UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23113
GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 75-1656431
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 WEST ARKANSAS 75455
MOUNT PLEASANT, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(903) 572-9881
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value
$1.00 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 17, 1999, the number of outstanding shares of Common Stock
was 2,898,280. As of such date, the aggregate market value of the shares of
Common Stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market System on such date, was approximately $26.1
million.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders (Part III, Items 10-13).
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PART I
ITEM 1. BUSINESS
GENERAL
Guaranty Bancshares, Inc. (the "Company") was incorporated as a business
corporation under the laws of the State of Texas in 1980 to serve as a holding
company for Guaranty Bank (the "Bank"), which was chartered in 1913, and for
Talco State Bank, which was chartered in 1912 and merged into the Bank in 1997.
The Company's headquarters are located at 100 West Arkansas, Mount Pleasant,
Texas 75455, and its telephone number is (903) 572-9881.
The Company has grown through a combination of internal growth, the
acquisition of community banks and the opening of new community banking offices.
In 1992, the Company established its Deport, Texas location by acquiring certain
assets and liabilities of the First National Bank of Deport (the "Deport Bank").
The Deport Bank also had a branch in Paris, Texas which the Company acquired. To
enhance its expansion into the Paris community, the Company constructed a new
facility to serve as its Paris location. In 1993, the Company purchased a
commercial bank in Bogata, Texas and in 1996 opened a second retail-service
banking facility in Mount Pleasant. In 1997, the Company merged Talco State Bank
into the Bank and opened a full-service location in Texarkana. Texarkana is the
center of a trade area encompassing approximately 123,000 people. Management of
the Company believes that this trade area provides opportunity for strong future
growth in loans and deposits. Highway 59 (scheduled to become Interstate 69)
which serves as one of the primary trucking routes linking the interior United
States and Mexico, is a main artery to Texarkana. The increased traffic along
this "NAFTA Highway" is expected to enhance economic activity in this area and
create more opportunities for growth. In 1998, the Company constructed a new
facility in Texarkana to enhance its expansion in the Texarkana market.
The Company has developed a community banking network, with most of its
offices located in separate communities. Lending and investment activities are
funded from a strong core deposit base consisting of more than 25,000 deposit
accounts. Each of the Company's offices has the authority and flexibility to
make pricing decisions within overall ranges developed by the Company as a form
of quality control. Management of the Company believes that its responsiveness
to local customers and ability to adjust deposit rates and price loans at each
location gives it a distinct competitive advantage. Employees are committed to
personal service and developing long-term customer relationships, and adequate
staffing is provided at each location to ensure that customers needs are well
addressed. The Company provides economic incentives to its officers to develop
additional business for the Company and to cross-sell additional products and
services to existing customers.
The Company continues to look for additional expansion opportunities,
either through acquisitions of existing financial institutions or by
establishing de-novo offices. The Company intends to consider various strategic
acquisitions of banks, banking assets or financial service entities related to
banking in those areas that management believes would complement and help grow
the Company's existing business. The Company is particularly optimistic about
the growth potential in the Texarkana, Paris and Mount Pleasant market areas.
The Bank owns interests in three entities which complement the Company's
business: (i) Guaranty Leasing Company ("Guaranty Leasing"), which finances
equipment leases and has engaged in certain transactions which have resulted in
the recognition of federal income tax losses deductible by the Company, (ii) BSC
Securities, L.C. ("BSC"), which provides brokerage services and (iii)
Independent Bank Services, L.C. ("IBS"), which performs compliance, loan review,
internal audit and electronic data processing audit functions.
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BUSINESS
The Company's guiding strategy is to increase shareholder value by
providing customers with individualized, responsive, quality service and to
augment its existing market share. The Company's main objective is to increase
loans and deposits through additional expansion opportunities in Northeast
Texas, while stressing efficiency and maximizing profitability. In furtherance
of this objective, the Company has employed the following operating strategies:
COMMUNITY BANKING. The Company has developed a reputation of being a
premier provider of financial services to small and medium-sized businesses,
professionals and individuals in Northeast Texas. Management believes the
Company's reputation for providing personal, professional and dependable service
is well established in communities located in this area. Each of the Company's
full-service branch locations is administered by a local President with
knowledge of the community and banking skills which complement the particular
local economy, whether it is based on agriculture, manufacturing and commerce or
professional services. Decisions regarding loans are made at each branch
location in a timely manner. Indicative of the Company's community banking
expertise, the Small Business Administration honored the Company as the top
rated small business lender in the State of Texas in 1994, 1995, 1996 and 1997
even though the Company did not participate in the Small Business Administration
guaranteed loan program. Management believes it can compete favorably with
super-regional and interstate banks in its communities on the basis of personal
service and product diversity.
STRONG CORE GROWTH. In recent years, the Company has increased its market
share in each of the communities in which it maintains a full-service banking
facility. In its principal location of Mount Pleasant, the Company has increased
its market share of financial institution deposits from 43.0% in 1997 to 45.8%
in 1998. Deposits at the Paris location grew 86.1% in 1997 and 8.9% in 1998.
Deposits at the Texarkana location, which opened in August of 1997, grew 135.7%
to $9.0 million in 1998 as the Company gained market share in Bowie County. The
Company is well known in its geographic area as a result of its longevity and
reputation for service. The Company intends to grow by continuing to seek
strategic acquisitions and branching opportunities.
TECHNOLOGY. The Company has embraced technological change as a way to
remain competitive, manage operational costs associated with growth and offer
superior products to its customers. Recent technological implementations include
check imaging, credit file imaging, optical report archival and an automated
voice response system. Currently, the Company is evaluating several additional
enhancements that will improve its ability to deliver information internally to
improve productivity and externally to provide convenience and timeliness to its
growing customer base. Such enhancements include high-speed wireless
communications between all locations combining data and voice traffic, and an
end-user Internet banking web site providing current account information,
electronic bill and note payment, on-line account reconciliation and internal
transfers. The Company has made significant investments in technology, and has
become a technological leader in its market.
COMPETITIVE PRODUCTS. The Company recognizes its competition is not solely
banks, but brokerage houses, insurance companies, credit unions and various
other competitors, and that in order to thrive it must be competitive in the
products that it offers. The Company offers a full range of commercial loan
products, including term loans, lines of credit, fixed asset loans and working
capital loans. The Company also offers consumers a full range of personal loan
products including automobile loans, home improvement loans, consumer loans and
mortgage loans. The Company also has a wide variety of deposit products,
including a Premier money market account that pays a rate competitive with most
brokerage investment accounts and has been very attractive to customers. This
product, coupled with certificates of deposit, NOW accounts, savings accounts,
free checking, debit cards and overdraft protection, gives the customer a full
compliment of deposit products at competitive rates.
ADDITIONAL REVENUE SOURCES. In order to provide service to its customers
and to augment revenues, the Company offers brokerage and trust services. BSC is
a full-service brokerage company that offers a complete array of investment
options including stocks, bonds, mutual funds, financial and retirement
planning, tax advantaged investments and asset allocations. BSC offers
securities through Pershing Securities, the largest independent securities
clearing firm in the industry. BSC is licensed and regulated through the
National Association of
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Securities Dealers, the Securities and Exchange Commission and various state and
federal banking authorities. The Company's Trust Department offers complete
trust services, including estate administration, custody, trust and asset
management services. Management believes that an aging affluent population will
foster an increase in the need for professional estate administration services.
The maturing of the baby boomer generation is creating a market for asset
management services. The Trust Department is in a unique position since there is
little competition for trust services in the Company's markets. Because of the
Company's strong presence in its markets, management believes that banking
relationships can be leveraged into growth for the Trust Department. Growth in
trust assets and corresponding management fees will result from expanding estate
administration, traditional trust services, asset management services and
custodial services in the Company's markets. The Company expects growth in this
department and anticipates that resulting fees will provide a stable stream of
income.
OPERATING EFFICIENCIES. In order to control overhead expenses, the Company
seeks to provide a full range of services as effectively as possible. Through
BSC, the Company is able to provide its customers with full brokerage services
without having to carry the entire cost itself due to a shared cost agreement
with other banks. Similarly, the Company enjoys the compliance, loan review,
internal audit and electronic data processing audit functions provided by IBS on
a shared cost basis with a group of other banks participating in this
arrangement. The Company has spent the last seven years and considerable revenue
expanding its market and improving the delivery of its financial products, which
has resulted in a higher than desired efficiency ratio. Beginning with the
acquisition of the Deport Bank in 1992, the Company has added five locations. As
a result, it has taken longer for the Company to achieve the desired economies
of scale, but with its growth rate, those economies are beginning to be realized
and the efficiency ratio is expected to show declining trends in the future. The
Company has the support staff and related fixed asset investments to accommodate
additional growth and enjoy additional economies of scale.
