AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1999.
REGISTRATION NO. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 6712 75-1656431
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
100 WEST ARKANSAS
MOUNT PLEASANT, TEXAS 75455
(903) 572-9881
(Address, including zip code, and
telephone number, including area code, of
registrant's principal executive offices)
Copies to:
DEVRY GARRETT, ESQ.
LEGAL OFFICER WILLIAM T. LUEDKE IV, ESQ.
100 WEST ARKANSAS BRACEWELL & PATTERSON, L.L.P.
MOUNT PLEASANT, TEXAS 75455 2900 SOUTH TOWER PENNZOIL PLACE
(903) 572-9881 HOUSTON, TEXAS 77002-2781
(Name, address, including zip code,
and telephone number, including
area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES
TO THE PUBLIC: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) 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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE PRICE FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, $1.00 par value 351,750 (1) $ 999,520 (2) $278
=======================================================================================================================
</TABLE>
(1) Not applicable.
(2) Computed in accordance with Rule 457(f) under the Securities Act of 1933,
as amended, based on the book value as of March 31, 1999 of the securities
to be received by the registrant in exchange for the securities registered
hereby.
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>
FIRST AMERICAN FINANCIAL CORPORATION GUARANTY BANCSHARES, INC.
PROXY STATEMENT/PROSPECTUS
Special Meeting of Shareholders to be held _____________, 1999.
-----------------------------------
GUARANTY BANCSHARES, INC.
(Common Stock, $1.00 Par Value Per Share)
First American Financial Corporation is providing you with this proxy
statement/prospectus in connection with a solicitation of proxies by the Board
of Directors of First American for approval of the proposed acquisition of First
American by Guaranty Bancshares, Inc. Pursuant to the Agreement and Plan of
Reorganization dated as of April 23, 1999, Guaranty will acquire First American
through the merger of First American with and into a wholly-owned subsidiary of
Guaranty. First American will hold a special shareholders' meeting to vote on
the merger on ___________, ____________, 1999, at ___________, local time, at
its principal executive office, 919 Gilmer Street, Sulphur Springs, Texas.
In exchange for all of the issued and outstanding common stock of First
American, Guaranty will issue 351,750 shares of Guaranty common stock and
$3,379,480 in cash. For each share of First American stock that you own, you
will receive 3.417039 shares of Guaranty common stock and $32.829609 in cash.
This proxy statement/prospectus also constitutes the prospectus of
Guaranty for the shares of Guaranty common stock to be issued in the merger.
Guaranty common stock is traded on the Nasdaq Stock Market National Market under
the symbol "GNTY." On _________, 1999, the last reported sale price per share of
Guaranty common stock on the Nasdaq was $________ per share.
This proxy statement/prospectus and the related materials are first being
mailed to the First American shareholders on or about ___________________.
--------------------
AN INVESTMENT IN GUARANTY COMMON STOCK
IN CONNECTION WITH THE MERGER INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 20.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER OR THE SHARES OF GUARANTY
COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is ________________________.
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION
919 GILMER STREET
SULPHUR SPRINGS, TEXAS 75483
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _____________, 1999
NOTICE IS HEREBY GIVEN that First American Financial Corporation will hold
a Special Meeting of Shareholders at its principal executive office, 919 Gilmer
Street, Sulphur Springs, Texas 75483 on _____________, 1999, at __:00 _.m.,
local time, for the following purposes:
1. To consider and vote on a proposal to be acquired by Guaranty
Bancshares, Inc. pursuant to an Agreement and Plan of Reorganization dated as of
April 23, 1999 between Guaranty Bancshares, Inc. and First American Financial
Corporation as more specifically described in the attached proxy
statement/prospectus.
2. To transact such other business as may properly come before the special
meeting or any adjournment or postponement thereof.
The Board of Directors fixed the close of business on ____________, 1999
as the record date for the determination of shareholders entitled to receive
notice of and to vote at the special meeting or any adjournment or postponement
thereof. Only shareholders of record at the close of business on the record date
are entitled to notice of and to vote at the special meeting. A complete list of
these shareholders will be available for examination at the special meeting and
at First American's offices at 919 Gilmer Street, Sulphur Springs, Texas 75483,
during ordinary business hours, after __________, 1999, for the examination of
any shareholder for any purpose germane to the special meeting.
By order of the Board of Directors,
James W. Capps
President
____________, 1999
----------------------
IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. EVEN IF
YOU PLAN TO BE PRESENT, YOU ARE URGED TO MARK, DATE, SIGN AND RETURN THE
ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENVELOPE PROVIDED, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL
MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE>
TABLE OF CONTENTS
WHERE YOU CAN FIND MORE INFORMATION.......................................... 1
Questions and Answers about the Merger....................................... 2
SUMMARY...................................................................... 5
The Companies............................................................ 5
The Merger............................................................... 5
The Special Meeting and Vote Required.................................... 5
Reasons for the Merger; Recommendation of the First American
Board of Directors..................................................... 6
What You Will Receive in the Merger...................................... 6
Conditions to Completion of the Merger................................... 6
Regulatory Approvals..................................................... 7
Termination of the Merger Agreement...................................... 7
Resale of Guaranty Common Stock Received
in the Merger.......................................................... 8
Appraisal Rights......................................................... 8
Comparative Shareholder Rights........................................... 8
Material Federal Income Tax Consequences
of the Merger.......................................................... 8
Selected Historical Financial Data........................................... 9
Selected Financial Data of Guaranty...................................... 9
Selected Financial Data of First American............................... 11
Summary of Historical and Pro Forma Per Share Selected Financial Data... 13
Comparative Stock Prices................................................ 14
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS................................. 15
CAPITALIZATION.............................................................. 19
RISK FACTORS................................................................ 20
FORWARD-LOOKING INFORMATION................................................. 26
Interest Rates and Economy ............................................. 26
Competition and Product Availability ................................... 26
Asset Management........................................................ 26
Liquidity and Capital .................................................. 26
Systems ................................................................ 26
Personnel .............................................................. 27
Tax, Regulatory, Compliance and Legal .................................. 27
NATURE OF TRADING MARKET AND MARKET PRICES.................................. 28
DIVIDEND HISTORY AND POLICIES............................................... 29
First American.......................................................... 29
Guaranty................................................................ 29
THE SPECIAL MEETING......................................................... 31
General................................................................. 31
Shares Entitled to Vote, Quorum and Vote Required....................... 31
Voting and Revocation of Proxies........................................ 31
THE MERGER.................................................................. 32
Terms of the Merger..................................................... 32
Shareholder Approval.................................................... 32
Stock Options........................................................... 32
Background and Reasons for the Merger; Recommendation of First
American Board......................................................... 32
Operations After the Merger............................................. 33
Other Terms and Conditions.............................................. 33
Business Pending Effective Time......................................... 34
Amendment............................................................... 34
Termination............................................................. 34
Expenses................................................................ 35
Exchange of Shares...................................................... 35
Material Federal Income Tax Consequences................................ 35
Dissenters Rights of Appraisal and Related Issues....................... 37
Accounting Treatment.................................................... 38
Restrictions on Sales of Guaranty Common Stock by Affiliates
of First American..................................................... 38
Regulatory Approvals.................................................... 38
COMPARISON OF RIGHTS OF SHAREHOLDERS OF GUARANTY AND FIRST AMERICAN......... 39
SELECTED CONSOLIDATED FINANCIAL DATA OF GUARANTY............................ 42
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GUARANTY.................................................. 44
GUARANTY.................................................................... 71
General................................................................. 71
Facilities.............................................................. 71
Competition............................................................. 71
Employees............................................................... 72
Legal Proceedings....................................................... 72
Interests of Certain Persons............................................ 72
MANAGEMENT OF GUARANTY...................................................... 72
Directors and Executive Officers of
Guaranty.............................................................. 72
Compensation Committee Interlocks and Insider Participation............. 74
Summary Compensation Table.............................................. 74
Stock Option Plan....................................................... 75
Bonus Plan.............................................................. 75
Benefit Plans........................................................... 76
Interests of Management and Others in
Certain Transactions.................................................. 76
BENEFICIAL OWNERSHIP OF COMMON STOCK BY MANAGEMENT OF GUARANTY AND
PRINCIPAL SHAREHOLDERS.................................................. 77
DESCRIPTIONS OF SECURITIES OF GUARANTY...................................... 79
Authorized Capital Stock................................................ 79
Preferred Stock......................................................... 79
Common Stock............................................................ 80
Texas Law and Certain Provisions of the Articles of
Incorporation and Bylaws.............................................. 80
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST AMERICAN...................... 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FIRST AMERICAN............................................ 85
FIRST AMERICAN.............................................................. 109
General................................................................. 109
Facilities.............................................................. 109
Competition............................................................. 109
Employees............................................................... 109
Legal Proceedings....................................................... 109
BENEFICIAL OWNERSHIP OF FIRST AMERICAN STOCK BY MANAGEMENT OF
FIRST AMERICAN AND PRINCIPAL SHAREHOLDERS............................... 110
SUPERVISION AND REGULATION OF GUARANTY AND FIRST AMERICAN................... 112
Guaranty and First American............................................. 112
Guaranty Bank........................................................... 114
First American Bank..................................................... 117
Instability of Regulatory Structure..................................... 120
Expanding Enforcement Authority......................................... 120
Effect on Economic Environment.......................................... 120
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS.................................. 122
LEGAL OPINIONS.............................................................. 122
EXPERTS..................................................................... 122
OTHER MATTERS............................................................... 122
INDEX TO FINANCIAL STATEMENTS............................................... F-1
EXHIBIT A Agreement and Plan of Reorganization.............................. A-1
EXHIBIT B Provisions of the Texas Business Corporation Act
Relating to Rights of Dissenting Shareholders..................... B-1
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Guaranty has filed with the Securities and Exchange Commission a
registration statement on Form S-4 to register the Guaranty common stock to be
issued in the merger. As allowed by Commission rules, this proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits thereto. The registration statement,
including the attached exhibits and schedules, contains additional relevant
information about Guaranty and the Guaranty common stock. This proxy
statement/prospectus is a part of the registration statement and is a prospectus
of Guaranty in addition to being a proxy statement of First American for the
special meeting.
In addition to filing this registration statement with the Commission,
Guaranty files reports, proxy statements and other information with the
Commission under the Securities Exchange Act of 1934. You may read and copy this
information at the following locations of the Commission:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800- SEC-0330. The Commission also maintains an
Internet world wide web site that contains reports, proxy statements and other
information about issuers, like Guaranty, who file electronically with the
Commission. The address of that site is http://www.sec.gov.
Upon your written or oral request, Guaranty will provide you without
charge a copy of this proxy statement/prospectus and a copy of any or all of the
documents incorporated by reference herein, other than the exhibits to those
documents, unless the exhibits are specifically incorporated by reference into
the information that this proxy statement/prospectus incorporates. Your written
or oral requests for copies of this proxy statement/prospectus and documents
Guaranty has incorporated by reference should be directed to:
INVESTOR RELATIONS
GUARANTY BANCSHARES, INC.
100 WEST ARKANSAS
MOUNT PLEASANT, TEXAS 75455
(903) 572-9881
TO OBTAIN TIMELY DELIVERY, YOU MUST MAKE A WRITTEN OR ORAL REQUEST FOR A
COPY OF SUCH INFORMATION BY ___________________, 1999.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. NEITHER FIRST AMERICAN NOR GUARANTY HAS AUTHORIZED ANY
PERSON TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES, NOR SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED. THE
INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE ONLY AS OF THE DATE
OF THIS PROXY STATEMENT/PROSPECTUS, EVEN IF THE PROXY STATEMENT/PROSPECTUS IS
DELIVERED TO YOU AFTER THE PROXY STATEMENT/PROSPECTUS DATE.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers highlight selected information
regarding the merger described in this proxy statement/prospectus and may not
contain all information that is important to you as you consider the merits of
the merger. For a more complete description of the terms of the merger and the
related transactions, please read this entire proxy statement/prospectus
carefully.
Q: WHY HAS FIRST AMERICAN PROPOSED TO BE ACQUIRED BY GUARANTY?
A: In January of 1999, the First American Board of Directors received a
merger proposal from Guaranty. The Board reviewed the proposal and
concluded that the merger consideration represented the fair value of
First American stock and that the merger would be in the best interests of
the First American shareholders. The merger will provide First American
shareholders with an investment in a larger, more diversified financial
institution. Further, because Guaranty common stock is traded on the
Nasdaq National Market, it will be easier for First American shareholders
to sell all or a part of their shares.
For the reasons set forth above, the First American Board of Directors
believes that the merger is in the best interests of First American and
its shareholders and recommends that you vote for this merger.
Q: IF THE MERGER IS COMPLETED, WHAT WILL I RECEIVE FOR MY FIRST AMERICAN
STOCK?
A: At the completion of the merger, each share of First American stock
outstanding will be converted into the right to receive 3.417039 shares of
Guaranty common stock and $32.829609 in cash. First American shareholders
will receive 351,750 shares of Guaranty common stock, which represents
ownership of approximately 10.82% of the issued and outstanding Guaranty
common stock after the merger.
Q: WHEN CAN I SELL THE SHARES OF GUARANTY COMMON STOCK THAT I RECEIVE IN
CONNECTION WITH THE MERGER?
A: You may sell the shares of Guaranty common stock you receive in connection
with the merger at any time without restriction unless you are considered
an "affiliate" of First American or you become an affiliate of Guaranty. A
director, executive officer or shareholder who beneficially owns 10% or
more of the outstanding shares of a company is generally deemed to be an
affiliate of that company.
Q: WHAT ARE MY TAX CONSEQUENCES AS A RESULT OF THE MERGER?
A: First American and Guaranty expect that the receipt of shares of Guaranty
common stock by First American shareholders will be a tax-free transaction
for federal income tax purposes for First American shareholders. However,
First American shareholders will have to pay taxes to the extent that they
receive cash in exchange for their shares of First American stock. To
review the tax consequences to shareholders in greater detail, see pages
35-37. The tax consequences of the merger to you will depend on your own
situation. You should consult your tax advisor for a full understanding of
the tax consequences of the merger to you.
Q: WHAT REGULATORY APPROVALS ARE REQUIRED?
A: The merger of First American Bank with Guaranty Bank must be approved by
the Texas Department of Banking and the Federal Deposit Insurance
Corporation, and the Federal Reserve Bank of Dallas must waive a filing of
any application by Guaranty that may otherwise be required to be filed
with the Federal Reserve. Further information on the required regulatory
approvals can be found on page 38.
Q: WHAT RISKS SHOULD I CONSIDER?
A: Your receipt of Guaranty common stock in connection with the merger
involves certain risks. You should review the "RISK FACTORS" section on
page 20.
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<PAGE>
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: First American and Guaranty are working toward completing the merger as
quickly as possible. The merger cannot be completed until a number of
important conditions, including First American shareholder approval and
regulatory approvals, are satisfied. We expect the merger to become
effective in September of 1999.
Q: HOW DO I VOTE WITH RESPECT TO THE MERGER?
A: Included with this proxy statement/prospectus is a proxy card on which you
can indicate your vote with respect to the merger.
Q: WHAT VOTE IS REQUIRED FOR FIRST AMERICAN SHAREHOLDERS TO APPROVE THE
MERGER?
A: In order for the merger to be approved, the holders of 81% of the issued
and outstanding First American stock must vote in favor of the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at
the special meeting in one of three ways. First, you can send a written
notice stating that you would like to revoke your proxy to the Secretary
of First American at the address given below. Second, you can complete a
new proxy card and send it to the Secretary of First American at the
address given below. You should send any written notice or new proxy card
to the Secretary (Nina Cook) of First American at 919 Gilmer Street,
Sulphur Springs, Texas 75483, and the new proxy card will automatically
replace any earlier proxy card you returned. You may request a new proxy
card by calling the Secretary of First American at (903) 885-3193. Third,
you can attend and vote in person at the special meeting which will
automatically revoke and replace any earlier proxy card you returned.
Q: DO I NEED TO ATTEND THE SPECIAL MEETING IN PERSON?
A: No. It is not necessary for you to attend the special meeting to vote your
shares if you have completed and mailed a proxy card. You are, however,
welcome to attend the meeting.
Q: WHAT IF I AM NOT IN FAVOR OF THE MERGER OR RECEIPT OF THE PROPOSED SHARES
OF STOCK AND CASH INTO WHICH MY SHARES ARE TO BE CONVERTED IF THE MERGER
IS APPROVED?
A: You may exercise dissenting shareholders' appraisal rights by complying
with the applicable requirements of the Texas Business Corporation Act. If
you comply with all of the applicable provisions of the Texas Business
Corporation Act and the merger is consummated, you will receive cash for
the fair market value of your shares in lieu of the Guaranty common stock
and cash to be issued to First American shareholders. For a description of
these provisions, see pages 37-38 and Exhibit B of this proxy
statement/prospectus.
Q: WHAT SHOULD I DO NOW?
A: After reading this document carefully, you should complete and sign your
proxy card and mail it in the enclosed return envelope as soon as
possible, so that your shares may be represented at the special meeting.
The Board of Directors of First American recommends that the First
American shareholders vote "FOR" the merger. The special meeting will be
held on ______________.
Q: SHOULD I SEND MY STOCK CERTIFICATES NOW?
A: No. At least 20 days prior to the completion of the merger, unless a later
date is agreed upon between Guaranty and First American, you will receive
written instructions for exchanging your stock certificates. You will
receive your Guaranty common stock certificate and cash payment as soon as
practicable after Guaranty receives your First American stock
certificates.
-3-
<PAGE>
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the merger or the special meeting, please
call Mr. James W. Capps, President of First American, at (903) 885-3193.
-4-
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger and related transactions more fully,
you should carefully read this entire document and the documents referred to in
the proxy statement/prospectus. Guaranty and First American urge you to read
carefully the entire proxy statement/prospectus.
THE COMPANIES
GUARANTY. Guaranty is a Texas corporation and a bank holding company
registered under the Bank Holding Company Act of 1956, as amended. Guaranty
provides commercial banking services to consumers and small and medium- sized
businesses in Northeast Texas through Guaranty Bank, a Texas state banking
association. At March 31, 1999, Guaranty operated seven banking offices located
in six Northeast Texas communities. As of March 31, 1999, Guaranty had total
assets of $284.5 million, total loans of $197.0 million, total deposits of
$253.7 million and total shareholders' equity of $24.3 million. Guaranty's
address is 100 West Arkansas, Mount Pleasant, Texas 75455 and its telephone
number is (903) 572-9881.
GUARANTY ACQUISITION CORPORATION. Guaranty Acquisition is a Texas
corporation that will be formed as a wholly-owned subsidiary of Guaranty solely
to facilitate the acquisition of First American by Guaranty.
FIRST AMERICAN. First American is a Texas corporation and a bank holding
company registered under the Bank Holding Company Act of 1956, as amended. First
American provides commercial banking services through First American Bank &
Mortgage, N.A. and First American Mortgage Company to consumers and small and
medium-sized businesses from its banking offices in Sulphur Springs and
Commerce, Texas. As of March 31, 1999, First American had total assets of $62.9
million, total loans of $39.3 million, total deposits of $57.0 million and total
stockholders' equity of $4.4 million. First American's address is 919 Gilmer
Street, Sulphur Springs, Texas 75483 and its telephone number is (903) 885-3193.
THE MERGER
If the shareholders of First American approve the merger and certain other
conditions are met, Guaranty will acquire First American through the merger of
First American with and into Guaranty Acquisition. The merger agreement and
amendments thereto are attached as Exhibit A to this proxy statement/prospectus.
To understand the merger more fully, you should carefully read the merger
agreement as well as this proxy statement/prospectus.
Immediately following the merger of First American with and into Guaranty
Acquisition, First American Bank will merge with and into Guaranty Bank. The
current main office and branch office of First American Bank will be operated
as full service branches of Guaranty Bank.
THE SPECIAL MEETING AND VOTE REQUIRED
First American is holding a special shareholders' meeting at __________
a.m., local time, on ___________________, 1999, at its principal executive
office, 919 Gilmer Street, Sulphur Springs, Texas. The purpose of this meeting
is for First American shareholders to consider and vote on the merger. Only
shareholders of record at the close of business on the record date will be
entitled to vote at the special meeting. Each holder of First American stock
will be entitled to one vote for each share of First American stock owned of
record on the record date.
The record date for the special meeting is the close of business on
__________________________, 1999.
As required by the merger agreement, the holders of eighty-one percent
(81%) of the outstanding shares of First American stock as of the record date
must vote in favor of the merger in order for the First American shareholders to
approve the merger. The directors, executive officers and principal shareholders
of First American who hold a total of 76,210 shares or 82.89% of the outstanding
shares have signed a Consent to Merger and Irrevocable Proxy in which these
shareholders have granted a proxy to Gene Watson, a director of First American,
with instructions to vote their shares in favor of the merger. Therefore, it is
expected that the merger will be approved at the meeting.
-5-
<PAGE>
STOCK OPTIONS
Three executive officers of First American currently hold options to
acquire 11,000 shares of the First American stock. Pursuant to the stock option
plan covering these options, the options vest and become exercisable following a
change of control of First American, which includes shareholder approval of a
merger. The holders of the outstanding options have informed First American of
their intention to exercise the options following shareholder approval of the
merger, if such approval is received. The total amount of cash and Guaranty
common stock to be paid to First American shareholders was calculated based upon
the anticipated exercise of these options prior to closing. At the completion of
the merger, the shares of First American stock received upon exercise of the
options will convert, like all other shares of First American stock, into
Guaranty common stock and cash.
REASONS FOR THE MERGER; RECOMMENDATION OF THE FIRST AMERICAN BOARD OF DIRECTORS
REASONS FOR THE MERGER. The Board of Directors of First American perceived
over the last several years that a strategic alliance with a larger banking
organization might be in th best intersts of First American shareholders. The
Board of Directors considered several merger proposals over the last three
years.
In January of 1999, the Board of Directors of First American received a
merger proposal from Guaranty. The Board reviewed the proposal and concluded
that the merger consideration represented the fair value of First American Stock
and that the merger with Guaranty would be in the best interests of First
American shareholders for a number of reasons. The merger will permit First
American to expand services and provide First American shareholders with an
investment in a larger, more diversified financial institution. In addition,
Guaranty's common stock is publicly traded and has a history of paying
dividends.
The merger agreement is the result of arm's-length negotiations between
representatives of Guaranty and First American.
RECOMMENDATION OF THE FIRST AMERICAN BOARD OF DIRECTORS. Based on the
reasons set out above, the Board of Directors of First American believes that
the merger is in the best interest of First American and its shareholders and
recommends that you vote "FOR" the merger.
WHAT YOU WILL RECEIVE IN THE MERGER
In exchange for all of the issued and outstanding shares of First American
stock, assuming that no shareholders of First American exercise their
dissenters' rights, Guaranty will issue 351,750 shares of Guaranty common stock
and make cash payments of $3,379,480. Each share of First American stock
outstanding as of the closing will be converted into the right to receive
3.417039 shares of Guaranty common stock and $32.829609 in cash.
Instead of issuing you a fractional share of Guaranty common stock,
Guaranty will pay you an amount of cash for any fractional share that you would
have been entitled to receive. The amount of cash will be determined by
multiplying the $10.00 fair market value of a share of Guaranty common stock
established in the merger agreement by the share fraction you would otherwise
receive.
The shares of Guaranty common stock issued in the merger will be
registered under applicable securities laws and will be authorized for trading
on the National Market System of The Nasdaq Stock Market under the symbol
"GNTY".
CONDITIONS TO COMPLETION OF THE MERGER
The completion of the merger depends upon the satisfaction or waiver of
certain conditions, including the following:
o The approval of the merger by First American shareholders.
o Guaranty shall have received all required governmental approvals.
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<PAGE>
o First American shall have received any necessary consents and
governmental approvals.
o The listing of the Guaranty common stock to be issued pursuant to
the merger on the Nasdaq National Market.
o The absence of a material adverse change in the condition of First
American or Guaranty from April 23, 1999 until the closing of the
merger.
o First American shall have received the opinion of a nationally
recognized legal firm that the merger will constitute a tax-free
reorganization.
o Guaranty shall have received the opinion of First American's counsel
acceptable to Guaranty as to certain corporate and legal
enforceability matters.
o Guaranty shall have received evidence of resolutions approved by the
First American Board of Directors terminating the CORPORATEplan for
Retirement 100-Profit Sharing/401(k) Plan.
o Guaranty shall have received written resignations of all directors
of First American effective as of the completion of the merger.
o Guaranty shall have received a signed release of all claims against
First American from each director of First American.
o The material accuracy of all representations and warranties of First
American and Guaranty.
o First American and Guaranty shall have performed or complied with
all covenants and conditions required by the merger agreement to be
performed or complied with by them prior the completion of the
merger.
o The absence of any actual or threatened action to prohibit the
merger or that might affect Guaranty's right to own First American
stock or subject Guaranty to any liability for owning First American
stock.
o The absence of any pending or threatened action to enjoin the merger
or impose liability upon First American or its officers, directors,
employees, shareholders or agents for any action taken in connection
with the merger.
REGULATORY APPROVALS
The merger of First American Bank with Guaranty Bank must be approved by
the Texas Department of Banking and the Federal Deposit Insurance Corporation
and the Federal Reserve Bank of Dallas must waive a filing of any application by
Guaranty that may otherwise be required to be filed with the Board of Governors
of the Federal Reserve System. On June 29, 1999, Guaranty filed an application
with the Texas Department of Banking and the Federal Deposit Insurance
Corporation to obtain prior approval of the bank merger. On June 29, 1999,
Guaranty filed a waiver request with the Federal Reserve Bank of Dallas to
obtain a waiver of any application that might otherwise be required to be filed
with the Federal Reserve.
TERMINATION OF THE MERGER AGREEMENT
First American and Guaranty may mutually agree to terminate the merger
agreement and not complete the merger. The merger agreement also may be
terminated in certain other circumstances, including the following:
o By First American or Guaranty if the merger is not completed on or
before September 30, 1999.
o By First American if one or more of the conditions required for its
obligations under the merger agreement is not fulfilled as of the
time the merger is set to be completed.
-7-
<PAGE>
o By Guaranty if one or more of the conditions required for its
obligations under the merger agreement is not fulfilled as of the
time the merger is set to be completed.
RESALE OF GUARANTY COMMON STOCK RECEIVED IN THE MERGER
Guaranty has registered under the federal securities laws the shares of
its common stock to be issued in the merger. Therefore, you may sell such shares
without restriction unless you are considered an "affiliate" of First American
or you become an affiliate of Guaranty. A director, executive officer or
shareholder who beneficially owns 10% or more of the outstanding shares of a
company is generally deemed to be an affiliate of that company.
If you are considered an affiliate of First American or become an
affiliate of Guaranty, you may resell the shares of Guaranty common stock you
receive only pursuant to an effective registration statement under the
securities laws, or pursuant to Rule 145 of the commission's rules, or in
transactions otherwise exempt from registration under the securities laws.
Guaranty is not obligated and does not intend to register for resale the shares
issued to affiliates of First American.
APPRAISAL RIGHTS
Under Texas law, First American shareholders may dissent from the merger
and demand the "fair value" of their shares in cash. To properly exercise this
right and avoid a waiver of this right, you must not vote your shares in favor
of the merger and you must follow the exact procedures required by Texas law.
See page 37.
COMPARATIVE SHAREHOLDER RIGHTS
Once the merger occurs, First American shareholders will become
shareholders of Guaranty. Both Guaranty and First American are Texas
corporations and are governed by Texas corporate law. However, as a result of
the merger, your rights as a shareholder, which now are governed by Texas
corporate law and the provisions of the Articles of Incorporation and Bylaws of
First American, will after the merger be governed by Texas corporate law and the
provisions of the Articles of Incorporation and Bylaws of Guaranty. Because of
the differences between the Articles and Bylaws of First American and the
Articles and Bylaws of Guaranty, your rights as a shareholder will change as a
result of the merger. See page 39.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The merger has been structured as a "tax-free reorganization" for federal
income tax purposes. Accordingly, holders of First American stock generally will
not recognize any gain or loss for federal income tax purposes on the exchange
of their First American stock for Guaranty common stock in the merger, but will
recognize gain or loss to the extent that they receive cash in exchange for
their shares of First American stock. The companies themselves will not
recognize gain or loss as a result of the merger. It is a condition to the
obligations of First American to complete the merger that First American receive
a legal opinion from a nationally recognized legal firm that the merger will be
a tax-free reorganization for federal income tax purposes. Neither First
American nor Guaranty will request a ruling from the Internal Revenue Service
concerning the federal income tax consequences of this transaction. See page 35.
The federal income tax consequences described above may not apply to some
holders of First American stock. Your tax consequences will depend upon your
personal situation. You should consult your tax advisor for a full understanding
of the tax consequences of the merger to you.
-8-
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
We are providing the following financial information to aid you in your
financial analysis of the financial aspects of the merger. This information is
only a summary and you should read it in conjunction with the consolidated
financial statements and notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Guaranty" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
First American" included in this proxy statement/prospectus.
Guaranty and First American have different fiscal years. Guaranty has a
fiscal year ending December 31 and in 1997 First American elected to use a
fiscal year ending June 30. Accordingly, the selected financial data for the
periods presented corresponds to each company's applicable fiscal year end. For
Guaranty, the financial data presented covers Guaranty's last five fiscal years
and the three months ended March 31, 1999 and 1998. For First American, the
financial data presented covers First American's most recent fiscal year (ending
June 30, 1998), a six month period ended June 30, 1997, the three fiscal years
ended December 31, 1996, 1995 and 1994 and the nine months ended March 31, 1999
and 1998.
SELECTED FINANCIAL DATA OF GUARANTY
The following selected financial data for each of the years ended December
31, 1994 through 1998 are derived from Guaranty's audited consolidated financial
statements. The following selected financial data for the three months ended
March 31, 1999 and March 31, 1998 are derived from the unaudited consolidated
financial statements of Guaranty and include, in the opinion of Guaranty's
management, all adjustments (consisting only of normal accruals) necessary to
present fairly the data of such periods.
<TABLE>
<CAPTION>
As of and for the
Three Months Ended
March 31, As of and for the Years Ended December 31,
----------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------- ------- ------- ------- -------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ............................. $4,763 $4,481 $18,368 $17,009 $14,851 $14,248 $11,658
Interest expense ............................ 2,273 2,232 8,951 8,192 6,919 6,372 4,470
------ ------ ------- ------- ------- ------- -------
Net interest income ...................... 2,490 2,249 9,417 8,817 7,932 7,876 7,188
Provision for loan losses ................... 105 370 540 355 206 149 298
Net interest income after
provision for loan losses .............. 2,385 1,879 8,877 8,462 7,726 7,727 6,890
Noninterest income .......................... 662 1,162 2,826 1,657 2,390 1,440 1,582
Noninterest expense ......................... 2,227 2,026 8,488 7,446 7,073 6,795 6,700
------ ------ ------- ------- ------- ------- -------
Earnings before taxes .................... 820 1,015 3,215 2,673 3,043 2,372 1,772
Provision for income tax expense ............ 165 295 541 273 165 261 245
------ ------ ------- ------- ------- ------- -------
Net earnings ............................. 655 720 2,674 2,400 2,878 2,111 1,527
Preferred stock dividend .................... -- -- 37 74 74 74 74
------ ------ ------- ------- ------- ------- -------
Net earnings available to
common shareholders ...................... $ 655 $ 720 $ 2,637 $ 2,326 $ 2,804 $ 2,037 $ 1,453
====== ====== ======= ======= ======= ======= =======
COMMON SHARE DATA (1):
Net earnings (basic and diluted)(2).......... $ 0.23 $ 0.28 $ 0.95 $ 0.91 $ 1.08 $ 0.75 $ 0.53
Book value .................................. 8.38 7.12 8.21 6.84 6.06 5.32 4.69
Tangible book value ......................... 8.31 7.03 8.14 6.74 5.95 5.21 4.57
Cash dividends .............................. -- -- 0.24 0.22 0.21 0.19 0.16
Dividend payout ratio ....................... --% --% 26.38% 24.24% 18.81% 24.79% 29.26%
Weighted average common shares
outstanding (in thousands) ............... 2,898 2,548 2,782 2,547 2,592 2,724 2,721
Period end shares outstanding
(in thousands) ........................... 2,898 2,548 2,898 2,548 2,545 2,725 2,723
</TABLE>
(TABLE CONTINUES ON NEXT PAGE.)
-9-
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Three Months Ended
March 31, As of and for the Years Ended December 31,
--------------------- -------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets .................... $284,535 $247,488 $272,906 $244,157 $213,932 $192,935 $187,547
Securities ...................... 49,344 52,580 51,367 58,139 30,382 31,200 30,321
Loans ........................... 197,048 163,061 185,886 157,395 139,289 126,287 124,307
Allowance for loan losses ....... 1,560 1,494 1,512 1,129 1,055 1,005 1,012
Total deposits .................. 253,710 225,158 242,325 222,961 194,855 174,717 170,884
Total common shareholders' equity 24,285 18,153 23,796 17,426 15,423 14,499 12,782
AVERAGE BALANCE SHEET DATA:
Total assets .................... $274,696 $246,178 $253,633 $228,782 $203,056 $190,782 $180,648
Securities ...................... 51,227 55,046 47,972 50,089 29,520 30,770 26,030
Loans ........................... 190,714 161,375 169,754 146,061 132,400 124,209 121,078
Allowance for loan losses ....... 1,525 1,174 1,397 1,070 1,029 968 1,067
Total deposits .................. 243,903 224,316 227,919 208,401 183,896 172,064 164,250
Total common shareholders' equity 24,242 17,940 21,363 16,508 15,164 13,861 12,559
PERFORMANCE RATIOS:
Return on average assets ........ 0.95% 1.17% 1.05% 1.05% 1.42% 1.11% 0.85%
Return on average common equity . 10.81 16.05 12.34 14.09 18.49 14.70 11.57
Net interest margin ............. 4.03 4.05 4.07 4.24 4.32 4.59 4.41
Efficiency ratio (3) ............ 70.65 59.40 69.33 71.09 68.52 72.94 76.40
ASSET QUALITY RATIOS (4):
Nonperforming assets to total
loans and other real estate.... 0.69% 0.44% 0.67% 1.22% 1.49% 1.58% 2.67%
Net loan charge-offs to average
loans ......................... 0.03 0.01 0.09 0.19 0.12 0.13 0.30
Allowance for loan losses to
total loans.................... 0.79 0.92 0.81 0.72 0.76 0.80 0.81
Allowance for loan losses to
nonperforming loans (5) ....... 128.61 162.75 130.80 92.85 93.12 100.60 45.28
CAPITAL RATIOS (4):
Leverage ratio .................. 8.76% 7.61% 9.30% 7.87% 7.87% 7.88% 7.35%
Average shareholders' equity to
average total assets .......... 8.83 7.62 8.59 7.58 7.88 7.70 7.41
Tier 1 risk-based capital ratio . 12.02 12.01 12.29 11.16 11.07 12.11 11.13
Total risk-based capital ratio .. 12.80 12.35 13.08 11.86 11.80 12.92 11.98
</TABLE>
- ------------------------
(1) Adjusted for a seven for one stock split effective March 24, 1998.
(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.
-10-
<PAGE>
SELECTED FINANCIAL DATA OF FIRST AMERICAN
The following selected financial data for each of the years ended December
31, 1994, 1995 and 1996, the six months ended June 30, 1997 and the year ended
June 30, 1998 are derived from First American's audited consolidated financial
statements. The following selected financial data for the nine months ended
March 31, 1999 and March 31, 1998 are derived from the unaudited consolidated
financial statements of First American and include, in the opinion of First
American's management, all adjustments (consisting only of normal accruals)
necessary to present fairly the data of such periods.
<TABLE>
<CAPTION>
As of and for the As of and for As of and for
Nine Months Ended the Year the Six Months As of and for the Years
March 31, Ended June 30 Ended June 30, Ended December 31,
-------------------- -------- -------- ---------------------------------
1999 1998 1998 1997(1) 1996 1995 1994(2)
------- -------- -------- -------- -------- ------- -------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ......................... $ 3,579 $ 3,775 $ 4,853 $ 2,506 $ 4,904 $ 4,861 $ 3,727
Interest expense ........................ 1,779 1,817 2,433 1,244 2,614 2,571 1,497
------- -------- -------- -------- -------- ------- -------
Net interest income ................ 1,800 1,958 2,420 1,262 2,290 2,290 2,230
Provision for loan losses ............... 187 180 181 622 182 87 62
------- -------- -------- -------- -------- ------- -------
Net interest income after
provision for loan losses......... 1,613 1,778 2,239 640 2,108 2,203 2,168
Noninterest income ...................... 446 597 906 545 1,083 1,346 809
Noninterest expense ..................... 1,944 1,968 2,601 1,719 3,087 2,699 2,418
------- -------- -------- -------- -------- ------- -------
Earnings (loss) before taxes ....... 115 407 544 (534) 104 850 559
(Benefit) provision for income
tax expense ........................... -- (100) (100) -- (174) 208 158
------- -------- -------- -------- -------- ------- -------
Net earnings (loss) ................ $ 115 $ 507 $ 644 $ (534) $ 278 $ 642 $ 401
======= ======== ======== ======== ======== ======= =======
COMMON SHARE DATA:
Net earnings ............................ $ 1.25 $ 5.51 $ 7.01 $ (5.69) $ 2.90 $ 6.69 $ 4.18
Book value .............................. 47.63 45.37 47.13 37.45 44.16 44.08 33.52
Cash dividends per share ................ -- -- 0.25 0.25 -- -- --
Dividend payout ratio ................... -- % -- % 3.57% N/A -- % -- % -- %
Weighted average common
shares outstanding (in thousands) ..... 91,940 91,940 91,931 93,870 96,000 96,000 96,000
Period end shares outstanding
(in thousands) ........................ 91,940 91,940 91,940 91,740 96,000 96,000 96,000
BALANCE SHEET DATA:
Total assets ............................ $62,855 $ 63,985 $ 65,937 $ 63,699 $ 62,635 $64,925 $57,695
Securities .............................. 15,227 18,363 18,816 21,834 18,362 25,594 23,710
Loans (net) ............................. 39,294 35,094 36,733 36,188 36,973 34,551 29,671
Allowance for loan losses ............... 497 511 457 470 470 433 404
Total deposits .......................... 57,009 56,236 58,808 55,151 54,740 50,143 46,516
Total common stockholders' equity ....... 4,379 4,171 4,333 3,436 4,239 4,232 3,218
AVERAGE BALANCE SHEET DATA:
Total assets ............................ $64,396 $ 63,993 $ 64,818 $ 63,167 $ 63,780 $61,310 $54,475
Securities .............................. 17,021 20,098 20,325 20,098 21,978 24,652 22,950
Loans (net) ............................. 38,013 35,641 36,460 38,080 35,762 32,111 26,913
Allowance for loan losses ............... 504 467 463 470 451 418 404
Total deposits .......................... 57,908 55,962 56,979 54,945 52,441 48,329 46,778
Total common stockholders' equity ....... 4,356 3,861 3,884 3,837 4,235 3,725 3,512
</TABLE>
(TABLE CONTINUES ON NEXT PAGE.)
-11-
<PAGE>
<TABLE>
<CAPTION>
As of and for the As of and for As of and for
Nine Months Ended the Year the Six Months As of and for the Years
March 31, Ended June 30 Ended June 30, Ended December 31,
-------------------- -------- -------- ---------------------------------
1999 1998 1998 1997(1) 1996 1995 1994(2)
------- -------- -------- -------- -------- ------- -------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average
assets ............................ 0.24% 1.06% 0.99% (0.84)% 0.44% 1.05% 0.74%
Return on average
common equity ..................... 3.51 17.51 16.58 (13.92) 6.56 17.23 11.42
Average stockholders'
equity to average
total assets .................. 6.76 6.03 5.99 6.07 6.64 6.07 6.45
</TABLE>
- ------------------------
(1) Represents the six month period from December 31, 1996 to June 30, 1997
due to a change in the fiscal year end of First American from December 31
to June 30.
(2) Represents financial data for First American Bank, N.A.
-12-
<PAGE>
SUMMARY OF HISTORICAL AND PRO FORMA PER SHARE SELECTED FINANCIAL DATA
Set forth below are the net earnings, diluted earnings, cash dividends and
book value per common share data for Guaranty and First American on a historical
basis, on a pro forma combined basis and on a pro forma combined basis per First
American equivalent share. Also included are weighted average shares outstanding
and shares outstanding at end of period for Guaranty, First American and on a
pro forma basis. The exchange ratio for the merger is 3.417039 shares of
Guaranty common stock and $32.829609 in cash for each share of First American
stock.
The pro forma data was derived by combining the historical consolidated
financial information of Guaranty and First American using a purchase method of
accounting for business combinations.
The First American pro forma equivalent share information shows the effect
of the merger from the perspective of an owner of First American stock. The
information was computed by multiplying the pro forma information by an exchange
ratio of 3.417039.
You should read the information below together with historical financial
statements and related notes and other information included in this proxy
statement/prospectus and incorporated by reference. The unaudited pro forma
combined data below is for illustrative purposes only. The companies may have
performed differently had they always been combined. You should not rely on this
information as being indicative of the historical results that would have been
achieved had the companies always been combined or the future results that the
combined company will experience after the merger.
<TABLE>
<CAPTION>
At or for the Three At or for the
Months Ended Twelve Months Ended
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Basic earnings per share
Guaranty ................................................. $ 0.23 $ 0.95
First American ........................................... 0.30 4.08
Pro Forma ................................................ 0.21 0.94
Equivalent pro forma per share of First American stock ... 0.08 1.07
Diluted earnings per share
Guaranty ................................................. $ 0.23 $ 0.95
First American ........................................... 0.27 3.64
Pro Forma ................................................ 0.21 0.94
Equivalent pro forma per share of First American stock ... 0.08 1.07
Cash dividends per share
Guaranty ................................................. $ -- $ 0.24
First American ........................................... -- 0.25
Pro Forma ................................................ -- 0.22
Equivalent pro forma per share of First American stock ... -- 0.07
Book value per share
Guaranty ................................................. $ 8.38 $ 8.21
First American ........................................... 47.63 47.07
Pro Forma ................................................ 8.82 8.65
Equivalent pro forma per share of First American stock ... 12.41 12.30
Weighted average common and dilutive potential
common shares outstanding
Guaranty ................................................. 2,898,280 2,781,613
First American ........................................... 102,940 102,940
Pro Forma ................................................ 3,250,030 3,133,363
Number of shares of common outstanding at end of period
Guaranty ................................................. 2,898,280 2,898,280
First American ........................................... 91,940 91,940
Pro Forma ................................................ 3,250,030 3,250,030
</TABLE>
-13-
<PAGE>
COMPARATIVE STOCK PRICES
The following table summarizes the comparative stock prices of First
American stock and Guaranty common stock on April 23, 1999, the business day
prior to the announcement of the merger. Because the market price of Guaranty
common stock is subject to fluctuation, the market value of the shares of
Guaranty common stock that holders of First American stock would receive upon
consummation of the merger may increase or decrease prior to the receipt of such
shares following the effectiveness of the merger. You should obtain current
market quotations for Guaranty common stock.
Historical Equivalent
-------------------------- Pro Forma
Guaranty First American Per Share of
First American Stock
--------------------
Market value per share $ 10.125(1) $ 40.00(2) $ 67.00(3)
- -----------------
(1) Represents the average of the high and low prices on the Nasdaq.
(2) Although there are occasional transactions in the First American stock,
there is no established trading market in the First American stock. The
market value listed above of $40.00 per share represents the last trade of
First American stock which occurred on October 9, 1998.
(3) Equivalent pro forma market value per share of First American stock
represents the sum of (i) the fair market value of Guaranty common stock
pursuant to the merger agreement of $10.00 per share multiplied by
3.417039 and (ii) $32.829609, the exchange rate pursuant to which each
share of First American stock will be converted into shares of Guaranty
common stock and cash as set forth in the merger agreement.
-14-
<PAGE>
PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The following Pro Forma Consolidated Balance Sheet as of March 31, 1999
and Pro Forma Consolidated Statements of Earnings as of the three months ended
March 31, 1999 and the year ended December 31, 1998 combine the historical
consolidated financial statements of Guaranty and First American and are
intended to give you a better picture of what the companies might have looked
like had the merger between First American and Guaranty been effective on
January 1, 1998. The companies may have performed differently if they had been
combined.
The unaudited pro forma consolidated financial statements are presented
for illustrative purposes only. You should not rely on the pro forma information
as being indicative of the consolidated financial position or results of future
operations of the combined entity or of the actual results that would have been
achieved had the merger been consummated as of January 1, 1998.
The fiscal year ends of Guaranty and First American are different. Upon
consummation of the merger, the fiscal year end of Guaranty will be the fiscal
year end of the combined entity. For purposes of the unaudited pro forma
consolidated statements of earnings for the three months ended March 31, 1999
and for the year ended December 31, 1998, First American's statements of income
for the three months ended March 31, 1999 and for the twelve months ended
December 31, 1998 have been combined with Guaranty's statements of earnings for
the three months ended March 31, 1999 and for the year ended December 31, 1998.
First American's statements of income for the three months ended March 31, 1999
and for the twelve months ended December 31, 1998 were prepared by management
and have not been audited but, in the opinion of management of First American,
contain all adjustments (consisting of normal recurring adjustments) necessary
for a fair statement of the results of the interim periods. Guaranty's statement
of earnings for the three months ended March 31, 1999 was prepared by management
and has not been audited, but, in th opinion of management of Guaranty, contains
all adjustments (consisting of normal recurring adjustments) necessary for a
fair statement of the results of the interim period.
-15-
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1999
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
First Pro Forma Pro Forma
Guaranty American Adjustments Consolidated
-------- -------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents
Cash and due from banks ................................... $ 8,062 $ 3,343 $(3,379)(1) $ 8,026
Interest bearing deposits in other banks .................. 2,032 288 -- 2,320
-------- -------- -------- --------
Total cash and cash equivalents ..................... 10,094 3,631 (3,379) 10,346
Federal funds sold ............................................ 13,705 2,155 -- 15,860
Securities
Available-for-sale ........................................ 42,172 12,786 -- 54,958
Held-to-maturity .......................................... 7,172 2,441 -- 9,613
-------- -------- -------- --------
Total securities .................................... 49,344 15,227 -- 64,571
Loans, net .................................................... 195,488 39,439 -- 234,927
Premises and equipment, net ................................... 7,460 1,028 -- 8,488
Other real estate ............................................. 144 12 -- 156
Intangible assets ............................................. 212 362 2,533 (2) 3,107
Other assets .................................................. 8,088 1,128 -- 9,216
-------- -------- -------- --------
Total assets ........................................ $284,535 $ 62,982 $ (846) $346,671
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing .................................... $ 43,071 $ 9,053 $-- $ 52,124
Interest-bearing deposits .............................. 210,639 48,135 -- 258,774
-------- -------- -------- --------
Total deposits ...................................... 253,710 57,188 -- 310,898
Borrowed funds ............................................ 3,911 1,000 -- 4,911
Accrued interest and other liabilities .................... 2,629 430 -- 3,059
-------- -------- -------- --------
Total liabilities ................................... 260,250 58,618 -- 318,868
Shareholders' equity
Preferred stock ........................................ -- -- -- --
Common stock ........................................... 2,898 240 112 (3) 3,250
Additional capital ..................................... 9,494 1,427 1,788 (4) 12,709
Retained earnings ...................................... 11,837 2,746 (2,746)(4) 11,837
Accumulated other comprehensive
income--Net unrealized appreciation of
available-for-sale securities, net of
tax of $4 ........................................... 56 (49) -- 7
-------- -------- -------- --------
Total shareholders' equity .......................... 24,285 4,364 (846) 27,803
-------- -------- -------- --------
Total liabilities and shareholders'
equity .......................................... $284,535 $ 62,982 $ (846) $346,671
======== ======== ======== ========
</TABLE>
- ---------------
(1) Represents the cash paid out in the transaction.
(2) Represents the estimated goodwill in the transaction.
(3) To adjust common stock for Guaranty issue of 351,750 shares of Guaranty
common stock at $1.00 par value per share.
(4) Represents the effects of purchase accounting on equity.
-16-
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
For the three months ended March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Guaranty First American Consolidated
-------- -------------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans, including fees ........................................... $3,881 $ 871 $4,752
Securities
Taxable ...................................................... 744 243 987
Nontaxable ................................................... 28 -- 28
Federal funds sold and interest-bearing deposits ................ 110 38 148
------ ------ ------
Total interest income ..................................... 4,763 1,152 5,915
------ ------ ------
Interest expense
Deposits ........................................................ 2,222 555 2,777
Other ........................................................... 51 13 64
------ ------ ------
Total interest expense .................................... 2,273 568 2,841
------ ------ ------
Net interest income ....................................... 2,490 584 3,074
Provision for loan losses ........................................... 105 86 191
------ ------ ------
Net interest income after provision for loan losses ....... 2,385 498 2,883
Noninterest income
Service charges ................................................. 405 104 509
Net realized gains on sales of available-for-sale securities .... 5 2 7
Other income .................................................... 252 129 381
------ ------ ------
Total noninterest income .................................. 662 235 897
------ ------ ------
Noninterest expense
Employee compensation and benefits .............................. 1,268 347 1,615
Occupancy expenses .............................................. 309 77 386
Other operating expenses ........................................ 650 281 931
------ ------ ------
Total noninterest expenses ................................ 2,227 705 2,932
------ ------ ------
Earnings before income taxes .............................. 820 28 848
Provision for income taxes .......................................... 165 -- 165
------ ------ ------
NET EARNINGS .............................................. $ 655 $ 28 $ 683
====== ====== ======
Earnings per share:
Basic ........................................................... $ 0.23 $ 0.30 $ 0.21
====== ====== ======
Diluted ......................................................... $ 0.23 $ 0.27 $ 0.21
====== ====== ======
</TABLE>
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<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
For the year ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Guaranty First American Consolidated
-------- -------------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans, including fees .......................................... $14,544 $3,476 $18,020
Securities
Taxable ..................................................... 2,991 1,174 4,165
Nontaxable .................................................. 64 -- 64
Federal funds sold and interest-bearing deposits ............... 769 205 974
------- ------ -------
Total interest income .................................... 18,368 4,855 23,223
------- ------ -------
Interest expense
Deposits ....................................................... 8,926 2,283 11,209
Other .......................................................... 25 142 167
------- ------ -------
Total interest expense ................................... 8,951 2,425 11,376
------- ------ -------
Net interest income ...................................... 9,417 2,430 11,847
Provision for loan losses .......................................... 540 112 652
------- ------ -------
Net interest income after provision for loan losses ...... 8,877 2,318 11,195
Noninterest income
Service charges ................................................ 1,336 400 1,736
Net realized gains on sales of available-for-sale securities ... 81 22 103
Other income ................................................... 1,409 461 1,870
------- ------ -------
Total noninterest income ................................. 2,826 883 3,709
------- ------ -------
Noninterest expense
Employee compensation and benefits ............................. 4,458 1,392 5,850
Occupancy expenses ............................................. 1,206 337 1,543
Other operating expenses ....................................... 2,824 1,097 3,921
------- ------ -------
Total noninterest expenses ............................... 8,488 2,826 11,314
------- ------ -------
Earnings before income taxes ............................. 3,215 375 3,590
Provision for income taxes ......................................... 541 -- 541
------- ------ -------
NET EARNINGS ............................................. $ 2,674 $ 375 $ 3,049
======= ====== =======
Earnings per share:
Basic .......................................................... $ 0.95 $ 4.08 $ 0.94
======= ====== =======
Diluted ........................................................ $ 0.95 $ 3.64 $ 0.94
======= ====== =======
</TABLE>
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<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of Guaranty
as of March 31, 1999, and as adjusted to give effect to Guaranty's acquisition
of First American, including the issuance by Guaranty of 351,750 shares of
Guaranty common stock in connection with the merger.
MARCH 31, 1999
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(DOLLARS IN THOUSANDS)
Shareholders' Equity:
Preferred Stock, $5.00 par
value; 15,000,000
shares authorized; no
shares issued
and outstanding ............................ $ -- $ --
Common Stock, $1.00 par value;
50,000,000 shares authorized;
2,898,280 shares issued
outstanding; 3,250,030 shares
issued and outstanding as .................. 2,898 3,250
adjusted
Additional capital ........................... 9,494 12,709
Retained earnings ............................ 11,837 11,837
Net unrealized appreciation of
available-for-sale securities .............. 56 7
------- -------
Total shareholders' equity ............... $24,285 $27,803
======= =======
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<PAGE>
RISK FACTORS
An investment in the Guaranty common stock in connection with the merger
involves certain risks. In considering the proposal to approve to merger, you
should carefully consider the following risk factors, in addition to the other
information contained in this proxy statement/prospectus.
GUARANTY MAY BE UNABLE TO MANAGE THE NEW ASSETS IT ACQUIRES.
As a result of the merger, Guaranty's total assets will increase 22.1% or
$63.0 million. Guaranty's ability to successfully integrate First American into
Guaranty's operations depends on its ability to
o monitor operations,
o control costs,
o maintain positive customer relations,
o maintain regulatory compliance, and
o attract, assimilate and retain qualified personnel.
If Guaranty fails to successfully integrate First American's operations
with its operations, Guaranty may experience interruptions in its business which
may have a material adverse impact on its business, financial condition or
results of operations. The significant integration issues which must be
addressed include
o consolidation of data processing operations,
o combination of employee benefit plans,
o creation of joint account and lending products, and
o development of unified marketing plans.
Successful integration of these operations could be more expensive than
anticipated. The failure to successfully integrate First American's operations
may also effect Guaranty's ability to operate Guaranty Bank consistent with safe
and sound banking practices.
Some of the risks involved with acquisitions in general, including the
proposed acquisition of First American, include
o changes in results of operations or cash flows,
o unforseen liabilities related to the acquired company or arising
from the acquisition,
o poor asset quality of the acquired company,
o adverse personnel relations,
o loss of customers due to the company's identity change, and
o deterioration in the local economic conditions.
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<PAGE>
YOU WILL LOSE YOUR ABILITY TO CONTROL ASPECTS OF FIRST AMERICAN.
As a First American shareholder, you control First American through
electing the board of directors and voting on certain matters affecting First
American and the other First American shareholders. As a result of the merger,
First American will be a part of Guaranty and as new Guaranty shareholders, you
and the other First American shareholders will not control Guaranty's management
or policies because the First American shareholders combined will not hold a
majority of the Guaranty common stock.
GUARANTY'S TAX LIABILITY BEGINNING IN THE YEAR 1999 WILL BE GREATER THAN IN
PREVIOUS YEARS AND GUARANTY COULD RECEIVE AN UNFAVORABLE DETERMINATION FROM THE
INTERNAL REVENUE SERVICE WHICH WOULD RESULT IN ITS PREVIOUS TAX LIABILITIES
BEING INCREASED.
Guaranty Leasing Corporation, a subsidiary of Guaranty, has invested,
through the acquisition of limited partnership interests, in certain
partnerships engaged in the equipment leasing business. The investments were
structured by TransCapital Corporation through various subsidiaries and
controlled partnerships of TransCapital. The transactions created federal income
tax losses which were deductible by Guaranty. As a result of these deductions,
Guaranty's effective tax rates in 1998, 1997 and 1996 were 16.83%, 10.21% and
5.42%, respectively. The tax benefits related to these leasing transactions
begin to decrease in 1999 and will not be available after 2001. This will result
in an increase in Guaranty's tax liability and Guaranty may not be able to
achieve the net income levels generated during the years in which these benefits
were available.
The Internal Revenue Service has taken the position that certain losses
taken by the partnerships during 1994, 1995 and 1996 of $302,000, $410,000 and
$447,000, respectively, would be disallowed. The partnerships plan to appeal the
determination with the Internal Revenue Service's Appellate Division. If the
appeal is unsuccessful, the partnerships plan to litigate the matter in Tax
Court. Guaranty will be bound by any final determination of the partnerships'
tax liability. If the Internal Revenue Service is ultimately successful in
redetermining the partnerships' tax liability, Guaranty's tax deductions taken
in 1994, 1995 and 1996 will be disallowed and its tax liability for these years
will be adjusted, which may adversely affect the results of operations of
Guaranty.
Similar to the investments of Guaranty mentioned above, First American,
through a subsidiary, has invested in a partnership engaged in the equipment
leasing business. This investment was also structured by TransCapital
Corporation and the transaction created federal income tax losses which were
deductible by First American. The amount of the losses deducted for the tax
years ended June 30, 1998, December 31, 1997 and December 31, 1996 were
approximately $349,000, $632,000 and $578,000, respectively. As a result of
these deductions, First American's effective tax rate in 1998, 1997 and 1996 was
0%.
As of the date of this proxy statement/prospectus, First American has not
been notified of and is not aware of any investigation into the lease
transactions and related tax losses by the Internal Revenue Service. However,
the Internal Revenue Service is currently investigating other partnerships
structured by TransCapital Corporation and neither Guaranty nor First American
can provide assurance that the Internal Revenue Service will not pursue an
investigation into the investment in the partnership and related tax deductions
taken by First American. If such an investigation occurs and the Internal
Revenue Service is successful in redetermining the partnership's tax liability,
First American's tax deductions taken in 1996, 1997 and 1998 will be disallowed
and its tax liability for these years will be adjusted. Such an adjustment may
affect the results of operations of First American, which as a result of the
merger, may affect the results of operations of Guaranty.
THERE IS A LIMITED MARKET FOR THE GUARANTY COMMON STOCK AND THE STOCK MARKET CAN
BE VOLATILE.
Although the Guaranty common stock is listed on the Nasdaq National
Market, there is currently only a limited trading market for the Guaranty common
stock. Guaranty cannot assure you that an active trading market will develop in
the future or that you will be able to sell the Guaranty common stock you
receive in the merger without a considerable delay or significant impact on the
price of the Guaranty common stock.
The current market price of the Guaranty common stock may significantly
fluctuate in response to various factors, including, but not limited to,
variations in annual or quarterly financial results, expansion of services by
Guaranty or its competitors, acquisitions by Guaranty or its
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<PAGE>
competitors, conditions in the economy in general or the banking industry in
particular, changes by financial research analysts in their estimates of the
earnings of Guaranty or its competitors or unfavorable publicity regarding
Guaranty or the banking industry. In addition, the stock markets have, on
occasion, experienced price and volume fluctuations which have affected the
market prices for the securities of many companies whose shares are traded,
although such fluctuations may be unrelated to the operating performance of
those companies. The limited trading market for Guaranty common stock may cause
these fluctuations to be more exaggerated than would occur in an active trading
market.
CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT GUARANTY'S BUSINESS.
Guaranty's earnings are significantly dependent on its net interest
income. Net interest income is the difference between the interest income
Guaranty earns on loans, investments and other interest-earning assets and the
interest expense Guaranty pays on deposits, other borrowings and
interest-bearing liabilities. Therefore, any change in general market interest
rates, such as a change in the monetary policy of the Board of Governors of the
Federal Reserve System or otherwise, can have a significant effect on net
interest income. Guaranty's assets and liabilities may react differently to
changes in overall market rates or conditions because there may be mismatches
between the repricing or maturity characteristics of the assets and liabilities.
As a result, a rapid increase or decrease in market interest rates could have an
adverse impact on Guaranty's net interest margin and results of operations.
GUARANTY'S OFFICERS AND DIRECTORS HAVE SIGNIFICANT INFLUENCE OVER GUARANTY AND
COULD CONTROL MATTERS SUBMITTED TO ITS SHAREHOLDERS.
After completion of the merger, Guaranty's executive officers, directors,
principal shareholders and certain entities affiliated with them will
beneficially own approximately 38.14% of the outstanding shares of Guaranty
common stock. As a result, these shareholders, if they act together, could
significantly influence the outcome of matters submitted to the shareholders for
a vote, including the election of directors, the determination of day-to-day
corporate and management policies, the approval of mergers and other business.
LOSS OF GUARANTY'S PRESIDENT OR OTHER EXECUTIVE OFFICERS COULD ADVERSELY AFFECT
ITS BUSINESS.
Guaranty's success is dependent upon the continued service and skills of
its executive officers and senior management, none of whom is bound by an
employment agreement. If Guaranty loses the services of these key personnel, it
could have a negative impact on Guaranty's business because of their skills,
years of industry experience and the difficulty of promptly finding qualified
replacement personnel. The services of Arthur B. Scharlach, Jr., Guaranty's
President and the President and Chief Executive Officer of Guaranty Bank, would
be particularly difficult to replace. Guaranty does maintain a "key-man" life
insurance policy covering Mr. Scharlach.
