<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998.
REGISTRATION NO. 333-48959
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GUARANTY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 6711 75-1656431
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
DEVRY GARRETT
GENERAL COUNSEL
100 WEST ARKANSAS 100 WEST ARKANSAS
MOUNT PLEASANT, TEXAS 75456 MOUNT PLEASANT, TEXAS 75456
(903) 572-9881 (903) 572-9881
(ADDRESS, INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLUDING ZIP CODE,
TELEPHONE NUMBER, AND TELEPHONE
INCLUDING AREA CODE, OF REGISTRANT'S NUMBER, INCLUDING AREA CODE, OF AGENT
PRINCIPAL EXECUTIVE OFFICES) FOR SERVICE)
----------------
COPIES TO:
WILLIAM T. LUEDKE IV, ESQ. HERBERT H. DAVIS, III, ESQ.
BRACEWELL & PATTERSON, L.L.P. ROTHGERBER JOHNSON & LYONS LLP
2900 SOUTH TOWER PENNZOIL PLACE ONE TABOR CENTER
HOUSTON, TEXAS 77002-2781 1200 SEVENTEENTH STREET, SUITE 3000
DENVER, COLORADO 80202-5839
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par
value.................. 365,000 $14.25 $5,201,250 $1,534
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
(1) A registration fee of $1,617 has been previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
365,000 SHARES
LOGO
[GUARANTY BANCSHARES, INC. LOGO APPEARS HERE]
GUARANTY BANCSHARES, INC.
COMMON STOCK
-------------------
All 365,000 shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being sold by Guaranty Bancshares, Inc. (the "Company"). Prior
to the Offering, there has been no established public market for the Common
Stock. The initial public offering price has been determined by negotiations
between the Company and Hoefer & Arnett, Incorporated (the "Underwriter"). See
"Underwriting." The shares of Common Stock have been approved for quotation on
The Nasdaq Stock Market's National Market ("Nasdaq/National Market") under the
symbol "GNTY."
The Company intends to use the proceeds of the Offering to redeem its
outstanding preferred stock and for general working capital purposes,
including the support of anticipated balance sheet growth. See "Use of
Proceeds."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
SEE "RISK FACTORS" ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $14.25 $0.892 $13.358
- --------------------------------------------------------------------------------
Total.................................. $5,201,250 $325,434 $4,875,816
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$250,000.
The shares of Common Stock to be distributed to the public are offered by
the Underwriter, subject to prior sale, when, as and if received and accepted
by the Underwriter, subject to approval of certain legal matters by counsel
for the Underwriter and certain other conditions. The Underwriter reserves the
right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the certificates for the shares of
Common Stock will be made against payment therefor in Dallas, Texas on or
about May 22, 1998.
-------------------
HOEFER & ARNETT
INCORPORATED
The date of this Prospectus is May 18, 1998.
<PAGE>
[MAP OF TEXAS LOCATIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE
THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NASDAQ/NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF THE
COMMON STOCK, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete, and is qualified in
its entirety by reference to the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise indicated, all share and per share information has
been adjusted to give effect to a seven for one common stock split effected in
the form of a stock dividend issued to shareholders of record as of March 24,
1998.
THE COMPANY
Guaranty Bancshares, Inc. (the "Company") is a bank holding company
headquartered in Mount Pleasant, Texas, which is located in Northeast Texas.
The Company derives substantially all of its revenue and income from the
operation of its bank subsidiary, Guaranty Bank (the "Bank"), a Texas state
bank with seven banking offices located in the Texas communities of Mount
Pleasant (two offices), Bogata, Deport, Paris, Talco and Texarkana. The Company
was formed in 1980 as a holding company for the Bank, which was chartered in
1913, and for Talco State Bank, which was chartered in 1912 and merged into the
Bank in 1997. As of December 31, 1997, the Company had total assets of $244.2
million, gross loans of $157.4 million, total deposits of $223.0 million and
total shareholders' equity of $18.3 million. Since 1995, the Company's total
assets have grown at an average annual rate of 12.5% and its deposits have
grown at a 13.0% average annual rate.
The Company's primary market lies approximately 130 miles east of the Dallas-
Fort Worth metroplex in an area extending from the Company's headquarters in
Mount Pleasant, north and west to Paris, Texas and east to Texarkana on the
Texas-Arkansas border. Management of the Company believes that the banking
market in this portion of Texas is fragmented, with many small community banks
and few mid-sized competitors. Management believes that this fragmentation
provides the Company with excellent growth opportunities through acquisitions
and de novo branches.
The Company has grown through a combination of internal growth, the
acquisition of community banks and the opening of new community banking
offices. In 1992, the Company established its Deport location by acquiring
certain assets and liabilities of the First National Bank of Deport (the
"Deport Bank"). The Deport Bank also had a branch in Paris which the Company
acquired. To enhance its expansion in the Paris community, the Company
constructed a new facility to serve as its Paris location. In 1993, the Company
purchased a commercial bank in Bogata and in 1996, opened a retail banking
facility in Mount Pleasant. In 1997, the Company merged Talco State Bank into
the Bank and opened a full-service location in Texarkana. Texarkana is the
economic center of a trade area encompassing approximately 123,000 people.
Management of the Company believes that this trade area provides an opportunity
for strong future growth in loans and deposits. The upgrading of Highway 59, a
main artery to Texarkana which will serve as a NAFTA highway, is expected to
further enhance growth in this area.
In addition to balance sheet growth, the Company has focused on improving
profitability by taking the following initiatives:
. Improving Net Interest Margin--Management is seeking to gather
noninterest-bearing deposits in order to reduce its cost of funds.
During 1997, demand deposits grew approximately 20%. Additionally, the
Company plans to increase its loan to deposit ratio over time from 70%
currently to approximately 75%.
. Increasing Noninterest Income--Management's increased emphasis on fee-
based services has resulted in noninterest income growth in the areas of
check cashing, ATM fees, appraisal fees and wire transfer charges. Also,
a "free checking" program initiated during 1995 significantly increased
deposit totals and thereby created additional fee income from
insufficient funds and other charges. Additional sources of revenue
include BSC Securities, L.C. ("BSC"), a joint venture with a group of
other banks which provides brokerage services, and the Company's Trust
Department, which offers a complete line of trust services and held
$18.2 million in customer funds at December 31, 1997.
3
<PAGE>
. Enhancing Technology--The Company has made significant investments in
new technologies designed to heighten competitiveness, increase
efficiency and improve product delivery and customer service.
Enhancements include check imaging, credit file imaging, optical report
archival and an automated voice response system. Among other things, the
Company is currently exploring an Internet banking platform. Management
believes that the Company is a leader in its markets with respect to
communications and electronic convenience to its customers.
. Improving Efficiency--For the year ended December 31, 1997, the
Company's efficiency ratio was 71.09%. Management believes that this
ratio will improve in the future as the Company's de novo branches
mature and begin to realize economies of scale. Technology enhancements
and the expected growth in the Texarkana market should also help to
increase efficiency.
The Company adheres to a community banking philosophy focused on servicing
and investing in the communities that comprise its market. The Company
emphasizes service-oriented, convenient, relationship banking, featuring
individualized, quality customer service, extended banking hours and accessible
locations. The Company makes a substantial investment in its "human capital" by
hiring talented people and training them to satisfy customer needs and develop
additional business relationships. Representatives of the Company actively
participate in numerous important civic and public service organizations in the
Company's communities, enabling them to better ascertain and respond to
customer needs and access an active business referral network. Among the
Company's officers, there is a substantial historical continuity of service
with the Company, which has facilitated the development of long-term customer
relationships. The Company endeavors to foster and participate in the success
of the community's individuals and businesses by making local loans funded by
local core deposits.
Among the traditional commercial and consumer products and services offered
by community banks, the Company has developed an expertise in servicing the
needs of the small, community-oriented businesses in its market area. Although
the Company is not a participant in the Small Business Administration
guaranteed loan program, the Small Business Administration honored the Company
as the top rated small business lender in the State of Texas in 1994, 1995 and
1996. The remainder of the Company's loan portfolio is diversified among short-
term residential financing, agricultural lending and traditional consumer
financing.
The Bank owns interests in three entities which complement the Company's
business: (i) Guaranty Leasing Company ("Guaranty Leasing"), which finances
equipment leases and has engaged in certain transactions which have resulted in
the recognition of federal income tax losses deductible by the Company, (ii)
BSC, which provides brokerage services and (iii) Independent Bank Services,
L.C. ("IBS"), which performs compliance, loan review, internal audit and
electronic data processing audit functions. See "Risk Factors--Leveraged
Leasing Activities" and "The Company--Leveraged Leasing Activities."
The Company's guiding strategy is to increase shareholder value by providing
customers with individualized, responsive, quality service and to augment its
existing market share and increase loans and deposits through additional
expansion opportunities in Northeast Texas while stressing efficiency and
maximizing profitability. The Company believes that by remaining responsive to
customer needs and offering new products, the Company can continue to attract
customers from and compete effectively with larger financial institutions.
4
<PAGE>
THE OFFERING
Common Stock offered by
the Company.............. 365,000 shares
Common Stock to be
outstanding after the
Offering................. 2,913,280 shares
Use of Proceeds........... The estimated net proceeds of the Offering
(approximately $4.6 million) will be used to redeem
outstanding preferred stock and for general working
capital purposes, including the support of
anticipated balance sheet growth.
Risk Factors.............. See "Risk Factors" and "Dilution" for a discussion
of certain factors that should be considered by
each prospective investor.
Nasdaq/National Market
Symbol................... "GNTY"
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company is derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income.......... $ 8,817 $ 7,932 $ 7,876 $ 7,188 $ 7,096
Provision for loan losses.... 355 206 149 298 89
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses... 8,462 7,726 7,727 6,890 7,007
Noninterest income........... 1,657 2,390 1,440 1,582 1,459
Noninterest expense.......... 7,446 7,073 6,795 6,700 6,306
-------- -------- -------- -------- --------
Earnings before taxes...... 2,673 3,043 2,372 1,772 2,160
Provision for income tax
expense..................... 273 165 261 245 491
-------- -------- -------- -------- --------
Net earnings................. 2,400 2,878 2,111 1,527 1,669
Preferred stock dividend..... 74 74 74 74 74
-------- -------- -------- -------- --------
Net earnings available to
common shareholders......... $ 2,326 $ 2,804 $ 2,037 $ 1,453 $ 1,595
======== ======== ======== ======== ========
COMMON SHARE DATA(1):
Net earnings (basic and
diluted)(2)................. $ 0.91 $ 1.08 $ 0.75 $ 0.53 $ 0.60
Book value................... 6.84 6.06 5.32 4.69 4.40
Tangible book value.......... 6.74 5.95 5.21 4.57 4.27
Cash dividends............... 0.22 0.21 0.19 0.16 0.14
Dividend payout ratio........ 24.24% 18.81% 24.79% 29.26% 23.90%
Weighted average common
shares outstanding (in
thousands).................. 2,547 2,592 2,724 2,721 2,668
Period end shares outstanding
(in thousands).............. 2,548 2,545 2,723 2,723 2,711
BALANCE SHEET DATA:
Total assets................. $244,157 $213,932 $192,935 $187,547 $174,612
Securities................... 58,139 30,382 31,200 30,321 27,666
Loans........................ 157,395 139,289 126,287 124,307 116,506
Allowance for loan losses.... 1,129 1,055 1,005 1,012 1,078
Total deposits............... 222,961 194,855 174,717 170,884 158,873
Total common shareholders'
equity...................... 17,426 15,423 14,499 12,782 11,917
AVERAGE BALANCE SHEET DATA:
Total assets................. $228,782 $203,056 $190,782 $180,648 $172,225
Securities................... 50,089 29,520 30,770 26,030 29,761
Loans........................ 146,061 132,400 124,209 121,078 109,940
Allowance for loan losses.... 1,070 1,029 968 1,067 1,113
Total deposits............... 208,401 183,896 172,964 164,250 157,449
Total common shareholders'
equity...................... 16,508 15,164 13,861 12,559 11,329
PERFORMANCE RATIOS:
Return on average assets..... 1.05% 1.42% 1.11% 0.85% 0.97%
Return on average common
equity...................... 14.09 18.49 14.70 11.57 14.08
Net interest margin.......... 4.24 4.32 4.59 4.41 4.57
Efficiency ratio(3).......... 71.09 68.52 72.94 76.40 73.71
</TABLE>
(Table continued on following page)
6
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS(4):
Nonperforming assets to
total loans and other real
estate..................... 1.22% 1.49% 1.58% 2.67% 2.53%
Net loan charge-offs to
average loans.............. 0.19 0.12 0.13 0.30 0.12
Allowance for loan losses to
total loans................ 0.72 0.76 0.80 0.81 0.93
Allowance for loan losses to
nonperforming loans(5)..... 92.85 93.12 100.60 45.28 76.24
CAPITAL RATIOS(4):
Leverage ratio.............. 7.87% 7.87% 7.88% 7.35% 7.20%
Average shareholders' equity
to average total assets.... 7.58 7.88 7.70 7.41 7.06
Tier 1 risk-based capital
ratio...................... 11.16 11.07 12.11 11.13 10.90
Total risk-based capital
ratio...................... 11.86 11.80 12.92 11.98 11.85
</TABLE>
- --------
(1) Adjusted for a seven for one stock split.
(2) Net earnings per share is based upon the weighted average number of common
shares outstanding during the period. The Company has no dilutive potential
common shares.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end, except net loan charge-offs to average loans and average
shareholders' equity to average total assets.
(5) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.
7
<PAGE>
RECENT UNAUDITED SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical data for the Company for the
periods indicated. The selected financial data as of and for the periods ended
March 31, 1998 and 1997 are unaudited. In the opinion of management of the
Company, the information presented reflects all adjustments (consisting only
of normal recurring adjustments) considered to be necessary for fair
presentation of the results of such periods. The information set forth below
should be read in conjunction with the financial statements of the Company and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" with respect to the years ended December
31, 1997, 1996, and 1995 included elsewhere in this Prospectus. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the future operations of the Company.
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income................................ $ 2,923(1) $ 1,983
Provision for loan losses.......................... 370(2) 20
Noninterest income................................. 488 386
Noninterest expense................................ 2,026 1,836
Earnings before taxes.............................. 1,015 513
Provision for income tax expense................... 295 75
Net earnings....................................... 720 438
Net earnings per share (3)........................ 0.28 0.17
Weighted average common shares outstanding (in
thousands)....................................... 2,548 2,548
PERFORMANCE RATIOS:
Return on average assets........................... 1.17% 0.80%
Return on average common equity.................... 16.05 11.14
Net interest margin................................ 5.19 3.96
Efficiency ratio (4)............................... 59.40 77.50
BALANCE SHEET DATA:
Total assets....................................... $247,488 $222,706
Securities......................................... 52,580 52,072
Loans.............................................. 161,567 139,382
Allowance for loan losses.......................... 1,494 1,057
Total deposits..................................... 225,158 203,247
Total common shareholders' equity.................. 18,153 15,848
Book value per share............................... 7.12 6.22
ASSET QUALITY RATIOS:
Nonperforming assets to total loans and other real
estate............................................ 0.44% 2.32%
Allowance for loan losses to nonperforming loans
(5)............................................... 162.75 45.19
</TABLE>
- --------
(1) Includes a gain of $674,000 on the sale of mortgage loans in March of
1998.
(2) In response to a 15.9% increase in loans, management elected to increase
the allowance for loan losses through a provision for loan losses of
$330,000 in addition to a scheduled $20,000 increase.
(3) Net earnings per share is based upon the weighted average number of common
shares outstanding during the period. The Company has no dilutive
potential common shares.
(4) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(5) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.
8
<PAGE>
Net earnings for the three months ended March 31, 1998 were $720,000 or
$0.28 per share compared to $438,000 or $0.17 per share for the three months
ended March 31, 1997, an increase of 64.4%. While aided by an increase in net
interest margin, the improvement in net earnings was primarily the result of a
gain on the sale of $1.9 million in principal amount of mortgage loans that
were originally purchased in 1992 at a discount from the Resolution Trust
Corporation. In March of 1998, the Company sold the mortgage loans at par,
which resulted in a gain of $444,000, net of $230,000 in taxes expensed as a
result of the sale. The Company did not have a gain from the sale of loans in
the first quarter of 1997. The gain on the sale of the loans in 1998 was
partially offset by an increase in the provision for loan losses from $20,000
in the first quarter of 1997 to $370,000 in the first quarter of 1998
primarily as the result of a $22,185,000 or 15.9% increase in loans during the
same time period. Accordingly, after giving effect to these transactions, core
earnings for the period were $606,000 or $0.24 per share for the first quarter
of 1998 compared to $438,000 or $0.17 per share for the first quarter of 1997,
a 38.4% increase.
The Company's net interest margin increased from 3.96% for the first quarter
of 1997 to 5.19% in the first quarter of 1998. This increase is primarily
attributable to the discount recorded on the sale of loans and the increase in
loans over the period. Deposits increased $21,911,000 or 10.8% from March 31,
1997 to March 31, 1998. The ratio of nonperforming assets to total loans and
other real estate was 0.44% as of March 31, 1998, a significant improvement
over 2.32% at March 31, 1997. This improvement was due to a reduction in past
due loans and nonaccrual loans for the comparative time periods.
9
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves certain risks. In
addition to the other information contained or incorporated by reference
herein, the following factors should be considered carefully in evaluating the
Company before purchasing the Common Stock offered hereby. Information
contained in this Prospectus contains "forward-looking statements" which can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "will," "should," "projected," "contemplated" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The following factors could cause actual
experience to vary materially from the future results covered in such forward-
looking statements. Other factors, such as the general state of the economy,
could also cause actual experience to vary materially from the matters covered
in such forward-looking statements.
LEVERAGED LEASING ACTIVITIES
Through Guaranty Leasing, the Company has invested in several equipment
leasing transactions through TransCapital Corporation ("TransCapital") and its
related entities that involve a structure sometimes referred to as "lease
strips" or "stripping transactions." These transactions create federal income
tax losses deductible by the Company, and largely as a result of these tax
benefits, the Company's effective federal income tax rates in 1997, 1996 and
1995 were 10.21%, 5.42% and 11.00%, respectively. The anticipated tax benefits
related to the leasing transactions begin to diminish in 1999 and will not be
available after 2001. As a result, the Company may be unable to achieve the
net income levels generated in years in which these benefits were available.
From time to time the Internal Revenue Service (the "Service") has challenged
the allocations of income, deductions and other types of tax treatment
recorded by companies engaged in these transactions. The Service has initiated
an examination of the TransCapital transactions, including the Company's lease
investments. The Company believes that it has correctly reported these
transactions for tax purposes and that it has obtained appropriate legal,
accounting and appraisal opinions and authority to support its positions. If
the Service does successfully redetermine the Company's tax liability, the
adjustments may have a significant, adverse effect on the Company. The
aggregate amount of tax benefits related to the leveraged leasing transactions
through December 31, 1997 was approximately $3,350,000. See "The Company--
Leveraged Leasing Activities" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Income Taxes."
DILUTION OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offering will incur
immediate dilution of approximately 47.5% in their investment, in that the
tangible book value of the Company after the Offering will be approximately
$7.48 compared with an initial public offering price of $14.25 per share. The
Company has implemented the 1998 Stock Option Plan (the "1998 Plan"). While no
options have yet been granted under the 1998 Plan, in the event that options
are granted and then exercised at per share prices less than per share
tangible book value at the time of such exercise, further dilution to
shareholders will occur. See "Dilution."
CONCENTRATION OF OWNERSHIP
After the consummation of the Offering, the executive officers and directors
of the Company will beneficially own 50.50% of the outstanding shares of
Common Stock. Accordingly, these executive officers and directors will be able
to influence, to a significant extent, the outcome of all matters required to
be submitted to the Company's shareholders for approval, including decisions
relating to the election of directors of the Company, the determination of
day-to-day corporate and management policies of the Company and other
significant corporate transactions. See "Management," "Principal Shareholders"
and "Description of Securities of the Company."
DEPENDENCE ON KEY PERSONNEL
The Company and the Bank are dependent on certain key personnel including
Arthur B. Scharlach, Jr., who is considered to be important to the success of
the Company. The unexpected loss of Mr. Scharlach or other members of senior
management could have an adverse effect on the Company and the Bank. The
Company has obtained "key man" life insurance on Mr. Scharlach.
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<PAGE>
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent to a significant extent upon economic
conditions in Texas in general and in Northeast Texas in particular, including
inflation, recession, unemployment and other factors beyond the Company's
control. During the mid 1980s, severely depressed oil and gas and real estate
prices materially and adversely affected the Texas and Northeast Texas
economies, causing recession and unemployment in the region and resulting in
excess vacancies in the local real estate market. Since 1987, the Texas and
Northeast Texas economies have improved in part due to their expansion into
non-energy related industries. As the Texas and Northeast Texas economies have
diversified away from the energy industry, however, they have become more
susceptible to adverse effects resulting from recession in the national
economy. Economic recession over a prolonged period or other economic
dislocation in Texas and Northeast Texas could cause increases in
nonperforming assets, thereby causing operating losses, impairing liquidity
and eroding capital. There can be no assurance that future adverse changes in
the Texas and Northeast Texas economies would not have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
INTEREST RATE RISK
The Company's earnings depend to a great extent on "rate differentials,"
which are the differences between interest income that the Company earns on
loans and investments and the interest expense paid on deposits and other
borrowings. These rates are highly sensitive to many factors which are beyond
the Company's control, including general economic conditions and the policies
of various governmental and regulatory authorities. Increases in the discount
rate by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board") usually lead to rising interest rates, which affect the Company's
interest income, interest expense and investment portfolio. Also, governmental
policies such as the creation of a tax deduction for individual retirement
accounts can increase savings and affect the cost of funds. From time to time,
maturities of assets and liabilities are not balanced, and a rapid increase or
decrease in interest rates could have an adverse effect on the net interest
margin and results of operations of the Company. The nature, timing and effect
of any future changes in federal monetary and fiscal policies on the Company
and its results of operations are not predictable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Interest Rate Sensitivity and Liquidity."
NO PRIOR TRADING MARKET; NO GUARANTEE OF LIQUID MARKET
Prior to the Offering, there has been no public market for the shares of
Common Stock. The shares of Common Stock have been approved for quotation on
the Nasdaq/National Market under the symbol "GNTY." The Underwriter has
advised the Company that it intends to make a market in the Common Stock as
long as the volume of trading activity in the Common Stock and certain other
market making conditions justify doing so. Nonetheless, there can be no
assurance that an active public market will develop or be sustained after the
Offering or that if such a market develops, investors in the Common Stock will
be able to resell their shares at or above the initial public offering price.
Making a market involves maintaining bid and asked quotations for the Common
Stock and being available as principal to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and
other regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence
in the marketplace of willing buyers and sellers of the Common Stock at any
given time, which presence is dependent upon the individual decisions of
investors over which neither the Company, the Underwriter nor any market maker
has any control.
SHARES AVAILABLE FOR FUTURE SALE
The Company will have 2,913,280 shares of Common Stock outstanding after the
Offering. The Company, its executive officers and directors and certain
shareholders (who collectively will own 50.50% of the outstanding
shares of Common Stock after the consummation of the Offering) have agreed
with the Underwriter not to offer, sell, contract to sell or otherwise dispose
of any of their shares of Common Stock for a period of 120 days after the date
of this Prospectus without the permission of the Underwriter. The currently
outstanding shares of
11
<PAGE>
Common Stock which are not subject to such agreement are held by approximately
359 shareholders of record, and all of such shares will be freely tradable in
accordance with Rule 144(k) under the Securities Act. In addition, all of the
shares of Common Stock sold in the Offering will generally be freely tradable
under the Securities Act. No prediction can be made as to the effect, if any,
that future sales of Common Stock or the availability of Common Stock for
future sale will have on the market price of the Common Stock prevailing from
time to time. Sales of a substantial number of such shares in the future, or
the perception that such sales could occur, could adversely affect the market
price of the Common Stock. See "Management" and "Principal Shareholders."
RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
While the Company has paid cash dividends on the Common Stock since 1980,
there is no assurance that the Company will pay dividends on the Common Stock
in the future. The declaration and payment of dividends on the Common Stock
will depend upon the earnings and financial condition of the Company,
liquidity and capital requirements, the general economic and regulatory
climate, the Company's ability to service any equity or debt obligations
senior to the Common Stock and other factors deemed relevant by the Company's
Board of Directors. It is the policy of the Federal Reserve Board that bank
holding companies should pay cash dividends on common stock only out of income
available over the past year and only if prospective earnings retention is
consistent with the organization's expected future needs and financial
condition. The policy provides that bank holding companies should not maintain
a level of cash dividends that undermines the bank holding company's ability
to serve as a source of strength to its banking subsidiaries.
The Company's principal source of funds to pay dividends on the shares of
Common Stock will be cash dividends that the Company receives from the Bank.
The payment of dividends by the Bank to the Company is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. As of December 31, 1997, an aggregate of approximately $10.5
million was available for payment of dividends by the Bank to the Company
under applicable restrictions, without regulatory approval. See "Supervision
and Regulation--The Bank."
The federal banking statutes prohibit federally insured banks from making
any capital distributions (including a dividend payment) if, after making the
distribution, the institution would be "undercapitalized" as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit an insured bank from engaging in an unsafe or unsound
practice, as determined by the agency, in conducting an activity. The payment
of dividends could be deemed to constitute such an unsafe or unsound practice,
depending on the financial condition of the Bank. Regulatory authorities could
impose administratively stricter limitations on the ability of the Bank to pay
dividends to the Company if such limits were deemed appropriate to preserve
certain capital adequacy requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital Resources"
and "Supervision and Regulation."
DETERMINATION OF MARKET PRICE AND POSSIBLE VOLATILITY OF STOCK PRICE
The initial public offering price of the shares of Common Stock was
determined by negotiations between the Company and the Underwriter and does
not necessarily bear any relationship to the Company's book value, past
operating results, financial condition or other established criteria of value
and may not be indicative of the market price of the Common Stock after the
Offering. Among the factors considered in such negotiations were prevailing
market and general economic conditions, the market capitalizations, trading
histories and stages of development of other traded companies that the Company
and the Underwriter believed to be comparable to the Company, the results of
operations of the Company in recent periods, the current financial position of
the Company, estimates of business potential of the Company and the present
state of the Company's development and the availability for sale in the market
of a significant number of shares of Common Stock. Additionally, consideration
was given to the general status of the securities market, the market
conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made. See "Underwriting" for
information relating to the method of determining the initial public offering
price. The stock market has from time to time experienced price and volume
volatility. These market fluctuations may be
12
<PAGE>
unrelated to the operating performance of particular companies whose shares
are traded and may adversely affect the market price of the Common Stock.
There can be no assurance that the market price of the Common Stock will not
decline below the initial public offering price.
POSSIBLE ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain certain
provisions which may delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include: (i) a Board of
Directors classified into three classes of directors with the directors of
each class having staggered, three-year terms, (ii) a provision that any
special meeting of shareholders of the Company may be called only by a
majority of the Board of Directors, the Chairman of the Board, the President,
or the holders of at least 50% of the shares entitled to vote on the matter
and that any action required or permitted to be taken by the Company's
shareholders may not be effected by consent in writing, (iii) a provision
establishing certain advance notice procedures for nomination of candidates
for election as directors and for shareholder proposals to be considered at an
annual or special meeting of shareholders and (iv) a provision that denies
shareholders the right to amend the Bylaws of the Company. The Company's
Articles of Incorporation provide for noncumulative voting for directors and
authorize the Board of Directors of the Company to issue shares of preferred
stock of the Company, $5.00 par value per share, without shareholder approval
and upon such terms as the Board of Directors may determine. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions, financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a controlling interest in the
Company. In addition, certain provisions of Texas law, including a recently
enacted provision which restricts certain business combinations between a
Texas corporation and certain affiliated shareholders, may delay, discourage
or prevent an attempted acquisition or change in control of the Company. See
"Supervision and Regulation," "Description of Securities of the Company--
Preferred Stock," and "--Texas Law and Certain Provisions of the Articles of
Incorporation and Bylaws."
SUPERVISION AND REGULATION
Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by several federal
and state regulatory agencies. The Company is subject to the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and to regulation and
supervision by the Federal Reserve Board. The Bank, as a Texas state banking
association, is subject to regulation and supervision by the Texas Banking
Department and, as a result of the insurance of its deposits, by the Federal
Deposit Insurance Corporation ("FDIC"). These regulations are intended
primarily for the protection of depositors and customers, rather than for the
benefit of investors. The Company and the Bank are subject to changes in
federal and state laws, as well as changes in regulations and governmental
policies, income tax laws and accounting principles. The effects of any
potential changes cannot be predicted but could adversely affect the business
and operations of the Company and the Bank in the future. See "Supervision and
Regulation."
The Federal Reserve Board has adopted a policy that requires a bank holding
company such as the Company to serve as a source of financial strength to its
banking subsidiaries. The Federal Reserve Board has required bank holding
companies to contribute cash to their troubled bank subsidiaries based upon
this "source of strength" policy, which could have the effect of decreasing
funds available for distributions to shareholders. In addition, a bank holding
company in certain circumstances could be required to guarantee the capital
plan of an undercapitalized banking subsidiary. See "Supervision and
Regulation."
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally upon the Company's ability to compete in the
market areas in which its banking operations are located. The Company competes
with other commercial banks, savings banks, savings and loan associations,
credit unions, finance
13
<PAGE>
companies, mutual funds, insurance companies, brokerage and investment banking
firms, asset-based non-bank lenders and certain other nonfinancial entities,
including retail stores which may maintain their own credit programs and
certain governmental organizations which may offer more favorable financing
than the Company. Many of such competitors may have greater financial and
other resources than the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing customer service,
technology and local office decision-making; by establishing long-term
customer relationships and building customer loyalty; and by providing
products and services designed to address the specific needs of its customers.
Although the Company has been able to compete effectively in the past, no
assurances may be given that the Company will continue to be able to compete
effectively in the future. Various legislative acts in recent years have led
to increased competition among financial institutions. There can be no
assurance that the United States Congress or the Texas legislature will not
enact legislation that may further increase competitive pressures on the
Company. Competition from both financial and nonfinancial institutions is
expected to continue. See "The Company--Competition."
REGULATION OF CONTROL
Individuals, alone, or acting in concert with others, seeking to acquire 10%
or more of any class of voting securities of the Company must comply with the
Change in Bank Control Act, which requires the prior approval of the Federal
Reserve Board for any such acquisition. Entities seeking to acquire 5% or more
of any class of voting securities of, or otherwise to control, the Company
must obtain the prior approval of the Federal Reserve Board under the BHCA.
Accordingly, prospective investors need to be aware of and to comply with
these requirements, if applicable, in connection with any purchase of shares
of the Common Stock offered hereby.
14
<PAGE>
THE COMPANY
GENERAL
The Company was incorporated as a business corporation under the laws of the
State of Texas in 1980 to serve as a holding company for the Bank, which was
chartered in 1913, and for Talco State Bank, which was chartered in 1912 and
merged into the Bank in 1997. The Company's headquarters are located at 100
West Arkansas, Mount Pleasant, Texas 75455, and its telephone number is (903)
572-9881.
The Company has grown through a combination of internal growth, the
acquisition of community banks and the opening of new community banking
offices. In 1992, the Company established its Deport location by acquiring
certain assets and liabilities of the Deport Bank. The Deport Bank also had a
branch in Paris which the Company acquired. To enhance its expansion into the
Paris community, the Company constructed a new facility to serve as its Paris
location. In 1993, the Company purchased a commercial bank in Bogata and in
1996, opened a second retail-service banking facility in Mount Pleasant. In
1997, the Company merged Talco State Bank into the Bank and opened a full-
service location in Texarkana. Texarkana is the center of a trade area
encompassing approximately 123,000 people. Management of the Company believes
that this trade area provides an opportunity for strong future growth in loans
and deposits. The upgrading of Highway 59, a main artery to Texarkana which
will serve as a NAFTA highway, is expected to further enhance growth in this
area.
The Bank owns interests in three entities which complement the Company's
business: (i) Guaranty Leasing, which finances equipment leases and has
engaged in certain transactions which have resulted in the recognition of
federal income tax losses deductible by the Company, (ii) BSC, which provides
brokerage services and (iii) IBS, which performs compliance, loan reserve,
internal audit and electronic data processing audit functions. See "Risk
Factors--Leveraged Leasing Activities" and "--Leveraged Leasing Activities."
BUSINESS
The Company's guiding strategy is to increase shareholder value by providing
customers with individualized, responsive, quality service and to augment its
existing market share and increase loans and deposits through additional
expansion opportunities in Northeast Texas, while stressing efficiency and
maximizing profitability. In furtherance of this objective, the Company has
employed the following operating strategies.
Community Banking. The Company believes that it has developed a reputation
of being a premier provider of financial services to small and medium-sized
businesses, professionals and individuals in Northeast Texas. The Company's
reputation for providing personal, professional and dependable service is very
marketable in communities located in this area. Each of the Company's full-
service branch locations is administered by a location President who has
banking skills which complement the particular local economy, whether it is
based on agriculture, industry and commerce or professional services.
Decisions regarding loans are made on-site in a timely manner. Indicative of
the Company's community banking expertise, the Small Business Administration
honored the Company as the top rated small business lender in the State of
Texas in 1994, 1995 and 1996, even though the Company did not participate in
the Small Business Administration guaranteed loan program. Management believes
it can compete favorably with super-regional and interstate banks in its
communities on the basis of personal service, product diversity and delivery.
Strong Core Growth. In recent years, the Company has increased its market
share in each of the communities in which it maintains a full-service banking
facility. In its principal location of Mount Pleasant, the Company has
increased its market share of financial institution deposits from 43.0% in
1996 to 50.0% in 1997. Although the Company's current share of the Paris
market is relatively low, deposits at the Paris location grew 77.6% in 1996
and 86.1% in 1997. The Company is well known in its geographic area as a
result of its longevity and reputation for service. The Company intends to
grow by continuing to seek strategic acquisitions and branching opportunities.
15
<PAGE>
Technology. The Company has embraced technological change as a way to remain
competitive, manage operational costs associated with growth and offer
superior products to its customers. Recent investments in technology include
check imaging, credit file imaging, optical report archival and an automated
voice response system. Currently, the Company is evaluating several additional
enhancements that will improve its ability to deliver information internally
to improve productivity and externally to provide convenience and
responsiveness to its growing customer base. Such enhancements include high-
speed wireless communications between all locations combining data and voice
traffic, and an end-user Internet banking product providing current account
information, electronic bill and note payment, on-line account reconciliation
and internal transfers. Management believes that the Company is a leader in
its markets with respect to communications and electronic convenience to its
customers.
Continuity and Quality of Management. The Company makes a substantial
investment in its "human capital" by hiring talented people and training them
to satisfy customer needs and develop additional business relationships. The
Company's two senior officers have been with the Company since 1969 and 1970,
respectively, and another senior officer recently retired after 53 years of
continuous service but continues as a director. This historical continuity of
service has facilitated the development and maintenance of long-term customer
relationships. The Company's employees focus on retaining existing customers,
expanding those relationships and acquiring new customers, all of which
requires excellence in three areas: service, sales and operations. Management
of the Company believes that superior service inspires customer loyalty and
gives the Company a competitive advantage. The Company profiles every customer
with a view toward matching the right product or service with the customer's
financial needs. The Company focuses on behind-the-scenes operations that will
have a positive impact on both the bottom line and the Company's ongoing
ability to deliver extraordinary sales and service.
Marketing. Management believes that the Company is one of the most respected
financial institutions in its market areas. The Company's primary external
goal is to maintain and enhance its public image as a top quality financial
institution. Reputation and public confidence in the Company are extremely
important. Everyone associated with the Company is expected to protect its
integrity, image and reputation. To help maintain the Company's reputation and
public image, the staff continues to be heavily involved in community affairs,
including civic clubs, industrial development, donations and volunteer work.
The Company places strong emphasis on coordinating the efforts between
marketing campaigns and employee training. Market research, with the support
of the Company's customer information system, enables the Company to continue
to broaden existing products and relationships and market new products to
better serve its customers. These products include a full-service Trust
Department, in-house brokerage service, loans and deposit accounts. New
products such as Internet banking and debit cards are expected to be
implemented in 1998.
Competitive Products. The Company recognizes that its competition is not
only banks, but brokerage houses, insurance companies, subsidized credit
unions and various other competitors, and in order to thrive it must be
competitive in the products that it offers. The Company offers a wide variety
of loan products at competitive terms, including a full range of commercial
loan products to small and medium-sized businesses, which include term loans,
lines of credit, fixed asset loans and working capital loans. The Company also
offers consumers a full range of loan products including automobile loans,
home improvement loans, personal loans and mortgage loans. The Company also
has a wide variety of deposit products, including a Premier money market
account that pays a rate competitive with most brokerage investment accounts
and has been very attractive to customers. This product, coupled with
certificates of deposit, NOW accounts, savings accounts, free checking and
overdraft protection, gives the customer a complete complement of deposit
products at competitive rates.
Additional Revenue Sources. In order to provide service to its customers and
to augment revenues, the Company offers brokerage and trust services. BSC is a
full-service brokerage company that offers a complete array of investment
options including stocks, bonds, mutual funds, financial and retirement
planning, tax advantaged investments and asset allocations. BSC offers
securities through Pershing Securities, the largest independent securities
clearing firm in the industry. BSC is licensed and regulated through the
National
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Association of Securities Dealers, the Securities and Exchange Commission and
various state and federal banking authorities. The Company's Trust Department
offers complete trust services, including estate administration, custodial
services and asset management. The Company believes that an aging affluent
population will foster an increase in the need for professional estate
administration services. The maturing of the baby boomer generation is
creating a market for asset management services. Management believes that
there is an opportunity for growth in the Trust Department because of the
Company's strong presence in its markets and the limited amount of competition
for trust services. Growth in trust assets and corresponding management fees
will result from expanding estate administration, traditional trust services,
asset management services and custodial services in the Company's markets.
Operating Efficiencies. In order to control overhead expenses, the Company
seeks to provide a full range of services as effectively as possible. Through
BSC the Company is able to provide its customers with full brokerage services
without having to carry the entire cost itself. Similarly, the Company enjoys
the compliance, loan review, internal audit and electronic data processing
audit functions provided by IBS on a shared cost basis with a group of other
banks participating in this arrangement. The Company has spent the last six
years and considerable revenue expanding its market and improving the delivery
of its financial products, which has resulted in a higher than desired
efficiency ratio. Beginning with the acquisition of the Deport Bank in 1992,
the Company has added four locations. As a result, it has taken longer for the
Company to achieve the desired economies of scale, but with its growth rate,
those economies are beginning to be realized, and the efficiency ratio is
expected to show declining trends in the future. The Company has the support
staff and related fixed asset investments to accommodate additional growth and
enjoy additional economies of scale.
FACILITIES
The Company conducts business at seven banking locations, two of which are
located in Mount Pleasant and the others located in the Texas communities of
Bogata, Deport, Paris, Talco and Texarkana. The Company's headquarters are
located at 100 West Arkansas in Mount Pleasant in a two story office building.
The Company owns all of its locations. The following table sets forth specific
information on each of the Company's locations.
<TABLE>
<CAPTION>
DEPOSITS AT
LOCATION DECEMBER 31, 1997
-------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Bogata............................................. $ 12,520
Deport............................................. 9,019
Mount Pleasant-Downtown............................ 146,212
Mount Pleasant-South............................... 2,125
Paris.............................................. 33,499
Talco.............................................. 15,784
Texarkana(1)....................................... 3,802
</TABLE>
- --------
(1) Opened for business in August of 1997. This location is currently housed
in a temporary facility. The permanent structure is under construction and
is expected to be completed in August of 1998.
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
nonfinancial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing customer service,
technology and local office decision-making; by establishing long-term
customer relationships and building customer loyalty; and by providing
products and services designed to address the specific needs of its customers.
See "Risk Factors--Competition."
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<PAGE>
LEVERAGED LEASING ACTIVITIES
In a series of transactions in 1992, 1994 and 1995, Guaranty Leasing
acquired limited partnership interests in certain partnerships (collectively,
the "Partnerships" or individually, a "Partnership") engaged in the equipment
leasing business. The investments were structured by TransCapital through
various subsidiaries and controlled partnerships, and a TransCapital
partnership owns a 10% interest in Guaranty Leasing.
Generally, in each of the transactions the Partnership became the lessee of
equipment from an equipment owner (pursuant to a sale and leaseback
transaction) and the sublessor of the equipment to the equipment user. Each of
the Partnerships receives note payments from the equipment owner under a
purchase money note given to purchase the equipment from the Partnerships. The
Partnerships make lease payments to the equipment owners under a master lease
of the equipment. In most instances, payments under the purchase money notes
equal lease payments under the master lease. Rental payments from the
equipment used under the equipment subleases were sold in advance subject to
existing liens for purchase of the equipment.
The Partnerships generally show a tax loss while the master lease/sublease
structure is in place, primarily because deductions for rentals paid under the
master lease exceed taxable interest under the purchase money note.
Consequently, Guaranty Leasing has reported tax losses as a result of its
investments in the Partnerships. The Service has notified the Company that it
has commenced an administrative proceeding to examine the Partnerships in
which Guaranty Leasing invested. The Company believes that it has correctly
reported these transactions for tax purposes and that it has obtained
appropriate legal, accounting and appraisal opinions and authority to support
its positions. If the Service does successfully redetermine the Company's tax
liability, the adjustments may have a significant adverse effect on the
Company. See "Risk Factors--Leveraged Leasing Activities."
EMPLOYEES
As of December 31, 1997, the Company had 121 full-time employees, 49 of whom
were officers of the Bank. The Company provides medical and hospitalization
insurance to its full-time employees. The Company considers its relations with
employees to be excellent.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering (based on
the initial public offering price of $14.25 per share), after deducting the
underwriting discount and estimated expenses, are estimated to be
approximately $4.6 million.
In order to eliminate the non-deductible dividend costs related to its
165,456 shares of Series A 9% Preferred Stock ("Preferred Stock"), the Company
intends to use a portion of the net proceeds to redeem all of such shares for
their per share liquidation value plus declared but unpaid dividends
immediately after completion of the Offering. Assuming the Preferred Stock is
redeemed on June 30, 1998, the redemption price will be $864,507. The Company
estimates that $230,115 of this amount will be paid to holders of Preferred
Stock who are executive officers and directors of the Company. The Preferred
Stock was issued in 1990. Dividends on the Preferred Stock are payable semi-
annually and are calculated based on the $5.00 par value of such shares which
is also the liquidation value. Dividends on the Preferred Stock are not
cumulative, and the Company is prohibited from paying any dividends on its
Common Stock until a dividend is declared and paid with respect to the
Preferred Stock. The holders of Preferred Stock have no voting rights. The
Preferred Stock may be redeemed, in whole or in part, at $5.00 per share
together with all declared and unpaid dividends per share.
The remaining net proceeds will be used for general working capital purposes
including support of anticipated balance sheet growth in the Company's current
markets, particularly in Texarkana, and for possible future market expansions
and acquisitions.
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<PAGE>
Pending the application of the net proceeds, the Company intends to invest
such proceeds in short-term, interest-bearing securities, certificates of
deposit or guaranteed obligations of the United States of America.
DIVIDEND POLICY
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. While the Company has declared dividends on its Common Stock since
1980 and currently pays semi-annual dividends aggregating $0.22 per share per
annum, there is no assurance that the Company will continue to pay dividends
in the future. The Board of Directors intends to continue to pay a cash
dividend on the Common Stock.
For a foreseeable period of time, the principal source of cash revenues to
the Company will be dividends paid by the Bank with respect to the Bank's
capital stock. There are certain restrictions on the payment of such dividends
imposed by federal and state banking laws, regulations and authorities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources" and "Supervision and Regulation--The Bank."
In the future, the declaration and payment of dividends on the Common Stock
will depend upon the earnings and financial condition of the Company,
liquidity and capital requirements, the general economic and regulatory
climate, the Company's ability to service any equity or debt obligations
senior to the Common Stock and other factors deemed relevant by the Company's
Board of Directors. See "Supervision and Regulation" and "Description of
Securities of the Company." As of December 31, 1997, an aggregate of
approximately $10.5 million was available for payment of dividends by the Bank
to the Company under applicable restrictions, without regulatory approval.
Regulatory authorities could impose administratively stricter limitations on
the ability of the Bank to pay dividends to the Company if such limits were
deemed appropriate to preserve certain capital adequacy requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources" and "Supervision and Regulation."
DILUTION
As of December 31, 1997, the tangible book value of the Common Stock was
$6.74 per share. "Tangible book value per share" represents the amount of
total tangible assets less total liabilities divided by the number of shares
of Common Stock outstanding. After giving effect to the sale by the Company of
365,000 shares of Common Stock offered hereby (after deducting underwriting
discount and other estimated offering expenses to be paid by the Company), the
pro forma tangible book value of the Company as of December 31, 1997 would
have been $7.48 per share. This represents an immediate increase in net
tangible book value of $0.74 per share to current shareholders and an
immediate dilution of $6.77 per share to new investors. The following table
illustrates this per share dilution.
<TABLE>
<S> <C>
Public offering price per share................................... $14.25
Tangible book value per share before Offering..................... 6.74
Increase per share attributable to new investors.................. 0.74
------
Pro forma tangible book value per share after Offering............ 7.48
------
Dilution to new investors......................................... $ 6.77
======
</TABLE>
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<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997, and as adjusted to give effect to (i) the
sale by the Company of 365,000 shares of Common Stock offered hereby, at a per
share price of $14.25, less underwriting discounts and other estimated
offering expenses and (ii) the redemption of the Series A Preferred Stock by
the Company. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Shareholders' Equity:
Preferred Stock, $5.00 par value; 15,000,000 shares
authorized; 165,456 shares designated Series A 9%
Preferred Stock, all of which are issued and
outstanding, none of which are outstanding as adjusted.. $ 827 $ --
------- -------
Common Stock, $1.00 par value; 50,000,000 shares
authorized; 2,548,280 shares issued and outstanding,
2,913,280 shares issued and outstanding as adjusted..... 2,548 2,913
Additional capital....................................... 5,396 9,657
Retained earnings........................................ 9,240 9,240
Net unrealized appreciation of available-for-sale
securities, net of deferred taxes of $124,000........... 242 242
------- -------
Total common shareholders' equity...................... $17,426 $22,052
------- -------
Total shareholders' equity............................. $18,253 $22,052
======= =======
</TABLE>
20
<PAGE>
NATURE OF THE TRADING MARKET AND MARKET PRICES
Prior to the Offering, there has been no public market for the shares of
Common Stock and there can be no assurance that an active public market will
develop or be sustained after the Offering or that if such a market develops,
investors in the Common Stock will be able to resell their shares at or above
the initial public offering price. The Underwriter has advised the Company
that it intends to make a market in the Common Stock as long as the volume of
trading activity in the Common Stock and certain other market making
conditions justify doing so. Nonetheless, there can be no assurance that an
active public market will develop or be sustained after the Offering or that
if such a market develops, investors in the Common Stock will be able to
resell their shares at or above the initial public offering price. Making a
market involves maintaining bid and asked quotations for the Common Stock and
being available as principal to effect transactions in reasonable quantities
at those quoted prices, subject to various securities laws and other
regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence
in the marketplace of willing buyers and sellers of the Common Stock at any
given time, which presence is dependent upon the individual decisions of
investors over which neither the Company, the Underwriter nor any market maker
has any control. See "Risk Factors--No Prior Trading Market; No Guarantee of
Liquid Market."