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
non-financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing customer service,
technology and local office decision-making, by establishing long-term customer
relationships and building customer loyalty, and by providing products and
services designed to address the specific needs of its customers. Competition
from both financial and non-financial institutions is expected to continue.
LEVERAGED LEASE TRANSACTIONS
In a series of transactions in 1992, 1994 and 1995, Guaranty Leasing
acquired limited partnership interests in certain partnerships (collectively,
the "Partnerships" or individually, a "Partnership") engaged in the equipment
leasing business. The investments were structured by TransCapital Corporation
("TransCapital") through various subsidiaries and controlled partnerships.
Generally, in each of the transactions the Partnership became the lessee
of equipment from an equipment owner (pursuant to a sale and leaseback
transaction) and the sublessor of the equipment to the equipment user. Each
Partnership receives note payments from the equipment owner under a purchase
money note given to purchase the equipment from that Partnership. The
Partnership makes lease payments to the equipment owner pursuant to the master
lease of the equipment. In most instances, payments under the purchase money
note equals lease payments under the master lease. Rental payments from the
equipment used under these equipment subleases were sold in advance subject to
existing liens for purchase of the equipment.
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The Partnership incurs a tax loss while the master lease/sublease
structure is in place; primarily because deductions for rentals paid under the
master lease exceed taxable interest income under the purchase money note.
Consequently, Guaranty Leasing has reported tax losses as a result of its
investments in the Partnership. In November 1998, Guaranty Leasing was informed
by the Internal Revenue Service (the "Service") that it has taken the position
that certain losses for calendar years 1994, 1995 and 1996, which losses
recorded were approximately $302,000, $410,000 and $447,000, respectively, for
the Partnership, would be disallowed. The Company believes that it has correctly
reported these transactions for tax purposes and that it has obtained
appropriate legal, accounting and appraisal opinions and authority to support
its positions. The Partnership plans to appeal the Service's determination with
the Service's Appellate Division. If the appeal is unsuccessful, the Partnership
plans to litigate the matter in Tax Court. Any final determination with respect
to the Partnership will be binding on the Company. If the Service is ultimately
successful in redetermining the Company's tax liability, the adjustments may
have a material adverse affect on the Company. The Partnership is actively
contesting the position of the Service in connection with this matter, and will
take appropriate steps necessary to protect its legal position.
EMPLOYEES
As of December 31, 1998, the Company had 135 full-time equivalent
employees, 51 of whom were officers of the Bank. The Company provides medical
and hospitalization insurance to its full-time employees. The Company considers
its relations with employees to be excellent.
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation ("FDIC") and the
banking system as a whole, and not for the protection of the bank holding
company shareholders or creditors. The banking agencies have broad enforcement
power over bank holding companies and banks including the power to impose
substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and it is subject
to supervision, regulation and examination by the Board of Governors of the
Federal Reserve System ("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.
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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, 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 non-banking 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 $1.0 million 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. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1998, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 12.29% and its ratio of total capital to total
risk-weighted assets was 13.08%. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
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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 December 31, 1998, the Company's leverage
ratio was 9.30%.
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" 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
consolidation 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 the Company,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the Company.
In addition, any company is required to obtain the approval of the Federal
Reserve 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 the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.
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THE BANK. The Bank is a Texas-chartered banking association, the deposits
of which are insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank is
not a member of the Federal Reserve System; therefore, the Bank is subject to
supervision and regulation by the FDIC and the Texas Department of Banking
("TDB"). Such supervision and regulation subjects the 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 the Bank, the Federal Reserve also has
supervisory authority which directly affects the Bank.
EQUIVALENCE TO NATIONAL BANK POWERS. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, 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 the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND ASSETS.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and it is anticipated that dividends paid by the Bank to the
Company will continue to be the Company's principal source of operating funds.
Capital adequacy requirements serve to limit the amount of dividends that may be
paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after
paying the dividend, the Bank will be "undercapitalized." The FDIC may declare a
dividend payment to be unsafe and unsound even though the Bank would continue to
meet its capital requirements after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository
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institution, the claims of depositors and other general or subordinated
creditors are entitled to a priority of payment over the claims of holders of
any obligation of the institution to its shareholders, including any depository
institution holding company (such as the Company) or any shareholder or creditor
thereof.
EXAMINATIONS. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The 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 the Bank as for the Company. As of
December 31, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 12.05% and its ratio of total capital to total risk-weighted assets
was 12.86%. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS".
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 December 31, 1998, the Bank's ratio of Tier 1 capital
to average total assets (leverage ratio) was 8.97%. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
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 1in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "under capitalized" if it fails to meet any one of the ratios required
to be adequately capitalized. The Bank is classified as "well capitalized" for
purposes of the FDIC's prompt corrective action regulations.
- 9 -
<PAGE>
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, and the Bank pays an assessment of 0.0122%.
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 Savings Association
Insurance Fund ("SAIF") and assure the payment of the Financing Corporation's
("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
0.0122% of deposits.
ENFORCEMENT POWERS. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan. The TDB 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.
- 10 -
<PAGE>
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. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
INSTABILITY OF REGULATORY STRUCTURE. Various legislation, including
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies and limit the investments that a
depository institution may make with insured funds, is from time to time
introduced in Congress. Such legislation may change banking statutes and the
operating environment of the Company and the Bank in substantial and
unpredictable ways. The Company cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon the financial condition or results of operations of the
Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY. One of the major additional burdens
imposed on the banking industry by FDICIA is the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve 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 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.
- 11 -
<PAGE>
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 the Company and the Bank cannot be
predicted.
ITEM 2. PROPERTIES
The Company conducts business at seven banking locations, two of which are
located in Mount Pleasant and the others located in the Northeast Texas
communities of Bogata, Deport, Paris, Talco and Texarkana. The Company's
headquarters are located at 100 West Arkansas in Mount Pleasant in a two-story
office building. The Company owns all of its locations. The following table sets
forth specific information on each of the Company's locations:
<TABLE>
<CAPTION>
DEPOSITS AT
LOCATION ADDRESS DECEMBER 31, 1998
-------- ------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bogata 110 Halesboro St., Bogata, Texas 75417 $ 13,439
Deport 111 Main St., Deport, Texas 75435 10,339
Mount Pleasant-Downtown 100 W. Arkansas, Mount Pleasant, Texas 75455 155,981
Mount Pleasant-South 2317 S. Jefferson, Mount Pleasant, Texas 75455 2,283
Paris 3250 Lamar Ave., Paris, Texas 75460 36,490
Talco 104 Broad St., Talco, Texas 75487 14,829
Texarkana 2202 St. Michael Dr., Texarkana, Texas 75503 8,964(1)
</TABLE>
- -----------------
(1) OPENED FOR BUSINESS IN AUGUST OF 1997.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is currently a party to any material
legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
- 12 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
In May 1998, the Company's registration statement ("Registration
Statement") previously filed with the Securities and Exchange Commission ("SEC")
was declared effective pursuant to which 350,000 shares of the Company's Common
Stock ("Common Stock") were sold to the public. Prior to this offering, the
Company's Common Stock was privately held and not listed on any public exchange
or actively traded. The Common Stock began trading on May 21, 1998 and is listed
on the Nasdaq National Market System ("Nasdaq NMS") under the symbol "GNTY". The
Company had a total of 2,898,280 shares outstanding at December 31, 1998. As of
February 5, 1999, there were 631 shareholders of record of Common Stock. The
number of beneficial shareholders is unknown to the Company at this time.
Prior to trading on the Nasdaq NMS, there was no established trading
market for the Common Stock, however, since the Common Stock began trading on
the Nasdaq NMS, the high and low Common Stock prices by quarter were as follows:
1998 HIGH LOW
- ---- ------ -------
First quarter................................... $ -- $ --
Second quarter (SINCE MAY 21, 1998)............. 15.25 14.38
Third quarter.................................. 15.50 12.00
Fourth quarter ................................. 11.50 8.88
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefore. While the Company has declared dividends on its Common Stock since
1980, and paid semi-annual dividends aggregating $0.24 per share per annum in
1998, there is no assurance that the Company will continue to pay dividends in
the future.