PROVISIONS OF GUARANTY'S ARTICLES OF INCORPORATION AND BYLAWS AND TEXAS LAW
COULD DETER A TAKEOVER ATTEMPT.
Provisions of Guaranty's Articles of Incorporation and Bylaws as well as
Texas law could make it more difficult for a third party to gain control or
acquire Guaranty, even if it would be beneficial to Guaranty's shareholders.
Guaranty is subject to the provisions of Texas law which restrict certain
business combinations between a Texas corporation and affiliated shareholders,
which may have the effect of inhibiting a non-negotiated merger or other
business combinations.
GUARANTY AND GUARANTY BANK OPERATE IN A HIGHLY REGULATED ENVIRONMENT.
Guaranty and Guaranty Bank operate in a highly regulated environment and
are subject to supervision and examination by various federal and state
regulatory agencies. As a bank holding company, Guaranty is subject to
regulation and supervision by the Board of Governors of Federal Reserve System.
Guaranty Bank, as a Texas banking association, is subject to regulation and
supervision by the Texas Department of Banking and, as a result of the insurance
it has on its deposits, by the Federal Deposit Insurance Corporation.
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<PAGE>
Federal and Texas laws and regulations govern numerous matters, including:
o adequate capital and financial condition,
o permissible types, amounts and terms of extensions of credit and
investments,
o permissible non-banking activities, and
o restrictions on dividend payments.
The federal and state regulators have extensive discretion and power to
prevent or remedy unsafe or unsound practices or violations of law by banks and
bank holding companies. Guaranty and Guaranty Bank undergo periodic examinations
by one or more regulatory agencies. Following such examinations, Guaranty may be
required, among other things, to change its asset valuations or the amounts of
required loss allowances or to restrict its operations. Such actions would
result from the regulators' judgments based on information available to them at
the time of their examination. In addition, Guaranty is required to serve as a
source of financial strength to Guaranty Bank, which could result in a decrease
of available funds for dividends to Guaranty shareholders. Guaranty Bank's
operations are also subject to a wide variety of state and federal consumer
protection and similar statutes and regulations. Such federal and state
regulatory restrictions limit the manner in which Guaranty and Guaranty Bank may
conduct business and obtain financing. Those laws and regulations can and do
change significantly from time to time, and any such change could adversely
affect Guaranty's business.
GUARANTY OPERATES IN A HIGHLY COMPETITIVE MARKET.
There is significant competition in Texas and elsewhere in the United
States for banking customers and Guaranty's profit depends primarily upon its
ability to compete in its market areas. Guaranty experiences competition from
commercial banks, savings banks, savings and loans associations, credit unions,
finance companies, mutual funds, investment banking firms and certain other
nonfinancial entities, including retail stores which have their own credit
programs and governmental organizations which may offer more favorable financing
than it can. Many of Guaranty's competitors have greater financial strength,
marketing capability and name recognition than it does, and operate on a
statewide or nationwide basis. In addition, recent developments in technology
and mass marketing have permitted larger companies to market loans more
aggressively to our small business customers. Such advantages may enable
Guaranty's competitors to realize greater economies of scale and operating
efficiencies than it can. Guaranty can provide no assurance that it will be able
to compete effectively against such competition.
Federal legislation enacted in August 1998 eased membership limits on
credit unions, which previously were permitted to serve only members that share
a single, common bond. Guaranty expects that this legislation will increase the
ability of credit unions to compete with community banks, such as Guaranty Bank,
for both deposits and loans.
DIVIDEND PAYMENTS BY GUARANTY BANK TO GUARANTY AND BY GUARANTY TO ITS
SHAREHOLDERS CAN BE RESTRICTED.
Guaranty has paid dividends on its common stock since 1980, but cannot
guarantee that it will continue to pay dividends on the common stock in the
future. Guaranty's ability to declare a dividend on the common stock will depend
upon, among other things, future earnings, operating and financial condition,
capital and liquidity requirements, general business and regulatory climate and
the receipt of regulatory approval, if then required.
As a bank holding company, Guaranty may pay a dividend on the common stock
only
o out of income available over the past year, and
o if prospective earnings retention is consistent with its expected
future needs and financial condition.
Guaranty's principal source of funds to pay dividends on the common stock
is from cash dividends it receives from Guaranty Bank. The payment of these
dividends by Guaranty Bank is also restricted by state and federal banking laws
and
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<PAGE>
regulations, including a prohibition on paying a dividend if, after paying the
dividend, Guaranty Bank would be "undercapitalized." As of March 31, 1999, an
aggregate of approximately $9.2 million was available for dividend payments from
Guaranty Bank to Guaranty without regulatory approval.
GUARANTY'S BUSINESS IS CONCENTRATED IN NORTHEAST TEXAS AND A DOWNTURN IN THE
TEXAS ECONOMY MAY ADVERSELY AFFECT ITS BUSINESS.
Substantially all of Guaranty's business is located in Northeast Texas,
and as a result, its financial condition, results of operations and cash flows
are subject to changes in the economic condition of that area. During the mid
1980s, Texas experienced a significant downturn in its economy, which caused
recession and unemployment in the region and resulted 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.
Because the Texas and Northeast Texas economies have diversified away from the
energy industry, they have become more susceptible to changes in the national
economy. A prolonged period of economic recession or other adverse economic
conditions in Texas and Northeast Texas could result in an increase in
nonpayment of loans, causing operating losses, impairing liquidity and eroding
capital. Guaranty can provide no assurance that conditions in the Texas and
Northeast Texas economies will not deteriorate in the future and that such a
deterioration will not have a material adverse effect on Guaranty.
NO ASSURANCES AS TO ADEQUACY OF ALLOWANCE FOR LOAN LOSSES.
Guaranty believes that its allowance for loan losses is maintained at a
level adequate to absorb any inherent losses in its loan portfolio. Management's
estimates are used to determine an allowance that is considered adequate to
absorb losses inherent in the existing loan portfolio. Management's estimates
are based on historical loan loss experience, industry diversification of the
commercial loan portfolio, the amount of nonperforming loans and related
collateral, current economic conditions that may affect the borrower's ability
to pay and value of collateral, volume, growth and composition of the loan
portfolio and other relevant factors. These estimates are inherently subjective
and their accuracy depends on the outcome of future events. Ultimate losses may
differ from current estimates. Depending on changes in economic, operating and
other conditions, including changes in interest rates, that are generally beyond
its control, Guaranty's actual loan losses could increase significantly. As a
result, such losses could exceed Guaranty's current allowance estimates.
Guaranty can provide no assurance that its allowance is sufficient to cover
actual loan losses should such losses be realized.
In addition, federal and state regulators, as an integral part of their
respective supervisory functions, periodically review Guaranty's allowance for
loan losses. Such regulatory agencies may require Guaranty to increase its
provision for loan losses or to recognize further loan charge-offs, based upon
judgments different from those of management. Any increase in its allowance
required by these regulatory agencies could have a negative effective on
Guaranty.
YEAR 2000 ISSUES MAY AFFECT GUARANTY'S INFORMATION TECHNOLOGY SYSTEMS.
The Year 2000 issue is a computer programming concern that may adversely
affect Guaranty's information technology systems and software, such as its item
and data processing applications, as well as so-called embedded technology, such
as microprocessors that control various functions, such as its security systems
and telecommunication equipment. The phrase "Year 2000 issue" refers to the
concern that certain computer applications will not be able to distinguish dates
in the twentieth and twenty-first centuries. Guaranty has developed a plan to
identify and remedy the material Year 2000 issues that directly affect its
systems and products. This plan also includes procedures to evaluate the
preparedness of its key vendors and significant customers in addressing the Year
2000 issue. Guaranty believes that it has taken reasonable steps to address its
internal Year 2000 concerns and to inquire about the actions that its vendors
and customers have taken to identify and address the Year 2000 issue. Guaranty
can provide no assurance, however, that its operational and financial systems,
or those of its vendors and customers, will not be adversely affected by Year
2000 issues or that any Year 2000 problem of Guaranty or its vendors and
customers will not adversely affect its business. In particular, it will be
difficult for Guaranty to implement viable contingency plans for any adverse
effect of the Year 2000 issue on local or national telecommunications systems or
on its local electric utility. Furthermore, Year 2000 problems may turn out to
exist in portions of important computer programs not now suspected, and Guaranty
can provide no assurance that it will not
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<PAGE>
be adversely affected by issues it has yet to identify. If Guaranty fails to
adequately address the Year 2000 issue pertaining to its internal operations or
those of its customers and vendors, that failure could adversely affect its
business.
In addition, bank regulatory agencies, as part of their supervisory
function, are assessing and will continue to assess Year 2000 readiness. The
failure of a financial institution, such as Guaranty, to take appropriate steps
to address deficiencies in its Year 2000 project management process may result
in one or more regulatory enforcement actions which could have a material
adverse effect on such institution. These actions may include the imposition of
fines, or result in the delay or denial of regulatory applications, such as an
application for a merger.
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<PAGE>
FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis by Guaranty contained or
incorporated in this proxy statement/prospectus that are not historical facts
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve a number of risks and uncertainties. The important factors that could
cause actual results to differ materially from the forward-looking statements
include, without limitation:
INTEREST RATES AND ECONOMY
o Changes in interest rates and economic conditions;
o changes in the levels of loan prepayments and the resulting effects
on the value of Guaranty's loan portfolio;
o changes in local economic and business conditions adversely
affecting Guaranty's borrowers and their ability to repay their
loans according to their terms or impacting the value of the related
collateral; and
o changes in local economic and business conditions adversely
affecting Guaranty's customers other than borrowers and their
ability to transact profitable business with Guaranty.
COMPETITION AND PRODUCT AVAILABILITY
o Increased competition for deposits and loans adversely affecting
rates and terms; and
o various strategic alternatives that Guaranty considers from time to
time, including acquisitions of other depository institutions, their
assets or their liabilities on favorable terms, and Guaranty's
successful integration of any such acquisitions.
ASSET MANAGEMENT
o Increased credit risk in Guaranty's assets and increased operating
risk caused by a material change in commercial, consumer and/or real
estate loans as a percentage of the total loan portfolio; and
o the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses.
LIQUIDITY AND CAPITAL
o Changes in the availability of funds resulting in increased costs or
reduced liquidity;
o changes in Guaranty's ability to pay dividends on its common stock;
and
o increased asset levels and changes in the composition of assets and
the resulting impact on Guaranty's capital levels and regulatory
capital ratios.
SYSTEMS
o Guaranty's ability to acquire, operate and maintain cost effective
and efficient systems;
o unexpectedly difficult or expensive but necessary technological
changes (including changes to address Year 2000 data systems
issues); and
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<PAGE>
o Guaranty's ability to complete its project to assess and resolve any
Year 2000 problems on time.
PERSONNEL
o The loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels.
TAX, REGULATORY, COMPLIANCE AND LEGAL
o The effects of the Internal Revenue Service's examination regarding
Guaranty's leveraged leasing transactions;
o changes in applicable statutes and government regulations or their
interpretations;
o claims of Guaranty's noncompliance with statutory and regulatory
requirements; and
o changes in the status of litigation to which Guaranty is a party.
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<PAGE>
NATURE OF TRADING MARKET AND MARKET PRICES
Guaranty common stock is traded on the Nasdaq National Market under the
symbol "GNTY." As of March 31, 1999, Guaranty common stock was held of record by
approximately 388 shareholders. The following table sets forth the high and low
closing price per share of Guaranty common stock for the periods indicated.
1999 High Low
- ---- ---- ---
Second quarter (through June 14, 1999) ....... $ 11.125 $ 9.375
First quarter ................................ 10.625 8.750
1998
- ----
Fourth quarter ............................... 11.50 8.88
Third quarter ................................ 15.50 12.00
Second quarter (since May 21, 1998) ......... 15.25 14.38
As of ___________, 1999, the last trading day immediately prior to the
date of this proxy statement/prospectus, the closing sale price for Guaranty
common stock was $______ per share. Prior to Guaranty's initial public offering
of common stock on May 21, 1998, there was no active public market for the
shares of Guaranty common stock.
There has been no active public trading market for shares of First
American stock, although it is traded infrequently in private transactions about
which First American's management has little reliable information regarding
price.
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<PAGE>
DIVIDEND HISTORY AND POLICIES
The following table sets forth the dividends paid per share of Guaranty
common stock and First American stock for the periods indicated.
1999 Guaranty Stock First American Stock
- ---- -------------- --------------------
First quarter .................... $ -- $ --
1998
- ----
Fourth quarter ................... 0.1300 --
Third quarter .................... -- 0.2500
Second quarter ................... 0.1100 --
First quarter .................... -- --
1997
- ----
Fourth quarter ................... 0.1140 --
Third quarter .................... -- --
Second quarter ................... 0.1070 --
First quarter .................... -- 0.2500
FIRST AMERICAN
Holders of First American stock are entitled to receive distributions
when, as and if declared by First American's Board of Directors out of funds
legally available therefor. First American has declared distributions on the
First American stock in the first quarter of 1997 and the third quarter of 1998.
The principal source of cash revenues to First American is dividends paid
by First American Bank with respect to First American Bank's capital stock.
There are certain restrictions on the payment of such dividends imposed by
federal and state banking laws, regulations and authorities. As of July 1, 1998,
an aggregate of approximately $75,000 was available for payment of dividends by
First American Bank to First American under applicable restrictions, without
regulatory approval. Regulatory authorities could impose administratively
stricter limitations on the ability of First American Bank to pay dividends to
First American if such limits were deemed appropriate to preserve certain
capital adequacy requirements.
If the merger is not approved, the declaration and payment of dividends on
the First American stock will depend upon the earnings and financial condition
of First American, liquidity and capital requirements, the general economic and
regulatory climate, First American's ability to service any equity or debt
obligations senior to the First American stock and other factors deemed relevant
by First American's Board of Directors.
GUARANTY
Holders of Guaranty common stock are entitled to receive dividends when,
as and if declared by Guaranty's Board of Directors out of funds legally
available therefor. While Guaranty has declared dividends on its common stock
since 1980 and in 1998 paid semi-annual dividends aggregating $0.24 per share
per annum, there is no assurance that Guaranty will continue to pay dividends in
the future.
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<PAGE>
The principal source of cash revenues to Guaranty is dividends paid by
Guaranty Bank with respect to Guaranty Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal and state
banking laws, regulations and authorities. As of March 31, 1999, an aggregate of
approximately $9.2 million was available for payment of dividends by Guaranty
Bank to Guaranty under applicable restrictions, without regulatory approval.
Regulatory authorities could impose administratively stricter limitations on the
ability of Guaranty Bank to pay dividends to Guaranty if such limits were deemed
appropriate to preserve certain capital adequacy requirements.
The declaration and payment of dividends on the Guaranty common stock will
depend upon the earnings and financial condition of Guaranty, liquidity and
capital requirements, the general economic and regulatory climate, Guaranty's
ability to service any equity or debt obligations senior to the Guaranty common
stock and other factors deemed relevant by Guaranty's Board of Directors.
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<PAGE>
THE SPECIAL MEETING
GENERAL
This proxy statement/prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of First American from the
shareholders of First American for use at the meeting. The meeting is a special
meeting of the shareholders of First American at which you will consider the
merger. A complete copy of the merger agreement and the amendments thereto is
attached to this proxy statement/prospectus as Exhibit A.
It is anticipated that this proxy statement/prospectus will first be
mailed to shareholders on or about ____________, 1999. The meeting will be held
on ___________, ____________, 1999 , at _______ a.m., local time, at the
principal executive office of First American, 919 Gilmer Street, Sulphur
Springs, Texas.
SHARES ENTITLED TO VOTE, QUORUM AND VOTE REQUIRED
The holders of record of the outstanding First American stock at the close
of business on ______________ will be entitled to notice of and to vote at the
meeting. At the close of business on such date, First American had issued and
outstanding and entitled to vote at the meeting 91,940 shares of First American
stock. Each holder of First American stock will be entitled to one vote for each
share of First American stock owned of record on the record date. The presence
of the holders of a majority of the First American stock, either in person or by
proxy, is required to constitute a quorum at the meeting. The affirmative vote
of 81% of the issued and outstanding First American stock is required to approve
the merger. A majority of the First American stock present at the meeting,
either in person or by proxy, is required to approve any other matters that may
be properly presented at the meeting. The directors and executive officers of
First American (and their affiliates) own or otherwise control the right to vote
58,272 shares of First American stock, comprising approximately 63.38% of the
total shares of First American stock issued and outstanding as of the record
date. THE FIRST AMERICAN BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
VOTE IN FAVOR OF THE MERGER.
The directors, executive officers and principal shareholders of First
American who hold a total of 76,210 shares of First American stock, or 82.89% of
the outstanding shares as of the record date, have signed a Consent to Merger
and Irrevocable Proxy in which such shareholders have granted a proxy to Gene
Watson, a director of First American, with instructions to vote their shares in
favor of the merger. Therefore, it is expected that the merger will be approved
at the meeting.
VOTING AND REVOCATION OF PROXIES
Proxies, in the form enclosed, which are properly executed by the
shareholders and returned to First American and not subsequently revoked, will
be voted at the meeting as directed in the proxy. Any properly executed proxy on
which voting instructions are not specified will be voted in favor of the
ratification and approval of the merger. The proxy also grants authority to the
persons designated in the proxy to vote in accordance with their own judgment if
an unscheduled matter is brought before the meeting. A proxy may be revoked at
any time before it is voted by giving written notice to the Secretary of First
American, by execution of a proxy of a later date filed with the Secretary of
First American at or before the meeting or by voting in person at the meeting.
This proxy solicitation is made by the First American Board of Directors.
Guaranty and First American are each responsible for their own expenses incurred
in preparing, assembling, printing, and mailing this proxy statement/prospectus.
Proxies will be solicited through the mail. Additionally, directors, officers,
and regular employees of First American intend to solicit proxies personally or
by telephone without receiving special compensation therefor. First American
will reimburse banks, brokers and other custodians, nominees and fiduciaries for
their reasonable expenses in forwarding the proxy materials to beneficial
owners.
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THE MERGER
The following information relating to the merger is not intended to be a
complete description of all information relating to the merger and is qualified
in its entirety by reference to more detailed information contained elsewhere in
this proxy statement/prospectus, including the exhibits hereto and the documents
referred to herein or incorporated herein by reference. A copy of the merger
agreement and amendments thereto is included as Exhibit A and is incorporated
herein by reference. All shareholders of First American are urged to read the
merger agreement in its entirety.
TERMS OF THE MERGER
The merger agreement provides for the merger of First American with and
into a wholly-owned subsidiary of Guaranty. The merger will be effective as soon
as practicable following the receipt of all necessary regulatory approvals and
the satisfaction of all other conditions to the consummation of the merger. As a
result of the merger, each holder of First American stock (other than those
shareholders who perfect their dissenters' rights of appraisal) will be entitled
to receive 3.417039 shares of Guaranty common stock and $32.829609 in cash per
share of First American stock owned and will no longer be owners of First
American stock. As a result of the merger, certificates for First American stock
will only represent the right to receive the merger consideration pursuant to
the merger agreement, and otherwise will be null and void after the completion
of the merger.
As a result of the merger, assuming that no First American shareholder
exercises their dissenter's rights, all issued and outstanding shares of First
American stock will be converted into 351,750 shares of Guaranty common stock
and $3,379,480 in cash.
Guaranty will not issue any certificates for fractional shares of Guaranty
common stock in connection with the merger. Instead of issuing fractional
shares, Guaranty will pay cash for such fractional shares in an amount based on
the fair market value of Guaranty common stock pursuant to the merger agreement
of $10.00 per share.
SHAREHOLDER APPROVAL
The merger agreement must be approved by the affirmative vote of the
holders of 81% of the outstanding shares of First American stock entitled to
vote at the meeting. Of the 91,940 shares of First American stock outstanding on
the record date, the holders of 74,472 shares must vote in favor of the merger
in order for it to be approved. Guaranty is expected to approve the merger as
the sole shareholder of Guaranty Acquisition.
STOCK OPTIONS
As of the date of this proxy statement/prospectus, three executive
officers of First American hold options to purchase 11,000 shares of First
American stock. Pursuant to the stock option plan covering the outstanding
options, the options vest and become exercisable upon a change of control, which
includes shareholder approval of a merger. Pursuant to the plan, the First
American Board of Directors has indicated its intention to determine the
effective date of the change of control for purposes of the plan to be the first
business day following the special meeting if shareholder approval of the merger
is obtained at the special meeting. The holders of the outstanding options have
informed First American of their intention to exercise the options following the
effective date of the change of control. The merger consideration set forth
above was calculated based upon the anticipated exercise of these options prior
to the completion of the merger. At the completion of the merger, the shares of
First American stock received upon exercise of the options will convert, like
all other shares of First American stock, into Guaranty common stock and cash.
BACKGROUND AND REASONS FOR THE MERGER; RECOMMENDATION OF FIRST AMERICAN BOARD
The Board of Directors of First American perceived over the last several
years that a strategic alliance with a larger banking organization might be in
the best interests of First American shareholders. Prior to entering into the
merger agreement with Guaranty, First American's Board of Directors considered
potential business combinations with other banking companies. In January of
1999, the Board of Directors of First American received a merger proposal from
Guaranty. In reaching its determination to enter into the merger agreement, the
First American Board considered a number of factors, including:
o the adequacy and fairness of the merger consideration, including whether
the merger consideration was comparable to the price range previously
established with the assistance of a financial advisor and to the
financial terms of a previously negotiated transaction,
o the increased investment liquidity the receipt of Guaranty common stock
would provide to First American shareholders,
o the future prospects of First American compared with the future
prospects of Guaranty, and
o the location of Guaranty's main office in Mount Pleasant, Texas and the
reputation of Guaranty for serving neighboring communities.
During its deliberations in connection with the merger proposal, the First
American Board of Directors did not assign any specific weights to these or any
other factors.
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The Board of Directors of Guaranty believes that acquiring First American
will allow Guaranty to strengthen its presence in the Northeast Texas region by
expanding into the Texas communities of Sulphur Springs and Commerce and will
also result in some economies of scale.
The merger agreement is the result of arm's-length negotiations between
representatives of Guaranty and First American and was executed on April 23,
1999. The aggregate consideration to be paid to the holders of First American
stock resulted from negotiations which considered the historical earnings and
dividends of First American and Guaranty, the earnings potential and deposit
base of First American, potential growth in First American's market, First
American's asset quality and the effect of the merger on the shareholders,
customers and employees of First American and Guaranty.
Subject to satisfaction of certain conditions contained in the merger
agreement, the First American Board of Directors believes the merger to be fair
and in the best interest of First American and its shareholders. THE FIRST
AMERICAN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE FIRST AMERICAN
SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER and has authorized consummation of
the merger, subject to approval of First American shareholders, federal and
state bank regulators and the satisfaction of certain other conditions.
OPERATIONS AFTER THE MERGER
Guaranty and First American intend that immediately following consummation
of the merger, First American Bank will merge with and into Guaranty Bank and
the current main office and branch office of First American Bank will be
operated as full service branches of Guaranty Bank.
OTHER TERMS AND CONDITIONS
The merger agreement contains a number of terms, conditions,
representations and covenants which must be satisfied as of the closing date,
including, but not limited to, the following:
o The approval of the merger by the First American shareholders.
o Guaranty shall have received all required governmental approvals.
o First American shall have received any necessary consents and
governmental approvals.
o The listing of the Guaranty common stock to be issued pursuant to
the merger on the Nasdaq National Market.
o The absence of a material adverse change in the condition of First
American or Guaranty from April 23, 1999 until the completion of the
merger.
o First American shall have received the opinion of a nationally
recognized legal firm by First American that (i) the merger will
constitute a "reorganization" within the meaning of Section 368 of
the Internal Revenue Code, (ii) no gain or loss will be recognized
by holders of First American stock upon receipt of Guaranty common
stock and (iii) the receipt of cash by holders of First American
stock shall be capital gain or loss to the extent the shares of
First American stock were held as a capital asset on the date of the
exchange.
o Guaranty shall have received the opinion of First American's counsel
acceptable to Guaranty as to certain corporate and legal
enforceability matters.
o Guaranty shall have received evidence of resolutions approved by the
Board of Directors of First American terminating the CORPORATEplan
for Retirement 100-Profit Sharing/401(k) Plan.
o Guaranty shall have received the written resignations of all
directors of First American effective as of the completion of the
merger.
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o Guaranty shall have received a signed release from the directors of
First American releasing First American from all claims of such
directors against First American.
o All representations and warranties of First American and Guaranty
shall be true and complete in all material respects at and as of the
date of the completion of the merger.
o First American and Guaranty shall have performed or complied with
all covenants and conditions required by the merger agreement to be
performed or complied with by them prior the completion of the
merger.
o The absence of any actual or threatened action to prohibit the
merger or that might affect Guaranty's right to own First American
stock or subject Guaranty to any liability for owning First American
Stock.
o The absence of any pending or threatened action to enjoin the merger
or impose liability upon First American or its officers, directors,
employees, shareholders or agents for any action taken in connection
with the merger.
Pursuant to the merger agreement, any condition to Guaranty's obligations
pursuant to the merger may be waived in writing by Guaranty.
BUSINESS PENDING EFFECTIVE TIME
The merger agreement imposes certain limitations on the conduct of First
American's business pending consummation of the merger. Among other things,
First American must conduct its businesses only in the usual, regular and
ordinary manner and may not declare, pay or make any dividend or other
distribution or payments in respect of the shares of First American stock.
AMENDMENT
The merger agreement may be amended only by a writing signed by the party
to the merger agreement to be bound by such amendment.
TERMINATION
MUTUAL CONSENT. The merger agreement may be terminated and the merger
abandoned at any time on the mutual written consent of Guaranty and First
American.
BY EITHER PARTY. The merger agreement may be terminated and the merger
abandoned at any time prior to the closing by either Guaranty or First American
if the merger shall not have been completed on or before September 30, 1999.
BY FIRST AMERICAN. The merger agreement may be terminated and the merger
abandoned at any time prior to the time the merger is to be completed by First
American if any one or more of the conditions precedent to its obligations
contained in the merger agreement are not fulfilled.
In the event First American desires to terminate the merger agreement as
provided in the item above, First American must notify Guaranty in writing of
its intent to terminate stating the reason therefor concurrently with such
termination.
BY GUARANTY. The merger agreement may be terminated and the merger
abandoned at any time prior to the time the merger is to be completed by
Guaranty if any one or more of the conditions precedent to its obligations
contained in the merger agreement are not fulfilled.
In the event Guaranty desires to terminate the merger agreement as
provided in the item above, Guaranty must notify First American in writing of
its intent to terminate stating the reason therefor concurrently with such
termination.
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REMEDIES. In the event of the termination of the merger agreement without
breach by any party hereto, the merger agreement will be void and have no
effect, without liability on the part of any party or the directors, officers or
shareholders of any party. A termination of the merger agreement will not
relieve a party of any liability for breach of the merger agreement.
EXPENSES
Whether or not the merger is consummated, each party to the merger
agreement will pay its respective expenses incurred in connection with the
preparation and performance of its obligations under the merger agreement.
EXCHANGE OF SHARES
At least 20 days prior to the closing date, or such other date agreed upon
by Guaranty and First American, First American will mail to each holder of an
outstanding certificate or certificates representing shares of First American
stock, a letter of transmittal for use in exchanging such certificates and
instructions explaining how to surrender the certificates to First American.
Promptly after receipt, Guaranty shall review the certificates and executed
letters of transmittal. For each letter of transmittal which is properly
completed, accompanied by the appropriate certificate or certificates and made
available for review by First American by noon on the first business day prior
to the closing date, Guaranty shall deliver to that shareholder on the closing
date, the per share merger consideration multiplied by the number of shares of
First American stock surrendered.
If a shareholder of First American does not provide a properly completed
letter of transmittal accompanied by the appropriate stock certificates to
Guaranty by the first business day prior to the closing date, that shareholder
will not receive any per share merger consideration on the closing date.
However, once a shareholder provides Guaranty with a properly completed letter
of transmittal accompanied by the appropriate stock certificates, Guaranty
shall, within two (2) business days following receipt of those documents, pay to
that shareholder the per share merger consideration multiplied by the number of
shares of First American stock surrendered.
Upon the effective date, you will cease to have any rights as shareholder
of First American. Until so surrendered, each certificate will be deemed for all
corporate purposes to represent and evidence solely the right to receive the
merger consideration to be paid pursuant to the merger agreement. Neither First
American nor any other party hereto will be liable to any holder of certificates
for any amount paid to a public official pursuant to any applicable abandoned
property, escheat or similar law. Except as required by law, no interest will be
paid on the cash portion of the merger consideration or the cash payable for
dissenting shares, and no dividends will be disbursed with respect to shares of
Guaranty common stock until certificates representing shares of First American
stock are surrendered in exchange therefor. If you are unable to locate any
certificate, you will receive your share of the merger consideration only upon
the First American's receipt of a lost certificate affidavit and an indemnity
agreement in a form acceptable to Guaranty.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of certain United States
federal income tax consequences of the merger. This discussion is based upon the
Internal Revenue Code, regulations promulgated by the United States Treasury
Department, judicial authorities, and current rulings and administrative
practice of the Internal Revenue Service in each case as in effect as of the
date hereof and all of which are subject to change at any time, possibly with
retroactive effect. For purposes of this discussion, it is assumed that shares
of First American stock are held as "capital assets" within the meaning of
Section 1221 of the Code (I.E., property held for investment). This discussion
does not address all aspects of federal income taxation that might be relevant
to particular holders of First American stock in light of their status or
personal investment circumstances; nor does it discuss the consequences to such
holders who are subject to special treatment under the federal income tax laws
such as foreign persons, dealers in securities, regulated investment companies,
life insurance companies, other financial institutions, tax-exempt
organizations, pass-through entities, taxpayers who hold First American stock as
part of a "straddle," "hedge" or "conversion transaction" or who have a
"functional currency" other than the United States dollar or to persons who have
received their First American stock as compensation. Further, this discussion
does not address the state, local or foreign tax consequences of the merger.
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The merger is intended to qualify as a reorganization under Section
368(a)(1)(A) of the Code. It is a condition to the obligation of First American
to consummate the merger that First American shall have received an opinion from
a nationally recognized legal firm to the effect that, for federal income tax
purposes, (i) the merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, (ii) no gain or loss will be recognized by
holders of First American stock upon receipt of Guaranty common stock and (iii)
the receipt of cash by a holder of First American stock will be treated as
capital gain or capital loss to the extent the shares of First American stock
were held by the shareholder as a capital asset. These opinions will be rendered
in reliance upon certain assumptions and representations made by officers and
shareholders of First American and officers of Guaranty and Guaranty
Acquisition. An opinion of counsel represents counsel's best legal judgment, but
has no binding effect or official status of any kind, and no assurance can be
given that contrary positions will not be taken by the IRS or a court
considering the issues. Neither First American nor Guaranty has requested or
will receive a ruling from the IRS as to the tax consequences of the merger.
Assuming the merger is treated as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, the merger will result in the following
federal income tax consequences to the First American shareholders:
o Each shareholder who receives Guaranty common stock and cash in the
merger will recognize gain equal to the amount of cash received.
However, this gain is limited to the difference between the sum of
(i) the fair market value of the Guaranty common stock of $10.00 per
share pursuant to the merger agreement and (ii) the amount of cash
received by the shareholder in the merger, less the shareholder's
basis in the First American stock exchanged therefor. The gain
recognized upon the receipt of cash will be a capital gain to the
extent the shares were held by the shareholder as a capital asset.
o A shareholder's aggregate tax basis in the shares of Guaranty common
stock received pursuant to the merger in exchange for First American
stock will be equal to the aggregate tax basis of the shares of
First American stock surrendered in exchange therefor (decreased by
the amount of the cash received by such shareholder in the merger
and increased by the amount of gain recognized by such shareholder
in the merger).
o Each shareholder will include in his holding period for Guaranty
common stock received in the merger the holding period of the shares
of First American stock surrendered in exchange therefor; provided
that the First American stock is held as a capital asset on the date
of the exchange.
o A shareholder who receives cash in lieu of a fractional share
interest in Guaranty common stock in the merger will be treated for
federal income tax purposes as if the fractional share of Guaranty
common stock had been received and then redeemed for cash and will
recognize a capital gain or loss in an amount equal to the
difference between the cash received and the proportionate part of
the aggregate federal income tax basis of such shareholder's First
American stock allocable to such fractional share interest, unless
such payment, under each such shareholder's particular facts and
circumstances, is deemed to have the effect of a dividend
distribution and not a redemption treated as an exchange under the
principles of Section 302 of the Code.
o A shareholder who exercises the right to dissent in connection with
the merger and receives only cash in exchange for such shareholder's
First American stock will be treated as having received such cash as
a distribution in redemption of such shareholder's First American
stock and will recognize a capital gain or loss equal to the
difference between the amount of cash received and the adjusted
basis of such shareholder's First American stock, unless such
payment, under each such shareholder's particular facts and
circumstances, is deemed to have the effect of a dividend
distribution and not a redemption treated as an exchange under the
principles of Section 302 of the Code.
THE FOREGOING IS A SUMMARY DISCUSSION OF MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. THE DISCUSSION IS INCLUDED FOR GENERAL INFORMATION
PURPOSES ONLY AND MAY NOT APPLY TO A PARTICULAR FIRST
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AMERICAN SHAREHOLDER IN LIGHT OF SUCH SHAREHOLDER'S PARTICULAR CIRCUMSTANCES.
FIRST AMERICAN SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICATION OF
STATE, LOCAL AND FOREIGN TAX LAWS AND POSSIBLE FUTURE CHANGES IN FEDERAL INCOME
TAX LAWS AND THE INTERPRETATION THEREOF, WHICH CAN HAVE RETROACTIVE EFFECTS.
DISSENTERS RIGHTS OF APPRAISAL AND RELATED ISSUES
You have a statutory right to dissent from the merger by following the
specific procedures set forth below. If the merger is approved by the
shareholders and consummated, any shareholder who properly perfects his
dissenters' rights will be entitled to receive an amount of cash equal to the
fair value of his shares of First American stock rather than being required to
receive the consideration established by the merger agreement. The following
summary is not a complete statement of the statutory dissenters' rights of
appraisal, and such summary is qualified by reference to the applicable
provisions of the Texas Business Corporation Act (the "TBCA"), which are
reproduced in full in Exhibit B to this proxy statement/prospectus. YOU MUST
FOLLOW THE EXACT PROCEDURE REQUIRED BY THE TBCA IN ORDER TO PROPERLY EXERCISE
YOUR DISSENTER'S RIGHTS OF APPRAISAL AND AVOID WAIVER OF THOSE RIGHTS.
Any shareholder who desires to dissent from the merger must file a written
objection to the merger with the Secretary of First American, Ms. Nina Cook, 919
Gilmer Street, Sulphur Springs, Texas 75483, prior to the meeting. The written
notice must state that the shareholder will exercise his right to dissent if the
merger is consummated and give the shareholder's address to which notice of
effectiveness of the merger should be sent. A vote against the merger is not
sufficient to perfect a shareholder's statutory right to dissent from the
merger. If the merger is consummated, each shareholder who sent notice to First
American as described above and who did not vote in favor of the merger will be
deemed to have dissented from the merger ("Dissenting Shareholder"). Failure to
vote against the merger will not constitute a waiver of the dissenters' rights
of appraisal; on the other hand, a vote in favor of the merger will constitute
such a waiver.
Guaranty will be liable for any payments to Dissenting Shareholders and
shall, within ten days of the effective date, notify the Dissenting Shareholders
in writing that the merger has been effected. Each Dissenting Shareholder so
notified must, within ten days of the delivery or mailing of such notice, make a
written demand on Guaranty, for payment of the fair value of the Dissenting
Shareholder's shares as estimated by the Dissenting Shareholder. Failure to
follow this procedure will constitute a waiver of his dissenter's rights of
appraisal by such Dissenting Shareholder. The demand shall state the number and
class of the shares owned by the Dissenting Shareholder and the fair value of
the shares as estimated by the Dissenting Shareholder. The fair value of the
shares shall be the value thereof as of the date immediately preceding the
meeting, excluding any appreciation or depreciation in anticipation of the
merger. Dissenting Shareholders who fail to make a written demand within the ten
day period will be bound by the merger and lose their rights to dissent. Within
twenty days after making a demand, the Dissenting Shareholder must submit his or
her Certificates to Guaranty for notation thereon that such demand has been
made. Dissenting Shareholders who have made a demand for payment of their shares
shall not thereafter be entitled to vote or exercise any other rights of a
shareholder except the right to receive payment for their shares pursuant to the
provisions of the TBCA and the right to maintain an appropriate action to obtain
relief on the basis of fraud.
Within twenty days after receipt of a Dissenting Shareholder's demand
letter as described above, Guaranty shall deliver or mail to the Dissenting
Shareholder written notice (i) stating that Guaranty accepts the amount claimed
in the demand letter and agrees to pay that amount, within ninety days after the
effective date, upon surrender of the Certificates duly endorsed by the
Dissenting Shareholder, or (ii) containing Guaranty's written estimate of the
fair value of the shares of First American stock together with an offer to pay
such amount within ninety days after the effective date if Guaranty receives
notice, within sixty days after the effective date, stating that the Dissenting
Shareholder agrees to accept that amount and upon surrender of the Certificates
duly endorsed by the Dissenting Shareholder. In either case, the Dissenting
Shareholder shall cease to have any ownership interest in First American
following consummation of the merger.
If the Dissenting Shareholder and Guaranty cannot agree on the fair value
of the shares within sixty days after the effective date, the Dissenting
Shareholder may, within sixty days of the expiration of the initial sixty day
period, file a petition ("Petition") in any court of competent jurisdiction in
Titus County, Texas requesting a finding and determination of the fair value of
the Dissenting Shareholder's shares. Each Dissenting Shareholder is not required
to file a separate Petition. If one Dissenting Shareholder files a Petition,
Guaranty must file, with the clerk of the court in which the Petition was filed,
a
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list containing the names and addresses of the Dissenting Shareholders with whom
agreements as to the value of their shares have not been reached. The court will
give notice of the time and place of the hearing on the Petition to the
Dissenting Shareholders named on the list. Dissenting Shareholders so notified
by the court will be bound by the final judgment of the court regarding fair
value of the shares. If no Petition is filed within the appropriate time period,
then all Dissenting Shareholders who have not reached an agreement with Guaranty
on the value of their shares shall be bound by the merger and lose their rights
to dissent.
After a hearing concerning the Petition, the court shall determine which
Dissenting Shareholders have complied with the provisions of the TBCA and have
become entitled to the valuation of, and payment for, their shares, and shall
appoint one or more qualified appraisers to determine the value of the shares of
First American stock in question. The appraiser shall determine such value and
file a report with the court. The court shall then in its judgment determine the
fair value of the shares of First American, which judgment shall be binding on
Guaranty and on all Dissenting Shareholders receiving notice of the hearing.
This value may be more than, less than, or equal to what is received by
non-Dissenting Shareholders. The court shall direct Guaranty to pay such amount,
together with interest thereon beginning 91 days after the effective date to the
date of judgment, to the Dissenting Shareholders entitled thereto. The judgment
shall be payable upon the surrender to Guaranty of the Certificates fully
endorsed by the Dissenting Shareholder. Upon payment of the judgment, the
Dissenting Shareholder shall cease to have any interest in the Certificates. All
court costs shall be allotted between the Dissenting Shareholders and Guaranty
in the manner the court determines to be fair and equitable.
Any Dissenting Shareholder who has made a written demand on Guaranty for
payment of the fair value of his First American stock may withdraw such demand
at any time before payment for his shares has been made or before a Petition has
been filed with an appropriate court for determination of the fair value of such
shares. If a Dissenting Shareholder withdraws his demand, or if he is otherwise
unsuccessful in asserting his dissenters' rights of appraisal, such Dissenting
Shareholder shall be bound by the merger and his status as a former shareholder
shall be restored without prejudice to any corporate proceedings, dividends, or
distributions which may have occurred during the interim.
In the absence of fraud in the transaction, a Dissenting Shareholder's
statutory right to appraisal is the exclusive remedy for the recovery of the
value of his shares or money damages to the Shareholder with respect to the
Merger. See Exhibit B.
ACCOUNTING TREATMENT
Guaranty expects to account for the merger as a purchase.
RESTRICTIONS ON SALES OF GUARANTY COMMON STOCK BY AFFILIATES OF FIRST AMERICAN
Guaranty has registered under the federal securities laws its shares of
common stock to be issued in the merger. Therefore, the Guaranty common stock to
be issued to First American shareholders in the merger will be freely
transferable, except for shares issued to persons who control, are controlled
by, or are under common control with, First American (such persons being
"affiliates" and generally include executive officers, directors and
shareholders who beneficially own 10% or more of the outstanding shares) at the
time of the meeting.
If you are considered an affiliate of First American or become an
affiliate of Guaranty after the merger, you may resell the shares of Guaranty
common stock acquired in connection with the merger only pursuant to an
effective registration statement under the securities laws, or pursuant to Rule
145 of the commission's rules, or in transactions otherwise exempt from
registration under the securities laws. Guaranty is not obligated and does not
intend to register for resale the shares issued to affiliates of First American.
REGULATORY APPROVALS
The merger of First American Bank with Guaranty Bank must be approved by
the Texas Department of Banking and the Federal Deposit Insurance Corporation
and the Federal Reserve Bank of Dallas must waive a filing of any application by
Guaranty that may otherwise be required to be filed with the Board of Governors
of the Federal Reserve System. On June 29, 1999, Guaranty filed an application
with the Texas
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Department of Banking and the Federal Deposit Insurance Corporation to obtain
prior approval of the bank merger. On June 29, 1999, Guaranty filed a waiver
request with the Federal Reserve Bank of Dallas to obtain a waiver of any
application that might otherwise be required to be filed with the Federal
Reserve.
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF GUARANTY AND FIRST AMERICAN
The rights of First American shareholders under Texas corporate law, the
Articles of Incorporation of First American and the Bylaws of First American
will differ in some respects from the rights First American shareholders will
have as shareholders of Guaranty under Texas corporate law, the Articles of
Incorporation of Guaranty and the Bylaws of Guaranty. Guaranty's Articles of
Incorporation and Bylaws contain several provisions which may make Guaranty a
less attractive target for an acquisition of control by anyone who does not have
the support of the Guaranty Board of Directors. Such provisions include a
staggered board of directors, a restriction on a shareholder's ability to call a
special meeting, the requirement of a supermajority vote of shareholders to
amend certain provisions of the Articles of Incorporation and Bylaws and the
limitation that shareholder action without a meeting may only be taken by
unanimous written consent. Copies of Guaranty's Articles of Incorporation and
Bylaws are filed as exhibits to the Registration Statement of which this proxy
statement/prospectus is a part. Copies of the First American Articles of
Incorporation and Bylaws are available upon written request from First American.
A description of the corresponding provisions contained in First
American's Articles of Incorporation and Bylaws and Guaranty's Articles of
Incorporation and Bylaws, as such differences may affect the current rights of
First American shareholders, are set forth below. This summary is not intended
to be complete and is qualified by reference to Texas corporate law, the First
American Articles of Incorporation, the First American Bylaws, the Guaranty
Articles of Incorporation and the Guaranty Bylaws.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF
FIRST AMERICAN SHAREHOLDERS AND RIGHTS THOSE PERSONS
WILL HAVE AS SHAREHOLDERS OF GUARANTY FOLLOWING THE MERGER
<TABLE>
<CAPTION>
FIRST AMERICAN GUARANTY
<S> <C> <C>
Corporate The rights of First American The rights of Guaranty
Governance: shareholders are currently shareholders are governed by
governed by Texas corporate law Texas corporate law and the
and the Articles of Articles of Incorporation and
Incorporation and Bylaws of Bylaws of Guaranty.
First American. Following the
completion of the merger,
rights of First American
shareholders who become
Guaranty shareholders will be
governed by Texas law and the
Articles of Incorporation and
Bylaws of Guaranty.
Classification First American does not have a Guaranty's board is divided into
of the Board classified board. The First three classes, as nearly equal
of Directors: American Bylaws require that in number as possible, with each
all directors be elected at class serving a staggered
each annual meeting of three-year term. This means
shareholders for a one-year that only one-third of the board
term. is elected at each annual
meeting of shareholders. The
classification makes it more
difficult to change the
composition of Guaranty's Board
of Directors because at least
two annual meetings of
shareholders are required to
change control of the Board of
Directors.
</TABLE>
-39-
<PAGE>
<TABLE>
FIRST AMERICAN GUARANTY
<S> <C> <C>
Removal of Texas law provides that at any Guaranty's Bylaws provide that
Directors meeting of shareholders called any director or the entire board
expressly for that purpose, any of directors may be removed, but
director or the entire board of only for cause, by the
directors may be removed, with or affirmative vote of the holders
without cause, by a specified of a majority of shares entitled
portion of votes not less than a to vote at an election of
majority of shares entitled to directors.
vote at an election of directors,
unless otherwise provided in a
corporation's articles of
incorporation or bylaws. The First
American Bylaws provide that any
director may be removed, with or
without cause, by the affirmative
vote of a majority in number of
shares of the shareholders
present, in person or proxy, at
such a meeting and entitled to
vote for the election of the
director(s).
Vote Required Texas law provides that on matters Guaranty's Articles of
for Certain other than the election of Incorporation do contain a
Shareholder directors, the affirmative vote of provision which reduces the
Actions: the holders of a majority of the required shareholder approval
shares entitled to vote and level to a majority for certain
represented at a shareholders' actions such as a merger, a
meeting shall be the act of the consolidation, a share exchange,
shareholders, unless the vote of a certain sales of substantially all
greater number is required by law, of Guaranty's assets, a
the articles of incorporation or dissolution or an amendment to
bylaws. Under Texas law, a Guaranty's Articles of
corporation's articles of Incorporation. Absent this pro-
incorporation may provide for a vision, each of the above matters
different level of approval, not would require two-thirds
less than a majority. The First shareholder approval under Texas
American Articles of Incorporation law.
do not provide for a different
number.
Amendment of Under Texas law, unless a Guaranty's Articles of
Bylaws: corporation's articles of Incorporation and Bylaws provide
incorporation or a bylaw adopted that Guaranty's Bylaws may be
by the shareholders provides amended only by Guaranty's Board
otherwise, a corporation's of Directors. The Guaranty
shareholders may amend the bylaws. shareholders do not have the power
The First American Bylaws provide to amend the Bylaws.
that the Bylaws may be amended by
the board of directors, with such
amendment being subject to repeal
or change at any shareholders'
meeting by the affirmative vote of
a majority of the shareholders
present at the meeting (provided
that notice of the proposed
amendment was contained in the
notice of the meeting).
Shareholder Under Texas law, shareholders may Guaranty's Articles of
Actions act without a meeting if a written Incorporation also do not provide
Without a consent is signed by all the for less than unanimous consent
Meeting: shareholders entitled to vote on when shareholder action is taken
the matter, unless a corporation's without a meeting, so no action
articles of incorporation require may be taken by written consent
less than unanimous consent (but unless all shareholders agree.
not less than the number of votes
necessary to take the action at a
meeting). First American's
</TABLE>
-40-
<PAGE>
<TABLE>
FIRST AMERICAN GUARANTY
<S> <C> <C>
Articles of Incorporation do not
provide for less than unanimous
consent when shareholder action is
taken without a meeting, so no
action may be taken by written
consent unless all shareholders
agree.
Special A special meeting of shareholders Guaranty's Articles of
Meetings of of a Texas corporation may be Incorporation provide that special
Shareholders: called by the president, the board meetings of shareholders can be
of directors, other persons so called by shareholders only at the
authorized in the corporation's of request of the holders of not less
articles of incorporation stock than 50% or the outstanding shares
bylaws or the holders less than of of not entitled to vote at the
10% of all the shares entitled to meeting.
vote at the meeting, unless a
different percentage, not to
exceed 50%, is provided for in the
articles of incorporation. First
American's Articles of
Incorporation do not require the
holders of a greater percentage of
shares to call a special meeting
of shareholders, therefore, the
holders of only 10% of the
outstanding shares entitled to
vote may call a special meeting of
shareholders.
</TABLE>
-41-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF GUARANTY
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of Guaranty and the notes
thereto, appearing elsewhere in this proxy statement/prospectus and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Guaranty." The selected consolidated
financial data as of and for the five years ended December 31, 1998 are derived
from Guaranty's Consolidated Financial Statements which have been audited by
independent certified public accountants. The selected consolidated financial
data as of and for the three months ended March 31, 1999 and March 31, 1998 have
not been audited but, in the opinion of the management of Guaranty, contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results of the interim periods.
<TABLE>
<CAPTION>
As of March 31, As of and for the Years Ended December 31,
------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income .................................. $ 4,763 $ 4,481 $ 18,368 $ 17,009 $ 14,851 $ 14,248 $ 11,658
Interest expense ................................. 2,273 2,232 8,951 8,192 6,919 6,372 4,470
-------- -------- -------- -------- -------- -------- --------
Net interest income ......................... 2,490 2,249 9,417 8,817 7,932 7,876 7,188
Provision for loan losses ........................ 105 370 540 355 206 149 298
Net interest income after
provision for loan losses ................ 2,385 1,879 8,877 8,462 7,726 7,727 6,890
Noninterest income ............................... 662 1,162 2,826 1,657 2,390 1,440 1,582
Noninterest expense .............................. 2,227 2,026 8,488 7,446 7,073 6,795 6,700
-------- -------- -------- -------- -------- -------- --------
Earnings before taxes ....................... 820 1,015 3,215 2,673 3,043 2,372 1,772
Provision for income tax expense ................ 165 295 541 273 165 261 245
-------- -------- -------- -------- -------- -------- --------
Net earnings ............................... 655 720 2,674 2,400 2,878 2,111 1,527
Preferred stock dividend ......................... -- -- 37 74 74 74 74
-------- -------- -------- -------- -------- -------- --------
Net earnings available to
common shareholders....................... $ 655 $ 720 $ 2,637 $ 2,326 $ 2,804 $ 2,037 $ 1,453
======== ======== ======== ======== ======== ======== ========
COMMON SHARE DATA (1):
Net earnings (basic and diluted) (2) ............. $ 0.23 $ 0.28 $ 0.95 $ 0.91 $ 1.08 $ 0.75 $ 0.53
Book value ....................................... 8.38 7.12 8.21 6.84 6.06 5.32 4.69
Tangible book value .............................. 8.31 7.03 8.14 6.74 5.95 5.21 4.57
Cash dividends ................................... -- -- 0.24 0.22 0.21 0.19 0.16
Dividend payout ratio ............................ -- % -- % 26.38% 24.24% 18.81% 24.79% 29.26%
Weighted average common shares
outstanding (in thousands) ................... 2,898 2,548 2,782 2,547 2,592 2,724 2,721
Period end shares outstanding (in thousands) ..... 2,898 2,548 2,898 2,548 2,545 2,725 2,723
BALANCE SHEET DATA:
Total assets ..................................... $284,535 $247,488 $272,906 $244,157 $213,932 $192,935 $187,547
Securities ....................................... 49,344 52,580 51,367 58,139 30,382 31,200 30,321
Loans ............................................ 197,048 163,061 185,886 157,395 139,289 126,287 124,307
Allowance for loan losses ........................ 1,560 1,494 1,512 1,129 1,055 1,005 1,012
Total deposits ................................... 253,710 225,158 242,325 222,961 194,855 174,717 170,884
Total common shareholders' equity ................ 24,285 18,153 23,796 17,426 15,423 14,499 12,782
AVERAGE BALANCE SHEET DATA:
Total assets ..................................... $274,696 $246,178 $253,633 $228,782 $203,056 $190,782 $180,648
Securities ....................................... 51,227 55,046 47,972 50,089 29,520 30,770 26,030
Loans ............................................ 190,714 161,375 169,754 146,061 132,400 124,209 121,078
Allowance for loan losses ........................ 1,525 1,174 1,397 1,070 1,029 968 1,067
Total deposits ................................... 243,903 224,316 227,919 208,401 183,896 172,964 164,250
Total common shareholders' equity ................ 24,242 17,940 21,363 16,508 15,164 13,861 12,559
</TABLE>
(TABLE CONTINUES ON NEXT PAGE.)
-42-
<PAGE>
<TABLE>
<CAPTION>
As of March 31, As of and for the Years Ended December 31,
-------------------- ------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Dollars in thousands, except per share data)
PERFORMANCE RATIOS:
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average assets .......................... 0.97% 1.19% 1.05% 1.05% 1.42% 1.11% 0.85%
Return on average common equity ................... 10.95 16.27 12.34 14.09 18.49 14.70 11.57
Net interest margin ............................... 4.03 4.05 4.07 4.24 4.32 4.59 4.41
Efficiency ratio (3) .............................. 70.65 59.40 69.33 71.09 68.52 72.94 76.40
ASSET QUALITY RATIOS(4):
Nonperforming assets to total loans
and other real estate ......................... 0.69% 0.44% 0.67% 1.22% 1.49% 1.58% 2.67%
Net loan charge-offs to average loans ............. 0.03 0.01 0.09 0.19 0.12 0.13 0.30
Allowance for loan losses to total loans .......... 0.79 0.92 0.81 0.72 0.76 0.80 0.81
Allowance for loan losses to
nonperforming loans (5) ....................... 128.61 162.75 130.80 92.85 93.12 100.60 45.28
CAPITAL RATIOS (4):
Leverage ratio .................................... 8.76% 7.61% 9.30% 7.87% 7.87% 7.88% 7.35%
Average shareholders' equity to
average total assets .......................... 8.83 7.62 8.59 7.58 7.88 7.70 7.41
Tier 1 risk-based capital ratio ................... 12.02 12.01 12.29 11.16 11.07 12.11 11.13
Total risk-based capital ratio .................... 12.80 12.35 13.08 11.86 11.80 12.92 11.98
</TABLE>
- --------------------------
(1) Adjusted for a seven for one stock split effective March 24, 1998.
(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.
-43-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GUARANTY
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Guaranty analyzes the major elements of Guaranty's balance sheets
and statements of earnings. This section should be read in conjunction with
Guaranty's Consolidated Financial Statements and accompanying notes and other
detailed information appearing elsewhere in this proxy statement/prospectus.
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
OVERVIEW
Net earnings available to common shareholders for the three months ended
March 31, 1999, were $655,000 or $0.23 per share compared with $720,000 or $0.28
per share for the three months ended March 31, 1998, a decrease of 9.0%. While
aided by an increase in net interest income resulting from an 11.4% growth in
average earning assets, net earnings decreased on a comparative basis as a
result of the inclusion in first quarter 1998 earnings of a gain on the sale of
approximately $2.0 million in principal amount of mortgage loans that were
originally purchased in 1991 at a discount from the Resolution Trust
Corporation. Guaranty 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. Guaranty
did not have a gain from the sale of loans in the first three months of 1999.
The gain on the sale of the loans in 1998 was partially offset by an additional
provision for loan losses of $340,000 in the first quarter of 1998. Accordingly,
after giving effect to these transactions, core earnings available to common
shareholders were $655,000 or $0.23 per share for the first three months of 1999
compared with $616,000 or $0.24 per share for the first three months of 1998, a
6.3% increase in net core earnings.
The three month period ended March 31, 1999 showed steady growth. Total
loans increased to $197.0 million at March 31, 1999, from $185.9 million at
December 31, 1998, an increase of $11.1 million or 6.0%. Total assets were
$284.5 million at March 31, 1999, compared with $272.9 million at December 31,
1998. The increase of $11.6 million in total assets resulted primarily from an
increase in total deposits to $253.7 million at March 31, 1999, from $242.3
million at December 31, 1998, an increase of $11.4 million or 4.7%, and an
increase in shareholders equity of $489,000. Common shareholders' equity was
$24.3 million at March 31, 1999, compared with $23.8 million at December 31,
1998, an increase of $489,000 or 2.1%. This increase was due to net earnings for
the period of $655,000 less a decrease in accumulated other comprehensive income
of $167,000.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
assets, including securities and loans, exceeds interest expense incurred on
interest-bearing liabilities, including deposits and other borrowed funds. Net
interest income is the principal source of Guaranty's earnings. Interest rate
fluctuations, as well as changes in the amount and type of earning assets and
liabilities, combine to affect net interest income.
Net interest income was $2.5 million for the three months ended March 31,
1999, compared with $2.2 million for the three months ended March 31, 1998, an
increase of $241,000 or 10.7%. The increase in net interest income resulted
primarily from growth in average earning assets to $250.9 million for the three
months ended March 31, 1999, from $225.3 million for the three months ended
March 31 1998, an increase of $25.6 million or 11.4%.
Guaranty's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest- bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change."
The following table sets forth, for each category of interest-earning
assets and interest-bearing liabilities, the average amounts outstanding, the
interest earned or paid on such amounts, and the average rate earned or paid for
the three months ended
-44-
<PAGE>
March 31, 1999 and 1998. The table also sets forth the average rate earned on
total interest-earning assets, the average rate paid on total interest-bearing
liabilities, and the net interest margin on average total interest-earning
assets for the same periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------
1999 1998
------------------------------------ --------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ------ ---- ------- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans:
Commercial and industrial......... $58,230 $1,163 8.10% $45,720 $ 945 8.38%
Real estate-mortgage and
construction.................... 111,495 2,217 8.06 93,912 1,983 8.56
Installment and other............. 20,989 501 9.68 21,743 519 9.68
Securities............................. 51,227 772 6.11 55,046 895 6.59
Federal funds sold..................... 6,936 83 4.85 8,862 139 6.36
Interest-bearing deposits in other
financial institutions............ 1,980 27 5.53 --- --- ---
------- ------ ---- ------- ------ ----
Total interest-earning assets..... 250,857 4,763 7.70% 225,283 4,481 8.07%
------ ---- ------ ----
Less allowance for loan losses......... (1,525) (1,174)
------- -------
Total interest-earning assets,
net of allowance................ 249,332 224,109
Non-earning assets:
Cash and due from banks................ 8,682 8,649
Premises and equipment................. 7,226 6,276
Interest receivable and other assets... 9,321 6,419
Other real estate owned................ 135 725
-------- --------
Total assets...................... $274,696 $246,178
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW, savings, and money market
accounts.......................... $65,569 $ 512 3.17% $ 59,235 $ 525 3.59%
Time Deposits.......................... 136,085 1,709 5.09 122,734 1,707 5.64
-------- ------ ----- -------- ------ -----
Total interest-bearing deposits... 201,654 2,221 4.47 181,969 2,232 4.97
Other borrowed funds................... 3,995 52 5.28 --- --- --
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities 205,649 2,273 4.48% 181,969 2,232 4.97%
------ ----- ------ -----
Noninterest-bearing liabilities:
Demand deposits........................ 42,249 42,347
Accrued interest, taxes and other
liabilities....................... 2,556 3,095
------- -------
Total liabilities................. 250,454 227,411
Shareholders' equity......................... 24,242 18,767
-------- -------
Total liabilities and
shareholders' equity ........... $274,696 $246,178
======== ========
Net interest income.......................... $2,490 $2,249
====== ======
Net interest spread.......................... 3.22% 3.10%
===== =====
Net interest margin.......................... 4.03% 4.05%
===== =====
</TABLE>
-45-
<PAGE>
The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to outstanding balances and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
can be segregated have been allocated.
THREE MONTHS ENDED MARCH 31,
1999 VS. 1998
---------------------------
INCREASE (DECREASE)
DUE TO
---------------
VOLUME RATE TOTAL
----- ----- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans ........................................ $ 627 $(193) $ 434
Securities ................................... (62) (61) (123)
Federal funds sold ........................... (30) (26) (56)
Interest-bearing deposits in other
financial institutions ..................... 27 -- 27
----- ----- -----
Total increase (decrease) in
interest income ........................ 562 (280) 282
----- ----- -----
Interest-bearing liabilities:
NOW, savings and money market accounts ....... 56 (69) (13)
Time Deposits ................................ 186 (184) 2
Other borrowed funds ......................... 52 -- 52
----- ----- -----
Total increase (decrease) in
interest expense ......................... 294 (253) 41
----- ----- -----
Increase (decrease) in net interest
income ..................................... $ 268 $ (27) $ 241
===== ===== =====
PROVISION FOR LOAN LOSSES
Guaranty's provision for loan losses is established through charges to
operating income in the form of the provision in order to bring the total
allowance for loan losses to a level deemed appropriate by management of
Guaranty based on such factors as historical experience, the volume and type of
lending conducted by Guaranty, the amount of nonperforming assets, regulatory
policies, generally accepted accounting principles, general economic conditions,
and other factors related to the collectibility of loans in Guaranty's
portfolio.