The initial public offering price of the shares of Common Stock has been
determined by negotiations between the Company and the Underwriter and does
not necessarily bear any relationship to the Company's book value, past
operating results, financial condition or other established criteria of value
and may not be indicative of the market price of the Common Stock after the
Offering. Among the factors considered in such negotiations were prevailing
market and general economic conditions, the market capitalizations, trading
histories and stages of development of other traded companies that the Company
and the Underwriter believe to be comparable to the Company, the results of
operations of the Company in recent periods, the current financial position of
the Company, estimates of the business potential of the Company and the
present state of the Company's development and the availability for sale in
the market of a significant number of shares of Common Stock. Additionally,
consideration was given to the general status of the securities market, the
market conditions for new issues of securities and the demand for securities
of comparable companies at the time the Offering was made. See "Underwriting"
for information relating to the method of determining the initial public
offering price. The shares of Common Stock have been approved for quotation on
the Nasdaq/National Market under the symbol "GNTY."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Prospectus, and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected historical consolidated financial data as
of and for the five years ended December 31, 1997 are derived from the
Company's Consolidated Financial Statements which have been audited by
independent public accountants.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income.............. $ 17,009 $ 14,851 $ 14,248 $ 11,658 $ 11,306
Interest expense............. 8,192 6,919 6,372 4,470 4,210
-------- -------- -------- -------- --------
Net interest income........ 8,817 7,932 7,876 7,188 7,096
Provision for loan losses.... 355 206 149 298 89
Net interest income after
provision for loan losses. 8,462 7,726 7,727 6,890 7,007
Noninterest income........... 1,657 2,390 1,440 1,582 1,459
Noninterest expense.......... 7,446 7,073 6,795 6,700 6,306
-------- -------- -------- -------- --------
Earnings before taxes...... 2,673 3,043 2,372 1,772 2,160
Provision for income tax
expense..................... 273 165 261 245 491
-------- -------- -------- -------- --------
Net earnings................. 2,400 2,878 2,111 1,527 1,669
Preferred stock dividend..... 74 74 74 74 74
-------- -------- -------- -------- --------
Net earnings available to
common shareholders......... $ 2,326 $ 2,804 $ 2,037 $ 1,453 $ 1,595
======== ======== ======== ======== ========
COMMON SHARE DATA(1):
Net earnings (basic and
diluted)(2)................. $ 0.91 $ 1.08 $ 0.75 $ 0.53 $ 0.60
Book value................... 6.84 6.06 5.32 4.69 4.40
Tangible book value.......... 6.74 5.95 5.21 4.57 4.27
Cash dividends............... 0.22 0.21 0.19 0.16 0.14
Dividend payout ratio........ 24.24% 18.81% 24.79% 29.26% 23.90%
Weighted average common
shares outstanding (in
thousands).................. 2,547 2,592 2,724 2,721 2,668
Period end shares outstanding
(in thousands).............. 2,548 2,545 2,725 2,723 2,711
BALANCE SHEET DATA:
Total assets................. $244,157 $213,932 $192,935 $187,547 $174,612
Securities................... 58,139 30,382 31,200 30,321 27,666
Loans........................ 157,395 139,289 126,287 124,307 116,506
Allowance for loan losses.... 1,129 1,055 1,005 1,012 1,078
Total deposits............... 222,961 194,855 174,717 170,884 158,873
Total common shareholders'
equity...................... 17,426 15,423 14,499 12,782 11,917
AVERAGE BALANCE SHEET DATA:
Total assets................. $228,782 $203,056 $190,782 $180,648 $172,225
Securities................... 50,089 29,520 30,770 26,030 29,761
Loans........................ 146,061 132,400 124,209 121,078 109,940
Allowance for loan losses.... 1,070 1,029 968 1,067 1,113
Total deposits............... 208,401 183,896 172,964 164,250 157,449
Total common shareholders'
equity...................... 16,508 15,164 13,861 12,559 11,329
</TABLE>
(Table continued on following page)
22
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets.... 1.05% 1.42% 1.11% 0.85% 0.97%
Return on average common
equity..................... 14.09 18.49 14.70 11.57 14.08
Net interest margin......... 4.24 4.32 4.59 4.41 4.57
Efficiency ratio(3)......... 71.09 68.52 72.94 76.40 73.71
ASSET QUALITY RATIOS(4):
Nonperforming assets to
total loans and other real
estate..................... 1.22% 1.49% 1.58% 2.67% 2.53%
Net loan charge-offs to
average loans.............. 0.19 0.12 0.13 0.30 0.12
Allowance for loan losses to
total loans................ 0.72 0.76 0.80 0.81 0.93
Allowance for loan losses to
nonperforming loans(5)..... 92.85 93.12 100.60 45.28 76.24
CAPITAL RATIOS(4):
Leverage ratio.............. 7.87% 7.87% 7.88% 7.35% 7.20%
Average shareholders' equity
to average total assets.... 7.58 7.88 7.70 7.41 7.06
Tier 1 risk-based capital
ratio...................... 11.16 11.07 12.11 11.13 10.90
Total risk-based capital
ratio...................... 11.86 11.80 12.92 11.98 11.85
</TABLE>
- --------
(1) Adjusted for a seven for one stock split.
(2) Net earnings per share is based upon the weighted average number of common
shares outstanding during the period. The Company has no dilutive
potential common shares.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end, except net loan charge-offs to average loans and average
shareholders' equity to average total assets.
(5) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's balance
sheets and statements of earnings. This section should be read in conjunction
with the Company's financial statements and accompanying notes and other
detailed information appearing elsewhere in this Prospectus.
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OVERVIEW
Net earnings available to common shareholders from 1996 to 1997 showed a
$344,000 or 17.4% increase, excluding a one-time gain of $822,000 in 1996 from
the proceeds of a key man life insurance policy, which has been excluded from
the calculations contained in this paragraph. Net earnings available to common
shareholders were $2.3 million, $2.0 million and $2.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively, and net earnings per
common share were $0.91, $0.76 and $0.75 for these same periods. The increase
in net earnings from 1996 to 1997 was primarily the result of an increase in
net interest income from $7.9 million to $8.8 million, offset in part by a
larger provision for loan losses and increased noninterest expense. Earnings
were relatively flat from 1995 to 1996. The Company posted returns on average
assets of 1.05%, 1.01% and 1.11% and returns on average common equity of
14.09%, 13.07% and 14.70%, for the years ended 1997, 1996 and 1995,
respectively.
Total assets at December 31, 1997, 1996 and 1995, were $244.2 million,
$213.9 million, and $192.9 million, respectively. Total deposits at December
31, 1997, 1996 and 1995 were $223.0 million, $194.9 million, and $174.7
million, respectively. Deposits increased by $20.1 million or 11.5% in 1996
and by $28.1 million or 14.4% in 1997. These increases were primarily
attributable to growth generated by the free checking campaign initiated by
the Company in 1995 and the development of the Premier money market account in
1996. At December 31, 1997, investment securities totaled $58.1 million, an
increase of $27.8 million or 91.4% from December 31, 1996. This increase was
primarily attributable to the investment of the growth in deposit funds.
Common shareholders' equity was $17.4 million, $15.4 million and $14.5 million
at December 31, 1997, 1996, and 1995, respectively, with the increases
resulting primarily from earnings retention.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the difference between income earned on interest-
earning assets and the interest expense incurred on interest-bearing
liabilities. The net yield on total interest-earning assets, also referred to
as interest rate margin or net interest margin, represents net interest income
divided by average interest-earning assets. The Company's principal interest-
earning assets are loans, investment securities and federal funds sold.
Net interest income was $8.8 million in 1997 compared to $7.9 million in
1996, an increase of $885,000 or 11.2%. The additional income resulted from an
increase in average interest-earning assets of $24.6 million in 1997 over
1996, versus an increase in average interest-bearing liabilities of $21.5
million during the same period. A decrease in the net interest margin to 4.24%
in 1997 from 4.32% in 1996 partially offset the increase.
Total interest income was $17.0 million in 1997, an increase of $2.2 million
or 14.5% over 1996. The increase resulted primarily from growth in average
loans of $13.7 million or 10.3% and growth in average investment securities of
$20.1 million or 69.7%, which contributed $1.2 million and $1.3 million,
respectively, to the increase in total interest income in 1997 over 1996.
These volume increases were augmented slightly by higher yields on both loans
and investment securities, contributing $77,000 and $50,000, respectively, to
the 1997 increase in total interest income. The higher yield on investment
securities resulted in part from the Company repositioning its assets within
its investment policy guidelines into higher yielding U.S. Government
securities and mortgage-backed securities. U.S. Government securities
increased from $8.9 million in 1996 to
24
<PAGE>
$20.5 million in 1997 and mortgage-backed securities increased from $5.7
million in 1996 to $20.7 million in 1997. In this repositioning of interest-
earning assets, the Company also decreased federal funds sold from $18.2
million to $7.7 million, causing a decrease in federal funds interest income
of $233,000. The Company also decreased its interest-earning deposits in other
financial institutions from $7.1 million to zero.
Total interest expense in 1997 was $1.3 million or 18.4% higher in 1997 than
in 1996 due to several factors. Average balances in NOW, savings and money
market accounts increased by $8.1 million or 16.8% in 1997 over 1996,
primarily from growth in the Premier money market account. This increase
contributed $267,000 to the increase in total interest expense in 1997 over
1996. Rates paid on NOW, savings and money market accounts also increased by
25 basis points to 3.52% in 1997 from 3.27% in 1996, contributing $143,000 to
the increase in total interest expense. In addition, average time deposit
balances increased to $114.6 million in 1997 from $101.1 million in 1996, an
increase of $13.5 million or 13.4%, and rates paid on such deposits increased
by 15 basis points to 5.40% in 1997 from 5.25% in 1996. These increases
contributed $710,000 and $170,000, respectively, to the 1997 increase in total
interest expense.
Net interest income remained relatively steady in 1996 compared to 1995,
showing a $56,000 increase. The increase resulted from a growth in interest-
earning assets of $11.8 million in 1996 over 1995, versus an increase in
average interest-bearing liabilities of $7.5 million during the same period.
Loans increased $13.0 million from $126.3 million to $139.3 million, and
despite a 22 basis point decrease in the yield on these loans, interest income
on loans increased $456,000. Federal funds sold increased from $10.6 million
in 1995 to $18.2 million in 1996, resulting in an increase in federal funds
interest income of $162,000. Total interest income increased from $14.2
million in 1995 to $14.9 million in 1996.
Interest expense increased from $6.4 million in 1995 to $6.9 million in
1996. This increase of $547,000 was caused by an increase in interest-bearing
liabilities of $17.1 million and a 14 basis point increase in cost of funds
from 4.48% in 1995 to 4.62% in 1996. The Company's net interest margin
declined from 4.59% in 1995 to 4.32% in 1996.
25
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made and all average balances are daily average balances.
Nonaccruing loans have been included in the tables as loans carrying a zero
yield.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans:
Commercial and
industrial............ $ 39,975 $3,411 8.53% $ 36,938 $3,183 8.62% $ 39,918 $3,535 8.86%
Real estate-mortgage
and construction...... 84,570 7,478 8.84 73,476 6,287 8.56 63,756 5,701 8.94
Installment and other.. 21,516 2,116 9.83 21,986 2,233 10.16 20,535 2,007 9.77
Fees on loans.......... -- 46 -- -- 58 -- -- 62 --
Securities............. 50,089 3,247 6.48 29,520 1,882 6.38 30,770 1,894 6.16
Federal funds sold..... 9,470 520 5.49 14,451 753 5.21 9,915 591 5.96
Interest-bearing
deposits in other
financial
institutions.......... 2,554 191 7.48 7,212 455 6.31 6,877 458 6.66
-------- ------ ---- -------- ------ ----- -------- ------ -----
Total interest-earning
assets................ 208,174 17,009 8.17% 183,583 14,851 8.09% 171,771 14,248 8.29%
------ ---- ------ ----- ------ -----
Less allowance for loan
losses................. (1,070) (1,029) (968)
-------- -------- --------
Total interest-earning
assets, net of
allowance............. 207,104 182,554 170,803
Non-earning assets:
Cash and due from
banks................. 8,228 7,838 7,421
Premises and equipment. 6,199 5,552 4,975
Interest receivable and
other assets.......... 6,361 6,165 6,301
Other real estate
owned................. 890 947 1,282
-------- -------- --------
Total assets........... $228,782 $203,056 $190,782
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
NOW, savings, and money
market accounts....... $ 56,636 $1,994 3.52% $ 48,497 $1,584 3.27% $ 43,041 $1,332 3.09%
Time deposits.......... 114,596 6,185 5.40 101,059 5,305 5.25 98,644 4,971 5.04
-------- ------ ---- -------- ------ ----- -------- ------ -----
Total interest-bearing
deposits.............. 171,232 8,179 4.78 149,556 6,889 4.61 141,685 6,303 4.45
Other borrowed funds... 168 13 7.74 319 30 9.40 682 69 10.12
-------- ------ ---- -------- ------ ----- -------- ------ -----
Total interest-bearing
liabilities........... 171,400 8,192 4.78% 149,875 6,919 4.62% 142,367 6,372 4.48%
------ ---- ------ ----- ------ -----
Noninterest-bearing
liabilities:
Demand deposits........ 37,169 34,340 31,279
Accrued interest, taxes
and other liabilities. 2,878 2,850 2,448
-------- -------- --------
Total liabilities...... 211,447 187,065 176,094
Shareholders' equity.... 17,335 15,991 14,688
-------- -------- --------
Total liabilities and
shareholders' equity.. $228,782 $203,056 $190,782
======== ======== ========
Net interest income..... $8,817 $7,932 $7,876
====== ====== ======
Net interest spread..... 3.39% 3.47% 3.81%
==== ===== =====
Net interest margin..... 4.24% 4.32% 4.59%
==== ===== =====
</TABLE>
26
<PAGE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning
assets and interest-bearing liabilities and distinguishes between the increase
(decrease) related to higher outstanding balances and the volatility of
interest rates. For purposes of this table, changes attributable to both rate
and volume which can be segregated have been allocated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
---------- --------- ------ ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................. $ 1,213 $ 77 $1,290 $ 746 $ (290) $456
Securities............ 1,315 50 1,365 (77) 65 (12)
Federal funds sold.... (260) 27 (233) 270 (108) 162
Interest-bearing
deposits in other
financial
institutions......... (294) 30 (264) 22 (25) (3)
---------- --------- ------ --------- ---------- ----
Total increase
(decrease) in
interest income.... 1,974 184 2,158 961 (358) 603
INTEREST-BEARING
LIABILITIES:
NOW, savings and money
market accounts...... 267 143 410 166 86 252
Time deposits......... 710 170 880 122 212 334
Other borrowed funds.. (13) (4) (17) (37) (2) (39)
---------- --------- ------ --------- ---------- ----
Total increase in
interest expense... 964 309 1,273 251 296 547
---------- --------- ------ --------- ---------- ----
Increase (decrease) in
net interest income.. $ 1,010 $ (125) $ 885 $ 710 $ (654) $ 56
========== ========= ====== ========= ========== ====
</TABLE>
Provision for Loan Losses
The amount of the provision for loan losses is based on periodic evaluations
of the loan portfolio, with particular attention directed toward nonperforming
and other potential problem loans. During these evaluations, consideration is
given to such factors as management's evaluation of specific loans, the level
and composition of nonperforming loans, historical loss experience, the market
value of collateral, the strength and availability of guaranties,
concentrations of credits and other subjective factors.
The Company's provision for loan losses during the twelve months ended
December 31, 1997 was $355,000, compared to $206,000 during the twelve months
ended December 31, 1996, or an increase of $149,000, as the Company's ratio of
net charge-offs to average loans increased slightly during 1997. The Company
made additional provisions to compensate for ongoing growth in the loan
portfolio and an increase in charge-offs. The Company's provision for loan
losses increased from $149,000 to $206,000 from 1995 to 1996 as the result of
loan growth. See "--Allowance for Loan Losses."
Noninterest Income
Noninterest income is an important source of revenue for financial
institutions in a deregulated environment. Excluding a $822,000 one-time gain
from the proceeds of a key man life insurance policy in 1996, noninterest
income for the year ended December 31, 1997 was $1.7 million, an increase of
$89,000 or 5.7% over 1996. Noninterest income was $1.4 million in 1995.
Excluding the one-time gain, noninterest income was $128,000 or 8.9% greater
in 1996 than in 1995.
27
<PAGE>
The following table presents for the periods indicated the major categories
of noninterest income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Service charges....................................... $1,097 $1,059 $1,032
Fee income............................................ 386 376 277
Securities gains, net................................. 19 2 --
Fiduciary income...................................... 43 43 34
Life insurance proceeds gain.......................... -- 822 --
Other noninterest income.............................. 112 88 97
------ ------ ------
Total noninterest income.......................... $1,657 $2,390 $1,440
====== ====== ======
</TABLE>
After excluding the one-time gain from proceeds of key man life insurance in
1996, the increase in noninterest income from 1996 to 1997 resulted primarily
from service charges and fee income due to an increase in the number of
deposit accounts. Additionally, the Company's increased emphasis on fee based
services resulted in greater income from check cashing, ATM fees, appraisal
fees and wire transfer fees. The increase in noninterest income from 1995 to
1996 was also the result of service charges and fee income related to an
increase in the number of deposit accounts.
Noninterest Expense
For the years ended 1997, 1996 and 1995, noninterest expense totaled $7.4
million, $7.1 million and $6.8 million, respectively. The $373,000 or 5.3%
increase in noninterest expense from 1996 to 1997 was primarily the result of
the opening of a second location in Mount Pleasant in October 1996 and a
location in Texarkana in August 1997, which caused employee compensation and
benefits to increase $168,000 or 4.7% as the number of full-time equivalent
employees increased from 110 in 1996 to 121 in 1997. In addition, bank
premises and fixed asset expense increased from $991,000 to $1.1 million, an
increase of $134,000 or 13.5%. Legal and professional fees increased $99,000
or 42.0% due to independent loan review expenses and bankruptcy and litigation
proceedings. The increase in total noninterest expense for 1996 over 1995 of
$278,000 or 4.1% was primarily due to an increase in employee compensation and
benefits of $238,000 or 7.2%, reflecting additional staff to handle customer
growth. The Company's efficiency ratios were 71.09% in 1997, 68.52% in 1996
and 72.94% in 1995. The following table presents for the periods indicated the
major categories of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Employee compensation and benefits..................... $3,717 $3,549 $3,311
Non-staff expenses:
Net bank premises and fixed asset expense............ 1,125 991 933
Office and computer supplies......................... 291 225 175
Legal and professional fees.......................... 335 236 220
Advertising.......................................... 246 225 166
Postage.............................................. 119 118 103
FDIC insurance....................................... 23 5 219
Other................................................ 1,590 1,724 1,668
------ ------ ------
Total non-staff expenses........................... 3,729 3,524 3,484
------ ------ ------
Total noninterest expense.......................... $7,446 $7,073 $6,795
====== ====== ======
</TABLE>
Income Taxes
Federal income tax is reported as income tax expense and is influenced by
the amount of taxable income, the amount of tax-exempt income, the amount of
non-deductible interest expense and the amount of other non-deductible
expenses. The Company utilized tax benefits on leveraged lease transactions in
the amounts of
28
<PAGE>
$530,000, $616,000 and $517,000 in 1997, 1996 and 1995, respectively. The
aggregate amount of tax benefits related to the leveraged leasing transactions
through December 31, 1997 was approximately $3,350,000. In 1996, the Company
also had non-taxable income in the form of proceeds from key man life
insurance in the amount of $822,000. The effective tax rates in 1997, 1996,
and 1995 were 10.21%, 5.42% and 11.00%, respectively. Income taxes for
financial purposes in the consolidated statements of earnings differ from the
amount computed by applying the statutory income tax rate of 34% to earnings
before income taxes. The difference in the statutory rate is primarily due to
the leveraged lease transactions and non-taxable income. See "Risk Factors--
Leveraged Leasing Activities" and "The Company--Leveraged Leasing Activities."
Additionally, the State of Texas imposes a Texas franchise tax. Taxable
income for the income tax component of the Texas franchise tax is the federal
pre-tax income, plus certain officers' salaries, less interest income from
federal securities. Total franchise tax expense was $34,000 in 1997, $58,000
in 1996 and $59,000 in 1995. Such expense was included as a part of other
noninterest expense.
Impact of Inflation
The effects of inflation on the local economy and on the Company's operating
results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which
do not necessarily change in accordance with inflation rates. The Company
tries to control the impact of interest rate fluctuations by managing the
relationship between its interest rate sensitive assets and liabilities. See
"--Interest Rate Sensitivity and Liquidity" below.
FINANCIAL CONDITION
Loan Portfolio
The Company provides a broad range of commercial, real estate and consumer
loan products to small and medium-sized businesses and individuals. The
Company aggressively pursues qualified lending customers in both the
commercial and consumer sectors, providing customers with direct access to
lending personnel and prompt, professional service. The 70.59% loan to deposit
ratio as of December 31, 1997, reflects the Company's commitment as an active
lender in the local business community. Total loans increased by $18.1 million
or approximately 13.0% to $157.4 million at December 31, 1997, from $139.3
million at December 31, 1996. In 1996, total loans increased by $13.0 million
or 10.3% from $126.3 million at December 31, 1995. The growth in loans has
resulted from a strong local economy, an aggressive advertising campaign and
the solicitation of new companies and individuals entering the Company's
markets.
The following table summarizes the loan portfolio of the Company by type of
loan as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial............. $ 36,598 23.26% $ 29,412 21.11% $ 26,099 20.67% $ 24,696 19.86% $ 22,264 19.12%
Agriculture............. 8,174 5.19 7,159 5.14 6,466 5.12 4,814 3.87 3,813 3.27
Real estate:
Construction and land
development........... 3,072 1.95 2,292 1.65 2,948 2.33 2,944 2.37 4,309 3.70
1-4 family residential. 41,398 26.30 36,967 26.54 35,024 27.73 35,201 28.32 33,242 28.53
Farmland............... 6,492 4.12 6,685 4.80 5,865 4.64 5,515 4.44 5,445 4.67
Non-residential and
non-farmland.......... 42,363 26.92 36,460 26.18 29,672 23.50 29,191 23.48 24,432 20,97
Multi-family
residential........... 360 0.23 535 0.38 388 0.31 70 0.06 234 0.20
Consumer................ 18,938 12.03 19,779 14.20 19,825 15.70 21,876 17.60 22,767 19.54
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans........... $157,395 100.00% $139,289 100.00% $126,287 100.00% $124,307 100.00% $116,506 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
29
<PAGE>
The primary lending focus of the Company is on small and medium-sized
commercial loans. The Company offers business loans, commercial real estate
loans, equipment loans, working capital loans, term loans, revolving lines of
credit and letters of credit. Most commercial loans are collateralized. The
purpose of a particular loan generally determines its structure. In almost all
cases, the Company requires personal guarantees on commercial loans to help
assure repayment.
The Company's commercial mortgage loans are generally secured by first liens
on real estate, typically have fixed interest rates and amortize over a 10 to
15 year period with balloon payments due at the end of one to three years. In
underwriting commercial mortgage loans, consideration is given to the
property's operating history, future operating projections, current and
projected occupancy, location and physical condition. The underwriting
analysis also includes credit checks, appraisals and a review of the financial
condition of the borrower.
The Company makes loans to finance the construction of residential and, to a
limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of
periodic draws on these loans. Underwriting guidelines similar to those
described above are also used in the Company's construction lending
activities. In keeping with the community-oriented nature of its customer
base, the Company provides construction and permanent financing for churches
located within its market area.
The Company rarely makes loans at its legal lending limit. Lending officers
are assigned various levels of loan approval authority based upon their
respective levels of experience and expertise. Loans above $500,000 are
evaluated and acted upon by the Executive Committee which meets once a week
and are reported to the Board of Directors. The Company's strategy for
approving or disapproving loans is to follow conservative loan policies and
underwriting practices which include: (i) granting loans on a sound and
collectible basis; (ii) investing funds properly for the benefit of
shareholders and the protection of depositors; (iii) serving the legitimate
needs of the community and the Company's general market area while obtaining a
balance between maximum yield and minimum risk; (iv) ensuring that primary and
secondary sources of repayment are adequate in relation to the amount of the
loan; (v) developing and maintaining adequate diversification of the loan
portfolio as a whole and of the loans within each category; and (vi) ensuring
that each loan is properly documented and, if appropriate, insurance coverage
is adequate. The Company's loan review and compliance personnel interact daily
with commercial and consumer lenders to identify potential underwriting or
technical exception variances. In addition, the Company has placed increased
emphasis on the early identification of problem loans to aggressively seek
resolution of the situations and thereby keep loan losses at a minimum.
Management believes that this strict adherence to conservative loan policy
guidelines has contributed to the Company's below average level of loan losses
compared to its industry peer group over the past few years.