The principal source of cash revenues to the Company is dividends paid by
the Bank with respect to the Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal and state
banking laws, regulations and authorities. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "SUPERVISION AND
REGULATION - THE BANK".
The cash dividends paid per share (adjusted for a seven for one stock
split effective March 24, 1998) by quarter were as follows:
1998 1997
-------- --------
Fourth quarter............................ $ 0.1300 $ 0.1140
Third quarter............................. -- --
Second quarter............................ 0.1100 0.1070
First quarter............................. -- --
- 13 -
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 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 December 31, 1998 and (ii) 15,000,000 shares
of Preferred Stock, $5.00 per share par value, none of which were issued or
outstanding as of December 31, 1998.
The following discussion of the terms and provisions of the Company's
capital stock is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to this Annual Report on Form 10-K:
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 all
voting power is in the Common Stock. Holders of Common Stock may not cumulate
their votes for the election of directors. Holders of Common Stock do not have
preemptive rights to acquire any additional, unissued or treasury shares of the
Company, or securities of the Company convertible into or carrying a right to
subscribe for or acquire shares of the Company.
Holders of Common Stock will be entitled to receive dividends out of funds
legally available therefore, if and when properly declared by the Board of
Directors. However, the Board of Directors may not declare or pay cash dividends
on Common Stock, and no Common Stock may be purchased by the Company, unless
full dividends have been declared and paid on any outstanding Preferred Stock
for the current dividend period and, with respect to any outstanding cumulative
Preferred Stock, all past dividend periods. As of December 31, 1998, there was
no Preferred Stock issued or outstanding.
On the liquidation of the Company, the holders of Common Stock are
entitled to share pro rata in any distribution of the assets of the Company,
after the holders of shares of Preferred Stock have received the liquidation
preference of their shares plus any cumulated but unpaid dividends (whether or
not earned or declared), if any, and after all other indebtedness of the Company
has been retired.
- 14 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto, appearing elsewhere in this Annual Report on Form 10-K, and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected historical consolidated
financial data as of and for the five years ended December 31, 1998 are derived
from the Company's Consolidated Financial Statements which have been audited by
independent certified public accountants.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ............................................ $ 18,368 $ 17,009 $ 14,851 $ 14,248 $ 11,658
Interest expense ........................................... 8,951 8,192 6,919 6,372 4,470
-------- -------- -------- -------- --------
Net interest income ................................... 9,417 8,817 7,932 7,876 7,188
Provision for loan losses .................................. 540 355 206 149 298
Net interest income after provision for loan losses ... 8,877 8,462 7,726 7,727 6,890
Noninterest income ......................................... 2,826 1,657 2,390 1,440 1,582
Noninterest expense ........................................ 8,488 7,446 7,073 6,795 6,700
-------- -------- -------- -------- --------
Earnings before taxes ................................. 3,215 2,673 3,043 2,372 1,772
Provision for income tax expense ........................... 541 273 165 261 245
-------- -------- -------- -------- --------
Net earnings .......................................... 2,674 2,400 2,878 2,111 1,527
Preferred stock dividend ................................... 37 74 74 74 74
-------- -------- -------- -------- --------
Net earnings available to common shareholders ......... $ 2,637 $ 2,326 $ 2,804 $ 2,037 $ 1,453
======== ======== ======== ======== ========
COMMON SHARE DATA (1):
Net earnings (basic and diluted) (2) ....................... $ 0.95 $ 0.91 $ 1.08 $ 0.75$ 0.53
Book value ................................................. 8.21 6.84 6.06 5.32 4.69
Tangible book value ........................................ 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) ........................................ 2,782 2,547 2,592 2,724 2,721
Period end shares outstanding (in thousands) ............... 2,898 2,548 2,545 2,725 2,723
BALANCE SHEET DATA:
Total assets ............................................... $272,906 $244,157 $213,932 $192,935 $187,547
Securities ................................................. 51,367 58,139 30,382 31,200 30,321
Loans ...................................................... 185,886 157,395 139,289 126,287 124,307
Allowance for loan losses .................................. 1,512 1,129 1,055 1,005 1,012
Total deposits ............................................. 242,325 222,961 194,855 174,717 170,884
Total common shareholders' equity .......................... 23,796 17,426 15,423 14,499 12,782
AVERAGE BALANCE SHEET DATA:
Total assets ............................................... $253,633 $228,782 $203,056 $190,782 $180,648
Securities ................................................. 47,972 50,089 29,520 30,770 26,030
Loans ...................................................... 169,754 146,061 132,400 124,209 121,078
Allowance for loan losses .................................. 1,397 1,070 1,029 968 1,067
Total deposits ............................................. 227,919 208,401 183,896 172,964 164,250
Total common shareholders' equity .......................... 21,363 16,508 15,164 13,861 12,559
PERFORMANCE RATIOS:
Return on average assets ................................... 1.05% 1.05% 1.42% 1.11% 0.85%
Return on average common equity ............................ 12.34 14.09 18.49 14.70 11.57
Net interest margin ........................................ 4.07 4.24 4.32 4.59 4.41
Efficiency ratio (3) ....................................... 69.33 71.09 68.52 72.94 76.40
</TABLE>
(TABLE CONTINUES ON NEXT PAGE.)
- 15 -
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
------ ----- ----- ------ -----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS(4):
Nonperforming assets to total loans and other real estate ....... 0.67% 1.22% 1.49% 1.58% 2.67%
Net loan charge-offs to average loans ........................... 0.09 0.19 0.12 0.13 0.30
Allowance for loan losses to total loans ....................... 0.81 0.72 0.76 0.80 0.81
Allowance for loan losses to nonperforming loans (5) ............ 130.80 92.85 93.12 100.60 45.28
CAPITAL RATIOS (4):
Leverage ratio .................................................. 9.30% 7.87% 7.87% 7.88% 7.35%
Average shareholders' equity to average total assets ............ 8.59 7.58 7.88 7.70 7.41
Tier 1 risk-based capital ratio ................................. 12.29 11. 16 1.07 12. 11 11.13
Total risk-based capital ratio .................................. 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.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in the documents
incorporated into this document by reference, including matters discussed under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and as such may
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. The words "expects," "estimates,"
"anticipates," "intends," "plans," "believes," "seek," "will," "would,"
"should," "projected," "contemplated" and similar expressions are intended to
identify such forward-looking statements.
The Company's actual results or experience may differ materially from the
results anticipated in such forward-looking statements due to a variety of
factors, including, but not limited to: (i) the effects of the Service's
examination regarding the Company's leveraged leasing transactions; (ii) the
effects of future economic conditions; (iii) governmental monetary and fiscal
policies, as well as legislative and regulatory changes; (iv) the risks of
changes in interest rates on the level and composition of deposits, loan demand
and the values of loan collateral, securities and interest rate protection
agreements, as well as interest rate risks; (v) the effects of competition from
other commercial banks, thrifts, mortgage banking firms, insurance companies,
money market and other mutual funds and other financial institutions operating
in the Company's market areas and elsewhere, including competitors offering
banking products and services by mail, telephone, computer and the Internet;
(vi) the failure of assumptions underlying the establishment of reserves for
loan losses and estimations of values of collateral and various financial assets
and liabilities; and (vii) other uncertainties set forth in the Company's other
public reports and filings and public statements. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.
- 16 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of earnings. This section should be read in conjunction with the
Company's Consolidated Financial Statements and accompanying notes and other
detailed information appearing elsewhere in this Annual Report on Form 10-K.
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 the Company 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 the Company 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. The Company 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 the Company'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 the Company's initial public offering in May 1998.
RESULTS OF OPERATION
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
interest-earning 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 the Company'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.
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.
- 17 -
<PAGE>
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 the Company repositioning its assets within its
investment policy guidelines into higher yielding U. S. Government securities
and mortgage-backed securities. U. S. Government securities increased from $8.9
million in 1996 to $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, the Company also decreased federal
funds sold from $18.2 million to $7.7 million, causing a decrease in federal
funds interest income of $233,000. The Company also decreased its
interest-earning deposits in other financial institutions from $7.1 million to
zero.