The provision for loan losses for the three months ended March 31, 1999,
was $105,000 compared with $370,000 for the three months ended March 31, 1998.
The first quarter 1998 provision included an extraordinary charge to the
provision of $340,000 done in order to get the reserve for loan losses to a
level management believed to be adequate based on loan growth, loan quality,
prior charge-off experience and local economic conditions. The first quarter
1999 provision is deemed adequate by management based on a continued low net
loan charge-off to average loans ratio of 0.03% as of March 31, 1999, and a low
nonperforming assets to total loans and other real estate ratio of 0.69% as of
March 31, 1999. For the three months ended March 31, 1999, net charge-offs were
$57,000.
NONINTEREST INCOME
Noninterest income is an important source of revenue for financial
institutions. Guaranty's primary sources of recurring noninterest income are
service charges on deposit accounts and fee income. Excluding a $674,000
nonrecurring gain from the sale of loans in March 1998, noninterest income for
the quarter ended March 31, 1999 increased to $662,000 from $488,000 for the
quarter ended March 31, 1998, an increase of $174,000 or 35.7%. The gain on sale
of loans was recorded in March 1998, when Guaranty sold approximately $2.0
million of loans originally purchased at a discount in June 1991 from the
Resolution Trust Corporation.
-46-
<PAGE>
The following table presents, for the periods indicated, the major
categories of noninterest income:
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts ................ $405 $ 287
Fee income ......................................... 117 153
Fiduciary income ................................... 17 16
Gain on sale of loans .............................. -- 674
Other noninterest income ........................... 118 32
Realized gain on securities ........................ 5 --
---- ------
Total noninterest income ........................ $662 $1,162
==== ======
After excluding the nonrecurring gain on the sale of loans, the increase
in noninterest income from March 31, 1998 to March 31, 1999, resulted primarily
from an increase in service charges on deposit accounts and fee income due to an
increase in the number of deposit accounts. Additionally, Guaranty's increased
emphasis on fee based services resulted in greater income from check cashing,
ATM fees, appraisal fees and wire transfer fees.
NONINTEREST EXPENSES
Noninterest expenses totaled $2.2 million for the three months ended March
31, 1999 compared with $2.0 million for the three months ended March 31, 1998,
an increase of $201,000 or 9.9%. The following table presents, for the periods
indicated, the major categories of noninterest expenses:
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
Employee compensation and benefits ............... $1,268 $1,082
Non-staff expenses:
Net bank premises expense ..................... 309 286
Office and computer supplies .................. 51 60
Legal and professional fees ................... 101 102
Advertising ................................... 42 53
Postage ....................................... 34 31
FDIC insurance ................................ 7 6
Other ......................................... 415 406
------ ------
Total non-staff expenses ................... 959 944
------ ------
Total noninterest expenses ................. $2,227 $2,026
====== ======
Employee compensation and benefits expense for the three months ended
March 31, 1999, was $1.3 million, an increase of $186,000 or 17.2% over the $1.1
million for the same period in 1998. The increase was due primarily to normal
salary increases and additional staff placement in the Texarkana, Mt. Pleasant
and Paris locations to handle customer growth. Guaranty has hired and begun
training staff for its new Pittsburg, Texas location which opened in May 1999.
The number of full-time equivalent employees was 135.5 at March 31, 1999,
compared with 124.5 at March 31, 1998, an increase of 8.8%.
Non-staff expenses were $959,000 for the three months ended March 31,
1999, compared with $944,000 for the same period in 1998, an increase of $15,000
or 1.6%. Net bank premises expense increased $23,000 or 8.0% to $309,000.
-47-
<PAGE>
Other non-staff expenses include director fees, insurance, franchise tax,
telephone expense and other miscellaneous expenses, the combination of which
increased $9,000 or 2.2% to $415,000 as of March 31, 1999.
INCOME TAXES
Income tax expense decreased approximately $130,000 to $165,000 for the
three months ended March 31, 1999 from $295,000 for the same period in 1998. The
decrease was primarily attributable to the gain on sale of loans Guaranty
recorded in 1998 of $674,000 creating an additional tax expense during that
period of approximately $230,000. Guaranty did not have a gain from the sale of
loans in the first quarter of 1999.
IMPACT OF INFLATION
The effects of inflation on the local economy and on Guaranty's operating
results have been relatively modest for the past several years. Since
substantially all of Guaranty'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. Guaranty 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
Guaranty provides a broad range of commercial, real estate and consumer
loan products to small and medium-sized businesses and individuals. Guaranty
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 76.71% loan to deposit ratio as of
December 31, 1998, reflects Guaranty's commitment as an active lender in the
local business communities it serves. Total loans were $197.0 million at March
31, 1999, an increase of $11.1 million or 6.0% from $185.9 million at December
31, 1998. Loan growth occurred primarily in one to four family residential
loans, commercial mortgage loans and commercial loans. Loans comprised 75.2% of
total earning assets at March 31, 1999 compared with 74.5% at December 31, 1998.
The following table summarizes the loan portfolio of Guaranty by type of
loan as of March 31, 1999, and December 31, 1998:
MARCH 31, 1999 DECEMBER 31, 1998
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial ........... $ 60,508 30.71% $ 59,241 31.86%
Real estate:
Construction and land
development ................ 3,538 1.80 3,130 1.68
One to four family residential. 55,591 28.21 48,376 26.02
Commercial mortgages .......... 49,905 25.32 47,977 25.81
Farmland ...................... 7,823 3.97 7,258 3.90
Multi-family residential ...... 1,202 0.61 844 0.45
Consumer ............................ 18,481 9.38 19,060 10.28
-------- -------- -------- --------
Total loans ................ $197,048 100.00% $185,886 100.00%
======== ======== ======== ========
The primary lending focus of Guaranty is to small and medium-sized
businesses. Guaranty offers business loans, commercial real estate loans,
equipment loans, working capital loans, term loans, revolving lines of credit
and letters of credit.
-48-
<PAGE>
Most commercial loans are collateralized and on payment programs. The purpose of
a particular loan generally determines its structure. In almost all cases,
Guaranty requires personal guarantees on commercial loans to help assure
repayment.
Guaranty'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.
Guaranty 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. Guaranty 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 Guaranty's construction lending activities. In keeping with the
community-oriented nature of its customer base, Guaranty provides construction
and permanent financing for churches located within its market area.
Guaranty 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 weekly and are reported to the Board
of Directors. Guaranty'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 Guaranty'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. Guaranty's loan review and compliance personnel interact
daily with commercial and consumer lenders to identify potential underwriting or
technical exception variances. In addition, Guaranty 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 Guaranty's below average level of loan losses
compared to its industry peer group over the past few years.
Guaranty'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. Guaranty requires mortgage title insurance and hazard insurance
in the amount of the loan. Of the mortgages originated, Guaranty generally
retains mortgage loans with short terms or variable rates and sells longer term
fixed-rate loans that do not meet Guaranty's credit underwriting standards to
Texas Independent Bank Mortgage Company.
As of March 31, 1999, Guaranty's one to four family real estate loan
portfolio was $56 million. Of this amount, $28 million is repriceable in one
year or less and an additional $20 million is repriceable from one year to five
years. These high percentages in short-term real estate loans reflects
Guaranty's commitment to reducing interest rate risk.
Guaranty provides a wide variety of consumer loans including motor vehicle,
watercraft, 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 March 31, 1999, Guaranty 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.
-49-
<PAGE>
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
March 31, 1999 are summarized in the following table:
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial .............. $ 43,457 $ 8,498 $ 803 $ 52,758
Real estate construction ............... 2,902 560 76 3,538
---------- ---------- ---------- ----------
Total ..................... $ 46,359 $ 9,058 $ 879 $ 56,296
========== ========== ========== ==========
Loans with a predetermined interest
rate ................................. $ 24,972 $ 9,883 $ 3,084 $ 37,939
Loans with a floating interest rate .... 7,430 8,604 2,323 18,357
---------- ---------- ---------- ----------
Total ..................... $ 32,402 $ 18,487 $ 5,407 $ 56,296
========== ========== ========== ==========
</TABLE>
NONPERFORMING ASSETS
Guaranty has several procedures in place to assist it in maintaining the
overall quality of its loan portfolio. Guaranty 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 Guaranty's loan portfolio will not become subject to increasing pressures
from deteriorating borrower credit due to general economic conditions.
Nonperforming assets were $1.4 million at March 31, 1999 compared with
$1.3 million at December 31, 1998, reflecting continued strong asset quality.
The ratio of nonperforming assets to total loans and other real estate was 0.69%
and 0.67% at March 31, 1999, and December 31, 1998, respectively.
Guaranty generally places a loan on nonaccrual status and ceases to accrue
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.
Guaranty is sometimes required to revise a loan's interest rate or repayment
terms in a troubled debt restructuring, however, Guaranty had no restructured
loans at March 31, 1999. In addition to an internal loan review, Guaranty
retains Independent Bank Services, L.C. ("IBS") for an annual external review to
evaluate the loan portfolio.
Guaranty 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 possible writedowns or appropriate additions to the
allowance for loan losses. Guaranty records other real estate at fair value at
the time of acquisition, less estimated costs to sell.
Guaranty has adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by SFAS
No. 118, ACCOUNTING FOR 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 Guaranty 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 Guaranty's financial statements.
-50-
<PAGE>
The following table presents information regarding nonperforming assets as
of the dates indicated:
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans .................................... $ 361 $ 290
Accuring loans 90 or more days past due ............. 852 $ 866
--------- ------------
Total nonperforming loans ........................... 1,213 1,156
Other real estate ................................... 144 97
--------- ------------
Total nonperforming assets .......................... $ 1,357 $ 1,253
========= ============
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 Guaranty's loan portfolio. Based on an evaluation of the loan portfolio,
management presents a quarterly review of the allowance for loan losses to
Guaranty'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
Guaranty'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 Guaranty's financial statements by its
independent auditors. Charge-offs occur when loans are deemed to be
uncollectible.
Guaranty follows an internal loan review program to evaluate the credit
risk in the loan portfolio. In addition, Guaranty contracts with IBS to annually
perform an external loan review. Through the loan review process, Guaranty
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 March 31, 1999, Guaranty had $3.1 million of such loans compared with
$3.3 million at March 31, 1998, a 4.3% decrease.
In addition to the internally classified loan list and delinquency list of
loans, Guaranty maintains a separate "watch list" which further aids Guaranty in
monitoring loan portfolios. 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 account 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. Guaranty
reviews these loans to assist in assessing the adequacy of the allowance for
loan losses. At March 31, 1999, Guaranty had $1.6 million of such loans.
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
Guaranty's historical charge-off experience. Guaranty 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.
-51-
<PAGE>
Management actively monitors Guaranty's asset quality and provides
specific loss allowances when necessary. Loans are charged-off against the
allowance for loan losses when appropriate. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. As of March 31, 1999, the allowance for loan losses amounted to
$1.6 million or 0.79% of total loans. The allowance for loan losses as a
percentage of nonperforming loans was 128.61% at March 31, 1999.
Set forth below is an analysis of the allowance for loan losses for the
three months ended March 31, 1999:
THREE MONTHS ENDED
MARCH 31, 1999
------------------
(DOLLARS IN THOUSANDS)
Average loans outstanding ............................... $ 190,714
==================
Gross loans outstanding at end of period ................ $ 197,048
==================
Allowance for loan losses at beginning of period ........ $ 1,512
Provision for loan losses ............................... 105
Charge-offs:
Commercial and industrial .......................... (4)
Real estate ........................................ --
Consumer ........................................... (73)
Recoveries:
Commercial and industrial .......................... 9
Real estate ........................................ 1
Consumer ........................................... 10
------------------
Net loan (charge-offs) recoveries ....................... (57)
------------------
Allowance for loan losses at end of period .............. $ 1,560
==================
Ratio of allowance to end of period loans ............... 0.79%
Ratio of net charge-offs to average loans ............... 0.03%
Ratio of allowance to end of period nonperforming loans . 128.61%
The following table describes the allocation of the allowance for loan losses
among various categories of loans and certain other information for the date
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.
March 31, 1999
----------------------
Percent of
Loans to
Amount Total Loans
------ ------------
(Dollars in thousands)
Balance of allowance for loan losses applicable to:
Commercial, industrial and agriculture $940 30.71%
Real Estate:
Construction and land development ................. - 1.80%
One to four family residential .................... 68 28.21
Commercial mortgage ............................... 145 25.32
Farmland .......................................... - 3.97
Multi-family ...................................... - 0.61
Consumer ............................................. 160 9.38
Unallocated .......................................... 247 -
----- -------
Total allowance for loan losses ................... $1,560 100.00%
===== =======
SECURITIES
Guaranty 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. Securities totaled $49.3 million at March 31, 1999, a decline of
$2.1 million from $51.4 million at December 31, 1998. The decline occurred as
maturing securities were used to fund loans. At March 31, 1999, securities
represented 17.3% of total assets compared with 18.8% of total assets at
December 31, 1998. The yield on average securities for the three months ended
March 31, 1999, was 6.11% compared with 6.59% for the same period in 1998. At
March 31, 1999, securities included $1.1 million in U.S. Treasury securities,
$27.1 million in U.S. Government securities, $17.6 million in mortgage-backed
securities, $1.1 million in equity securities and $2.4 million in municipal
securities. The average life of the securities portfolio at March 31, 1999, was
approximately two years and six months.
-52-
<PAGE>
The following table summarizes the contractual maturity of investment
securities on an amortized cost basis and their weighted average yields as of
March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------------------------------------------------------------
AFTER ONE YEAR BUT AFTER FIVE YEARS BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN 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 ...... $ 1,110 6.29% $ -- --% $ -- --% $ -- --% $ 1,110 6.29%
U.S. Government securities .... -- -- 11,130 5.97 15,940 6.21 -- -- 27,070 6.11
Mortgage-backed securities .... 5 5.16 5,462 6.49 4,010 5.79 8,062 5.80 17,539 6.02
Equity Securities ............. -- -- -- -- -- -- 1,147 5.23 1,147 5.23
State and municipal securities. 100 4.55 70 6.01 1,736 4.32 487 5.65 2,393 4.65
-------- -------- --------- -------- --------- -------- -------- ------- -------- --------
Total ................ $ 1,215 6.14% $ 16,662 6.14% $ 21,686 5.98% $ 9,696 5.73% $ 49,259 5.99%
======== ======== ========= ======== ========= ======== ======== ======= ========= =======
</TABLE>
The following table summarizes the carrying value and classification of
securities as of March 31, 1999:
MARCH 31, 1999
--------------
(Dollars in thousands)
Available-for-sale .................. $ 42,172
Held-to-maturity .................... 7,172
--------------
Total securities ........... $ 49,344
==============
The following table summarizes the amortized cost of securities classified
as available-for-sale and their approximate fair values as of the date shown:
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------------------
AMORTIZED GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
--------- --------------- --------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities ........... $ 1,010 $ 12 $ -- $ 1,022
U.S. Government securities ......... 27,070 131 93 27,108
Mortgage-backed securities ......... 12,860 65 30 12,895
Equity Securities .................. 1,147 -- -- 1,147
State and municipal securities ..... -- -- -- --
--------- --------------- --------------- ---------
Total ..................... $ 42,087 $ 208 $ 123 $ 42,172
========= =============== =============== =========
</TABLE>
The following table summarizes the amortized cost of securities classified as
held-to-maturity and their approximate fair values as of the date shown:
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------------------
AMORTIZED GROSS GROSS FAIR
COST UNREALIZED GAIN UNREALIZED LOSS VALUE
--------- --------------- --------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities ........... $ 100 $ 1 $ -- $ 101
U.S. Government securities ......... -- -- -- --
Mortgage-backed securities ......... 4,679 56 8 4,727
Equity Securities .................. -- -- -- --
State and municipal securities ..... 2,393 55 11 2,437
--------- --------------- --------------- ---------
Total ..................... $ 7,172 $ 112 $ 19 $ 7,265
========= =============== =============== =========
</TABLE>
Guaranty accounts for securities according to SFAS No.115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At the date of purchase,
Guaranty 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
-53-
<PAGE>
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.
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 Guaranty's mortgage-backed
securities at March 31, 1999 were agency- issued collateral obligations.
At March 31, 1999, 45.97% of the mortgage-backed securities held by Guaranty
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
Guaranty receives the total amount invested, of the mortgage-backed security
will be shorter than the contractual maturity. Guaranty 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 $8.9 million of
Guaranty'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.
PREMISES AND EQUIPMENT
Premises and equipment totaled $7.5 million at March 31, 1999 and $7.0
million at December 31, 1998. The net change shows an increase of $428,000 or
6.1%, in fixed assets. The increase is primarily due to the purchase of land in
Pittsburg, Texas for a new full-service bank which opened in May 1999.
OTHER ASSETS
On July 1, 1998, Guaranty invested $3.1 million in single insurance premium
policies. Such policies insured the lives of certain key senior officers. As of
March 31, 1999, the net surrender values of these policies totaled $3.2 million.
DEPOSITS
Guaranty offers a variety of deposit accounts having a wide range of interest
rates and terms. Guaranty's deposit accounts consist of demand, savings, money
market and time accounts. Guaranty relies primarily on competitive pricing
policies and customer service to attract and retain these deposits. Guaranty
does not have or accept any brokered deposits.
At March 31, 1999, demand, money market and savings deposits accounted for
approximately 45.9% of total deposits, while certificates of deposit made up
54.1% of total deposits. Noninterest-bearing demand deposits totaled $43.1
million or 17.0% of total deposits at March 31, 1999, compared with $47.4
million or 19.5% of total deposits at December 31, 1998. The average cost of
deposits, including noninterest-bearing demand deposits, was 3.69% for the three
months ended March 31, 1999 compared with 4.04% for the same period in 1998. The
decrease in the average cost of deposits was primarily due to the lower interest
rate environment during the first quarter 1999 compared with the same period in
1998.
-54-
<PAGE>
The daily average balances and weighted average rates paid on deposits for
the period ended March 31, 1999 are presented below:
THREE MONTHS ENDED
MARCH 31, 1999
------------------------
AMOUNT RATE
---------- ----------
(DOLLARS IN THOUSANDS)
Regular savings .................................... $ 7,614 2.50%
NOW accounts ....................................... 22,438 2.46
Money market checking .............................. 35,517 3.76
Time deposits less than $100,000 ................... 78,828 5.07
Time deposits $100,000 and over .................... 57,257 5.12
---------- ----------
Total interest-bearing deposits ................. $ 201,654 4.47%
Noninterest-bearing deposits ....................... 42,249 --
---------- ----------
Total deposits .................................. $ 243,903 3.69%
========== ==========
The following table sets forth the amount of Guaranty's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
MARCH 31, 1999
--------------
(DOLLARS IN THOUSANDS)
3 months or less .......................................... $ 17,794
Over 3 months through 6 months ............................ 18,465
Over 6 months through 1 year .............................. 17,641
Over 1 year ............................................... 4,029
--------------
Total............................................. $ 57,929
==============
INTEREST RATE SENSITIVITY AND LIQUIDITY
Guaranty's Asset Liability and Funds Management Policy provides management
with the necessary guidelines for effective funds management, and Guaranty has
established a measurement system for monitoring its net interest rate
sensitivity position. Guaranty 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 Guaranty, in accordance with policies
approved by Guaranty's Board of Directors. The ALCO formulates strategies based
on appropriate levels in interest rate risk. In determining the appropriate
level of interest rate risk, the ALCO considers the impact on earnings and
capital based on 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
activity, 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: (i) an analysis of
relationships between interest-earning assets and interest- bearing liabilities;
and (ii) an interest rate shock simulation model. Guaranty has traditionally
managed its business to reduce its overall exposure to changes in interest
rates, however, under current policies of Guaranty's Board of Directors,
management has been given some latitude to increase Guaranty's interest rate
sensitivity position within certain limits if, in management's judgement, it
will enhance profitability. As a result, changes in market interest rates may
have a greater impact on Guaranty's financial performance in the future than
they have had historically.
To effectively measure and manage interest rate risk, Guaranty uses an
interest rate shock simulation model to determine the impact on net interest
income under various interest rate scenarios, balance sheet trends and
strategies. From these simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented. Additionally, duration and
market value sensitivity measures are utilized when they provide added value to
the overall interest rate risk management process. The overall interest rate
risk position and strategies are reviewed by Guaranty's Board of Directors on an
ongoing basis. Guaranty manages its exposure to interest rates by structuring
its balance sheet in the ordinary course of business. Guaranty does not
currently 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.
-55-
<PAGE>
An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences 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 net interest income adversely, 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. However, it is management's intent 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
Guaranty at March 31, 1999:
<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 ........................ $ 2,974 $ 8,036 $ 12,602 $16,577 $ 5,134 $ 2,729 $ 61 $ 48,113
Loans ............................. 16,630 65,059 47,679 31,655 25,396 10,443 -- 196,862
Federal funds sold ................ 13,705 -- -- -- -- -- -- 13,705
Due from banks .................... -- 1,980 -- -- -- -- -- 1,980
-------- -------- -------- ------- ------- ------- ------------ --------
Total interest-earning assets ... 33,309 75,075 60,281 48,232 30,530 13,172 61 260,660
-------- -------- -------- ------- ------- ------- ------------ --------
Interest-bearing liabilities:
NOW, money market and
savings deposits ................ 73,330 -- -- -- -- -- -- 73,330
Certificates of deposit and
other time deposits ............. 14,593 65,348 46,793 9,879 1,329 -- -- 137,888
Borrowed funds .................... 23 115 144 624 681 1,933 391 3,911
-------- -------- -------- ------- ------- ------- ------------ --------
Total interest-bearing
liabilities ................... 87,892 65,463 46,937 10,503 2,010 1,933 391 215,129
-------- -------- -------- ------- ------- ------- ------------ --------
Period GAP ............................. $(54,583) $ 9,612 $ 13,344 $37,729 $28,520 $11,239 $ (330) $ 45,531
Cumulative GAP ......................... $(54,583) $(44,971) $(31,627) $ 6,102 $34,622 $45,861 $ 45,531
Period GAP to total assets ............. (19.18)% 3.38% 4.69% 13.26% 10.02% 3.95% (0.12)%
Cumulative GAP to total assets ......... (19.18)% (15.81)% (11.12)% 2.14% 12.17% 16.12% 16.00%
Cumulative interest-earning assets
to cumulative interest-bearing
liabilities ....................... 37.90% 70.68% 84.21% 102.89% 116.27% 121.36% 121.16%
</TABLE>
Guaranty's one-year cumulative GAP position at March 31, 1999, was
negative $31.6 million or 11.12% of assets. This is a one-day position that is
continually changing and is not indicative of Guaranty'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 environment
and still have its net interest income exposed to increased rate risk. Guaranty
maintains a Rate Committee and the ALCO that review Guaranty's interest rate
risk position on a weekly or monthly basis, respectively.
Liquidity involves Guaranty'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 Guaranty
on an ongoing basis. Guaranty's liquidity needs are primarily met by growth in
core deposits. Although access to purchased funds from correspondent banks is
available and has been utilized on occasion to take advantage of investment
opportunities, Guaranty does not rely on
-56-
<PAGE>
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.
Guaranty's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities was
$745,000 and $3.3 million for the three months ended March 31, 1999 and 1998,
respectively. The decrease was due primarily to the proceeds from the sale of
loans in the first quarter 1998 of $2.0 million. Guaranty did not have any sale
of loans in the first quarter of 1999.
Net cash (used) by investing activities was $(13.7) million and $(7.4)
million for the three months ended March 31, 1999 and 1998, respectively. During
the three months ended March 31, 1999, Guaranty funded more loans than it did in
the three months ended March 31, 1998.
Net cash provided by financing activities was $11.3 million and $2.2
million for the three months ended March 31, 1999 and 1998, respectively. The
difference was due primarily to a larger net increase in deposits of $11.4 in
1999 as compared to a net increase of $2.2 million in 1998.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current
and future operations. Guaranty is subject to capital adequacy requirements
imposed by the Board of Governors of the Federal Reserve ("Federal Reserve") and
the Bank is subject to capital adequacy requirements imposed by the Federal
Deposit Insurance Corporation ("FDIC") and the Texas Department of Banking
("TDB"). Both the Federal Reserve 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.
The risk-based capital standards issued by the Federal Reserve require all
bank holding companies 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.
"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 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 the Federal Deposit Insurance Corporation Improvement Act
("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'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.
-57-
<PAGE>
Total shareholders' equity as of March 31, 1999, was $24.3 million, an
increase of $489,000 or 2.1% compared with shareholders' equity of $23.8 million
at December 31, 1998. The increase was due to net earnings for the period of
$655,000 offset by the decrease in accumulated other comprehensive income of
$167,000.
The following table provides a comparison of Guaranty's and Guaranty
Bank's leverage and risk-weighted capital ratios as of March 31, 1999 to the
minimum and well-capitalized regulatory standards:
MINIMUM WELL- ACTUAL RATIO AT
REQUIRED CAPITALIZED MARCH 31, 1999
-------- ----------- ---------------
GUARANTY
Leverage ratio .................. 3.00%(1) N/A 8.76%
Tier 1 risk-based capital ratio . 4.00% N/A 12.02%
Risk-based capital ratio ........ 8.00% N/A 12.80%
GUARANTY BANK
Leverage ratio .................. 3.00%(2) 5.00% 8.36%
Tier 1 risk-based capital ratio . 4.00% 6.00% 11.46%
Risk-based capital ratio ........ 8.00% 10.00% 12.24%
- ---------------
(1) The Federal Reserve may require Guaranty to maintain a leverage ratio of
up to 200 basis points above the required minimum.
(2) The FDIC may require Guaranty Bank to maintain a leverage ratio of up to
200 basis points above the required minimum.
YEAR 2000 COMPLIANCE
GENERAL. The Year 2000 risk involves computer programs and computer
software that are not able to perform without interruption into the Year 2000.
If computer systems do not correctly recognize the date change from December 31,
1999, to January 1, 2000, computer applications that rely on the date field
could fail or create erroneous results. Such erroneous results could affect
interest, payment or due dates or cause the temporary inability to process
transactions, send invoices or engage in similar normal business activities. If
these issues are not addressed by Guaranty, its suppliers and its borrowers,
there could be a material adverse impact on Guaranty's financial condition or
results of operations.
STATE OF READINESS. Guaranty formally initiated its Year 2000 project and
plan in August 1997 to insure that its operational and financial systems will
not be adversely affected by Year 2000 problems. Guaranty has formed a Year 2000
project team, and the Board of Directors and management are supporting all
compliance efforts and allocating the necessary resources to ensure completion.
An inventory of all systems and products (including both information technology
("IT") and non-informational technology ("non-IT") systems) that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to their importance to Guaranty and an assessment of all mission
critical IT and mission critical non-IT systems has been completed. This
assessment involved inputting test data which simulates the Year 2000 date
change into such IT systems and reviewing the system output for accuracy.
Guaranty's assessment of mission critical non-IT systems involved reviewing such
systems to determine whether they were date dependent. Based on such assessment,
Guaranty believes that none of its mission critical non-IT systems are date
dependent. The software for Guaranty's systems is provided through service
bureaus and software vendors. Guaranty has contacted all of its third party
vendors and software providers and is requiring them to demonstrate and
represent that the products provided are or will be Year 2000 compliant and has
planned a program of testing compliance. Guaranty's item processing software
provider, which performs substantially all of Guaranty's data processing
functions, has stated that its software is Year 2000 compliant and pursuant to
applicable regulatory guidelines Guaranty is currently producing testing
scenarios to verify this assertion. In addition, Guaranty's compliance efforts
regarding Year 2000 issues were reviewed by the FDIC in January 1999 and June
1999.
Except as discussed above, Guaranty has completed the following phases of
its Year 2000 plan: (i) recognizing Year 2000 issues and (ii) assessing the
impact of Year 2000 issues on Guaranty's mission critical systems. Guaranty is
in the process of upgrading, testing and implementing the mission-critical
systems for Year 2000 compliance.
COSTS OF COMPLIANCE. Management does not expect that the cost of bringing
Guaranty's systems into Year 2000 compliance will have a material adverse effect
on Guaranty's financial condition, results of operations or liquidity. Guaranty
has budgeted $50,000 to address Year 2000 issues. As of March 31, 1999, Guaranty
has not incurred any significant costs in
-58-
<PAGE>
relation to Year 2000. The largest potential risk to Guaranty concerning Year
2000 is the malfunction of its data processing system. In the event its data
processing system does not function properly, Guaranty is prepared to perform
functions manually. Guaranty believes it is in compliance with regulatory
guidelines regarding Year 2000 compliance, including the timetable for achieving
compliance.
RISKS RELATED TO THIRD PARTIES. The impact of Year 2000 noncompliance by
third parties with which Guaranty transacts business cannot be accurately
gauged. Guaranty identified its largest dollar depositors (aggregate deposits
over $100,000) and loan customers ($150,000 or more) and, based on information
available to Guaranty, conducted a preliminary evaluation to determine which of
those customers are likely to be affected by Year 2000 issues. In addition,
corporate borrowers have been contacted and assessed by their respective lending
officers and scored on a scale of one, two or three, with three being the least
affected by Year 2000 issues. A corporate borrower which received a rating of
one or two was subsequently contacted to assess Year 2000 readiness efforts. To
the extent a problem is identified with respect to a customer, Guaranty intends
to monitor the customer's progress in resolving such problem. In the event that
Year 2000 noncompliance adversely affects borrowers, Guaranty may be required to
charge-off the loan to such borrowers. For a discussion of possible effects of
such charge-offs, see "Contingency Plans" below. In the event that Year 2000
noncompliance causes depositors to withdraw funds, Guaranty plans to maintain
additional cash on hand. Guaranty relies on the Federal Reserve for electronic
fund transfers and check clearing and understands that the Federal Reserve has
certified its systems to be Year 2000 compliant and continues to test product
upgrades. With respect to its borrowers, Guaranty includes in its loan documents
a Year 2000 disclosure form and an addendum to the loan agreement in which the
borrower represents and warrants its Year 2000 compliance to Guaranty.
CONTINGENCY PLANS. Guaranty is in the process of finalizing its
contingency planning with respect to the Year 2000 date change and believes that
if its own systems should fail, Guaranty could convert to a manual entry system
for a period of up to three months without significant losses. Guaranty believes
that any mission critical system could be recovered and operating within three
to five days. In the event that the Federal Reserve is unable to handle
electronic funds transfers and check clearing, Guaranty does not expect the
impact to be material to its financial condition or results of operations as
long as Guaranty is able to utilize an alternative funds transfer and clearing
source. As part of its contingency planning, Guaranty has reviewed its loan
customer base and the potential impact on capital of Year 2000 noncompliance.
Based upon such review, using what it considers to be a reasonable worst case
scenario, Guaranty has assumed that certain of its commercial borrowers whose
businesses are most likely to be affected by Year 2000 noncompliance would be
unable to repay their loans, resulting in charge-offs of loan amounts in excess
of collateral values. If such were the case, Guaranty believes that it is
unlikely that its exposure would exceed $100,000, although there are no
assurances that this amount will not be substantially higher. Management does
not believe that this amount is material enough for Guaranty to adjust its
current methodology for making provisions to the allowance for loan losses. In
addition, Guaranty plans to maintain additional cash on hand to meet any unusual
deposit withdrawal activity.
SUBSEQUENT EVENTS
On April 9, 1999 Guaranty received approval from the Texas Department of
Banking and the Federal Deposit Insurance Corporation to open a new full-service
banking facility in Pittsburg, Texas. Property was purchased and the bank opened
in temporary quarters on May 12, 1999.
-59-
<PAGE>
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
OVERVIEW
Net earnings available to common shareholders were $2.6 million, $2.3
million and $2.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively, and net earnings per common share were $0.95, $0.91 and $1.08 for
these same periods. The increase in earnings from 1997 to 1998 resulted
primarily from higher net interest income generated by the significant growth in
loans during the year. Additional income was generated by the gain on sale of
loans in March 1998 of $674,000 when Guaranty sold approximately $2.0 million of
loans originally purchased in June 1991 from the Resolution Trust Company
("RTC"). Net earnings decreased from $2.8 million in 1996 to $2.3 million in
1997, a total of $478,000 or 17.0%. The decrease was attributable to the
$822,000 one time gain by Guaranty in 1996 from proceeds of a key man life
insurance policy offset by an increase in net interest income of $885,000 or
11.2% in 1997 over 1996. Guaranty posted returns on average assets of 1.05%,
1.05 % and 1.42% and returns on average common equity of 12.34%, 14.09% and
18.49% for the years ended 1998, 1997 and 1996, respectively.
Total assets at December 31, 1998, 1997 and 1996 were $272.9 million,
$244.2 million and $213.9 million, respectively. Total deposits at December 31,
1998, 1997 and 1996 were $242.3 million, $223.0 million and $194.9 million,
respectively. Deposits increased by $28.1 million or 14.4% in 1997 and by $19.4
million or 8.7 % in 1998. These increases were primarily attributable to growth
in public funds deposit monies, certificates of deposits and the development of
the Premier money market account in 1996. At December 31, 1998, 1997 and 1996,
investment securities totaled $51.4 million, $58.1 million and $30.4 million,
respectively. The decrease in 1998 was primarily attributable to Guaranty's
strong loan demand that increased loans by approximately $28.5 million during
the year. The increase in 1997 was primarily attributable to the investment of
the growth in deposit funds. Common shareholders' equity was $23.8 million,
$17.4 million and $15.4 million at December 31, 1998, 1997 and 1996,
respectively. The increase in common shareholder's equity reflects earnings
retention and Guaranty's initial public offering in May 1998.
RESULTS OF OPERATION
NET INTEREST INCOME
1998 VERSUS 1997. Net interest income increased from $8.8 million in 1997
to $9.4 million in 1998, a $600,000 increase, primarily due to growth in
interest income of $1.4 million. This increase was partially offset by an
increase in interest expense of $760,000. This resulted in net interest margins
of 4.07% and 4.24% and net interest spreads of 3.18% and 3.39% for 1998 and
1997, respectively.
The increase in interest income was driven by growth in average
interest-earning assets of $23.0 million or 11.0% primarily attributable to the
growth in average loans of $23.7 million or 16.2 % offset by a small decrease in
average securities. The yield on average interest-earning assets decreased 22
basis points from 1997 to 1998.
1997 VERSUS 1996. Net interest income totaled $8.8 million in 1997
compared with $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 the 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. 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 Guaranty 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 $20.5 million in 1997 and mortgaged-backed securities
increased from $5.7 million in 1996 to $20.7 million in 1997. In this
repositioning of interest- earning assets, Guaranty also decreased federal funds
sold from $18.2 million to $7.7 million, causing a decrease in federal funds
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<PAGE>
interest income of $233,000. Guaranty also decreased its interest-earning
deposits in other financial institutions from $7.1 million to zero.
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 yearly average balances. Nonaccruing
loans have been included in the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
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 ........ $ 49,182 $ 4,108 8.35% $ 39,975 $ 3,411 8.53% $ 36,938 $ 3,183 8.62%
Real estate-mortgage and
construction ................. 98,962 8,247 8.33 84,570 7,478 8.84 73,476 6,287 8.56
Installment and other .......... 21,610 2,135 9.88 21,516 2,116 9.83 21,986 2,233 10.16
Fees on loans ...................... -- 54 -- -- 46 -- -- 58 --
Securities ......................... 47,972 3,104 6.47 50,089 3,247 6.48 29,520 1,882 6.38
Federal funds sold ................. 12,867 689 5.35 9,470 520 5.49 14,451 753 5.21
Interest-bearing deposits in
other financial institutions ...... 572 31 5.42 2,554 191 7.48 7,212 455 6.31
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
Total interest-earning assets .. 231,165 18,368 7.95% 208,174 17,009 8.17% 183,583 14,851 8.09%
-------- ------- -------- ------- -------- -------
Less allowance for loan losses ...... (1,397) (1,070) (1,029)
----------- ----------- -----------
Total interest-earning
assets, net of allowance 229,768 207,104 182,554
Non-earning assets:
Cash and due from banks ........ 8,579 8,228 7,838
Premises and equipment ......... 6,687 6,199 5,552
Interest receivable and
other assets .............. 8,209 6,361 6,165
Other real estate owned ........ 390 890 947
----------- ----------- -----------
Total assets ............. $ 253,633 $ 228,782 $ 203,056
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW, savings, and money
market accounts ............ $ 59,276 $ 2,013 3.40% $ 56,636 $ 1,994 3.52% $ 48,497 $ 1,584 3.27%
Time deposits .................. 127,472 6,913 5.42 114,596 6,185 5.40 101,059 5,305 5.25
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
Total interest-bearing
deposits ............... 186,748 8,926 4.78 171,232 8,179 4.78 149,556 6,889 4.61
Other borrowed funds ........... 809 25 3.09 168 13 7.74 319 30 9.40
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
Total interest-bearing
liabilities ............ 187,557 8,951 4.77% 171,400 8,192 4.78% 149,875 6,919 4.62%
-------- ------- -------- ------- -------- -------
Noninterest-bearing liabilities:
Demand deposits ................ 41,171 37,169 34,340
Accrued interest, taxes and
other liabilities .......... 3,129 2,878 2,850
----------- ----------- -----------
Total liabilities .......... 231,857 211,447 187,065
Shareholders' equity ................ 21,776 17,335 15,991
----------- ----------- -----------
Total liabilities and
shareholders' equity ... $ 253,633 $ 228,782 $ 203,056
=========== =========== ===========
Net interest income ................. $ 9,417 $ 8,817 $ 7,932
======== ======== ========
Net interest spread ................. 3.18% 3.39% 3.47%
======= ======= =======
Net interest margin ................. 4.07% 4.24% 4.32%
======= ======= =======
</TABLE>
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<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 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,
---------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
------------------------------ ------------------------------
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-EARNINGS ASSETS:
Loans .......................................................... $ 2,121 $ (628) $ 1,493 $ 1,213 $ 77 $ 1,290
Securities ..................................................... (137) (6) (143) 1,315 50 1,365
Federal funds sold ............................................. 187 (18) 169 (260) 27 (233)
Interest-bearing deposits in other
financial institutions ....................................... (148) (12) (160) (294) 30 (264)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest income ............................................ 2,023 (664) 1,359 1,974 184 2,158
INTEREST-BEARING LIABILITIES:
NOW, savings and money market accounts ......................... 90 (71) 19 267 143 410
Time deposits .................................................. 701 27 728 710 170 880
Other borrowed funds ........................................... 50 (38) 12 (13) (4) (17)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest expense ........................................... 841 (82) 759 964 309 1,273
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income .................. $ 1,182 $ (582) $ 600 $ 1,010 $ (125) $ 885
======== ======== ======== ======== ======== ========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses during the twelve months ended December 31,
1998 was $540,000 compared with $355,000 during the twelve months ended December
31, 1997, or an increase of $185,000. Guaranty made additional provisions to
compensate for the ongoing growth in the loan portfolio. Strong asset quality is
reflected as net charge-offs remains at low levels totaling $157,000, or 0.09%
of average loans in 1998 compared with $281,000, or 0.19% of average loans in
1997. Guaranty's provision for loan losses increased from $206,000 in 1996 to
$355,000 in 1997 also as a result of loan growth and a slight increase in net
loan charge-offs for the year.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1998 was $2.8 million,
an increase of $1.2 million from $1.7 million in 1997 and up from $2.4 million
in 1996. The year ended December 31,1998 included a gain on sale of loans of
$674,000 which occurred when Guaranty sold $2.0 million in loans that were
originally purchased at a discount in 1992 from the RTC. The year ended December
31, 1996 included a one-time gain from the proceeds of a key man life insurance
policy of $822,000. Excluding these gains, noninterest income was $495,000
greater in 1998 than in 1997, and $89,000 greater in 1997 than in 1996. This
results in annual percentage increases of 29.8% and 5.7% for 1998 and 1997,
respectively.
The following table presents for the periods indicated the major
categories of noninterest income:
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
Service charges ............................... $1,336 $1,097 $1,059
Fee income .................................... 434 386 376
Securities gains, net ......................... 81 19 2
Fiduciary income .............................. 46 43 43
Life insurance proceeds gain .................. -- -- 822
Gain on sale of loans ......................... 674 -- --
Other noninterest income ...................... 255 112 88
------ ------ ------
Total noninterest income ............ $2,826 $1,657 $2,390
====== ====== ======
After excluding the gain on sale of loans in 1998, the increase in
noninterest income from 1997 to 1998 resulted primarily from service charges and
fee income due to an increase in the number of deposit accounts and an increase
in fees
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<PAGE>
charged per check in 1998. Additionally, Guaranty'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
1996 to 1997 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 December 31, 1998, 1997 and 1996, noninterest expense
totaled $8.5 million, $7.4 million and $7.1 million, respectively. The 14.0%
increase in 1998 was primarily the result of additional operating expenses
incurred at the Texarkana location which formally opened in August 1997. The new
Texarkana location contributed to the increase in employee compensation and
benefits as the number of full-time equivalent employees for Guaranty grew from
121 in 1997 to 135 in 1998. In addition, bank premises and fixed asset expense
increased from $1.1 million to $1.2 million, an increase of $81,000 or 7.2%.
Legal and professional fees increased $57,000 or 17.0% due to independent loan
review expenses and bankruptcy and litigation proceedings. The increase in total
noninterest expense for 1997 over 1996 of $373,000 or 5.3% was primarily the
result of the opening of a second location in Mount Pleasant in October 1996 and
the initial opening of the Texarkana location in August 1997. Guaranty's
efficiency ratios, calculated by dividing total noninterest expenses (excluding
securities losses) by net interest income plus noninterest income, were 69.33%
in 1998, 71.09% in 1997 and 68.52% in 1996. The following table presents for the
periods indicated the major categories of noninterest expense:
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
Employee compensation and benefits ............ $4,458 $3,717 $3,549
Non-staff expenses:
Net bank premises and fixed
asset expense ............................ 1,206 1,125 991
Office and computer supplies .............. 280 291 225
Legal and professional fees ............... 392 335 236
Advertising ............................... 254 246 225
Postage ................................... 132 119 118
FDIC insurance ............................ 26 23 5
Other ..................................... 1,740 1,590 1,724
------ ------ ------
Total non-staff expenses ................ 4,030 3,729 3,524
------ ------ ------
Total noninterest expense ............... $8,488 $7,446 $7,073
====== ====== ======
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 expense.
Guaranty utilized tax benefits on leveraged lease transactions in the amounts of
$430,000, $530,000 and $616,000 in 1998, 1997 and 1996, respectively. In 1996,
Guaranty 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 1998, 1997 and
1996 were 16.83%, 10.21% and 5.42%, 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 tax
benefits on the leveraged lease transactions and non-taxable income.
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 $52,000 in 1998, $34,000 in
1997 and $58,000 in 1996. Such expense was included as a part of other
noninterest expense.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans increased by $28.5 million or approximately 18.1% to $185.9
million at December 31, 1998, from $157.4 million at December 31, 1997. In 1997,
total loans increased by $18.1 million to $157.4 million from $139.3 million at
-63-
<PAGE>
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 reflected the improving
local economy, an aggressive advertising campaign, Guaranty's pro-lending
reputation and the solicitation of new companies and individuals entering
Guaranty's market areas.
The following table summarizes the loan portfolio of Guaranty by type of
loan as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
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 ..... $ 51,589 27.75% $ 36,598 23.26% $ 29,412 21.11% $ 26,099 20.67% $ 24,696 19.86%
Agriculture .................... 7,652 4.11 8,174 5.19 7,159 5.14 6,466 5.12 4,814 3.87
Real estate:
Construction and land
development ................ 3,130 1.68 3,072 1.95 2,292 1.65 2,948 2.33 2,944 2.37
One to four family
residential .............. 48,376 26.02 41,398 26.30 36,967 26.54 35,024 27.73 35,201 28.32
Farmland ..................... 7,258 3.90 6,492 4.12 6,685 4.80 5,865 4.64 5,515 4.44
Non-residential and non-
farmland .................. 47,977 25.81 42,363 26.92 36,460 26.18 29,672 23.50 29,191 23.48
Multi-family residential ..... 844 0.45 360 0.23 535 0.38 388 0.31 70 0.06
Consumer ....................... 19,060 10.28 18,938 12.03 19,779 14.20 19,825 15.70 21,876 17.60
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans ................ $185,886 100.00% $157,395 100.00% $139,289 100.00% $126,287 100.00% $124,307 100.00%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
The contractual maturity ranges of the commercial, industrial and real
estate construction loan portfolio and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1998, are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial .................. $ 32,405 $ 17,203 $ 1,981 $51,589
Real estate construction ................... 3,051 -- 79 3,130
-------- ---------- ---------- -------
Total ................................. $ 35,456 $ 17,203 $ 2,060 $54,719
======== ========== ========== =======
Loans with a predetermined interest
rate ..................................... $ 26,297 $ 10,497 $ 1,817 $38,611
Loans with a floating interest rate ........ 9,159 6,706 243 16,108
-------- ---------- ---------- -------
Total ................................. $ 35,456 $ 17,203 $ 2,060 $54,719
======== ========== ========== =======
</TABLE>
NONPERFORMING ASSETS
Guaranty's conservative lending approach, as well as a healthy local
economy, has resulted in strong asset quality. Nonperforming assets at December
31, 1998, decreased 35.1% to $1.3 million compared with $1.9 million at December
31, 1997. Nonperforming assets were $2.1 million at December 31, 1996. This
resulted in ratios of nonperforming assets to total loans plus other real estate
of 0.67%, 1.22% and 1.49% for the years ended December 31, 1998, 1997 and 1996,
respectively.
-64-
<PAGE>
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ..................................... $ 290 $ 298 $ 722 $ 817 $ 514
Accruing loans past due 90 days or more .............. 866 918 411 172 1,683
Restructured loans ................................... -- -- -- 10 38
Other real estate .................................... 97 714 953 1,016 1,112
---------- ---------- ---------- ---------- ----------
Total nonperforming assets ......................... $ 1,253 $ 1,930 $ 2,086 $ 2,015 $ 3,347
========== ========== ========== ========== ==========
Nonperforming assets to total loans and
other real estate .................................. 0.67% 1.22% 1.49% 1.58% 2.67%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
For the twelve months ended December 31, 1998, net loan charge-offs
totaled $157,000 or 0.09% of average loans outstanding for the period, compared
with $281,000 in net loan charge-offs or 0.19% of average loans for the year
ended December 31, 1997. During 1998, Guaranty recorded a provision for loan
losses of $540,000 compared with $355,000 for 1997. The increase in the
provision for 1998 is the result of a $28.5 million increase in loans during
1998. Guaranty made a provision for loan losses of $206,000 for 1996. At
December 31, 1998, the allowance for loan losses totaled $1.5 million, or 0.81%
of total loans. At December 31, 1997, the allowance for loan losses totaled $1.1
million or 0.72% 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,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding ............................ $ 169,754 $ 146,061 $ 132,400 $ 124,209 $ 121,078
---------- ---------- ---------- ---------- ----------
Gross loans outstanding at end of period ............. $ 185,886 $ 157,395 $ 139,289 $ 126,287 $ 124,307
---------- ---------- ---------- ---------- ----------
Allowance for loan losses at beginning of period ..... $ 1,129 $ 1,055 $ 1,005 $ 1,012 $ 1,078
Provision for loan losses ............................ 540 355 206 149 298
Charge-offs:
Commercial and industrial ...................... (113) (53) (116) (184) (299)
Real estate .................................... (14) (170) (66) (19) (49)
Consumer ....................................... (149) (162) (101) (95) (68)
Recoveries:
Commercial and industrial ...................... 33 65 65 81 34
Real estate .................................... 26 13 23 15 4
Consumer ....................................... 60 26 39 46 14
---------- ---------- ---------- ---------- ----------
Net loan charge-offs ................................. (157) (281) (156) (156) (364)
---------- ---------- ---------- ---------- ----------
Allowance for loan losses at end of period ........... $ 1,512 $ 1,129 $ 1,055 $ 1,005 $ 1,012
========== ========== ========== ========== ==========
Ratio of allowance to end of
period loans ....................................... 0.81% 0.72% 0.76% 0.80% 0.81%
Ratio of net loan charge-offs
to average loans ................................... 0.09% 0.19% 0.12% 0.13% 0.30%
Ratio of allowance to end of
period nonperforming loans ......................... 130.80% 92.85% 93.12% 100.60% 45.28%
</TABLE>
-65-
<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,
------------------------------------------
1998 1997
-------------------- -------------------
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, industrial and agriculture .............................................. $ 932 31.86% $ 554 28.45%
Real estate:
Construction and land development .............................................. -- 1.68 -- 1.95
One to four family residential ................................................. 67 26.02 58 26.30
Commercial mortgage ............................................................ 145 25.81 128 26.92
Farmland ....................................................................... -- 3.90 -- 4.12
Multi-family ................................................................... -- 0.45 -- 0.23
Consumer ........................................................................... 166 10.28 171 12.03
Unallocated ........................................................................ 202 -- 218 --
------ ------ -------- --------
Total allowance for loan losses ............................................ $1,512 100.00% $ 1,129 100.00%
====== ====== ======== ========
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- -------------------
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, industrial and agriculture ........................... $ 501 26.25% $ 320 25.79% $ 432 23.73%
Real estate:
Construction and land development .............................. -- 1.65 -- 2.33 -- 2.37
One to four family residential ................................. 86 26.54 95 27.73 105 28.32
Commercial mortgage ............................................ 91 26.18 93 23.50 89 23.48
Farmland ....................................................... -- 4.80 -- 4.64 -- 4.44
Multi-family ................................................... -- 0.38 -- 0.31 -- 0.06
Consumer ......................................................... 128 14.20 124 15.70 102 17.60
Unallocated ...................................................... 249 -- 373 -- 284 --
------ ----------- ------ ----------- ------ -----------
Total allowance for loan losses ........................ $1,055 100.00% $1,005 100.00% $1,012 100.00%
====== =========== ====== =========== ====== ===========
</TABLE>
Management believes that the allowance for loan losses at December 31,
1998 is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that Guaranty will not sustain losses in
future periods, which could be substantial in relation to the size of the
allowance for loan losses at December 31, 1998.
SECURITIES
At December 31, 1998, investment securities totaled $51.4 million, a
decrease of $6.8 million from $58.1 million at December 31, 1997. The decrease
was primarily attributable to Guaranty's strong loan demand that increased loans
by approximately $28.5 million during 1998. During 1997, securities increased
approximately $27.7 million from $30.4 million at December 31, 1996, to $58.1
million at December 31, 1997. 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. At December 31, 1998, investment securities represented 18.8% of
total assets compared to 23.8% of total assets at December 31, 1997. The yield
on the investment portfolio for the year ended December 31, 1998, was 6.08%
compared to a yield of 6.69% for the year ended December 31, 1997.
-66-
<PAGE>
The following table summarizes the amortized cost of investment securities
held by Guaranty as of the dates shown:
DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities ................... $ 3,115 $14,372 $14,378
U.S. Government securities ................ 27,114 20,366 8,880
Mortgage-backed securities ................. 17,884 20,664 5,654
Equity securities .......................... 1,092 992 393
State and municipal securities ............. 1,825 1,379 1,048
------- ------- -------
Total securities ................. $51,030 $57,773 $30,353
======= ======= =======
The following table summarizes the contractual maturity of investment
securities on an amortized cost basis and their weighted average yields as of
December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
-------------- --------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
------ ------ ------- ------ ------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities .................. $3,115 6.21% $ -- --% $ -- --% $ -- -- % $ 3,115 6.21%
U.S. Government securities ................ -- -- 10,143 5.96 16,971 6.28 -- -- 27,114 6.16
Mortgage-backed securities ................ 7 6.39 2,786 5.95 6,165 6.34 8,926 6.04 17,884 6.14
Equity securities ......................... -- -- -- -- -- -- 1,092 4.75 1,092 4.75
State and municipal securities ........... 240 5.21 55 5.94 726 4.60 804 5.13 1,825 4.96
------ ------ ------- ------ ------- ------ ------- ------ ------- ------
Totals ............................ $3,362 6.14% $12,984 5.96% $23,862 6.24% $10,822 5.84% $51,030 6.08%
====== ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown:
DECEMBER 31,
-------------------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Available-for-sale ................ $44,305 $42,906 $ 8,305
Held-to-maturity .................. 7,062 15,233 22,077
------- ------- -------
Total securities .................. $51,367 $58,139 $30,382
======= ======= =======
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, 1998 DECEMBER 31, 1997
------------------------------------------ ------------------------------------------
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 ....... $ 3,015 $ 29 $ -- $ 3,044 $ 12,178 $ 272 $ -- $12,450
U.S. Government securities ..... 27,114 241 5 27,350 16,174 94 -- 16,268
Mortgage-backed securities ..... 12,747 77 5 12,819 13,196 -- -- 13,196
Equity securities .............. 1,092 -- -- 1,092 992 -- -- 992
--------- ---------- ---------- ------- --------- ---------- ---------- -------
Total .................. $ 43,968 $ 347 $ 10 $44,305 $ 42,540 $ 366 $ -- $42,906
========= ========== ========== ======= ========= ========== ========== =======
</TABLE>
-67-
<PAGE>
DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities ............ $ 6,794 $ 27 $ -- $6,821
U.S. Government securities .......... 996 2 -- 998
Mortgage-backed securities .......... 93 -- -- 93
Equity securities ................... 393 -- -- 393
--------- ---------- ---------- ------
Total ..................... $ 8,276 $ 29 $ -- $8,305
========= ========== ========== ======
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, 1998 DECEMBER 31, 1997
----------------------------------------- -------------------------------------------
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 ............. $ 100 $ 1 $ -- $ 101 $ 2,194 $ 8 $ -- $ 2,202
U.S. Government securities ........... -- -- -- -- 4,192 144 -- 4,336
Mortgage-backed securities ........... 5,137 74 2 5,209 7,468 -- -- 7,468
State and municipal
securities ......................... 1,825 65 4 1,886 1,379 96 -- 1,475
--------- ---------- ---------- ------ --------- ---------- ---------- -------
Total ........................... $ 7,062 $ 140 $ 6 $7,196 $ 15,233 $ 248 $ -- $15,481
========= ========== ========== ====== ========= ========== ========== =======
<CAPTION>
DECEMBER 31, 1996
------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities ............... $ 7,584 $ 66 $ -- $ 7,650
U.S. Government securities ............ 7,884 113 5 7,992
Mortgage-backed securities ............. 5,561 -- -- 5,561
State and municipal securities ......... 1,048 39 -- 1,087
--------- ---------- ---------- -------
Total ........................ $ 22,077 $ 218 $ 5 $22,290
========= ========== ========== =======
</TABLE>
DEPOSITS
Total deposits at December 31, 1998, increased to $242.3 million from
$223.0 million at December 31, 1997, an increase of $19.4 million or 8.7%. The
increase can be attributed to several factors. First, Guaranty's certificates of
deposits increased from $119.6 million at December 31, 1997, to $130.7 million
at December 31, 1998, an $11.1 million or 9.3% increase for the year. Second,
public fund deposits were $27.4 million at December 31, 1998, an increase of
$6.3 million or 30.1% from December 31, 1997. There were no additional deposit
contracts for public fund entities added in 1998. Third, Guaranty continues to
expand its customer base with its free checking product and its Premier money
market account. The number of checking accounts increased 10.9% to 14,573 while
the number of Premier money market accounts increased 15.4% to 1,510 during
1998. The Paris and Texarkana locations increased their deposits by a combined
$8.2 million or 21.9% and continue to gain market share as Guaranty becomes
better known in these communities. In 1997, deposits rose to $223.0 million from
$194.9 million in 1996, an increase of $28.1 million or 14.4%. This increase is
primarily attributable to the free checking campaign that increased checking
accounts by $6.8 million or 19.1% and the Premier money market account that
increased deposits by $3.4 million or 11.7%. Guaranty's ratio of average
noninterest-bearing demand deposits to average total deposits for years ended
December 31, 1998, 1997 and 1996, were 18.1%, 17.8% and 18.7%, respectively.
-68-
<PAGE>
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1998, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regular savings ............................................... $ 7,653 2.68% $ 7,555 2.74% $ 8,191 2.81%
NOW accounts .................................................. 19,276 2.64 17,516 2.78 16,818 2.90
Money market checking ......................................... 32,347 4.02 31,565 4.12 23,487 3.69
Time deposits less than $100,000 .............................. 78,724 5.37 70,743 5.32 63,177 5.18
Time deposits $100,000 and over ............................... 48,748 5.50 43,853 5.53 37,883 5.37
-------- ------ -------- ------ -------- ------
Total interest-bearing deposits ........................... $186,748 4.78% $171,232 4.78% $149,556 4.61%
Noninterest-bearing deposits .................................. 41,171 -- 37,169 -- 34,340 --
-------- ------ -------- ------ -------- ------
Total deposits ............................................ $227,919 3.92% $208,401 3.92% $183,896 3.75%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the amount of Guaranty's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
DECEMBER 31, 1998
-----------------
(DOLLARS IN THOUSANDS)
3 months or less ......................... $ 18,676
Over 3 months through 6 months .......... 8,973
Over 6 months through 1 year ............ 19,400
Over 1 year .............................. 4,678
-----------------
Total ........................... $ 51,727
=================
INTEREST RATE SENSITIVITY AND LIQUIDITY
The following table sets forth an interest rate sensitivity analysis for
Guaranty at December 31, 1998:
<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 ....................... $ 3,330 $ 10,017 $ 11,797 $19,880 $ 4,862 $ 1,118 $ 363 $ 51,367
Loans ............................ 35,201 48,667 37,087 34,834 23,324 6,773 -- 185,886
Federal funds sold ............... 10,090 -- -- -- -- -- -- 10,090
Due from banks ................... 50 1,980 -- -- -- -- -- 2,030
-------- -------- -------- ------- ------- ------- ------------ --------
Total interest-earning assets. 48,671 60,664 48,884 54,714 28,186 7,891 363 249,373
-------- -------- -------- ------- ------- ------- ------------ --------
Interest-bearing liabilities:
NOW, money market and
savings deposits ............. 64,305 -- -- -- -- -- -- 64,305
Certificates of deposit and
other time deposits .......... 17,099 44,360 55,581 12,582 1,038 -- -- 130,660
Borrowed funds ................... 23 117 140 607 1,040 1,643 410 3,980
-------- -------- -------- ------- ------- ------- ------------ --------
Total interest-bearing
liabilities .................. 81,427 44,477 55,721 13,189 2,078 1,643 410 198,945
-------- -------- -------- ------- ------- ------- ------------ --------
Period GAP ............................ $(32,756) $ 16,187 $ (6,837) $41,525 $26,108 $ 6,248 $ (47) $ 50,428
Cumulative GAP ........................ $(32,756) $(16,569) $(23,406) $18,119 $44,227 $50,475 $ 50,428
Period GAP to total assets ............ (12.00)% 5.93% (2.51)% 15.22% 9.57% 2.29% (0.02)%
Cumulative GAP to total assets ........ (12.00)% (6.07)% (8.58)% 6.64% 16.21% 18.50% 18.48%
Cumulative interest-earning assets
to cumulative interest-bearing
liabilities ...................... 59.77% 86.84% 87.11% 109.30% 122.46% 125.42% 125.35%
</TABLE>
-69-
<PAGE>
Liquidity involves Guaranty'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 Guaranty
on an ongoing basis. Guaranty'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, Guaranty 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. Guaranty 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. Guaranty does not currently have any
borrowings under this program. As of December 31, 1998, Guaranty does not have
any of its investment securities in safekeeping at the FHLB.
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 Guaranty's one to four family
mortgage loans. At December 31, 1998, Guaranty had approximately $4.0 million
borrowed of a potential $36.3 million available under this program, leaving
approximately $32.3 million in available borrowings.
See "Management's Discussion and Analysis and Results of Operations of
Guaranty - Interest Rate Sensitivity and Liquidity" for the three months ended
March 31, 1999 and 1998 for a discussion of Guaranty's policies regarding asset
and liability risk management.