The contractual maturity ranges of the commercial, industrial and real
estate construction loan portfolio and the amount of such loans with
predetermined or floating interest rates in each maturity range as of December
31, 1997, are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
-------- ---------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............. $21,775 $14,570 $253 $36,598
Real estate construction.............. 2,963 -- 109 3,072
-------- -------- ----- --------
Total............................... $24,738 $14,570 $362 $39,670
======== ======== ===== ========
Loans with a predetermined interest
rate................................. $19,340 $ 9,579 $216 $29,135
Loans with a floating interest rate... 5,398 4,991 146 10,535
-------- -------- ----- --------
Total............................... $24,738 $14,570 $362 $39,670
======== ======== ===== ========
</TABLE>
30
<PAGE>
The Company's loans collateralized by single-family residential real estate
generally are originated in amounts of no more than 90% of the lower of cost
or appraised value. The Company requires mortgage title insurance and hazard
insurance in the amount of the loan. Of the mortgages originated, the Company
generally retains mortgage loans with short terms or variable rates and sells
longer term fixed-rate loans to Texas Independent Bank Mortgage Company.
As of December 31, 1997, the Company's one to four family real estate loan
portfolio was $41.4 million. Of this amount, $27.1 million is repriceable in
one year or less and an additional $11.5 million is repriceable from one year
to five years. These high percentages in short-term real estate loans reflect
the Company's commitment to reducing interest rate risk.
The Company provides a wide variety of consumer loans including motor
vehicle, education loans, personal loans (collateralized and uncollateralized)
and deposit account collateralized loans. The terms of these loans typically
range from 12 to 72 months and vary based upon the nature of collateral and
size of loan. As of December 31, 1997, the Company had no indirect consumer
loans, indicating a preference to maintain personal banking relationships and
strict underwriting standards. Installment loans have decreased during the
last five years, reflecting management's tight control of consumer credit due
to record high personal bankruptcy filings nationwide. This concern also
prompted management to sell its credit card portfolio at book value to Texas
Independent Bank in March 1997.
Nonperforming Assets
The Company has several procedures in place to assist it in maintaining the
overall quality of its loan portfolio. The Company has established
underwriting guidelines to be followed by its officers and also monitors its
delinquency levels for any negative or adverse trends. There can be no
assurance, however, that the Company's loan portfolio will not become subject
to increasing pressures from deteriorating borrower credit due to general
economic conditions.
The Company's conservative lending approach, as well as a healthy local
economy, have resulted in strong asset quality. Nonperforming assets at
December 31, 1997, decreased 7.5% to $1.9 million compared to $2.1 million at
December 31, 1996. Nonperforming assets were $2.0 million at December 31,
1995. This resulted in ratios of nonperforming assets to total loans plus
other real estate of 1.22%, 1.49% and 1.58% as of the years ended 1997, 1996
and 1995, respectively.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. Loans where
the interest payments jeopardize the collection of principal are placed on
nonaccrual status, unless the loan is both well-secured and in the process of
collection. Cash payments received while a loan is classified as nonaccrual
are recorded as a reduction of principal as long as doubt exists as to
collection. The Company is sometimes required to revise a loan's interest rate
or repayment terms in a troubled debt restructuring, however, the Company had
no restructured loans at either December 31, 1997 or December 31, 1996 and had
only $10,000 in restructured loans at December 31, 1995. In addition to an
internal loan review and an independent audit, the Company retains IBS for an
annual external review to evaluate the loan portfolio.
The Company maintains current appraisals on loans secured by real estate,
particularly those categorized as nonperforming loans and potential problem
loans. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for appropriate additions to the allowance for
loan losses. The Company records other real estate at fair value at the time
of acquisition, less estimated costs to sell.
31
<PAGE>
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans....................... $ 298 $ 722 $ 817 $ 514 $ 923
Accruing loans past due 90 days or
more.................................. 918 411 172 1,683 466
Restructured loans..................... -- -- 10 38 25
Other real estate...................... 714 953 1,016 1,112 1,567
------ ------ ------ ------ ------
Total nonperforming assets........... $1,903 $2,086 $2,015 $3,347 $2,981
====== ====== ====== ====== ======
Nonperforming assets to total loans and
other real estate..................... 1.22% 1.49% 1.58% 2.67% 2.53%
</TABLE>
The Company has adopted SFAS No. 114, Accounting by Creditors for Impairment
of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures. Under SFAS No. 114, as amended,
a loan is considered impaired based on current information and events if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the loan's observable market price or based on the fair value of the
collateral if the loan is collateral dependent. The implementation of SFAS No.
114 did not have a material adverse affect on the Company's financial
statements.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has
established an allowance for loan losses which it believes is adequate for
estimated losses in the Company's loan portfolio. Based on an evaluation of
the loan portfolio, management presents a quarterly review of the allowance
for loan losses to the Company's Board of Directors, indicating any change in
the allowance since the last review and any recommendations as to adjustments
in the allowance. In making its evaluation, management considers the
diversification by industry of the Company's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio
of current economic indicators and their probable impact on borrowers, the
amount of charge-offs for the period, the amount of nonperforming loans and
related collateral security, the evaluation of its loan portfolio by the
annual external loan review conducted by IBS and the annual examination of the
Company's financial statements by its independent auditors. Charge-offs occur
when loans are deemed to be uncollectible.
The Company follows an internal loan review program to evaluate the credit
risk in the loan portfolio. In addition, the Company contracts with IBS to
annually perform an external loan review. Through the loan review process, the
Company maintains an internally classified loan list which, along with the
delinquency list of loans, helps management assess the overall quality of the
loan portfolio and the adequacy of the allowance for loan losses. Loans
internally classified as "substandard" or in the more severe categories of
"doubtful" or "loss" are those loans that at a minimum have clear and defined
weaknesses such as a highly-leveraged position, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the debt. At December 31, 1997, the Company had $2.9 million
of such loans compared to $2.6 at December 31, 1996, an 11.5% increase.
In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate "watch list" which further aids the
Company in monitoring the loan portfolio. Watch list loans show warning
elements where the present status portrays one or more deficiencies that
require attention in the short term or where pertinent ratios of the loan have
weakened to a point where more frequent monitoring is warranted. These loans
do not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements as compared with those of a
satisfactory credit. The Company reviews these loans to assist in assessing
the adequacy of the allowance for loan losses. At December 31, 1997, the
Company had $385,000 of such loans.
32
<PAGE>
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans
and other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Company's historical charge-off experience. The Company then charges to
operations a provision for loan losses to maintain the allowance for loan
losses at an adequate level determined by the foregoing methodology.
For the twelve months ended December 31, 1997, net loan charge-offs totaled
$281,000 or 0.19% of average loans outstanding for the period, compared to
$156,000 in net loan charge-offs or 0.12% of average loans for the year ended
December 31, 1996. During 1997, the Company recorded a provision for loan
losses of $355,000 compared to $206,000 for 1996. The increase in the
provision for 1997 is the result of an $18.1 million increase in loans during
1997 and an increase in net charge-offs of $125,000 during the same period.
The Company made a provision for loan losses of $149,000 for 1995. At December
31, 1997, the allowance totaled $1.1 million or 0.72% of total loans. At
December 31, 1996, the allowance aggregated $1.1 million or 0.76% of total
loans.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding.... $146,061 $132,400 $124,209 $121,078 $109,940
-------- -------- -------- -------- --------
Gross loans outstanding at
end of period............... $157,395 $139,289 $126,287 $124,307 $116,506
-------- -------- -------- -------- --------
Allowance for loan losses at
beginning of period......... $ 1,055 $ 1,005 $ 1,012 $ 1,078 $ 1,122
Provision for loan losses.... 355 206 149 298 89
Charge-offs:
Commercial and industrial.. 53 116 184 299 154
Real estate................ 170 66 19 49 18
Consumer................... 162 101 95 68 74
Recoveries:
Commercial and industrial.. 65 65 81 34 34
Real estate................ 13 23 15 4 7
Consumer................... 26 39 46 14 72
-------- -------- -------- -------- --------
Net loan charge-offs......... 281 156 156 364 133
Allowance for loan losses at
end of period............... $ 1,129 $ 1,055 $ 1,005 $ 1,012 $ 1,078
======== ======== ======== ======== ========
Ratio of allowance to end of
period loans................ 0.72% 0.76% 0.80% 0.81% 0.93%
Ratio of net loan charge-offs
to average loans............ 0.19 0.12 0.13 0.30 0.12
Ratio of allowance to end of
period nonperforming loans.. 92.85 93.12 100.60 45.28 76.24
</TABLE>
33
<PAGE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996
------------------ ------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial............. $ 554 28.45% $ 501 26.25%
Real estate:
Construction and land development... -- 1.95 -- 1.65
1-4 family residential.............. 58 26.30 86 26.54
Commercial mortgage................. 128 26.92 91 26.18
Farmland............................ -- 4.12 -- 4.80
Multi-family........................ -- 0.23 -- 0.38
Consumer.............................. 171 2.03 128 14.20
Unallocated........................... 218 249
------ ------ ------ ------
Total allowance for loan losses... $1,129 100.00% $1,055 100.00%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for
loan losses applicable
to:
Commercial and
industrial........... $ 320 25.79% $ 432 23.73% $ 509 22.39%
Real estate:
Construction and
land development... -- 2.33 -- 2.37 -- 3.70
1-4 family
residential........ 95 27.73 105 28.32 69 28.53
Commercial mortgage. 93 23.50 89 23.48 74 20.97
Farmland............ -- 4.64 -- 4.44 -- 4.67
Multi-family........ -- 0.31 -- 0.06 -- 0.20
Consumer.............. 124 15.70 102 17.60 49 19.54
Unallocated........... 373 284 377
------ ------ ------ ------ ------ ------
Total allowance
for loan losses.. $1,005 100.00% $1,012 100.00% $1,078 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Securities
The Company uses its securities portfolio to ensure liquidity for cash
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for municipal pledging requirements and to
manage asset quality. At December 31, 1997, investment securities totaled
$58.1 million, an increase of $27.7 million from $30.4 million at December 31,
1996. The increase was primarily attributable to the investment of additional
funds generated by the free checking product, the Premier money market account
and the certificate of deposit campaign initiated in mid-1997. During 1996,
securities decreased slightly by approximately $818,000 from $31.2 million at
December 31, 1995, to $30.4 million at December 31, 1996. This was a
reflection of an
34
<PAGE>
increase in loan demand in 1996. At December 31, 1997, investment securities
represented 23.8% of total assets compared to 14.2% of total assets at
December 31,1996. The yield on the investment portfolio for the year ended
December 31, 1997, was 6.69% compared to a yield of 6.31% for the year ended
December 31, 1996.
Mortgage-backed securities are securities which have been developed by
pooling a number of real estate mortgages and are principally issued by
federal agencies such as the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. These securities are deemed to have
high credit ratings and minimum regular monthly cash flows of principal and
interest which are guaranteed by the issuing agencies. All the Company's
mortgage-backed securities at December 31, 1997, were agency-issued collateral
obligations.
At December 31, 1997, 55.42% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. However, unlike U.S.
Treasury and U.S. government agency securities, which have a lump sum payment
at maturity, mortgage-backed securities provide cash flows from regular
principal and interest payments and principal prepayments throughout the lives
of the securities. Therefore, the average life, or the average amount of time
until the Company receives the total amount invested, of the mortgage-backed
security will be shorter than the contractual maturity. The Company estimates
the remaining average life of the fixed-rate mortgage-backed security
portfolio to be less than five years. Mortgage-backed securities which are
purchased at a premium will generally suffer decreasing net yields as interest
rates drop because home owners tend to refinance their mortgages. Thus, the
premium paid must be amortized over a shorter period. Therefore, securities
purchased at a discount will obtain higher net yields in a decreasing interest
rate environment. As interest rates rise, the opposite will generally be true.
During a period of increasing interest rates, fixed rate mortgage-backed
securities do not tend to experience heavy prepayments of principal and
consequently, the average life of this security will not be unduly shortened.
Approximately $11.4 million of the Company's mortgage-backed securities earn
interest at floating rates and reprice within one year, and accordingly are
less susceptible to declines in value should interest rates increase.
The Company accounts for securities according to Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories: held-to-
maturity, trading or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to-maturity and measured at amortized cost
in the financial statements only if management has the positive intent and
ability to hold those securities to maturity. Securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading and measured at fair value in the financial statements
with unrealized gains and losses included in earnings. Investments not
classified as either held-to-maturity or trading are classified as available-
for-sale and measured at fair value in the financial statements with
unrealized gains and losses reported, net of tax, in a separate component of
shareholders' equity until realized.
The following table summarizes the amortized cost of investment securities
held by the Company as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury securities............................ $14,372 $14,378 $18,470
U.S. Government securities.......................... 20,366 8,880 4,519
Mortgage-backed securities.......................... 20,664 5,654 6,722
Equity securities................................... 992 393 393
State and municipal securities...................... 1,379 1,048 1,065
------- ------- -------
Total securities.................................. $57,773 $30,353 $31,169
======= ======= =======
</TABLE>
35
<PAGE>
The following table summarizes the contractual maturity of investment
securities on an amortized cost basis and their weighted average yields as of
December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN ONE YEAR BUT WITHIN YEARS BUT WITHIN AFTER TEN
YEAR FIVE YEARS TEN YEARS YEARS
------------ ----------------- ----------------- -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
------ ----- --------- ------- --------- ------- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............. $8,293 6.21% $ 6,079 6.36% $ -- --% $ -- --% $14,372 6.27%
U.S. Government
securities............. -- -- 6,253 6.86 14,113 6.83 -- -- 20,366 6.86
Mortgage-backed
securities............. -- -- 29 7.25 9,184 6.88 11,451 6.69 20,664 6.78
Equity securities....... -- -- -- -- -- -- 992 2.85 992 2.85
State and municipal
securities............. 191 4.33 332 5.54 329 5.22 527 5.72 1,379 5.37
------ ---- --------- ------ --------- ------ ------- ---- ------- ----
Totals................. $8,484 6.17% $ 12,693 6.59% $ 23,626 6.83% $12,970 6.14% $57,773 6.69%
====== ==== ========= ====== ========= ====== ======= ==== ======= ====
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Available-for-sale................................... $42,906 $ 8,305 $ 6,151
Held-to-maturity..................................... 15,233 22,077 25,049
------- ------- -------
Total securities................................... $58,139 $30,382 $31,200
======= ======= =======
</TABLE>
The following table summarizes the amortized cost of securities classified
as available-for-sale and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- --------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- ------- --------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............. $12,178 $272 $ -- $12,450 $6,794 $27 $ -- $6,821
U.S. Government
securities............. 16,174 94 -- 16,268 996 2 -- 998
Mortgage-backed
securities............. 13,196 -- -- 13,196 93 -- -- 93
Equity securities....... 992 -- -- 992 393 -- -- 393
------- ---- ---- ------- ------ --- ---- ------
Total.................. $42,540 $366 $ -- $42,906 $8,276 $29 $ -- $8,305
======= ==== ==== ======= ====== === ==== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities............. $5,605 $33 $ 4 $5,634
U.S. Government securities........... -- -- -- --
Mortgage-backed securities........... 122 3 -- 125
Equity securities.................... 393 -- 1 392
------ --- --- ------
Total.............................. $6,120 $36 $ 5 $6,151
====== === === ======
</TABLE>
36
<PAGE>
The following table summarizes the amortized cost of securities classified
as held-to-maturity and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- ---------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- ------- --------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............. $ 2,194 $ 8 $ -- $ 2,202 $ 7,584 $ 66 $ -- $ 7,650
U.S. Government
securities............. 4,192 144 -- 4,336 7,884 113 5 7,992
Mortgage-backed
securities............. 7,468 -- -- 7,468 5,561 -- -- 5,561
State and municipal
securities............. 1,379 96 -- 1,475 1,048 39 -- 1,087
------- ---- ---- ------- ------- ---- ---- -------
Total.................. $15,233 $248 $ -- $15,481 $22,077 $218 $ 5 $22,290
======= ==== ==== ======= ======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities............. $12,865 $199 $-- $13,064
U.S. Government securities........... 4,519 144 2 4,661
Mortgage-backed securities........... 6,600 -- -- 6,600
State and municipal securities....... 1,065 46 2 1,109
------- ---- --- -------
Total.............................. $25,049 $389 $ 4 $25,434
======= ==== === =======
</TABLE>
Deposits
Total deposits at December 31, 1997, increased to $223.0 million from $194.9
million at December 31, 1996, an increase of $28.1 million or 14.42%. The
increase can be attributed to several factors. First, a certificate of deposit
campaign implemented in June 1997 for a two month period prompted an $18.2
million or 18.0% increase in total certificates of deposit during 1997.
Second, the free checking campaign which was implemented in 1995 and provides
checking without service charges, continued its momentum and checking accounts
increased by $6.8 million or 19.1% from 1996 to 1997. The number of accounts
also increased significantly from 10,788 to 13,139, a 21.8% increase. The
Paris location increased its deposits by $15.5 million or 86.1% and continued
to gain market share as the Company became better known in the community.
Another area of growth was in the Premier money market account which increased
$3.4 million or 11.7% in 1997. While the balances represent primarily core
deposits, customers' deposits in this investment vehicle may fluctuate from
time to time depending on other alternative investments or cash needs. In
1996, deposits rose to $194.9 million from $174.7 million in 1995, an increase
of $20.2 million or 11.6%. This increase is primarily attributable to the free
checking campaign that increased checking accounts by $4.3 million or 13.9%,
and the Premier money market account that increased deposits by $12.4 million
or 72.5%. The Company's ratio of average noninterest-bearing demand deposits
to average total deposits for years ended December 31, 1997, 1996, and 1995,
were 17.8%, 18.7%, and 18.1%, respectively.
37
<PAGE>
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1997, 1996, and 1995 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regular savings........... $ 7,555 2.74% $ 8,191 2.81% $ 9,037 2.73%
NOW accounts.............. 17,516 2.78 16,818 2.90 17,916 3.16
Money market accounts..... 31,565 4.12 23,487 3.69 16,089 3.23
Time deposits less than
$100,000................. 70,743 5.32 63,177 5.18 62,751 4.91
Time deposits $100,000 and
over..................... 43,853 5.53 37,883 5.37 35,893 5.27
-------- ---- -------- ---- -------- ----
Total interest-bearing
deposits............... 171,232 4.78 149,556 4.61 141,686 4.45
Noninterest-bearing
deposits................. 37,169 -- 34,340 -- 31,278 --
-------- ---- -------- ---- -------- ----
Total deposits.......... $208,401 3.92% $183,896 3.75% $172,964 3.64%
======== ==== ======== ==== ======== ====
</TABLE>
The Company does not accept brokered deposits. The following table sets
forth the amount of the Company's certificates of deposit that are $100,000 or
greater by time remaining until maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3 months or less...................................... $12,374
Between 3 months and 6 months......................... 10,039
Between 6 months and 1 year........................... 18,645
Over 1 year........................................... 1,938
-------
Total............................................... $42,996
=======
</TABLE>
Interest Rate Sensitivity and Liquidity
The Company's Asset Liability and Funds Management Policy provides
management with the necessary guidelines for effective funds management, and
the Company has established a measurement system for monitoring its net
interest rate sensitivity position. The Company manages its sensitivity
position within established guidelines.
Interest rate risk is managed by the Asset Liability Committee ("ALCO"),
which is composed of senior officers of the Company, in accordance with
policies approved by the Company's Board of Directors. The ALCO formulates
strategies based on appropriate levels of interest rate risk. In determining
the appropriate level of interest rate risk, the ALCO considers the impact on
earnings and capital of the current outlook on interest rates, potential
changes in interest rates, regional economies, liquidity, business strategies
and other factors. The ALCO meets regularly to review, among other things, the
sensitivity of assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses, purchase
and sale activities, commitments to originate loans and the maturities of
investments and borrowings. Additionally, the ALCO reviews liquidity, cash
flow flexibility, maturities of deposits and consumer and commercial deposit
activity. Management uses two methodologies to manage interest rate risk: 1)
an analysis of relationships between interest-earning assets and interest-
bearing liabilities; and 2) an interest rate shock simulation model. The
Company has traditionally managed its business to reduce its overall exposure
to changes in interest rates, however, under current policies of the Company's
Board of Directors, management has been given some latitude to increase the
Company's interest rate sensitivity position within certain limits if, in
management's judgment, it will enhance profitability. As a result, changes in
market interest rates may have a greater impact on the Company's financial
performance in the future than they have had historically.
38
<PAGE>
The Company manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. The Company does not enter
into instruments such as leveraged derivatives, structured notes, interest
rate swaps, caps, floors, financial options, financial futures contracts or
forward delivery contracts for the purpose of reducing interest rate risk.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or can experience an interest rate change in line
with general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments.
Interest rate sensitivity reflects the potential effect on net interest income
of a movement in interest rates. A company is considered to be asset
sensitive, or having a positive GAP, when the amount of its interest-earning
assets maturing or repricing within a given period exceeds the amount of its
interest-bearing liabilities also maturing or repricing within that time
period. Conversely, a company is considered to be liability sensitive, or
having a negative GAP, when the amount of its interest-bearing liabilities
maturing or repricing within a given period exceeds the amount of its
interest-earning assets also maturing or repricing within that time period.
During a period of rising interest rates, a negative GAP would tend to affect
adversely net interest income, while a positive GAP would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative GAP would tend to result in an increase in net interest income, while
a positive GAP would tend to affect net interest income adversely. It is
management's intent, however, to achieve a proper balance so that incorrect
rate forecasts should not have a significant impact on earnings.
The following table sets forth an interest rate sensitivity analysis for the
Company at December 31, 1997:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
----------------------------------------------------------------------------------
0-30 31-180 181-365 1-3 3-5 5-10 GREATER THAN
DAYS DAYS DAYS YEARS YEARS YEARS 10 YEARS TOTAL
-------- -------- -------- ------- ------- ------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities............. $ 7,965 $ 5,434 $ 7,524 $ 7,561 $ 5,268 $23,834 $ 553 $ 58,139
Loans.................. 46,432 30,915 37,714 23,879 15,882 2,573 -- 157,395
Federal funds sold..... 7,720 -- -- -- -- -- -- 7,720
-------- -------- -------- ------- ------- ------- ------- --------
Total interest-earning
assets................ 62,117 36,349 45,238 31,440 21,150 26,407 553 223,254
-------- -------- -------- ------- ------- ------- ------- --------
Interest-bearing
liabilities:
NOW, money market and
savings deposits...... 57,071 -- -- -- -- -- -- 57,071
Certificates of deposit
and other time
deposits.............. 28,086 23,931 61,208 6,086 284 -- -- 119,595
-------- -------- -------- ------- ------- ------- ------- --------
Total interest-bearing
liabilities........... 85,157 23,931 61,208 6,086 284 -- -- 176,666
-------- -------- -------- ------- ------- ------- ------- --------
Period GAP.............. $(23,040) $ 12,418 $(15,970) $25,354 $20,866 $26,407 $ 553 $ 46,588
Cumulative GAP.......... $(23,040) $(10,622) $(26,592) $(1,238) $19,628 $46,035 $46,588
Period GAP to total
assets................. (9.44)% 5.09 % (6.54)% 10.38 % 8.55% 10.82% 0.23%
Cumulative GAP to total
assets................. (9.44)% (4.35)% (10.89)% (0.51)% 8.04% 18.85% 19.08%
Cumulative interest-
earning assets to
cumulative interest-
bearing liabilities.... 72.94 % 90.26 % 84.38 % 99.30 % 111.11% 126.06% 126.37%
</TABLE>
The Company's one-year cumulative GAP position at December 31, 1997 was
negative $26.6 million or 10.89% of assets. This is a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the GAP position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not contemplated
by the GAP position, an institution could have a matched GAP position in the
current rate
39
<PAGE>
environment and still have its net interest income exposed to increased rate
risk. The Company maintains a Rate Committee and the ALCO that review the
Company's interest rate risk position on a weekly or monthly basis,
respectively.