- 18 -
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are 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
--------------------------------- --------------------------------
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 ..... $ 49,182 $ 4,108 8.35% $ 39,975 $ 3,411 8.53%
Real estate-mortgage and
construction ................ 98,962 8,247 8.33 84,570 7,478 8.84
Installment and other ......... 21,610 2,135 9.88 21,516 2116 9.83
Fees on loans ................. -- 54 -- -- 46 --
Securities .................... 47,972 3,104 6.47 50,089 3,247 6.48
Federal funds sold ............ 12,867 689 5.35 9,470 520 5.49
Interest-bearing deposits in
other financial institutions 572 31 5.42 2,554 191 7.48
--------- --------- ---- --------- --------- ----
Total interest-earning assets . 231,165 18,368 7.95% 208,174 17,009 8.17%
--------- ---- --------- ----
Less allowance for loan losses ..... (1,397) (1,070)
--------- ---------
Total interest-earning
assets, net of allowance .... 229,768 207,104
Non-earning assets:
Cash and due from banks ....... 8,579 8,228
Premises and equipment ........ 6,687 6,199
Interest receivable and
other assets ................ 8,209 6,361
Other real estate owned ....... 390 890
--------- ---------
Total assets ............ $ 253,633 $ 228,782
========= =========
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%
Time deposits ................. 127,472 6,913 5.42 114,596 6,185 5.40
--------- --------- ---- --------- --------- ----
Total interest-bearing
deposits .............. 186,748 8,926 4.78 171,232 8,179 4.78
Other borrowed funds .......... 809 25 3.09 168 13 7.74
--------- --------- ---- --------- --------- ----
Total interest-bearing
liabilities ........... 187,557 8,951 4.77% 171,400 8,192 4.78%
--------- ---- --------- ----
Noninterest-bearing liabilities:
Demand deposits ............... 41,171 37,169
Accrued interest, taxes and
other liabilities ......... 3,129 2,878
--------- ---------
Total liabilities ......... 231,857 211,447
Shareholders' equity ............... 21,776 17,335
--------- ---------
Total liabilities and
shareholders' equity .. $ 253,633 $ 228,782
========= =========
Net interest income ................ $ 9,417 $ 8,817
========= =======
Net interest spread ................ 3.18% 3.39%
==== ====
Net interest margin ................ 4.07% 4.24%
==== ====
</TABLE>
YEARS ENDED DECEMBER 31,
-------------------------------
1996
-------------------------------
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
--------- --------- ----
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans:
Commercial and industrial ..... $ 36,938 $ 3,183 8.62%
Real estate-mortgage and
construction ................ 73,476 6,287 8.56
Installment and other ......... 21,986 2,233 10.16
Fees on loans ................. -- 58 --
Securities .................... 29,520 1,882 6.38
Federal funds sold ............ 14,451 753 5.21
Interest-bearing deposits in
other financial institutions 7,212 455 6.31
--------- --------- ----
Total interest-earning assets . 183,583 14,851 8.09%
--------- ----
Less allowance for loan losses ..... (1,029)
--------
Total interest-earning
assets, net of allowance .... 182,554
Non-earning assets:
Cash and due from banks ....... 7,838
Premises and equipment ........ 5,552
Interest receivable and
other assets ................ 6,165
Other real estate owned ....... 947
--------
Total assets ............ $203,056
========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW, savings, and money
market accounts ........... $ 48,497 $ 1,584 3.27%
Time deposits ................. 101,059 5,305 5.25
--------- --------- ----
Total interest-bearing
deposits .............. 149,556 6,889 4.61
Other borrowed funds .......... 319 30 9.40
--------- --------- ----
Total interest-bearing
liabilities ........... 149,875 6,919 4.62%
--------- ----
Noninterest-bearing liabilities:
Demand deposits ............... 34,340
Accrued interest, taxes and
other liabilities ......... 2,850
---------
Total liabilities ......... 187,065
Shareholders' equity ............... 15,991
---------
Total liabilities and
shareholders' equity .. $ 203,056
=========
Net interest income ................ $ 7,932
===========
Net interest spread ................ 3.47%
====
Net interest margin ................ 4.32%
====
- 19 -
<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. 1977 1997 VS. 1996
----------------------------------- ----------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) 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 market money
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 amount of the provision for loan losses is based on periodic
evaluations of the loan portfolio, with particular attention directed toward
nonperforming and other potential problem loans. During these evaluations,
consideration is given to such factors as management's evaluation of specific
loans, the level and composition of nonperforming loans, historical loss
experience, the market value of collateral, the strength and availability of
guaranties, concentrations of credits and other subjective factors.
The Company's provision for loan losses during the twelve months ended
December 31, 1998 was $540,000, compared with $355,000 during the twelve months
ended December 31, 1997, or an increase of $185,000. The Company 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. The Company'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 is an important source of revenue for financial
institutions. The Company's primary source of noninterest income is service
charges on deposit accounts and other banking service related fees.
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 the Company 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.
- 20 -
<PAGE>
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 charged per check in 1998. Additionally, the Company's increased
emphasis on fee-based services resulted in greater income from check cashing,
ATM fees, appraisal fees and wire transfer fees. The increase in noninterest
income from 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 the Company 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. The Company'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.
The Company 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, the Company also had non-
- 21 -
<PAGE>
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.
IMPACT OF INFLATION
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities.
See "Interest Rate Sensitivity and Liquidity" below.
FINANCIAL CONDITION
LOAN PORTFOLIO
The Company provides a broad range of commercial, real estate and consumer
loan products to small and medium-sized businesses and individuals. The Company
aggressively pursues qualified lending customers in both the commercial and
consumer sectors, providing customers with direct access to lending personnel
and prompt, professional service. The 76.71% loan to deposit ratio as of
December 31, 1998, reflects the Company's commitment as an active lender in the
local business communities it serves. 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 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, the Company's pro-lending reputation and the solicitation of new
companies and individuals entering the Company's market areas.
The following table summarizes the loan portfolio of the Company 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
1-4 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>
- 22 -
<PAGE>
The primary lending focus of the Company is to small and medium-sized
businesses. The Company offers business loans, commercial real estate loans,
equipment loans, working capital loans, term loans, revolving lines of credit
and letters of credit. Most commercial loans are collateralized and on payment
programs. The purpose of a particular loan generally determines its structure.
In almost all cases, the Company requires personal guarantees on commercial
loans to help assure repayment.
The Company's commercial mortgage loans are generally secured by first
liens on real estate, typically have fixed interest rates and amortize over a 10
to 15 year period with balloon payments due at the end of one to three years. In
underwriting commercial mortgage loans, consideration is given to the property's
operating history, future operating projections, current and projected
occupancy, location and physical condition. The underwriting analysis also
includes credit checks, appraisals and a review of the financial condition of
the borrower.
The Company makes loans to finance the construction of residential and, to
a limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company's construction lending activities. In keeping with
the community-oriented nature of its customer base, the Company provides
construction and permanent financing for churches located within its market
area.
The Company rarely makes loans at its legal lending limit. Lending
officers are assigned various levels of loan approval authority based upon their
respective levels of experience and expertise. Loans above $500,000 are
evaluated and acted upon by the Executive Committee which meets weekly and are
reported to the Board of Directors. The Company's strategy for approving or
disapproving loans is to follow conservative loan policies and underwriting
practices which include: (i) granting loans on a sound and collectible basis;
(ii) investing funds properly for the benefit of shareholders and the protection
of depositors; (iii) serving the legitimate needs of the community and the
Company's general market area while obtaining a balance between maximum yield
and minimum risk; (iv) ensuring that primary and secondary sources of repayment
are adequate in relation to the amount of the loan; (v) developing and
maintaining adequate diversification of the loan portfolio as a whole and of the
loans within each category; and (vi) ensuring that each loan is properly
documented and, if appropriate, insurance coverage is adequate. The Company's
loan review and compliance personnel interact daily with commercial and consumer
lenders to identify potential underwriting or technical exception variances. In
addition, the Company has placed increased emphasis on the early identification
of problem loans to aggressively seek resolution of the situations and thereby
keep loan losses at a minimum. Management believes that this strict adherence to
conservative loan policy guidelines has contributed to the Company's below
average level of loan losses compared to its industry peer group over the past
few years.
The contractual maturity ranges of the commercial, industrial and real
estate construction loan portfolio and the amount of such loans with
predetermined interest rates in each maturity range as of December 31, 1998, are
summarized in the following table:
DECEMBER 31, 1998
----------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
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
======== ========= ========== =======
- 23 -
<PAGE>
The Company's loans collateralized by single-family residential real
estate generally are originated in amounts of no more than 90% of the lower of
cost or appraised value. The Company requires mortgage title insurance and
hazard insurance in the amount of the loan. Of the mortgages originated, the
Company generally retains mortgage loans with short terms or variable rates and
sells longer term fixed-rate loans that do not meet the Company's credit
underwriting standards to Texas Independent Bank Mortgage Company.