CAPITAL RESOURCES
Shareholders' equity increased to $23.8 million at December 31, 1998, from
$18.3 million at December 31, 1997, an increase of $5.5 million or 30.4%. This
increase was primarily the result of net income of $2.7 million, net proceeds
from Guaranty's initial public offering of $4.4 million, offset by the payment
of common stock and preferred stock dividends of $696,000 and $37,000,
respectively, and the redemption of preferred stock of $827,000. During 1997,
shareholders' equity increased by $2.0 million or 12.2%, from $16.3 million at
December 31, 1996. The increase was primarily the result of net income of $2.4
million and an increase in net unrealized appreciation on available-for-sale
securities offset by the payment of common stock and preferred stock dividends
of $564,000 and $74,000 respectively. Guaranty had approximately $827,000 in
preferred stock outstanding at December 31, 1997.
The following table provides a comparison of Guaranty's and Guaranty
Bank's leverage and risk-weighted capital ratios as of December 31, 1998 to the
minimum and well-capitalized regulatory standards:
<TABLE>
<CAPTION>
MINIMUM ACTUAL RATIO AT
REQUIRED WELL-CAPITALIZED DECEMBER 31, 1998
-------- ---------------- -----------------
<S> <C> <C> <C>
GUARANTY
Leverage ratio ........................... 3.00%(1) N/A 9.30%
Tier 1 risk-based capital ratio .......... 4.00% N/A 12.29%
Risk-based capital ratio ................. 8.00% N/A 13.08%
GUARANTY BANK
Leverage ratio ........................... 3.00%(2) 5.00% 8.97%
Tier 1 risk-based capital ratio .......... 4.00% 6.00% 12.05%
Risk-based capital ratio ................. 8.00% 10.00% 12.86%
</TABLE>
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(1) The Federal Reserve may require Guaranty to maintain a leverage ratio of
up to 200 basis points above the required minimum.
(2) The FDIC may require Guaranty Bank to maintain a leverage ratio of up to
200 basis points above the required minimum.
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<PAGE>
GUARANTY
GENERAL
Guaranty was incorporated as a business corporation under the laws of the
State of Texas in 1980 to serve as a holding company for Guaranty Bank, which
was chartered in 1913, and for Talco State Bank, which was chartered in 1912 and
merged into Guaranty Bank in 1997. Guaranty's headquarters are located at 100
West Arkansas, Mount Pleasant, Texas 75455 and its telephone number is (903)
572-9881. As of March 31, 1999, Guaranty had total assets of $284.5 million,
total loans of $197.0 million, total deposits of $253.7 million and total
shareholders' equity of $24.3 million.
FACILITIES
Guaranty conducts business at eight banking locations, two of which are
located in Mount Pleasant and the others located in the Northeast Texas
communities of Bogata, Deport, Paris, Pittsburg, Talco and Texarkana. Guaranty's
headquarters are located at 100 West Arkansas in Mount Pleasant in a two-story
office building. Guaranty owns all of its locations. The following table sets
forth specific information on each of Guaranty's locations:
<TABLE>
<CAPTION>
DEPOSITS AT
LOCATION ADDRESS MARCH 31, 1999
- -------- ------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bogata 110 Halesboro St., Bogata, Texas 75417 $ 12,817
Deport 111 Main St., Deport, Texas 75435 10,011
Mount Pleasant-Downtown 100 W. Arkansas, Mount Pleasant, Texas 75455 165,366
Mount Pleasant-South 2317 S. Jefferson, Mount Pleasant, Texas 75455 2,244
Paris 3250 Lamar Ave., Paris, Texas 75460 37,424
Pittsburg 116 Greer, Pittsburg, Texas 75686 -- (1)
Talco 104 Broad St., Talco, Texas 75487 14,704
Texarkana 2202 St. Michael Dr., Texarkana, Texas 75503 11,144
</TABLE>
- -----------------
(1) Opened for business on May 12, 1999.
COMPETITION
The banking business is highly competitive, and the profitability of
Guaranty depends principally on Guaranty's ability to compete in the market
areas in which its banking operations are located. Guaranty 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 non-financial
entities, including retail stores which may maintain their own credit programs
and certain governmental organizations which may offer more favorable financing
than Guaranty. Guaranty 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. Competition from both financial and
non-financial institutions is expected to continue.
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<PAGE>
EMPLOYEES
As of March 31, 1999, Guaranty had 135 full-time employees, 4 of whom were
executive officers. Guaranty provides medical and hospitalization insurance to
its full-time employees. Guaranty considers its relations with employees to be
excellent.
LEGAL PROCEEDINGS
In the normal course of its businesses, Guaranty from time to time is
involved in legal proceedings. Other than such proceedings incidental to its
business, Guaranty's management is not aware of any pending or threatened legal
proceedings which, upon resolution, would have a material adverse effect upon
Guaranty's financial condition, results of operations or cash flows. The
continued absence of such proceedings is a condition to First American's
obligation to consummate the merger.
INTERESTS OF CERTAIN PERSONS
No director or executive officer of Guaranty has any material director or
indirect financial interest in First American or the merger except as a
director, executive officer or shareholder of Guaranty or its subsidiaries.
MANAGEMENT OF GUARANTY
DIRECTORS AND EXECUTIVE OFFICERS OF GUARANTY
The following is a list of the directors and executive officers of
Guaranty, their respective positions with Guaranty and Guaranty Bank and their
ages:
NAME POSITIONS AGE
---- --------- ---
John A. Conroy........... Class I Director of Guaranty; Director 81
of Guaranty Bank
Jonice Crane............. Class II Director of Guaranty; Director of 73
Guaranty Bank
C. A. Hinton, Sr......... Class II Director of Guaranty; Director of 75
Guaranty Bank
Bill G. Jones............ Chairman of the Board, Class III Director 69
and Chief Executive Officer of Guaranty;
Chairman of the Board of Guaranty Bank
Russell L. Jones......... Class III Director and Senior Vice President of 44
Guaranty; Director and Executive Vice President
of Guaranty Bank
Weldon Miller............ Class III Director of Guaranty; Director of 63
Guaranty Bank
Clifton A. Payne......... Class I Director, Senior Vice President and 41
Controller of Guaranty; Director, Executive Vice
President and Chief Financial Officer of Guaranty
Bank
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<PAGE>
Arthur B. Scharlach, Jr.. Class II Director and President of Guaranty; 59
Director, President and Chief Executive Officer
of Guaranty Bank
D. R. Zachry, Jr......... Class I Director of Guaranty; Director of 75
Guaranty Bank
JOHN A. CONROY. Mr. Conroy has served as a director of Guaranty 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 Guaranty Bank in 1943 and had 53 years of
continuous service until her retirement as an officer of Guaranty Bank in 1996.
She served as an Executive Vice President of Guaranty Bank from 1971 to 1996 and
has served as a director of Guaranty Bank since 1971 and a director of Guaranty
since its inception.
C. A. HINTON, SR. Mr. Hinton has served as a director of Guaranty Bank
since 1960 and as a director of Guaranty since it was formed in 1980. Mr. Hinton
is the Chairman of Hinton Production Company in Mount Pleasant, Texas. In 1994,
Hinton Drilling Company filed for bankruptcy under Chapter 11.
BILL G. JONES. Mr. Jones joined Guaranty Bank as President and a director
in 1969 and became Chairman of the Board in 1979. He retired as an officer of
Guaranty Bank in 1996 but continues to serve as Chairman of the Board. Mr. Jones
has been Chairman of the Board of Guaranty since 1992 and Chief Executive
Officer of Guaranty since its formation in 1980.
RUSSELL L. JONES. Mr. Jones has been a director of Guaranty 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 of
Talco State Bank, which was acquired by Guaranty in 1980 and merged into
Guaranty Bank in 1997. Mr. Jones became a Senior Vice President of Guaranty 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 Guaranty in 1980 and has
served as a director of Guaranty Bank since 1969. Mr. Miller is the President of
Everybody's Furniture Company in Mount Pleasant, Texas.
CLIFTON A. PAYNE. Mr. Payne joined Guaranty Bank in 1984 after four years
in private practice as a Certified Public Accountant. He became a Vice President
of Guaranty Bank in 1986 and was elected an Executive Vice President in 1996 and
Chief Financial Officer in 1998. In 1995, Mr. Payne was elected to the Board of
Directors of Guaranty and Guaranty Bank. Mr. Payne is also a Senior Vice
President and Controller of Guaranty.
ARTHUR B. SCHARLACH, JR. Mr. Scharlach is the President and a director of
Guaranty and President, Chief Executive Officer and a director of Guaranty Bank.
He joined Guaranty Bank in 1970 as a Vice President and Loan Officer and was
elected to Guaranty Bank's Board of Directors in 1971. He was elected a Senior
Vice President of Guaranty Bank in 1974, President in 1979, Chief Operating
Officer in 1983 and Chief Executive Officer in 1989. He has served as a director
of Guaranty 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 Guaranty Bank
since 1957 and as a director of Guaranty since its inception. He is retired.
Directors are elected for three year terms, classified into Classes I, II
and III. Messrs. Conroy, Payne and Zachry are Class I directors with terms of
office expiring on the date of Guaranty's annual meeting of shareholders in
2001; Messrs. Hinton and Scharlach and Ms. Crane are Class II directors with
terms of office expiring on the date of Guaranty's annual meeting of
shareholders in 2002; and Messrs. Bill G. Jones, Russell L. Jones and Miller are
Class III directors with terms of office expiring on the date of Guaranty's
annual meeting of shareholders in 2000.
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<PAGE>
The Board of Directors has established Audit and Compensation Committees.
The Audit Committee reviews the general scope of the audit conducted by
Guaranty's independent auditors and matters relating to Guaranty's internal
control systems. In performing its function, the Audit Committee meets
separately with representatives of Guaranty's independent auditors and with
representatives of senior management. The Audit Committee is composed of Messrs.
Conroy and Miller and Ms. Crane, 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 Guaranty's executive
officers and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters. The Compensation Committee
also administers Guaranty'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 composed of Messrs. Hinton (Chairman) and Miller
and Ms. Crane, 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, employee benefit matters and stock options were
considered by the Personnel Committee of Guaranty Bank, which included Arthur B.
Scharlach, Jr., Clifton A. Payne and Russell L. Jones. As members of this
committee, Messrs. Scharlach, Payne and Russell Jones participated in
determinations as to compensation of executive officers, including themselves.
Final determination regarding compensation was made by the Board of Directors of
Guaranty Bank.
DIRECTOR COMPENSATION
Directors of Guaranty receive fees for attending Guaranty Board meetings.
Inside directors are paid $175 for each meeting attended, and outside directors
are paid $400 for each meeting attended. The Board of Directors of Guaranty Bank
also meets monthly. Inside directors of Guaranty Bank are paid $375 for each
meeting of Guaranty Bank's Board of Directors attended, and outside directors
are paid $400 for each meeting attended. An Executive Committee meets weekly and
consists of all members of the Board of Directors of Guaranty. Inside directors
are paid $225 for each Executive Committee meeting attended and outside
directors are paid $250 for each Executive Committee meeting attended.
EXECUTIVE COMPENSATION AND OTHER MATTERS
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation paid or accrued by Guaranty to or on behalf of Guaranty's Chairman
of the Board and Chief Executive Officer and each of the other five most highly
compensated executive officers of Guaranty and Guaranty Bank (determined as of
the end of the last fiscal year) for each of the two fiscal years ended December
31, 1998:
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------ ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Bill G. Jones......................................... 1998 $ 48,000 $13,900 $ 39,968(1)
Chairman of the Board and Chief Executive Officer 1997 48,000 24,159 40,733
Arthur B. Scharlach, Jr............................... 1998 207,600 61,191 42,226(2)
President 1997 195,994 51,916 14,750
Clifton A. Payne...................................... 1998 96,800 37,382 13,657(3)
Senior Vice President and Controller 1997 86,476 28,587 8,630
Devry W. Garrett...................................... 1998 127,604 19,763 14,694(4)
Legal Officer of the Bank 1997 121,988 17,949 10,495
Russell L. Jones...................................... 1998 93,800 36,871 13,043(5)
Senior Vice President 1997 86,178 28,752 7,762
Byron Rhea............................................ 1998 92,971 32,716 11,869(6)
Executive Vice President of the Bank 1997 85,176 26,586 7,784
</TABLE>
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<PAGE>
- ----------
(1) Consists of contributions by Guaranty to the 401(k) Plan of $4,642 and
$5,412 in 1998 and 1997, respectively, and the payment of $35,326 and
$35,321 in 1998 and 1997, respectively in connection with a supplemental
retirement plan.
(2) Consists of contributions by Guaranty to the 401(k) Plan of $12,290 and
$14,750 in 1998 and 1997, respectively, and $29,936 in 1998 in connection
with a salary continuation plan.
(3) Consists of contributions by Guaranty to the 401(k) Plan of $10,064 and
$8,630 in 1998 and 1997, respectively, and $3,593 in 1998 in connection
with an incentive retirement plan.
(4) Consists of contributions by Guaranty to the 401(k) Plan of $10,904 and
$10,495 in 1998 and 1997, respectively, and $3,790 in 1998 in connection
with an incentive retirement plan.
(5) Consists of contributions by Guaranty to the 401(k) Plan of $9,577 and
$7,762 in 1998 and 1997, respectively, and $3,466 in 1998 in connection
with an incentive retirement plan.
(6) Consists of contributions by Guaranty to the 401(k) Plan of $8,462 and
$7,784 in 1998 and 1997, respectively, and $3,407 in 1998 in connection
with an incentive retirement plan.
STOCK OPTION PLAN
Guaranty's Board of Directors and shareholders approved a stock option
plan in 1998 (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 with Guaranty,
if earlier. The 1998 Plan also provides for the granting of restricted stock
awards, stock appreciation rights, phantom stock awards and performance awards
on substantially similar terms. No options or other awards have been granted
under the 1998 Plan. The 1998 Plan provides that in the event of a change in
control of Guaranty, all options granted immediately vest and become
exercisable. In addition, the 1998 Plan permits the Compensation Committee,
which administers the 1998 plan, discretion in the event of a change in control
to modify in certain respects the terms of awards under the 1998 Plan, including
(i) providing for the payment of cash in lieu of such award, (ii) limiting the
time during which an option may be exercised, (iii) making adjustments to
options to reflect the change in control and (iv) providing that options shall
be exercisable for another form of consideration in lieu of the Common Stock
pursuant to the terms of the transaction resulting in a change in control.
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. Although
it does not require the fair value based method to be adopted, a company must
comply with the disclosure requirements set forth in the statement. Guaranty has
continued to apply accounting in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, ("APB 25") and related
Interpretations, and, accordingly, provides the pro forma disclosures of net
income and earnings per share.
BONUS PLAN
Guaranty has a bonus plan for its officers and employees which provides
for a bonus pool in an amount 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 13.2% is achieved. The bonus pool increases to a maximum of 14.5% of
after-tax income with a return on equity of 17.6% or greater. Allocation of the
bonus pool is in the discretion of the Board of Directors and is generally based
on
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<PAGE>
management's recommendations regarding an employee's merit. The bonus pool was
$387,000 and $306,000 in 1998 and 1997, respectively.
BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. Effective January 1, 1992, the Board of
Directors of Guaranty 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
Guaranty and six persons, three of whom are members of the Board of Directors,
serve as trustees. The ESOP 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 $271,000, $234,000 and $232,000 in 1998, 1997 and 1996,
respectively. At December 31, 1998, the book value of ESOP assets was
approximately $6.5 million, with an approximate market value of $5.7 million.
SUPPLEMENTAL RETIREMENT PLAN. In 1992, Guaranty 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 executive officer's
average salary over the five year period immediately prior to his retirement.
Guaranty contributes to the retirement plan on a non-funded basis. Plan expenses
totaled approximately $18,000, $20,000 and $52,000 in 1998, 1997 and 1996,
respectively.
EXECUTIVE INCENTIVE RETIREMENT PLAN. In 1998, Guaranty established a
non-qualified, non-contributory incentive retirement plan for certain executive
officers of Guaranty and the Bank. The plan provides retirement benefits in
amounts based on a selected percentage of salary, which varies depending upon
each officer's responsibility and longevity with Guaranty or the Bank. The
percentage of salary which will be contributed to the retirement plan by
Guaranty will be determined by the earnings performance of Guaranty, however, no
contribution will be made in any given year in which Guaranty's earnings do not
meet the target performance goal for that year. The plan is non-funded. Plan
expenses totaled $18,000 in 1998.
SALARY CONTINUATION PLAN. In 1998, Guaranty established a non-qualified,
non-contributory salary continuation plan for Guaranty's President, Arthur B.
Scharlach, Jr. The plan is designed to provide benefits over a ten year period
equal to 75% of Mr. Scharlach's projected compensation at retirement as adjusted
for amounts payable under Guaranty's retirement plan and certain social security
benefits. The plan is non-funded. Plan expenses totaled $30,000 in 1998.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of the directors, executive officers and principal shareholders of
Guaranty (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 Guaranty. During 1998,
Guaranty made loans in the ordinary course of business to many of the directors,
executive officers and principal shareholders of Guaranty 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 Guaranty 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 Guaranty are subject to
limitations contained in the Federal Reserve Act, the principal effect of which
is to require that extensions of credit by Guaranty to executive officers,
directors and principal shareholders satisfy the foregoing standards. On
December 31, 1998, all of such loans aggregated $1.4 million which was
approximately 5.9% of Guaranty's Tier 1 capital at such date. Guaranty 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>
BENEFICIAL OWNERSHIP OF COMMON STOCK BY
MANAGEMENT OF GUARANTY AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Guaranty common stock as of the record date by (i)
directors, executive officers of Guaranty and certain officers of Guaranty Bank
listed in the Summary Compensation Table herein, (ii) each person who is known
by Guaranty to own beneficially 5% or more of the Guaranty common stock and
(iii) all directors and executive officers as a group. Unless otherwise
indicated, each person has sole voting and investment power over the shares
indicated as owned by such person and the address of each shareholder is the
same as the address of Guaranty.
PRO FORMA
PERCENTAGE PERCENTAGE
NUMBER BENEFICIALLY BENEFICIALLY OWNED
NAME OF SHARES OWNED AFTER MERGER (1)
--------- ------------ ------------------
John A. Conroy ................... 126,350 4.36% 3.89%
Jonice Crane ..................... 97,692(2) 3.37% 3.01%
Guaranty Bancshares, Inc. Employee
Stock Ownership Plan .......... 407,514 14.06% 12.54%
Devry W. Garrett ................. 7,162(3) * *
C. A. Hinton, Sr ................. 179,676(4) 6.20% 5.53%
Bill G. Jones .................... 334,194(5) 11.53% 10.28%
Russell L. Jones ................. 101,735(6) 3.51% 3.13%
Weldon Miller .................... 223,872(7) 7.72% 6.89%
Clifton A. Payne ................. 1,330 * *
Byron M. Rhea .................... 56 * *
Arthur B. Scharlach, Jr .......... 82,742(8) 2.85% 2.55%
D. R. Zachry, Jr ................. 92,029(9) 3.18% 2.83%
Directors and Executive Officers
as a Group(9).................. 1,239,620 42.77% 38.14%
- ----------
* Indicates ownership which does not exceed 1.0%.
(1) Assumes the issuance of 351,750 shares of Guaranty common stock in
connection with the merger.
(2) Includes 3,500 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 5,432 shares held of record by the Devry W. Garrett IRA.
(4) Includes 2,884 shares held of record by the Charles A. Hinton IRA.
(5) Includes 22,827 shares held of record by the Bill G. Jones IRA Rollover
and 161 shares held of record by Alma Jones, the wife of Mr. Jones.
(6) Includes 5,164 shares held of record by Trust A under the Jones Family
Trust, of which Mr. Jones is trustee and 1,000 shares held of record by
Trust C under the Jones Family Trust, of which Mr. Jones is trustee.
(7) Includes 8,463 shares held of record by Everybody's Furniture Company, of
which Mr. Miller is the President, 37,657 shares held of record by the
Everybody's Furniture Company Profit Sharing Plan & Trust, of which Mr.
Miller is the trustee, 865 shares held of record by the Weldon Miller IRA
and 865 shares held of record by the Joann Miller IRA. Joann Miller is the
wife of Mr. Miller.
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<PAGE>
(8) Includes 9,991 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,
105 shares held of record by the Erin Scharlach Trust, of which Mr.
Scharlach is the trustee and 105 shares held of record by the Emily
Scharlach Trust, of which Mr. Scharlach is the trustee.
(9) Includes 2,884 shares held of record by the D. R. Zachry IRA.
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<PAGE>
DESCRIPTIONS OF SECURITIES OF GUARANTY
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Guaranty consists of (i) 15,000,000 shares
of preferred stock, $5.00 per share par value issuable in series, none of which
are issued and outstanding and (ii) 50,000,000 shares of common stock, $1.00 per
share par value, of which 2,898,280 shares were issued and outstanding as of the
date of this proxy statement/prospectus. The terms of any new series of
preferred stock may be fixed by the Board of Directors of Guaranty within
certain limits set by Guaranty's Articles of Incorporation.
The following discussion of the terms and provisions of Guaranty's capital
stock is qualified in its entirety by reference to Guaranty's Articles of
Incorporation and Bylaws, copies of which have been filed as exhibits to the
Registration Statement of which this proxy statement/prospectus is a part.
PREFERRED STOCK
Guaranty 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 Guaranty's Board of Directors, including, without
limitation, making future acquisitions, raising additional equity capital and
financing. Subject to certain limits set by Guaranty'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 Guaranty).
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. Guaranty'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:
o dividend rate, preference of dividend with respect to any other
class or series of stock, and cumulativity, non-cumulativity or
partial cumulativity of dividends;
o 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;
o sinking fund provisions for the redemption or purchase of shares;
o the amount payable upon shares in the event of voluntary or
involuntary liquidation;
o the terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion;
o voting rights; and
o such other powers, preferences and rights as the Board of Directors
shall determine.
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 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 Guaranty 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 Guaranty and
its then existing shareholders.
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<PAGE>
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 Guaranty'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 Guaranty'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:
o reduction of the amount otherwise available for payments of
dividends on common stock if dividends are payable on the series of
preferred stock;
o restrictions on dividends on common stock if dividends on the series
of preferred stock are in arrears;
o 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;
o 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
o restrictions on the rights of holders of common stock to share in
Guaranty'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 Guaranty, or securities of Guaranty convertible
into or carrying a right to subscribe for or acquire shares of Guaranty.
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 Guaranty, 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.
On the liquidation of Guaranty, the holders of common stock are entitled
to share pro rata in any distribution of the assets of Guaranty, 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 Guaranty has been retired.
TEXAS LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of Texas law, Guaranty's Articles of Incorporation and
Guaranty's Bylaws could make more difficult the acquisition of Guaranty 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 Guaranty to negotiate first with
Guaranty.
Guaranty is subject to the provisions of the Texas Business Combination
Law (Articles 13.01 through 13.08 of the Texas Business Corporation Act), which
provides that a Texas corporation such as Guaranty may not engage in certain
business combinations, including mergers, consolidations and asset sales, with a
person, or an affiliate or associate of such
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<PAGE>
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 Guaranty contain any provision expressly providing that Guaranty 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 Guaranty, even if such event would be
beneficial to Guaranty's shareholders.
The following discussion is a summary of certain material provisions of
Guaranty's Articles of Incorporation and Guaranty'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 Guaranty's Bylaws, the Board of
Directors is classified into three classes, with the directors being elected for
staggered, three-year terms. The classification of Guaranty'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.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND NOMINATIONS. Guaranty's Bylaws
establish an advance notice procedure for shareholders to make nominations of
candidates for election as directors or bring other business before any meeting
of shareholders of Guaranty. 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 Guaranty
prior to the meeting at which directors are to be elected, will be eligible for
election as directors of Guaranty and that, at a shareholders' 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 Guaranty 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 a shareholders' meeting to be
timely, such notice must be received by Guaranty not less than 60 days prior to
the meeting.
A shareholder's notice to Guaranty 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, a representation that the shareholder is a record holder
of Guaranty stock entitled to vote at the meeting and information regarding each
proposed nominee or each proposed matter of business that would be required
under the federal
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securities laws to be included in a proxy statement soliciting proxies for the
proposed nominee or the proposed matter of business.
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
Guaranty 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. Guaranty's Articles
of Incorporation provide that, notwithstanding any provision of the Texas
Business Corporation Act 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 meting, the vote or approval of a majority of the shares of Guaranty'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 Guaranty's assets, a dissolution or an amendment
to Guaranty's Articles of Incorporation, each of which would otherwise require
two-thirds shareholder approval under Texas law.
AMENDMENT OF BYLAWS. Guaranty'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 Guaranty's Bylaws.
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SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST AMERICAN
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of First American and the
notes thereto, appearing elsewhere in this proxy statement/prospectus and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations of First American." The selected
consolidated financial data as of and for the three years ended December 31,
1994, 1995 and 1996, as of and for the six months ended June 30, 1997 and as of
and for the year ended June 30, 1998 are derived from First American's
Consolidated Financial Statements which have been audited by independent
certified public accountants. The selected consolidated financial data as of and
for the nine months ended March 31, 1999 and March 31, 1998 have not been
audited but, in the opinion of the management of First American, contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results of the interim periods.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR AS OF AND FOR
NINE MONTHS ENDED THE YEAR THE SIX MONTHS AS OF AND FOR THE YEARS
MARCH 31, ENDED JUNE 30, ENDED JUNE 30, ENDED DECEMBER 31,
----------------- ------------- ------------- ---------------------------
1999 1998 1998 1997(1) 1996 1995 1994(2)
------- -------- ------------- ------------- -------- ------- -------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ................................... $ 3,579 $ 3,775 $ 4,853 $ 2,506 $ 4,904 $ 4,861 $ 3,727
Interest expense .................................. 1,779 1,817 2,433 1,244 2,614 2,571 1,497
------- -------- ------------- ------------- -------- ------- -------
Net interest income ...................... 1,800 1,958 2,420 1,262 2,290 2,290 2,230
Provision for loan losses ......................... 187 180 181 622 182 87 62
------- -------- ------------- ------------- -------- ------- -------
Net interest income after provision
for loan losses .......................... 1,613 1,778 2,239 640 2,108 2,203 2,168
Noninterest income ................................ 446 597 906 545 1,083 1,346 809
Noninterest expense ............................... 1,944 1,968 2,601 1,719 3,087 2,699 2,418
------- -------- ------------- ------------- -------- ------- -------
Earnings (loss) before taxes ............. 115 407 544 (534) 104 850 559
(Benefit) provision for income tax
expense ........................................... -- (100) (100) -- (174) 208 158
------- -------- ------------- ------------- -------- ------- -------
Net earnings (loss) ...................... $ 115 $ 507 $ 644 $ (534) $ 278 $ 642 $ 401
======= ======== ============= ============= ======== ======= =======
COMMON SHARE DATA:
Net earnings ...................................... $ 1.25 $ 5.51 $ 7.01 $ (5.69) $ 2.90 $ 6.69 $ 4.18
Book value ........................................ 47.63 45.37 47.13 37.45 44.16 44.08 33.52
Cash dividends per share .......................... -- -- 0.25 0.25 -- -- --
Dividend payout ratio ............................. -- -- 3.57% N/A -- -- --
Weighted average common shares
outstanding (in thousands) ....................... 91,940 91,940 91,931 93,870 96,000 96,000 96,000
Period end shares outstanding
(in thousands) ........................... 91,940 91,940 91,940 91,740 96,000 96,000 96,000
BALANCE SHEET DATA:
Total assets ...................................... $62,855 $ 63,985 $ 65,937 $ 63,699 $ 62,635 $64,925 $57,695
Securities ........................................ 15,227 18,363 18,816 21,834 18,362 25,594 23,710
Loans (net) ....................................... 39,294 35,094 36,733 36,188 36,973 34,551 29,671
Allowance for loan losses ......................... 497 511 457 470 470 433 404
Total deposits .................................... 57,009 56,236 58,808 55,151 54,740 50,143 46,516
Total common stockholders' equity ................. 4,379 4,171 4,333 3,436 4,239 4,232 3,218
AVERAGE BALANCE SHEET DATA:
Total assets ...................................... $64,396 $ 63,993 $ 64,818 $ 63,167 $ 63,780 $61,310 $54,475
Securities ........................................ 17,021 20,098 20,325 20,098 21,978 24,652 22,950
Loans (net) ....................................... 38,013 35,641 36,460 38,080 35,762 32,111 26,913
Allowance for loan losses ......................... 504 467 463 470 451 418 404
Total deposits .................................... 57,908 55,962 56,979 54,945 52,441 48,329 46,778
Total common stockholders' equity ................. 4,356 3,861 3,884 3,837 4,235 3,725 3,512
</TABLE>
(TABLE CONTINUES ON NEXT PAGE.)
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<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR AS OF AND FOR
NINE MONTHS ENDED THE YEAR THE SIX MONTHS AS OF AND FOR THE YEARS
MARCH 31, ENDED JUNE 30, ENDED JUNE 30, ENDED DECEMBER 31,
----------------- ------------- ------------- ---------------------------
1999 1998 1998 1997(1) 1996 1995 1994(2)
------- -------- ------------- ------------- -------- ------- -------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets .......................... 0.24% 1.06% 0.99% (0.84)% 0.44% 1.05% 0.74%
Return on average common equity ................... 3.51 17.51 16.58 (13.92) 6.56 17.23 11.42
Average stockholders' equity to average
total assets .................................. 6.76 6.03 5.99 6.07 6.64 6.07 6.45
</TABLE>
- ------------------
(1) Represents the six month period from December 31, 1996 to June 30, 1997
due to a change in the fiscal year end of First American from December 31
to June 30.
(2) Represents financial data for First American Bank, N.A.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FIRST AMERICAN
Management's Discussion and Analysis of Financial Condition and Results of
Operations of First American analyzes the major elements of First American's
balance sheets and statements of income. This section should be read in
conjunction with First American's Consolidated Financial Statements and
accompanying notes and other detailed information appearing elsewhere in this
proxy statement/prospectus.
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
OVERVIEW
For the nine months ended March 31, 1999, net income decreased $392,000,
or 77.3%, to $115,000 as compared with $507,000 for the nine months ended March
31, 1998. This decrease in earnings was primarily the result of a decrease in
noninterest income of $151,000 and a reduction in net interest income of
$158,000 for the nine months ended March 31, 1999 as compared with the nine
month period ended March 31, 1998. Falling interest rates through the last half
of 1998 affected both net interest income and noninterest income. Such movements
in interest rates effect the level of prepayment associated with First
American's servicing portfolio, which influences both the value of the servicing
and the level of fees generated.
Total assets decreased $3,082,000 to $62,855,000 as of March 31, 1999 as
compared with $65,937,000 as of June 30, 1998. This decrease was the result of
the repayment of $1,000,000 of other borrowings during the nine months ended
March 31, 1999 and a decrease in deposits of $1,799,000 to $57,009,000 as of
March 31, 1999 as compared with $58,808,000 as of June 30, 1998. The increase in
loans of $2,561,000 during the nine months ended March 31, 1999 was funded by a
$3,589,000 reduction in investments and mortgage-backed securities and a
decrease in cash and cash equivalents of $1,889,000 for the same time period.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income before provisions decreased $158,000 to $1,800,000 for
the nine months ended March 31, 1999 compared with the nine months ended March
31, 1998. This decrease was the net result of total interest income decreasing
$196,000 for the nine month period ended March 31, 1999 as compared with the
nine month period ended March 31, 1998 and a decrease in total interest expense
of $38,000 for the same comparative period. The decrease in total interest
income was primarily the result of decreasing portfolio yields due to the
reductions in the prime lending rate that occurred in the fall of 1998. Total
interest expense decreased as First American reduced other borrowings and
replaced those funds with lower cost deposits.
Total interest income decreased $196,000, or 5.2%, to $3,579,000 for the
nine months ended March 31, 1999, from $3,775,000 for the nine months ended
March 31, 1998. The decreases in interest income on investment and
mortgage-backed securities and interest income on loans of $193,000 and $78,000,
respectively, for the nine months ended March 31, 1999 as compared with the nine
months ended March 31, 1998 were offset by an increase in the interest on
overnight interest-bearing deposits of $75,000 for the same time period. The
loan portfolio increased over $2,500,000 during the nine month period ended
March 31, 1999 but this was not enough to completely offset the lower portfolio
yields. Interest income on investment and mortgage-backed securities decreased
due to decreased portfolio volumes, compounded by lower net yields. The increase
in interest income on overnight interest-bearing deposits increased primarily
due to the generally higher balances maintained during the nine months ended
March 31, 1999 as compared with the balances maintained during the nine months
ended March 31, 1998.
Total interest expense decreased $38,000, or 2.1%, to $1,779,000 for the
nine months ended March 31, 1999 as compared with $1,817,000 for the nine months
ended March 31, 1998. Interest on deposit accounts increased $32,000 to
$1,707,000 for the nine month period ended March 31,1999 as compared with the
nine months ended March 31, 1998. This increase is the net result of higher
deposit volume offset by a decrease in deposit yields. Interest expense on other
borrowings decreased $70,000 to $72,000 for the nine months ended March 31, 1999
as compared with $142,000 for the nine months ended
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March 31, 1998. This increase was due primarily to the decreased level of
borrowing experienced during the nine month period ended March 31, 1999 as
compared with the same period in 1998.
The following table sets forth for the periods indicated the weighted
average yields earned on First American's interest- earning assets, the weighted
average rate paid on interest-bearing liabilities, the interest rate spread and
net yield on interest- earning assets:
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
OUTSTANDING INTEREST YIELD/ OUTSTANDING INTEREST YIELD/
BALANCE EARNED/PAID RATE BALANCE EARNED/PAID RATE
----------- ----------- ------- ----------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans .......................................... $ 11,863 $ 826 9.28% $ 9,691 $ 669 9.20%
Other loans ............................................. 26,150 1,816 9.26 25,950 2,052 10.54
----------- ----------- ------- ----------- ----------- -------
Total loans .......................................... 38,013 2,642 9.27 35,641 2,721 10.18
Investment and mortgage-backed securities ............... 17,022 798 6.25 20,406 990 6.47
Overnight interest-bearing deposits ..................... 6,739 139 2.75 4,908 64 1.74
----------- ----------- ------- ----------- ----------- -------
Total investment securities .......................... 23,761 937 5.26 25,314 1,054 5.55
----------- ----------- ------- ----------- ----------- -------
Total interest-earning assets ........................ 61,774 3,579 7.73% 60,955 3,775 8.26%
----------- ----------- ------- ----------- ----------- -------
Noninterest-earning assets:
Office property and equipment, net ...................... 1,054 1,008
Real estate acquired through foreclosure ................ 11 1
Other noninterest-earning assets ........................ 1,564 2,025
----------- -----------
Total assets ......................................... $ 64,403 $ 63,989
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposit accounts ........................................ $ 44,607 $ 1,707 5.10% $ 46,388 $ 1,675 4.82%
Borrowings .............................................. 1,500 72 6.40 3,750 142 5.05
----------- ----------- ------- ----------- ----------- -------
Total interest-bearing liabilities ................... 46,107 1,779 5.14% 50,088 1,817 4.84%
----------- ----------- ------- ----------- ----------- -------
Noninterest-bearing deposits ............................ 13,464 9,595
Other liabilities ....................................... 476 505
----------- -----------
Total liabilities .................................... 60,047 60,188
----------- -----------
Stockholders' equity ....................................... 4,356 3,801
----------- -----------
Total liabilities and stockholders' equity .............. $ 64,403 $ 63,989
=========== ===========
Net interest income ........................................ $ 1,800 $ 1,958
=========== ===========
Interest rate spread ....................................... 2.59% 3.42%
======= =======
Net yield on average interest-earning assets ............... 3.88% 4.28%
======= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities .................... 1.34% 1.22%
======= =======
</TABLE>
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The following table sets forth certain information regarding changes in
the interest income and interest expense of First American for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in volume multiplied by old rate); (ii) changes in rate (changes
in rate multiplied by the old volume); and (iii) the total. Changes in
rate/volume (changes in rate multiplied by the changes in volume) have been
allocated to rate and volumes consistently on a proportionate basis.
NINE MONTHS ENDED MARCH 31,
--------------------------------
1999 VS. 1998
--------------------------------
INCREASE (DECREASE)
DUE TO
--------------------
VOLUME RATE TOTAL
--------- --------- ---------
(Dollars in thousands)
Change in interest income:
Loans .................................... $ 244 $ (322) $ (78)
Investment and mortgage-backed securities. (149) (44) (193)
Overnight interest-bearing securities .... 28 47 75
--------- --------- ---------
Total interest income .................... 123 (319) (196)
--------- --------- ---------
Change in interest expense:
Deposits ................................. 75 (43) 32
Borrowings ............................... 46 (116) (70)
--------- --------- ---------
Total interest expense ................... 121 (159) (38)
--------- --------- ---------
Change in net interest income ............... $ 2 $ (160) $ (158)
--------- --------- ---------
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $7,000 for the nine months ended
March 31, 1999 to $187,000 as compared with $180,000 for the same period in
1998. The allowance for loan losses as a percentage of total loans at March 31,
1999 was 1.21% as of March 31, 1999 as compared with 1.19% as of March 31, 1998.
The allowance for loan losses as a percentage of total non- performing loans was
43.9% and 97.5% as of March 31, 1999 and June 30, 1998, respectively.
NONINTEREST INCOME
Total noninterest income decreased $151,000, or 25.3%, for the nine months
ended March 31, 1999 as compared with the nine months ended March 31, 1998.
During the nine months ended March 31, 1999, First American experienced an
increase in the prepayment of its servicing assets which caused First American
to accelerate the amortization of its purchased and capitalized servicing
rights. The increased prepayments also led to net reduction in the volume of
assets serviced and the level of fee income derived from this activity. This
combination of events caused net loan servicing fees to decrease $91,000 for the
nine months ended March 31, 1999 as compared with the nine months ended March
31, 1998. Fee income decreased $80,000 for the nine months ended March 31, 1999
as compared with the nine months ended March 31, 1998. The decrease is primarily
the result of a reduction in the fees earned on the origination of single family
mortgage loans. Competitive pressures reduced the fees generated per loan and
caused a reduction in originations.
NONINTEREST EXPENSE
Total noninterest expense decreased $24,000, or 1.2%, to $1,944,000 for
the nine months ended March 31, 1999 from $1,968,000 for the nine months ended
March 31, 1998. This decrease was primarily the result of decreases in
compensation and employee benefits and occupancy and equipment expense of
$76,000 and $50,000, respectively, which were partially offset by increases of
$64,000 and $38,000 in other expense and professional services, respectively,
for the nine months ended March 31, 1999 as compared with the nine months ended
March 31, 1998. The decrease in compensation and employee benefits is due to a
reduction in the number of staff which resulted from attrition. Occupancy and
equipment expense decreased as the result of operational efficiencies and
increased productivity. Other expense increased primarily as the result of an
acceleration of the
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amortization of deferred costs related to a leasing transaction. Professional
services increased as the result of the implementation of an internal audit
program and costs associated with First American's Year 2000 program.
INCOME TAXES
First American has not paid any taxes or recorded any federal income tax
expense for the nine month periods ended March 31, 1999 and 1998 because of the
existence of certain net operating loss carryforwards primarily created from the
tax effects of a leverage lease transaction.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principals, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the relative purchasing power of money
over time due to inflation. Unlike industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of the general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services. However, noninterest expenses do
reflect general levels of inflation.
FINANCIAL CONDITION
LOAN PORTFOLIO
LOANS. First American's net loan portfolio totaled approximately
$39,294,000 at March 31, 1999, representing approximately 62.5% of total assets
and 68.9% of deposits. The principal lending activity of First American is the
origination of commercial, consumer and one-to-four family residential mortgage
loans. As of March 31,1999, $10,830,000 or 26.35% of the total loan portfolio
consisted of commercial loans, $9,959,000 or 24.23% of the loans were secured by
one-to-four family residential property and $8,141,000 or 19.81%, were consumer
credits. To a lesser extent, First American originates other mortgage loans
secured by commercial real estate, which totaled $5,337,000 at March 31, 1999.
First American also offers construction and land loans on one-to-four family
residential property and commercial property. Loans of this type were
$2,738,000, or 6.66% of the total loan portfolio at March 31, 1999.
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Set forth below is selected data relating to the composition of First
American's loan portfolio by type of loan on the dates indicated:
AT MARCH 31, AT JUNE 30,
1999 1998
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------
(Dollars in thousands)
Real estate:
One-to-four family residential .... $ 9,959 24.23% $ 7,053 18.40%
Commercial real estate ............ 5,337 12.99 5,121 13.36
Construction and land loans ....... 2,738 6.66 2,190 5.71
Loans held for sale, at fair value. 146 0.35 300 0.78
Other loans - real estate ......... 930 2.26 1,853 4.84
Commercial .......................... 10,830 26.35 10,332 26.95
Agriculture ......................... 3,019 7.35 3,091 8.06
Consumer and installment (1) ........ 8,141 19.81 8,394 21.90
-------- -------- -------- --------
Total loans ....................... $ 41,100 100.00% $ 38,334 100.00%
======== ======== ======== ========
Less: Undisbursed portion of
interim construction loans ......... (1,004) (634)
Unearned income ................... (305) (510)
Allowance for loan losses ......... (497) (457)
-------- --------
Total loans receivable, net ..... $ 39,294 $ 36,733
======== ========
- ---------
(1) Includes primarily automobile loans, mobile home loans and unsecured
consumer loans.
First American offers commercial lending products to small and
medium-sized businesses. First American offers general business loans,
commercial real estate loans, equipment loans, working capital loans, revolving
lines of credit and letters of credit. Generally, commercial loans are
collateralized and on a structured repayment program; however, First American
does originate term loans depending on the needs of the customer. Essentially
all commercial loans are personally guaranteed by the owners or principal
participants. Commercial loans generally have adjustable rates of interest and
adjustment provisions that range from daily to annually.
First American offers fixed-rate and adjustable-rate one-to-four family
residential loans with terms up to 30 years. One-to-four family residential
loans are amortized on a monthly basis with principal and interest due each
month. All residential mortgage loans customarily include "due-on-sale" clauses
which are provisions giving First American the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage. First American is aware
of the risks inherent in originating fixed-rate, one-to-four family residential
loans for its portfolio but recognizes the need to respond to the market demand
for fixed-rate loans. Substantially all fixed-rate, one-to-four family mortgage
loans with terms greater than 15 years are originated and underwritten using
secondary mortgage market criteria for sale into the secondary mortgage market.
The sale of these loans reduces First American's exposure to interest rate risk.
First American offers adjustable-rate, one-to-four family mortgage loans
("ARMs") in order to decrease the vulnerability of its operations to changes in
interest rates. First American's residential ARMs are fully amortizing loans
with contractual maturities of up to 30 years. Substantially all of the ARMs in
its portfolio have interest rates that adjust on an annual basis in accordance
with a designated index. First American currently offers ARMs with either a 2%
limit on the rate adjustment per period and a 6% limit on the rate adjustment
over the life of the loan. First American's underwriting standards for ARMs
require that it assess a potential borrower's ability to make principal and
interest payments assuming a 2% increase in the interest rate from the rate at
the time of origination. First American's ARMs are not convertible into
fixed-rate loans, are assumable only with approval from First American Bank, do
not contain prepayment penalties and do not produce negative amortization.
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<PAGE>
First American's commercial real estate loans include loans secured by
businesses, churches, small office buildings and family-type business
establishments while multi-family residential loans are secured primarily by
small apartment buildings. At March 31, 1999, First American's commercial and
multi-family real estate loans were secured by properties located in First
American Bank's primary market. As a general rule, commercial real estate and
multi-family loans have terms of up to 25 years and loan-to-value ratios are
limited to a maximum of 75%. The loan-to-value ratio and term to maturity are
based upon the age of the applicable structure, condition of repair and
remaining economic life. First American originates both fixed-rate and
adjustable-rate commercial and multi-family real estate loans.
Federal regulations permit a maximum loan-to-value ratio of 100% for
one-to-four family dwellings and 80% for all other real estate loans. First
American's lending policies generally limit the maximum loan-to-value ratio on
one-to-four family real estate loans to 80% of the lesser of the appraised value
or the purchase price. All real estate loans made in excess of interagency
policy are reported separately and monitored monthly by the Board of Directors.
First American generally originates real estate loans that are less than the
maximum permissible under applicable regulations and in accordance with sound
lending practices, market conditions and applicable underwriting standards.
First American requires appraisals of all properties securing real estate
loans. Depending upon the size of the loan, appraisals are performed by either
an in-house appraiser or an independent fee appraiser designated by First
American. All appraisals are reviewed and approved by the servicing officer. In
originating real estate loans, First American considers the quality and location
of the real estate and the credit quality of the borrower. Additionally,
corporate cash flows and the quality of management involved with the property
are considered for commercial real estate loans. Commercial and multi-family
residential real estate loans to corporations require the personal guaranty of
the entity's controlling stockholders. After a real estate loan is approved, it
is First American's policy to record a lien on the real estate securing the loan
and to obtain a title insurance policy which insures that the property is free
of prior encumbrances. Borrowers must also obtain hazard insurance policies
prior to closing. Flood insurance is required for properties located in an area
designated as flood plain by the Department of Housing and Urban Development.
First American makes land loans primarily to individuals for the
acquisition of both improved and unimproved land. Construction loans are
originated for the construction of residential and commercial properties.
Residential construction loans are made to individuals for the construction of
their residence and to approved builders for the construction of presold and
unsold (speculative) properties. Although these loans afford First American the
opportunity to achieve higher interest rates and fees with shorter terms to
maturity than do one-to-four family permanent mortgage loans, construction
financing is generally considered to involve a higher degree of risk. First
American's risk of loss on a construction loan is largely dependent upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. If the estimate of value proves inaccurate, First American may be
confronted at, or prior to, maturity of the loan, with a projection of value
which is insufficient to assure full repayment. If the estimate of construction
cost or salability of the property upon completion of the project proves
inaccurate, First American may be required to advance funds beyond the amount
originally committed to permit completion of the project. Speculative
construction loans carry more risk than other construction loans originated by
First American because the payoff for the loan is dependent upon the builder's
ability to sell the property prior to the time the construction loan is due.
First American attempts to mitigate these risks by among other things, working
with builders with whom it has established relationships and by generally
limiting the number of unsold homes under construction.
Construction and land loans are generally limited to First American's
primary lending area and generally have terms that do not exceed one year.
Construction loans are originated and closed separately from the permanent
financing on the structure, however, the borrower must have obtained a
commitment for permanent financing from First American before the construction
loan is closed. Construction loans are typically interest only, with principal
and interest payments beginning with the closing of the permanent mortgage loan.
Construction loans are underwritten pursuant to the same general guidelines used
for originating permanent loans. Loan disbursements occur only after an
inspection of the site has been made and documented by First American's
servicing officer.
First American makes loans for a wide variety of personal, or consumer
purposes. First American's consumer loan portfolio consists primarily of loans
secured by savings accounts, automobiles, boats, recreational vehicles and other
consumer goods. As a service to our customers, First American from time to time
will make an unsecured loan based on the financial strength of the borrower.
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<PAGE>
For loans secured by automobiles, boats and recreational vehicles, First
American retains the original certificate of title to the collateral until the
loan is paid in full. Borrowers must provide proof of collision coverage and any
other applicable loss coverage as a condition of the loan. A condition report is
required on all used auto, boat and recreational vehicle loans. There is a
minimum loan amount of $500 for consumer loans. The maximum loan amount is a
condition of a published value of the collateral, such as NADA value for an
automobile, and applicable loan-to-value ratios.
Consumer loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. Collection of consumer loans
is dependent upon the borrower's continuing financial stability, and thus are
more likely to be adversely affected by job loss, divorce, illness and personal
bankruptcy. In many cases, the repossessed collateral for a defaulted consumer
loan will not provide an adequate source of repayment of the outstanding loan
balance because of improper repair and maintenance of the underlying security.
The remaining deficiency often does not warrant further substantial collection
efforts against the borrower. First American has attempted to limit these
greater risks generally associated with consumer lending by emphasizing loans be
fully secured by readily marketable collateral.
The following table sets forth certain information at March 31, 1999
regarding the dollar amount of loans maturing in First American's loan portfolio
based on contractual terms to maturity:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------------------
DUE AFTER ONE
DUE WITHIN THROUGH FIVE DUE AFTER FIVE
ONE YEAR(1) YEARS YEARS TOTAL
---------- ------------- -------------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family residential ... $ 593 $ 675 $ 8,046 $ 9,314
Commercial real estate ........... 844 582 123 1,549
Construction and land loans ...... 1,032 843 3 1,878
Consumer and other loans ......... 14,096 7,739 4,718 26,553
---------- ------------- -------------- -------
Total ......................... $ 16,565 $ 9,839 $ 12,890 $39,294
========== ============= ============== =======
</TABLE>
- --------------------
(1) Demand loans, having no stated schedule of repayments and no stated
maturity and overdrafts are included as due within one year.
Loans with a predetermined interest rate due after one year totaled
$9,655,000 at March 31, 1999 while loans with a floating interest rate due after
one year totaled $5,052,000 as of the same date.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of First
American are subject to the written, non- discriminatory underwriting standards
and loan origination procedures established by First American's Board of
Directors and management. Loan originations come primarily from walk-in
customers and begin with an initial interview with an officer of First American
Bank for the purpose of obtaining a formal application. Upon receipt of a loan
application from a perspective borrower, a credit report is ordered to verify
specific information relating to the applicant's income and credit standing.
This information may be verified by personal contacts with other reference
sources. If the loan is secured by real property, an appraisal of the real
estate intended to secure the proposed loan is undertaken by a pre-approved,
qualified, independent appraiser. As soon as the required information has been
obtained and the appraisal complete, the information is reviewed for compliance
with corporate underwriting standards. Single-family residential loans over
$214,000 require Board approval. All other loans in excess of $100,000 require
the approval of the Officer's Loan Committee and Director's Loan Committee.
Mortgage loans underwritten for specific government programs, such as
Farmers Home Administration or the Veterans Administration are sold "servicing
released" with First American receiving compensation for the value of the
servicing rights sold and origination fees charged to the customer. Conventional
fixed-rate mortgage loans are sold "servicing retained" with First American
receiving 25 basis points to service the loans. All sales of conventional loans
were cash sales with no recourse provisions. Governmental loans sold were cash
sales with the purchaser having the right to require First American to
repurchase the loan if it defaults in the first 12 months.
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<PAGE>
First American originates small business loans guaranteed by the Small
Business Administration ("SBA") and the Farm Services Administration ("FSA"),
formerly known as the Farmers Home Administration. The participation amounts
range from 75% to 90% of the loan value and is typically a condition of loan
approval. At March 31, 1999 the guaranteed portion of loans guaranteed by the
SBA and FSA totaled $1,585,000.
First American has sold participation interests in commercial loans to
other financial institutions to reduce First American's exposure to any one
project. First American services these loans and remits the investors' portion
as called for in the participation agreement. First American had sold $1,228,000
of participation interests as of March 31, 1999.
First American, from time to time, will purchase participation interests
from other financial institutions. Participations purchased totaled $435,000 at
March 31, 1999 and consisted primarily of interim construction loans on
one-to-four family residential real estate.
LOAN SERVICING ACTIVITIES. In addition to servicing loans held in its
portfolio, First American services one-to-four family residential real estate
loans sold to the secondary market. The servicing portfolio consists of
one-to-four family residential real estate loans sold to Federal National
Mortgage Corporation ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC"). Servicing includes collecting and remitting loan payments, accounting
for principal and interest, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent borrowers, supervising
foreclosures in the event of unremedied defaults and general administration of
the loans. The aggregate unpaid principal balance of loans serviced for others
at March 31, 1999 was $46,278,000.
NONPERFORMING ASSETS
DELINQUENT LOANS. When a borrower fails to make a scheduled loan payment,
First American contacts the customer in an effort to bring the loan current. In
general, contacts are made after a real estate loan is more than 15 days past
due. A delinquent notice is sent and a late charge imposed, if called for in the
note, after the loan payment is 15 days past due. If a delinquency on a mortgage
loan reaches 90 days and is not cured through First American's normal collection
process, or an acceptable arrangement is not worked out with the borrower, First
American will implement measures to remedy the default, including foreclosure
action or, in special circumstances, accepting a voluntary deed in lieu of
foreclosure from the borrower. When a commercial loan becomes 5 days delinquent,
a delinquent notice is sent. Generally, the borrower will receive a call from
the servicing officer before a loan reaches 30 day delinquent. If a commercial
loan is not cured within 90 days, action necessary to protect First American's
interest and minimize loss is taken. Defaults are cured promptly in most cases.
Consumer installment loans that are five days past due are sent a
delinquent notice. When an installment loan that is collateralized with real or
personal property becomes 90 days past due, title and possession of the property
is taken unless other arrangements are made that are satisfactory with First
American.
NONPERFORMING ASSETS. Loan are placed on a non-accrual status when, in the
opinion of management, the collectability of additional interest is deemed
insufficient to warrant further accrual. Generally, First American places all
loans more than 90 days past due on non-accrual status. When a loan is placed on
non-accrual status, interest is not accrued beyond 90 days. Subsequent payments
are applied to the outstanding principal balance until the loan is brought
current. A loan is returned to accrual status when the loan has been brought
current and, in the opinion of management, the borrower's ability to pay as
agreed has been restored.
Real estate acquired through foreclosure, or a deed in lieu of
foreclosure, is classified as real estate acquired in the settlement of loans.
When the property is acquired, it is recorded at the lower of the recorded
investment in the property or its fair value, whichever is less. The recorded
investment is the sum of the unpaid principal balance, accrued interest as of
the date of acquisition and acquisition costs associated with the property. If
the recorded investment in the property exceeds its fair value, the excess is
charged to the allowance for loan losses at the time of acquisition. Any
subsequent write-downs and costs associated with holding and maintaining the
property are charged to earnings.
Under generally accepted accounting principles, First American is required
to account for certain loan modifications or restructurings as "troubled debt
restructurings." In general, the modification or restructuring of a debt
constitutes a troubled debt restructuring if First American, for economic or
legal reasons related to the borrower's financial difficulties, grants a
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<PAGE>
concession to the borrower that First American would not otherwise consider.
Debt restructurings and/or loan modifications do not necessarily always
constitute troubled debt restructurings and troubled debt restructurings do not
necessarily result in non-accrual loans.
The following table sets forth information with respect to First
American's nonperforming assets as of the dates indicated:
MARCH 31, JUNE 30,
1999 1998
--------- ---------
(Dollars in thousands)
Non-accruing loans ...................................... $ 370 $ 1,114
Accruing loans greater than 90 days delinquent .......... 99 18
--------- ---------
Total nonperforming loans ........................... 469 1,132
Real estate acquired through foreclosure ................ 11 1
--------- ---------
Total nonperforming assets .......................... $ 480 $ 1,133
========= =========
For non-accruing loans, First American would have recognized additional
interest income of approximately $40,000 under the original terms of these loans
during the nine months ended March 31, 1999.
CLASSIFIED ASSETS. Federal regulations require that each insured bank
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, federal examiners have the authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
"Substandard" assets have one or more defined weaknesses and are characterized
by the distinct possibility that the insured institution will sustain some loss
if the deficiencies are not corrected. "Doubtful" assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified "loss" is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. A fourth
category, designated "special mention", is for assets which contain deficiencies
but do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as "substandard", "doubtful" or "loss". Potential
losses in assets classified as "substandard" or "doubtful" may require additions
to the institution's general allowance for loan loss. If an asset or portion
thereof is classified "loss", the insured institution must either establish a
specific allowance for loan loss in the amount of 100% of the portion of the
asset classified "loss", or charge-off such amount. General loss allowances
established to cover possible losses related to assets classified "substandard"
or "doubtful" may be included in determining an institution's regulatory
capital. Federal examiners may disagree with an insured institution's self
classifications and corresponding reserve amounts and may require the
institution to reclassify assets and adjust reserves accordingly. First
American's total classified assets as of March 31, 1999 amounted to $1,032,000,
or 1.65% of total assets.
ALLOWANCE FOR LOAN LOSSES
It is management's policy to maintain an allowance for estimated loan losses
at a level which management considers adequate to absorb losses inherent in the
loan portfolio at each reporting date. Management's estimation of this amount
includes a review of all loans for which full collection is not reasonably
assured. Management considers, among other factors, prior years' loss
experience, current and anticipated economic conditions, distribution of
portfolio loans by risk class and the estimated value of underlying collateral.
Although management uses the best information available to make determinations
with respect to the provision for loan losses, additional provisions for loan
losses may be required in the future should economic or other conditions change
substantially. In addition, the Office of the Comptroller of the Currency
("OCC") and the FDIC, as an integral part of their examination process,
periodically review First American's allowance for loan losses and may require
First American to recognize additions to such allowance based on their judgments
about information available to them at the time of their examination.
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<PAGE>
Activity in the allowance for loan losses consisted of the following:
NINE MONTHS ENDED
MARCH 31, 1999
-----------------
(Dollars in thousands)
Balance at beginning of period ............................ $ 457
Provision for loan losses ................................. 187
Charge-offs:
Commercial and industrial ............................ (57)
Real estate .......................................... --
Consumer ............................................. (157)
Recoveries:
Commercial and industrial ............................ 18
Real estate .......................................... --
Consumer ............................................. 49
-----------------
Net charge-offs ........................................... (147)
-----------------
Balance at end of period .................................. $ 497
=================
Ratio of net charge-offs to average
loans outstanding ....................................... 0.39%
The following table describes the allocation of the allowance for loan
losses among the various loan categories as of March 31, 1999:
MARCH 31, 1999
------------------------
PERCENT OF LOANS
AMOUNT TO TOTAL LOANS
------ ----------------
(Dollars in thousands)
Balance of allowance for loan losses applicable to:
Commercial and agriculture .......................... $ 220 33.70%
Real estate:
Commercial ...................................... 104 15.25
One-to-four family residential .................. 89 31.24
Consumer ............................................ 84 19.81
------ ----------------
Total allowance for loan losses ..................... $ 497 100.00%
====== ================
SECURITIES
First American has the authority under federal regulation to invest in
certain types of investment securities, including United States Treasury
obligations, securities of various federal agencies, state and municipal
governments, certificates of deposits in federally insured institutions, certain
banker's acceptances and federal funds. Subject to various restrictions, First
American may also invest in commercial paper, corporate debt securities and
mutual funds.
First American's investment and mortgage-backed securities portfolio is
managed in accordance with its Investment Policy adopted by the Board of
Directors and administered by the Investment Committee. The stated goals of the
investment policy are to maximize the return on the portfolio while maintaining
the liquidity necessary to effectively manage the operations of First American.
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The following table summarizes the amortized cost of the investment and
mortgage-backed securities held by First American as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998
--------------------- ---------------------
AMORTIZED PERCENT OF AMORTIZED PERCENT OF
COST PORTFOLIO COST PORTFOLIO
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations ..... $ 4,954 32.37% $ 4,588 24.33%
Equity securities .......................... 266 1.75 262 1.40
Mortgage-backed securities ................. 10,081 65.88 14,006 74.27
--------- ---------- --------- ----------
Total ................................. $ 15,301 100.00% $ 18,856 100.00%
========= ========== ========= ==========
</TABLE>
The fair value of First American's investment and mortgage-backed
securities portfolio was $15,215,000 and $18,806,000 at March 31, 1999 and June
30, 1998, respectively.
Management purchases both fixed-rate and adjustable-rate mortgage-backed
securities, from FHLMC, FNMA and GNMA with maturities from five to 40 years.
First American purchases derivative securities in the form of
collateralized mortgage obligations ("CMOs") and structured notes. While these
types of investments possess minimal credit risk due to the federal guarantee
backing the issuing U.S. government agencies, they do possess liquidity risk and
interest rate risk. While all financial instruments are subject to interest rate
risk and liquidity risk, these instruments are more sensitive because of the
regulatory concerns and differing note structures. The fair value of the CMOs at
March 31, 1999 and June 30, 1998 was approximately $6,198,000 and $8,363,000,
respectively. First American does not purchase derivatives for speculative or
hedging purposes.