As a financial institution, the Company's primary component of market risk
is interest rate volatility, primarily in the prime lending rate. Fluctuations
in interest rates will ultimately impact both the level of income and expense
recorded on most of the Company's assets and liabilities, and the market value
of all interest-earning assets and interest-bearing liabilities, other than
those which have a short term to maturity. Based upon the nature of the
Company's operations, the Company is not subject to foreign exchange or
commodity price risk. The Company does not own any trading assets.
The Company's exposure to market risk is reviewed on a regular basis by the
ALCO. Interest rate risk is the potential of economic losses due to future
interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximizing
income. Management realizes certain risks are inherent, and that the goal is
to identify and accept the risks.
The Company applies a market value ("MV") methodology to gauge its interest
rate risk exposure as derived from its simulation model. Generally, MV is the
discounted present value of the difference between incoming cash flows on
interest-earning assets and other investments and outgoing cash flows on
interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk by measuring the change in the MV that would
result from a theoretical 200 basis point change in market interest rates.
Both a 200 basis point increase and a 200 basis point decrease in market rates
are considered.
At December 31, 1997, it was estimated that the Company's MV would decrease
19.4% in the event of a 200 basis point increase in market interest rates. The
Company's MV at the same date would increase 11.5% in the event of a 200 basis
point decrease in market interest rates.
Presented below, as of December 31, 1997, is an analysis of the Company's
interest rate risk as measured by changes in MV for instantaneous and
sustained parallel shifts of 200 basis points in market interest rates:
<TABLE>
<CAPTION>
MARKET VALUE AS A % OF
PRESENT VALUE OF ASSETS
-------------------------
$ CHANGE IN MV
CHANGE IN RATES (IN THOUSANDS) % CHANGE IN MV MV RATIO CHANGE
--------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
-200 bp $ 1,933 11.53% 7.64% 79 bp
0 bp -- -- 6.85% --
+200 bp ($3,254) (19.41%) 5.52% (133 bp)
</TABLE>
Management believes that the MV methodology overcomes three shortcomings of
the typical maturity GAP methodology. First, it does not use arbitrary
repricing intervals and accounts for all expected future cash flows. Second,
because the MV method projects cash flows of each financial instrument under
different interest rate environments, it can incorporate the effect of
embedded options on an institution's interest rate risk exposure. Third, it
allows interest rates on different instruments to change by varying amounts in
response to a change in market interest rates, resulting in more accurate
estimates of cash flows.
As with any method of gauging interest rate risk, however, there are certain
shortcomings inherent to the MV methodology. The model assumes interest rate
changes are instantaneous parallel shifts in the yield curve. In reality, rate
changes are rarely instantaneous. The use of the simplifying assumption that
short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts.
Further, the model assumes that certain assets and liabilities of similar
maturity or repricing will react identically to changes in rates. In reality,
the market value of certain types of financial instruments may adjust in
anticipation of changes in market rates, while any adjustment in the valuation
of other types of financial
40
<PAGE>
instruments may lag behind the change in general market rates. Additionally,
the MV methodology does not reflect the full impact of contractual
restrictions on changes in rates for certain assets, such as adjustable rate
loans. When interest rates change, actual loan prepayments and actual early
withdrawals from certificates of deposit may deviate significantly from the
assumptions used in the model. Finally, this methodology does not measure or
reflect the impact that higher rates may have on the ability of adjustable-
rate loan clients to service their debt. All of these factors are considered
in monitoring the Company's exposure to interest rate risk.
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Company's liquidity needs are met primarily
by financing activities, which consisted mainly of growth in core deposits,
supplemented by investment securities and earnings through operating
activities. Although access to purchased funds from correspondent banks is
available and has been utilized on occasion to take advantage of investment
opportunities, the Company does not generally rely on these external funding
sources. The cash and federal funds sold position, supplemented by amortizing
investments along with payments and maturities within the loan portfolio, have
historically created an adequate liquidity position.
Federal Home Loan Bank ("FHLB") advances may be utilized from time to time
as either a short-term funding source or a longer-term funding source. FHLB
advances can be particularly attractive as a longer-term funding source to
balance interest rate sensitivity and reduce interest rate risk. The Company
is eligible for two borrowing programs through the FHLB. The first, called
"Short-Term Fixed," requires delivery of eligible securities for collateral.
Maturities under this program range from 1-35 days. The Company does not
currently have any borrowings under this program. The Company currently
maintains some of its investment securities in safekeeping at the FHLB of
Dallas. At December 31, 1997, the Company had approximately $4.1 million
available for pledging.
The second borrowing program, the "Blanket Borrowing Program," is under a
borrowing agreement which does not require the delivery of specific
collateral. Borrowings are limited to a maximum of 75% of the Company's 1-4
family mortgage loans. At December 31, 1997, the Company had approximately
$31.0 million in potential borrowings available under this program.
Capital Resources
Capital management consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve Board and the Bank is subject to capital
adequacy requirements imposed by the FDIC and the Texas Banking Department.
Both the Federal Reserve Board and the FDIC have adopted risk-based capital
requirements for assessing bank holding company and bank capital adequacy.
These standards define capital and establish minimum capital requirements in
relation to assets and off-balance sheet exposure, adjusted for credit risk.
The risk-based capital standards currently in effect are designed to make
regulatory capital requirements more sensitive to differences in risk profiles
among bank holding companies and banks, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate relative risk weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items.
Bank regulatory authorities in the United States have issued risk-based
capital standards by which all bank holding companies and banks are evaluated
in terms of capital adequacy. The risk-based capital standards issued by the
Federal Reserve Board apply to the Company. These guidelines relate a
financial institution's capital to the risk profile of its assets. The risk-
based capital standards require all financial institutions to have "Tier 1
capital" of at least 4.0% and "total risk-based" capital (Tier 1 and Tier 2)
of at least 8.0% of total risk-adjusted assets. "Tier 1 capital" generally
includes common shareholders' equity and qualifying perpetual preferred stock
together with related surpluses and retained earnings, less deductions for
goodwill and various other intangibles.
41
<PAGE>
"Tier 2 capital" may consist of a limited amount of intermediate-term
preferred stock, a limited amount of term subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock not
qualifying as Tier 1 capital, and a limited amount of the general valuation
allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is
"total risk-based capital."
The Federal Reserve Board has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to
average total consolidated assets ("leverage ratio") of 3.0% for institutions
with well diversified risk, including no undue interest rate exposure;
excellent asset quality; high liquidity; good earnings; and that are generally
considered to be strong banking organizations, rated composite 1 under
applicable federal guidelines, and that are not experiencing or anticipating
significant growth. Other banking organizations are required to maintain a
leverage ratio of at least 4.0% to 5.0%. These rules further provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets.
Pursuant to Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency revised its risk-based capital
standards to ensure that those standards take adequate account of interest
rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of
loss on multifamily mortgages. The Bank is subject to capital adequacy
guidelines of the FDIC that are substantially similar to the Federal Reserve
Board's guidelines. Also pursuant to FDICIA, the FDIC has promulgated
regulations setting the levels at which an insured institution such as the
Bank would be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." The Bank is classified "well capitalized" for purposes of
the FDIC's prompt corrective action regulations. See "Supervision and
Regulation--The Company" and "--The Bank."
Shareholders' equity increased from $16.3 million at December 31, 1996, to
$18.3 million at December 31, 1997, an increase of $2.0 million or 12.23%.
This increase was primarily the result of net income of $2.4 million and an
increase in net unrealized gains on available for sale securities net of taxes
of $223,000, less the payment of common stock and preferred stock dividends of
$566,000 and $74,000, respectively. The Company had approximately $827,000 in
Preferred Stock outstanding at December 31, 1997.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1997 to the
minimum and well-capitalized regulatory standards:
<TABLE>
<CAPTION>
MINIMUM WELL- ACTUAL RATIO AT
REQUIRED CAPITALIZED DECEMBER 31, 1997
-------- ----------- -----------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio...................... 3.00%(1) N/A 7.87%
Tier 1 risk-based capital ratio..... 4.00% N/A 11.16%
Risk-based capital ratio............ 8.00% N/A 11.86%
THE BANK
Leverage ratio...................... 3.00%(2) 5.00% 7.60%
Tier 1 risk-based capital ratio..... 4.00% 6.00% 11.03%
Risk-based capital ratio............ 8.00% 10.00% 11.75%
</TABLE>
- --------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.
42
<PAGE>
Year 2000
Like any financial institution, the Company is sensitive to Year 2000
issues. The Company formally initiated a project in September of 1997 to
ensure that its operational and financial systems will not be adversely
affected by Year 2000 software problems. A Year 2000 project team has been
formed with representatives from all areas of the Company. Management is
supporting all compliance efforts and is allocating the necessary resources to
complete the project. An inventory of all systems and products that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to the Company. The software for the
Company's systems is primarily provided through service bureaus and software
vendors. The Company is requiring its software providers to demonstrate and
represent that the products provided are or will be Year 2000 compliant and
has planned a program of testing compliance. The Company believes it is in
compliance with regulatory guidelines regarding Year 2000 compliance,
including the timetable for achieving compliance. Management does not expect
the costs of bringing the Company's systems into Year 2000 compliance will
have a materially adverse effect on the Company's financial condition, results
of operations or liquidity.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of all of the directors and executive officers of
the Company, their respective positions with the Company and the Bank and
their ages:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<C> <S> <C>
John A. Conroy.............. Director of the Company and the Bank 81
Jonice Crane................ Director of the Company and the Bank 71
C. A. Hinton, Sr. .......... Director of the Company and the Bank 75
Bill G. Jones............... Chairman of the Board and Chief Executive 68
Officer of the Company; Chairman of the
Board of the Bank
Russell L. Jones............ Director and Senior Vice President of the 43
Company; Director and Executive Vice
President of the Bank
Weldon Miller............... Director of the Company and the Bank 63
Clifton A. Payne............ Director, Senior Vice President and 40
Controller of the Company; Director,
Executive Vice President and Controller
of the Bank
Arthur B. Scharlach, Jr. ... Director and President of the Company; 58
Director, President and Chief Executive
Officer of the Bank
D. R. Zachry, Jr. .......... Director of the Company and the Bank 75
</TABLE>
John A. Conroy. Mr. Conroy has served as a director of the Company since it
was formed in 1980 and as a director of the Bank since 1975. Mr. Conroy is the
owner of Conroy Ford Tractor Company in Mount Pleasant, Texas.
Jonice Crane. Ms. Crane joined the Bank in 1943 and had 53 years of
continuous service until her retirement as an officer of the Bank in 1996. She
served as an Executive Vice President of the Bank from 1971 to 1996 and has
served as a director of the Bank since 1971 and a director of the Company
since its inception in 1980.
C.A. Hinton, Sr. Mr. Hinton has served as a director of the Bank since 1960
and as a director of the Company since it was formed in 1980. Mr. Hinton is
the Chairman of Hinton Production Company in Mount Pleasant, Texas. In 1994,
an affiliated company, Hinton Drilling Company, filed for bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code.
Bill G. Jones. Mr. Jones joined the Bank as President and a director in 1969
and became Chairman of the Board in 1979. He retired as an officer of the Bank
in 1996 but continues to serve as Chairman of the Board. Mr. Jones has been
Chairman of the Board of the Company since 1992 and Chief Executive Officer of
the Company since its formation in 1980.
Russell L. Jones. Mr. Jones has been a director of the Company since 1992
and has served as Senior Vice President since 1992. Mr. Jones began working
for Talco State Bank in 1973. In 1982, he became a Director and Vice President
and, in 1988, President of Talco State Bank, which was acquired by the Company
in 1980 and merged into the Bank in 1997. Mr. Jones became a Senior Vice
President of the Bank in 1996 and was elected an Executive Vice President in
1998. Mr. Jones is the nephew of Bill G. Jones.
Weldon Miller. Mr. Miller became a director of the Company in 1980 and has
served as a director of the Bank since 1969. Mr. Miller is the President of
Everybody's Furniture Company in Mount Pleasant, Texas.
Clifton A. Payne. Mr. Payne joined the Bank in 1984 after four years in
private practice as a Certified Public Accountant. He became a Vice President
of the Bank in 1986 and was elected Controller in 1988 and Executive Vice
President in 1996. In 1995, Mr. Payne was elected to the Board of Directors of
the Company and the Bank. Mr. Payne has been a Senior Vice President of the
Company since 1990.
Arthur B. Scharlach, Jr. Mr. Scharlach is the President and a director of
the Company and President, Chief Executive Officer and a director of the Bank.
He joined the Bank in 1970 as a Vice President and Loan Officer and was
elected to the Bank's Board of Directors in 1971. He was elected a Senior Vice
President in 1974,
44
<PAGE>
President in 1979, Chief Operating Officer in 1983 and Chief Executive Officer
in 1989. He has served as a director of the Company since its inception and as
President since 1992. Mr. Scharlach is a director and Vice Chairman of Texas
Independent Bank, Dallas, Texas.
D. R. Zachry, Jr. Mr. Zachry has served as a director of the Bank since 1957
and as a director of the Company since its inception. He is retired.
Directors are elected for three year terms, classified into Classes I, II
and III. Messrs. Scharlach and Hinton and Ms. Crane are Class II directors
with terms of office expiring on the date of the Company's annual meeting in
1999; Messrs. Bill G. Jones, Russell L. Jones and Miller are Class III
directors with terms of office expiring on the date of the Company's annual
meeting of shareholders in 2000; and Messrs. Conroy, Zachry and Payne are
Class I directors with terms of office expiring on the date of the Company's
annual meeting of shareholders in 2001. Each officer of the Company is elected
by the Board of Directors of the Company and holds office until his or her
successor is duly elected and qualified or until his or her earlier death,
resignation or removal.
The Board of Directors has established Audit and Compensation Committees.
The Audit Committee reviews the general scope of the audit conducted by the
Company's independent auditors and matters relating to the Company's internal
control systems. In performing its function, the Audit Committee meets
separately with representatives of the Company's independent auditors and with
representatives of senior management. The Audit Committee is composed of Ms.
Crane and Messrs. Conroy and Miller, each of whom is an outside director.
The Compensation Committee is responsible for making recommendations to the
Board of Directors with respect to the compensation of the Company's executive
officers and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters. The Compensation Committee
also administers the Company's stock option plans and makes recommendations to
the Board of Directors as to option grants to Company employees under such
plans. The Compensation Committee is comprised of Ms. Crane and Messrs. Hinton
and Zachry, each of whom is an outside director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in 1998, matters
related to compensation and employee benefit matters were considered by the
Personnel Committee of the Bank, which included Messrs. Scharlach, Payne and
Russell Jones. As members of this committee, Messrs. Scharlach, Payne and
Russell Jones participated in determinations as to compensation to executive
officers, including themselves. Final determination regarding compensation was
made by the Board of Directors of the Bank.
DIRECTOR COMPENSATION
Directors of the Company receive fees for attending monthly Board meetings.
Inside Directors are paid $175.00 for each meeting attended, and outside
Directors are paid $400.00 for each meeting attended. The Board of Directors
of the Bank also meets monthly. Inside Directors of the Bank are paid $375.00
for each meeting attended, and outside Directors are paid $400.00 for each
meeting attended. An Executive Committee meets weekly and consists of inside
Directors who are paid $225.00 for each meeting attended and outside Directors
who are paid $250.00 for each meeting attended. The Executive Committee
consists of all members of the Board of Directors of the Company.
45
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chairman of the Board and each of the other five most highly compensated
executive officers of the Company (determined as of the end of the last fiscal
year) for the fiscal year ended December 31, 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
--------------------------- -------- ------- ---------------
<S> <C> <C> <C>
Bill G. Jones
Chairman of the Board and Chief Executive
Officer.................................... $ 48,000 $24,159 $40,733
Arthur B. Scharlach, Jr.
President................................... 195,994 51,916 14,750
Clifton A. Payne
Senior Vice President....................... 86,476 28,587 8,630
Devry W. Garrett
Legal Officer of the Bank................... 121,988 17,949 10,495
Russell L. Jones
Senior Vice President....................... 86,178 28,752 7,762
Byron M. Rhea
Senior Vice President of the Bank........... 85,176 26,586 7,784
</TABLE>
- --------
(1) Consists of contributions by the Company to the 401(k) Plan except for
$35,321 paid to Mr. Bill G. Jones in connection with a supplemental
retirement plan.
STOCK OPTION PLANS
The Company's Board of Directors and shareholders approved the 1998 Plan
which authorizes the issuance of up to 1,000,000 shares of Common Stock under
both "non-qualified" and "incentive" stock options to employees and "non-
qualified" stock options to directors who are not employees. Generally, under
the 1998 Plan it is intended that the options will vest 60% at the end of the
third year following the date of grant and an additional 20% at the end of
each of the two following years; however, an individual option may vest as
much as 20% at the end of the first or second year following the date of grant
if necessary to maximize the "incentive" tax treatment to the optionee for the
particular option being granted. Options under the 1998 Plan generally must be
exercised within 10 years following the date of grant or no later than three
months after optionee's termination of employment with the Company, if
earlier. No options have been granted under the 1998 Plan.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). This statement established fair value based
accounting and reporting standards for all transactions in which a company
acquires goods or services by issuing its equity investments, which includes
stock-based compensation plans. Under SFAS 123, compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Fair value of stock
options is determined using an option- pricing model. This statement
encourages companies to adopt as prescribed the fair value based method of
accounting to recognize compensation expense for employee stock compensation
plans. However, it does not require the fair value based method to be adopted
but a company must comply with the disclosure requirements set forth in the
statement. The Company will apply accounting in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, and, accordingly, will provide the pro forma disclosures of
net income and earnings per share.
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<PAGE>
BONUS PLAN
The Company has a bonus plan for its officers and employees. The bonus plan
provides for a bonus pool based on a graduated percentage of return on equity.
The bonus pool is funded with 8% of after tax income if a return on equity of
11.5% is achieved. The bonus pool increases to a maximum of 14.5% of after tax
income with a return on equity of 16.5% or greater. Allocation of the bonus
pool is in the discretion of the Board of Directors of the Company and is
generally based on management's recommendations regarding the employee's
merit. In 1997, the bonus pool was $439,770.
BENEFIT PLANS
Employee Stock Ownership Plan. Effective January 1, 1992, the Board of
Directors of the Company voted to restate the existing 401(k) profit sharing
(defined contribution) plan as an Employee Stock Ownership Plan ("ESOP")
containing 401(k) provisions. The ESOP covers substantially all employees of
the Company. The ESOP is administered by five trustees, three of whom are
members of the Company's Board of Directors, and calls for an employer
matching contribution on behalf of each ESOP participant of up to 4.0% of such
participant's qualified compensation. Contributions to the ESOP charged to
expenses totaled approximately $234,000, $232,000 and $221,000 in 1997, 1996
and 1995, respectively. As of December 31, 1997, the book value of ESOP assets
was approximately $4.3 million, with an approximate market value of $5.6
million.
Supplemental Retirement Plan. In 1992, the Company established a non-
qualified, non-contributory retirement plan for an executive officer who
retired from the Bank in 1996. The plan generally provides benefits equal to
amounts payable under the Bank's retirement plan and certain social security
benefits to aggregate a predetermined percentage of the final five year
average salary. The Company contributes to the retirement plan on a non-funded
basis. Plan expenses totaled approximately $20,000, $52,000 and $55,000 in
1997, 1996 and 1995, respectively.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of the directors, executive officers and principal shareholders of the
Company (i.e., those who own 10% or more of the Common Stock) and their
associates, which include corporations, partnerships and other organizations
in which they are officers or partners or in which they and their immediate
families have at least a 5% interest, are customers of the Company. During
1997, the Company made loans in the ordinary course of business to many of the
directors, executive officers and principal shareholders of the Company and
their associates, all of which were on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with persons unaffiliated with the Company and did not involve
more than the normal risk of collectibility or present other unfavorable
features. Loans to directors, executive officers and principal shareholders of
the Company are subject to limitations contained in the Federal Reserve Act,
the principal effect of which is to require that extensions of credit by the
Company to executive officers, directors and principal shareholders satisfy
the foregoing standards. On December 31, 1997, all of such loans aggregated
$5.2 million, which was approximately 28.9% of the Company's Tier 1 capital at
such date. The Company expects to have such transactions or transactions on a
similar basis with its directors, executive officers and principal
shareholders and their associates in the future.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 1998, and as adjusted
to reflect the sale of the Common Stock offered hereby by (i) each director
and executive officer of the Company, (ii) each person who is known by the
Company to own beneficially 5% or more of the Common Stock and (iii) all
directors and executive officers as a group. Unless otherwise indicated, each
person has sole voting and dispositive power over the shares indicated as
owned by such person and the address of each shareholder is the same as the
address of the Company.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
--------------------
NUMBER OF BEFORE AFTER
NAME SHARES OFFERING OFFERING(1)
---- --------- -------- -----------
<S> <C> <C> <C>
John A. Conroy............................... 126,350 4.96% 4.34%
Jonice Crane................................. 97,692(2) 3.83% 3.35%
Guaranty Bancshares, Inc. Employee Stock Own-
ership Plan................................. 241,024 9.46% 8.27%
C. A. Hinton, Sr............................. 179,676(3) 7.05% 6.17%
Bill G. Jones................................ 334,194(4) 13.11% 11.47%
Russell L. Jones............................. 103,145 4.05% 3.54%
Weldon Miller................................ 215,635(5) 8.46% 7.40%
Clifton A. Payne............................. 1,330 * *
Arthur B. Scharlach, Jr...................... 80,108(6) 3.14% 2.75%
D. R. Zachry, Jr............................. 92,029(7) 3.61% 3.16%
Directors and Executive Officers as a Group.. 1,471,183 57.73% 50.50%
</TABLE>
- --------
* Indicates ownership which does not exceed 1.0%
(1) Assumes the issuance of 365,000 shares in the Offering.
(2) Includes 105 shares held of record by the Jonice Crane IRA and 1,715
shares held of record by Horace Crane, the husband of Ms. Crane.
(3) Includes 2,884 shares held of record by the Charles A. Hinton IRA.
(4) Includes 1,393 shares held of record by the Bill G. Jones IRA, 24,745
shares held of record by the Bill Jones IRA Rollover, 5,803 shares held of
record by the Bill G. Jones IRA/SEP and 161 shares held of record by Alma
Jones, the wife of Mr. Jones.
(5) Includes 8,463 shares held of record by Everybody's Furniture Company, of
which Mr. Miller is the President, and 31,150 shares held of record by the
Everybody's Furniture Company Profit Sharing Plan & Trust of which Mr.
Miller is the Trustee.
(6) Includes 7,427 shares held of record by the Arthur B. Scharlach, Jr. IRA,
34,041 shares held of record by Jane Scharlach, the wife of Mr. Scharlach,
70 shares held of record by the Erin Scharlach Trust, of which Mr.
Scharlach is the Trustee and 70 shares held of record by the Emily
Scharlach Trust, of which Mr. Scharlach is the Trustee.
(7) Includes 2,884 shares held of record by the D.R. Zachry IRA.
48
<PAGE>
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the
deposit insurance funds of the FDIC and the banking system as a whole, and not
for the protection of the bank holding company shareholders or creditors. The
banking agencies have broad enforcement power over bank holding companies and
banks including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and
are qualified in their entirety by reference to such statutes and regulations.
THE COMPANY
The Company is a bank holding company registered under the BHCA, and it is
subject to supervision, regulation and examination by the Federal Reserve
Board. The BHCA and other federal laws subject bank holding companies to
particular restrictions on the types of activities in which they may engage,
and to a range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy
of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that
undermines the bank holding company's ability to serve as a source of strength
to its banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be
inclined to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
Activities "Closely Related" to Banking. The BHCA prohibits a bank holding
company, with certain limited exceptions, from acquiring direct or indirect
ownership or control of any voting shares of any company which is not a bank
or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be so
closely related to banking or managing or controlling banks, as to be a proper
incident thereto. Some of the activities that have been determined by
regulation to be closely related to banking are making or servicing loans,
performing certain data processing services, acting as an investment or
financial advisor to certain investment trusts and investment companies, and
providing securities brokerage services. Other activities approved by the
Federal Reserve Board include consumer financial counseling, tax planning and
tax preparation, futures and options advisory services, check guaranty
services, collection agency and credit bureau services, and personal property
appraisals. In approving acquisitions by bank holding companies of companies
engaged in banking-related activities, the Federal Reserve Board considers a
number of factors, and weighs the expected benefits to the public (such as
greater convenience and increased competition or gains in efficiency) against
the risks of possible adverse effects (such as undue concentration of
49
<PAGE>
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices). The Federal Reserve Board is also empowered to
differentiate between activities commenced de novo and activities commenced
through acquisition of a going concern.
