 1998 and 1997, respectively, $4,600 for the year
ended June 30, 1996, $5,500 for the six months ended December 31, 1996 and
$24,500 and $6,800 for the six months ended June 30, 1999 and 1998,
respectively.
17. 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-36
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
17. 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 amounts are
as follows:
December 31,
June 30, ------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent
credit risk
Commitments to extend credit $38,549,000 $61,917,000 $18,145,000
Standby letters of credit written 2,118,000 1,454,000 944,000
Financial instruments whose contract amounts represent
interest rate risk
Forward commitment to purchase
mortgage-backed securities - 10,000,000 -
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 65% of
the loans collateralized by one to four family residential properties.
F-37
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly financial data is shown as follows: (Dollars in thousands
except per share data)
Year Ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Total interest income $2,508 $2,956 $3,506 $4,090
Total interest expense 1,540 1,753 2,065 2,051
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 968 1,203 1,441 2,039
Provision for loan losses 42 44 49 49
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 926 1,159 1,392 1,990
Other income 613 375 730 248
Other expenses 1,173 1,245 1,607 1,768
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 366 289 515 470
Income taxes 153 105 201 165
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 213 $ 184 $ 314 $ 305
========================================================================================================================
Basic and diluted earnings per share $ .17 $ .12 $ .21 $ .18
========================================================================================================================
F-38
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly financial data is shown as follows: (Dollars in thousands
except per share data)
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Total interest income $2,186 $2,374 $2,451 $2,508
Total interest expense 1,408 1,537 1,580 1,513
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 778 837 871 995
Provision for loan losses - 46 30 46
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 778 791 841 949
Other income 222 399 579 668
Other expenses 790 886 1,013 1,154
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 210 304 407 463
Income taxes 77 106 141 162
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 133 $ 198 $ 266 $ 301
========================================================================================================================
Basic and diluted earnings per share $ .10 $ .13 $ .18 $ .19
========================================================================================================================
F-39
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
19. 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
- ------------------------------------------------------------------------------------------------------------------------------
December 31,
June 30, ------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in subsidiaries, at equity $19,647,370 $19,289,414 $11,758,347
Cash 11,804 11,612 10,000
Prepaid expenses and other assets 521,250 527,117 40,836
- ------------------------------------------------------------------------------------------------------------------------------
$20,180,424 $19,828,143 $11,809,183
==============================================================================================================================
Liabilities and Stockholders' Equity
Other liabilities $ 257,260 $ 250,072 $ -
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 257,260 250,072 -
- ------------------------------------------------------------------------------------------------------------------------------
Subordinated debt 7,113,425 7,113,425 -
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 1,877,159 1,877,159 1,876,729
Additional paid-in capital 5,724,524 5,724,524 5,724,954
Retained earnings 5,208,056 4,862,963 4,207,500
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,809,739 12,464,646 11,809,183
- ------------------------------------------------------------------------------------------------------------------------------
$20,180,424 $19,828,143 $11,809,183
==============================================================================================================================
F-40
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
19. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
Condensed Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended Six Months Ended
June 30, December 31, December 31,
------------------------ ------------------------- ------------
1999 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Income
Dividends received from Bank $429,177 $179,320 $ 723,841 $274,529 $46,200
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 429,177 179,320 723,841 274,529 46,200
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense (248,778) (83,210) (319,324) - -
Noninterest expenses (13,056) (10,655) (19,305) (7,028) (52,582)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before undistributed
net income of subsidiaries 167,343 85,455 385,212 267,501 (6,382)
Undistributed net income of subsidiaries 357,956 344,015 631,067 630,214 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $529,299 $429,470 $1,016,279 $897,715 $ (6,382)
====================================================================================================================================
F-41
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
(Information as of June 30, 1999 and for the
six months ended June 30, 1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
19. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
Condensed Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended Six Months Ended
June 30, December 31, December 31,
---------------------- ------------------------- ------------
1999 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $525,299 $429,470 $1,016,279 $897,715 $(6,382)
Adjustments
Undistributed earnings of subsidiaries (357,956) (344,015) (631,067) (630,214) -
(Increase) decrease in prepaid
and other assets 5,867 (352,851) (486,281) 49,844 (21,701)
(Decrease) increase in other
liabilities 7,188 143,631 250,072 (182,086) 37,686
Other - - - - 36,597
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by operating
activities 180,398 (123,765) 149,003 135,259 46,200
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Investment in the Bank - - - (4,470,978) -
Investment in Guaranty
Capital Trust - (6,900,000) (6,900,000) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by
investing activities - (6,900,000) (6,900,000) (4,470,978) -
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Cash dividends paid on common
stock (180,206) (89,660) (360,816) (135,259) (46,200)
Issuance of subordinate debt - 7,113,425 7,113,425 - -
Issuance of common stock - - - 4,470,978 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by financing activities (180,206) 7,023,765 6,752,609 4,335,719 (46,200)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash 192 - 1,612 - -
Cash, beginning of period 11,612 10,000 10,000 10,000 10,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $11,804 $10,000 $11,612 $10,000 $10,000
====================================================================================================================================
F-42
================================================================================
November 17, 1999
[LOGO OF GUARANTY FINANCIAL CORPORATION]
400,000 Shares of Common Stock
_________________
PROSPECTUS
_________________
McKinnon & Company, Inc.
================================================================================
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
================================================================================