The following table sets forth at amortized cost the maturities and
weighted average yields of First American's investment and mortgage-backed
securities portfolio at March 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------------------------------------------
LESS THAN ONE TO FIVE FIVE TO TEN OVER TEN
ONE YEAR YEARS YEARS YEARS TOTAL
------------- ------------- ------------- ------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency obligations ............ $ 452 4.86% $3,507 6.12% $ 496 7.05% $ 499 6.36% $ 4,954 6.12%
Debt securities ................................... -- -- -- -- -- -- 266 -- 266 --
Mortgage-backed securities ........................ -- -- 135 8.64 808 6.54 2,821 6.33 3,764 6.46
Collateralized mortgage obligations ............... -- -- -- -- 2,723 5.69 3,594 5.94 6,317 5.84
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Total ...................................... $ 452 4.86% $3,642 6.21% $4,027 6.03% $7,180 5.91% $15,301 5.98%
====== ===== ====== ===== ====== ===== ====== ===== ======= =====
</TABLE>
At March 31, 1999, approximately $4,965,000 million of mortgage-backed
securities were adjustable-rate securities.
Securities classified as held-to-maturity consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations .. $ 666 $ 1 $ (2) $ 665
Debt securities ......................... 266 -- -- 266
Mortgage-backed securities .............. 1,776 9 (19) 1,766
--------- ---------- ---------- -------
Total held-to-maturity securities ... $ 2,708 $ 10 $ (21) $ 2,697
========= ========== ========== =======
</TABLE>
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Securities classified as available-for-sale consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations .............. $ 4,288 $ 24 $ (10) $ 4,302
FNMA stock .......................................... -- 11 -- 11
Mortgage-backed securities .......................... 1,988 21 (2) 2,007
Collateralized mortgage obligations ................. 6,317 12 (130) 6,199
--------- ---------- ---------- ---------
Total available-for-sale securities.... $ 12,593 $ 68 $ (142) $ 12,519
========= ========== ========== =========
</TABLE>
DEPOSITS AND BORROWINGS
Deposits are the major source of First American's funds for lending and
other investment purposes. In addition to deposits, First American derives funds
from principal repayments and interest payments on loans and mortgage-backed
securities. Loans and mortgage-backed securities repayments of principal and
interest payments are a relatively stable source of funds, typically slowing as
rates rise and speeding up as rates fall. Borrowings are used on a short-term
basis to compensate for reductions in the availability of funds from other
sources and for general business purposes.
Local deposits are, and traditionally have been, the primary source of
First American's funds for use in lending and for other general business
purposes. First American offers a number of deposit accounts including demand
accounts, negotiable order of withdrawal ("NOW") accounts, money market savings
accounts, savings accounts, individual retirement accounts ("IRAs") and
certificate of deposit accounts. Deposit accounts vary as to term regarding
withdrawal provisions, deposit provisions and interest rates. First American
adjusts the interest rates offered on its deposit accounts as necessary so as to
remain competitive with other financial institutions in its market area. First
American does not solicit or accept brokered deposits.
The daily average balances and weighted average rates paid on deposits for
the period ended March 31, 1999 are presented below:
NINE MONTHS ENDED
MARCH 31, 1999
------------------
AMOUNT RATE
-------- --------
(Dollars in thousands)
Checking and savings accounts:
Demand .............................................. $ 8,876 -- %
NOW ................................................. 4,016 1.25
Money market ........................................ 7,710 3.55
Savings accounts .................................... 1,880 2.25
-------- --------
Total checking and savings deposit ............... $ 22,482 1.63%
======== ========
Certificates of deposit
IRA's ............................................... 3,476 5.77
Money Market CDs .................................... 31,051 5.44
-------- --------
Total certificates of deposit ....................... 34,527 5.47
-------- ========
Total deposits ................................... $ 57,009 3.96%
======== ========
The following table sets forth the maturities of First American's
certificates of deposit with balances in excess of $100,000:
MARCH 31, 1999
-----------------
(Dollars in thousands)
Three months or less ...................................... $ 1,559
Over three through six months ............................. 1,438
Over six through twelve months ............................ 3,846
Over twelve months ........................................ 2,799
-----------------
Total ................................................. $ 9,642
=================
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During the nine months ended March 31, 1999 First American used advances
from the Federal Home Loan Bank of Dallas ("FHLB") to supplement its supply of
lendable funds for granting loans, making investments and to meet deposit
withdrawal requirements. First American had an average amount of outstanding
advances of approximately $1,000,000 for the nine months ended March 31, 1999.
INTEREST RATE SENSITIVITY
First American is committed to following a program of asset and liability
management in an effort to manage the fluctuations in earnings caused by
movements in interest rates. The ability to maximize net interest income is
largely dependent upon the achievement of a positive net interest rate spread
that can be sustained during fluctuations in prevailing market interest rates.
Interest rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice,
or mature, within a given time period. This difference, or the interest rate
repricing "gap", provides an indication of the extent to which First American's
interest rate spread will be affected by changes in interest rates. In addition
to the effects of changes in the relative level of interest rates, changes in
the relationship between long-term interest rates and short-term interest rates
also affect the net interest rate spread of First American. Generally, a
positively sloped yield curve (long-term rates are higher than short-term rate)
increases First American's net interest rate spread while a negatively sloped
yield curve (short-term interest rates are higher than long-term interest rates)
generally leads to a decrease in the net interest rate spread.
One means of evaluating the sensitivity of an institution's net interest
income to changes in interest rates is to examine the extent to which its assets
and liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that time period. A gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities and negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of falling
interest rates, the net interest income of an institution with a positive gap
may be adversely affected due to its interest-earning assets repricing to a
greater extent than its interest-bearing liabilities, while an institution with
a negative gap would likely experience the opposite result. Conversely, during a
period of rising interest rates, the net interest income of an institution with
a positive gap may increase since it is able to increase the yield on its
interest-earning assets more rapidly than the costs of its interest-bearing
liabilities, while an institution with a negative gap would likely have an
opposite result.
The following table sets forth First American's interest-earning assets
and interest-bearing liabilities at March 31, 1999, which are anticipated, based
upon certain assumptions, to reprice or mature in each of the future time
periods shown. The amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the earlier
of the term to repricing or the contractual maturity of the asset or liability.
The actual maturities of loans, investment securities and mortgage-backed
securities can be significantly shorter than contractual maturities due to the
ability of the borrowers and issuers to call, repay, or prepay, principal with,
or without, call or prepayment penalties.
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<TABLE>
<CAPTION>
TIME TO REPRICING OR MATURITY FROM MARCH 31, 1999
----------------------------------------------------------------
THREE FOUR MONTHS OVER ONE
MONTHS OR THROUGH ONE YEAR THROUGH MORE THAN
LESS YEAR FIVE YEARS FIVE YEARS TOTAL
--------- ----------- ------------ ------------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net .................................................... $ 15,597 $ 12,599 $ 10,619 $ 632 $39,447
Loans held-for-sale ........................................... -- -- -- 145 145
Mortgage-backed securities .................................... 5,205 1,432 2,209 665 9,511
Debt and equity securities .................................... 1,688 1,642 1,861 286 5,477
Short-term interest-bearing deposits .......................... 3,286 -- -- -- 3,286
--------- ----------- ------------ ------------ -------
Total interest-earning assets ............................... 25,776 15,673 14,689 1,728 57,866
--------- ----------- ------------ ------------ -------
Interest-bearing liabilities:
Savings accounts .............................................. 1,880 -- -- -- 1,880
NOW accounts .................................................. 4,017 -- -- -- 4,017
Money market accounts/ ........................................ 7,710 -- -- -- 7,710
Certificate of deposits ....................................... 5,894 19,407 9,218 -- 34,519
Borrowed funds ................................................ -- -- 1,000 -- 1,000
--------- ----------- ------------ ------------ -------
Total interest-bearing liabilities ......................... 19,501 19,407 10,218 -- 49,126
--------- ----------- ------------ ------------ -------
Interest sensitivity gap ......................................... $ 6,275 $ (3,734) $ 4,471 $ 1,728 $ 8,740
Cumulative interest sensitivity gap .............................. $ 6,275 $ 2,541 $ 7,012 $ 8,740
Cumulative total interest-earning assets as a percentage
of cumulative interest-bearing liabilities ................... 1.32% 1.07% 1.14% 1.18%
Cumulative interest sensitivity gap as a percentage of
total assets ................................................. 9.98% 4.04% 11.16% 13.90%
</TABLE>
The table above does not include any estimate of prepayments, which can
significantly shorten the average life of mortgage loans. The actual average
life of mortgage loans is substantially less than the contractual term because
of loan repayments and the enforcement of due-on-sale clauses which gives First
American the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
loan and mortgage. The average life of mortgage loans tends to increase when
current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decreases when current mortgage loan rates are
substantially lower than rates on existing mortgage loans.
As indicated in the preceding table, First American has a positive
$2,541,000 cumulative gap for assets and liabilities maturing or repricing in
one year or less which is equal to 4.04% of total assets . Thus, decreases in
interest rates during this time would generally decrease First American's net
interest income. However, certain limitations are inherent in the method of
analysis presented in the foregoing table. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in the market interest rates, while the interest rates on
other types may lag behind changes in market rates. Additionally, certain assets
such as adjustable-rate mortgage loans have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of changes in interest rates, prepayment and decay rates would likely
deviate significantly from those assumed in calculating the table.
While the preceding table provides an indication of the sensitivity of
First American's net interest income to future changes in interest rates, it
does not include any indication of the sensitivity of servicing fee income
earned by First American for servicing loans for others to changes in interest
rates. These fees are included in noninterest income in First American's
consolidated statements of income. In periods of rising interest rates, when
prepayments on loans generally decline, the servicing fee income on a given
group of loans generally remains higher than if the rates had not increased. The
converse is generally true during periods of falling interest rates. The rate at
which mortgage servicing rights are amortized generally decreases during periods
of rising interest rates and increases during periods of falling interest rates.
Thus, net servicing fee income earned on loans serviced for others will
generally remain higher when rates rise and will generally be reduced when rates
fall.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current
and future operations. First American Bank is subject to capital adequacy
requirements imposed by the OCC for assessing bank capital adequacy. First
American is not subject to the capital adequacy guidelines of the Federal
Reserve, which are substantially similar to those of the OCC, because First
American's consolidated assets do not total $150,000,000 or more. These
standards
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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.
The risk-based capital standards issued by the OCC require all national
banks 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. "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 OCC 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 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 multi-family mortgages. Also pursuant to FDICIA, the OCC has promulgated
regulations setting the levels at which an insured institution such as First
American Bank would be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." First American Bank's riskbased capital ratios remain above
the levels required for First American Bank to be designated as
"well-capitalized" as of March 31, 1999.
Total stockholders' equity as of March 31, 1999, was $4,379,000, an
increase of $46,000 or 10.6% compared with stockholders' equity of $4,333,000 at
June 30, 1998.
The following table provides a comparison of First American Bank's
leverage and risk-weighted capital ratios as of March 31, 1999 to the minimum
and well-capitalized regulatory standards:
MINIMUM WELL- ACTUAL RATIO AT
REQUIRED CAPITALIZED MARCH 31, 1999
-------- ----------- ---------------
FIRST AMERICAN BANK
Leverage ratio ................... 3.00%(1) 5.00% 6.94%
Tier 1 risk-based capital ratio .. 4.00% 6.00% 11.04%
Risk-based capital ratio ......... 8.00% 10.00% 12.31%
- -----------------
(1) The OCC may require First American Bank to maintain a leverage ratio of up
to 200 basis points above the required minimum.
YEAR 2000 COMPLIANCE
GENERAL. The Year 2000 risk involves computer programs and computer
software that are not able to perform without interruption into the Year 2000.
If computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or create erroneous results. Such erroneous results could affect interest,
payment or due dates or cause the temporary inability to process transactions,
send invoices or engage in
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similar normal business activities. If these issues are not addressed by First
American, its suppliers and its borrowers, there could be a material adverse
impact on First American's financial condition or results of operations.
STATE OF READINESS. First American formally initiated its Year 2000
project and plan in September 1997 to insure that its operational and financial
systems will not be adversely affected by Year 2000 problems. First American has
formed a Year 2000 project team, and the Board of Directors and management are
supporting all compliance efforts and allocating the necessary resources to
ensure completion. An inventory of all systems and products (including both
information technology ("IT") and non-informational technology ("non-IT")
systems) that could be affected by the Year 2000 date change has been developed,
verified and categorized as to their importance to First American and an
assessment of all mission critical IT and mission critical non-IT systems has
been completed. This assessment involved inputting test data which simulates the
Year 2000 date change into such IT systems and reviewing the system output for
accuracy. First American's assessment of mission critical non-IT systems
involved reviewing such systems to determine whether they were date dependent.
Based on such assessment, First American believes that none of its mission
critical non-IT systems are date dependent. The software for First American's
systems is provided through service bureaus and software vendors. First American
has contacted all of its third party vendors and software providers and is
requiring them to demonstrate and represent that the products provided are or
will be Year 2000 compliant and has planned a program of testing compliance.
First American's item processing software provider, which performs substantially
all of First American's data processing functions, has stated that its software
is Year 2000 compliant and pursuant to applicable regulatory guidelines First
American is currently producing testing scenarios to verify this assertion. In
addition, First American's compliance efforts regarding Year 2000 issues were
reviewed by the OCC in April 1999.
Except as discussed above, First American has completed the following
phases of its Year 2000 plan: (i) recognizing Year 2000 issues and (ii)
assessing the impact of Year 2000 issues on First American's mission critical
systems. First American is in the process of upgrading, testing and implementing
the mission-critical systems for Year 2000 compliance.
COSTS OF COMPLIANCE. Management does not expect that the cost of bringing
First American's systems into Year 2000 compliance will have a material adverse
effect on First American's financial condition, results of operations or
liquidity. First American has budgeted $20,000 to address Year 2000 issues. As
of March 31, 1999, First American has not incurred any significant costs in
relation to Year 2000. The largest potential risk to First American concerning
Year 2000 is the malfunction of its data processing system. In the event its
data processing system does not function properly, First American is prepared to
perform functions manually. First American believes it is in compliance with
regulatory guidelines regarding Year 2000 compliance, including the timetable
for achieving compliance.
RISKS RELATED TO THIRD PARTIES. The impact of Year 2000 noncompliance by
third parties with which First American transacts business cannot be accurately
gauged. Corporate borrowers have been contacted and assessed by their respective
lending officers in regards to Year 2000 issues. To the extent a problem is
identified with respect to a customer, First American intends to monitor the
customer's progress in resolving such problem. In the event that Year 2000
noncompliance adversely affects borrowers, First American may be required to
charge-off the loan to such borrowers. In the event that Year 2000 noncompliance
causes depositors to withdraw funds, First American plans to maintain additional
cash on hand and has entered into an agreement with the Federal Home Loan Bank
of Dallas to provide additional cash if necessary. First American relies on the
Federal Reserve for electronic fund transfers and check clearing and understands
that the Federal Reserve has certified its systems to be Year 2000 compliant and
continues to test product upgrades. With respect to its borrowers, First
American includes in its loan documents a Year 2000 disclosure form and an
addendum to the loan agreement in which the borrower represents and warrants its
Year 2000 compliance to First American.
CONTINGENCY PLANS. First American is in the process of finalizing its
contingency planning with respect to the Year 2000 date change and believes that
if its own systems should fail, First American could convert to a manual entry
system for a period of up to one month without significant losses. First
American believes that any mission critical system could be recovered and
operating within three to five days. In the event that the Federal Reserve is
unable to handle electronic funds transfers and check clearing, First American
does not expect the impact to be material to its financial condition or results
of operations as long as First American is able to utilize an alternative funds
transfer and clearing source. As part of its contingency planning, First
American has reviewed its loan customer base and the potential impact on capital
of Year 2000 noncompliance. Based upon such review, using what it considers to
be a reasonable worst case scenario, First American has assumed that certain of
its commercial borrowers whose businesses are most likely to be affected by Year
2000 noncompliance would be unable to repay their loans, resulting in
charge-offs of loan amounts in excess of collateral values. If such were the
case, First American believes that the
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effect would not be material, although there are no assurances such amount might
increase and materially effect the financial condition or results of operations
of First American. Management does not believe that this amount is material
enough for First American to adjust its current methodology for making
provisions to the allowance for loan losses. In addition, First American plans
to maintain additional cash on hand to meet any unusual deposit withdrawal
activity.
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Beginning January 1, 1997, First American changed its fiscal year end from
December 31 to June 30. The audited consolidated financial statements of First
American included elsewhere in this proxy statement/prospectus are for the year
ended December 31, 1996, the six month period ended June 30, 1997 and the year
ended June 30, 1998. The following analysis of the financial condition and
results of operations of First American is for the twelve month periods ending
June 30, 1998 and June 30, 1997. Audited financial statements are not provided
for the year ended June 30, 1997. The information presented as of June 30, 1997
is derived from the financial statements included herewith for the six month
period ended June 30, 1997 and unaudited information prepared by management for
the six month period ended December 31, 1996.
OVERVIEW
For the year ended June 30, 1998, net income increased $1,085,000 to
$644,000 as compared with a loss of $441,000 for the year ended June 30, 1997.
This increase in earnings was primarily the result of a decrease in noninterest
expense of $588,000 and a $181,000 provision for loan losses for the year ended
June 30, 1998 as compared with a provision of $747,000 for the year ended June
30, 1997.
Total assets increased $2,238,000, or 3.51%, to $65,937,000 at June 30,
1998, from $63,699,000 at June 30, 1997. During fiscal 1998, First American
increased liquidity and reduced its dependence on borrowed funds. Cash and
overnight interest-bearing deposits increased 227.9%, or $5,337,000 to
$7,678,000 during the year ended June 30, 1998 while other borrowings decreased
55.56%, or $2,500,000, to $2,000,000 during the same time period. Deposits
increased $3,657,000 to $58,808,000 as of June 30, 1998 from $55,151,000 as of
June 30, 1997. First American reduced its holdings of investment and
mortgage-backed securities $3,018,000 to $18,816,000 during the year ended June
30, 1998. These funds were used to increase liquidity, reduce borrowings and
fund new loans, net. Loans increased $545,000 to $36,733,000 at June 30, 1998
from $36,188,000 at June 30, 1997.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income before provisions decreased $81,000 to $2,420,000 for
the year ended June 30, 1998 compared with the year ended June 30, 1997. This
decrease was the result of total interest income decreasing $138,000 for the
year ended June 30, 1998 compared with the prior year and while total interest
expense decreased $57,000 for the same comparative period. The decrease in total
interest income was primarily the result of reduced portfolio yields, which were
partially offset by increased portfolio volumes. Total interest expense
decreased primarily as the result of a reduction in other borrowings, which was
offset with lower cost deposits.
Total interest income decreased $138,000, or 2.8%, to $4,853,000 for the
year ended June 30, 1998, from $4,991,000 for the year ended June 30, 1997.
Interest income on loans decreased $204,000, or 5.6%, from $3,648,000 for the
year ended June 30, 1997 to $3,444,000 for the year ended June 30, 1998. This
decrease was primarily the result of lower portfolio yields offsetting the
increased volume of loans outstanding. Interest income on overnight
interest-bearing deposits increased $102,000 to $137,000 for the year ended June
30, 1998 as compared with the year ended June 30, 1997. This was the result of
First American maintaining minimal funds purchased balances the year ended June
30, 1997 and often maintaining a funds sold position. Interest income on
investment and mortgage-backed securities decreased $36,000 for the year ended
June 30, 1998 as compared with the year ended June 30, 1997 and was primarily
the result of a decrease in the yields.
Interest expense decreased $57,000, or 2.3%, to $2,433,000 for the year
ended June 30, 1998 as compared with $2,490,000 for the year ended June 30,
1997. Interest on deposit accounts increased $62,000 to $2,251,000 for the year
ended
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<PAGE>
June 30, 1998 as compared with the year ended June 30, 1997. This increase was
the net result of higher deposit volume offsetting the decrease in deposit
yields. Interest expense on other borrowings decreased $119,000 to $182,000 for
the year ended June 30, 1998 as compared with $301,000 for the year ended June
30, 1997. This increase was due primarily to the decreased level of borrowing
experienced during the year ended June 30, 1998 as compared with the year ended
June 30, 1997.
The following table sets forth for the periods indicated the weighted
average yields earned on First American's interest- earning assets, the weighted
average rate paid on interest-bearing liabilities, the interest rate spread and
net yield on interest- earning assets:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------------------
1998 1997
------------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ AVERAGE OUTSTANDING EARNED/ AVERAGE
BALANCE PAID YIELD/RATE BALANCE PAID YIELD/RATE
----------- -------- ---------- ----------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans ................................................... $ 36,461 $ 3,444 9.45% $ 36,580 $ 3,648 9.97%
Investment and mortgage-backed securities ............... 20,325 1,272 6.26 20,098 1,308 6.51
Overnight interest-bearing deposits ..................... 2,192 137 6.25 1,003 35 3.49
----------- -------- ---------- ----------- -------- ----------
Total interest-earning assets .................. $ 58,978 $ 4,853 8.23% $ 57,681 $ 4,991 8.65%
=========== ======== ========== =========== ======== ==========
Noninterest-earning assets:-
Office property and equipment, net ...................... 998 1,034
Real estate acquired through foreclosure ................ 85 181
Other noninterest-earning assets ........................ 4,757 4,271
----------- -----------
Total assets ............................................... $ 64,818 $ 63,167
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposit accounts ........................................ $ 46,928 $ 2,251 4.80% $ 45,980 $ 2,189 4.76%
Borrowings .............................................. 3,250 182 5.60 3,750 301 8.03
----------- -------- ---------- ----------- -------- ----------
Total interest-bearing liabilities ...................... 50,178 2,433 4.85% 49,730 2,490 5.01%
----------- -------- ---------- ----------- -------- ----------
Noninterest-bearing deposits ............................... 10,051 8,966
Other liabilities .......................................... 704 634
----------- -----------
Total liabilities ....................................... 60,933 59,330
Stockholders' equity ....................................... 3,885 3,837
=========== ===========
Total liabilities and stockholders' equity ................. $ 64,818 $ 63,167
=========== ===========
Net interest income ........................................ $ 2,420 $ 2,501
======== ========
Interest rate spread ....................................... 3.38% 3.64%
========== ==========
Net yield on average interest-earning assets ............... 4.10% 4.34%
========== ==========
Ratio of average interest-earning assets to
average interest-bearing liabilities ..................... 1.18% 1.16%
========== ==========
</TABLE>
The following table sets forth certain information regarding changes in
the interest income and interest expense of First American for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate); (2) changes in rate (changes
in rate multiplied by the old volume); and (3) the total. Changes in rate/volume
(changes in rate multiplied by the changes in volume) have been allocated to
rate and volumes consistently on a proportionate basis.
YEARS ENDED JUNE 30,
-------------------------------------
1998 VS. 1997
INCREASE (DECREASE) DUE TO
--------------------------
VOLUME RATE TOTAL
------------ ------------ --------
(Dollars in thousands)
Change in interest income:
Loans ............................... $ (13) $ (191) $ (204)
Mortgage-backed securities .......... 14 (50) (36)
Overnight interest-bearing deposits.. 58 44 102
------------ ------------ --------
Total interest income .......... 59 (197) (138)
Change in interest expense:
Deposits ............................ (45) (17) (62)
Borrowings .......................... 34 85 119
------------ ------------ --------
Total interest expense ......... (11) 68 57
------------ ------------ --------
Change in net interest income .......... $ 48 $ (129) $ (81)
============ ============ ========
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<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $566,000 for the year ended June
30, 1998 to $181,000 as compared with the provision for loan losses of $747,000
for the year ended June 30, 1997. The decrease in the provision for loan losses
for the year ended June 30, 1998 as compared with the year ended June 30, 1997
was due primarily to anticipated losses associated with purchased sub-prime
automobile paper. The allowance for loan losses as a percentage of total loans
at June 30, 1998 and 1997, respectively, was 1.23% and 1.28%. The allowance for
loan losses as a percentage of total nonperforming loans was 38.64% and 58.98%
as of June 30, 1998 and 1997, respectively.
NONINTEREST INCOME
Total noninterest income decreased $218,000, or 19.4%, for the year ended
June 30, 1998 as compared with the year ended June 30, 1997. During 1997, First
American recorded income associated with a leasing transaction in the amount of
approximately $335,000. No income was recorded in association with this
transaction during the year ended June 30, 1998. Fee income generated by First
American increased $146,000 to $435,000 for the year ended June 30, 1998 as
compared with the year ended June 30, 1997, partially offsetting the above
mentioned reduction.
NONINTEREST EXPENSE
Total noninterest expense decreased 18.4%, or $588,000, to $2,601,000 for
the year ended June 30, 1998 from $3,189,000 for the year ended June 30, 1997.
This decrease was primarily the result of a decrease of approximately $284,000
in amortization expense relating to a leasing transaction during the year ended
June 30, 1997 that was not taken during the year ended June 30, 1998. Occupancy
and equipment expense and compensation and employee benefits increased $143,000
and $96,000, respectively, for the year ended June 30, 1998 as compared with the
year ended June 30, 1997.
INCOME TAXES
First American has not paid any taxes or recorded any federal income tax
expenses for the year ended December 31, 1996, the six month period ended June
1, 1997 and the year ended June 30, 1998 because of the existence of certain net
operating loss carryforwards primarily created from the tax effects of a
leverage lease transaction.
FINANCIAL CONDITION
LOAN PORTFOLIO
LOANS. First American's net loan portfolio increased 1.51% to
approximately $36,733,000 at June 30, 1998 from $36,188,000 at June 30, 1997.
This represented approximately 55.70% of total assets and 62.46% of deposits at
June 30, 1998 as compared with 56.81% and 65.62%, respectively, at June 30,
1997. The principal lending activity of First American is the origination of
commercial, consumer and one-to-four family residential mortgage loans. As of
June 30,1998, $10,332,000, or 26.95%, of the total loan portfolio consisted of
commercial loans, $7,053,000, or 18.40% of the loans were secured by one-to-
four family residential property and $8,394,000, or 21.90%,were consumer
credits. To a lesser extent, First American originates other mortgage loans
secured by commercial real estate, which totaled $5,121,000 at June 30, 1998.
First American also offers construction and land loans on single-family
residential property and commercial property. Loans of this type were
$2,190,000, or 5.71% of the total loan portfolio at June 30, 1998. At June 30,
1997, commercial loans totaled $9,354,000 and represented 24.91% of the loan
portfolio while one-to-four family residential property totaled $8,912,000, or
23.73%, of the loan portfolio at June 30, 1997. Consumer and installment loans
totaled $7,660,000, or 20.40%, of the loan portfolio at June 30, 1997.
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Set forth below is the selected data relating to the composition of First
American's loan portfolio by type of loan on the dates indicated:
AT JUNE 30, 1998 AT JUNE 30, 1997
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(Dollars in thousands)
Real estate:
One-to-four family residential .... $ 7,053 18.40% $ 8,912 23.73%
Commercial real estate ............ 5,121 13.36 4,787 12.74
Construction and land loans ....... 2,190 5.71 2,423 6.45
Loans held for sale, at fair value. 300 0.78 682 1.81
Other loans - real estate ........ 1,853 4.84 589 1.57
Commercial ........................... 10,332 26.95 9,354 24.91
Agriculture .......................... 3,091 8.06 3,147 8.39
Consumer and installment (1) ......... 8,394 21.90 7,660 20.40
-------- ------- -------- -------
Total loans ....................... $ 38,334 100.00% $ 37,554 100.00%
======== ======= ======== =======
Less: Undisbursed portion of interim
construction loans ................. (634) (688)
Unearned income .................. (510) (208)
Allowance for loan losses ........ (457) (470)
-------- --------
Total loans receivable, net .... $ 36,733 $ 36,188
======== ========
- ------------------
(1) Includes primarily automobile loans, mobile home loans and unsecured
consumer loans.
The following table sets forth certain information at June 30, 1998
regarding the dollar amount of loans maturing in First American's loan portfolio
based on contractual terms to maturity:
JUNE 30, 1998
--------------------------------------------
DUE AFTER
DUE WITHIN ONE THROUGH DUE AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ---------- -------
(Dollars in thousands)
One-to-four family residential.... $ 810 $ 635 $ 5,908 $ 7,353
Commercial real estate ........... 880 467 131 1,478
Construction and land loans ...... 873 884 4 1,761
Consumer and other loans ......... 13,304 7,357 5,480 26,141
---------- ----------- ---------- -------
Total ...................... $ 15,867 $ 9,343 $ 11,523 $36,733
========== =========== ========== =======
As of June 30, 1998, First American had loans with a predetermined
interest rate of $9,014,000 and loans with a floating interest rate of
$5,337,000.
First American has sold participation interests in commercial loans to
other financial institutions to reduce First American's exposure to any one
project. First American services these loans and remits the investors
participation as called for in the participation agreement. First American had
sold $686,964 participation interests as of June 30, 1998 and $908,723 as of
June 30, 1997.
First American, from time to time, will purchase participation interests
from other financial institutions. Participations purchased totaled $108,050 and
$96,000 at June 30, 1998 and 1997, respectively, and consisted primarily of
interim construction on single family and one-to-four family residential real
estate.
LOAN SERVICING ACTIVITIES. In addition to servicing loans held in its
portfolio, First American services one-to-four family residential real estate
loans sold to the secondary market. The servicing portfolio consists of
single-family residential real estate loans sold to Federal National Mortgage
Corporation ("FNMA") and Federal Home Loan Mortgage Corporation. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, holding escrow funds for the payment of real estate taxes and
insurance premiums, contacting delinquent borrowers, supervising foreclosures in
the event of unremedied defaults and general administration of the loans. The
aggregate unpaid principal balance of loans serviced for others at June 30, 1998
was $54,104,000.
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NONPERFORMING ASSETS
The following table sets forth information with respect to First
American's nonperforming assets at the periods indicated:
JUNE 30,
----------------------
1998 1997 1996
------ ---- ----
(Dollars in thousands)
Non-accruing loans ................................... $1,114 $283 $352
Accruing loans greater than 90 days delinquent ....... 18 16 72
Restructured loans ................................... -- 313 363
------ ---- ----
Total nonperforming loans ......................... 1,132 612 787
Real estate acquired through foreclosure ............. 1 168 195
------ ---- ----
Total nonperforming assets ........................ $1,133 $780 $982
====== ==== ====
For non-accruing loans, First American would have recognized additional
interest income of approximately $95,000, $66,000 and $80,100 under the original
terms of these loans during the years ended June 30, 1998, 1997 and 1996,
respectively.
ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for each of the years ended June
30, 1998 and 1997 consisted of the following:
YEARS ENDED JUNE 30,
-------------------
1998 1997
------- -------
(Dollars in thousands)
Balance at beginning of period ......................... $ 470 $ 454
Provision for loan losses .............................. 181 666
Charge-offs:
Commercial and industrial .......................... (64) (414)
Real estate ........................................ -- (4)
Consumer ........................................... (267) (287)
Recoveries:
Commercial and industrial .......................... 77 4
Real estate ........................................ -- 6
Consumer ........................................... 60 45
------- -------
Net charge-offs ........................................ (194) (650)
------- -------
Balance at end of period ............................... $ 457 $ 470
======= =======
Ratio of net charge-offs to average
loans outstanding .................................... 0.53% 1.76%
The following table describes the allocation of the allowance for loan
losses among the various loan categories for the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997
------------------- -------------------
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 agriculture .............................. $ 221 35.01% $ 273 33.48%
Real estate:
Commercial ........................................ 104 18.20 9 8.47
One-to-four family residential .................... 49 24.89 38 30.87
Consumer ................................................ 83 21.90 150 27.18
------ ----------- ------ -----------
Total allowance for loan losses ......................... $ 457 100.00% $ 470 100.00%
====== =========== ====== ===========
</TABLE>
SECURITIES
First American's investment and mortgage-backed securities portfolio is
managed in accordance with First American's Investment Policy adopted by the
Board of Directors and administered by the Investment Committee. The stated
goals of the investment policy are to maximize the return on the portfolio while
maintaining the liquidity necessary to effectively manage the operations of
First American.
-105-
<PAGE>
The following table summarizes the amortized cost of the investment and
mortgage-backed securities held by First American as of the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
--------------------- ---------------------
AMORTIZED PERCENT OF AMORTIZED PERCENT OF
COST PORTFOLIO COST PORTFOLIO
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations ..... $ 4,588 24.33% $ 8,044 36.09%
Equity securities .......................... 262 1.40 649 2.91
Mortgage-backed securities ................. 14,006 74.27 13,593 61.00
--------- ---------- --------- ----------
Total .................................... $ 18,856 100.00% $ 22,286 100.00%
========= ========== ========= ==========
</TABLE>
The fair value of First American's investment and mortgage-backed
securities portfolio was $18,806,000 and $21,794,000 at June 30, 1998 and 1997,
respectively.
The following table sets forth at amortized cost the maturities and
weighted average yields of First American's investment and mortgage-backed
securities portfolio at June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------------------------------------
LESS THAN ONE ONE TO FIVE FIVE TO TEN OVER TEN
YEAR YEARS YEARS YEARS TOTAL
------------- ------------- ------------- ------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations ................................... $ -- -- % $2,712 6.40% $1,876 6.80% $ -- -- % $ 4,588 6.57%
Debt securities ................................... -- -- -- -- -- -- 262 -- 262 --
Mortgage-backed securities ........................ 43 8.49 1,718 6.88 3,294 6.72 464 6.25 5,519 6.74
Collateralized mortgage
obligations ................................... 1,172 5.54 823 5.35 3,213 5.77 3,279 6.28 8,487 5.89
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Total ....................................... $1,215 5.64% $5,253 6.39% $8,383 6.37% $4,005 5.86% $18,856 6.22%
====== ===== ====== ===== ====== ===== ====== ===== ======= =====
</TABLE>
Securities classified as held-to-maturity consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations ......... $ 112 $ -- $ -- $ 112
Mortgage-backed securities ..................... 2,130 12 (22) 2,120
--------- ---------- ---------- -------
Total held-to-maturity securities ......... $ 2,242 $ 12 $ (22) $ 2,232
========= ========== ========== =======
<CAPTION>
JUNE 30, 1997
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(Dollars in thousands)
U.S. Government and agency obligations ......... $ -- $ -- $ -- $ --
Mortgage-backed securities ..................... 2,618 13 (53) 2,578
--------- ---------- ---------- -------
Total held-to-maturity securities ......... $ 2,618 $ 13 $ (53) $ 2,578
========= ========== ========== =======
</TABLE>
Securities classified as available-for-sale consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations ......... $ 4,476 $ 55 $ (2) $ 4,529
FNMA stock ..................................... 262 20 -- 272
Mortgage-backed securities ..................... 11,876 53 (156) 11,773
--------- ---------- ---------- -------
Total available-for-sale securities ....... $ 16,614 $ 118 $ (158) $16,574
========= ========== ========== =======
</TABLE>
-106-
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations ...... $ 8,044 $ -- $ (63) $ 7,981
Other ....................................... 649 -- -- 649
Mortgage-backed securities .................. 10,975 11 (400) 10,586
--------- ---------- ---------- -------
Total available-for-sale securities ...... $ 19,668 $ 11 $ (463) $19,216
========= ========== ========== =======
</TABLE>
DEPOSITS AND BORROWINGS
Deposits are the major source of First American's funds for lending and
other investment purposes. In addition to deposits, First American derives funds
from principal repayments and interest payments on loans and mortgage-backed
securities. Loans and mortgage-backed securities repayments of principal and
interest payments are a relatively stable source of funds, typically slowing as
rates rise and speeding up as rates fall. Borrowings are used on a short-term
basis to compensate for reductions in the availability of funds from other
sources and for general business purposes.
The daily average balances and weighted average rates paid on deposits for
each of the years ended June 30, 1998 and 1997 are presented below:
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
AMOUNT RATE AMOUNT RATE
------- ---- ------- ----
(Dollars in thousands)
Checking and savings accounts:
Demand ................................ $10,954 -- % $ 9,147 -- %
NOW ................................... 4,290 1.97 3,817 1.97
Money market .......................... 9,587 3.68 9,865 3.83
Savings accounts ...................... 1,831 2.50 2,197 2.50
Certificates of deposit ..................... 32,146 5.82 30,125 5.67
------- ---- ------- ----
Total deposits ........................ $58,808 4.00% $55,151 4,63%
======= ==== ======= ====
The following table sets forth the maturities of First American's
certificates of deposits with balances in excess of $100,000 at June 30, 1998:
JUNE 30, 1998
-------------
(Dollars in thousands)
Three months or less ................................... $ 1,452
Over three through six months .......................... 1,479
Over six through twelve months ......................... 2,015
Over twelve months ..................................... 4,188
-------------
Total ............................................. $ 9,134
=============
CAPITAL RESOURCES
Total stockholders' equity as of June 30, 1998, was $4,333,000, an
increase of $897,000 or 26.11% compared with stockholders' equity of $3,436,000
at June 30, 1997. The increase was primarily due to net earnings for the period
of $644,000 and an increase in the market value of available-for-sale investment
securities, which increased in value by $272,000, net of tax, during the twelve
months ended June 30, 1998.
-107-
<PAGE>
The following table provides a comparison of First American Bank's
leverage and risk-weighted capital ratios as of June 30, 1998 to the minimum and
well-capitalized regulatory standards:
ACTUAL
MINIMUM WELL- RATIO AT
REQUIRED CAPITALIZED JUNE 30, 1998
-------- ----------- -------------
FIRST AMERICAN BANK
Leverage ratio ..................... 3.00%(1) 5.00% 6.54%
Tier 1 risk-based capital ratio..... 4.00% 6.00% 11.00%
Risk-based capital ratio ........... 8.00% 10.00 12.19%
- --------------
(1) The OCC may require First American to maintain a leverage ratio of up to
200 basis points above the required minimum.
-108-
<PAGE>
FIRST AMERICAN
GENERAL
First American was organized as a Texas corporation and a bank holding
company for First American Bank in 1991. First American Bank is a national
banking association that was chartered in 1964. First American offers a variety
of services through First American Bank to satisfy the needs of the consumer and
commercial customers in its market areas in Northeast Texas. The principal
services offered by First American include most types of lending, including
commercial, consumer and real estate loans. It also offers safe deposit boxes, a
night deposit facility, motor bank, wire transfer and ATM cards. As of March 31,
1999, First American had total assets of $62,855,000, loans of $39,294,000,
total deposits of $57,009,000 and total stockholders' equity of $4,379,000.
FACILITIES
First American conducts business at a full service banking location in
Sulphur Springs, Texas and a branch location in Commerce, Texas. First
American's headquarters are located at 919 Gilmer Road, Sulphur Springs, Texas
in an office building which First American owns. First American leases its
facility located in Commerce, Texas.
COMPETITION
The banking business is highly competitive, and the profitability of First
American depends principally on First American's ability to compete in the
market areas in which its banking operations are located. First American's most
direct competition for deposits has historically come from other commercial
banks, savings banks, savings and loan associations and credit unions located in
Northeast Texas, including large financial institutions which have greater
financial and marketing resources available to them. In addition, First American
faces additional significant competition for investors' funds from mutual funds,
brokerage and investment banking firms corporate and government securities,
annuities and other investment products. The ability of First American to
attract and retain savings deposits depends on its ability to generally provide
a rate of return, liquidity and risk comparable to that offered by competing
investment opportunities.
First American experiences competition for loans principally from other
commercial banks, savings banks, savings and loan associations and mortgage
banking companies. First American competes for loan customers principally
through the interest rates and the loan fees it charges, the quality of services
it provides borrowers and convenience.
EMPLOYEES
As of March 31, 1999, First American had 36 full-time employees, 3 of whom
were executive officers of First American. First American provides medical and
hospitalization insurance to its full-time employees. First American considers
its relations with employees to be excellent.
LEGAL PROCEEDINGS
In the normal course of its businesses, First American from time to time
is involved in legal proceedings. Other than such proceedings incidental to its
business, First American's management is not aware of any pending or threatened
legal proceedings which, upon resolution, would have a material adverse effect
upon First American's financial condition, results of operations or cash flows.
The continued absence of such proceedings is a condition to Guaranty's
obligation to consummate the merger.
-109-
<PAGE>
BENEFICIAL OWNERSHIP OF FIRST AMERICAN STOCK BY
MANAGEMENT OF FIRST AMERICAN AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of First American stock as of the record date by (i)
directors and executive officers of First American, (ii) each person who is
known by First American to own beneficially 5% or more of the First American
stock and (iii) all directors and executive officers as a group. Also included
is the number of shares and percentage of Guaranty common stock to be owned by
such persons and by directors and executive officers as a group upon the
exchange of First American stock for Guaranty common stock and cash pursuant to
the merger. Unless otherwise indicated, each individual has sole voting and
investment power with respect to all shares of First American stock of which he
or she is the beneficial owner and the address of each shareholder is the same
as the address of First American.
<TABLE>
<CAPTION>
PRO FORMA
AMOUNT AMOUNT
(PERCENT) (PERCENT)
AND NATURE AND NATURE OF
OF BENEFICIAL BENEFICIAL
OWNERSHIP OF OWNERSHIP
NAME AND ADDRESS OF FIRST AMERICAN OF GUARANTY
BENEFICIAL OWNER POSITION WITH FIRST AMERICAN STOCK (1) COMMON STOCK (2)
---------------- ---------------------------- -------------- ----------------
<S> <C> <C> <C>
David Baucom Director 7,357 25,200
(8.00%) (*)
David Brewer Senior Vice President 2,500 8,542
(2.65%) (3) (*)
James W. Capps Chief Executive Officer and 6,251 21,359
Director (6.38%) (4) (*)
Jeffrey David Senior Vice President and 2,500 8,542
Chief Financial Officer (2.65%) (5) (*)
Bob Gideon Director 3,785 12,933
(4.12%) (*)
Hopkins County Abstract(6) Principal Shareholder 5,324 18,192
(5.79%) (*)
Tim Kelty Director 10,259 35,055
(11.16%) (1.08%)
Joe Dan Kennedy Director 4,495 15,359
(4.89%) (*)
Bob Mangum Director 9,309 31,809
(10.13%) (*)
Dick Pogue Director 8,376 28,621
(9.11%) (*)
Elizabeth Steinsiek(7) Principal Shareholder 12,614 43,102
(13.72%) (1.33%)
</TABLE>
-110-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Gene Watson Director 14,422 49,280
(15.69%) (1.52%)
Directors and Executive Officers 69,272 (8) 236,705
as a Group (10) (67.29%) (7.28%)
</TABLE>
- -----------------
(1) Unless otherwise indicated, all percentages are based upon 91,940 shares
of First American stock issued and outstanding as of the record date.
(2) Assumes the issuance of 3.417039 shares of Guaranty common stock and
$32.829609 in cash in exchange for each share of First American stock in
connection with the merger. All percentages are based upon 3,250,030
shares of Guaranty common stock issued and outstanding after the merger.
(3) Consists of 2,500 shares which may be acquired pursuant to the First
American Stock Option Plan. The percentage for Mr. Brewer is based upon
94,440 shares of First American stock issued and outstanding as of the
record date, which includes the 2,500 shares he may acquire.
(4) Includes 6,000 shares which may be acquired pursuant to the First American
Stock Option Plan. The percentage for Mr. Capps is based upon 97,940
shares of First American stock issued and outstanding as of the record
date, which includes the 6,000 shares he may acquire.
(5) Consists of 2,500 shares which may be acquired pursuant to the First
American Stock Option Plan. The percentage for Mr. David is based upon
94,440 shares of First American stock issued and outstanding as of the
record date, which includes the 2,500 shares he may acquire.
(6) The address of Hopkins County Abstract is 109 Jefferson, Sulphur Springs,
Texas 75482.
(7) The address of Elizabeth Steinsiek is 1701 College Street, Sulphur
Springs, Texas 75482.
(8) The percentage for directors and executive officers as a group is based
upon 102,940 shares of First American stock issued and outstanding as of
the record date, which includes the 11,000 shares which may be acquired
pursuant to the First American Stock Option Plan.
-111-
<PAGE>
SUPERVISION AND REGULATION OF GUARANTY AND FIRST AMERICAN
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 Guaranty
and First American and Guaranty Bank and First American Bank, N.A. 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.
GUARANTY AND FIRST AMERICAN
Guaranty and First American are bank holding companies registered under
the BHC Act, and are subject to supervision, regulation and examination by the
Federal Reserve. The BHC Act 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 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 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 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 BHC Act 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, 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 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 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 resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices). The Federal Reserve is also empowered
to differentiate between activities commenced de novo and activities commenced
through acquisition of a going concern.
SECURITIES ACTIVITIES. The Federal Reserve has approved applications by
bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper,
-112-
<PAGE>
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's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve 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 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 could take the position that paying a
dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve 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 has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies with consolidated assets of $150 million or more. 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. Currently, these Federal
Reserve guidelines do not apply to First American because it does not have
consolidated assets of at least $150 million. As of March 31, 1999, Guaranty's
ratio of Tier 1 capital to total risk-weighted assets was 12.02% and its ratio
of total capital to total risk-weighted assets was 12.80 %.
In addition to the risk-based capital guidelines, the Federal Reserve 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 March 31, 1999, Guaranty's leverage ratio
was 8.76%.
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 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.
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"
-113-
<PAGE>
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 approval of proposed dividends, or might be required to
consent to a merger or to divest the troubled institution or other affiliates.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal Reserve 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 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 has been notified and has not objected to the transaction. Under
a rebuttable presumption established by the Federal Reserve, the acquisition of
10% or 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 Guaranty,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of Guaranty.
In addition, any company is required to obtain the approval of the Federal
Reserve under the BHC Act before acquiring 25% (5% in the case of an acquiror
that is a bank holding company) or more of the outstanding Common Stock of
Guaranty or First American, or otherwise obtaining control or a "controlling
influence" over Guaranty or First American.
GUARANTY BANK
Guaranty Bank is a Texas-chartered banking association, the deposits of
which are insured by the Bank Insurance Fund ("BIF") of the FDIC. Guaranty Bank
is not a member of the Federal Reserve System; therefore, Guaranty Bank is
subject to supervision and regulation by the FDIC and the Texas Department of
Banking ("TDB"). Such supervision and regulation subjects Guaranty Bank to
special restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC and the TDB. Because the Federal Reserve regulates the
bank holding company parent of Guaranty Bank, the Federal Reserve also has
supervisory authority which directly affects Guaranty 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, the Federal Deposit
Insurance Corporation Improvement Act ("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.
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
TDB. 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 Guaranty Bank and its nonbanking subsidiaries, including Guaranty, 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 Guaranty or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between Guaranty
Bank and its affiliates be on terms substantially the same, or at least as
favorable to Guaranty Bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.
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<PAGE>
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 Guaranty Bank have provided a substantial part of Guaranty's
operating funds and it is anticipated that dividends paid by Guaranty Bank to
Guaranty will continue to be Guaranty's principal source of operating funds.
Capital adequacy requirements serve to limit the amount of dividends that may be
paid by Guaranty Bank. Under federal law, Guaranty Bank cannot pay a dividend
if, after paying the dividend, Guaranty Bank will be "undercapitalized." The
FDIC may declare a dividend payment to be unsafe and unsound even though
Guaranty Bank would continue to meet its capital requirements after the
dividend.
Because Guaranty 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 Guaranty) 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 TDB 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 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 Guaranty Bank as for Guaranty. As of
March 31, 1999, Guaranty Bank's ratio of Tier 1 capital to total risk-weighted
assets was 11.46% and its ratio of total capital to total risk-weighted assets
was 12.24%.
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 TDB 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 March 31, 1999, Guaranty Bank's ratio of Tier 1
capital to average total assets (leverage ratio) was 8.36%.
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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 composite 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.
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. 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 recapitalize the SAIF and 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 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 0.0126% 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
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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 TBD 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.
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. Guaranty Bank must comply with the applicable provisions of
these consumer protection laws and regulations as part of their ongoing customer
relations.
FIRST AMERICAN BANK
As a national banking association, First American Bank is principally
supervised, examined and regulated by the Office of the Comptroller of the
Currency ("OCC"). The OCC regularly examines such areas as capital adequacy,
reserves, loan portfolio, investments and management practices. First American
Bank must also furnish quarterly and annual reports to the OCC, and the OCC may
exercise cease and desist and other enforcement powers over First American Bank
if its actions represent unsafe or unsound practices or violations of law. Since
the deposits of First American Bank are insured by the BIF of the FDIC, First
American Bank is also subject to regulation and supervision by the FDIC.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions
between First American Bank and its nonbanking subsidiaries, 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 First American Bank or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between First
American Bank and its affiliates be on terms substantially the same, or at least
as favorable to First American Bank, as those prevailing at the time for
comparable transactions with or involving other nonaffiliated persons.
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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 OCC 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 First American Bank to First American are First American's
principal source of operating funds. Capital adequacy requirements serve to
limit the amount of dividend that may be paid by First American Bank. Until
capital surplus equals capital stock, a national bank must transfer 10% of its
net income for the preceding four quarters to capital surplus in the case of an
annual dividend, or 10% of its net income for the preceding two quarters to
capital surplus in the case of a quarterly or semiannual dividend. Without
approval of the OCC, dividends may not be paid in excess of a bank's total net
profits for that year, plus its retained profits for the preceding two years,
less any required transfers to capital surplus. Additionally, a national bank
may not pay dividends in excess of total retained profits, including current
year's earnings. In some cases, the OCC may find a dividend payment that meets
these statutory requirements to be an unsafe or unsound practice. Under FDICIA,
First American Bank cannot pay a dividend if it will cause First American Bank
to be "undercapitalized."
EXAMINATIONS. The OCC periodically examines and evaluates insured banks.
Based upon such an evaluation, the OCC may revalue the assets of the institution
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets.
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 OCC, 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 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 OCC has adopted regulations
establishing minimum requirements for the capital adequacy of national banks.
The OCC 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 OCC's risk-based capital guidelines generally require national 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%. As of March
31, 1999, First American Bank's ratio of Tier 1 capital to total risk-weighted
assets was 11.04% and its ratio of total capital to total risk-weighted assets
was 12.31%.
The OCC's leverage guidelines require national 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. As of March 31, 1999, First American Bank's ratio of Tier 1 capital to
average total assets (leverage ratio) was 6.94%.
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
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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 composite 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.
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 OCC'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 OCC 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. First American 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. 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 FICO bond obligations. Under this new 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 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 0.0126% of deposits.
ENFORCEMENT POWERS. The FDIC, OCC 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 First American Bank, 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.
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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. 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 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.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, First American 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. First American 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 Guaranty, First American, Guaranty
Bank and First American Bank in substantial and unpredictable ways. Guaranty or
First American 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 either Guaranty or First
American or their 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, OCC 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, have a significant effect on the operating results of bank
holding companies and their subsidiaries. Among the means available to the
Federal Reserve 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
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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 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 Guaranty, First American, Guaranty Bank
and First American Bank cannot be predicted.
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RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
Guaranty's Board of Directors appointed Arnold, Walker, Arnold & Co.,
P.C., as independent auditors for Guaranty for the year ending December 31,
1999. Arnold, Walker, Arnold & Co., P.C., has served as Guaranty's independent
auditors continuously for 18 years.
Guaranty has been advised by Arnold, Walker, Arnold & Co., P.C. that
Arnold, Walker, Arnold & Co., P.C. does not have any direct financial interest
or any material indirect financial interest in Guaranty or its affiliates other
than arising from that firm's employment as auditors for Guaranty.
First American's Board of Directors appointed Fisk & Robinson, P.C. as
independent auditors for First American for the year ending June 30, 1999. Fisk
& Robinson, P.C. has served as First American's independent auditors
continuously since 1996.
First American has been advised by Fisk & Robinson, P.C. that Fisk &
Robinson, P.C. does not have any direct financial interest or any material
indirect financial interest in First American other than arising from that
firm's employment as auditors for First American.
LEGAL OPINIONS
The validity of the shares of Guaranty common stock to be issued by
Guaranty and certain federal income tax consequences of the merger have been
passed upon by Bracewell & Patterson, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Guaranty for each of the three
years in the period ended December 31, 1998 have been included in this proxy
statement/prospectus in reliance upon the report of Arnold, Walker, Arnold &
Co., P.C., independent auditors given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of First American for the year ended
June 30, 1998, the six month period ended June 30, 1997 and the year ended
December 31, 1996, included in this proxy statement/prospectus have been audited
by Fisk & Robinson, P.C., independent auditors, as stated in their report, and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
OTHER MATTERS
The First American Board of Directors does not know of any matters to be
presented at the meeting other than those set forth above. If any other matters
are properly brought before the meeting or any adjournment thereof, the enclosed
proxy will be voted in accordance with the recommendations of the First American
Board of Directors unless "Authority Withheld" is indicated in the appropriate
box on the proxy.
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INDEX TO FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC.
Independent Auditor's Report............................................... F-2
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and
December 31, 1998 and 1997........................................... F-3
Consolidated Statements of Earnings for the Three Months Ended
March 31, 1999 and 1998 (Unaudited) and for the Years Ended
December 31, 1998, 1997 and 1996..................................... F-4
Consolidated Statements of Shareholders' Equity for the Three
Months Ended March 31, 1999 (Unaudited) and for the Years
Ended December 31, 1998, 1997 and 1996............................... F-5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998(Unaudited) and for the Years Ended
December 31, 1998, 1997 and 1996..................................... F-6
Notes to Consolidated Financial Statements................................. F-7
FIRST AMERICAN FINANCIAL CORPORATION
Independent Auditors' Report............................................... F-26
Consolidated Balance Sheets as of March 31, 1999 and 1998 (Unaudited)...... F-27
Consolidated Statements of Income for the Nine Months Ended
March 31, 1999 and 1998 (Unaudited).................................. F-28
Consolidated Statements of Changes in Stockholders' Equity for the
Nine Months ended March 31, 1998 and 1998 (Unaudited)................ F-29
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1999 and 1998 (Unaudited).................................. F-30
Selected Notes to Unaudited Financial Statements........................... F-31
Consolidated Balance Sheets as of June 30, 1998 and 1997................... F-33
Consolidated Statements of Operations for the Year Ended June 30,
1998, the Six Month Period Ended June 30, 1997 and the Year
Ended December 31, 1996.............................................. F-34
Consolidated Statements of Changes in Stockholders' Equity for the
Year Ended June 30, 1998, the Six Month Period Ended June 30, 1997
and the Year Ended December 31, 1996................................. F-35
Consolidated Statements of Cash Flows for the and for Year Ended
June 30, 1998, the Six Month Period Ended June 30, 1997 and the
Year Ended December 31, 1996......................................... F-36
Notes to Consolidated Financial Statements................................. F-38
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, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARNOLD, WALKER, ARNOLD & CO., P.C.
Mt. Pleasant, Texas
January 26, 1999 (except with respect to
Note P as to which the date is April 23, 1999)
F-2
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1999 1998 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks......... $ 8,064 $ 9,691 $ 9,750
Interest bearing deposits in
other banks................... 2,030 2,030 --
----------- ----------- -----------
Total cash and cash
equivalents............. 10,094 11,721 9,750
Federal funds sold................... 13,705 10,090 7,720
Securities
Available-for-sale.............. 42,172 44,305 42,906
Held-to-maturity (approximate
market value of $7,265 at
March 31, 1999, $7,196 and
$15,481 at December 31, 1998
and 1997, respectively)....... 7,172 7,062 15,233
----------- ----------- -----------
Total securities........... 49,344 51,367 42,906
Loans, net........................... 195,488 184,374 156,266
Premises and equipment, net.......... 7,460 7,032 6,359
Other real estate.................... 144 97 714
Accrued interest receivable.......... 2,368 2,331 2,224
Other assets......................... 5,932 5,894 2,985
----------- ----------- -----------
$ 284,535 $ 272,906 $ 244,157
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing........ $ 43,071 $ 47,360 $ 46,295
Interest-bearing
deposits................ 210,639 194,965 176,666
----------- ----------- -----------
Total deposits.......... 253,710 242,325 222,961
Borrowed funds.................. 3,911 3,980 --
Accrued interest and other
liabilities................... 2,629 2,805 2,943
----------- ----------- -----------
Total liabilities....... 260,250 249,110 225,904
Commitments and contingencies........ -- -- --
Shareholders' equity
Preferred stock................. -- -- 827
Common stock.................... 2,898 2,898 2,548
Additional capital.............. 9,494 9,494 5,396
Retained earnings............... 11,837 11,181 9,240
Accumulated other comprehensive
income --
net unrealized appreciation on
available-for-sale securities,
net of tax of $29, $114 and
$124.......................... 56 223 242
----------- ----------- -----------
24,285 23,796 18,253
----------- ----------- -----------
$ 284,535 $ 272,906 $ 244,157
=========== =========== ===========
</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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income
Loans, including fees........... $ 3,881 $ 3,447 $ 14,544 $ 13,051 $ 11,761
Securities
Taxable.................... 744 878 2,991 3,177 1,825
Nontaxable................. 28 17 64 70 57
Federal funds sold and interest
bearing deposits.............. 110 139 769 711 1,208
--------- --------- --------- --------- ---------
Total interest
income............. 4,763 4,481 18,368 17,009 14,851
Interest expense
Deposits........................ 2,222 2,232 8,926 8,179 6,889
Other........................... 51 -- 25 13 30
--------- --------- --------- --------- ---------
Total interest
expense............ 2,273 2,232 8,951 8,192 6,919
Net interest income... 2,490 2,249 9,417 8,817 7,932
Provision for loan losses............ 105 370 540 355 206
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses........ 2,385 1,879 8,877 8,462 7,726
Noninterest income
Service charges................. 405 287 1,336 1,097 1,059
Net realized gains on sales of
available-for-sale
securities.................... 5 -- 81 19 2
Life insurance proceeds gain.... -- -- -- -- 822
Other income.................... 252 875 1,409 541 507
Total noninterest
income............. 662 1,162 2,826 1,657 2,390
--------- --------- --------- --------- ---------
Noninterest expense
Employee compensation and
benefits...................... 1,268 1,082 4,458 3,717 3,549
Occupancy expenses.............. 309 286 1,206 1,125 991
Other operating expenses........ 650 658 2,824 2,604 2,533
--------- --------- --------- --------- ---------
Total noninterest
expenses........... 2,227 2,026 8,488 7,446 7,073
--------- --------- --------- --------- ---------
Earnings before income
taxes.............. 820 1,015 3,215 2,673 3,043
Provision for income taxes...........