Securities Activities. The Federal Reserve Board has approved applications
by bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four
family mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to
use such subsidiaries to underwrite and deal in corporate debt and equity
securities.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year,
is equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Depending upon the circumstances, the Federal Reserve Board could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets
are assigned different risk weights, based generally on the perceived credit
risk of the asset. These risk weights are multiplied by corresponding asset
balances to determine a "risk-weighted" asset base. The guidelines require a
minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is
required to consist of Tier 1 capital elements). Total capital is the sum of
Tier 1 and Tier 2 capital. As of December 31, 1997, the Company's ratio of
Tier 1 capital to total risk-weighted assets was 11.16% and its ratio of total
capital to total risk-weighted assets was 11.86%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Capital
Resources."
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy
of bank holding companies. The leverage ratio is a company's Tier 1 capital
divided by its average total consolidated assets. Certain highly-rated bank
holding companies may maintain a minimum leverage ratio of 3.0%, but other
bank holding companies may be required to maintain a leverage ratio of up to
200 basis points above the regulatory minimum. As of December 31, 1997, the
Company's leverage ratio was 7.87%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to
operate with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances
warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
50
<PAGE>
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit
a capital restoration plan. The capital restoration plan will not be accepted
by the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital
restoration plan up to a certain specified amount. Any such guarantee from a
depository institution's holding company is entitled to a priority of payment
in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized
or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior
Federal Reserve Board approval of proposed dividends, or might be required to
consent to a consolidation or to divest the troubled institution or other
affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve Board before it
may acquire all or substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition it
would own or control, directly or indirectly, more than 5% of the voting
shares of such bank. In approving bank acquisitions by bank holding companies,
the Federal Reserve Board is required to consider the financial and managerial
resources and future prospects of the bank holding company and the banks
concerned, the convenience and needs of the communities to be served, and
various competitive factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% of more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as the Company, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the Company.
In addition, any company is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common
Stock of the Company, or otherwise obtaining control or a "controlling
influence" over the Company.
THE BANK
The Bank is a Texas-chartered banking association, the deposits of which are
insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank is not a
member of the Federal Reserve System; therefore, the Bank is subject to
supervision and regulation by the FDIC and the Texas Banking Department. Such
supervision and regulation subjects the Bank to special restrictions,
requirements, potential enforcement actions and periodic examination by the
FDIC and the Texas Banking Department. Because the Federal Reserve Board
regulates the bank holding company parent of the Bank, the Federal Reserve
Board also has supervisory authority which directly affects the Bank.
Equivalence to National Bank Powers. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, FDICIA has
operated to limit this authority. FDICIA provides that no state bank or
subsidiary thereof may engage as principal in any activity not permitted for
national banks, unless the institution complies with applicable capital
requirements and the FDIC determines that the activity poses no significant
risk to the insurance fund. In general, statutory restrictions on the
activities of banks are aimed at protecting the safety and soundness of
depository institutions.
51
<PAGE>
Branching. Texas law provides that a Texas-chartered bank can establish a
branch anywhere in Texas provided that the branch is approved in advance by
the Texas Banking Department. The branch must also be approved by the FDIC,
which considers a number of factors, including financial history, capital
adequacy, earnings prospects, character of management, needs of the community
and consistency with corporate powers.
Restrictions on Transactions With Affiliates and Insiders. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the
amount of advances to third parties which are collateralized by the securities
or obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the
Bank and its affiliates be on terms substantially the same, or at least as
favorable to the Bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must
be met before such a loan can be made. There is also an aggregate limitation
on all loans to insiders and their related interests. These loans cannot
exceed the institution's total unimpaired capital and surplus, and the FDIC
may determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company's
principal source of operating funds. Capital adequacy requirements serve to
limit the amount of dividends that may be paid by the Bank. Under federal law,
the Bank cannot pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The FDIC may declare a dividend payment to be unsafe and
unsound even though the Bank would continue to meet its capital requirements
after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of an insured depository institution, the
claims of depositors and other general or subordinated creditors are entitled
to a priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.
Examinations. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The Texas Banking Department also conducts examinations of state banks
but may accept the results of a federal examination in lieu of conducting an
independent examination.
Audit Reports. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement.
Auditors must receive examination reports, supervisory agreements and reports
of enforcement actions. In addition, financial statements prepared in
accordance with generally accepted accounting principles, management's
certifications concerning responsibility for the financial statements,
internal controls and compliance with legal requirements designated by the
FDIC, and an attestation by the auditor regarding the statements of management
relating to the internal controls must be submitted. For institutions with
total assets of more than $3 billion, independent auditors may be required to
review quarterly financial statements. FDICIA requires that independent audit
committees be formed, consisting
52
<PAGE>
of outside directors only. The committees of such institutions must include
members with experience in banking or financial management, must have access
to outside counsel, and must not include representatives of large customers.
Capital Adequacy Requirements. The FDIC has adopted regulations establishing
minimum requirements for the capital adequacy of insured institutions. The
FDIC may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest
rate risk.
The FDIC's risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%
and a ratio of total capital to total risk-weighted assets of 8.0%. The
capital categories have the same definitions for the Bank as for the Company.
As of December 31, 1997, the Bank's ratio of Tier 1 capital to total risk-
weighted assets was 11.03% and its ratio of total capital to total risk-
weighted assets was 11.75%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation of the Company--Capital
Resources."
The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets. The Texas Banking Department has issued a policy which generally
requires state chartered banks to maintain a leverage ratio (defined in
accordance with federal capital guidelines) of 6.0%. As of December 31, 1997,
the Bank's ratio of Tier 1 capital to average total assets (leverage ratio)
was 7.60%. The Bank is classified "well capitalized." See "Management's
Discussion and Analysis of Financial Condition and Results of Operation of the
Company--Capital Resources."
Corrective Measures for Capital Deficiencies. The federal banking regulators
are required to take "prompt corrective action" with respect to capital-
deficient institutions. Agency regulations define, for each capital category,
the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk
based capital ratio of 10.0% or higher; a Tier 1 risk based capital ratio of
6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any
written agreement, order or directive requiring it to maintain a specific
capital level for any capital measure. An "adequately capitalized" bank has a
total risk based capital ratio of 8.0% or higher; a Tier 1 risk based capital
ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if
the bank was rated a CAMEL 1 in its most recent examination report and is not
experiencing significant growth); and does not meet the criteria for a well
capitalized bank. A bank is "under capitalized" if it fails to meet any one of
the ratios required to be adequately capitalized. The Bank is classified "well
capitalized" for purposes of the FDIC's prompt corrective action regulations.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions.
The FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver
or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC for
federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification.
53
<PAGE>
Institutions assigned to higher-risk classifications (that is, institutions
that pose a greater risk of loss to their respective deposit insurance funds)
pay assessments at higher rates than institutions that pose a lower risk. An
institution's risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. In
addition, the FDIC can impose special assessments in certain instances. The
current range of BIF assessments is between 0% and 0.27% of deposits.
The FDIC established a process for raising or lowering all rates for insured
institutions semi-annually if conditions warrant a change. Under this new
system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in
the rate schedule outside the five cent range above or below the current
schedule can be made by the FDIC only after a full rulemaking with opportunity
for public comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the SAIF and to assure
the payment of the Financing Corporation's ("FICO") bond obligations. Under
this act, banks insured under the BIF are required to pay a portion of the
interest due on bonds that were issued by FICO to help shore up the ailing
Federal Savings and Loan Insurance Corporation in 1987. The BIF rate must
equal one-fifth of the Savings Association Insurance Fund ("SAIF") rate
through year-end 1999, or until the insurance funds are merged, whichever
occurs first. Thereafter BIF and SAIF payers will be assessed pro rata for the
FICO bond obligations. With regard to the assessment for the FICO obligation,
the current BIF rate is .0126% of deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations
and supervisory agreements could subject the Company or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver for a banking institution (or the
FDIC may appoint itself, under certain circumstances) if any one or more of a
number of circumstances exist, including, without limitation, the fact that
the banking institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized; fails to become adequately capitalized when
required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan.
The Texas Banking Department also has broad enforcement powers over the Bank,
including the power to impose orders, remove officers and directors, impose
fines and appoint supervisors and conservators.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the
FDIC, and are subject to restrictions on the interest rates that can be paid
on such deposits. Undercapitalized institutions may not accept, renew, or roll
over brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions
liable to the FDIC for any losses incurred in connection with the failure of a
commonly controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA")
and the regulations issued thereunder are intended to encourage banks to help
meet the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks.
These regulations also provide for regulatory assessment of a bank's record in
meeting the needs of its service area when considering applications to
establish branches, merger applications and applications to acquire the assets
and assume the liabilities of another bank. FIRREA requires federal banking
agencies to make public a rating of a bank's performance under the CRA. In the
case of a bank holding company, the CRA performance record of the banks
involved in the transaction are reviewed in connection with the filing of an
application to acquire ownership or control of shares or assets of a bank or
to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.
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<PAGE>
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic
Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, and the Fair Housing Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. The Bank must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.
INSTABILITY OF REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies
and limit the investments that a depository institution may make with insured
funds, is from time to time introduced in Congress. Such legislation may
change banking statutes and the operating environment of the Company and its
banking subsidiaries in substantial and unpredictable ways. The Company cannot
determine the ultimate effect that potential legislation, if enacted, or
implementing regulations with respect thereto, would have upon the financial
condition or results of operations of the Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve Board and FDIC are possessed of extensive authority to police unsafe
or unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may
terminate the deposit insurance of any institution which it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions,
and publicly disclose such actions. FDICIA, FIRREA and other laws have
expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of the
Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board to affect the money supply are open market
operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member
bank deposits. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect
of such policies on the business and earnings of the Company and its
subsidiaries cannot be predicted.
55
<PAGE>
DESCRIPTION OF SECURITIES OF THE COMPANY
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 15,000,000
shares of preferred stock, $5.00 per share par value ("Preferred Stock"),
issuable in series, 165,456 shares of which are designated Series A Preferred
Stock, all of which are issued and outstanding and (ii) 50,000,000 shares of
Common Stock, $1.00 per share par value, of which 2,548,280 shares were issued
and outstanding as of the date of this Prospectus. The terms of any new series
of preferred stock may be fixed by the Board of Directors of the Company
within certain limits set by the Company's Articles of Incorporation.
The following discussion of the terms and provisions of the Company's
capital stock is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Company is authorized to issue 15,000,000 shares of Preferred Stock. The
Preferred Stock (or other securities convertible in whole or in part into
Preferred Stock) is available for issuance from time to time for various
purposes as determined by the Company's Board of Directors, including, without
limitation, making future acquisitions, raising additional equity capital and
financing. Subject to certain limits set by the Company's Articles of
Incorporation, the Preferred Stock (or such convertible securities) may be
issued on such terms and conditions, and at such times and in such situations,
as the Board of Directors in its sole discretion determines to be appropriate,
without any further approval or action by the shareholders (unless otherwise
required by laws, rules, regulations or agreements applicable to the Company).
Moreover, except as otherwise limited by the Articles of Incorporation or
applicable laws, rules or regulations, the Board of Directors has the sole
authority to determine the relative rights and preferences of the Preferred
Stock and any series thereof without shareholder approval. The Company's
Articles of Incorporation require all shares of Preferred Stock to be
identical, except as to the following characteristics, which may vary between
different series of Preferred Stock:
(i) dividend rate, preference of dividend with respect to any other class
or series of stock, and cumulativity, non-cumulativity or partial
cumulativity of dividends;
(ii) redemption price and terms, including, to the extent permitted by law,
the manner in which shares are to be chosen for redemption if less
than all the shares of a series are to be redeemed;
(iii) sinking fund provisions for the redemption or purchase of shares;
(iv) the amount payable upon shares in the event of voluntary or
involuntary liquidation;
(v) the terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion;
(vi) voting rights; and
(vii) such other powers, preferences and rights as the Board of Directors
shall determine.
The Company has issued and outstanding 165,456 shares of Series A Preferred
Stock. Dividends on Series A Preferred Stock aggregate 9% of par value per
annum, payable semi-annually. Dividends with respect to the Series A Preferred
Stock are not cumulative. Accordingly, the Board of Directors of the Company
has no obligation to declare and pay dividends with respect to the Preferred
Stock except as expressly provided in the Articles of Incorporation or as
provided by law. Pursuant to the terms of the Series A Preferred Stock,
however, the Company may not declare or pay a dividend with respect to the
Common Stock unless the Company has paid all declared dividends with respect
to the Series A Preferred Stock. The Series A Preferred Stock has no voting
rights. The Series A Preferred Stock is redeemable at any time at the option
of the Company at the $5.00 liquidation value of the shares plus all declared
but unpaid dividends thereon to the date fixed for redemption. In the event of
the liquidation, dissolution or winding up of the affairs of the Company,
prior to any distribution or
56
<PAGE>
payment to the holders of Common Stock or any other class of stock of the
Company ranking junior to the Preferred Stock, holders of the Preferred Stock
shall be entitled to be paid in full the $5.00 liquidation value of the shares
plus all declared but unpaid dividends thereon to the date of payment. The
Company plans to redeem all of the Series A Preferred Stock after the closing
of the Offering.
The Board of Directors does not intend to seek shareholder approval prior to
any issuance of Preferred Stock or any series thereof, unless otherwise
required by law. Under the Texas Business Corporation Act ("TBCA"),
shareholder approval prior to the issuance of shares of Common Stock or
Preferred Stock is required in connection with certain mergers. Frequently,
opportunities arise that require prompt action, such as the possible
acquisition of a property or business or the private sale of securities, and
it is the belief of the Board of Directors that the delay necessary for
shareholder approval of a specific issuance could be to the detriment of the
Company and its shareholders. The Board of Directors does not intend to issue
any shares of Common Stock or Preferred Stock except on terms which the Board
of Directors deems to be in the best interests of the Company and its then
existing shareholders.
Although the Preferred Stock could be deemed to have an anti-takeover
effect, the Board of Directors is not aware of any takeover efforts. If a
hostile takeover situation should arise, shares of Preferred Stock could be
issued to purchasers sympathetic with the Company's management or others in
such a way as to render more difficult or to discourage a merger, tender
offer, proxy contest, the assumption of control by a holder of a large block
of the Company's securities or the removal of incumbent management.
The effects of the issuance of the Preferred Stock on the holders of Common
Stock could include, among other things, (i) reduction of the amount otherwise
available for payments of dividends on Common Stock if dividends are payable
on the series of Preferred Stock; (ii) restrictions on dividends on Common
Stock if dividends on the series of Preferred Stock are in arrears; (iii)
dilution of the voting power of Common Stock if the series of Preferred Stock
has voting rights, including a possible "veto" power if the series of
Preferred Stock has class voting rights; (iv) dilution of the equity interest
of holders of Common Stock if the series of Preferred Stock is convertible,
and is converted, into Common Stock; and (v) restrictions on the rights of
holders of Common Stock to share in the Company's assets upon liquidation
until satisfaction of any liquidation preference granted to the holders of the
series of Preferred Stock. Holders of Common Stock have no preemptive rights
to purchase or otherwise acquire any Preferred Stock that may be issued.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share of
Common Stock owned. Except as expressly provided by law and except for any
voting rights which may be conferred by the Board of Directors on any shares
of Preferred Stock issued, all voting power is in the Common Stock. Holders of
Common Stock may not cumulate their votes for the election of directors.
Holders of Common Stock do not have preemptive rights to acquire any
additional, unissued or treasury shares of the Company, or securities of the
Company convertible into or carrying a right to subscribe for or acquire
shares of the Company.
Holders of Common Stock will be entitled to receive dividends out of funds
legally available therefor, if and when properly declared by the Board of
Directors. However, the Board of Directors may not declare or pay cash
dividends on Common Stock, and no Common Stock may be purchased by the
Company, unless full dividends have been declared and paid on outstanding
Preferred Stock for the current dividend period and, with respect to any
outstanding cumulative preferred stock, all past dividend periods. See "Risk
Factors--Restrictions on Ability to Pay Dividends" and "Supervision and
Regulation."
On the liquidation of the Company, the holders of Common Stock are entitled
to share pro rata in any distribution of the assets of the Company, after the
holders of shares of Preferred Stock have received the liquidation preference
of their shares plus any cumulated but unpaid dividends, if any, and after all
other indebtedness of the Company has been retired.
57
<PAGE>
TEXAS LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of Texas law, the Company's Articles of Incorporation and
the Company's Bylaws could make more difficult the acquisition of the Company
by means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are intended to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of the Company to negotiate
first with the Company.
The Company is subject to the provisions of the Texas Business Combination
Law (Articles 13.01 through 13.08 of the TBCA), which provides that a Texas
corporation such as the Company may not engage in certain business
combinations, including mergers, consolidations and asset sales, with a
person, or an affiliate or associate of such person, who is an "Affiliated
Shareholder" (generally defined as the holder of 20% or more of the
corporation's voting shares) for a period of three years from the date such
person became an Affiliated Shareholder unless: (i) the business combination
or purchase or acquisition of shares made by the Affiliated Shareholder was
approved by the board of directors of the corporation before the Affiliated
Shareholder became an Affiliated Shareholder or (ii) the business combination
was approved by the affirmative vote of the holders of at least two-thirds of
the outstanding voting shares of the corporation not beneficially owned by the
Affiliated Shareholder, at a meeting of shareholders called for that purpose
(and not by written consent), not less than six months after the Affiliated
Shareholder became an Affiliated Shareholder. The Texas Business Combination
Law is not applicable to: (i) the business combination of a corporation: (a)
where the corporation's original charter or bylaws contain a provision
expressly electing not to be governed by the Texas Business Combination Law,
(b) that adopted an amendment to its charter or bylaws before December 31,
1997, expressly electing not to be governed by the Texas Business Combination
Law, or (c) that adopts an amendment to its charter or bylaws after December
31, 1997, by the affirmative vote of the holders, other than Affiliated
Shareholders, of at least two-thirds of the outstanding voting shares of the
corporation, expressly electing not to be governed by the Texas Business
Combination Law; (ii) a business combination of a corporation with an
Affiliated Shareholder that became an Affiliated Shareholder inadvertently, if
the Affiliated Shareholder: (a) as soon as practicable divests itself of
enough shares to no longer be an Affiliated Shareholder and (b) would not at
any time within the three year period preceding the announcement of the
business combination have been an Affiliated Shareholder but for the
inadvertent acquisition; (iii) a business combination with an Affiliated
Shareholder that was the beneficial owner of 20% or more of the outstanding
voting shares of the corporation on December 31, 1996, and continuously until
the announcement date of the business combination; (iv) a business combination
with an Affiliated Shareholder who became an Affiliated Shareholder through a
transfer of shares of the corporation by will or intestate succession and
continuously was such an Affiliated Shareholder until the announcement date of
the business combination; and (v) a business combination of a corporation with
a wholly owned subsidiary if the subsidiary is not an affiliate or associate
of the Affiliated Shareholder other than by reason of the Affiliated
Shareholder's beneficial ownership of the voting shares of the corporation.
Neither the Articles of Incorporation nor the Bylaws of the Company contain
any provision expressly providing that the Company will not be subject to the
Texas Business Combination Law. The Texas Business Combination Law may have
the effect of inhibiting a non-negotiated merger or other business combination
involving the Company, even if such event would be beneficial to the Company's
shareholders.
The following discussion is a summary of certain material provisions of the
Company's Articles of Incorporation and the Company's Bylaws, copies of which
are filed as exhibits to the Registration Statement of which this Prospectus
is a part.
Classified Board of Directors. Under the Company's Bylaws, the Board of
Directors is classified into three classes, with the directors being elected
for staggered, three-year terms. The classification of the Company's Board of
Directors will have the effect of making it more difficult to change the
composition of the Board of Directors, because at least two annual meetings of
the shareholders would be required to change the control of the Board of
Directors rather than one. In addition, the Bylaws provide that directors may
be removed by the shareholders only for cause and that vacancies on the Board
of Directors may be filled by the remaining directors.
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<PAGE>
Advance Notice of Shareholder Proposals and Nominations. The Company's
Bylaws establish an advance notice procedure for shareholders to make
nominations of candidates for election as directors or bring other business
before an annual meeting of shareholders of the Company (the "Shareholder
Notice Procedure"). The Shareholder Notice Procedure provides that only
persons who are nominated by, or at the direction of, the Board, or by a
shareholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company and that, at an annual
meeting, only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a shareholder
who has given timely written notice to the Secretary of the Company of such
shareholder's intention to bring such business before such meeting.
Under the Shareholder Notice Procedure, for notice of shareholder
nominations or other business to be made at an annual meeting to be timely,
such notice must be received by the Company not less than 60 days prior to the
first anniversary of the previous year's annual meeting (or if the date of the
annual meeting is advanced by more than 20 days not later than the tenth day
after public announcement of the date of such meeting is first made).
Notwithstanding the foregoing, in the event that the number of directors to be
elected is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased Board made by
the Company at least 80 days prior to the first anniversary of the preceding
year's annual meeting, a shareholder's notice will be timely, but only with
respect to nominees for any new positions created by such increase, if it is
received by the Company not later than the 10th day after such public
announcement is first made by the Company.
Under the Shareholder Notice Procedure, a shareholder's notice to the
Company proposing to nominate a person for election as a director or proposing
other business must contain certain information specified in the Bylaws,
including the identity and address of the nominating shareholder, the class
and number of shares of stock of the Company owned by such shareholder,
information regarding the proposed nominee that would be required under the
federal securities laws to be included in a proxy statement soliciting proxies
for the proposed nominee and, with respect to business other than a
nomination, a brief description of the business the shareholder proposes to
bring before the meeting, the reasons for conducting such business at such
meeting and any material interest of such shareholder in the business so
proposed.
The Shareholder Notice Procedure may have the effect of precluding a contest
for the election of directors or the consideration of shareholder proposals if
the proper procedures are not followed, and of discouraging or deterring a
third party from conducting a solicitation of proxies to elect its own slate
of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its shareholders.
Special Meetings of Shareholders. The Articles of Incorporation provide that
special meetings of shareholders can be called by shareholders only at the
request of the holders of not less than one-half of the outstanding shares of
stock entitled to vote at the meeting.
Reduced Shareholder Vote Required for Certain Actions. The Company's
Articles of Incorporation provide that, notwithstanding any provision of the
TBCA that would require approval of more than a majority of the shares
entitled to vote on such matter and present or represented by proxy at the
meeting, the vote or approval of a majority of the shares of the Company's
stock entitled to vote on such matter will be sufficient to approve such
matter. This provision reduces the required shareholder approval level for
certain actions such as a merger, a consolidation, a share exchange, certain
sales of substantially all of the Company's assets, a dissolution or an
amendment to the Company's Articles of Incorporation, each of which would
otherwise require two-thirds shareholder approval under Texas law.
No Action by Written Consent. The Company's Bylaws provide that no action
required or permitted to be taken at an annual or special meeting of
shareholders may be taken by written consent in lieu of a meeting of
shareholders.
Amendment of Bylaws. The Company's Articles of Incorporation and Bylaws
provide that the Bylaws may be amended only by the Board of Directors.
Shareholders do not have the power to amend the Company Bylaws.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriter, the Underwriter has agreed to purchase from the
Company 365,000 shares of Common Stock at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent and that the Underwriter will
purchase all such shares of the Common Stock if any of such shares are
purchased. The Underwriter is obligated to take and pay for all of the shares
of Common Stock offered hereby if any are taken.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer such shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $0.55 per share. The
Underwriter may allow, and such dealers may re-allow, a concession not in
excess of $0.10 per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Underwriter.
The Company, each of its directors and executive officers, and certain other
shareholders of the Company have agreed not to sell or otherwise dispose of
any shares of Common Stock for a period of 120 days after the date of this
Prospectus without the prior written consent of the Underwriter. See "Risk
Factors--Restrictions on Future Sale of Shares."