As of December 31, 1998, the Company's one to four family real estate loan
portfolio was $48.4 million. Of this amount, $24.6 million is repriceable in one
year or less and an additional $18.4 million is repriceable from one year to
five years. These high percentages in short-term real estate loans reflects the
Company's commitment to reducing interest rate risk.
The Company 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 December 31, 1998, the Company had no
indirect consumer loans, indicating a preference to maintain personal banking
relationships and strict underwriting standards. Installment loans have
decreased during the last five years, reflecting management's tight control of
consumer credit due to record high personal bankruptcy filings nationwide. This
concern also prompted management to sell its credit card portfolio at book value
to Texas Independent Bank in March 1997.
NONPERFORMING ASSETS
The Company has several procedures in place to assist it in maintaining
the overall quality of its loan portfolio. The Company has established
underwriting guidelines to be followed by its officers and also monitors its
delinquency levels for any negative or adverse trends. There can be no
assurance, however, that the Company's loan portfolio will not become subject to
increasing pressures from deteriorating borrower credit due to general economic
conditions.
The Company's conservative lending approach, as well as a healthy local
economy, 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.
The Company 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.
The Company is sometimes required to revise a loan's interest rate or repayment
terms in a troubled debt restructuring, however, the Company had no restructured
loans at either December 31, 1998, December 31, 1997 or December 31, 1996. In
addition to an internal loan review, the Company retains IBS for an annual
external review to evaluate the loan portfolio.
The Company maintains current appraisals on loans secured by real estate,
particularly those categorized as nonperforming loans and potential problem
loans. In instances where updated appraisals reflect reduced collateral values,
an evaluation of the borrower's overall financial condition is made to determine
the need, if any, for possible writedowns or appropriate additions to the
allowance for loan losses. The Company records other real estate at fair value
at the time of acquisition, less estimated costs to sell.
- 24 -
<PAGE>
The following table presents information regarding nonperforming assets at
the dates indicated:
DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
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%
The Company 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 the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or the loan's
observable market price or based on the fair value of the collateral if the loan
is collateral-dependent. The implementation of SFAS No. 114 did not have a
material adverse affect on the Company's financial statements.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has established
an allowance for loan losses which it believes is adequate for estimated losses
in the Company's loan portfolio. Based on an evaluation of the loan portfolio,
management presents a quarterly review of the allowance for loan losses to the
Company's Board of Directors, indicating any change in the allowance since the
last review and any recommendations as to adjustments in the allowance. In
making its evaluation, management considers the diversification by industry of
the Company's commercial loan portfolio, the effect of changes in the local real
estate market on collateral values, the results of recent regulatory
examinations, the effects on the loan portfolio of current economic indicators
and their probable impact on borrowers, the amount of charge-offs for the
period, the amount of nonperforming loans and related collateral security, the
evaluation of its loan portfolio by the annual external loan review conducted by
IBS and the annual examination of the Company's financial statements by its
independent auditors. Charge-offs occur when loans are deemed to be
uncollectible.
The Company follows an internal loan review program to evaluate the credit
risk in the loan portfolio. In addition, the Company contracts with IBS to
annually perform an external loan review. Through the loan review process, the
Company maintains an internally classified loan list which, along with the
delinquency list of loans, helps management assess the overall quality of the
loan portfolio and the adequacy of the allowance for loan losses. Loans
internally classified as "substandard" or in the more severe categories of
"doubtful" or "loss" are those loans that at a minimum have clear and defined
weaknesses such as a highly-leveraged position, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the debt. At December 31, 1998, the Company had $2.8 million
of such loans compared with $2.9 million at December 31, 1997, a 3.4% decrease.
In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate "watch list" which further aids the
Company in monitoring 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
- 25 -
<PAGE>
loans do not have all of the characteristics of a classified loan (substandard
or doubtful) but do show weakened elements as compared with those of a
satisfactory credit. The Company reviews these loans to assist in assessing the
adequacy of the allowance for loan losses. At December 31, 1998, the Company had
$1.8 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 the
Company's historical charge-off experience. The Company then charges to
operations a provision for loan losses to maintain the allowance for loan losses
at an adequate level determined by the foregoing methodology.
For the twelve months ended December 31, 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, the Company 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. The Company 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>
- 26 -
<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 PERCENT
OF OF
LOANS TO LOANS TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT 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
1-4 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 -- .23
Consumer ......................................................... 166 10.28 171 12.03
Unallocated ...................................................... 202 -- 218 --
------ -------- ------ -------
Total allowance for loan losses .......................... $1,512 100.00% $1,129 100.00%
====== ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOAN 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
1-4 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 the Company 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
The Company uses its securities portfolio to ensure liquidity for cash
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for municipal pledging requirements and to manage
asset quality. At December 31, 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 the Company'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.
- 27 -
<PAGE>
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.
The following table summarizes the amortized cost of investment securities
held by the Company 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> <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 Company accounts for securities according to 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.
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
======= ======= =======
- 28 -
<PAGE>
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>
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
========= ========== ========== ======= ========= ========== ========== =======
</TABLE>
<TABLE>
<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>
- 29 -
<PAGE>
Mortgage-backed securities are securities which have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. These securities are deemed to have high credit
ratings and minimum regular monthly cash flows of principal and interest which
are guaranteed by the issuing agencies. All the Company's mortgage-backed
securities at December 31, 1998 were agency-issued collateral obligations.
At December 31, 1998, 49.9% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. However, unlike U.S.
Treasury and U.S. Government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Therefore, the average life, or the average amount of time until the
Company receives the total amount invested, of the mortgage-backed security will
be shorter than the contractual maturity. The Company estimates the remaining
average life of the fixed-rate mortgage-backed security portfolio to be less
than five years. Mortgage-backed securities which are purchased at a premium
will generally suffer decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, securities purchased at a discount
will obtain higher net yields in a decreasing interest rate environment. As
interest rates rise, the opposite will generally be true. During a period of
increasing interest rates, fixed rate mortgage-backed securities do not tend to
experience heavy prepayments of principal and consequently, the average life of
this security will not be unduly shortened. Approximately $8.9 million of the
Company's mortgage-backed securities earn interest at floating rates and reprise
within one year, and accordingly are less susceptible to declines in value
should interest rates increase.
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposit accounts consist of demand,
savings, money market and time accounts. The Company relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits. The Company does not have or accept any brokered 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, the Company'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, the
Company 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 the Company 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%. The Company'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.
- 30 -
<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
-------- ---- -------- ---- -------- ----
<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 the Company'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 Company's Asset Liability and Funds Management Policy provides
management with the necessary guidelines for effective funds management, and the
Company has established a measurement system for monitoring its net interest
rate sensitivity position. The Company manages its sensitivity position within
established guidelines.
Interest rate risk is managed by the Asset Liability Committee ("ALCO"),
which is composed of senior officers of the Company, in accordance with policies
approved by the Company's Board of Directors. The ALCO formulates strategies
based on appropriate levels 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. The Company has
traditionally managed its business to reduce its overall exposure to changes in
interest rates, however, under current policies of the Company's Board of
Directors, management has been given some latitude to increase the Company's
interest rate sensitivity position within certain limits if, in management's
judgement, it will enhance profitability. As a result, changes in market
interest rates may have a greater impact on the Company's financial performance
in the future than they have had historically.
To effectively measure and manage interest rate risk, the Company 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 the Company's Board of Directors on
an ongoing basis.
- 31 -
<PAGE>
The Company manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. The Company 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.
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
the Company at December 31, 1998:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
------------------------------------------------------------------------------------------------
0-30 180 181-365 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>
The Company's one-year cumulative GAP position at December 31, 1998, was
negative $23.4 million or 8.58% of assets. This is a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the GAP position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not
- 32 -
<PAGE>
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. The Company maintains a Rate Committee and the
ALCO that review the Company's interest rate risk position on a weekly or
monthly basis, respectively.
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Company's liquidity needs are met primarily by
financing activities, which consisted mainly of growth in core deposits,
supplemented by investment securities and earnings through operating activities.
Although access to purchased funds from correspondent banks is available and has
been utilized on occasion to take advantage of investment opportunities, the
Company does not generally rely on these external funding sources. The cash and
federal funds sold position, supplemented by amortizing investments along with
payments and maturities within the loan portfolio, have historically created an
adequate liquidity position.