Current......................... 165 295 541 228 165
Deferred........................ -- -- -- 45 --
--------- --------- --------- --------- ---------
165 295 541 273 165
--------- --------- --------- --------- ---------
Net earnings.......... $ 655 $ 720 $ 2,674 $ 2,400 $ 2,878
========= ========= ========= ========= =========
Basic earnings per common
share......................... $ 0.23 $ 0.28 $ 0.95 $ 0.91 $ 1.08
========= ========= ========= ========= =========
Diluted earnings per common
share......................... $ 0.23 $ 0.28 $ 0.95 $ 0.91 $ 1.08
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 AND YEARS ENDED DECEMBER 31, 1998, 1997 AND
1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME -- NET COMMON
UNREALIZED GAIN STOCK
PREFERRED COMMON ADDITIONAL RETAINED (LOSS) ON SECURITIES IN
STOCK STOCK CAPITAL EARNINGS AVAILABLE-FOR-SALE TREASURY
--------- ------ ---------- -------- --------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........... $ 827 $2,725 $5,479 $ 6,274 $ 21 $ --
--------- ------ ---------- -------- ----- -------
Net earnings for the year 1996....... -- -- -- 2,878 -- --
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax
of $1.............................. -- -- -- -- (2) --
--------- ------ ---------- -------- ----- -------
Total comprehensive income........... -- -- -- 2,878 (2) --
Purchase of treasury stock........... -- -- -- -- -- (438)
Sale of treasury stock............... -- -- -- -- -- 418
Redemption of common stock........... -- (177 ) (83) (1,070 ) -- --
Dividends
Preferred -- $0.45 per share..... -- -- -- (74 ) -- --
Common -- $0.21 per share........ -- -- -- (528 ) -- --
Balance at December 31, 1996......... 827 2,548 5,396 7,480 19 (20)
--------- ------ ---------- -------- ----- -------
Net earnings for the year 1997....... -- -- -- 2,400 -- --
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax
of $114............................ -- -- -- -- 223 --
--------- ------ ---------- -------- ----- -------
Total comprehensive income........... -- -- -- 2,400 223 --
Sale of treasury stock............... -- -- -- -- -- 20
Dividends
Preferred -- $0.45 per share..... -- -- -- (74 ) -- --
Common -- $0.22 per share........ -- -- -- (566 ) -- --
--------- ------ ---------- -------- ----- -------
Balance at December 31, 1997......... 827 2,548 5,396 9,240 242 --
--------- ------ ---------- -------- ----- -------
Net earnings for the year 1998....... -- -- -- 2,674 -- --
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax
of $10............................. -- -- -- -- (19) --
--------- ------ ---------- -------- ----- -------
Total comprehensive income........... -- -- -- 2,674 (19) --
Purchase of treasury stock........... -- -- -- -- -- (2)
Sale of treasury stock............... -- -- -- -- -- 2
Redemption of preferred stock........ (827) -- -- -- -- --
Sale of common stock................. -- 350 4,098 -- -- --
Dividends
Preferred -- $0.23 per share..... -- -- -- (37 ) -- --
Common -- $0.24 per share........ -- -- -- (696 ) -- --
--------- ------ ---------- -------- ----- -------
Balance at December 31, 1998......... $ -- $2,898 $9,494 $11,181 $ 223 $ --
--------- ------ ---------- -------- ----- -------
Purchase of treasury stock........... -- -- -- -- -- --
Sale of treasury stock............... -- -- -- -- -- --
Purchase of preferred stock.......... -- -- -- -- -- --
Sale of common stock................. -- -- -- -- -- --
Dividends
Preferred -- $0.00 per share..... -- -- -- -- -- --
Common -- $0.00 per share........ -- -- -- -- -- --
Rounding......................... -- -- -- 1 -- --
Net change in unrealized gain on
available-for-sale securities, net
of tax of $85(1)................... -- -- -- -- (167) --
Net earnings(1)...................... -- -- -- 655 -- --
--------- ------ ---------- -------- ----- -------
Balance at March 31, 1999(1)......... $ -- $2,898 $9,494 $11,837 $ 56 $ --
========= ====== ========== ======== ===== =======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at January 1, 1996........... $15,326
-------------
Net earnings for the year 1996....... 2,878
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax
of $1.............................. (2)
-------------
Total comprehensive income........... 2,876
Purchase of treasury stock........... (438)
Sale of treasury stock............... 418
Redemption of common stock........... (1,330)
Dividends
Preferred -- $0.45 per share..... (74)
Common -- $0.21 per share........ (528)
Balance at December 31, 1996......... 16,250
-------------
Net earnings for the year 1997....... 2,400
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax
of $114............................ 223
-------------
Total comprehensive income........... 2,623
Sale of treasury stock............... 20
Dividends
Preferred -- $0.45 per share..... (74)
Common -- $0.22 per share........ (566)
-------------
Balance at December 31, 1997......... 18,253
-------------
Net earnings for the year 1998....... 2,674
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax
of $10............................. (19)
-------------
Total comprehensive income........... 2,655
Purchase of treasury stock........... (2)
Sale of treasury stock............... 2
Redemption of preferred stock........ (827)
Sale of common stock................. 4,448
Dividends
Preferred -- $0.23 per share..... (37)
Common -- $0.24 per share........ (696)
-------------
Balance at December 31, 1998......... $23,796
-------------
Purchase of treasury stock........... --
Sale of treasury stock............... --
Purchase of preferred stock.......... --
Sale of common stock................. --
Dividends
Preferred -- $0.00 per share..... --
Common -- $0.00 per share........ --
Rounding......................... 1
Net change in unrealized gain on
available-for-sale securities, net
of tax of $85(1)................... (167)
Net earnings(1)...................... 655
-------------
Balance at March 31, 1999(1)......... $24,285
=============
</TABLE>
- ------------
(1) Unaudited
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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities
Net earnings..................... $ 655 $ 720 $ 2,674 $ 2,400 $ 2,878
Adjustments to reconcile net
earnings to net cash provided
by operating activities
Depreciation..................... 160 136 564 537 467
Amortization of premiums, net of
(accretion) of discounts on
securities..................... 73 37 186 95 85
Net realized gain on
available-for-sale
securities..................... (5) -- (81) (19) (2)
Gain on sale of loans............ (674) -- --
Provision for loan losses........ 105 370 540 355 206
Write-down of other real estate
and repossessed assets......... -- 15 25 150 159
Proceeds from sale of loans...... -- 1,967 1,967 -- --
Gain on sale of premises,
equipment and other real
estate......................... (11) (3) (63) (11) (47)
(Increase) decrease in accrued
interest receivable and other
assets......................... (142) (343) (3,112) (623) 217
(Decrease) increase in accrued
interest and other
liabilities.................... (90) 404 (128) 287 207
--------- --------- --------- --------- ---------
Net cash provided by
operating activities...... 745 3,303 1,898 3,171 4,170
Cash flows from investing activities
Purchases of held-to-maturity
securities..................... (708) -- (688) (7,179) (9,536)
Proceeds from sales and
maturities of
available-for-sale
securities..................... 4,445 5,042 16,186 1,630 5,108
Purchases of available-for-sale
securities..................... (2,627) (2,434) (17,709) (35,990) (7,256)
Proceeds from maturities and
principal repayments of
held-to-maturity securities.... 593 2,925 8,849 14,023 12,507
Purchases of premises and
equipment...................... (588) (139) (1,237) (1,368) (973)
Proceeds from sale of premises,
equipment and other real
estate......................... 31 19 751 296 329
Net increase in loans............ (11,219) (7,638) (29,941) (18,387) (13,161)
Net (increase) decrease in
federal funds sold............. (3,615) (5,175) (2,370) 10,430 (7,560)
--------- --------- --------- --------- ---------
Net cash used in investing
activities................ (13,688) (7,400) (26,159) (36,545) (20,542)
Cash flows from financing activities
Proceeds from borrowings......... -- -- 4,000 -- --
Repayment of borrowings.......... (69) -- (20) (171) (272)
Change in deposits, net.......... 11,385 2,197 19,364 28,106 20,138
Purchase of treasury stock....... -- (2) (2) -- (438)
Sale of treasury stock........... -- -- 2 20 418
Redemption of preferred stock.... -- -- (827) -- --
Sale of common stock............. -- -- 4,448 -- --
Redemption of common stock....... -- -- -- -- (1,330)
Dividends paid................... -- -- (733) (640) (602)
--------- --------- --------- --------- ---------
Net cash provided by
financing activities...... 11,316 2,195 26,232 27,315 17,914
--------- --------- --------- --------- ---------
Net increase (decrease) in
cash and cash
equivalents............... (1,627) (1,902) 1,971 (6,059) 1,542
Cash and cash equivalents at
beginning of year.................. 11,721 9,750 9,750 15,809 14,267
========= ========= ========= ========= =========
Cash and cash equivalents at end of
year............................... $ 10,094 $ 7,848 $ 11,721 $ 9,750 $ 15,809
========= ========= ========= ========= =========
</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, 1998, 1997 AND 1996
(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.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
F-7
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-8
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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, 1996.
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.
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
F-9
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. RECENT ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which requires that all components of comprehensive income
and total comprehensive income be reported on the financial statements. The
Company is disclosing this information on its consolidated statements of
shareholders' equity.
15. RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 1998
presentation.
F-10
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
--------- ---------- ---------- ---------
Available-for-sale securities:
<S> <C> <C> <C> <C>
December 31, 1998:
U. S. Treasury
securities.............. $ 3,015 $ 29 $-- $ 3,044
U.S. Government agency
securities.............. 27,114 241 5 27,350
Mortgage-backed
securities.............. 12,747 77 5 12,819
Equity securities.......... 1,092 -- -- 1,092
--------- ---------- ---------- ---------
$43,968 $ 347 $ 10 $ 44,305
========= ========== ========== =========
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
========= ========== ========== =========
Held-to-maturity securities:
December 31, 1998:
U.S. Treasury securities... $ 100 $ 1 $-- $ 101
Mortgage-backed
securities.............. 5,137 74 2 5,209
Obligations of state and
political
subdivisions............ 1,825 65 4 1,886
--------- ---------- ---------- ---------
$ 7,062 $ 140 $ 6 $ 7,196
========= ========== ========== =========
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
========= ========== ========== =========
</TABLE>
There were no gross realized losses on sales of available-for-sale
securities for the years ended December 31, 1998, 1997 and 1996. Gross realized
gains on sales of available-for-sale securities were $81, $19 and $2 for the
years ended December 31, 1998, 1997 and 1996.
F-11
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled maturities of securities to be held-to-maturity and
securities available-for-sale December 31, 1998, were as follows (in thousands):
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
-------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------ --------- -------
<S> <C> <C> <C> <C>
Due in one year or less.............. $ 347 $ 350 $ 3,015 $ 3,043
Due from one year through five
years.............................. 55 57 12,929 13,058
Due from five years through ten
years.............................. 1,856 1,891 22,006 22,188
Due after ten years.................. 4,804 4,898 4,926 4,924
Equity securities.................... -- -- 1,092 1,092
--------- ------ --------- -------
$ 7,062 $7,196 $43,968 $44,305
========= ====== ========= =======
</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 $32,041 and $26,835 at
December 31, 1998 and 1997, 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:
1998 1997
---------- ----------
Commercial........................... $ 51,589 $ 36,598
Agriculture.......................... 7,652 8,174
Real estate
Construction.................... 3,130 3,072
1-4 family residential.......... 48,376 41,398
Farmland........................ 7,258 6,492
Non-residential and
non-farmland.................. 47,977 42,363
Other........................... 844 360
Consumer............................. 20,043 20,120
---------- ----------
186,869 158,577
Less:
Unearned discounts.............. 983 1,182
Allowance for loan losses....... 1,512 1,129
---------- ----------
$ 184,374 $ 156,266
========== ==========
Impaired loans were $290 and $298 at December 31, 1998 and 1997. 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.
Outstanding loans to directors and executive officers of the Bank and to
their related business interests aggregated approximately $9,611 and $6,130 at
December 31, 1998 and 1997.
F-12
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is an analysis of activity with respect to such amounts:
1998
---------
Balance at January 1.................... $ 6,130
New loans and advances............. 6,261
Repayments......................... (2,780)
---------
Balance at December 31.................. $ 9,611
=========
NOTE D -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows at December 31:
1998 1997 1996
--------- --------- ---------
Balance at January 1.................... $ 1,129 $ 1,055 $ 1,005
Provision............................... 540 355 206
Charge-offs............................. (276) (385) (283)
Recoveries.............................. 119 104 127
--------- --------- ---------
Balance at December 31.................. $ 1,512 $ 1,129 $ 1,055
========= ========= =========
NOTE E -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows at December 31:
1998 1997
--------- ---------
Land.................................... $ 1,627 $ 1,597
Building and improvements............... 6,402 5,367
Furniture, fixtures and equipment....... 2,810 2,688
Automobiles............................. 292 279
--------- ---------
11,131 9,931
Less accumulated depreciation........... 4,099 3,572
--------- ---------
$ 7,032 $ 6,359
========= =========
NOTE F -- INTEREST-BEARING DEPOSITS
The types of accounts and their respective balances included in
interest-bearing deposits are as follows at December 31:
1998 1997
---------- ----------
NOW accounts............................ $ 23,241 $ 16,778
Savings and money market accounts....... 41,064 40,293
Certificates of deposit................. 130,660 119,595
---------- ----------
$ 194,965 $ 176,666
========== ==========
F-13
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000 was approximately $51,727 and $42,996 at December 31,
1998 and 1997. At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
3 months or less..................... $ 36,168
Between 3 months and 6 months........ 25,412
Between 6 months and 1 year.......... 55,315
Over 1 year.......................... 13,765
----------
$ 130,660
==========
Deposits of executive officers, significant shareholders and directors were
$2,659 and $2,290 (including time deposits of $1,551 and $1,725) at December 31,
1998 and 1997.
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 and $30 for the years
ended December 31, 1997 and 1996, respectively.
During the year ended December 31, 1998, the Company borrowed from the
Federal Home Loan Bank of Dallas ("FHLB"). On September 25, 1998, the Company
borrowed $1,000 at 5.06% with final maturity of October 1, 2008, and $1,000 at
5.18% with maturity of October 1, 2013. On November 9, 1998, the Company
borrowed $2,000 at 5.34% with final maturity of October 1, 2013. Interest
expense was $25 for the year ended December 31, 1998. The following is a
schedule of the next five years of principal and interest requirements.
YEAR PRINCIPAL INTEREST TOTAL
- ------------------------------------- --------- -------- ---------
1999................................. $ 281 $ 202 $ 483
2000................................. 296 186 482
2001................................. 312 171 483
2002................................. 328 154 482
2003................................. 346 136 482
Thereafter........................... 2,417 398 2,815
--------- -------- ---------
$ 3,980 $ 1,247 $ 5,227
========= ======== =========
The Company secures such FHLB borrowings under a "Blanket Borrowing
Program", with its 1-4 family mortgage loans.
F-14
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 COMMON COMMON
OUTSTANDING STOCK STOCK TREASURY
PREFERRED STOCK ISSUED OUTSTANDING STOCK
--------------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at January 31, 1996.......... 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 --
Purchase of treasury stock...... -- -- -- (1,867)
Sale of common stock............ -- 350,000 350,000 --
Sale of treasury stock.......... -- -- -- 1,867
Redemption of preferred stock... (165,456) -- -- --
--------------- ----------- ----------- --------
Balance at December 31, 1998......... -- 2,898,280 2,898,280 --
=============== =========== =========== ========
</TABLE>
At December 31, 1997 and 1996, 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. At December 31, 1998, the Company had 15,000,000 authorized shares of
preferred stock at $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.
At December 31, 1997 and 1996, 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.
At December 31, 1998, the Company had 50,000,000 shares of common stock at $1
par value.
In May 1998, the Company sold 350,000 shares of common stock at an
aggregate offering amount of $4,897. Expenses related to the sale were
approximately $540.
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:
1998 1997 1996
--------- --------- ---------
Current.............................. $ 150 $ (89) $ 9
Deferred tax asset................... 155 256 340
Deferred tax liability............... (1,463) (1,574) (1,499)
F-15
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
1998 1997 1996
--------- --------- ---------
Deferred tax assets:
Allowance for loan losses....... $ 65 $ 74 $ 67
Tax credits..................... -- 24 133
Difference in basis of other
real estate..................... 90 113 77
Other........................... -- 45 63
--------- --------- ---------
$ 155 $ 256 $ 340
========= ========= =========
Deferred tax liabilities:
Unrealized gain on
available-for-sale
securities.................... $ (114) $ (124) $ (10)
Depreciation.................... (623) (546) (446)
Leasing transactions............ (387) (644) (799)
Deferred loan costs, net........ (301) (260) (244)
Other........................... (38) -- --
--------- --------- ---------
$ (1,463) $ (1,574) $ (1,499)
========= ========= =========
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate as of December 31 is as follows:
1998 1997 1996
--------- --------- ---------
Statutory federal income tax rate.... 34.00% 34.00% 34.00%
Effect of utilization of graduated
tax rates.......................... (0.37) (0.44) (0.39)
Tax exempt income.................... (1.86) (0.90) (0.66)
Effect of utilization of tax
credits............................ -- (0.90) (4.37)
Recognition of benefit on leveraged
leases............................. (11.99) (19.93) (20.25)
Life insurance proceeds.............. -- -- (9.17)
Other, net........................... (2.95) (1.62) 6.26
--------- --------- ---------
Effective income tax rate............ 16.83% 10.21% 5.42%
========= ========= =========
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.
F-16
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
CONTRACT OR
NOTIONAL AMOUNT
--------------------
1998 1997
--------- ---------
Commitments to extend credit......... $ 12,831 $ 7,977
Letters of credit.................... 176 202
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 lesses 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, 1998.
DECEMBER 31,
- -------------------------------------
1999............................ $2,322
2000............................ 2,291
2001............................ 1,407
2002............................ --
------------
Total........................... $6,020
============
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.
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, 1998, 1997 and 1996 were approximately $271,
$234 and $232.
The Company established a non-qualified, non-contributory "Supplemental
Retirement Plan" in 1992. The plan covers an executive officer 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, 1998, 1997 and 1996 were approximately $18,
$20 and $52.
The Company established a non-qualified, non-contributory, "Salary
Continuation Plan" in 1998. The plan covers an executive officer to provide
benefits equal to an amount which represents 75% of projected compensation at
retirement as adjusted for amounts payable under the Company's retirement plan
and certain social security benefits. This plan is non-funded. As of December
31, 1998, $30 was accrued in other liabilities and charged to expense.
During 1998 the Company established a non-qualified, non-contributory,
"Executive Incentive Retirement Plan." The plan covers a selected group of key
personnel to provide benefits equal to amounts computed under an "award
criteria" at various targeted salary levels as adjusted for annual earnings
performance of the Company. As of December 31, 1998, $18 was accrued in other
liabilities and charged to expense.
F-17
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a bonus 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, 1998,
1997 and 1996 were $387, $306 and $261.
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
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. Performance of 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 K -- REGULATORY MATTERS
The Company and Guaranty 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
F-18
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
average assets (as defined). Management believes, as of December 31, 1998, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
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
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------------------------ ------------------------------ -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT
(GREATER THAN (GREATER THAN (GREATER THAN (GREATER THAN (GREATER THAN
OR EQUAL TO) OR EQUAL TO) OR EQUAL TO) OR EQUAL TO) OR EQUAL TO)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ 25,089 13.08% 15,345 8.00% N/A
Guaranty Bank................... 24,155 12.86% 14,991 8.00% 18,739
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ 23,577 12.29% 7,673 4.00% N/A
Guaranty Bank................... 22,643 12.05% 7,516 4.00% 11,275
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc........ 23,577 9.30% 7,605 3.00% N/A
Guaranty Bank................... 22,643 8.97% 7,572 3.00% 12,622
As of December 31, 1997
Total Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ 19,137 11.86% 12,905 8.00% N/A
Guaranty Bank................... 18,435 11.75% 12,551 8.00% 15,688
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ 18,008 11.16% 6,453 4.00% N/A
Guaranty Bank................... 17,306 11.03% 6,275 4.00% 9,413
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc........ 18,008 7.87% 6,863 3.00% N/A
Guaranty Bank................... 17,306 7.60% 6,830 3.00% 11,384
<CAPTION>
RATIO
(GREATER THAN
OR EQUAL TO)
-------------
<S> <C>
As of December 31, 1998
Total Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ N/A
Guaranty Bank................... 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ N/A
Guaranty Bank................... 6.00%
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc........ N/A
Guaranty Bank................... 5.00%
As of December 31, 1997
Total Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ N/A
Guaranty Bank................... 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc........ N/A
Guaranty Bank................... 6.00%
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc........ N/A
Guaranty Bank................... 5.00%
</TABLE>
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-19
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
The following is supplemental information with respect to the December 31
Consolidated Statements of Cash Flows:
1998 1997 1996
--------- --------- ---------
Cash paid for:
Interest........................ $ 8,926 $ 8,030 $ 6,864
Income taxes.................... 790 130 215
NON-CASH ACTIVITY:
Loans transferred to other real
estate or repossessed assets.. 167 206 270
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:
o Cash and Cash Equivalents and Federal Funds Sold
The balance sheet carrying amount approximates fair value.
o 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.
o 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.
o 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, 1998 and 1997 (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-20
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
o 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.
o 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, 1998 and 1997. 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>
1998 1997
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....... $ 11,721 $ 11,721 $ 9,750 $ 9,750
Federal funds sold.............. 10,090 10,090 7,720 7,720
Securities
Available-for-sale.............. 44,305 44,305 42,906 42,906
Held-to-maturity................ 7,062 7,196 15,233 15,481
Loans, net......................... 184,374 183,782 156,266 155,729
Financial liabilities:
Deposits
Noninterest-bearing............. $ 47,360 $ 47,360 $ 46,295 $ 46,295
Interest-bearing transaction and
money market accounts......... 64,305 64,305 57,070 57,070
Certificates of deposit......... 130,660 131,292 119,596 120,039
Borrowings......................... 3,980 3,980 -- --
</TABLE>
F-21
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Net earnings......................... $ 2,674 $ 2,400 $ 2,878
Less: dividends on preferred stock... 37 74 74
--------- --------- ---------
Net earnings available to common
shareholders used in basic and
diluted EPS........................ $ 2,637 $ 2,326 $ 2,804
========= ========= =========
Weighted average common shares in
basic EPS.......................... 2,782 2,547 2,592
Effect of dilutive securities........ -- -- --
--------- --------- ---------
Weighted average common and potential
dilutive common shares used in
dilutive EPS....................... 2,782 2,547 2,592
========= ========= =========
NOTE P -- SUBSEQUENT EVENT
On April 23, 1999, the Company entered into a merger agreement with First
American Financial Corporation ("First American") located in Sulphur Springs,
Texas. This transaction is subject to various regulatory approvals and approval
of First American shareholders.
NOTE Q -- PARENT-ONLY FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC.
(PARENT ONLY)
BALANCE SHEETS
DECEMBER 31,
--------------------
1998 1997
--------- ---------
ASSETS
Cash and cash equivalents............ $ 57 $ 165
Investment in subsidiaries........... 22,867 17,556
Investments, insurance............... 701 631
Premises and equipment, net.......... 9 22
Other assets......................... 207 2
--------- ---------
$ 23,841 $ 18,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities.................... $ 45 $ 123
--------- ---------
Total liabilities.......... 45 123
Commitments and contingencies........ -- --
Preferred stock................. -- 827
Common stock.................... 2,898 2,548
Additional capital.............. 9,494 5,396
Retained earnings............... 11,181 9,240
Accumulated other comprehensive
income -- net unrealized
appreciation on
available-for-sale securities,
net of tax of
$114 and $124................. 223 242
--------- ---------
23,796 18,253
========= =========
$ 23,841 $ 18,376
========= =========
F-22
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTY BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
Interest income
Interest bearing deposits....... $ -- $ -- $ 6
Life insurance proceeds gain......... -- -- 822
Other income......................... -- 2 --
--------- --------- ---------
-- 2 828
Costs and expenses
General and administrative...... 405 321 388
Income taxes
Current......................... -- (77) (123)
Deferred........................ -- -- --
--------- --------- ---------
(Loss) earnings before equity in net
earnings of subsidiaries........... (405) (242) 563
Equity in net earnings of
subsidiaries....................... 3,079 2,642 2,315
--------- --------- ---------
NET EARNINGS......................... $ 2,674 $ 2,400 $ 2,878
========= ========= =========
F-23
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTY BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities
Net earnings....................... $ 2,674 $ 2,400 $ 2,878
Adjustments to reconcile net
earnings to net cash used in
operating activities
Earnings of subsidiaries........ (3,079) (2,642) (2,315)
Depreciation.................... 13 14 5
Amortization.................... -- -- 1
Life insurance proceeds gain.... -- -- (822)
Increase in other assets........ (276) (83) (11)
(Decrease) increase in other
liabilities................... (78) 94 (80)
--------- --------- ---------
Net cash (used in) provided
by operating
activities.............. (746) (217) (344)
Cash flows from investing activities
Dividends from subsidiaries..... 1,250 950 1,425
Purchase of subsidiary stock.... (3,500) -- --
Life insurance proceeds......... -- -- 1,318
Purchases of premises and
equipment..................... -- -- (40)
--------- --------- ---------
Net cash (used in) provided
by investing
activities.............. (2,250) 950 2,703
Cash flows from financing activities
Repayment of borrowings......... -- (171) (272)
Purchase of treasury stock...... (2) -- (438)
Sale of treasury stock.......... 2 20 418
Redemption of preferred stock... (827) -- --
Sale of common stock............ 4,448 -- --
Redemption of common stock...... -- -- (1,330)
Dividends paid.................. (733) (640) (602)
--------- --------- ---------
Net cash provided by (used
in) financing
activities.............. 2,888 (791) (2,224)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents................... (108) (58) 135
Cash and cash equivalents at
beginning of year.................. 165 223 88
--------- --------- ---------
Cash and cash equivalents at end of
year............................... $ 57 $ 165 $ 223
========= ========= =========
F-24
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE R -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth condensed quarterly results of operations for 1998
and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED 1998
------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
<S> <C> <C> <C> <C>
Interest income......................... $ 4,721 $ 4,605 $ 4,561 $4,481
Interest expense........................ 2,227 2,255 2,237 2,232
------- -------- ------- --------
Net interest income..................... 2,494 2,350 2,324 2,249
Provision for loan losses............... 50 60 60 370
------- -------- ------- --------
Net interest income after provision for
loan losses........................... 2,444 2,290 2,264 1,879
Noninterest income...................... 587 611 466 1,162
Noninterest expense..................... 2,146 2,128 2,188 2,026
------- -------- ------- --------
Earnings before taxes................... 885 773 542 1,015
Provision for income tax expense........ 150 21 75 295
------- -------- ------- --------
$ 735 $ 752 $ 467 $ 720
======= ======== ======= ========
Earnings per share:
Basic.............................. $ 0.26 $ 0.26 $ 0.15 $ 0.28
Diluted............................ 0.26 0.26 0.15 0.28
<CAPTION>
QUARTER ENDED 1997
------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
<S> <C> <C> <C> <C>
Interest income......................... $ 4,738 $ 4,306 $ 4,067 $3,898
Interest expense........................ 2,225 2,099 1,953 1,915
------- -------- ------- --------
Net interest income..................... 2,513 2,207 2,114 1,983
Provision for loan losses............... 245 70 20 20
------- -------- ------- --------
Net interest income after provision for
loan losses........................... 2,268 2,137 2,094 1,963
Noninterest income...................... 428 436 407 386
Noninterest expense..................... 1,971 1,845 1,794 1,836
------- -------- ------- --------
Earnings before taxes................... 725 728 707 513
Provision for income tax expense........ 73 45 80 75
------- -------- ------- --------
$ 652 $ 683 $ 627 $ 438
======= ======== ======= ========
Earnings per share:
Basic.............................. $ 0.24 $ 0.27 $ 0.23 $ 0.17
Diluted............................ 0.24 0.27 0.23 0.17
</TABLE>
F-25
<PAGE>
[FISK ROBINSON LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First American Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of First American
Financial Corporation and Subsidiaries (collectively referred to as Company) as
of June 30, 1998 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
American Financial Corporation and Subsidiaries as of June 30, 1998, the results
of its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
August 7, 1998
/s/ FISK & ROBINSON P.C.
F-26
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1999 and 1998 (Unaudited)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,504 $ 2,262
Short-term interest bearing deposits 3,285 4,736
----------- -----------
Total cash and cash equivalents 5,789 6,998
----------- -----------
Securities available for sale (at market value) 12,519 16,100
Securities held to maturity (market values of
$2,697 and $2,294 at March 31, 1999
and 1998, respectively) 2,708 2,263
Loans receivable:
Held for sale, at fair value 145 146
Held for investment, net of allowance for loan
losses and unearned income of $1,806
and $1,176 at March 31, 1999 and
1998, respectively 39,149 34,948
----------- -----------
Total loans receivable 39,294 35,094
----------- -----------
Bank premises and equipment, net 1,121 1,007
Other real estate owned, net 11 -
Other assets 1,413 2,523
----------- -----------
Total assets $ 62,855 $ 63,985
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 8,876 $ 9,567
Interest bearing 48,133 46,669
----------- -----------
Total deposits 57,009 56,236
Borrowed funds 1,000 3,000
Other liabilities 467 578
Commitments and contingencies - -
----------- -----------
Total liabilities 58,476 59,814
Stockholders' equity:
Common stock, $0.01 par value; 1,000,000 shares
authorized, and 91,940 issued and outstanding
at March 31, 1999 and 1998, respectively 1 1
Paid-in capital 1,666 1,666
Retained earnings 2,964 2,768
Accumulated other comprehensive deficit ( 49 ) ( 61 )
----------- -----------
4,582 4,374
----------- -----------
Less 4,060 shares treasury stock at cost ( 203 ) ( 203 )
----------- -----------
Total stockholders' equity 4,379 4,171
----------- -----------
Total liabilities and stockholders' equity $ 62,855 $ 63,985
=========== ===========
</TABLE>
See accompanying selected notes.
F-27
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
For the Nine Months Ended March 31, 1999 and 1998 (Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,643 $ 2,721
Interest on short-term interest bearing deposits 139 64
Interest and dividends on investment securities:
Taxable 797 990
Nontaxable - -
----------- -----------
Total interest income 3,579 3,775
Interest expense on deposit accounts (including
interest expense on certificates of deposit
of $100,000 and over of $374 and $191
in 1999 and 1998, respectively) 1,707 1,675
Interest expense on other borrowings 72 142
----------- -----------
Total interest expense 1,779 1,817
----------- -----------
Net interest income 1,800 1,958
Provision for possible loan losses 187 180
----------- -----------
Net interest income after provision for possible
loan losses 1,613 1,778
----------- -----------
Noninterest income:
Fees for financial services 307 387
Loan servicing fees 74 165
Net gains on the sale of loans 46 41
Other 19 4
----------- -----------
Total noninterest income 446 597
----------- -----------
Noninterest expense:
Compensation and employee benefits 911 987
Occupancy and equipment 410 460
Professional services 151 113
Other 472 408
----------- -----------
Total noninterest expense 1,944 1,968
----------- -----------
Income before income taxes 115 407
Income tax benefit - 100
----------- -----------
Net income $ 115 $ 507
=========== ===========
Primary and fully diluted earnings per common and
common equivalent share $ 1.25 $ 5.51
=========== ===========
Weighted average common and common equivalent
shares outstanding 91,940 91,940
=========== ===========
</TABLE>
See accompanying selected notes.
F-28
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Nine Months Ended March 31, 1999 and 1998 (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS DEFICIT STOCK TOTAL
----- ------- -------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 $ 1 $ 1,666 $ 2,280 $( 298 ) $( 213 ) $ 3,436
Net income - - 507 - - 507
Other comprehensive income:
Net change in unrealized depreciation on
securities available for sale - - - 237 - 237
-------
Total comprehensive income - - - - - 744
Dividends paid - - ( 19 ) - - ( 19 )
Sale of treasury stock - - - - 10 10
----------- ----------- ----------- -------- --------- -------
Balance at March 31, 1998 $ 1 $ 1,666 $ 2,768 $( 61 ) $( 203 ) $ 4,171
=========== =========== =========== ======== ========= =======
Balance at July 1, 1998 $ 1 $ 1,666 $ 2,895 $( 26 ) $( 203 ) $ 4,333
Net income - - 115 - - 115
Other comprehensive income:
Net change in unrealized depreciation on
securities available for sale - - - - - ( 23 )
-------
Total comprehensive income - - - ( 23 ) - 92
Dividends paid - - ( 46 ) - - ( 46 )
----------- ----------- ----------- -------- --------- -------
Balance at March 31, 1999 $ 1 $ 1,666 $ 2,964 $( 49 ) $( 203 ) $ 4,379
=========== =========== =========== ======== ========= =======
</TABLE>
See accompanying selected notes.
F-29
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Nine Months Ended March 31, 1999 and 1998 (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities, net of
effect of purchase transactions:
Net income $ 115 $ 507
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization net of
accretion 134 122
Provision for loan losses 187 182
(Gain) loss on the sale of investment
securities available for sale ( 38 ) 1
Net gain on sales of loans held for sale ( 46 ) ( 41 )
Loss (gain) on sale of other real estate 25 ( 12 )
Net change in other assets and other
liabilities ( 10 ) ( 525 )
----------- -----------
Net cash provided by operating activities 367 234
----------- -----------
Cash flows from investing activities:
Proceeds from sales or maturities of available
for sale securities 11,705 6,541
Purchase of available for sale securities ( 7,562 ) ( 2,621 )
Purchase of held to maturity securities ( 550 ) -
Net loans originated ( 5,340 ) ( 2,614 )
Proceeds from the sale of loans 2,502 3,339
Purchase of premises and equipment ( 268 ) ( 119 )
Proceeds from sale of other real estate owned 101 321
----------- -----------
Net cash provided by investing activities 588 4,847
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits ( 1,798 ) 1,085
Net proceeds from sale of treasury stock - 10
Repayments of other borrowings ( 1,000 ) ( 1,500 )
Dividends paid ( 46 ) ( 19 )
----------- -----------
Net cash used by financing activities ( 2,844 ) ( 424 )
----------- -----------
Net (decrease) increase in cash and cash
equivalents ( 1,889 ) 4,657
Cash and cash equivalents at beginning of period 7,678 2,341
----------- -----------
Cash and cash equivalents at end of period $ 5,789 $ 6,998
=========== ===========
</TABLE>
See accompanying selected notes.
F-30
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Selected Notes to Consolidated Financial Statements
March 31, 1999 and 1998 (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements as of and for the nine
month periods ended March 31, 1999 and 1998, respectively, reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for such periods presented. Management has determined
that all such adjustments are of a normal recurring nature.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Under this guidance, the
Company is required to recognize the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when control
has been surrendered and derecognize liabilities when extinguished. SFAS 125
became effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. However,
certain provisions of the Statement were delayed for one year. The Company did
not experience a significant impact upon implementation of SFAS 125.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The term
"other comprehensive income" denotes revenues, expenses, gains and losses that
are included in comprehensive income but not in net income in accordance with
generally accepted accounting principles. The Company adopted SFAS No. 130
effective with its fiscal year beginning July 1, 1998 as required by the
pronouncement. Because the 1998 interim financial statements are included for
comparative purposes, they have been reclassified to reflect provisions of SFAS
No. 130.
F-31
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management has
not yet fully evaluated the effects of this change in its operations. The
Company, should it acquire such derivative instruments or should it engage in
such hedging activities, will adopt SFAS No. 133 as required for its year ended
December 31, 2001.
3. STATEMENT OF CASH FLOWS
The Company has chosen to report its cash flows by the indirect method and has
chosen to report on a net basis its cash receipts and cash payments for time
deposits accepted and repayments of those deposits, and loans made to customers
and principal collections on those loans.
Supplemental information on cash flows and non-cash transactions for the nine
months ended March 31, 1999 and 1998 (unaudited) is as follows (in thousands):
1999 1998
------------- -------------
Cash transactions:
Interest expense paid $ 1,767 $ 1,820
=========== ===========
Federal income taxes paid $ - $ -
=========== ===========
Noncash transactions:
Net acquisitions of other real estate
owned $ 11 $ -
=========== ===========
F-32
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 3,293 $ 2,341
Short-term interest-bearing deposits 4,385 --
-------- --------
Total cash and cash equivalents 7,678 2,341
-------- --------
Investments and mortgage-backed securities:
Held to maturity, at amortized cost (fair values of $2,232 and
$2,578, respectively) 2,242 2,618
Available for sale, at fair value 16,574 19,216
-------- --------
Total investments and mortgage-backed securities 18,816 21,834
-------- --------
Loans receivable:
Held for sale, at fair value 300 682
Held for investment net of allowance for loan losses and unearned income
of $1,130 and $1,366 at June 30, 1998 and 1997, respectively 36,433 35,506
-------- --------
Total loans receivable, net 36,733 36,188
-------- --------
Bank premises and equipment, net 987 1,010
Other real estate owned, less allowance 1 168
Other assets 1,722 2,158
-------- --------
Total assets $ 65,937 $ 63,699
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 10,954 $ 9,147
Interest bearing 47,854 46,004
-------- --------
58,808 55,151
Other borrowings 2,000 3,000
Federal funds purchased -- 1,500
Accrued interest and other liabilities 796 612
-------- --------
Total liabilities 61,604 60,263
-------- --------
Stockholders' equity:
Common stock - $0.01 par value; 1,000,000 shares authorized, 96,000 shares
issued at June 30, 1998 and 1997 and 91,940 and 91,740
shares outstanding at June 30, 1998 and 1997, respectively 1 1
Additional paid-in capital 1,666 1,666
Retained earnings 2,895 2,280
Net unrealized loss on investment and mortgage-backed securities
available for sale, net of tax (26) (298)
-------- --------
4,536 3,649
-------- --------
Less treasury stock - 4,060 and 4,260 shares at cost (203) (213)
-------- --------
Total stockholders' equity 4,333 3,436
-------- --------
Total liabilities and stockholders' equity $ 65,937 $ 63,699
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
For the Year Ended June 30, 1998, the Six Month Period Ended June 30, 1997
and the Year Ended December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,444 $ 1,815 $ 3,490
Short-term interest bearing deposits 137 9 27
Interest and dividends on investment securities:
Taxable 1,272 682 1,387
Nontaxable -- -- --
-------- -------- --------
Total interest income 4,853 2,506 4,904
-------- -------- --------
Interest expense:
Deposit accounts including interest expense on certificates of deposit of
$100,000 and over $333, $116 and $236 in 1998, 1997
1996, respectively 2,251 1,106 2,133
Other borrowings 182 138 481
-------- -------- --------
Total interest expense 2,433 1,244 2,614
-------- -------- --------
Net interest income 2,420 1,262 2,290
Provision for loan loss 181 622 182
-------- -------- --------
Net interest income after provision for loan loss 2,239 640 2,108
-------- -------- --------
Noninterest income:
Fees for financial services 435 202 417
Loan servicing and origination fees 423 196 477
Other 48 147 189
-------- -------- --------
Total noninterest income 906 545 1,083
-------- -------- --------
Noninterest expense:
Compensation and employee benefits 1,265 668 1,163
Occupancy and equipment expense 661 406 788
Professional services 178 119 179
Other 497 526 957
-------- -------- --------
Total noninterest expense 2,601 1,719 3,087
-------- -------- --------
Income (loss) before income taxes 544 (534) 104
Income tax benefit 100 -- 174
-------- -------- --------
Net income (loss) $ 644 $ (534) $ 278
======== ======== ========
Earnings (loss) per common share of stock $ 7.01 $ (5.69) $ 2.90
======== ======== ========
Weighted average number of common shares outstanding 91,931 93,870 96,000
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Year Ended June 30, 1998, the Six Month Period Ended June 30, 1997
and the Year Ended December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
NET
UNREALIZED LOSS
ADDITIONAL AVAILABLE TOTAL
COMMON PAID-IN RETAINED ON SECURITIES TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE STOCK EQUITY
---------- ------------ ---------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 1 $ 1,666 $ 2,597 $ (32) $ -- $ 4,232
Net income -- -- 278 -- -- 278
Preferred stock - minority interest dividend -- -- (15) -- -- (15)
Change in unrealized loss on securities
available for sale -- -- -- (256) -- (256)
------- ------- ------- ------- ------- -------
Balance at December 31, 1996 1 1,666 2,860 (288) -- 4,239
Net income -- -- (534) -- -- (534)
Dividends -- -- (24) -- -- (24)
Preferred stock - minority interest dividend -- -- (22) -- -- (22)
Purchase of treasury stock -- -- -- -- (213) (213)
Change in unrealized gains (losses) on
securities available for sale -- -- -- (10) -- (10)
------- ------- ------- ------- ------- -------
Balance at June 30, 1997 1 1,666 2,280 (298) (213) 3,436
Sale of treasury stock -- -- -- -- 10 10
Net change in unrealized gain (loss) on
securities available for sale -- -- -- 272 -- 272
Preferred stock - minority interest dividend -- -- (29) -- -- (29)
Net income -- -- 644 -- -- 644
------- ------- ------- ------- ------- -------
Balance at June 30, 1998 $ 1 $ 1,666 $ 2,895 $ (26) $ (203) $ 4,333
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Year Ended June 30, 1998, the Six Month Period Ended June 30, 1997
and the Year Ended December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash from operating activities:
Net income (loss) $ 644 $ (534) $ 278
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan loss 181 622 182
Depreciation and amortization, net of accretion 308 113 350
Net (gain) loss on sale of investment securities
available for sale (4) 5 (30)
Net gain on sale of loans held for sale (84) (198) 152
Net loss on the sale of other real estate owned 6 -- --
Net loss (gain) on sale of assets -- 5 (50)
FHLB stock dividends (38) -- --
Decrease (increase) in other assets 350 (119) (30)
Increase (decrease) in other liabilities 47 193 (89)
-------- -------- --------
Net cash provided by operating activities 1,410 87 763
-------- -------- --------
Cash flows from investing activities:
Net loan (originations) repayments (5,770) 361 (2,997)
Proceeds from the sale of loans 5,100 -- --
Purchase of investment and mortgage-backed securities:
Held to maturity (112) -- --
Available for sale (4,063) (6,083) (5,295)
Proceeds from maturities and paydowns of securities
held to maturity -- 216 442
Proceeds from sale and maturity of investment and
mortgage-backed securities available for sale 7,609 2,357 11,701
Proceeds from sale of real estate acquired through
foreclosure 186 -- --
Purchase of premises and equipment (161) (52) (108)
-------- -------- --------
Net cash provided (used) by investing activities 2,789 (3,201) 3,743
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Continued)
For the Year Ended June 30, 1998, the Six Month Period Ended June 30, 1997
and the Year Ended December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from financial activities:
Dividends paid (29) (46) (15)
Proceeds from sale of treasury stock 10 -- --
Net increase in deposits 3,657 411 4,597
(Repayment) borrowings of other borrowed funds (2,500) 1,343 (6,805)
Purchase of treasury stock -- (213) --
------- ------- -------
Net cash provided by financing activities 1,138 1,495 (2,223)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,337 (1,619) 2,283
Cash and cash equivalents at beginning of period 2,341 3,960 1,677
------- ------- -------
Cash and cash equivalents and end of period $ 7,678 $ 2,341 $ 3,960
======= ======= =======
Supplemental disclosures:
Cash paid for:
Income taxes $ -- $ -- $ --
Interest $ 2,421 $ 1,248 $ 2,601
Non-cash transactions:
Net acquisition of other real estate owned $ 25 $ -- $ 241
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998 and 1997 and December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
First American Financial Corp. (the "Company") was incorporated in the State of
Texas in February, 1991 for the purpose of forming a bank holding company for
First American Bank and Mortgage, N.A., a federally chartered bank (the "Bank").
The bank conducts business through two full service branches located in two
counties in Northeast Texas. The Bank offers a full range of financial services
including both personal and commercial deposit services and loan products. The
Bank originates and services residential mortgages through its full service
mortgage subsidiary, First American Mortgage Company.
ACCOUNTING PRINCIPLES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and practices generally followed within the
banking industry. In preparing consolidated financial statements, management is
required to make estimates and assumptions that affect certain reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for loan loss, the valuation of other real estate owned, and the valuation of
deferred tax assets and the effect of prepayments on mortgage servicing rights
and the premiums and discounts associated with mortgage-related securities.
Management believes that the allowance for loan loss, the valuations of other
real estate owned and deferred tax assets are adequate, and that the effect of
prepayments on mortgage servicing rights and premiums and discounts associated
with investments and mortgage-related securities has been adequately evaluated.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan loss and valuation of other
real estate owned. The following summarizes the more significant policies.
F-38
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Corporation, First American Delaware Financial Corporation, First American Bank
& Mortgage, N.A., its wholly-owned subsidiary, First American Mortgage Company
(collectively referred to as Company), and its 99% limited partnership interest
in Equipment Leasing Associates 1994 - III Limited Partnership. First American
Delaware Financial Corporation owns 100% of the capital stock of the Bank. First
American Financial Corporation owns 100% of the stock of First American Delaware
Financial Corporation. All significant inter-company balances and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, federal funds sold and short term,
interest-bearing deposits. Federal funds are normally sold for one-day periods.
Periodically, the Company's cash deposits with other financial institutions may
exceed the FDIC insurance limits.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The Company accounts for its investment in debt and equity securities as
prescribed in Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Debt and Equity Securities" ("SFAS 115"). The following summarizes
SFAS 115 security classifications and corresponding accounting treatment:
Held-to-Maturity securities are debt securities that the Company has the
positive intent and ability to hold to maturity and are reported at
amortized cost. Premiums and discounts are amortized or accreted as
adjustments to income over the life of the security using the level yield
method.
Trading securities are debt and equity securities that are bought and held
principally for the purpose of selling in the near term and are reported
at fair value, with unrealized gains and losses included in earnings. At
June 30, 1998 and 1997, no securities have been classified as trading
securities.
Available-for-sale securities are debt and equity securities not
classified as either held-to-maturity or trading securities and reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of tax.
Premiums and discounts are amortized or accreted as adjustments to income
over the life of the security using the level yield method.
F-39
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Gains or losses on the sale of securities are based on the specific
identification method. The fair value of securities is based on quoted market
prices, or dealer quotes. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Transfers of securities between classifications are accounted for at fair value.
Federal Home Loan Bank stock, Federal Reserve Bank stock and Texas Independent
Bank stock are owned due to regulatory and collateral requirements. These stocks
are not considered to be a marketable equity security under SFAS 115 and,
therefore, are carried at cost.
LOANS
Loans that the Company has the intent and ability to hold to maturity or
repayment, are recorded at cost and represent the unpaid principal balances,
adjusted for allowance for loan loss, net deferred origination fees or costs on
originated loans and unamortized premiums or discounts on loans purchased.
Costs have been deferred and are recognized over the life of the loans as an
adjustment to yield.
Loans are placed on a non-accrual status when, in the opinion of management, the
possibility of collection of additional interest is deemed insufficient to
warrant further accrual. Generally, the Company places all loans more than
ninety days past due on non-accrual status. When a loan is placed on non-accrual
status, interest accruals are suspended until, in the opinion of management, the
borrower has regained the ability to make periodic interest and principal
payments in accordance with the terms of the loan agreement. When the interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are received.
Discounts on acquired first mortgage loans are amortized to income using methods
that approximate the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments of principal.
Discounts and premiums on consumer loans are recognized over the lives of the
loans using methods that approximate the interest method.
F-40
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
valued at the aggregate of lower of cost or market. Net unrealized losses are
recognized through a valuation allowance by charges to income. Most loans sold
are sold with servicing rights retained, however, the Company does sell a
portion of its loans held for sale portfolio without retention of servicing
rights. The decision to retain or sell the servicing rights is a function of the
loan product and the buyer. Gains and losses on the sale of such loans are
recognized when substantially all risks and rewards of ownership are
transferred. If the loan servicing rights are retained, the value of future
servicing rights are considered in the determination of the amount of gain or
loss.
ALLOWANCES FOR ESTIMATED LOSSES
The Company maintains allowances for estimated loan loss, uncollected accrued
interest receivable and losses on real estate acquired in the settlement of
loans. Loss provisions are charged to income when, in the opinion of management,
such losses for which no provision has been made are probable.
The allowance for loan loss is maintained at a level that management considers
adequate to provide for potential losses based upon an evaluation of known and
inherent risks in the loan portfolio. Management believes that the allowance for
loan loss is adequate. Management's periodic evaluation is based upon analysis
of the portfolio, past loss experience, current economic conditions, and other
relevant factors. While management uses the best information available to make
such evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory authorities as an integral part of
their examination process, periodically review the allowance for loan loss.
These authorities may require the Company to recognize additions to the
allowance for loan loss based on their judgments of information which is
available to them at the time of their examination.
F-41
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" (SFAS 114), and the Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" (SFAS 118), which amends SFAS 114., defines the
recognition criteria for loan impairment and the measurement methods for certain
impaired loans and loans for which terms have been modified in troubled debt
restructuring (a restructured loan). Specifically, a loan is considered impaired
when it is probable a creditor will be unable to collect all amounts due - both
principal and interest - according to the contractual terms of the loan
agreement. When measuring impairment, the expected future cash flows of an
impaired loan are required to be discounted at the loan's effective interest
rate. Alternatively, impairment can be measured by reference to an observable
market price, if one exists, or the fair value of the collateral for a
collateral dependent loan. Regardless of the historical measurement method used,
SFAS 114 requires a creditor to measure impairment based on the fair value of
the collateral when the creditor determines foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting the
total expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest on an impaired loan. The Company has elected to continue to
use its existing nonaccrual methods for recognizing interest income on impaired
loans. The adoption of SFAS 118 and SFAS 114 resulted in no adjustment to the
allowance for loan loss.
BANK PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises and equipment are carried at cost less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line method. Average useful lives used for depreciation with respect to
major classifications of property are as follows:
TYPE ESTIMATED LIFE
---- --------------
Building 30 years
Furniture and equipment 2 to 7 years
Maintenance and repairs are charged to expense; improvements and renewals are
capitalized. Upon retirement or replacement, the cost of the asset and the
related accumulated depreciation are eliminated with any resulting gains or
losses charged or credited to income.
F-42
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the time of foreclosure at the lower of
the Company's cost of acquisition or the asset's fair market value which becomes
the property's new basis. Any write-downs at date of acquisition are charged to
the allowance for loan losses. An allowance for estimated costs to sell the
property is established, if necessary, at the date the real estate is acquired
by a charge to operations. Expenses incurred in maintaining other real estate
owned and subsequent provisions to reflect declines in the fair market value of
the property are included in other real estate owned expense.
INTANGIBLE ASSETS
Intangible assets are amortized over their estimated useful lives on either the
straight-line method or based on the expiration of the underlying assets.
FEDERAL INCOME TAXES
The Corporation files a consolidated income tax return with its subsidiaries.
Federal income tax expense or benefit has been allocated on a separate return
basis.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized, as
determined under provisions of FASB No. 109, "Accounting for Income Taxes".
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights represent the carrying value of the rights to service
mortgage loans for others. The mortgage servicing rights are amortized against
loan servicing fee income on an accelerated basis in proportion to, and over the
period of, estimated net future loan servicing fee income, which periods
initially do not exceed seven years. Service fee income is recognized when the
related loan payments are collected. On a quarterly basis, management evaluates
and makes any necessary adjustments to the remaining balances of mortgage
servicing rights, if the fair value of the disaggregated servicing rights
indicate that the carrying value is not considered recoverable. Assumptions
utilized in the quarterly evaluations are based on current prepayment and
investor rates of return provided by an independent investment advisor.
F-43
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Effective January 1, 1997 the Company adopted SFAS 122 "Accounting for Mortgage
Servicing Rights." This standard prospectively requires the Company, which
services mortgage loans for others in return for a servicing fee, to recognize
these servicing rights as assets, regardless of how such assets were acquired.
Additionally, the Company is required to assess the fair value of these assets
at each reporting date to determine impairment.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
EARNINGS PER COMMON SHARE OF STOCK
Earnings per common share of stock is computed by dividing net income by the
weighted average number of common shares outstanding during each year.
FORWARD-LOOKING STATEMENTS
Certain phrases contained in these financial statements including, without
limitation, statements containing the words "believes", "anticipates",
"estimates", "expects" and words of similar meaning, constitute forward-looking
statements, as defined in securities law. Among others, notes to the financial
statements concerning financial instruments, contingencies, and Year 2000
readiness identify important risk factors that could cause actual results to
differ significantly from those contained in the forward-looking statements.
F-44
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Under this guidance, the
Company is required to recognize the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when control
has been surrendered and derecognize liabilities when extinguished. SFAS 125
became effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. However,
certain provisions of the Statement were delayed for one year. The Company did
not experience a significant impact upon implementation of SFAS 125.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management has
not yet fully evaluated the effects of this change in its operations. The
Company, should it acquire such derivative instruments or should it engage in
such hedging activities, will adopt SFAS No. 133 as required for its year ended
December 31, 2001.
F-45
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
3. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheet according to management's intent. The carrying amount of securities and
their approximate fair values are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
June 30, 1998:
U.S. Agency obligations $ 112 $ -- $ -- $ 112
Pass-through certificates guaranteed
by FNMA, GNMA and FHLMC 2,130 12 22 2,120
------- ------- ------- -------
$ 2,242 $ 12 $ 22 $ 2,232
======= ======= ======= =======
June 30, 1997:
Pass-through certificates guaranteed
by FNMA, GNMA and FHLMC $ 2,618 $ 13 $ 53 $ 2,578
======= ======= ======= =======
SECURITIES AVAILABLE FOR SALE
June 30, 1998:
Investment securities:
U.S. Agency obligations $ 4,476 $ 55 $ 2 $ 4,529
Equity securities 262 10 -- 272
Mortgage-backed securities:
FHLMC 1,580 15 -- 1,595
FNMA 1,801 15 1 1,815
CMO's 8,495 23 155 8,363
------- ------- ------- -------
$16,614 $ 118 $ 158 $16,574
======= ======= ======= =======
June 30, 1997:
Investment securities:
U.S. Agency obligations $ 8,044 $ -- $ 63 $ 7,981
Pass-through certificates guaranteed
by FNMA, GNMA and FHLMC 10,975 11 400 10,586
Other 649 -- -- 649
------- ------- ------- -------
$19,668 $ 11 $ 463 $19,216
======= ======= ======= =======
</TABLE>
F-46
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Proceeds from sales of securities available for sale were approximately
$1,000,000, $1,600,000 and $9,071,000 for the year ended June 30, 1998, the six
month period ended June 30, 1997 and the year ended December 31, 1996,
respectively. Gross realized gains on these sales were approximately $11,000,
$2,000 and $57,000 for the year ended June 30, 1998, the six month period ended
June 30, 1997 and the year ended December 31, 1996, respectively. Gross realized
losses on these sales were approximately $7,000, $7,000 and $27,000 for the year
ended June 30, 1998, the six month period ended June 30, 1997 and the year ended
December 31, 1996, respectively.
Securities with a book value of approximately $894,000 and a fair value of
approximately $896,000 were pledged to secure public fund deposits and other
purposes as of June 30, 1998.
The maturities of the investment and mortgage-backed securities at June 30, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
--------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ---------- ------------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 43 $ 44 $ 1,172 $ 1,161
Due from one year to five years 1,207 1,211 4,045 4,049
Due from five to ten years 992 977 7,398 7,395
Due after ten years -- -- 3,737 3,697
------- ------- ------- -------
Total debt investment and
mortgage-backed securities 2,242 2,232 16,352 16,302
Equity securities -- -- 262 272
------- ------- ------- -------
Total investment and mortgage-
backed securities $ 2,242 $ 2,232 $16,614 $16,574
======= ======= ======= =======
</TABLE>
At June 30, 1998, approximately $4,500,000 par value of the debt securities were
considered structured notes with call provisions ranging from 1 month to 3
years.
At June 30, 1998, the Company's collateralized mortgage obligations ("CMO's")
and mortgage-backed securities portfolio consisted of securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage
Corporation ("GNMA"), or the Federal National Mortgage Corporation ("FNMA") and
mature between one and forty years. The actual lives of these securities may be
significantly shorter as the result of payments and prepayments of the
underlying collateral.
F-47
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
4. LOANS RECEIVABLE, NET
Loans receivable consisted of the following (in thousands):
1998 1997
-------- --------
Real estate loans:
Residential $ 7,053 $ 8,871
Commercial 5,121 2,572
Construction 2,190 1,888
Other 1,853 676
-------- --------
Total real estate loans 16,217 14,007
-------- --------
Other loans:
Commercial 10,332 9,297
Agricultural 3,091 3,147
Consumer and installment 8,394 10,895
-------- --------
Total other loans 21,817 23,339
-------- --------
Held for sale loans 300 682
Total loans 38,334 38,028
-------- --------
Less:
Unearned discount (673) (850)
Undisbursed portion of interim
construction loans (634) (688)
Allowance for loan loss (457) (470)
Net deferred loan costs 163 168
-------- --------
Total loans, net $ 36,733 $ 36,188
======== ========
Substantially all of the Company's loans are with borrowers located within 100
miles of Sulphur Springs, Texas. The Company's concentrations of credit risk
related to the loan portfolio are reflected in the preceding schedule.
F-48
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Impairment of loans having recorded investments of approximately $370,000 and
$587,000 at June 30, 1998 and 1997, respectively, has been recognized in
conformity with SFAS No. 114 as amended by SFAS No. 118. The average recorded
investment in impaired loans during 1998 and 1997 was approximately $479,000 and
$567,000, respectively. The total allowance for loan losses related to these
loans at June 30, 1998 and 1997 was approximately $60,000 and $64,000,
respectively. Interest income recognized on impaired loans was approximately
$15,000 for both 1998 and 1997.
At June 30, 1998 and 1997, loans which were accounted for on a non-accrual basis
or were contractually past due ninety days or more totaled approximately
$370,000 and $587,000, respectively. The amount the Company will ultimately
realize from these loans could differ materially from their carrying value
because of future developments affecting the underlying collateral or the
borrower's ability to repay the loans. During the year ended June 30, 1998, the
six month period ended June 30, 1997 and the year ended December 31, 1996, the
Company recognized no interest income on loans past due 90 days or more,
whereas, under the original terms of these loans, the Company would have
recognized additional interest income of approximately $27,000, $24,000 and
$53,000, respectively.
Directors and officers of the Company are customers of the Company in the
ordinary course of business. Loans to directors and officers have terms
consistent with those offered to other customers. The aggregate amount of such
loans outstanding at June, 30, 1998 and 1997 was $635,000 and $837,000,
respectively. During 1998 and 1997, new loans to such related parties amounted
to $1,129,000 and $112,000, respectively, and repayments amounted to $1,392,000
and $39,000, respectively.
The Company has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
Activity in the allowance for loan loss consisted of the following for the year
ended June 30, 1998, the six months period ended June 30, 1997 and the year
ended December 31, 1996 (in thousands):
1998 1997 1996
----- ----- -----
Balance at the beginning of the year $ 470 $ 470 $ 433
Provision for loan loss 181 622 182
Charge-offs, net of recoveries (194) (622) (145)
----- ----- -----
Balance at the end of the period $ 457 $ 470 $ 470
===== ===== =====
At June 30, 1998 and 1997, accrued interest receivable on loans was $317,000 and
$309,000, respectively.
F-49
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following (in thousands):
1998 1997
------- -------
Land $ 342 $ 342
Building and improvements 500 462
Office furniture, fixtures and equipment 890 782
------- -------
1,732 1,586
Less accumulated depreciation (745) (576)
------- -------
Bank premises and equipment, net $ 987 $ 1,010
======= =======
Depreciation expense totaled approximately $185,000, $95,000 and $198,000 for
the year ended June 30, 1998, the six month period ended June 30, 1997 and the
year ended December 31, 1996, respectively.
6. LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others at June 30,
1998 and 1997 was approximately $54,351,000 and $62,763,000, respectively. The
Company sells loans in the secondary market without recourse and retains
servicing rights on the sale of conventional mortgage loans. The Company
originates and sells all FHA/VA servicing released. Servicing loans for others
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. Loan servicing
income is recorded on the accrual basis and includes servicing fees received
from the investors as well as certain charges collected from the borrower, such
as late payment fees. In connection with these loans serviced for others, the
Company held custodial escrow balances of $985,000 and $1,145,000 at June 30,
1998 and 1997, respectively.
Mortgage servicing rights purchased and capitalized amounted to approximately
$345,000 and $829,000 at June 30, 1998 and 1997, respectively. Related
amortization expense of mortgage servicing rights for the year ended June 30,
1998, the six month period ended June 30, 1997 and the year ended December 31,
1996 amounted to approximately $99,000, $35,000 and $55,000, respectively. There
was no valuation allowance at June 30, 1998.
F-50
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Mortgage servicing rights of approximately $25,000 were originated and
capitalized during both the year ended June 30, 1998 and the six month period
ended June 30, 1997. Amortization of originated mortgage servicing rights for
the year ended June 30, 1998, the six month period ended June 30, 1997 and the
year ended December 31, 1996 was $4,000, $2,000 and $4,000, respectively.
7. DEPOSITS
Deposit accounts were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
BALANCE PERCENT BALANCE PERCENT
------- -------- ------- -------
<S> <C> <C> <C> <C>
Demand accounts $10,954 18.6% $ 9,147 $ 16.6%
NOW accounts 4,290 7.3 3,817 6.9
Money market checking accounts 9,587 16.3 9,865 17.9
Savings accounts 1,831 3.1 2,197 4.0
------- ------- ------- -------
Total demand and savings deposits 26,662 45.3 25,026 45.4
Certificates of deposit 32,146 54.7 30,125 54.6
------- ------- ------- -------
Total deposit accounts $58,808 100.0% $55,151 100.0%
======= ======= ======= =======
</TABLE>
As of June 30, 1998 and 1997, deposit accounts with balances of $100,000 and
over totaled approximately $13,866,000 and $3,412,000, respectively.
8. BORROWED FUNDS
Other borrowed funds consisted of the following at June 30, 1998 (in thousands):
Within one year - fixed rate $ -
Due after one year through five years 2,000
--------
Total borrowings $ 2,000
========
F-51
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
At June 30, 1998, the Company had $2,000,000 of advances outstanding from the
Federal Home Loan Bank of Dallas . These advances have interest rates that
adjust monthly. The advances are prepayable with the balance due in 2001.