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
Until the distribution of the Common Stock is completed, rules of the
Commission (as defined herein) may limit the ability of the Underwriter to bid
for and purchase the Common Stock. As an exception to these rules, the
Underwriter is permitted to engage in certain transactions that stabilize the
price of the Common Stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriter creates a short position in the Common Stock in
connection with the Offering, i.e., if it sells a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriter may reduce the short position by purchasing shares of Common
Stock in the open market.
The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, it may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part
of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor the Underwriter make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor the Underwriter make any representation that
the Underwriter will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Underwriter and dealers may engage in passive market making transactions
in the shares of Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, shares of Common Stock at a price that exceeds the highest
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independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% of its average daily trading volume
in the Common Stock during a specified two month prior period, or 200 shares,
whichever is greater. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriter and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock has been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in such negotiations were prevailing market and general
economic conditions, the market capitalizations, trading histories and stages
of development of other traded companies that the Company and the Underwriter
believed to be comparable to the Company, the results of operations of the
Company in recent periods, the current financial position of the Company,
estimates of the business potential of the Company and the present state of
the Company's development and the availability for sale in the market of a
significant number of shares of Common Stock. Additionally, consideration was
given to the general status of the securities market, the market conditions
for new issues of securities and the demand for securities of comparable
companies at the time the Offering was made.
The shares of Common Stock have been approved for quotation on the
Nasdaq/National Market.
LEGAL MATTERS
The validity of the shares of Common Stock to be issued by the Company will
be passed upon by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal
matters with respect to the Common Stock offered hereby have been passed upon
for the Underwriter by Rothgerber Johnson & Lyons LLP, Denver, Colorado.
EXPERTS
The consolidated Balance Sheets of the Company as of December 31, 1997 and
1996 and the related consolidated Statements of Earnings, Shareholders'
Equity, and Cash Flows for each of the three years in the period ended
December 31, 1997, have been included in this Prospectus in reliance upon the
reports of Arnold, Walker, Arnold & Co., P.C., independent certified public
accountants, given on the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act,
with respect to the offer and sale of Common Stock pursuant to this
Prospectus. This Prospectus, filed as a part of the Registration Statement,
does not contain all of the information set forth in the Registration
Statement or the exhibits and schedules thereto in accordance with the rules
and regulations of the Commission and reference is hereby made to such omitted
information. Statements made in this Prospectus concerning the contents of any
contract, agreement or other document filed as an exhibit to the Registration
Statement are summaries of the terms of such contracts, agreements or
documents and are not necessarily complete. Reference is made to each such
exhibit for a more complete description of the matters involved and such
statements shall be deemed qualified in their entirety by such reference. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
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Washington, D.C. 20549 and at the regional offices of the Commission located
at 7 World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. For
further information pertaining to the Common Stock offered by this Prospectus
and the Company, reference is made to the Registration Statement. The
Registration Statement and other information filed by the Company with the
Commission are also available at the Commission's World Wide Web site on the
Internet at http:/www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports containing unaudited financial statements for the first
three quarters of each fiscal year.
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INDEX TO FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. F-3
Consolidated Statements of Earnings for the Years Ended December 31, 1997,
1996, and 1995........................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996, and 1995..................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Guaranty Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Guaranty
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Guaranty Bancshares, Inc.
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARNOLD, WALKER, ARNOLD & CO., P.C.
Mount Pleasant, Texas
January 28, 1998 (except for Note Q,
as to which the date is
March 24, 1998)
F-2
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
ASSETS 1997 1996
------ -------- --------
<S> <C> <C>
Cash and cash equivalents
Cash and due from banks..................................... $ 9,750 $ 8,694
Interest bearing deposits in other banks.................... -- 7,115
-------- --------
Total cash and cash equivalents......................... 9,750 15,809
Federal funds sold............................................ 7,720 18,150
Securities
Available-for-sale.......................................... 42,906 8,305
Held-to-maturity (approximate market value of $15,481 and
$22,290 at December 31, 1997 and 1996, respectively)....... 15,233 22,077
-------- --------
Total securities........................................ 58,139 30,382
Loans, net.................................................... 156,266 138,234
Premises and equipment, net................................... 6,359 5,532
Other real estate............................................. 714 953
Accrued interest receivable................................... 2,224 1,661
Other assets.................................................. 2,985 3,211
-------- --------
$244,157 $213,932
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities
Deposits
Noninterest-bearing....................................... $ 46,295 $ 38,070
Interest-bearing deposits................................. 176,666 156,785
-------- --------
Total deposits.......................................... 222,961 194,855
Accrued interest and other liabilities...................... 2,943 2,827
-------- --------
Total liabilities....................................... 225,904 197,682
Commitments and contingencies................................. -- --
Shareholders' equity
Preferred stock........................................... 827 827
Common stock.............................................. 2,548 2,548
Additional capital........................................ 5,396 5,396
Retained earnings......................................... 9,240 7,480
Net unrealized appreciation on available-for-sale
securities, net of tax of $124 and $10................... 242 19
-------- --------
18,253 16,270
Less common stock in treasury--at cost.................... -- (20)
-------- --------
18,253 16,250
-------- --------
$244,157 $213,932
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans, including fees................................. $13,051 $11,761 $11,305
Securities
Taxable.............................................. 3,177 1,825 1,835
Nontaxable........................................... 70 57 59
Federal funds sold and interest bearing deposits...... 711 1,208 1,049
------- ------- -------
Total interest income............................... 17,009 14,851 14,248
Interest expense
Deposits.............................................. 8,179 6,889 6,303
Other................................................. 13 30 69
------- ------- -------
Total interest expense.............................. 8,192 6,919 6,372
Net interest income................................. 8,817 7,932 7,876
Provision for loan losses.............................. 355 206 149
------- ------- -------
Net interest income after provision for loan losses. 8,462 7,726 7,727
Noninterest income
Service charges....................................... 1,097 1,059 1,032
Net realized gains on sales of available-for-sale
securities........................................... 19 2 --
Life insurance proceeds gain.......................... -- 822 --
Other income.......................................... 541 507 408
------- ------- -------
Total noninterest income............................ 1,657 2,390 1,440
Noninterest expense
Employee compensation and benefits.................... 3,717 3,549 3,311
Occupancy expenses.................................... 1,125 991 933
Other operating expenses.............................. 2,604 2,533 2,551
------- ------- -------
Total noninterest expenses.......................... 7,446 7,073 6,795
------- ------- -------
Earnings before income taxes........................ 2,673 3,043 2,372
Provision for income taxes
Current............................................... 228 165 165
Deferred.............................................. 45 -- 96
------- ------- -------
273 165 261
------- ------- -------
NET EARNINGS........................................ $ 2,400 $ 2,878 $ 2,111
======= ======= =======
Basic earnings per common share........................ $ 0.91 $ 1.08 $ 0.75
======= ======= =======
Diluted earnings per common share...................... $ 0.91 $ 1.08 $ 0.75
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN
(LOSS) ON
SECURITIES COMMON TOTAL
PREFERRED COMMON ADDITIONAL RETAINED AVAILABLE- STOCK IN SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS FOR-SALE TREASURY EQUITY
--------- ------ ---------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... $827 $2,725 $5,479 $4,742 $(109) $ (5) $13,659
Purchase of treasury
stock.................. -- -- -- -- -- (95) (95)
Sale of treasury stock.. -- -- -- -- -- 100 100
Dividends
Preferred--$0.45 per
share................ -- -- -- (74) -- -- (74)
Common--$0.19 per
share................ -- -- -- (505) -- -- (505)
Net change in unrealized
gain (loss) on
available-for-sale
securities, net of tax
of $67................. -- -- -- -- 130 -- 130
Net earnings for the
year................... -- -- -- 2,111 -- -- 2,111
---- ------ ------ ------ ----- ---- -------
Balance at December 31,
1995................... 827 2,725 5,479 6,274 21 -- 15,326
Purchase of treasury
stock.................. -- -- -- -- -- (438) (438)
Sale of treasury stock.. -- -- -- -- -- 418 418
Redemption of common
stock.................. -- (177) (83) (1,070) -- -- (1,330)
Dividends
Preferred--$0.45 per
share................ -- -- -- (74) -- -- (74)
Common--$0.21 per
share................ -- -- -- (528) -- -- (528)
Net change in unrealized
gain (loss) on
available-for-sale
securities, net of tax
of $1.................. -- -- -- -- (2) -- (2)
Net earnings for the
year................... -- -- -- 2,878 -- -- 2,878
---- ------ ------ ------ ----- ---- -------
Balance at December 31,
1996................... 827 2,548 5,396 7,480 19 (20) 16,250
Sale of treasury stock.. -- -- -- -- -- 20 20
Dividends
Preferred--$0.45 per
share................ -- -- -- (74) -- -- (74)
Common--$0.22 per
share................ -- -- -- (566) -- -- (566)
Net change in unrealized
gain (loss) on
available-for-sale
securities, net of tax
of $114................ -- -- -- -- 223 -- 223
Net earnings for the
year................... -- -- -- 2,400 -- -- 2,400
---- ------ ------ ------ ----- ---- -------
Balance at December 31,
1997................... $827 $2,548 $5,396 $9,240 $ 242 $ -- $18,253
==== ====== ====== ====== ===== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings...................................... $ 2,400 $ 2,878 $ 2,111
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation...................................... 537 467 429
Amortization of premiums, net of (accretion) of
discounts on securities.......................... 95 85 93
Net realized gain on available-for-sale
securities....................................... (19) (2) --
Provision for loan losses......................... 355 206 149
Write-down of other real estate and repossessed
assets........................................... 150 159 201
Gain on sale of premises, equipment and other real
estate........................................... (11) (47) (71)
(Decrease) increase in accrued interest receivable
and other assets................................. (623) 217 (700)
Increase in accrued interest and other
liabilities...................................... 287 207 245
-------- ------- -------
Net cash provided by operating activities....... 3,171 4,170 2,457
Cash flows from investing activities
Purchases of held-to-maturity securities.......... (7,179) (9,536) (6,265)
Proceeds from sales and maturities of available-
for-sale securities.............................. 1,630 5,108 3,906
Purchases of available-for-sale securities........ (35,990) (7,256) (600)
Proceeds from maturities and principal repayments
of held-to-maturity securities................... 14,023 12,507 2,141
Purchases of premises and equipment............... (1,368) (973) (398)
Proceeds from sale of premises, equipment and
other real estate................................ 296 329 1,085
Net increase in loans............................. (18,387) (13,161) (3,213)
Net decrease (increase) in federal funds sold..... 10,430 (7,560) (1,190)
-------- ------- -------
Net cash used by investing activities........... (36,545) (20,542) (4,534)
Cash flows from financing activities
Repayment of borrowings........................... (171) (272) (372)
Change in deposits, net........................... 28,106 20,138 3,833
Purchase of treasury stock........................ -- (438) (95)
Sale of treasury stock............................ 20 418 100
Redemption of common stock........................ -- (1,330) --
Dividends paid.................................... (640) (602) (579)
-------- ------- -------
Net cash provided by financing activities....... 27,315 17,914 2,887
-------- ------- -------
Net (decrease) increase in cash and cash equiva-
lents.......................................... (6,059) 1,542 810
Cash and cash equivalents at beginning of year..... 15,809 14,267 13,457
-------- ------- -------
Cash and cash equivalents at end of year........... $ 9,750 $15,809 $14,267
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in the preparation of the consolidated financial statements. The policies
conform to generally accepted accounting principles and to general practices
within the banking industry.
1. GENERAL
The Company operates seven locations in Northeast Texas. The Company's main
sources of income are derived from granting loans primarily in Northeast Texas
and investing in United States Treasury and Agency securities. A variety of
financial products and services are provided to individual and corporate
customers. The primary deposit products are checking accounts, money market
accounts, and certificates of deposit. The primary lending products are real
estate, commercial, and consumer loans. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' abilities to honor
contracts is dependent on the economy of the area.
2. PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN SUBSIDIARIES
The consolidated financial statements include the accounts of Guaranty
Bancshares, Inc. (collectively referred to as the Company) and its wholly-
owned subsidiary Guaranty Financial Corp., Inc. which wholly owns Guaranty
Bank and one non-bank subsidiary Guaranty Company. Guaranty Bank has two non-
bank subsidiaries, Guaranty Leasing Company and GB Com, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
3. CASH AND CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as those amounts included in the
balance sheet caption "Total cash and cash equivalents." Cash and cash
equivalents includes due from bank accounts, teller and vault cash.
4. SECURITIES
The Company accounts for securities according to Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. At the date of purchase, the Company is required
to classify debt and equity securities into one of three categories: held-to-
maturity, trading, or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to-maturity and measured at amortized cost
in the financial statements only if management has the positive intent and
ability to hold those securities to maturity. Securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading and measured at fair value in the financial statements
with unrealized gains and losses included in earnings. Investments not
classified as either held-to-maturity or trading are classified as available-
for-sale and measured at fair value in the financial statements with
unrealized gains and losses reported, net of tax, in a separate component of
shareholders' equity until realized.
Gains and losses on the sale of securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their carrying value that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
F-7
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
5. LOANS
Loans are reported at the principal amount outstanding, net of charge-offs,
unearned discounts, purchase discounts and an allowance for loan losses.
Unearned discounts on installment loans are recognized using a method which
approximates a level yield over the term of the loans. Interest on other loans
is calculated using the simple interest method on the daily balance of the
principal amount outstanding.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan costs
is discontinued when a loan is placed on nonaccrual status.
The Company applies SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, as amended by SFAS No. 118. Under SFAS 114, as amended, a loan is
identified as impaired when it is probable that interest and principal will
not be collected according to the contractual terms of the loan agreement. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. All
loans past due 90 days are placed on nonaccrual status unless the loan is both
well-secured and in the process of collection. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. Loans
are not again placed on accrual status until payments are brought current and,
in management's judgement, the loan will continue to pay as agreed.
6. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is considered adequate to provide for losses
based on past loan loss experience and management's evaluation of the loan
portfolio under current economic conditions. While management uses available
information to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. Recognized losses,
net of recoveries, are charged to the allowance for loan losses. Additions to
the allowance are included in the consolidated statements of earnings as
provision for loan losses.
7. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the related assets. Maintenance, repairs and minor improvements are
charged to noninterest expense as incurred.
8. OTHER REAL ESTATE AND REPOSSESSED ASSETS
Real estate properties acquired by foreclosure and repossessed assets are
recorded at fair value at the date of foreclosure, establishing a new cost
basis. After foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest expenses. Repossessed
assets are presented on the Balance Sheet as a component of other assets.
F-8
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
9. INVESTMENT IN LEVERAGED LEASES
The Company accounts for investment in leveraged leases according to SFAS
No. 13, Accounting for Leases. Under SFAS 13, the Company records its
investment in leveraged leases net of nonrecourse debt. The investment in
leveraged leases less deferred taxes arising from differences between pretax
accounting income and taxable income represents the lessor's net investment in
leveraged leases for purposes of computing periodic net income from the
leases. Net investment in leveraged leases is adjusted annually by the
difference in net cash flow and the amount of income recognized. If at any
time during the lease term the projected net cash receipts over the term of
the lease are less than the initial investment, a loss is recognized for the
deficiency. Estimated residual values and other important assumptions
affecting total net income from the leases are reviewed annually. The net
investment balance is adjusted considering all values and assumptions.
During the initial years of the leases, the Company receives benefits for
income tax purposes of deductions for depreciation on the equipment and
interest on the debt that in the aggregate exceed the rental income from the
related equipment.
During the later years, rental income will exceed related deductions.
Provision has been made for deferred income taxes that arise from these
differences.
The Company deducts, for tax purposes, rent payments paid to lessors under a
master lease. A prior sale of user lease receivables created a difference
between tax and book basis which will not reverse.
10. INCOME TAXES
The Company files a consolidated Federal income tax return. By agreement
with the Parent, subsidiaries record a provision or benefit for Federal income
taxes on the same basis as if they filed a separate Federal income tax return.
The asset and liability method of accounting is used for income taxes where
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When management determines that it is more likely than not that a
deferred tax asset will not be realized, a valuation allowance must be
established. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
11. EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income
available for common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is calculated
by dividing net earnings available for common shareholders by the weighted
average number of common and dilutive potential common shares. Stock options
may be potential dilutive common shares and are therefore considered in the
earnings per share calculation, if dilutive. The number of dilutive potential
common shares is determined using the treasury stock method.
12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit and
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
F-9
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
13. USE OF 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A majority of the loan portfolio consists of real estate loans. The ultimate
collectibility of the loan portfolio and the recovery of a substantial portion
of the carrying amount of foreclosed real estate are susceptible to changes in
local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowance may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the recognition of allowances for losses on loans and foreclosed real
estate. Such agencies may require additions to the allowances based on their
judgements about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change in the
near term.
14. RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 1997
presentation.
F-10
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
NOTE B--SECURITIES
The securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
December 31, 1997:
U.S. Treasury securities............. $12,178 $272 $-- $12,450
U.S. Government agency securities.... 16,174 94 -- 16,268
Mortgage-backed securities........... 13,196 -- -- 13,196
Equity securities.................... 992 -- -- 992
------- ---- --- -------
$42,540 $366 $-- $42,906
======= ==== === =======
December 31, 1996:
U.S. Treasury securities............. $ 6,794 $ 27 $-- $ 6,821
U.S. Government agency securities.... 996 2 -- 998
Mortgage-backed securities........... 93 -- -- 93
Equity securities.................... 393 -- -- 393
------- ---- --- -------
$ 8,276 $ 29 $-- $ 8,305
======= ==== === =======
HELD-TO-MATURITY SECURITIES:
December 31, 1997:
U.S. Treasury securities............. $ 2,194 $ 8 $-- $ 2,202
U.S. Government agency securities.... 4,192 144 -- 4,336
Mortgage-backed securities........... 7,468 -- -- 7,468
Obligations of state and political
subdivisions........................ 1,379 96 -- 1,475
------- ---- --- -------
$15,233 $248 $-- $15,481
======= ==== === =======
December 31, 1996:
U.S. Treasury securities............. $ 7,584 $ 66 $-- $ 7,650
U.S. Government agency securities.... 7,884 113 5 7,992
Mortgage-backed securities........... 5,561 -- -- 5,561
Obligations of state and political
subdivisions........................ 1,048 39 -- 1,087
------- ---- --- -------
$22,077 $218 $ 5 $22,290
======= ==== === =======
</TABLE>
There were no gross realized losses on sales of available-for-sale
securities for the years ended December 31, 1997, 1996, and 1995. Gross
realized gains on sales of available-for-sale securities were $19, $2, and $0
for the years ended December 31, 1997, 1996, and 1995.
F-11
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
The scheduled maturities of securities to be held-to-maturity and securities
available-for-sale December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-
SECURITIES SALE SECURITIES
----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Due in one year or less..................... $ 2,284 $ 2,291 $ 6,200 $ 6,210
Due from one year through five years........ 2,659 2,684 10,034 10,171
Due from five years through ten years....... 4,228 4,291 19,399 19,605
Due after ten years......................... 6,062 6,215 5,915 5,928
Equity securities........................... -- -- 992 992
------- ------- ------- -------
$15,233 $15,481 $42,540 $42,906
======= ======= ======= =======
</TABLE>
Mortgage-backed securities are presented based on contractual maturities.
The actual average life of these securities may be different from the
contractual maturity.
Securities with a market value of approximately $26,835 and $26,257 at
December 31, 1997, and 1996, were pledged to secure public deposits and for
other purposes as required or permitted by law.
NOTE C--LOANS
Major classifications of loans are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Commercial................................................... $ 36,598 $ 29,412
Agriculture.................................................. 8,174 7,159
Real estate
Construction............................................... 3,072 2,292
1-4 family residential..................................... 41,398 36,967
Farmland................................................... 6,492 6,685
Non-residential and non-farmland........................... 42,363 36,460
Other...................................................... 360 535
Consumer..................................................... 20,120 20,925
-------- --------
158,577 140,435
Less:
Unearned discounts......................................... 1,182 1,146
Allowance for loan losses.................................. 1,129 1,055
-------- --------
$156,266 $138,234
======== ========
</TABLE>
Impaired loans were $298 and $722 at December 31, 1997 and 1996. The
interest income associated with these impaired loans was insignificant and no
valuation allowance for loan losses related to impaired loans has been
established. There were no commitments to lend additional funds to borrowers
whose loans were classified as impaired.
F-12
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Outstanding loans to directors and executive officers of the Bank and to
their related business interests aggregated approximately $5,210 and $4,617 at
December 31, 1997 and 1996. Following is an analysis of activity with respect
to such amounts:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Balance at January 1.............................................. $4,617
New loans and advances.......................................... 2,667
Repayments...................................................... (2,074)
------
Balance at December 31............................................ $5,210
======
</TABLE>
NOTE D--ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance at January 1.................................... $1,055 $1,005 $1,012
Provision............................................... 355 206 149
Charge-offs............................................. (385) (283) (298)
Recoveries.............................................. 104 127 142
------ ------ ------
Balance at December 31.................................. $1,129 $1,055 $1,005
====== ====== ======
</TABLE>
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land............................................................. $1,597 $ 796
Building and improvements........................................ 5,367 5,178
Furniture, fixtures and equipment................................ 2,688 3,011
Automobiles...................................................... 279 233
------ ------
9,931 9,218
Less accumulated depreciation.................................... 3,572 3,686
------ ------
$6,359 $5,532
====== ======
</TABLE>
NOTE F--INTEREST-BEARING DEPOSITS
The types of accounts and their respective balances included in interest-
bearing deposits are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
NOW accounts................................................. $ 16,778 $ 18,379
Savings and money market accounts............................ 40,293 37,022
Certificates of deposit...................................... 119,595 101,384
-------- --------
$176,666 $156,785
======== ========
</TABLE>
F-13
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000 was approximately $42,996 and $40,362 at December 31,
1997 and 1996. At December 31, 1997, the scheduled maturities of certificates
of deposit are as follows:
<TABLE>
<S> <C>
3 months or less...................................................... $ 28,084
Between 3 months and 6 months......................................... 24,246
Between 6 months and 1 year........................................... 60,895
Over 1 year........................................................... 6,370
--------
$119,595
========
</TABLE>
Deposits of executive officers, significant shareholders and directors were
$2,290 and $2,212 (including time deposits of $1,725 and $1,411) at December
31, 1997 and 1996.
NOTE G--BORROWINGS
During the year ended December 31, 1997, the Company retired the final
installment of a note payable to Texas Independent Bank, Dallas, Texas.
Company subsidiaries' stock securing the debt was released. As of December 31,
1996 the balance outstanding was $171. Interest expense was $6, $30 and $69
for the years ended December 31, 1997, 1996, and 1995, respectively.
NOTE H--PREFERRED AND COMMON STOCK
The following summary of issued and outstanding shares of stock shows the
effects of a seven for one common shares stock split, effective March 24,
1998.
<TABLE>
<CAPTION>
ISSUED AND
OUTSTANDING COMMON COMMON
PREFERRED STOCK STOCK TREASURY
STOCK ISSUED OUTSTANDING STOCK
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.......... 165,456 2,724,680 2,723,448 (1,232)
Sale of treasury stock............ -- -- 1,232 1,232
------- --------- --------- ------
Balance at December 31, 1995........ 165,456 2,724,680 2,724,680 --
Purchase of treasury stock........ -- -- (3,213) (3,213)
Redemption of common stock........ -- (176,400) (176,400) --
------- --------- --------- ------
Balance at December 31, 1996........ 165,456 2,548,280 2,545,067 (3,213)
Sale of treasury stock............ -- -- 3,213 3,213
------- --------- --------- ------
Balance at December 31, 1997........ 165,456 2,548,280 2,548,280 --
======= ========= ========= ======
</TABLE>
At December 31, 1997, 1996 and 1995, the Company had 3,000,000 authorized
shares of preferred stock of $5 par value. Effective March 24, 1998 a
resolution was passed authorizing a total of 15,000,000 shares of preferred
stock of $5 par value.
The preferred stock pays dividends semi-annually. The preferred stock is not
cumulative or participating, has no voting rights and is not convertible.
Preferred stock has liquidation preferences over common stock of the Company.
Dividends on common stock of the Company may not be declared or paid unless
dividends for the same period on preferred stock have been paid or declared.