Federal Home Loan Bank ("FHLB") advances may be utilized from time to time
as either a short-term funding source or a longer-term funding source. FHLB
advances can be particularly attractive as a longer-term funding source to
balance interest rate sensitivity and reduce interest rate risk. The Company is
eligible for two borrowing programs through the FHLB. The first, called "Short
Term Fixed," requires delivery of eligible securities for collateral. Maturities
under this program range from 1-35 days. The Company does not currently have any
borrowings under this program. As of December 31, 1998, the Company 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 the Company's 1-4 family mortgage
loans. At December 31, 1998, the Company had approximately $4.0 million borrowed
of a potential $36.3 million available under this program, leaving approximately
$32.3 million in available borrowings.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current
and future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve and the Bank is subject to capital adequacy
requirements imposed by the FDIC and the 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
- 33 -
<PAGE>
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 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. SEE "SUPERVISION AND REGULATION - THE COMPANY" AND " - THE BANK".
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 the Company'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. The Company had approximately $827,000 in
Preferred Stock outstanding at December 31, 1997.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1998 to the minimum
and well-capitalized regulatory standards:
ACTUAL RATIO AT
MINIMUM REQUIRED WELL-CAPITALIZED DECEMBER 31, 1998
---------------- ---------------- -----------------
THE COMPANY
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%
THE 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%
- ----------------------
(1) The Federal Reserve may require the Company to maintain a leverage ratio
of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.
YEAR 2000 COMPLIANCE
GENERAL. The Year 2000 risk involves computer programs and computer
software that are not able to perform without interruption into the Year 2000.
If computer systems do not correctly recognize the date change from December 31,
1999, to January 1, 2000, computer applications that rely on the date field
could fail or create erroneous results. Such erroneous results could affect
interest, payment or due dates or cause the temporary inability to process
transactions, send invoices or engage in similar normal business activities. If
these issues are not addressed by the Company, its suppliers and its borrowers,
there could be a material adverse impact on the Company's financial condition or
results of operations.
- 34 -
<PAGE>
STATE OF READINESS. The Company formally initiated its Year 2000 project
and plan in August 1997 to insure that its operational and financial systems
will not be adversely affected by Year 2000 problems. The Company has formed a
Year 2000 project team, and the Board of Directors and management are supporting
all compliance efforts and allocating the necessary resources to ensure
completion. An inventory of all systems and products (including both information
technology ("IT") and non-informational technology ("non-IT") systems) that
could be affected by the Year 2000 date change has been developed, verified and
categorized as to their importance to the Company and an assessment of all
mission critical IT and mission critical non-IT systems has been completed. This
assessment involved inputting test data which simulates the Year 2000 date
change into such IT systems and reviewing the system output for accuracy. The
Company's assessment of mission critical non-IT systems involved reviewing such
systems to determine whether they were date dependent. Based on such assessment,
the Company believes that none of its mission critical non-IT systems are date
dependent. The software for the Company's systems is provided through service
bureaus and software vendors. The Company has contacted all of its third party
vendors and software providers and is requiring them to demonstrate and
represent that the products provided are or will be Year 2000 compliant and has
planned a program of testing compliance. The Company's item processing software
provider, which performs substantially all of the Company's data processing
functions, has stated that its software is Year 2000 compliant and pursuant to
applicable regulatory guidelines the Company is currently producing testing
scenarios to verify this assertion. In addition, the Company's compliance
efforts regarding Year 2000 issues were reviewed by the FDIC in October 1998.
Except as discussed above, the Company 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 the Company's mission critical systems. The
Company 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
the Company's systems into Year 2000 compliance will have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
The Company has budgeted $50,000 to address Year 2000 issues. As of December 31,
1998, the Company has not incurred any significant costs in relation to Year
2000. The largest potential risk to the Company concerning Year 2000 is the
malfunction of its data processing system. In the event its data processing
system does not function properly, the Company is prepared to perform functions
manually. The Company believes it is in compliance with regulatory guidelines
regarding Year 2000 compliance, including the timetable for achieving
compliance.
RISKS RELATED TO THIRD PARTIES. The impact of Year 2000 noncompliance by
third parties with which the Company transacts business cannot be accurately
gauged. The Company identified its largest dollar depositors (aggregate deposits
over $100,000) and loan customers ($150,000 or more) and, based on information
available to the Company, conducted a preliminary evaluation to determine which
of those customers are likely to be affected by Year 2000 issues. In addition,
corporate borrowers have been contacted and assessed by their respective lending
officers and scored on a scale of one, two or three, with three being the least
affected by Year 2000 issues. A corporate borrower which received a rating of
one or two was subsequently contacted to assess Year 2000 readiness efforts. To
the extent a problem is identified with respect to a customer, the Company
intends to monitor the customer's progress in resolving such problem. In the
event that Year 2000 noncompliance adversely affects borrowers, the Company may
be required to charge-off the loan to such borrowers. For a discussion of
possible effects of such charge-offs, see "Contingency Plans" below. In the
event that Year 2000 noncompliance causes depositors to withdraw funds, the
Company plans to maintain additional cash on hand. The Company relies on the
Federal Reserve for electronic fund transfers and check clearing and understands
that the Federal Reserve expected that its systems would be Year 2000 compliant
by the end of 1998. With respect to its borrowers, the Company 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 the
Company.
CONTINGENCY PLANS. The Company 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, the Company could convert to a manual entry
system for a period of up to three months without significant losses. The
Company believes that any mission
- 35 -
<PAGE>
critical system could be recovered and operating within three to five days. In
the event that the Federal Reserve is unable to handle electronic funds
transfers and check clearing, the Company does not expect the impact to be
material to its financial condition or results of operations as long as the
Company is able to utilize an alternative funds transfer and clearing source. As
part of its contingency planning, the Company 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, the
Company has assumed that certain of its commercial borrowers whose businesses
are most likely to be affected by Year 2000 noncompliance would be unable to
repay their loans, resulting in charge-offs of loan amounts in excess of
collateral values. If such were the case, the Company believes that it is
unlikely that its exposure would exceed $100,000, although there are no
assurances that this amount will not be substantially higher. Management does
not believe that this amount is material enough for the Company to adjust its
current methodology for making provisions to the allowance for loan losses. In
addition, the Company plans to maintain additional cash on hand to meet any
unusual deposit withdrawal activity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information regarding the market risk of the Company's financial
instruments, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION--INTEREST RATE SENSITIVITY AND LIQUIDITY". The
Company's principal market risk exposure is to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, the reports thereon, the notes thereto and
supplementary data commence at page F-1 of this Annual Report on Form 10-K.
CONSOLIDATED QUARTERLY FINANCIAL DATA OF THE COMPANY
The following table presents certain unaudited quarterly financial
information concerning the Company's results of operations for each of the two
years ended December 31, 1998. The information should be read in conjunction
with the historical Consolidated Financial Statements of the Company and the
notes thereto appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
QUARTER ENDED 1998
---------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
(Dollars in thousands, except per share data)
<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
------- -------- ------- --------
Net earnings ................................................ $ 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
</TABLE>
(Table continues on following page.)
- 36 -
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED 1997
---------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
(Dollars in thousands, except per share data)
<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
------- -------- ------- --------
Net earnings ................................................ $ 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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with accountants on any matter of
accounting principles or practices or financial statement disclosures during the
two year period ended December 31, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Election of Directors," "Continuing
Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders (the "1999 Proxy Statement") is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Matters" in the 1999 Proxy Statement is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Beneficial Ownership of Common Stock by
Management of the Company and Principal Shareholders" in the 1999 Proxy
Statement is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Interests of Management and Others in
Certain Transactions" in the 1999 Proxy Statement is incorporated herein by
reference in response to this item.
- 37 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Reference is made to the Financial Statements, the reports thereon, the
notes thereto and supplementary data commencing at page F-1 of this Annual
Report on Form 10-K. Set forth below is a list of such Financial Statements:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Earnings for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or
notes thereto.
EXHIBITS
Each exhibit marked with an asterisk is filed with this Annual Report on
Form 10-K.
EXHIBIT
NUMBER DESCRIPTION
------ -----------------------------------------------------------------
3.1 -- Amended Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-48959) (the
"Registration Statement")).
3.2 -- Amended and Restated Bylaws of the Company (incorporated herein
by reference to Exhibit 3.2 to the Registration Statement).
4 -- Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to the
Registration Statement).
10.1 -- Guaranty Bancshares, Inc. 1998 Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.1 to the Registration
Statement).
21 -- Subsidiaries of Guaranty Bancshares, Inc. (incorporated herein by
reference to Exhibit 21 to the Registration Statement).
27* -- Financial Data Schedule.
REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of 1998.