Interest is due monthly. The Company pledges as collateral to these borrowings
their Federal Home Loan Bank stock and has entered into blanket collateral
agreements with the Federal Home Loan Bank whereby the Company maintains, free
of other encumbrances, qualifying mortgages (as defined) with unpaid principal
balances equal to, when discounted at 75% of the principal balances, 100% of
total advances.
9. INCOME TAXES
The consolidated federal income tax (benefit) expense differs from "expected"
consolidated federal income tax for the year ended June 30, 1998, the six month
period ended June 30, 1997 and the year ended December 31, 1996, computed by
applying the statutory U.S. federal corporate tax rate of 34% to income tax
expense as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) $ 219 $(199) $ 35
Effect of leveraged leasing transaction (206) (106) (189)
Change in valuation allowance (111) 260 --
Other (2) 45 (20)
----- ----- -----
Federal income tax (benefit) $(100) $-- $(174)
===== ===== =====
</TABLE>
F-52
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Deferred income taxes reflect the net tax effects of temporary differences
between the recorded amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities as of June 30, 1998 and
1997 are as follows (in thousands):
1998 1997
----- -----
Deferred tax assets:
Net unrealized loss on securities available for sale $ 13 $ 153
Allowance for loan losses for book in excess
of tax 155 159
Net operating loss carryforward 236 243
Provision for repossessed assets 32 32
Other -- 11
----- -----
Gross deferred tax assets 436 598
----- -----
Deferred tax liabilities:
Bank premises and equipment basis for book in
excess of tax 11 21
Core deposit tangible 11 18
Federal Home Loan Bank stock 25 --
----- -----
Gross deferred tax liabilities 47 39
----- -----
Net potential deferred asset 389 559
Valuation allowance (175) (286)
----- -----
Net deferred tax asset $ 214 $ 273
===== =====
A summary of the valuation allowance at June 30, 1998 and 1997 is as follows (in
thousands):
1998 1997
----- -----
Valuation allowance, beginning of period $ 286 $ 26
Change in valuation allowance (111) 260
----- -----
Valuation allowance, end of period $ 175 $ 286
===== =====
F-53
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
At June 30, 1998, the Company has an available net operating loss carryforward
of approximately $150,000 which is due to expire, if not utilized, by 2004 and
is subject to annual limitations of approximately $78,000 under Section 382 of
the Internal Revenue Code. Additionally, the Company has a net operating loss
carryforward of approximately $543,000 which will begin to expire, if not
utilized, by 2012 and is not subject to annual Internal Revenue Code limitations
under Section 382.
Included in other assets and other liabilities in the consolidated balance sheet
are net deferred tax assets of approximately $214,000 and $273,000 at June 30,
1998 and 1997, respectively.
10. EMPLOYEE BENEFITS
The Company has a qualified defined contribution plan, which covers
substantially all employees that meet certain service requirements. Employees
can contribute up to 15% of their unadjusted compensation. Contributions by the
Company are determined as a percent of each covered employee's salary at the
Company's discretion for each plan year. Benefits accrued for the year ended
June 30, 1998 and for the six month period ended June 30, 1997, pursuant to the
plan were approximately $20,000 and $25,000, respectively. There were no
benefits accrued for the year ended December 31, 1996.
11. COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Company upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
F-54
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The Company
had outstanding loan commitments as follows at June 30, 1998 and 1997 (in
thousands):
1998 1997
------ ------
Commitments to extend credit:
Loan commitments $3,350 $4,842
Undisbursed portion of interim
construction loans 633 --
Standby letters of credit 91 81
------ ------
Total commitment to extend credit $4,074 $4,923
====== ======
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company holds various collateral
supporting those commitments for which collateral is deemed necessary.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The Company has no additional financial instruments with off-balance
sheet risks.
CONCENTRATIONS OF CREDIT RISK
The Company's business is principally with customers located in northeast Texas.
Except for residential mortgage loans in the Company's market area, the Company
has no other significant concentrations of credit risk.
F-55
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
LITIGATION
The Company is involved in legal actions in the normal course of business. In
the opinion of management, based on the advice of its general counsel, the
resolution of these matters will not have a material adverse impact on the
future results of operations or the financial position of the Company.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The Company's profitability depends to a large extent on its net interest
income, which is the difference between interest income from loans and
investments and interest expense on deposits and borrowings. Like most financial
institutions, the Company's interest income and interest expense are
significantly affected by changes in market interest rates and other economic
factors beyond its control. The Company's interest earning assets consist
primarily of long-term, fixed-rate mortgage loans and investments which adjust
more slowly to changes in interest rates than its interest-bearing liabilities
which are primarily term deposits. Accordingly, the Company's earnings would be
adversely affected during periods of rising interest rates.
The Company contracts outside data processing services subject to a
noncancelable agreement which expires in June 1999. Monthly payments are
contingent upon the amount of usage during a given month. Total expenses
pursuant to the agreement were approximately $160,000, $115,000 and $231,000 for
the year ended June 30, 1998, the six month period ended June 30, 1997 and the
year ended December 31, 1996, respectively.
In the normal course of business, there are various commitments and contingent
liabilities outstanding which are not reflected in the accompanying consolidated
balance sheets. Management anticipates no material losses as a result of these
transactions.
12. STOCKHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
Under federal banking law, there are legal restrictions limiting the amount of
dividends the Bank can declare. Approval of the Office of the Comptroller of the
Currency is required if dividends declared exceed the net profits for that year
combined with the retained net profits for the two preceding years. The
calculation of the amount available for payment of dividends is based on the net
profits determined in accordance with regulatory accounting principles, reduced
by the amount of dividends declared. As of July 1, 1998, the Bank had regulatory
approval to pay dividends in the amount of $75,000. However, these net profits
are subject to regulatory capital requirements and other factors that
substantially limit their distribution.
F-56
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
Further, the Office of the Comptroller of the Currency may prohibit the payment
of any dividends if it determines that certain circumstances exist in the Bank,
including those relating to the financial condition of the Bank, such that the
payment of dividends would be considered an unsafe and unsound practice.
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
the regulators that, if taken, could have a material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework requiring prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification 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 Bank to maintain minimum amounts and ratios of total and Tier I
capital ( as defined by regulation) to risk weighted assets (as defined), and
Tier I capital to average assets ( as defined). The following table sets forth
(in thousands) the Bank's current capital requirements, actual capital position
and excess capital in both a dollar and percentage basis for June 30, 1998 and
1997:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ----------------------------- -----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998:
Total capital to risk weighted assets $4,685 12.2% $3,075 > or = to 8.0% $3,844 > or = to 10.0%
Tier I capital to risk weighted assets 4,230 11.0 1,537 > or = to 4.0 2,306 > or = to 6.0
Tier I capital to average assets 4,230 6.5 2,586 > or = to 4.0 3,233 > or = to 5.0
June 30, 1997:
Total capital to risk weighted assets $3,750 9.1% $3,285 > or = to 8.0% $4,106 > or = to 10.0%
Tier I capital to risk weighted assets 3,280 8.0 1,643 > or = to 4.0 2,464 > or = to 6.0
Tier I capital to average assets 3,280 5.1 2,594 > or = to 4.0 3,243 > or = to 5.0
</TABLE>
13. YEAR 2000 COMPLIANCE (UNAUDITED)
The Company is in the process of implementing a Year 2000 compliant information
system and has initiated an assessment project which addresses those systems
that may have Year 2000 compliance issues. This assessment project is to
determine that nature of the problem and to determine what actions are necessary
for the Company to be in compliance.
F-57
<PAGE>
FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
The Company presently believes that with the implementation of certain systems
modifications, validation, and other related actions, including distribution of
information to borrowers, Year 2000 compliance will not result in significant
operational issues for the Company. However, if the implementation process is
not completed on a timely basis, Year 2000 compliance may have a significant
effect on the operations of the Company.
14. SUBSEQUENT EVENT
In July 1998, the Company entered into Special Stock Option Agreements whereby
the Company granted options to certain key employees for the purchase of shares
of its common stock at $50 per share, the estimated fair value on the dates of
grant. The following table summarizes the options, all of which remain
outstanding:
NUMBER OF OPTION
SHARES PRICE
GRANT DATE EXERCISABLE PER SHARE
---------- ------------ ------------
July 1998 $ 10,000 $ 50.00
============ ============
The above options remain in effect for 10 years and generally vest at 20
percent per year.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123) allows companies to continue to apply the accounting
provisions of the Accounting Principles Board Opinion 25 (APB Opinion 25) or
adopt the fair value based method of accounting for stock options. Under the
fair value based method, 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. The provisions of SFAS 123 permit a company to
remain with the accounting provisions in APB Opinion 25. However, pro forma
disclosures of net income as if the fair value based method of accounting as
defined in SFAS 123 had been applied must be provided. The Company has elected
to apply APB Opinion 25 and its related interpretations in accounting for its
stock options. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant date in accordance with the
provisions of SFAS 123, the Company' estimated salaries expense for its fiscal
year ended 1999 is not expected to be materially impacted. The fair value of
each option is estimated on the grant date based on the Company's current stock
price less the present value of the options discounted at a risk-free rate of
return over the estimated expected life of the options.
F-58
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
and entered into effective as of April 23, 1999, by and between FIRST AMERICAN
FINANCIAL CORP. ("First American") and GUARANTY BANCSHARES, INC., ("Buyer"), and
provides as follows:
W I T N E S S E T H:
WHEREAS, Buyer desires to acquire all of the issued and outstanding
stock of First American through the merger of First American with and into a
subsidiary of Buyer (the "Merger');
WHEREAS, Buyer and First American believe that the Merger is in the
best interests of Buyer, First American and their respective shareholders;
WHEREAS, Buyer and First American desire to set forth the terms and
conditions of the Merger;
WHEREAS, the respective boards of directors of Buyer and First
American have approved this Agreement.
NOW THEREFORE, in consideration of the premises, First American and
Buyer hereby agree that a wholly owned subsidiary of Buyer shall be merged with
and into First American on the following terms and conditions:
SECTION 1: MERGER
(a) MERGER OF FIRST AMERICAN INTO SUBSIDIARY OF BUYER. Subject to the
terms and conditions of this Agreement, on the Closing Date (as defined herein),
a wholly-owned subsidiary of Buyer shall be merged with and into First American
pursuant to the provisions of and with the effect provided in Part Five of the
Texas Business Corporation Act (the "TBCA").
A-1
<PAGE>
(b) EFFECT OF MERGER. The specific Plan of Merger is set forth in
Exhibit A attached hereto and made a part hereof. The Merger shall have the
effects set forth in Part Five of the TBCA. On the Closing Date, First American
shall continue as the corporation surviving the Merger (the "Surviving
Corporation") which shall not be deemed to be a new corporation, and the
separate corporate existence of the subsidiary of Buyer shall cease. On the
Closing Date, all rights, title, and interests to all real and personal property
owned by First American and said subsidiary shall be allocated to the vested in
the Surviving Corporation without reversion or impairment, without further act
or deed, and without any transfer or assignment having occurred, but subject to
any existing liens or encumbrances thereon. On the Closing Date, all liabilities
and obligations of First American and said subsidiary shall be allocated to the
Surviving Corporation and the Surviving Corporation shall be the sole obligor
therefore. Thereafter, the Surviving Corporation shall be merged into Buyer.
(c) THE SURVIVING CORPORATION. The specific Plan of Merger is set
forth in Exhibit A attached hereto and made a part hereof. The established
office and facilities of First American shall continue as the office and
facilities of the Surviving Corporation. The Articles of Incorporation and
Bylaws of First American shall continue in effect as the Articles of
Incorporation and Bylaws of the Surviving Corporation until the same shall be
amended and changed as provided by law. The directors and officers of said
subsidiary shall continue as the directors and officers of the Surviving
Corporation until their respective successors are duly elected or appointed and
qualified in the manner provided in the Articles of Incorporation of the
Surviving Corporation or as otherwise provided by law.
(d) FINAL MERGER. Immediately after Closing, the Surviving
Corporation shall be merged with and into Buyer ("Continuing Company")
A-2
<PAGE>
under the charter and Articles of Incorporation of Buyer pursuant to the
provisions of, and with the effect provided in Article Five of the TBCA.
The Articles of Incorporation of Continuing Company shall be the
Articles of Incorporation of Buyer. Until altered, amended or repealed as
therein provided and in the Articles of Incorporation of Continuing Company, the
Bylaws of Continuing Company shall be the Bylaws of Buyer. Unless and until
changed by the Board of Directors of Continuing Company, the main office of
Continuing Company shall be the main office of Buyer. The established offices
and facilities of the Surviving Corporation immediately prior to the Merger
shall become established offices and facilities of the Continuing Company. Until
thereafter changed in accordance with law or the Articles of Incorporation or
Bylaws of Continuing Company, all corporate acts, plans, policies, contracts,
approvals and authorizations of the Surviving Corporation and Buyer and their
respective shareholders, boards of directors, committees elected or appointed
thereby, officers and agents, which were valid and effective shall be taken for
all purposes as the acts, plans, policies, contracts, approvals and
authorizations of Continuing Company and shall be as effective and binding
thereon.
(e) MERGER CONSIDERATION. At the consummation of the Plan of Merger,
in exchange for all of the issued and outstanding common stock of First American
(the "First American Stock"), Buyer shall issue a total of 351,750 shares of its
voting common stock, par value $1.00 per share (the "Buyer Stock"), the fair
market value of which is agreed to be $10.00 per share, and pay a total of
$3,379,480.00 in cash to the shareholders of First American (the "Merger
Consideration").
(f) CONVERSION OF THE FIRST AMERICAN STOCK. On the Closing Date, by
virtue of this Agreement and without any further action on the part of any
holder, each share of First American Stock shall cease to be issued and
A-3
<PAGE>
outstanding, and other than shares with respect to which dissenters' rights have
been perfected, shall be converted into and become the right to receive 3.417039
shares of Buyer Stock and $32.829609 cash (the "Per Share Consideration").
(g) CONVERSION OF SUBSIDIARY STOCK. The shares of stock of Buyer's
subsidiary outstanding on the Closing Date shall, by virtue of the Merger an
without any action on the part of the Buyer or any other party as holder
thereof, be converted into and become shares of capital stock of Surviving
Corporation. By virtue of this Agreement and without any action by any party,
the number of shares of capital stock of the Surviving Corporation to be
outstanding after the Closing Date shall be 102,940 shares of common stock,
$1.00 pat value per share.
SECTION 2: CLOSING
On a date mutually agreeable to First American and Buyer within five
(5) business days after the receipt of all necessary regulatory, corporate and
other approvals and the expiration of any mandatory waiting periods (herein
called the "Closing Date"), but not later than September 30, 1999, a closing
(the "Closing") will take place at the offices of First American at which the
parties to this Agreement will exchange certificates, opinions, letters and
other documents in order to determine whether all of the conditions set forth in
this Agreement have been satisfied or waived. If no such condition then exists
or if no party has previously exercised any right it may have to terminate this
Agreement, then and thereupon the appropriate parties shall execute such
documents and instruments as may be necessary in order to effect the
transactions contemplated by this Agreement.
(a) DELIVERY OF CONSIDERATION. First American shall send to each
holder of First American Stock a letter of transmittal (which shall include a
representation regarding title) for use in exchanging such holder's certificates
A-4
<PAGE>
for the Merger Consideration. Provided that all necessary shareholder and
regulatory approvals have been obtained, First American shall forward letters of
transmittal to all of the shareholders at least twenty (20) days prior to the
Closing Date unless First American and Buyer shall mutually agree to send such
letters at a later date. Promptly after receipt of such certificates and letter
of transmittal, Buyer shall review the executed letters of transmittal in order
to verify proper execution. Provided that the letter of transmittal is properly
completed, accompanied by all of the appropriate stock certificates and made
available for review by First American by twelve noon on the business day before
the Closing Date, on the Closing Date, Buyer shall deliver to such shareholder
the Per Share Consideration multiplied by the number of shares of First American
Stock surrendered. If a shareholder does not provide properly completed letters
of transmittal and all appropriate stock certificates to Buyer on the business
day before the Closing Date, then, provided that the letter of transmittal is
properly completed and accompanied by all of the appropriate stock certificates
and delivered to Buyer, Buyer promptly, but in no event later than two (2)
business days following receipt of those documents by Buyer, shall pay to such
shareholder the Per Share Consideration multiplied by the number of shares of
First American Stock surrendered. In the event that a letter of transmittal
contains an error, is incomplete or is not accompanied by all appropriate stock
certificates, then neither Buyer nor any other party to this Agreement shall be
liable to any holder of certificates representing the First American Stock for
any amount paid to a public official pursuant to any applicable abandoned
property, escheat or similar law. No interest shall be payable with respect to
the payment of the Merger Consideration.
A-5
<PAGE>
SECTION 3. REPRESENTATIONS AND WARRANTIES OF FIRST AMERICAN.
First American does hereby represent and warrant to
Buyer and agree as follows:
(a)ORGANIZATION, GOOD STANDING, POWER. First American is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Texas, and has all requisite corporate power and authority
to own, lease, operate, and sell its respective properties and to carry on its
respective businesses as they are presently conducted. First American is a bank
holding company which wholly owns a bank in Sulphur Springs, Texas, a bank in
Commerce, Texas (collectively, the "Bank") and a mortgage company, named First
American Mortgage Corporation (the "Mortgage Company"). No other party owns any
interest in the Bank or the Mortgage Company, except for the outstanding
preferred stock of the Mortgage Company which shall be redeemed prior to the
Closing. First American has no other businesses or ownership interest in any
other businesses.
(b) CAPITALIZATION. The authorized capital of First American
consists of 1,000,000 shares of common stock, $2.50 par value, of which 91,940
shares are validly issued and outstanding, fully paid and nonassessable, and
11,000 shares in options have been granted, which shall be fully exercised prior
to the Closing.
(c)AUTHORIZATION. This Agreement has been duly executed by First
American and, subject to regulatory and shareholder approval, constitutes the
valid, legally binding and enforceable obligations of First American.
(d) EFFECT OF AGREEMENT. The execution, delivery, and
performance of this Agreement by First American and the consummation of
A-6
<PAGE>
transactions contemplated hereby, will not conflict with or result in a breach
or termination of any provision of, or constitute a default under, or result in
the creation of any lien, charge, or encumbrance upon any of the assets of First
American pursuant to the corporate charter or by-laws of First American, or
pursuant to any indenture, mortgage, deed of trust, lease, contract, agreement,
or other instrument, or any governmental approval, authorization, certificate,
consent, license, order, or permit, or any judgment, award, decree, statute,
ordinance, regulation, or any other restriction of any kind or character, to
which First American is a party which breach, termination or default would or
may prevent consummation of the transactions contemplated hereby by First
American.
(e)FINANCIAL STATEMENTS OF THE CORPORATION. Delivered to Buyer
herewith are the certified balance sheets of First American as of December 31,
1998, December 31, 1997 and December 31, 1996, and the statements of earnings,
statements of stockholders' equity and statements of cash flow with respect to
First American for the fiscal years ended 1998, 1997 and 1996 (referred to
collectively herein as the "Certified Financial Statements"). Also delivered
herewith are the unaudited balance sheet of First American as of March 31, 1999,
and the unaudited statement of earnings, consolidated statement of stockholders'
equity and consolidated statement of cash flow with respect to First American
for the three-month period ended March 31, 1999 (referred to herein as the
"Interim Financial Statements"). The Certified Financial Statements and the
Interim Financial Statements are in accordance with the books and records of
First American, fairly present the financial position of the First American as
of the dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a basis consistent with
prior years, except as stated therein.
A-7
<PAGE>
(f) UNDISCLOSED LIABILITIES. Except for liabilities disclosed in
the Certified Financial Statements and Internal Financial Statements referred
to above, First American has no liabilities nor obligations of any kind,
whether accrued, absolute, contingent, or otherwise, and regardless of whether
such liabilities or obligations would have been required to be disclosed on a
balance sheet prepared in accordance with generally accepted accounting
principles.
(g) ACCOUNTS RECEIVABLE AND PAYABLE. The accounts and notes
receivable of First American reflected on the Interim Financial Statements,
and all accounts and notes receivable arising after March 31, 1999 and prior
to the Closing Date, are not subject to any defenses, counterclaims, or rights
of setoff, and are current and fully collectible, less applicable reserves.
First American has no accounts or notes payable, or other liabilities or
obligations, except in the ordinary course of business.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as otherwise
disclosed in Exhibit B attached hereto, since January 1, 1999, First American
has not:
(i) incurred any obligation or liability (contingent or
otherwise) or entered into any contract, transaction, or commitment, except in
the ordinary course of business;
(ii) discharged or satisfied any lien or encumbrance or
paid any obligation or liability (contingent or otherwise), except in the
ordinary course of business;
(iii) mortgaged, pledged, or subjected to lien, charge,
security interest, or to any other encumbrance any of its assets;
(iv) sold, assigned, transferred, conveyed, leased, or
otherwise disposed of, or agreed to sell, assign, transfer, convey, lease,
A-8
<PAGE>
or otherwise dispose of, any of its assets, other than in the ordinary course of
business;
(v) canceled any debt or claim;
(vi) waived or released anyrights;
(vii) made any capital expenditures in excess of
$5,000.00;
(viii) suffered any casualty loss or damage, whether or
not such loss or damage shall have been covered by insurance;
(ix) suffered any material adverse change in
operations, assets, properties, or businesses;
(x) declared any dividend or made any payment or
distribution in respect of its capital stock;
(xi) engaged in any business other than the Bank and the
Mortgage Company.
(i)TAX MATTERS. First American has filed all United States,
foreign, state, county, local, and other tax and duty returns and reports
required to be filed and have paid, or set up a reasonable and adequate reserve
that is reflected in the Financial Statements of the payment of all income,
franchise, property, sales, employment, ad valorem, and other taxes and duties
required to be paid in respect of the periods covered by such returns, and have
set up a reasonable and adequate reserve that is reflected in the Interim
Financial Statements for the payment of all income, franchise, property, sales,
employment, or other taxes or duties required to be paid or anticipated to be
required to be paid in respect of the periods subsequent to the last of such
periods covered by such returns and prior to the Closing Date. First American
has made all withholding of tax required to be made under all applicable United
States, state, and local tax regulations. First American is not a party to any
A-9
<PAGE>
pending action, examination, investigation or proceeding, nor is any action,
examination, investigation or proceeding threatened, by any governmental
authority for assessment or collection of taxes, and no claim for assessment or
collection of taxes has been asserted against First American. To the best
knowledge of First American, the liability for Federal Income Taxes for First
American is closed for all taxable years ending on or prior to 1998.
(j) LIST OF PRIORITIES, CONTRACTS, AND OTHER DATA.
Attached hereto as Exhibit C are correct and complete lists, descriptions, or
summaries, as the case may be, setting forth, as of the date of this Agreement
except as specified thereon, the following:
(i) all policies of insurance in force (with a notation as
to the date through which premiums have been paid) with respect to First
American;
(ii)all existing contracts and commitments, including,
without limiting the generality of the foregoing, all mortgages, deeds of trust,
indentures, loan agreements, credit agreements, partnership agreements, and
joint venture agreements, by which any of First American's assets are or maybe
bound;
(iii) all collective bargaining agreements, employment and
consulting agreements, executive compensation plans, bonus plans, incentive
compensation plans, deferred compensation agreements, employee compensation
plans or retirement plans, employee profit sharing plans, employee stock
purchase or stock option plans, and hospitalization insurance or other plans or
arrangements providing for benefits for employees of First American;
(iv)the names and current annual total compensation of all
present directors and officers of First American;
A-10
<PAGE>
(v) the names of all retired employees of First American who
are receiving or are entitled to receive any unfunded pensions not fully covered
by any pension plan to which First American is or was a party, their ages, and
their current annual unfunded pension rates;
(vi)by category, all personal property used by First
American in its businesses, including automobiles, machinery, equipment,
furniture, and fixtures;
(vii) all approvals, authorizations, certificates, consents,
licenses, orders, permits, and restrictions of any governmental agency, whether
federal, state, or local, required by First American to permit the continued
operation of its businesses in the manner in which they are currently conducted.
True and complete copies of all documents, including all amendments
thereto, referred to in such lists or summaries have been delivered to Buyer or
are available for inspection at the office of First American. All documents,
rights, obligations, and commitments referred to in such lists are valid and
enforceable in accordance with their respective terms for the periods stated
herein, and there is not under any of them existing default, event of default,
or event that with the giving of notice or the passage of time, or both, would
constitute a default.
(k)TITLE TO ASSETS; LEASES. First American has good and
marketable title to its all of its assets, free and clear of all claims, liens,
and encumbrances, and will have good and marketable title, free and clear of all
claims, liens, and encumbrances, to all other assets acquired after the date
hereof but before the Closing Date. There are no contracts pursuant to which
First American leases any real or personal property, save and except the lease
of the Commerce, Texas, location.
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(l)FIXED ASSETS. The real property improvements, equipment, and
other tangible assets used or owned by First American in the conduct of its
businesses are fit for their intended use and are in good operating condition
and repair, subject to ordinary wear and tear. None of said improvements,
equipment, and other assets is subject to any commitment or other arrangement
for their use by any other parties.
(m)LITIGATION. Except as disclosed in Exhibit D attached hereto,
there are no actions, suits, or proceedings at law or in equity before or by any
federal, state, municipal, or other governmental or nongovernmental department,
commission, board, bureau, agency, or instrumentality, pending or threatened
against or affecting First American or wherein an unfavorable decision, ruling,
or finding would adverse affect the consummation of the transactions
contemplated by this Agreement, and to the best knowledge of First American, no
facts are now in existence upon which such an action, suit, or proceeding could
be brought. First American reasonably believes that the damages, liabilities,
and related expenses (including the cost and expenses of investigating,
prosecuting, or defending any such legal proceeding and fees and disbursements
of counsel incurred herein) , whether occasioned through a final adjudication of
the issues or good faith settlement, which may be incurred by First American as
the result of any pending litigation set forth on Exhibit D will not exceed
$50,000.00.
(n)EPA AND OSHA. There are no actions pending or to First
American's knowledge, threatened between First American and any former employees
or anyone representing them. To the best knowledge of First American, First
American has complied with all requirements made upon it or threatened on it
under both the Environmental Protection Act, as amended, and the Occupational
Safety and Health Act and has complied in all material respects
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with all other laws relating to the environment or employment of labor,
including any provisions thereof relating to wages, hours, collective
bargaining, and the collection or payment of social security withholding and
similar taxes, and is not liable for any arrears of wages or any taxes or
penalties for failure to comply with any of the foregoing.
(o)PATENTS, TRADEMARKS, COPYRIGHTS. First American does not own
or use or infringe upon the rights of others with respect to any patents, patent
applications, trade secrets, trademarks, trade names, or copyrights, and no
patents, patent applications, trade secrets, trademarks, trade names, or
copyrights are necessary for the conduct of the businesses of First American as
now conducted. No director or officer of First American owns, directly or
indirectly, in whole or in part, any patents, trademarks, trade names,
copyrights.
(p)BOOKS AND RECORDS. The books, records, and work papers of
First American are substantially complete and correct, have been maintained in
accordance with good business practices, and accurately reflect the basis for
the financial condition of First American set forth in the Financial Statements.
(q) LICENSES, PERMITS, AUTHORIZATIONS. First American has all
approvals, authorizations, certificates, consents, licenses, orders, and other
permits of all governmental agencies, whether federal state or local, required
to permit the operation of its businesses presently conducted, and no action is
underway that may cause the termination, modification, or revocation thereof.
(r) COMPLIANCE WITH APPLICABLE LAW. The conduct of the
businesses of First American does not materially violate or infringe any
domestic laws, statutes, ordinances, regulations, orders, or requirements. First
American has not received notice of, nor do its officers have any specific
knowledge of, the violation by First American of any applicable law, statute,
ordinance, regulation, order, or requirement relating to its operations or
assets.
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(s) TRANSACTION WITH MANAGEMENT. Except as disclosed in Exhibit
E attached hereto, First American is not a party to any contract, lease, or
commitment with stockholders of First American or any employee, officer, or
director of First American, or any member of the family of any such person, nor
are there any loans outstanding to or from any of such persons from or to First
American. No officer or director has any direct or indirect financial interest
in any competitor of First American.
(t)UNDUE INFLUENCE. First American has not made any payments to
or entered into any transactions with any person as an inducement to such person
(or to induce such person to influence another person) to take action deemed to
be to the advantage of First American in such person's official position with a
governmental authority, or in such person's position with any other business
entity, nor has First American directly or indirectly made any payment to any
person or entity that was contrary to any law or regulation of any such
governmental authority.
(u)NO UNTRUE STATEMENT. Neither this Agreement nor any of the
document, certificate, or written statement furnished to Buyer by or on behalf
of First American in connection with the transactions contemplated hereby
contains any untrue statement or omits to state a fact necessary in order to
make the statements contained herein and therein not misleading. There is no
fact, which has not been described in this Agreement or in the Exhibits attached
hereto, that is known to First American or Stockholders relating to the
businesses of First American which now or in the future will, with reasonable
probability, materially and adversely affect First American.
(v)PAYMENT OF BROKERS OR FINDERS. First American has not incurred
any obligations or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions, or other like payment in connection with this
Agreement.
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(w)PENSION PLANS AND WELFARE PLANS. First American is not the
sponsor of any pension benefit or welfare benefit plan as defined in the
Employee Retirement Income Security Act of 1974, as amended, nor are any of the
employees of First American covered by any such pension benefit or welfare
benefit plan.
(x)OFFICIAL STATEMENTS. All filings and statements to all state
or federal regulatory agencies (the "Official Statements") and other documents
utilized in connection therewith including, without limiting the generality of
the foregoing, call reports and examination reports, do not contain any untrue
statement of a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(y) OFFER AND SALE OF SECURITIES. First American has not sold or
offered to sell any securities, as such term is defined in the Securities Act of
1933, as amended ("1933 Act"), or the Securities Exchange Act of 1934, as
amended ("1934 Act"), except such securities as shall have been "exempted
securities" as such are set forth in Section 3 of the 1933 Act, or except
pursuant to "exempted transactions" as such are set forth in Section 4 of the
1933 Act. Each Prospectus, notice, circular, advertisement, letter or other
communication, written or by radio or television, pursuant to which First
American has offered for sale any security, as such term is defined in the 1933
Act or the 1934 Act, did not at the time such security was issued and sold and
does not as of the date hereof contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
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SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to First American as follows:
(a) ORGANIZATION, GOOD STANDING, POWER. Buyer is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Texas, and has all requisite corporate power and authority
to own, lease, and operate its properties, to carry on its business as it is
presently conducted, and to enter into this Agreement and to perform its
obligations hereunder.
(b)AUTHORIZATION. The execution, delivery, and performance of
this Agreement by Buyer have been duly and effectively authorized by all
necessary corporate action of Buyer. This Agreement has been duly executed by
Buyer and is a valid, legally binding, and enforceable obligation of Buyer.
(c)EFFECT OF AGREEMENT. The execution, delivery, and performance
of this Agreement by Buyer and the consummation of the transactions contemplated
hereby, will not conflict with or result in a breach or termination of any
provision of, or constitute a default under, or result in the creation of any
lien, charge, or encumbrance upon any of the assets of Buyer pursuant to the
Certificate of Incorporation or by-laws of Buyer, or pursuant to any indenture,
mortgage, deed of trust, lease, contract, agreement, or other instrument, or any
governmental approval, authorization, certificate, consent, license, order, or
permit, or any judgment, award, decree, statute, ordinance, regulation, or any
other restriction of any kind or character, to which Buyer is a party, or by
which or pursuant to which Buyer or any of its assets may be bound, which
breach, termination, or default would prevent or may be executed to prevent
consummation of the transactions contemplated hereby by Buyer.
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(d) BROKERS OR FINDERS. Buyer has not incurred any obligations
or liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other like payment in connection with this Agreement.
(e) PURCHASE FOR INVESTMENT. Buyer is purchasing the Stock
for its own account for investment without a view to or for the distribution
thereof.
(f) BUYER STOCK. The authorized capital consists of
50,000,000 shares of voting common stock, $1.00 par value per share, of which
2,898,280 shares are validly issued and outstanding, fully paid and
nonassessable. Buyer has delivered a certified copy of its Articles of
Incorporation and Bylaws, as amended, to First American. Except as set forth in
its 1998 Option Plan, the Buyer has not granted or committed to grant any
options, rights, warrants or other contractual rights to acquire shares of
Buyer's capital stock or securities. The shares of common stock to be issued by
Buyer to shareholders of First American pursuant to this Agreement will be
validly issued, fully paid and nonassessable and will not be issued in violation
of the preemptive rights or any person. The shares of Buyer's capital stock are
registered under and have been issued in compliance with the 1933 Act and the
1934 Act. Such shares shall be listed for trading on the NASDAQ securities
exchange or securities quotation system and will be freely transferable on such
exchange without restriction or limitation. Each registration statement,
prospectus, annual or quarterly report or filing, and notice, circular,
advertisement and other item, relating to Buyer's securities did not at the date
of
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such item and does not as of the date hereof contain any untrue statement or
material fact or omit to state a material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
(g) NO MATERIAL ADVERSE CHANGE. Since December 31, 1998,
Buyer has not suffered any material adverse change in operations, assets,
properties or business.
SECTION 5. COVENANTS OF FIRST AMERICAN.
First American covenants and agrees as follows with respect to actions
to be taken between the date of this Agreement and the Closing Date:
(a) MAINTAIN REPRESENTATIONS AND WARRANTIES. Without the prior written
consent of Buyer, no action will be taken that would violate the terms and
conditions hereof.
(b) ACCESS TO INFORMATION. First American will give, and to the
extent necessary cause other parties to give, to Buyer and its agents and
representatives, full access, during normal business hours throughout the period
prior to the Closing Date, to the properties, books, work papers, contracts,
commitments and records, as well as other assets of First American, whether in
the possession of First American, its accountants or other representatives, and
will furnish to Buyer during such period all such information concerning First
American as Buyer may reasonably request. Buyer agrees that it will, and will
cause its agents and representatives, to hold in strict confidence all
information so
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obtained from First American, not disclose such information to any person or
entity, and to use such information solely and exclusively for determining
whether to proceed with the transaction contemplated by this Agreement, and if
the transactions herein provided for is not consummated as contemplated herein,
Buyer will return all such data and all copies and memoranda and other written
evidence or summation thereof.
(c) EVIDENCE OF TITLE. First American will give, and to the
extent necessary cause other parties to give, to Buyer and its agents and
representatives true and correct copies of all title policies, title documents,
and instruments creating or evidencing the encumbrances, easements, and
restrictions affecting the properties of First American.
(d) CONDUCT OF BUSINESS PENDING THE CLOSING DATE. Except such
actions as shall be specifically agreed to by Buyer pursuant to advance written
consent (which consent shall not be unreasonably withheld), First American,
during the period between the date of this Agreement and the Closing Date,
shall:
(i) operate its businesses only in the usual, regular, and
ordinary manner and, to the extent consistent with such operation, use its best
efforts to preserve its present business organizations intact, keep available
the services of its present officers and preserve its present relationship with
persons having business dealings with it;
(ii) maintain all of its assets in customary repair, order, and
condition, reasonable wear and use excepted, and maintain insurance upon all of
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such assets in such amounts and of such kinds comparable to that in effect on
the date of this Agreement;
(iii) maintain its books, accounts, and records in the usual,
regular, and ordinary manner, on a basis consistent with prior years, and
endeavor to comply with all laws applicable to it and to the conduct of its
businesses and to perform all of its obligations without default;
(iv) not enter or agree to enter into any merger or consolidation
with any corporation or change the character of its businesses in any manner;
(v) not declare, pay, or make any dividend or other distribution
or payments in respect of shares of its capital stock, or purchase or redeem any
of such shares other than the redemption of preferred stock by the Mortgage
Company;
(vi)not (1) hire any employees; (2) make any increase in the
compensation payable or to become payable by it to any director, officer or
agent except in the ordinary course of business; (3) except for the June profit
sharing distribution, pay or provide for any bonus, stock option, stock
purchase, profit sharing, deferred compensation, pension, retirement, or other
similar payment or arrangement; (4) pay or provide for any unfunded pensions not
covered by any pension plan to which it is a party; and ( 5) enter into any
employment or consulting agreement, sales agency, or other contract or
arrangement with respect to the performance of personal services;
(vii) not (1) incur or become subject to, or agree to incur or
become subject to, any obligation or liability (contingent or otherwise) ,
except in the ordinary course of business; (2) discharge or satisfy any lien or
encumbrance or pay any obligation or liability (contingent or otherwise), except
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in the ordinary course of business; ( 3) mortgage, pledge, or subject to lien or
encumbrance any of its assets; (4) sell, assign, transfer, convey, lease, or
otherwise dispose of any of its assets except in the ordinary course of
business; (5) acquire or agree to acquire any assets except in the ordinary
course of business;(6) cancel, compromise, or postpone any debt or claim except
in the ordinary course of business; (7) waive any right, except in the ordinary
course of business and not of material value; (8) transfer or grant any rights
under any concessions, licenses, patents, inventions, trade names, trademarks,
copyrights, or with respect to know-how; (9) enter into, modify, change, or
terminate any existing license, lease, contract, or other documents; (10) make
any capital expenditures in excess of $5,000.00, or enter into any commitment
therefor; (11) enter into any collective bargaining agreement or, through
negotiation or otherwise, make any commitment or incur any liability to any
labor organization; (12) enter into any transactions or make or enter into any
contract or commitment that by reason of its size or otherwise is not in the
ordinary course of business; ( 13) enter into any contract, lease, or commitment
with any member of the family of any officer, director, employee, or stockholder
of or corporation affiliated with First American, or loan or otherwise make any
advances to any of such entities or persons.
(viii) make no change in its banking policies.
(e)NOTIFICATION OF CHANGES. First American will promptly notify
Buyer in writing of the existence or happening of any fact, event, or
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occurrence that may alter the accuracy or completeness of any representation or
warranty contained in this Agreement.
(f)CONSENTS. First American will obtain any consents or
agreements of third parties necessary for the performance by First American of
its obligations under this Agreement.
(g)REGULATORY AUTHORIZATIONS. First American will execute and
file, or join in the execution and filing, any applications or other documents
that may be necessary in order to obtain the authorization, approval, or consent
of any governmental body that may be required, or that Buyer may reasonably
request, in connection with the consummation of that transactions contemplated
by this Agreement, including but not limited to change of control filings.
(h) EFFORTS AND COOPERATION. First American will use its good
faith reasonable effort to cause the satisfaction of the conditions precedent
set forth in this Agreement and shall cooperate with Buyer to consummate the
transaction contemplated by this Agreement.
SECTION 6. COVENANTS OF BUYER.
Buyer covenants and agrees as follows with respect to actions to be taken
between the date of this Agreement and the Closing Date:
(a) MAINTAIN REPRESENTATIONS AND WARRANTIES. Without the prior
consent of First American, no action will be taken that would violate the terms
and conditions hereof.
(b) NO CHANGE IN CAPITAL. Buyer shall not make any change in its
authorized capital structure or in its issued and outstanding securities. Buyer
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shall not issue any securities other than the securities to be issued pursuant
to the Merger.
(c) REGISTRATION STATEMENT AND REGULATORY FILINGS. Within 30
days of the effective date of this Agreement, Buyer shall prepare and file with
the SEC any required Registration Statement (on such form as may be appropriate)
and all amendments and supplements thereto, with respect to the common stock to
be issued pursuant to this Agreement. Within 30 days of the effective date of
this Agreement, Buyer shall prepare and file all necessary filings with any
banking regulatory agency which may be necessary for approval to consummate the
transactions contemplated by this Agreement. Buyer shall provide to First
American (1) copies of drafts of all filings made pursuant to this section in
advance of filing, (ii) copies of documents as filed, and (iii) copies of any
correspondence between Buyer and any applicable agency including the SEC and the
Board of Governors of the Federal Reserve System respecting the filings made
pursuant to this section.
(d) LISTING. Prior to the Closing Date, Buyer shall list the
shares of Buyer common stock to be issued in the Merger on the securities
exchange or other quotation system on which such shares are primarily traded.
(e) EFFORTS AND COOPERATION. Buyer will use its good faith
reasonable effort to cause the satisfaction of the conditions precedent set
forth in this Agreement and shall cooperate with First American to consummate
the transaction contemplated by this Agreement.
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(f) INCORPORATED AND ORGANIZATION OF SUBSIDIARY. Buyer will
incorporate, charter and organize a subsidiary as a Texas corporation. Buyer
will, as soon as practicable after the execution of this Agreement, enter into
the Plan of Merger, the form of which is attached hereto as EXHIBIT "A", and
shall perform all of its obligations thereunder. Buyer will, as soon as
practicable after the execution of this Agreement, cause the subsidiary to duly
authorize and enter into the Plan of Merger and shall cause the subsidiary to
perform all of its obligations thereunder. Buyer shall vote all of the stock of
the subsidiary in favor of the Merger and the Plan of Merger.
SECTION 7. CONDITIONS TO FIRST AMERICAN'S OBLIGATIONS.
The obligations of First American hereunder are
subject to each of the conditions set forth below,
(a)COMPLIANCE WITH TERMS. On the Closing Date, all of the terms,
conditions, and covenants of this Agreement to be complied with and performed by
Buyer at or before the Closing Date shall have been complied with or performed.
(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by Buyer in this Agreement shall be correct
and complete in all material respects at and as of the Closing Date.
(c) SHAREHOLDER APPROVAL. The holders of at least eighty-one
percent of the outstanding shares of common stock of First American shall have
approved the Merger.
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(d) REGULATORY APPROVAL. Buyer shall have obtained the approval
of the transaction contemplated by this Agreement by all required banking and
securities regulatory agencies.
(e) NO LITIGATION. No action shall have been taken or overtly
threatened to enjoin the Merger or to impose liability upon First American or
its shareholders, directors, officers, employees or agents for any action taken
in connection with the Merger.
(f) LISTING ON SECURITIES EXCHANGE. The shares of Buyer common
stock to be issued pursuant to the Merger shall have been listed on the
securities exchange or quotation system upon which shares of Buyer common stock
are traded.
(g) MATERIAL ADVERSE CHANGE. Between the date of this Agreement
and the Closing Date, there shall have been no material adverse change in the
condition, financial or otherwise, of the Buyer.
(h) TAX OPINION. An opinion of a nationally recognized legal
firm shall have been received in form and substance reasonably satisfactory to
First American to the effect that (i) the Merger will constitute a
"reorganization" within the meaning of Section 368 of the Code; (ii) no gain or
loss will be recognized by the shareholders of First American with respect to
the shares of Buyer common stock received pursuant to the Merger; and (iii) the
receipt of cash by shareholders of First American pursuant to the Merger shall
be capital gain (or loss) to the extent shares of First American Stock were held
as capital assets.
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SECTION 8. CONDITIONS TO BUYER'S OBLIGATIONS.
The obligations of Buyer at the closing hereunder are subject to each of the
conditions set forth below. Any of such conditions may be waived by Buyer, but
only in writing. Notwithstanding the failure or any one or more of such
conditions, Buyer may nevertheless proceed with the Closing without satisfaction
of such conditions and without written waiver, and Buyer shall not be deemed to
have waived any rights or remedies it may have by reason of failure of any of
such conditions.
(a) OPINION OF COUNSEL FOR FIRST AMERICAN. Buyer shall have
received an opinion of counsel for First American, dated the Closing Date in
form and substance satisfactory to Buyer, to the effect that:
(i) First American is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Texas and has the power and authority to own, lease, operate and sell its
properties and to carry on its businesses as it is presently conducted.
(ii) The authorized capitalization of First American consists
of ________ shares of common stock, $2.50 par value, of which 102,940 are
validly issued and outstanding, fully paid and nonassessable.
(iii) This Agreement has been duly executed and delivered by First
American, and is a valid, legally binding and enforceable obligation as the same
may be limited or otherwise affected by applicable bankruptcy, reorganization,
moratorium, and other similar laws affecting the rights of creditors generally;
provided, however, that no opinion need be rendered as to
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whether a court would grant specific performance or any other equitable remedy
with respect to the enforcement of any provision of this Agreement;
(iv) The execution, delivery, and performance of this Agreement by
First American and the consummation of the transactions contemplated hereby do
not conflict with or result in a breach or termination of any provision of, or
constitute a default under, or result in the creation of any lien, charge, or
encumbrance upon any of assets of First American pursuant to the corporate
charter or by-laws of First American, or, to such counsel's knowledge, pursuant
to any indenture, mortgage, deed of trust, lease, contract, agreement, or other
instrument, or any governmental approval, authorization, certificate, consent,
license, order, or permit, or any judgment, award, decree, statute, ordinance,
regulation, or any other restriction of any kind or character, to which First
American is a party or by which or pursuant to which First American or any of
their assets may be bound;
(v) Except as disclosed in therein, to the knowledge of such
counsel, there are no actions, suits, or proceedings at law or in equity by or
before any federal, state, municipal, or other governmental or non governmental
department, commission, board, bureau, agency, or instrumentality, pending or
threatened against or affecting First American or wherein an unfavorable
decision, ruling, or finding would adversely affect the consummation of the
transactions contemplated by this Agreement,
(vi)To the knowledge of such counsel, First American has all
approvals, authorizations, certificates, consents, licenses, orders, and other
permits of all governmental agencies, whether federal, state, or local, required
to permit the operation of its businesses as presently conducted, and
consummation of the transactions contemplated hereby will not cause the
termination, modification, or revocation thereof, or require the consent,
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approval, or authorization of any governmental entity or agency or any other
third party.
(b) COMPLIANCE WITH TERMS. On the Closing Date, all of the
terms, conditions, and covenants of this Agreement to be complied with and
performed by First American on or before the Closing Date shall have been
complied with or performed.
(c)ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by First American in this Agreement shall be
correct and complete at and as of the Closing Date in all material respects.
(d)CONSENTS AND AUTHORIZATIONS. Buyer shall have received any
necessary consents from third parties and any necessary governmental approvals,
consents, or permits for the performance by Buyer of its obligations under this
Agreement.
(e)ACTUAL OR THREATENED ACTIONS. There shall not be any actual or
threatened action or proceeding by or before any court or other governmental
body or agency that shall seek to restrain, prohibit or invalidate the
transactions contemplated by this Agreement, or that might affect the right of
Buyer to own the First American Stock after the Closing Date, or subject Buyer
to any liability therefor.
(f)NO ADVERSE CHANGE. Between the date of this Agreement and the
Closing Date there shall have been no material adverse change in the condition
or prospects (financial or otherwise) of First American.
(g) RESIGNATIONS. Buyer shall have received the written
resignations of all the directors of First American, which resignations shall
become effective of the Closing Date, and a signed release by said directors of
all claims against First American in form satisfactory to Buyer.
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SECTION 9. TERMINATION.
Anything herein or elsewhere to the contrary notwithstanding, this Agreement
may be terminated at any time prior to the Closing:
(a) By mutual written consent of First American and Buyer;
(b) If any one or more of the conditions precedent to its obligations
herein shall not have been fulfilled or, in any event, if the Closing has not
occurred on or before September 30, 1999;
Written notice of any termination under this section stating
the grounds therefor shall be given by the party entitled to terminate this
Agreement concurrently with such termination.
SECTION 10. CONTINUING MANAGEMENT.
The parties agree that during the interim period between the date of the
execution of this Agreement and the Closing Date, Buyer shall have the right to
have one or more executive officers of Buyer (collectively, the "Executive")
present at the offices of First American during such term, to review contracts,
documents, instruments and other obligations of First American, to familiarize
himself with the conduct and operations of First American, to acquaint himself
with the officers and employees of First American, and to monitor the business
operations of First American. The Executive shall have the opportunity to review
and express his suggestions, comments and concerns regarding the business
activities of First American during said period. In no event shall the Executive
be considered to be an employee of First American, First American
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shall have no obligation to pay the Executive, or withhold taxes or provide
benefits for the Executive.
Notwithstanding the termination, closing, or other disposition or resolution
of the terms and conditions of this Agreement and the matters contained herein,
First American and the Stockholders agree with Buyer that in no event shall
Buyer or the Executive incur any liability as a result of the actions,
omissions, or other deeds of the Executive done pursuant to the above paragraph,
and First American and Stockholders do hereby release, relinquish, waive, and
hold Buyer and the Executive harmless from any and all losses, costs, expenses,
claims, fees or other liabilities in connections with or related to, directly or
indirectly, the actions, omissions, or deeds of the Executive in conducting the
activities referred to herein. This release and waiver shall incorporate any and
all acts, deeds and omissions of the Executive, including, but not limited to,
the Executive's own negligence. This release is between the parties to this
Agreement only, and does not limit any action of a third party or any Agency.
SECTION 11. MISCELLANEOUS.
(a) NOTICES. All notices or deliveries required or desired to
be given hereunder shall be in writing and shall be delivered in person or by
registered or certified United States mail, postage prepaid, return receipt
requested, or by wire, telegram, or telex, and addressed to the parties at their
respective address set forth below, unless by such notice a different address
shall have been designated. All notices sent by mail as aforesaid shall be
deemed
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delivered two days after deposit in the mail. All notices sent by wire,
telegram, or telex as aforesaid shall be deemed delivered one day after being
sent. All other notices shall be deemed delivered when actually received.
If to the Buyer: Guaranty Bank
Attn: Art Scharlach
P.O. Box 1158
Mt. Pleasant, Texas 75456-1158
If to the Seller: First American Financial Corp.
Attn: Gene Watson
919 Gilmer Street
Sulphur Springs, Texas 75483
(b) CONTROLLING LAW. All questions
concerning the validity, operation and interpretation of this Agreement and the
performance of the obligations imposed upon the parties hereunder shall be
governed by the laws of the State of Texas.
(c) HEADINGS. The headings and titles to the Sections of this
Agreement are inserted for convenience only and shall not be deemed to be a
part hereof or to affect the construction or interpretation of any provision
hereof.
(d) MODIFICATIONS AND WAIVER. No termination, cancellation,
modification, amendment, deletion, addition, or other change in this
agreement, or any provision hereof, or waiver of any right or remedy herein
provided, shall be effective for any purpose unless specifically set forth in
a writing signed by the party or parties to be bound thereby. The waiver of
any right or remedy in respect to any occurrence or event on one occasion
shall not be deemed a waiver of such right or remedy in respect to such
occurrence or event on any other occasion.
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(e)ENTIRE AGREEMENT. This Agreement supersedes all other
agreements, oral or written, heretofore made with respect to the subject matter
hereof and the transactions contemplated hereby, and contains the entire
agreement of the parties hereto.
(f)ASSIGNMENTS. This Agreement and any rights or duties hereunder
shall not be assigned without the advance written consent of all parties hereto.
(g)COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
(h) TIME OF ESSENCE. The parties acknowledge that time is of the
essence in connection with the obligations of each party hereunder.
(i)BINDING ON SUCCESSORS. Except as otherwise provided herein,
this Agreement shall be binding upon, and shall inure to the benefit of, the
parties hereto and their respective legal representatives, estates, heirs,
successors, and assigns.
(j)EXPENSES. Each party shall pay all expenses, including,
without limiting the generality of the foregoing, the fees and expenses of the
agents, representatives, counsel, and accountants of all parties hereto
incidental to the preparation of this Agreement and the consummation of the
transactions provided herein.
(k)REPRESENTATIONS AND WARRANTIES. The representations and
warranties hereunder are cumulative, not exclusive, and no representation or
warranty shall be deemed to limit the scope and reasonable meaning of any other
representation or warranty.
(1)EXHIBITS. The exhibits attached hereto are incorporated
herein by reference and specifically form a part of this Agreement.
(m)SPECIFIC PERFORMANCE. The duties and obligations of Buyer and
First American under this Agreement shall be subject to specific performance.
(n)CONFIDENTIALITY. All parties agree that the matters contained
herein are confidential and are not to be disclosed to any third party, save and
except the Agencies, and
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agree to keep all matters herein strictly confidential, and will inform the
officers and employees of the obligation to maintain such confidentiality.
EXECUTED as of the date set forth above.
GUARANTY BANCSHARES, INC.
By:/s/ARTHER B. SCHLARACH
Name: Arther B. Schlarach
Title:President
FIRST AMERICAN FINANCIAL CORP.
By:/s/GENE WATSON
Name:Gene Watson
Title:Chairman of the Board
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<PAGE>
EXHIBIT B
PROVISIONS OF THE TEXAS BUSINESS CORPORATION ACT
RELATING TO
RIGHTS OF DISSENTING SHAREHOLDERS
(Articles 5.11 - 5.13)
ARTICLE 5.11.RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN
CORPORATE ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote thereon
as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not
including any pledge, mortgage, deed of trust or trust indenture unless
otherwise provided in the articles of incorporation) of all, or substantially
all, the property and assets, with or without good will, of a corporation if
special authorization of the shareholders is required by this Act and
shareholders hold shares of a class or series that was entitled to vote thereon
as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act
in which the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:
(1) the shares held by the shareholder are part of a class or series,
shares of which are on the record date fixed to determine the shareholders
entitled to vote on the plan of merger or the plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation system)
or designated as a national market security on an interdealer quotation system
by the National Association of Securities Dealers, Inc., or successor entity; or
(c) held of record by not less than 2,000 holders; and
(2) the shareholder is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any consideration
that is different than the consideration (other than cash in lieu of fractional
shares that the shareholders would otherwise be entitled to receive) to be
provided to any other holder of shares of the same class or series of shares
held by such shareholder; and
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(3) the shareholders is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any consideration
other than:
(a) shares of a domestic or foreign corporation, that immediately after
the effective time of the merger or exchange, will be a part of a class or
series, shares of which are:
(i) listed, or authorized for listing upon official notice of issuance,
on a national securities exchange;
(ii) approved for quotation as a national market security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or successor entity; or
(iii) held of record by not less than 2,000 holders; (b) cash in lieu
of fractional shares otherwise entitled to be received; or
(c) any combination of the securities and cash described in
Subdivisions (a) and (b) of this subsection.
ARTICLE 5.12.PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent from
any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1)(a) With respect to proposed corporate action that is submitted
to a vote of shareholders at a meeting, the shareholder shall file with
the corporation, prior to the meeting, a written objection to the
action, setting out that the shareholder's right to dissent will be
exercised if the action is effective and giving the shareholder's
address, to which notice thereof shall be delivered or mailed in that
event. If the action is effected and the shareholder shall not have
voted in favor of the action, the corporation, in the case of action
other than a merger, or the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's
right of dissent, in the case of a merger, shall, within ten (10) days
after the action is effected, deliver or mail to the shareholder
written notice that the action has been effected, and the shareholder
may, within ten (10) days from the delivery or mailing of the notice,
make written demand on the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, for payment
of the fair value of the shareholder's shares. The fair value of the
shares shall be the value thereof as of the day immediately preceding
the meeting, excluding any appreciation or depreciation in anticipation
of the proposed action. The demand shall state the number and class of
the shares owned by the shareholder and the fair market value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in
the case of
action other than a merger,
and the surviving or new corporation (foreign or domestic) or other
entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten
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(10) days after the date the action is effected, mail to each
shareholder of record as of the effective date of the action notice of
the fact and date of the action and that the shareholder may exercise
the shareholder's right to dissent from the action. The notice shall be
accompanied by a copy of this Article and any articles or documents
filed by the corporation with the Secretary of State to effect the
action. If the shareholder shall not have consented to the taking of
the action, the shareholder may, within twenty (20) days after the
mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The
fair value of the shares shall be the value thereof as of the date the
written consent authorizing the action was delivered to the corporation
pursuant to Section A of Article 9.10 of this Act, excluding any
appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting
shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty
(20) day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing,
surviving, or new corporation (foreign or domestic) or other entity, as
the case may be, of a demand for payment made by a dissenting
shareholder in accordance with Subsection (1) of this Section, the
corporation (foreign or domestic) or other entity shall deliver or mail
to the shareholder a written notice that shall either set out that the
corporation (foreign or domestic) or other entity accepts the amount
claimed in the demand and agrees to pay that amount within ninety (90)
days after the date on which the action was effected, and, in the case
of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the
corporation (foreign or domestic) or other entity of the fair value of
the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was
effected, upon receipt of notice within sixty (60) days after that date
from the shareholder that the shareholder agrees to accept that amount
and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the
corporate action was effected, the value of the shares is agreed upon
between the shareholder and the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, payment for
the shares shall be made within ninety (90) days after the date on
which the action was effected and, in the case of shares represented by
certificates, upon surrender of the certificates duly endorsed. Upon
payment of the agreed value, the shareholder shall cease to have any
interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity may be, do not so agree,
then the shareholder or the corporation (foreign or domestic) or other entity
may, within sixty (60) days after the expiration of the sixty (60) day period,
file a petition in any court of competent jurisdiction in the county in which
the principal office of the
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domestic corporation is located, asking for a finding and determination of the
fair value of the shareholder's shares. Upon the filing of any such petition by
the shareholder, service of a copy thereof shall be made upon the corporation
(foreign or domestic) or other entity, which shall, within ten (10) days after
service, file in the office of the clerk of the court in which the petition was
filed a list containing he names and addresses of all shareholders of the
domestic corporation who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
corporation (foreign or domestic) or other entity. If the petition shall be
filed by the corporation (foreign or domestic) or other entity, the petition
shall be accompanied by such a list. The clerk of the court shall give notice of
the time and place fixed for the hearing of the petition by registered mail to
the corporation (foreign or domestic) or other entity and to the shareholders
named on the list at the addresses therein stated. The forms of the notices by
mail shall be approved by the court. All shareholders thus notified and the
corporation (foreign or domestic) or other entity shall thereafter be bound by
the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment of their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuating, and they shall make
a determination of the fair value of the shares upon such investigation as to
them may seem proper. The appraisers shall also afford a reasonable opportunity
to the parties interested to submit to them pertinent evidence as to the value
of the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or
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<PAGE>
pursuant to payment of the judgment entered for the value of the shares, as in
this Article provided, shall, in the case of a merger, be treated as provided in
the plan of merger and, in all other cases, may be held and disposed of by the
corporation as in the case of other treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ARTICLE 5.13.PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with Article 5.12 or 5.16 of this Act shall not thereafter be entitled to vote
or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with Article 5.12 or 5.16 of this Act, each holder of certificates
representing shares so demanding payment shall submit such certificates to the
corporation for notation thereon that such demand has been made. The failure of
holders of certificated shares to do so shall, at the option of the corporation,
terminate such shareholder's right under Article 5.12 and 5.16 of this Act
unless a court of competent jurisdiction for good and sufficient cause shown
shall otherwise direct. If uncertificated shares for which payment has been
demanded or shares represented by a certificate on which notation has been so
made shall be transferred, any new certificate issued therefor shall bear
similar notation together with the name of the original dissenting holder of
such shares and a transferee of such shares shall acquire by such transfer no
rights in the corporation other than those which the original dissenting
shareholder had after making demand for payment of the fair value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with Article 5.12 or 5.16 of this Act may withdraw such demand at any time
before payment for his shares or before any petition has been filed pursuant to
Article 5.12 or 5.16 of this Act asking for a finding and determination of the
fair value of such shares, but no such demand may be withdrawn after such
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<PAGE>
payment has been made or, unless the corporation shall consent thereto, after
any such petition has been filed. If, however, such demand shall be withdrawn as
hereinbefore provided, or if pursuant to Section B of this Article the
corporation shall terminate the shareholder's rights under Article 5.12 or 5.16
of this Act, as the case may be, or if no petition asking for a finding and
determination of fair value of such shares by a court shall have been filed
within the time provided in Article 5.12 or 5.16 of this Act, as the case may
be, or if after the hearing of a petition filed pursuant to Article 5.12 or
5.16, the court shall determine that such shareholder is not entitled to the
relief provided by those articles, then, in any such case, such shareholder and
all persons claiming under him shall be conclusively presumed to have approved
and ratified the corporate action from which he dissented and shall be bound
thereby, the right of such shareholder to be paid the fair value of his shares
shall cease, and his status as a shareholder shall be restored without prejudice
to any corporate proceedings which may have been taken during the interim, and
such shareholder shall be entitled to receive any dividends or other
distributions made to shareholders in the interim.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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.
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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES
(A) EXHIBITS
The following documents are filed as exhibits to this
Registration Statement:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 -- Agreement and Plan of Reorganization dated as of April 23, 1999
Between First American Financial Corporation and Guaranty
Bancshares, Inc.