F-14
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
At December 31, 1997, 1996 and 1995, the Company had 1,000,000 authorized
shares of common stock of $1 par value. Effective March 24, 1998 a resolution
was passed authorizing a total of 50,000,000 shares of common stock of $1 par
value.
NOTE I--INCOME TAXES
Federal income tax currently (payable) receivable, deferred tax asset and
deferred tax liability, included in other assets and other liabilities,
respectively, are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current................................................. $ (89) $ 9 $ (41)
Deferred tax asset...................................... 256 340 444
Deferred tax liability.................................. (1,574) (1,499) (1,604)
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31 are presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses.......................... $ 74 $ 67 $ 97
Tax credits........................................ 24 133 263
Difference in basis of other real estate........... 113 77 84
Other.............................................. 45 63 --
------- ------- -------
$256 $ 340 $ 444
======= ======= =======
Deferred tax liabilities:
Unrealized gain on available-for-sale securities... $ (124) $ (10) $ (11)
Depreciation....................................... (546) (446) (384)
Leasing transactions............................... (644) (799) (830)
Deferred loan costs, net........................... (260) (244) (268)
Other.............................................. -- -- (111)
------- ------- -------
$(1,574) $(1,499) $(1,604)
======= ======= =======
</TABLE>
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate as of December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate....................... 34.00% 34.00% 34.00%
Effect of utilization of graduated tax rates............ (0.44) (0.39) (0.50)
Tax exempt income....................................... (0.90) (0.66) (1.90)
Effect of utilization of tax credits.................... (0.90) (4.37) (5.49)
Recognition of benefit on leveraged leases.............. (19.93) (20.25) (21.83)
Life insurance proceeds................................. -- (9.17) --
Other, net.............................................. (1.62) 6.26 6.72
------ ------ ------
Effective income tax rate............................... 10.21% 5.42% 11.00%
====== ====== ======
</TABLE>
F-15
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
NOTE J--COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting
principles, are not included in the consolidated balance sheets. These
transactions are referred to as "off-balance sheet commitments". The Company
enters into these transactions to meet the financing needs of its customers.
These transactions include commitments to extend credit and letters of credit
which involve elements of credit risk in excess of the amounts recognized in
the consolidated balance sheets. The Company minimizes its exposure to loss
under these commitments by subjecting them to credit approval and monitoring
procedures.
The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will
be available for working capital purposes, for capital expenditures and to
ensure access to funds at specified terms and conditions. Substantially all of
the Company's commitments to extend credit are contingent upon customers
maintaining specific credit standards at the time of loan funding. Management
assesses the credit risk associated with certain commitments to extend credit
in determining the level of the allowance for credit losses.
Letters of credit are written conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The Company's
policies generally require that letters of credit arrangements contain
security and debt covenants similar to those contained in loan agreements.
Outstanding commitments and letters of credit at December 31 are
approximately as follows:
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL
AMOUNT
-------------
1997 1996
------ ------
<S> <C> <C>
Commitments to extend credit..................................... $7,977 $8,623
Letters of credit................................................ 202 153
Credit card arrangements......................................... -- 2,364
</TABLE>
Guaranty Leasing Company, a non-bank subsidiary of the Bank, is a partner in
various equipment leasing transactions involving leveraged leases. The
transactions were structured as "wrap leases" under which the partnerships are
the lessees with respect to the owners of the equipment and are the sublessors
under the sublease with the users.
The following is a schedule by years of future gross minimum rental
payments, without respect to related offsetting note receivable payments due
the partnerships, under the leases as of December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1998........................................................ $2,360
1999........................................................ 2,322
2000........................................................ 2,291
2001........................................................ 1,407
2002........................................................ --
------
Total....................................................... $8,380
======
</TABLE>
The Company is involved in certain claims and lawsuits occurring in the
normal course of business. Management, after consultation with legal counsel,
does not believe that the outcome of these actions would have a material
impact on the financial statements of the Company.
F-16
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
The Company maintains an Employee Stock Ownership Plan containing Section
401(k) provisions covering substantially all employees. The plan provides for
a matching contribution of up to 4% of qualified compensation. Total
contributions accrued or paid for December 31, 1997, 1996 and 1995 were
approximately $234, $232 and $221.
The Company established a non-qualified, non-contributory "Supplemental
Retirement Plan" in 1992. The plan covers an executive officer, who retired
from the Bank in 1996, to provide benefits equal to amounts payable under the
Company's retirement plan and certain social security benefits to aggregate a
predetermined percentage of the final five year average salary. The plan is
non-funded. Amounts accrued or paid for the period ended December 31, 1997,
1996 and 1995 were approximately $20, $52 and $55.
The Company has a cash incentive plan which provides guidelines whereby key
employees can earn bonus compensation based on the profitability of the
Company. The bonus amounts are determined based on achievement by the Company
on certain percentages of return on equity targets. This plan is approved and
adopted annually by the Board of Directors of the Company at the first board
meeting of the year. Total expenses under this plan for the years ended
December 31, 1997, 1996, and 1995 were $306, $261, and $280.
NOTE K--REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by state and federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classifications are also subject to qualitative judgements by the
regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1997, that the Company and the Bank meet all capital adequacy requirements
to which they are subject.
F-17
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table. (See Note L.)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------ -------------- --------------
AMOUNT RATIO AMOUNT* RATIO* AMOUNT* RATIO*
------ ----- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc......... 19,137 11.86% 12,905 8.00% N/A N/A
Guaranty Bank.................... 18,435 11.75% 12,551 8.00% 15,688 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc......... 18,008 11.16% 6,453 4.00% N/A N/A
Guaranty Bank.................... 17,306 11.03% 6,275 4.00% 9,413 6.00%
Tier 1 Capital (to Average
Assets):
Guaranty Bancshares, Inc......... 18,008 7.87% 6,863 3.00% N/A N/A
Guaranty Bank.................... 17,306 7.60% 6,830 3.00% 11,384 5.00%
As of December 31, 1996
Total Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc......... 17,033 11.80% 11,546 8.00% N/A N/A
Guaranty Bank.................... 14,787 11.66% 10,150 8.00% 12,687 10.00%
Talco State Bank................. 1,632 14.48% 902 8.00% 1,127 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc......... 15,978 11.07% 5,773 4.00% N/A N/A
Guaranty Bank.................... 13,911 10.96% 5,075 4.00% 7,612 6.00%
Talco State Bank................. 1,453 12.89% 451 4.00% 676 6.00%
Tier 1 Capital (to Average
Assets):
Guaranty Bancshares, Inc......... 15,978 7.87% 6,092 3.00% N/A N/A
Guaranty Bank.................... 13,911 7.57% 5,511 3.00% 9,185 5.00%
Talco State Bank................. 1,453 7.90% 552 3.00% 920 5.00%
</TABLE>
- ------------
* Greater than or equal to
NOTE L--MERGER
Effective January 1, 1997, former bank subsidiary Talco State Bank, merged
with Guaranty Bank under the Articles of Merger as filed with the Texas
Department of Banking. As a result of that merger, the Articles of Association
of Guaranty Bank were amended and restated and the common shares of Talco
State Bank were canceled. This merger had no effect on the consolidated
financial statements of the Company.
F-18
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE M--SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
The following is supplemental information with respect to the December 31
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
CASH PAID FOR:
Interest................................................ $8,030 $6,864 $6,267
Income taxes............................................ 130 215 50
NON-CASH ACTIVITY:
Loans transferred to other real estate or repossessed
assets................................................. 206 270 958
</TABLE>
NOTE N--FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are based on management's estimates
and do not purport to represent the aggregate net fair value of the Company.
Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among different
financial institutions and which are subject to change.
The following methods and assumptions were used by the Company in estimating
financial instrument fair values:
. CASH AND CASH EQUIVALENTS AND FEDERAL FUNDS SOLD
The balance sheet carrying amount approximates fair value.
. SECURITIES TO BE HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE
Fair values for investment securities are based on quoted market prices or
quotations received from securities dealers. If quoted market prices are
not available, fair value estimates may be based on quoted market prices of
similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
. LOANS
Fair values of loans are estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, real estate and consumer loans. Each of these categories is
further subdivided into fixed and adjustable rate loans and performing and
nonperforming loans. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the various types of loans. The fair value of
nonperforming loans is estimated at the value of the underlying collateral.
. DEPOSITS
The fair value of demand deposits, such as non-interest bearing demand
deposits and interest-bearing transaction accounts such as savings, NOW and
money market accounts are equal to the amount payable on demand as of
December 31, 1997 and 1996 (i.e. their carrying amounts).
The fair value of demand deposits is defined as the amount payable, and
prohibits adjustment for any value derived from the expected retention of
such deposits for a period of time. That value, commonly referred to as the
core deposit base intangible, is neither included in the following fair
value amounts nor recorded as an intangible asset in the balance sheet.
F-19
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The fair value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate used represents rates
currently offered for deposits of similar remaining maturities.
. BORROWINGS
The fair value of borrowings is estimated by discounting the contractual
cash flows using the current interest rate at which similar borrowing for
the same remaining maturities could be made.
. OFF-BALANCE SHEET INSTRUMENTS
Estimated fair values for the Company's off-balance sheet instruments are
based on fees, net of related expenses, currently charged to enter into
similar agreements, considering the remaining terms of the agreements and
the counterparties' credit standing.
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997 and 1996. The fair value
of financial instruments is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other
than in a forced or liquidation sale.
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents................ $ 9,750 $ 9,750 $ 15,809 $ 15,809
Federal funds sold....................... 7,720 7,720 18,150 18,150
Securities
Available-for-sale..................... 42,906 42,906 8,305 8,305
Held-to-maturity....................... 15,233 15,481 22,077 22,290
Loans, net............................... 156,266 155,729 138,234 137,710
Financial liabilities:
Deposits
Noninterest-bearing.................... $ 46,295 $ 46,295 $ 38,070 $ 38,070
Interest-bearing transaction and money
market accounts....................... 57,070 57,070 55,401 55,401
Certificates of deposit................ 119,596 120,039 101,384 101,083
Borrowings............................... -- -- 171 171
</TABLE>
F-20
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
NOTE O--EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential common
stock. Computations reflect the effects of a seven for one common shares stock
split, effective March 24, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net earnings.............................................. $2,400 $2,878 $2,111
Less: dividends on preferred stock........................ 74 74 74
------ ------ ------
Net earnings available to common shareholders used in ba-
sic and diluted EPS...................................... $2,326 $2,804 $2,037
====== ====== ======
Weighted average common shares in basic EPS............... 2,547 2,592 2,724
Effect of dilutive securities............................. -- -- --
------ ------ ------
Weighted average common and potential dilutive common
shares used in dilutive EPS.............................. 2,547 2,592 2,724
====== ====== ======
</TABLE>
NOTE P--NEW PRONOUNCEMENT
The FASB has issued Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which is effective for fiscal years beginning after
December 15, 1997. The new standard requires an entity to report and display
comprehensive income and its components. Comprehensive income will include net
income plus net unrealized gain or loss on securities.
NOTE Q--SUBSEQUENT EVENTS
Effective March 24, 1998 the Company approved a seven for one common shares
stock split. The effects of such split have been incorporated into the
consolidated financial statements and notes thereto as if the split had been
effective January 1, 1995.
The Company on March 24, 1998 adopted a Stock Incentive Plan (the "1998
Stock Incentive Plan") which is intended to provide employees with an
opportunity to acquire a proprietary interest in the Company and provide
additional incentive opportunities based on the growth of the Company. The
1998 Stock Incentive Plan provides that a committee of the Board of Directors
(the "Compensation Committee") shall have the right to grant incentive stock
options, non-qualified stock options, restricted stock awards, stock
appreciation rights, performance awards, phantom stock awards and any
combination thereof. The aggregate number of shares that may be issued under
this plan is limited to 1,000,000 shares. The Plan has not been implemented,
and, no stock options have been awarded to any employee of the Company.
If approved by the Compensation Committee, incentive stock options may be
granted under terms and conditions they approve, provided, however, that the
term of any incentive stock option cannot exceed ten years, and no option may
be exercised earlier than six months from the date of the grant. The exercise
price is determined by the Compensation Committee, provided that the exercise
price cannot be less than the fair market value on the date the option is
granted, subject to adjustments. Restricted stock awards may allow an employee
to receive stock without cash payment, under terms approved by the
Compensation Committee, provided, that such awards are subject to restrictions
regarding disposition and subject to forfeiture as the Compensation Committee
may approve. The restrictions may be based on items such as earnings of the
Company, revenue of
F-21
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
the Company, return on shareholders' equity achieved by the Company, or other
factors. A stock appreciation right permits the holder to receive an amount in
cash or stock or combination thereof equal to the number of stock appreciation
rights exercised by the holder multiplied by the excess of the fair market
value of the stock on the exercise date over the stock appreciation right
exercise price. No stock appreciation right may be exercised earlier than six
months from the date of the grant. Phantom stock awards may also be paid in
cash, stock, or any combination thereof, determined by the Compensation
Committee. The grant of such awards may be contingent upon the achievement by
the Company or a department thereof, of performance goals established by the
Company. The awards may terminate if the grantee's employment with the Company
is terminated. Such awards may vest as determined by the Compensation
Committee. As mentioned above, the Compensation Committee has awarded no such
options or rights to any employee.
NOTE R--PARENT-ONLY FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC.
(PARENT ONLY)
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------- -------
<S> <C> <C>
Cash and cash equivalents..................................... $ 165 $ 223
Investment in subsidiaries.................................... 17,556 15,641
Investments, insurance........................................ 631 541
Premises and equipment, net................................... 22 36
Other assets.................................................. 2 9
------- -------
$18,376 $16,450
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Borrowings.................................................... $ -- $ 171
Other liabilities............................................. 123 29
------- -------
Total liabilities......................................... 123 200
Commitments and contingencies................................. -- --
Preferred stock............................................. 827 827
Common stock................................................ 2,548 2,548
Additional capital.......................................... 5,396 5,396
Retained earnings........................................... 9,240 7,480
Net unrealized appreciation on available-for-sale
securities,
net of tax of $124 and $10................................. 242 19
------- -------
18,253 16,270
Less common stock in treasury--at cost...................... -- (20)
------- -------
18,253 16,250
------- -------
$18,376 $16,450
======= =======
</TABLE>
F-22
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
GUARANTY BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Interest income
Interest bearing deposits............................ $ -- $ 6 $ --
Life insurance proceeds gain........................... -- 822 --
Other income........................................... 2 -- 2
------ ------ ------
2 828 2
Costs and expenses
General and administrative........................... 321 388 445
Income taxes
Current.............................................. (77) (123) (122)
Deferred............................................. -- -- --
------ ------ ------
(Loss) earnings before equity in net earnings of sub-
sidiaries............................................. (242) 563 (321)
Equity in net earnings of subsidiaries................. 2,642 2,315 2,432
------ ------ ------
NET EARNINGS........................................... $2,400 $2,878 $2,111
====== ====== ======
</TABLE>
F-23
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
GUARANTY BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings........................................... $2,400 $2,878 $2,111
Adjustments to reconcile net earnings to net cash used
in operating activities
Earnings of subsidiaries.............................. (2,642) (2,315) (2,432)
Depreciation.......................................... 14 5 10
Amortization.......................................... -- 1 16
Life insurance proceeds gain.......................... -- (822) --
Increase in other assets.............................. (83) (11) (378)
Increase (decrease) in other liabilities.............. 94 (80) 131
------ ------ ------
Net cash used in operating activities............... (217) (344) (542)
Cash flows from investing activities
Dividends from subsidiaries........................... 950 1,425 1,325
Life insurance proceeds............................... -- 1,318 --
Purchases of premises and equipment................... -- (40) --
------ ------ ------
Net cash provided by investing activities........... 950 2,703 1,325
Cash flows from financing activities
Repayment of borrowings............................... (171) (272) (372)
Purchase of treasury stock............................ -- (438) (95)
Sale of treasury stock................................ 20 418 100
Redemption of common stock............................ -- (1,330) --
Dividends paid........................................ (640) (602) (579)
------ ------ ------
Net cash used in financing activities............... (791) (2,224) (946)
------ ------ ------
Net (decrease) increase in cash and cash equivalents... (58) 135 (163)
Cash and cash equivalents at beginning of year......... 223 88 251
------ ------ ------
Cash and cash equivalents at end of year............... $ 165 $ 223 $ 88
====== ====== ======
</TABLE>
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF
COMMON STOCK OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAIN HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Summary Consolidated Financial Data....................................... 6
Recent Unaudited Selected Consolidated Financial Data..................... 8
Risk Factors.............................................................. 10
The Company............................................................... 15
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 19
Dilution.................................................................. 19
Capitalization............................................................ 20
Nature of the Trading Market and Market Prices............................ 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Management................................................................ 44
Principal Shareholders.................................................... 48
Supervision and Regulation................................................ 49
Description of Securities of the Company.................................. 56
Underwriting.............................................................. 60
Legal Matters............................................................. 61
Experts................................................................... 61
Available Information..................................................... 61
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL JUNE 12, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
365,000 SHARES
[LOGO OF GRARANTY BANCSHARES APPEARS HERE]
GUARANTY BANCSHARES, INC.
COMMON STOCK
------------
PROSPECTUS
------------
HOEFER & ARNETT
INCORPORATED
MAY 18, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated fees and expenses incurred by the Registrant in connection
with this Offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................... $ 1,617
National Association of Securities Dealers, Inc. filing fee........... $ 5,000
Printing and engraving expenses....................................... $ 25,000
Legal fees and expenses of counsel for the Registrant................. $100,000
Accounting fees and expenses.......................................... $ 35,000
Blue sky filing fees and expenses (including legal fees and expenses). $ 5,000
Transfer Agent fees................................................... $ 1,000
Miscellaneous......................................................... $ 77,383
--------
Total................................................................. $250,000
========
</TABLE>
- --------
* To be supplied by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws require the Registrant
to indemnify officers and directors of the Registrant to the fullest extent
permitted by Article 2.02-1 of the Business Corporation Act of the State of
Texas (the "TBCA"). The Articles of Incorporation and Bylaws of the Registrant
are filed as Exhibit 3.1 and 3.2 to the Registration Statement. Generally,
Article 2.02-1 of the TBCA permits a corporation to indemnify a person who
was, is, or is threatened to be made a named defendant or respondent in a
proceeding because the person was or is a director or officer if it is
determined that such person (i) conducted himself in good faith, (ii)
reasonably believed (a) in the case of conduct in his official capacity as a
director or officer of the corporation, that his conduct was in the
corporation's best interests, and/or (b) in other cases, that his conduct was
at least not opposed to the corporation's best interests, and (iii) in the
case of any criminal proceeding, had no reasonable cause to believe that his
conduct was unlawful. In addition, the TBCA requires a corporation to
indemnify a director or officer for any action that such director or officer
is wholly successfully in defending on the merits.
The Registrant's Articles of Incorporation provide that a director of the
Registrant will not be liable to the corporation for monetary damages for an
act or omission in the director's capacity as a director, except to the extent
not permitted by law. Texas law does not permit exculpation of liability in
the case of (i) a breach of the director's duty of loyalty to the corporation
or its shareholders, (ii) an act or omission not in good faith that involves
intentional misconduct or a knowing violation of the law, (iii) a transaction
from which a director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office, (iv)
an act or omission for which the liability of the director is expressly
provided by statute, or (v) an act related to an unlawful stock repurchase or
dividend.
Pursuant to the Underwriting Agreement, a form of which is filed as Exhibit
1.1 to this Registration Statement, the Underwriter has agreed to indemnify
the directors, officers and controlling persons of the Registrant against
certain civil liabilities that may be incurred in connection with this
Offering, including certain liabilities under the Securities Act.
The Registrant may provide liability insurance for each director and officer
for certain losses arising from claims or changes made against them while
acting in their capabilities as directors or officers of Registrant, whether
or not Registrant would have the power to indemnify such person against such
liability, as permitted by law.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following documents are filed as exhibits to this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------------
<C> <C> <S>
*1 -- Form of Underwriting Agreement by and between the Underwriter and
the Company.
*3.1 -- Amended Articles of Incorporation of the Company.
*3.2 -- Amended and Restated Bylaws of the Company.
*4 -- Form of Certificate representing shares of Common Stock.
5 -- Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
securities being registered.
*10.1 -- Guaranty Bancshares, Inc. 1998 Stock Incentive Plan
*21 -- Subsidiaries of the Registrant
23.1 -- Consent of Arnold, Walker, Arnold & Co., P.C.
23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in the opinion
to be filed as Exhibit 5 to this Registration Statement).
*27 -- Financial Data Schedule
</TABLE>
- --------
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
None
All other schedules for which provision is made in Regulation S-X of the
Commission are not required under the related instructions or are inapplicable
and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officer and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised 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. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-2
<PAGE>
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497)(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Guaranty Bancshares, Inc., has duly caused this Registration Statement or
amendment thereto to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Mount Pleasant and State of Texas on May 21,
1998.
GUARANTY BANCSHARES, INC.
/s/ Arthur B. Scharlach, Jr.
By:__________________________________
Arthur B. Scharlach, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement or amendment thereto has been signed by the following
persons in the indicated capacities on May 21, 1998.
<TABLE>
<S> <C>
SIGNATURE TITLE
/s/ Bill G. Jones Chairman of the Board
- -----------------------------------
Bill G. Jones
/s/ Clifton A. Payne Treasurer (principal
financial officer
- ----------------------------------- and principal
Clifton A. Payne accounting officer)
and Director
/s/ Arthur B. Scharlach, Jr. President (principal
- ----------------------------------- executive officer) and
Arthur B. Scharlach, Jr. Director
/s/ John A. Conroy Director
- -----------------------------------
John A. Conroy
/s/ Jonice Crane Director
- -----------------------------------
Jonice Crane
/s/ C. A. Hinton, Sr. Director
- -----------------------------------
C. A. Hinton, Sr.
/s/ Russell L. Jones Director
- -----------------------------------
Russell L. Jones
/s/ Weldon Miller Director
- -----------------------------------
Weldon Miller
/s/ D. R. Zachry, Jr. Director
- -----------------------------------
D. R. Zachry, Jr.
</TABLE>
II-4
<PAGE>
EXHIBIT 5
May 21, 1998
Guaranty Bancshares, Inc.
100 West Arkansas
Mount Pleasant, Texas 75456
Gentlemen:
We have acted as counsel for Guaranty Bancshares, Inc., a Texas corporation
("Company"), in connection with the Registration Statement on Form S-1
(Registration No. 333-48959), as amended, filed by the Company under the
Securities Act of 1933, as amended ("Registration Statement"), with respect to
up to a maximum of 365,000 shares of common stock, $1.00 par value ("Common
Stock"), of the Company to be issued pursuant to an Underwriting Agreement dated
May 19, 1998 between the Company and Hoefer & Arnett Incorporated (the
"Underwriting Agreement").
In such capacity we are familiar with the Articles of Incorporation, as amended,
and the Amended and Restated Bylaws of the Company, the Registration Statement
and the Underwriting Agreement and have examined all statutes, records,
instruments and documents as we have deemed necessary for purposes hereof. In
addition, we have relied on certificates of officers of the Company and of
public officials and others as to certain matters of fact relating to this
opinion and have made such investigations of law as we have deemed necessary and
relevant as a basis hereof. We have assumed the genuineness of all signatures,
the authenticity of all documents and records submitted to us as originals, the
conformity to original documents and records of all documents and records
submitted to us as copies and the truthfulness of all statements of fact
contained therein.
Based on the foregoing and subject to the limitations and assumptions set forth
herein, and having due regard for such legal considerations as we deem relevant,
we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Texas.
<PAGE>
Guaranty Bancshares, Inc.
May 21, 1998
Page 2
2. The shares of Common Stock proposed to be sold pursuant to the
Underwriting Agreement will, when issued in accordance with the terms thereof,
be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement and to the reference to
us under the caption "Legal Matters."
Very truly yours,
Bracewell & Patterson, L.L.P.
WTL/bev
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 28, 1998 (except for Note Q, as to
which the date is March 24, 1998), accompanying the financial statements of
Guaranty Bancshares, Inc. and Subsidiaries contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
ARNOLD, WALKER, ARNOLD & CO., P.C.
Mount Pleasant, Texas
May 21, 1998