- 38 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Guaranty Bancshares, Inc., has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mount Pleasant and the State of Texas on March 9,
1999.
GUARANTY BANCSHARES, INC.
By: /s/ ARTHUR B. SCHARLACH, JR.
Arthur B. Scharlach, Jr.
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report or amendment thereto has been signed by the following persons in the
indicated capacities on March 9, 1999.
SIGNATURE POSITIONS
/s/ BILL G.JONES Chairman of the Board and Chief Executive
Bill G. Jones Officer (principal executive officer)
/s/ CLIFTON A. PAYNE Senior Vice President, Controller and
Clifton A. Payne Director (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 Senior Vice President and Director
Russell L. Jones
/s/ WELDON MILLER Director
Weldon Miller
/s/ D. R. ZACHRY Director
D. R. Zachry
- 39 -
<PAGE>
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
PAGE
Independent Auditor's Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
Consolidated Statements of Earnings for the
Years Ended December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.......................... F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements............................... F-7
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
F-2
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
December 31,
-------------------
1998 1997
-------- --------
Cash and cash equivalents
Cash and due from banks ................................ $ 9,691 $ 9,750
Interest bearing deposits in other banks ............... 2,030 --
-------- --------
Total cash and cash equivalents ................ 11,721 9,750
Federal funds sold ....................................... 10,090 7,720
Securities
Available-for-sale ..................................... 44,305 42,906
Held-to-maturity (approximate market value of $7,196 and
$15,481 at December 31, 1998 and 1997, respectively) 7,062 15,233
-------- --------
Total securities ............................... 51,367 42,906
Loans, net ............................................... 184,374 156,266
Premises and equipment, net .............................. 7,032 6,359
Other real estate ........................................ 97 714
Accrued interest receivable .............................. 2,331 2,224
Other assets ............................................. 5,894 2,985
-------- --------
$272,906 $244,157
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing .................................. $ 47,360 $ 46,295
Interest-bearing deposits ............................ 194,965 176,666
-------- --------
Total deposits ................................. 242,325 222,961
Borrowed funds ......................................... 3,980 --
Accrued interest and other liabilities ................. 2,805 2,943
-------- --------
Total liabilities .............................. 249,110 225,904
Commitments and contingencies ............................ -- --
Shareholders' equity
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
-------- --------
$272,906 $244,157
======== ========
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest income
Loans, including fees ............................................... $ 14,544 $ 13,051 $ 11,761
Securities
Taxable ........................................................... 2,991 3,177 1,825
Nontaxable ........................................................ 64 70 57
Federal funds sold and interest bearing deposits .................... 769 711 1,208
-------- -------- --------
Total interest income ....................................... 18,368 17,009 14,851
Interest expense
Deposits .......................................................... 8,926 8,179 6,889
Other ............................................................. 25 13 30
-------- -------- --------
Total interest expense ...................................... 8,951 8,192 6,919
Net interest income ........................................ 9,417 8,817 7,932
Provision for loan losses ............................................. 540 355 206
-------- -------- --------
Net interest income after provision for loan losses ........ 8,877 8,462 7,726
Noninterest income
Service charges ..................................................... 1,336 1,097 1,059
Net realized gains on sales of available-for-sale securities ........ 81 19 2
Life insurance proceeds gain ........................................ -- -- 822
Other income ........................................................ 1,409 541 507
Total noninterest income .................................... 2,826 1,657 2,390
-------- -------- --------
Noninterest expense
Employee compensation and benefits .................................. 4,458 3,717 3,549
Occupancy expenses .................................................. 1,206 1,125 991
Other operating expenses ............................................ 2,824 2,604 2,533
-------- -------- --------
Total noninterest expenses ................................. 8,488 7,446 7,073
-------- -------- --------
Earnings before income taxes ............................... 3,215 2,673 3,043
Provision for income taxes ............................................
Current ............................................................. 541 228 165
Deferred ............................................................ -- 45 --
-------- -------- --------
541 273 165
-------- -------- --------
NET EARNINGS ................................................ $ 2,674 $ 2,400 $ 2,878
======== ======== ========
Basic earnings per common share ..................................... $ 0.95 $ 0.91 $ 1.08
======== ======== ========
Diluted earnings per common share ................................... $ 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
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME -- NET
UNREALIZED GAIN
(LOSS) ON COMMON TOTAL
PREFERRED COMMON ADDITIONAL RETAINED SECURITIES STOCK IN SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS AVAILABLE-FOR-SALE TREASURY EQUITY
--------- -------- ---------- -------- ------------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ........ $ 827 $ 2,725 $ 5,479 $ 6,274 $ 21 $ -- $ 15,326
--------- -------- ---------- -------- ------------------ -------- -------------
Net earnings for the year 1996 .... -- -- -- 2,878 -- -- 2,878
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax of $1 ..... -- -- -- -- (2) -- (2)
--------- -------- ---------- -------- ------------------ -------- -------------
Total comprehensive income ........ -- -- -- 2,878 (2) -- 2,876
Purchase of treasury stock ........ -- -- -- -- -- (438) (438)
Sale of treasury stock ............ -- -- -- -- -- 418 418
Redemption of common stock ........ -- (177) (83) (1,070) -- -- (1,330)
Dividends
Preferred-$0.45 per share ...... -- -- -- (74) -- -- (74)
Common-$0.21 per share ......... -- -- -- (528) -- -- (528)
Balance at December 31, 1996 ...... 827 2,548 5,396 7,480 19 (20) 16,250
--------- -------- ---------- -------- ------------------ -------- -------------
Net earnings for the year 1997 .... -- -- -- 2,400 -- -- 2,400
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax of $114 ... -- -- -- -- 223 -- 223
--------- -------- ---------- -------- ------------------ -------- -------------
Total comprehensive income ........ -- -- -- 2,400 223 -- 2,623
Sale of treasury stock ............ -- -- -- -- -- 20 20
Dividends
Preferred-$0.45 per share ........ -- -- -- (74) -- -- (74)
Common-$0.22 per share ........... -- -- -- (566) -- -- (566)
--------- -------- ---------- -------- ------------------ -------- -------------
Balance at December 31, 1997 ...... 827 2,548 5,396 9,240 242 -- 18,253
--------- -------- ---------- -------- ------------------ -------- -------------
Net earnings for the year 1998 .... -- -- -- 2,674 -- -- 2,674
Accumulated other comprehensive
income -- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax of $10 .... -- -- -- -- (19) -- (19)
--------- -------- ---------- -------- ------------------ -------- -------------
Total comprehensive income ........ -- -- -- 2,674 (19) -- 2,655
Purchase of treasury stock ........ -- -- -- -- -- (2) (2)
Sale of treasury stock ............ -- -- -- -- -- 2 2
Redemption of preferred stock ..... (827) -- -- -- -- -- (827)
Sale of common stock .............. -- 350 4,098 -- -- -- 4,448
Dividends
Preferred-$0.23 per share ........ -- -- -- (37) -- -- (37)
Common-$0.24 per share ........... -- -- -- (696) -- -- (696)
--------- -------- ---------- -------- ------------------ -------- -------------
Balance at December 31, 1998 ...... $ -- $ 2,898 $ 9,494 $ 11,181 $ 223 $ -- $ 23,796
========= ======== ========== ======== ================== ======== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings.............................................................. $ 2,674 $ 2,400 $ 2,878
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation............................................................ 564 537 467
Amortization of premiums, net of (accretion) of
discounts on securities............................................... 186 95 85
Net realized gain on available-for-sale securities...................... (81) (19) (2)
Gain on sale of loans.................................................. (674) - -
Provision for loan losses............................................... 540 355 206
Write-down of other real estate and repossessed assets.................. 25 150 159
Proceeds from sale of loans............................................. 1,967 - -
Gain on sale of premises, equipment and other
real estate........................................................... (63) (11) (47)
(Increase) decrease in accrued interest receivable and other assets..... (3,112) (623) 217
(Decrease) increase in accrued interest and other liabilities........... (128) 287 207
------------- ------------- -------------
Net cash provided by operating activities.......................... 1,898 3,171 4,170
Cash flows from investing activities
Purchases of held-to-maturity securities................................ (688) (7,179) (9,536)
Proceeds from sales and maturities of available-for-sale
securities............................................................ 16,186 1,630 5,108
Purchases of available-for-sale securities.............................. (17,709) (35,990) (7,256)
Proceeds from maturities and principal repayments
of held-to-maturity securities........................................ 8,849 14,023 12,507
Purchases of premises and equipment..................................... (1,237) (1,368) (973)
Proceeds from sale of premises, equipment and other real estate......... 751 296 329
Net increase in loans................................................... (29,941) (18,387) (13,161)
Net (increase) decrease in federal funds sold........................... (2,370) 10,430 (7,560)
------------- ------------- -------------
Net cash used in investing activities............................... (26,159) (36,545) (20,542)
Cash flows from financing activities
Proceeds from borrowings.............................................. 4,000 - -
Repayment of borrowings................................................. (20) (171) (272)
Change in deposits, net................................................. 19,364 28,106 20,138
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 financing activities........................... 26,232 27,315 17,914
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents............... 1,971 (6,059) 1,542
Cash and cash equivalents at beginning of year.................................. 9,750 15,809 14,267
------------- ------------- -------------
Cash and cash equivalents at end of year........................................ $ 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)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
5. LOANS
Loans are reported at the principal amount outstanding, net of charge-offs,
unearned discounts, purchase discounts and an allowance for loan losses.