2.2 -- First Amendment to the Agreement and Plan of Reorganization Between
First American Financial Corporation and Guaranty Bancshares, Inc.
2.3 -- Second Amendment to the Agreement and Plan of Reorganization Between
First American Financial Corporation and Guaranty Bancshares, Inc.
3.1 -- Amended Articles of Incorporation of Guaranty (incorporated herein
by reference to Exhibit 3.1 to Form S-1, Registration No.
333-48959).
3.2 -- Amended and Restated Bylaws of Guaranty (incorporated herein by
reference to Exhibit 3.1 to Form S-1, Registration No. 333-48959).
4 -- Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to Form S-1,
Registration No. 333-48959).
5 -- Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
securities being registered.
*8 -- Opinion of Bracewell & Patterson, L.L.P. as to certain federal
income tax matters.
10.1 -- Guaranty Bancshares, Inc. 1998 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to Form S-1, Registration No.
333-48959).
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<PAGE>
21 -- Subsidiaries of the Registrant (incorporated herein by reference to
Exhibit 21 to Form S-1, Registration No. 333-48959).
23.1 -- Consent of Arnold, Walker, Arnold & Co., P.C.
23.2 -- Consent of Fisk & Robinson, P.C.
23.3 -- Consent of Bracewell & Patterson, L.L.P. (included in the Opinion to
be filed as Exhibit 5 to this Registration Statement).
23.4 -- Consent of Bracewell & Patterson, L.L.P. (included in the Opinion to
be filed as Exhibit 8 to this Registration Statement).
99.1 -- Form of Proxy for First American
99.2 -- Form of Consent to Merger and Irrevocable Proxy.
- ----------
* To be filed by amendment.
(b) FINANCIAL STATEMENTS AND SCHEDULES
Either not applicable or shown in the financial statements or notes thereto.
(c) OPINION OF FINANCIAL ADVISOR
Not applicable.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
caused this Registration Statement or amendment thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, in Mount Pleasant, Texas,
on June 29, 1999.
GUARANTY BANCSHARES, INC.
(Registrant)
By: /s/ Arthur B. Scharlach, Jr.
Name: Arthur B. Scharlach, Jr.
Title: President
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<PAGE>
SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Bill G. Jones and Arthur B. Scharlach, Jr. as his or
her attorney-in-fact with power of substitution for him or her in any and all
capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instruments he deems necessary or appropriate, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed by the following persons in the
capacities indicated on June 29, 1999.
SIGNATURE TITLE
/s/ Bill G. Jones Chairman of the Board and Chief Executive Officer
Bill G. Jones (principal executive officer)
/s/ Clifton A. Payne Senior Vice President, Controller and Director
Clifton A. Payne (principal financial officer and principal
accounting officer)
/s/ Arthur B. Scharlach, Jr. President and Director
Arthur B. Scharlach, Jr.
/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 Director
D. R. Zachry
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 -- Agreement and Plan of Reorganization dated as of April 23, 1999
Between First American Financial Corporation and Guaranty
Bancshares, Inc.
2.2 -- First Amendment to the Agreement and Plan of Reorganization Between
First American Financial Corporation and Guaranty Bancshares, Inc.
2.3 -- Second Amendment to the Agreement and Plan of Reorganization Between
First American Financial Corporation and Guaranty Bancshares, Inc.
3.1 -- Amended Articles of Incorporation of Guaranty (incorporated herein
by reference to Exhibit 3.1 to Form S-1, Registration No.
333-48959).
3.2 -- Amended and Restated Bylaws of Guaranty (incorporated herein by
reference to Exhibit 3.1 to Form S-1, Registration No. 333-48959).
4 -- Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to Form S-1,
Registration No. 333-48959).
5 -- Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
securities being registered.
*8 -- Opinion of Bracewell & Patterson, L.L.P. as to certain federal
income tax matters.
10.1 -- Guaranty Bancshares, Inc. 1998 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to Form S-1, Registration No.
333-48959).
21 -- Subsidiaries of the Registrant (incorporated herein by reference to
Exhibit 21 to Form S-1, Registration No. 333-48959).
23.1 -- Consent of Arnold, Walker, Arnold & Co., P.C.
23.2 -- Consent of Fisk & Robinson, P.C.
23.3 -- Consent of Bracewell & Patterson, L.L.P. (included in the Opinion to
be filed as Exhibit 5 to this Registration Statement).
23.4 -- Consent of Bracewell & Patterson, L.L.P. (included in the Opinion to
be filed as Exhibit 8 to this Registration Statement).
99.1 -- Form of Proxy for First American
99.2 -- Form of Consent to Merger and Irrevocable Proxy.
- ----------
* To be filed by amendment.
II-5
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
FIRST AMERICAN FINANCIAL CORP.
AND
GUARANTY BANCSHARES, INC.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
and entered into effective as of April 23, 1999, by and between FIRST AMERICAN
FINANCIAL CORP. ("First American") and GUARANTY BANCSHARES, INC., ("Buyer"), and
provides as follows:
W I T N E S S E T H:
WHEREAS, Buyer desires to acquire all of the issued and outstanding
stock of First American through the merger of First American with and into a
subsidiary of Buyer (the "Merger');
WHEREAS, Buyer and First American believe that the Merger is in the
best interests of Buyer, First American and their respective shareholders;
WHEREAS, Buyer and First American desire to set forth the terms and
conditions of the Merger;
WHEREAS, the respective boards of directors of Buyer and First
American have approved this Agreement.
NOW THEREFORE, in consideration of the premises, First American and
Buyer hereby agree that a wholly owned subsidiary of Buyer shall be merged with
and into First American on the following terms and conditions:
SECTION 1: MERGER
(a) MERGER OF FIRST AMERICAN INTO SUBSIDIARY OF BUYER. Subject to the
terms and conditions of this Agreement, on the Closing Date (as defined herein),
a wholly-owned subsidiary of Buyer shall be merged with and into First American
pursuant to the provisions of and with the effect provided in Part Five of the
Texas Business Corporation Act (the "TBCA").
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(b) EFFECT OF MERGER. The specific Plan of Merger is set forth in
Exhibit A attached hereto and made a part hereof. The Merger shall have the
effects set forth in Part Five of the TBCA. On the Closing Date, First American
shall continue as the corporation surviving the Merger (the "Surviving
Corporation") which shall not be deemed to be a new corporation, and the
separate corporate existence of the subsidiary of Buyer shall cease. On the
Closing Date, all rights, title, and interests to all real and personal property
owned by First American and said subsidiary shall be allocated to the vested in
the Surviving Corporation without reversion or impairment, without further act
or deed, and without any transfer or assignment having occurred, but subject to
any existing liens or encumbrances thereon. On the Closing Date, all liabilities
and obligations of First American and said subsidiary shall be allocated to the
Surviving Corporation and the Surviving Corporation shall be the sole obligor
therefore. Thereafter, the Surviving Corporation shall be merged into Buyer.
(c) THE SURVIVING CORPORATION. The specific Plan of Merger is set
forth in Exhibit A attached hereto and made a part hereof. The established
office and facilities of First American shall continue as the office and
facilities of the Surviving Corporation. The Articles of Incorporation and
Bylaws of First American shall continue in effect as the Articles of
Incorporation and Bylaws of the Surviving Corporation until the same shall be
amended and changed as provided by law. The directors and officers of said
subsidiary shall continue as the directors and officers of the Surviving
Corporation until their respective successors are duly elected or appointed and
qualified in the manner provided in the Articles of Incorporation of the
Surviving Corporation or as otherwise provided by law.
(d) FINAL MERGER. Immediately after Closing, the Surviving
Corporation shall be merged with and into Buyer ("Continuing Company")
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under the charter and Articles of Incorporation of Buyer pursuant to the
provisions of, and with the effect provided in Article Five of the TBCA.
The Articles of Incorporation of Continuing Company shall be the
Articles of Incorporation of Buyer. Until altered, amended or repealed as
therein provided and in the Articles of Incorporation of Continuing Company, the
Bylaws of Continuing Company shall be the Bylaws of Buyer. Unless and until
changed by the Board of Directors of Continuing Company, the main office of
Continuing Company shall be the main office of Buyer. The established offices
and facilities of the Surviving Corporation immediately prior to the Merger
shall become established offices and facilities of the Continuing Company. Until
thereafter changed in accordance with law or the Articles of Incorporation or
Bylaws of Continuing Company, all corporate acts, plans, policies, contracts,
approvals and authorizations of the Surviving Corporation and Buyer and their
respective shareholders, boards of directors, committees elected or appointed
thereby, officers and agents, which were valid and effective shall be taken for
all purposes as the acts, plans, policies, contracts, approvals and
authorizations of Continuing Company and shall be as effective and binding
thereon.
(e) MERGER CONSIDERATION. At the consummation of the Plan of Merger,
in exchange for all of the issued and outstanding common stock of First American
(the "First American Stock"), Buyer shall issue a total of 351,750 shares of its
voting common stock, par value $1.00 per share (the "Buyer Stock"), the fair
market value of which is agreed to be $10.00 per share, and pay a total of
$3,379,480.00 in cash to the shareholders of First American (the "Merger
Consideration").
(f) CONVERSION OF THE FIRST AMERICAN STOCK. On the Closing Date, by
virtue of this Agreement and without any further action on the part of any
holder, each share of First American Stock shall cease to be issued and
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outstanding, and other than shares with respect to which dissenters' rights have
been perfected, shall be converted into and become the right to receive 3.417039
shares of Buyer Stock and $32.829609 cash (the "Per Share Consideration").
(g) CONVERSION OF SUBSIDIARY STOCK. The shares of stock of Buyer's
subsidiary outstanding on the Closing Date shall, by virtue of the Merger an
without any action on the part of the Buyer or any other party as holder
thereof, be converted into and become shares of capital stock of Surviving
Corporation. By virtue of this Agreement and without any action by any party,
the number of shares of capital stock of the Surviving Corporation to be
outstanding after the Closing Date shall be 102,940 shares of common stock,
$1.00 pat value per share.
SECTION 2: CLOSING
On a date mutually agreeable to First American and Buyer within five
(5) business days after the receipt of all necessary regulatory, corporate and
other approvals and the expiration of any mandatory waiting periods (herein
called the "Closing Date"), but not later than September 30, 1999, a closing
(the "Closing") will take place at the offices of First American at which the
parties to this Agreement will exchange certificates, opinions, letters and
other documents in order to determine whether all of the conditions set forth in
this Agreement have been satisfied or waived. If no such condition then exists
or if no party has previously exercised any right it may have to terminate this
Agreement, then and thereupon the appropriate parties shall execute such
documents and instruments as may be necessary in order to effect the
transactions contemplated by this Agreement.
(a) DELIVERY OF CONSIDERATION. First American shall send to each
holder of First American Stock a letter of transmittal (which shall include a
representation regarding title) for use in exchanging such holder's certificates
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for the Merger Consideration. Provided that all necessary shareholder and
regulatory approvals have been obtained, First American shall forward letters of
transmittal to all of the shareholders at least twenty (20) days prior to the
Closing Date unless First American and Buyer shall mutually agree to send such
letters at a later date. Promptly after receipt of such certificates and letter
of transmittal, Buyer shall review the executed letters of transmittal in order
to verify proper execution. Provided that the letter of transmittal is properly
completed, accompanied by all of the appropriate stock certificates and made
available for review by First American by twelve noon on the business day before
the Closing Date, on the Closing Date, Buyer shall deliver to such shareholder
the Per Share Consideration multiplied by the number of shares of First American
Stock surrendered. If a shareholder does not provide properly completed letters
of transmittal and all appropriate stock certificates to Buyer on the business
day before the Closing Date, then, provided that the letter of transmittal is
properly completed and accompanied by all of the appropriate stock certificates
and delivered to Buyer, Buyer promptly, but in no event later than two (2)
business days following receipt of those documents by Buyer, shall pay to such
shareholder the Per Share Consideration multiplied by the number of shares of
First American Stock surrendered. In the event that a letter of transmittal
contains an error, is incomplete or is not accompanied by all appropriate stock
certificates, then neither Buyer nor any other party to this Agreement shall be
liable to any holder of certificates representing the First American Stock for
any amount paid to a public official pursuant to any applicable abandoned
property, escheat or similar law. No interest shall be payable with respect to
the payment of the Merger Consideration.
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SECTION 3. REPRESENTATIONS AND WARRANTIES OF FIRST AMERICAN.
First American does hereby represent and warrant to
Buyer and agree as follows:
(a)ORGANIZATION, GOOD STANDING, POWER. First American is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Texas, and has all requisite corporate power and authority
to own, lease, operate, and sell its respective properties and to carry on its
respective businesses as they are presently conducted. First American is a bank
holding company which wholly owns a bank in Sulphur Springs, Texas, a bank in
Commerce, Texas (collectively, the "Bank") and a mortgage company, named First
American Mortgage Corporation (the "Mortgage Company"). No other party owns any
interest in the Bank or the Mortgage Company, except for the outstanding
preferred stock of the Mortgage Company which shall be redeemed prior to the
Closing. First American has no other businesses or ownership interest in any
other businesses.
(b) CAPITALIZATION. The authorized capital of First American
consists of 1,000,000 shares of common stock, $2.50 par value, of which 91,940
shares are validly issued and outstanding, fully paid and nonassessable, and
11,000 shares in options have been granted, which shall be fully exercised prior
to the Closing.
(c)AUTHORIZATION. This Agreement has been duly executed by First
American and, subject to regulatory and shareholder approval, constitutes the
valid, legally binding and enforceable obligations of First American.
(d) EFFECT OF AGREEMENT. The execution, delivery, and
performance of this Agreement by First American and the consummation of
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transactions contemplated hereby, will not conflict with or result in a breach
or termination of any provision of, or constitute a default under, or result in
the creation of any lien, charge, or encumbrance upon any of the assets of First
American pursuant to the corporate charter or by-laws of First American, or
pursuant to any indenture, mortgage, deed of trust, lease, contract, agreement,
or other instrument, or any governmental approval, authorization, certificate,
consent, license, order, or permit, or any judgment, award, decree, statute,
ordinance, regulation, or any other restriction of any kind or character, to
which First American is a party which breach, termination or default would or
may prevent consummation of the transactions contemplated hereby by First
American.
(e)FINANCIAL STATEMENTS OF THE CORPORATION. Delivered to Buyer
herewith are the certified balance sheets of First American as of December 31,
1998, December 31, 1997 and December 31, 1996, and the statements of earnings,
statements of stockholders' equity and statements of cash flow with respect to
First American for the fiscal years ended 1998, 1997 and 1996 (referred to
collectively herein as the "Certified Financial Statements"). Also delivered
herewith are the unaudited balance sheet of First American as of March 31, 1999,
and the unaudited statement of earnings, consolidated statement of stockholders'
equity and consolidated statement of cash flow with respect to First American
for the three-month period ended March 31, 1999 (referred to herein as the
"Interim Financial Statements"). The Certified Financial Statements and the
Interim Financial Statements are in accordance with the books and records of
First American, fairly present the financial position of the First American as
of the dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a basis consistent with
prior years, except as stated therein.
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(f) UNDISCLOSED LIABILITIES. Except for liabilities disclosed in
the Certified Financial Statements and Internal Financial Statements referred
to above, First American has no liabilities nor obligations of any kind,
whether accrued, absolute, contingent, or otherwise, and regardless of whether
such liabilities or obligations would have been required to be disclosed on a
balance sheet prepared in accordance with generally accepted accounting
principles.
(g) ACCOUNTS RECEIVABLE AND PAYABLE. The accounts and notes
receivable of First American reflected on the Interim Financial Statements,
and all accounts and notes receivable arising after March 31, 1999 and prior
to the Closing Date, are not subject to any defenses, counterclaims, or rights
of setoff, and are current and fully collectible, less applicable reserves.
First American has no accounts or notes payable, or other liabilities or
obligations, except in the ordinary course of business.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as otherwise
disclosed in Exhibit B attached hereto, since January 1, 1999, First American
has not:
(i) incurred any obligation or liability (contingent or
otherwise) or entered into any contract, transaction, or commitment, except in
the ordinary course of business;
(ii) discharged or satisfied any lien or encumbrance or
paid any obligation or liability (contingent or otherwise), except in the
ordinary course of business;
(iii) mortgaged, pledged, or subjected to lien, charge,
security interest, or to any other encumbrance any of its assets;
(iv) sold, assigned, transferred, conveyed, leased, or
otherwise disposed of, or agreed to sell, assign, transfer, convey, lease,
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or otherwise dispose of, any of its assets, other than in the ordinary course of
business;
(v) canceled any debt or claim;
(vi) waived or released anyrights;
(vii) made any capital expenditures in excess of
$5,000.00;
(viii) suffered any casualty loss or damage, whether or
not such loss or damage shall have been covered by insurance;
(ix) suffered any material adverse change in
operations, assets, properties, or businesses;
(x) declared any dividend or made any payment or
distribution in respect of its capital stock;
(xi) engaged in any business other than the Bank and the
Mortgage Company.
(i)TAX MATTERS. First American has filed all United States,
foreign, state, county, local, and other tax and duty returns and reports
required to be filed and have paid, or set up a reasonable and adequate reserve
that is reflected in the Financial Statements of the payment of all income,
franchise, property, sales, employment, ad valorem, and other taxes and duties
required to be paid in respect of the periods covered by such returns, and have
set up a reasonable and adequate reserve that is reflected in the Interim
Financial Statements for the payment of all income, franchise, property, sales,
employment, or other taxes or duties required to be paid or anticipated to be
required to be paid in respect of the periods subsequent to the last of such
periods covered by such returns and prior to the Closing Date. First American
has made all withholding of tax required to be made under all applicable United
States, state, and local tax regulations. First American is not a party to any
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pending action, examination, investigation or proceeding, nor is any action,
examination, investigation or proceeding threatened, by any governmental
authority for assessment or collection of taxes, and no claim for assessment or
collection of taxes has been asserted against First American. To the best
knowledge of First American, the liability for Federal Income Taxes for First
American is closed for all taxable years ending on or prior to 1998.
(j) LIST OF PRIORITIES, CONTRACTS, AND OTHER DATA.
Attached hereto as Exhibit C are correct and complete lists, descriptions, or
summaries, as the case may be, setting forth, as of the date of this Agreement
except as specified thereon, the following:
(i) all policies of insurance in force (with a notation as
to the date through which premiums have been paid) with respect to First
American;
(ii)all existing contracts and commitments, including,
without limiting the generality of the foregoing, all mortgages, deeds of trust,
indentures, loan agreements, credit agreements, partnership agreements, and
joint venture agreements, by which any of First American's assets are or maybe
bound;
(iii) all collective bargaining agreements, employment and
consulting agreements, executive compensation plans, bonus plans, incentive
compensation plans, deferred compensation agreements, employee compensation
plans or retirement plans, employee profit sharing plans, employee stock
purchase or stock option plans, and hospitalization insurance or other plans or
arrangements providing for benefits for employees of First American;
(iv)the names and current annual total compensation of all
present directors and officers of First American;
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(v) the names of all retired employees of First American who
are receiving or are entitled to receive any unfunded pensions not fully covered
by any pension plan to which First American is or was a party, their ages, and
their current annual unfunded pension rates;
(vi)by category, all personal property used by First
American in its businesses, including automobiles, machinery, equipment,
furniture, and fixtures;
(vii) all approvals, authorizations, certificates, consents,
licenses, orders, permits, and restrictions of any governmental agency, whether
federal, state, or local, required by First American to permit the continued
operation of its businesses in the manner in which they are currently conducted.
True and complete copies of all documents, including all amendments
thereto, referred to in such lists or summaries have been delivered to Buyer or
are available for inspection at the office of First American. All documents,
rights, obligations, and commitments referred to in such lists are valid and
enforceable in accordance with their respective terms for the periods stated
herein, and there is not under any of them existing default, event of default,
or event that with the giving of notice or the passage of time, or both, would
constitute a default.
(k)TITLE TO ASSETS; LEASES. First American has good and
marketable title to its all of its assets, free and clear of all claims, liens,
and encumbrances, and will have good and marketable title, free and clear of all
claims, liens, and encumbrances, to all other assets acquired after the date
hereof but before the Closing Date. There are no contracts pursuant to which
First American leases any real or personal property, save and except the lease
of the Commerce, Texas, location.
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(l)FIXED ASSETS. The real property improvements, equipment, and
other tangible assets used or owned by First American in the conduct of its
businesses are fit for their intended use and are in good operating condition
and repair, subject to ordinary wear and tear. None of said improvements,
equipment, and other assets is subject to any commitment or other arrangement
for their use by any other parties.
(m)LITIGATION. Except as disclosed in Exhibit D attached hereto,
there are no actions, suits, or proceedings at law or in equity before or by any
federal, state, municipal, or other governmental or nongovernmental department,
commission, board, bureau, agency, or instrumentality, pending or threatened
against or affecting First American or wherein an unfavorable decision, ruling,
or finding would adverse affect the consummation of the transactions
contemplated by this Agreement, and to the best knowledge of First American, no
facts are now in existence upon which such an action, suit, or proceeding could
be brought. First American reasonably believes that the damages, liabilities,
and related expenses (including the cost and expenses of investigating,
prosecuting, or defending any such legal proceeding and fees and disbursements
of counsel incurred herein) , whether occasioned through a final adjudication of
the issues or good faith settlement, which may be incurred by First American as
the result of any pending litigation set forth on Exhibit D will not exceed
$50,000.00.
(n)EPA AND OSHA. There are no actions pending or to First
American's knowledge, threatened between First American and any former employees
or anyone representing them. To the best knowledge of First American, First
American has complied with all requirements made upon it or threatened on it
under both the Environmental Protection Act, as amended, and the Occupational
Safety and Health Act and has complied in all material respects
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with all other laws relating to the environment or employment of labor,
including any provisions thereof relating to wages, hours, collective
bargaining, and the collection or payment of social security withholding and
similar taxes, and is not liable for any arrears of wages or any taxes or
penalties for failure to comply with any of the foregoing.
(o)PATENTS, TRADEMARKS, COPYRIGHTS. First American does not own
or use or infringe upon the rights of others with respect to any patents, patent
applications, trade secrets, trademarks, trade names, or copyrights, and no
patents, patent applications, trade secrets, trademarks, trade names, or
copyrights are necessary for the conduct of the businesses of First American as
now conducted. No director or officer of First American owns, directly or
indirectly, in whole or in part, any patents, trademarks, trade names,
copyrights.
(p)BOOKS AND RECORDS. The books, records, and work papers of
First American are substantially complete and correct, have been maintained in
accordance with good business practices, and accurately reflect the basis for
the financial condition of First American set forth in the Financial Statements.
(q) LICENSES, PERMITS, AUTHORIZATIONS. First American has all
approvals, authorizations, certificates, consents, licenses, orders, and other
permits of all governmental agencies, whether federal state or local, required
to permit the operation of its businesses presently conducted, and no action is
underway that may cause the termination, modification, or revocation thereof.
(r) COMPLIANCE WITH APPLICABLE LAW. The conduct of the
businesses of First American does not materially violate or infringe any
domestic laws, statutes, ordinances, regulations, orders, or requirements. First
American has not received notice of, nor do its officers have any specific
knowledge of, the violation by First American of any applicable law, statute,
ordinance, regulation, order, or requirement relating to its operations or
assets.
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(s) TRANSACTION WITH MANAGEMENT. Except as disclosed in Exhibit
E attached hereto, First American is not a party to any contract, lease, or
commitment with stockholders of First American or any employee, officer, or
director of First American, or any member of the family of any such person, nor
are there any loans outstanding to or from any of such persons from or to First
American. No officer or director has any direct or indirect financial interest
in any competitor of First American.
(t)UNDUE INFLUENCE. First American has not made any payments to
or entered into any transactions with any person as an inducement to such person
(or to induce such person to influence another person) to take action deemed to
be to the advantage of First American in such person's official position with a
governmental authority, or in such person's position with any other business
entity, nor has First American directly or indirectly made any payment to any
person or entity that was contrary to any law or regulation of any such
governmental authority.
(u)NO UNTRUE STATEMENT. Neither this Agreement nor any of the
document, certificate, or written statement furnished to Buyer by or on behalf
of First American in connection with the transactions contemplated hereby
contains any untrue statement or omits to state a fact necessary in order to
make the statements contained herein and therein not misleading. There is no
fact, which has not been described in this Agreement or in the Exhibits attached
hereto, that is known to First American or Stockholders relating to the
businesses of First American which now or in the future will, with reasonable
probability, materially and adversely affect First American.
(v)PAYMENT OF BROKERS OR FINDERS. First American has not incurred
any obligations or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions, or other like payment in connection with this
Agreement.
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(w)PENSION PLANS AND WELFARE PLANS. First American is not the
sponsor of any pension benefit or welfare benefit plan as defined in the
Employee Retirement Income Security Act of 1974, as amended, nor are any of the
employees of First American covered by any such pension benefit or welfare
benefit plan.
(x)OFFICIAL STATEMENTS. All filings and statements to all state
or federal regulatory agencies (the "Official Statements") and other documents
utilized in connection therewith including, without limiting the generality of
the foregoing, call reports and examination reports, do not contain any untrue
statement of a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(y) OFFER AND SALE OF SECURITIES. First American has not sold or
offered to sell any securities, as such term is defined in the Securities Act of
1933, as amended ("1933 Act"), or the Securities Exchange Act of 1934, as
amended ("1934 Act"), except such securities as shall have been "exempted
securities" as such are set forth in Section 3 of the 1933 Act, or except
pursuant to "exempted transactions" as such are set forth in Section 4 of the
1933 Act. Each Prospectus, notice, circular, advertisement, letter or other
communication, written or by radio or television, pursuant to which First
American has offered for sale any security, as such term is defined in the 1933
Act or the 1934 Act, did not at the time such security was issued and sold and
does not as of the date hereof contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
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SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to First American as follows:
(a) ORGANIZATION, GOOD STANDING, POWER. Buyer is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Texas, and has all requisite corporate power and authority
to own, lease, and operate its properties, to carry on its business as it is
presently conducted, and to enter into this Agreement and to perform its
obligations hereunder.
(b)AUTHORIZATION. The execution, delivery, and performance of
this Agreement by Buyer have been duly and effectively authorized by all
necessary corporate action of Buyer. This Agreement has been duly executed by
Buyer and is a valid, legally binding, and enforceable obligation of Buyer.
(c)EFFECT OF AGREEMENT. The execution, delivery, and performance
of this Agreement by Buyer and the consummation of the transactions contemplated
hereby, will not conflict with or result in a breach or termination of any
provision of, or constitute a default under, or result in the creation of any
lien, charge, or encumbrance upon any of the assets of Buyer pursuant to the
Certificate of Incorporation or by-laws of Buyer, or pursuant to any indenture,
mortgage, deed of trust, lease, contract, agreement, or other instrument, or any
governmental approval, authorization, certificate, consent, license, order, or
permit, or any judgment, award, decree, statute, ordinance, regulation, or any
other restriction of any kind or character, to which Buyer is a party, or by
which or pursuant to which Buyer or any of its assets may be bound, which
breach, termination, or default would prevent or may be executed to prevent
consummation of the transactions contemplated hereby by Buyer.
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(d) BROKERS OR FINDERS. Buyer has not incurred any obligations
or liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other like payment in connection with this Agreement.
(e) PURCHASE FOR INVESTMENT. Buyer is purchasing the Stock
for its own account for investment without a view to or for the distribution
thereof.
(f) BUYER STOCK. The authorized capital consists of
50,000,000 shares of voting common stock, $1.00 par value per share, of which
2,898,280 shares are validly issued and outstanding, fully paid and
nonassessable. Buyer has delivered a certified copy of its Articles of
Incorporation and Bylaws, as amended, to First American. Except as set forth in
its 1998 Option Plan, the Buyer has not granted or committed to grant any
options, rights, warrants or other contractual rights to acquire shares of
Buyer's capital stock or securities. The shares of common stock to be issued by
Buyer to shareholders of First American pursuant to this Agreement will be
validly issued, fully paid and nonassessable and will not be issued in violation
of the preemptive rights or any person. The shares of Buyer's capital stock are
registered under and have been issued in compliance with the 1933 Act and the
1934 Act. Such shares shall be listed for trading on the NASDAQ securities
exchange or securities quotation system and will be freely transferable on such
exchange without restriction or limitation. Each registration statement,
prospectus, annual or quarterly report or filing, and notice, circular,
advertisement and other item, relating to Buyer's securities did not at the date
of
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such item and does not as of the date hereof contain any untrue statement or
material fact or omit to state a material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
(g) NO MATERIAL ADVERSE CHANGE. Since December 31, 1998,
Buyer has not suffered any material adverse change in operations, assets,
properties or business.
SECTION 5. COVENANTS OF FIRST AMERICAN.
First American covenants and agrees as follows with respect to actions
to be taken between the date of this Agreement and the Closing Date:
(a) MAINTAIN REPRESENTATIONS AND WARRANTIES. Without the prior written
consent of Buyer, no action will be taken that would violate the terms and
conditions hereof.
(b) ACCESS TO INFORMATION. First American will give, and to the
extent necessary cause other parties to give, to Buyer and its agents and
representatives, full access, during normal business hours throughout the period
prior to the Closing Date, to the properties, books, work papers, contracts,
commitments and records, as well as other assets of First American, whether in
the possession of First American, its accountants or other representatives, and
will furnish to Buyer during such period all such information concerning First
American as Buyer may reasonably request. Buyer agrees that it will, and will
cause its agents and representatives, to hold in strict confidence all
information so
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obtained from First American, not disclose such information to any person or
entity, and to use such information solely and exclusively for determining
whether to proceed with the transaction contemplated by this Agreement, and if
the transactions herein provided for is not consummated as contemplated herein,
Buyer will return all such data and all copies and memoranda and other written
evidence or summation thereof.
(c) EVIDENCE OF TITLE. First American will give, and to the
extent necessary cause other parties to give, to Buyer and its agents and
representatives true and correct copies of all title policies, title documents,
and instruments creating or evidencing the encumbrances, easements, and
restrictions affecting the properties of First American.
(d) CONDUCT OF BUSINESS PENDING THE CLOSING DATE. Except such
actions as shall be specifically agreed to by Buyer pursuant to advance written
consent (which consent shall not be unreasonably withheld), First American,
during the period between the date of this Agreement and the Closing Date,
shall:
(i) operate its businesses only in the usual, regular, and
ordinary manner and, to the extent consistent with such operation, use its best
efforts to preserve its present business organizations intact, keep available
the services of its present officers and preserve its present relationship with
persons having business dealings with it;
(ii) maintain all of its assets in customary repair, order, and
condition, reasonable wear and use excepted, and maintain insurance upon all of
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such assets in such amounts and of such kinds comparable to that in effect on
the date of this Agreement;
(iii) maintain its books, accounts, and records in the usual,
regular, and ordinary manner, on a basis consistent with prior years, and
endeavor to comply with all laws applicable to it and to the conduct of its
businesses and to perform all of its obligations without default;
(iv) not enter or agree to enter into any merger or consolidation
with any corporation or change the character of its businesses in any manner;
(v) not declare, pay, or make any dividend or other distribution
or payments in respect of shares of its capital stock, or purchase or redeem any
of such shares other than the redemption of preferred stock by the Mortgage
Company;
(vi)not (1) hire any employees; (2) make any increase in the
compensation payable or to become payable by it to any director, officer or
agent except in the ordinary course of business; (3) except for the June profit
sharing distribution, pay or provide for any bonus, stock option, stock
purchase, profit sharing, deferred compensation, pension, retirement, or other
similar payment or arrangement; (4) pay or provide for any unfunded pensions not
covered by any pension plan to which it is a party; and ( 5) enter into any
employment or consulting agreement, sales agency, or other contract or
arrangement with respect to the performance of personal services;
(vii) not (1) incur or become subject to, or agree to incur or
become subject to, any obligation or liability (contingent or otherwise) ,
except in the ordinary course of business; (2) discharge or satisfy any lien or
encumbrance or pay any obligation or liability (contingent or otherwise), except
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in the ordinary course of business; ( 3) mortgage, pledge, or subject to lien or
encumbrance any of its assets; (4) sell, assign, transfer, convey, lease, or
otherwise dispose of any of its assets except in the ordinary course of
business; (5) acquire or agree to acquire any assets except in the ordinary
course of business;(6) cancel, compromise, or postpone any debt or claim except
in the ordinary course of business; (7) waive any right, except in the ordinary
course of business and not of material value; (8) transfer or grant any rights
under any concessions, licenses, patents, inventions, trade names, trademarks,
copyrights, or with respect to know-how; (9) enter into, modify, change, or
terminate any existing license, lease, contract, or other documents; (10) make
any capital expenditures in excess of $5,000.00, or enter into any commitment
therefor; (11) enter into any collective bargaining agreement or, through
negotiation or otherwise, make any commitment or incur any liability to any
labor organization; (12) enter into any transactions or make or enter into any
contract or commitment that by reason of its size or otherwise is not in the
ordinary course of business; ( 13) enter into any contract, lease, or commitment
with any member of the family of any officer, director, employee, or stockholder
of or corporation affiliated with First American, or loan or otherwise make any
advances to any of such entities or persons.
(viii) make no change in its banking policies.
(e)NOTIFICATION OF CHANGES. First American will promptly notify
Buyer in writing of the existence or happening of any fact, event, or
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<PAGE>
occurrence that may alter the accuracy or completeness of any representation or
warranty contained in this Agreement.
(f)CONSENTS. First American will obtain any consents or
agreements of third parties necessary for the performance by First American of
its obligations under this Agreement.
(g)REGULATORY AUTHORIZATIONS. First American will execute and
file, or join in the execution and filing, any applications or other documents
that may be necessary in order to obtain the authorization, approval, or consent
of any governmental body that may be required, or that Buyer may reasonably
request, in connection with the consummation of that transactions contemplated
by this Agreement, including but not limited to change of control filings.
(h) EFFORTS AND COOPERATION. First American will use its good
faith reasonable effort to cause the satisfaction of the conditions precedent
set forth in this Agreement and shall cooperate with Buyer to consummate the
transaction contemplated by this Agreement.
SECTION 6. COVENANTS OF BUYER.
Buyer covenants and agrees as follows with respect to actions to be taken
between the date of this Agreement and the Closing Date:
(a) MAINTAIN REPRESENTATIONS AND WARRANTIES. Without the prior
consent of First American, no action will be taken that would violate the terms
and conditions hereof.
(b) NO CHANGE IN CAPITAL. Buyer shall not make any change in its
authorized capital structure or in its issued and outstanding securities. Buyer
23
<PAGE>
shall not issue any securities other than the securities to be issued pursuant
to the Merger.
(c) REGISTRATION STATEMENT AND REGULATORY FILINGS. Within 30
days of the effective date of this Agreement, Buyer shall prepare and file with
the SEC any required Registration Statement (on such form as may be appropriate)
and all amendments and supplements thereto, with respect to the common stock to
be issued pursuant to this Agreement. Within 30 days of the effective date of
this Agreement, Buyer shall prepare and file all necessary filings with any
banking regulatory agency which may be necessary for approval to consummate the
transactions contemplated by this Agreement. Buyer shall provide to First
American (1) copies of drafts of all filings made pursuant to this section in
advance of filing, (ii) copies of documents as filed, and (iii) copies of any
correspondence between Buyer and any applicable agency including the SEC and the
Board of Governors of the Federal Reserve System respecting the filings made
pursuant to this section.
(d) LISTING. Prior to the Closing Date, Buyer shall list the
shares of Buyer common stock to be issued in the Merger on the securities
exchange or other quotation system on which such shares are primarily traded.
(e) EFFORTS AND COOPERATION. Buyer will use its good faith
reasonable effort to cause the satisfaction of the conditions precedent set
forth in this Agreement and shall cooperate with First American to consummate
the transaction contemplated by this Agreement.
24
<PAGE>
(f) INCORPORATED AND ORGANIZATION OF SUBSIDIARY. Buyer will
incorporate, charter and organize a subsidiary as a Texas corporation. Buyer
will, as soon as practicable after the execution of this Agreement, enter into
the Plan of Merger, the form of which is attached hereto as EXHIBIT "A", and
shall perform all of its obligations thereunder. Buyer will, as soon as
practicable after the execution of this Agreement, cause the subsidiary to duly
authorize and enter into the Plan of Merger and shall cause the subsidiary to
perform all of its obligations thereunder. Buyer shall vote all of the stock of
the subsidiary in favor of the Merger and the Plan of Merger.
SECTION 7. CONDITIONS TO FIRST AMERICAN'S OBLIGATIONS.
The obligations of First American hereunder are
subject to each of the conditions set forth below,
(a)COMPLIANCE WITH TERMS. On the Closing Date, all of the terms,
conditions, and covenants of this Agreement to be complied with and performed by
Buyer at or before the Closing Date shall have been complied with or performed.
(b) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by Buyer in this Agreement shall be correct
and complete in all material respects at and as of the Closing Date.
(c) SHAREHOLDER APPROVAL. The holders of at least eighty-one
percent of the outstanding shares of common stock of First American shall have
approved the Merger.
25
<PAGE>
(d) REGULATORY APPROVAL. Buyer shall have obtained the approval
of the transaction contemplated by this Agreement by all required banking and
securities regulatory agencies.
(e) NO LITIGATION. No action shall have been taken or overtly
threatened to enjoin the Merger or to impose liability upon First American or
its shareholders, directors, officers, employees or agents for any action taken
in connection with the Merger.
(f) LISTING ON SECURITIES EXCHANGE. The shares of Buyer common
stock to be issued pursuant to the Merger shall have been listed on the
securities exchange or quotation system upon which shares of Buyer common stock
are traded.
(g) MATERIAL ADVERSE CHANGE. Between the date of this Agreement
and the Closing Date, there shall have been no material adverse change in the
condition, financial or otherwise, of the Buyer.
(h) TAX OPINION. An opinion of a nationally recognized legal
firm shall have been received in form and substance reasonably satisfactory to
First American to the effect that (i) the Merger will constitute a
"reorganization" within the meaning of Section 368 of the Code; (ii) no gain or
loss will be recognized by the shareholders of First American with respect to
the shares of Buyer common stock received pursuant to the Merger; and (iii) the
receipt of cash by shareholders of First American pursuant to the Merger shall
be capital gain (or loss) to the extent shares of First American Stock were held
as capital assets.
26
<PAGE>
SECTION 8. CONDITIONS TO BUYER'S OBLIGATIONS.
The obligations of Buyer at the closing hereunder are subject to each of the
conditions set forth below. Any of such conditions may be waived by Buyer, but
only in writing. Notwithstanding the failure or any one or more of such
conditions, Buyer may nevertheless proceed with the Closing without satisfaction
of such conditions and without written waiver, and Buyer shall not be deemed to
have waived any rights or remedies it may have by reason of failure of any of
such conditions.
(a) OPINION OF COUNSEL FOR FIRST AMERICAN. Buyer shall have
received an opinion of counsel for First American, dated the Closing Date in
form and substance satisfactory to Buyer, to the effect that:
(i) First American is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Texas and has the power and authority to own, lease, operate and sell its
properties and to carry on its businesses as it is presently conducted.
(ii) The authorized capitalization of First American consists
of ________ shares of common stock, $2.50 par value, of which 102,940 are
validly issued and outstanding, fully paid and nonassessable.
(iii) This Agreement has been duly executed and delivered by First
American, and is a valid, legally binding and enforceable obligation as the same
may be limited or otherwise affected by applicable bankruptcy, reorganization,
moratorium, and other similar laws affecting the rights of creditors generally;
provided, however, that no opinion need be rendered as to
27
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whether a court would grant specific performance or any other equitable remedy
with respect to the enforcement of any provision of this Agreement;
(iv) The execution, delivery, and performance of this Agreement by
First American and the consummation of the transactions contemplated hereby do
not conflict with or result in a breach or termination of any provision of, or
constitute a default under, or result in the creation of any lien, charge, or
encumbrance upon any of assets of First American pursuant to the corporate
charter or by-laws of First American, or, to such counsel's knowledge, pursuant
to any indenture, mortgage, deed of trust, lease, contract, agreement, or other
instrument, or any governmental approval, authorization, certificate, consent,
license, order, or permit, or any judgment, award, decree, statute, ordinance,
regulation, or any other restriction of any kind or character, to which First
American is a party or by which or pursuant to which First American or any of
their assets may be bound;
(v) Except as disclosed in therein, to the knowledge of such
counsel, there are no actions, suits, or proceedings at law or in equity by or
before any federal, state, municipal, or other governmental or non governmental
department, commission, board, bureau, agency, or instrumentality, pending or
threatened against or affecting First American or wherein an unfavorable
decision, ruling, or finding would adversely affect the consummation of the
transactions contemplated by this Agreement,
(vi)To the knowledge of such counsel, First American has all
approvals, authorizations, certificates, consents, licenses, orders, and other
permits of all governmental agencies, whether federal, state, or local, required
to permit the operation of its businesses as presently conducted, and
consummation of the transactions contemplated hereby will not cause the
termination, modification, or revocation thereof, or require the consent,
28
<PAGE>
approval, or authorization of any governmental entity or agency or any other
third party.
(b) COMPLIANCE WITH TERMS. On the Closing Date, all of the
terms, conditions, and covenants of this Agreement to be complied with and
performed by First American on or before the Closing Date shall have been
complied with or performed.
(c)ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by First American in this Agreement shall be
correct and complete at and as of the Closing Date in all material respects.
(d)CONSENTS AND AUTHORIZATIONS. Buyer shall have received any
necessary consents from third parties and any necessary governmental approvals,
consents, or permits for the performance by Buyer of its obligations under this
Agreement.
(e)ACTUAL OR THREATENED ACTIONS. There shall not be any actual or
threatened action or proceeding by or before any court or other governmental
body or agency that shall seek to restrain, prohibit or invalidate the
transactions contemplated by this Agreement, or that might affect the right of
Buyer to own the First American Stock after the Closing Date, or subject Buyer
to any liability therefor.
(f)NO ADVERSE CHANGE. Between the date of this Agreement and the
Closing Date there shall have been no material adverse change in the condition
or prospects (financial or otherwise) of First American.
(g) RESIGNATIONS. Buyer shall have received the written
resignations of all the directors of First American, which resignations shall
become effective of the Closing Date, and a signed release by said directors of
all claims against First American in form satisfactory to Buyer.
29
<PAGE>
SECTION 9. TERMINATION.
Anything herein or elsewhere to the contrary notwithstanding, this Agreement
may be terminated at any time prior to the Closing:
(a) By mutual written consent of First American and Buyer;
(b) If any one or more of the conditions precedent to its obligations
herein shall not have been fulfilled or, in any event, if the Closing has not
occurred on or before September 30, 1999;
Written notice of any termination under this section stating
the grounds therefor shall be given by the party entitled to terminate this
Agreement concurrently with such termination.
SECTION 10. CONTINUING MANAGEMENT.
The parties agree that during the interim period between the date of the
execution of this Agreement and the Closing Date, Buyer shall have the right to
have one or more executive officers of Buyer (collectively, the "Executive")
present at the offices of First American during such term, to review contracts,
documents, instruments and other obligations of First American, to familiarize
himself with the conduct and operations of First American, to acquaint himself
with the officers and employees of First American, and to monitor the business
operations of First American. The Executive shall have the opportunity to review
and express his suggestions, comments and concerns regarding the business
activities of First American during said period. In no event shall the Executive
be considered to be an employee of First American, First American
30
<PAGE>
shall have no obligation to pay the Executive, or withhold taxes or provide
benefits for the Executive.
Notwithstanding the termination, closing, or other disposition or resolution
of the terms and conditions of this Agreement and the matters contained herein,
First American and the Stockholders agree with Buyer that in no event shall
Buyer or the Executive incur any liability as a result of the actions,
omissions, or other deeds of the Executive done pursuant to the above paragraph,
and First American and Stockholders do hereby release, relinquish, waive, and
hold Buyer and the Executive harmless from any and all losses, costs, expenses,
claims, fees or other liabilities in connections with or related to, directly or
indirectly, the actions, omissions, or deeds of the Executive in conducting the
activities referred to herein. This release and waiver shall incorporate any and
all acts, deeds and omissions of the Executive, including, but not limited to,
the Executive's own negligence. This release is between the parties to this
Agreement only, and does not limit any action of a third party or any Agency.
SECTION 11. MISCELLANEOUS.
(a) NOTICES. All notices or deliveries required or desired to
be given hereunder shall be in writing and shall be delivered in person or by
registered or certified United States mail, postage prepaid, return receipt
requested, or by wire, telegram, or telex, and addressed to the parties at their
respective address set forth below, unless by such notice a different address
shall have been designated. All notices sent by mail as aforesaid shall be
deemed
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<PAGE>
delivered two days after deposit in the mail. All notices sent by wire,
telegram, or telex as aforesaid shall be deemed delivered one day after being
sent. All other notices shall be deemed delivered when actually received.
If to the Buyer: Guaranty Bank
Attn: Art Scharlach
P.O. Box 1158
Mt. Pleasant, Texas 75456-1158
If to the Seller: First American Financial Corp.
Attn: Gene Watson
919 Gilmer Street
Sulphur Springs, Texas 75483
(b) CONTROLLING LAW. All questions
concerning the validity, operation and interpretation of this Agreement and the
performance of the obligations imposed upon the parties hereunder shall be
governed by the laws of the State of Texas.
(c) HEADINGS. The headings and titles to the Sections of this
Agreement are inserted for convenience only and shall not be deemed to be a
part hereof or to affect the construction or interpretation of any provision
hereof.
(d) MODIFICATIONS AND WAIVER. No termination, cancellation,
modification, amendment, deletion, addition, or other change in this
agreement, or any provision hereof, or waiver of any right or remedy herein
provided, shall be effective for any purpose unless specifically set forth in
a writing signed by the party or parties to be bound thereby. The waiver of
any right or remedy in respect to any occurrence or event on one occasion
shall not be deemed a waiver of such right or remedy in respect to such
occurrence or event on any other occasion.
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<PAGE>
(e)ENTIRE AGREEMENT. This Agreement supersedes all other
agreements, oral or written, heretofore made with respect to the subject matter
hereof and the transactions contemplated hereby, and contains the entire
agreement of the parties hereto.
(f)ASSIGNMENTS. This Agreement and any rights or duties hereunder
shall not be assigned without the advance written consent of all parties hereto.
(g)COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
(h) TIME OF ESSENCE. The parties acknowledge that time is of the
essence in connection with the obligations of each party hereunder.
(i)BINDING ON SUCCESSORS. Except as otherwise provided herein,
this Agreement shall be binding upon, and shall inure to the benefit of, the
parties hereto and their respective legal representatives, estates, heirs,
successors, and assigns.
(j)EXPENSES. Each party shall pay all expenses, including,
without limiting the generality of the foregoing, the fees and expenses of the
agents, representatives, counsel, and accountants of all parties hereto
incidental to the preparation of this Agreement and the consummation of the
transactions provided herein.
(k)REPRESENTATIONS AND WARRANTIES. The representations and
warranties hereunder are cumulative, not exclusive, and no representation or
warranty shall be deemed to limit the scope and reasonable meaning of any other
representation or warranty.
(1)EXHIBITS. The exhibits attached hereto are incorporated
herein by reference and specifically form a part of this Agreement.
(m)SPECIFIC PERFORMANCE. The duties and obligations of Buyer and
First American under this Agreement shall be subject to specific performance.
(n)CONFIDENTIALITY. All parties agree that the matters contained
herein are confidential and are not to be disclosed to any third party, save and
except the Agencies, and
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agree to keep all matters herein strictly confidential, and will inform the
officers and employees of the obligation to maintain such confidentiality.
EXECUTED as of the date set forth above.
GUARANTY BANCSHARES, INC.
By:/s/ARTHER B. SCHLARACH
Name: Arther B. Schlarach
Title:President
FIRST AMERICAN FINANCIAL CORP.
By:/s/GENE WATSON
Name:Gene Watson
Title:Chairman of the Board
34
EXHIBIT 2.2
FIRST AMENDMENT TO THE
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN FIRST AMERICAN FINANCIAL CORPORATION
AND GUARANTY BANCSHARES, INC.
This First Amendment to the Agreement and Plan of Reorganization Between
First American Financial Corporation and Guaranty Bancshares, Inc. dated April
23, 1999 (the "Agreement") was approved by First American Financial Corporation
("First American") and Guaranty Bancshares, Inc. ("Buyer") and is effective as
of May 20, 1999.
SECTION 1. AMENDMENT. Pursuant to Section 11(d) of the Agreement, the
Agreement is hereby amended in the following respects:
a. Section 5 of the Agreement regarding the covenants of First
American is hereby amended by the addition of a new subsection (i), which
shall read in its entirety as follows:
SECTION 5(i) TERMINATION OF QUALIFIED PLAN. First American shall furnish
Buyer with certified copies of resolutions duly adopted by the Board of
Directors of First American terminating the CORPORATEplan for Retirement 100 -
Profit Sharing/401(k) Plan effective as of the first business day immediately
preceding the Closing, in a form reasonably acceptable to Buyer.
b. Section 6(c) of the Agreement regarding the covenants of Buyer is
hereby amended to extend the time period provided for the preperation and
filing of the Registration Statement and other necessary regulatory
filings, and shall read in its entirety as follows:
SECTION 6(c) REGISTRATION STATEMENT AND REGULATORY FILINGS. Within 75 days
of the effective date of this Agreement, Buyer shall prepare and file with the
SEC any required Registration Statement (on such form as may be appropriate) and
all amendments and supplements thereto, with respect to the common stock to be
issued pursuant to this Agreement. Within 75 days of the effective date of this
Agreement, Buyer shall prepare and file all necessary filings with any banking
regulatory agency which may be necessary for approval to consummate this
transactions contemplated by this Agreemant. Buyer shall provide to First
American (i) copies of all drafts of all filings made pursuant to this section
in advance of filing, (ii) copies of documents as filed, and (iii) copies of any
correspondence between Buyer and any applicable agency including the SEC and the
Board of Governors of the Federal Reserve System respecting the filings made
pursuant to this section.
SECTION 2. RATIFICATION. Except as hereby amended, the Agreement shall
remain unchanged and is ratified and confirmed in all respects.
SECTION 3. DEFINED TERMS. All terms used in the First Amendment that are
defined in the Agreement shall have the same meaning as in the Agreement.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, First American and Buyer have caused this First
Amendment to be executed as of the date first above written.
FIRST AMERICAN FINANCIAL CORPORATION
By:________________________________________
Name:______________________________________
Title:_____________________________________
GUARANTY BANCSHARES, INC.
By:________________________________________
Name:______________________________________
Title:_____________________________________
-2-
EXHIBIT 2.3
SECOND AMENDMENT TO THE
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN FIRST AMERICAN FINANCIAL CORPORATION
AND GUARANTY BANCSHARES, INC.
This Second Amendment to the Agreement and Plan of Reorganization
Between First American Financial Corporation and Guaranty Bancshares, Inc. dated
April 23, 1999 (the "Agreement") was approved by First American Financial
Corporation ("First American") and Guaranty Bancshares, Inc. ("Buyer") and is
effective as of June 25, 1999.
SECTION 1. AMENDMENT. Pursuant to Section 11(d) of the Agreement, the
Agreement is hereby amended in the following respects:
a. The recital in the Agreement is hereby amended to alter the
structure of the merger and shall read in its entirety as follows:
NOW THEREFORE, in consideration of the premises, First
American and Buyer hereby agree that First American shall be merged
with and into a wholly-owned subsidiary of Buyer on the following terms
and conditions:
b. Section 1 of the Agreement regarding the mechanics of the
merger is hereby amended, and the new text of Section 1 shall read in
its entirety as follows:
SECTION 1: MERGER
(a) MERGER OF SUBSIDIARY OF BUYER INTO FIRST AMERICAN. Subject to the
terms and conditions of this Agreement, on the Closing Date (as defined
herein), First American shall be merged with and into a wholly-owned
subsidiary of Buyer pursuant to the provisions of and with the effect
provided in Part Five of the Texas Business Corporation Act (the
"TBCA").
(b) EFFECT OF MERGER. The specific Plan of Merger is set forth in
Exhibit A attached hereto and made a part hereof. The Merger shall have
the effects set forth in Part Five of the TBCA. On the Closing Date, a
wholly-owned subsidiary of Buyer shall continue as the corporation
surviving the Merger (the "Surviving Corporation") and the separate
corporate existence of First American shall cease. On the Closing Date,
all rights, title and interests to all real and personal property owned
by First American and said subsidiary shall be allocated to and vested
in the Surviving Corporation without reversion or impairment, without
further act or deed, and without any transfer or assignment having
occurred, but subject to any existing liens or encumbrances thereon. On
the Closing Date, all liabilities and obligations of First American and
said subsidiary shall be allocated to the Surviving Corporation and the
Surviving Corporation shall be the sole obligor therefor. Thereafter,
the Surviving Corporation shall be merged into Buyer.
<PAGE>
(c) THE SURVIVING CORPORATION. The specific Plan of Merger is set forth
in Exhibit A attached hereto and made a part hereof. The established
office and facilities of the wholly-owned subsidiary of Buyer shall
continue as the office and facilities of the Surviving Corporation. The
Articles of Incorporation and Bylaws of said subsidiary shall continue
in effect as the Articles of Incorporation and Bylaws of the Surviving
Corporation until the same shall be amended and changed as provided by
law. The directors and officers of said subsidiary shall continue as
the directors and officers of the Surviving Corporation until their
respective successors are duly elected or appointed and qualified in
the manner provided in the Articles of Incorporation of the Surviving
Corporation or as otherwise provided by law.
(d) FINAL MERGER. Immediately after Closing, the Surviving Corporation
shall be merged with and into Buyer ("Continuing Company") under the
charter and Articles of Incorporation of Buyer pursuant to the
provisions of, and with the effect provided in Article Five of the
TBCA.
The Articles of Incorporation of Continuing Company shall be
the Articles of Incorporation of Buyer. Until altered, amended or
repealed as therein provided and in the Articles of Incorporation of
Continuing Company, the Bylaws of Continuing Company shall be the
Bylaws of Buyer. Unless and until changed by the Board of Directors of
Continuing Company, the main office of Continuing Company shall be the
main office of Buyer. The established offices and facilities of the
Surviving Corporation immediately prior to the Merger shall become the
established offices and facilities of the Continuing Company. Until
thereafter changed in accordance with law or the Articles of
Incorporation or Bylaws of Continuing Company, all corporate acts,
plans, policies, contracts, approvals and authorizations of the
Surviving Corporation and Buyer and their respective shareholders,
boards of directors, committees elected or appointed thereby, officers
and agents, which were valid and effective shall be taken for all
purposes as the acts, plans, policies, contracts, approvals and
authorizations of Continuing Company and shall be effective and binding
thereon.
(e) MERGER CONSIDERATION. At the consummation of the Plan of Merger, in
exchange for all of the issued and outstanding common stock of First
American (the "First American Stock"), Buyer shall issue a total of
351,750 shares of its voting common stock, par value $1.00 per share
(the "Buyer Stock"), and pay a total of $3,379,480.00 in cash to the
shareholders of First American (the "Merger Consideration"). Buyer
shall not issue any certificates for fractional shares of its common
stock in connection with the Merger. In lieu of issuing fractional
shares, Buyer shall pay cash for such fractional shares in an amount
based on the fair market value of its voting common stock pursuant to
this Agreement of $10.00 per share.
(f) CONVERSION OF FIRST AMERICAN STOCK. On the Closing Date, by virtue
of this Agreement and without any further action on the part of any
holder, each share of First American Stock shall cease to be issued and
outstanding, and other than shares with respect to which dissenters'
rights have been perfected, shall be converted into and become the
right
<PAGE>
to receive 3.417039 shares of Buyer Stock and $32.829609 in cash (the
"Per Share Merger Consideration").
SECTION 2. RATIFICATION. Except as hereby amended, the Agreement shall
remain unchanged and is ratified and confirmed in all respects.
SECTION 3. DEFINED TERMS. All terms used in the Second Amendment that
are defined in the Agreement shall have the same meaning as in the Agreement.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, First American and Buyer have caused this Second
Amendment to be executed as of the date first above written.
FIRST AMERICAN FINANCIAL CORPORATION
By:_________________________________
Name:_______________________________
Title:______________________________
GUARANTY BANCSHARES, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
EXHIBIT 5
June 29, 1999
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-4
(Registration No. 333-_____), filed by the Company under the Securities Act of
1933, as amended ("Registration Statement"), with respect to up to a maximum of
351,750 shares of common stock, $1.00 par value ("Common Stock"), of the Company
to be issued to the shareholders of First American Financial Corporation ("First
American") pursuant to the Agreement and Plan of Reorganization as of April 23,
1999, as amended, between First American and the Company (the "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 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.
June 18, 1999
Page 2
2. The shares of Common Stock proposed to be issued pursuant to the
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,
/s/ BRACEWELL & PATTERSON, L.L.P.
Bracewell & Patterson, L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
We have issued our report dated January 26, 1999 (except with respect to
Note P as to which the date is April 23, 1999) accompanying the financial
statements of Guaranty Bancshares, Inc. and Subsidiaries contained in this
Registration Statement on Form S-4. We consent to the use of the aforementioned
report in the Registration Statement, and to the use of our name as it appears
under the caption "Experts".
/s/ARNOLD, WALKER ARNOLD & CO., P.C.
ARNOLD, WALKER ARNOLD & CO., P.C.
Mount Pleasant, Texas
June 29, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated August 7, 1998 accompanying the financial
statements of First American Financial Corporation and Subsidiaries contained in
this Registration Statement on Form S-4. We consent to the use of the
aforementioned reports in the Registration Statement, and to the use of our name
as it appears under the caption "Experts".
/s/FISK & ROBINSON, P.C.
FISK & ROBINSON, P.C.
Dallas, Texas
June 29, 1999
EXHIBIT 99.1
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PROXY
FIRST AMERICAN FINANCIAL CORPORATION
SULPHER SPRINGS, TEXAS
SPECIAL MEETING OF SHAREHOLDERS
____________, 1999
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The undersigned shareholder of First American Financial Corporation (the
"Company") hereby constitutes and appoints ___________________ and
___________________ each with full power of substitution, as proxy or proxies of
the undersigned, to vote the number of shares of common stock of the Company
which the undersigned would be entitled to vote if personally present at the
Special Meeting of Shareholders of the Company to be held at __:00 _.m., local
time, on ____________, _________, 1999, and at any adjournments thereof (the
"Meeting"), with respect to the proposals described in the Proxy
Statement/Prospectus and the Notice of Special Meeting of Shareholders both
dated _______________, 1999, timely receipt of which is acknowledged, in the
manner specified below.
1. Approval of the acquisition of the Company by Guaranty Bancshares, Inc.
pursuant to an Agreement and Plan of Reorganization dated as of April 23, 1999
between the Company and Guaranty Bancshares, Inc. as more specifically described
in the Proxy Statement/Prospectus.
[ ] For [ ] Against [ ] Abstain
2. In their sole discretion on such other matters as may properly come
before the Meeting or any adjournments thereof.
[ ] Authorized [ ] Withhold Authority
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this Proxy will
be voted "FOR" Proposal 1 and with discretionary authority on all other matters
that may properly come before the Meeting or any adjournments thereof.
Please date and sign exactly as your name appears on the certificates
representing your shares of common stock of the Company. If shares are held
jointly, each shareholder must sign. When signing as attorney, trustee or
guardian, please give full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
_______________________________
(Signature of Shareholder)
_______________________________
(Signature of Shareholder)
Dated ________________, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS AND MAY BE
REVOKED BY THE SHAREHOLDER PRIOR TO ITS EXERCISE.
EXHIBIT 99.2
CONSENT TO MERGER AND IRREVOCABLE PROXY
The undersigned, being a Stockholder of First American Financial
Corporation, a bank holding company, do hereby consent to the merger of a
subsidiary of Guaranty Bancshares, Inc. into First American Financial Corp. and
approve to the transaction as set forth in the "Agreement and Plan of
Reorganization of First American Financial Corporation" executed by First
American Financial Corp. and Guaranty Bancshares, Inc. In this regard, I hereby
constitute Gene Watson as my agent and attorney-in-fact, and grant to him my
irrevocable proxy, to vote my shares to approve the merger transaction described
in the terms and conditions of said Agreement. I agree that the grant of this
proxy shall be irrevocable for the purposes stated herein.
Shareholder:
____________________________________
Name:_____________________________
Number of Shares Owned:_____________