Unearned discounts on installment loans are recognized using a method which
approximates a level yield over the term of the loans. Interest on other loans
is calculated using the simple interest method on the daily balance of the
principal amount outstanding.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan costs is
discontinued when a loan is placed on nonaccrual status.
The Company applies SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN, as amended by SFAS No. 118. Under SFAS 114, as amended, a loan is
identified as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreement. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. All
loans past due 90 days are placed on nonaccrual status unless the loan is both
well-secured and in the process of collection. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. Loans are
not again placed on accrual status until payments are brought current and, in
management's judgement, the loan will continue to pay as agreed.
6. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is considered adequate to provide for losses
based on past loan loss experience and management's evaluation of the loan
portfolio under current economic conditions. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. Recognized losses, net of
recoveries, are charged to the allowance for loan losses. Additions to the
allowance are included in the consolidated statements of earnings as provision
for loan losses.
7. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the related assets. Maintenance, repairs and minor improvements are
charged to noninterest expense as incurred.
8. OTHER REAL ESTATE AND REPOSSESSED ASSETS
Real estate properties acquired by foreclosure and repossessed assets are
recorded at fair value at the date of foreclosure, establishing a new cost
basis. After foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest expenses. Repossessed
assets are presented on the Balance Sheet as a component of other assets.
F-8
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
9. INVESTMENT IN LEVERAGED LEASES
The Company accounts for investment in leveraged leases according to SFAS
No. 13, ACCOUNTING FOR LEASES. Under SFAS 13, the Company records its investment
in leveraged leases net of nonrecourse debt. The investment in leveraged leases
less deferred taxes arising from differences between pretax accounting income
and taxable income represents the lessor's net investment in leveraged leases
for purposes of computing periodic net income from the leases. Net investment in
leveraged leases is adjusted annually by the difference in net cash flow and the
amount of income recognized. If at any time during the lease term the projected
net cash receipts over the term of the lease are less than the initial
investment, a loss is recognized for the deficiency. Estimated residual values
and other important assumptions affecting total net income from the leases are
reviewed annually. The net investment balance is adjusted considering all values
and assumptions.
During the initial years of the leases, the Company receives benefits for
income tax purposes of deductions for depreciation on the equipment and interest
on the debt that in the aggregate exceed the rental income from the related
equipment. During the later years, rental income will exceed related deductions.
Provision has been made for deferred income taxes that arise from these
differences. The Company deducts, for tax purposes, rent payments paid to
lessors under a master lease. A prior sale of user lease receivables created a
difference between tax and book basis which will not reverse.
10. INCOME TAXES
The Company files a consolidated Federal income tax return. By agreement
with the Parent, subsidiaries record a provision or benefit for Federal income
taxes on the same basis as if they filed a separate Federal income tax return.
The asset and liability method of accounting is used for income taxes where
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When management determines that it is more likely than not that a
deferred tax asset will not be realized, a valuation allowance must be
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
11. EARNINGS PER SHARE
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.
F-9
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
13. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A majority of the loan portfolio consists of real estate loans. The
ultimate collectibility of the loan portfolio and the recovery of a substantial
portion of the carrying amount of foreclosed real estate are susceptible to
changes in local market conditions.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowance may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
recognition of allowances for losses on loans and foreclosed real estate. Such
agencies may require additions to the allowances based on their judgements about
information available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses on loans and
foreclosed real estate may change in the near term.
14. 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)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
NOTE B - SECURITIES
The securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale securities:
December 31, 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)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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.
F-12
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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.
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)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
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.
F-15
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31 are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
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)
======= ======= =======
</TABLE>
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate as of December 31 is as follows:
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%
======= ======= =======
F-16
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
NOTE J - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included in the consolidated balance sheets. These transactions are
referred to as "off-balance sheet commitments". The Company enters into these
transactions to meet the financing needs of its customers. These transactions
include commitments to extend credit and letters of credit which involve
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheets. The Company minimizes its exposure to loss under these
commitments by subjecting them to credit approval and monitoring procedures.
The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for credit losses.
Letters of credit are written conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The Company's
policies generally require that letters of credit arrangements contain security
and debt covenants similar to those contained in loan agreements.
Outstanding commitments and letters of credit at December 31 are
approximately as follows:
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.
F-17
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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.
F-18
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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 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
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------------- ----------------------------- -----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(greater than (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) or equal to)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <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 N/A
Guaranty Bank ................ 24,155 12.86% 14,991 8.00% 18,739 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc. .... 23,577 12.29% 7,673 4.00% N/A N/A
Guaranty Bank ................ 22,643 12.05% 7,516 4.00% 11,275 6.00%
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc. .... 23,577 9.30% 7,605 3.00% N/A N/A
Guaranty Bank ................ 22,643 8.97% 7,572 3.00% 12,622 5.00%
As of December 31, 1997
Total Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc. .... 19,137 11.86% 12,905 8.00% N/A N/A
Guaranty Bank ................ 18,435 11.75% 12,551 8.00% 15,688 10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Guaranty Bancshares, Inc. .... 18,008 11.16% 6,453 4.00% N/A N/A
Guaranty Bank ................ 17,306 11.03% 6,275 4.00% 9,413 6.00%
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc. .... 18,008 7.87% 6,863 3.00% N/A N/A
Guaranty Bank ................ 17,306 7.60% 6,830 3.00% 11,384 5.00%
</TABLE>
F-19
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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.
NOTE M - SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
The following is supplemental information with respect to the December 31
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
</TABLE>
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are based on management's
estimates and do not purport to represent the aggregate net fair value of the
Company. Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among different
financial institutions and which are subject to change.
The following methods and assumptions were used by the Company in
estimating financial instrument fair values:
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).
F-20
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE 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.
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)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE O - EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential common
stock. Computations reflect the effects of a seven for one common shares stock
split, effective March 24, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-22
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
NOTE P - PARENT-ONLY FINANCIAL STATEMENTS
GUARANTY BANCSHARES, INC.
(PARENT ONLY)
BALANCE SHEETS
DECEMBER 31,
ASSETS
1998 1997
------- -------
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-23
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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-24
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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-25
<PAGE>
GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE Q - 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
--------- ---------- --------- ----------
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-26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FORM GUARANTY BANCSHARES, INC. FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,691
<INT-BEARING-DEPOSITS> 2,030
<FED-FUNDS-SOLD> 10,090
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,305
<INVESTMENTS-CARRYING> 7,062
<INVESTMENTS-MARKET> 7,196
<LOANS> 185,886
<ALLOWANCE> 1,512
<TOTAL-ASSETS> 272,906
<DEPOSITS> 242,325
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,805
<LONG-TERM> 3,980
0
0
<COMMON> 2,898
<OTHER-SE> 20,898
<TOTAL-LIABILITIES-AND-EQUITY> 272,906
<INTEREST-LOAN> 14,544
<INTEREST-INVEST> 3,055
<INTEREST-OTHER> 769
<INTEREST-TOTAL> 18,368
<INTEREST-DEPOSIT> 8,926
<INTEREST-EXPENSE> 8,951
<INTEREST-INCOME-NET> 9,417
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 81
<EXPENSE-OTHER> 8,488
<INCOME-PRETAX> 3,215
<INCOME-PRE-EXTRAORDINARY> 3,215
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,674
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 7.95
<LOANS-NON> 290
<LOANS-PAST> 866
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,129
<CHARGE-OFFS> 276
<RECOVERIES> 119
<ALLOWANCE-CLOSE> 1,512
<ALLOWANCE-DOMESTIC> 1,512
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 202
</TABLE>
