UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-KSB
Annual Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number: 33-60742
Guaranty State Bancorp
---------------------------------------------
(Name of small business issuer in its Charter)
North Carolina 27701 56-1816641
- ---------------------------------------------- ------------------
(State or other jurisdiction of incorporation) (Corporation's ID)
302 West Main Street
Durham, North Carolina 27701
----------------------------------------
(Address of principal executive offices)
(919-688-9361)
---------------------------
(Issuer's Telephone Number)
SECURITIES REGISTERED UNDER SECTION 12 (b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE ACT:
Common Stock, $1 par value
--------------------------
(Title of Class)
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 Bank was required to file such reports,) and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X]
Indicate by check mark if disclosure filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-K. [ ]
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES OF
GUARANTY STATE BANCORP AT MARCH 14, 1997: $14,207,350
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 14, 1997:
881,553
<PAGE>
Table of Contents
page(s)
-------
Part I Item 1 Business 3
Part I Item 2 Properties 4-5
Part I Item 3 Legal Proceedings 5
Part I Item 4 Submission of Matters to a Vote of Security 4
Holders
Part II Item 5 Market and Related Shareholder Matters 12
Incorporated by reference - Annual Report
Part II Item 6 Selected Financial Data 2
Incorporated by reference - Annual Report
Part II Item 7 Management Discussion and Analysis 3-14
Incorporated by reference - Annual Report
Part II Item 8 Financial Statements and Supplementary Data 15-35
Incorporated by reference - Annual Report
Part II Item 9 Not Applicable 5
Part III Item 10 Directors and Executive Officers 2-3, 7-9
Incorporated by reference - Proxy Statement
Part III Item 11 Executive Compensation 9-10
Incorporated by reference - Proxy Statement
Part III Item 12 Security Ownership 2-3
Incorporated by reference - Proxy Statement
Part III Item 13 Certain Transactions 10
Incorporated by reference - Proxy Statement
Part IV Item 14 None
Signatures 6
2
<PAGE>
PART I
Item 1. Business
Guaranty State Bancorp ("the Corporation") is a registered bank holding
company headquartered in Durham, North Carolina and is the parent holding
company of Guaranty State Bank, ("the Bank"), a North Carolina chartered
commercial bank. The Corporation was organized on March 26, 1993 and
received final regulatory approval on September 21, 1993 for the Bank to
become a wholly owned subsidiary of the Corporation. On September 21,
1993, the shareholders of the Bank became shareholders of the Corporation.
Guaranty State Bank is the only subsidiary of the Corporation.
The Bank Holding Company Act of 1956, as amended (The "BHCA"), prohibits
the Corporation from acquiring direct or indirect control of more than 5%
of the outstanding voting stock or substantially all of the assets of any
financial institution, or merging or consolidating with another bank
holding company without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Corporation from engaging in or
acquiring ownership or control of more than 5% of the outstanding voting
stock of any company engaged in a non-banking activity unless such activity
is determined by the Federal Reserve to be so closely related to banking as
to be properly incident thereto.
Federal Reserve approval generally must be obtained before any person may
acquire control of a bank holding company. Control is presumed to exist
is, among other things, when a person acquires more than 25% of any class
of voting stock and the holding company has registered securities under
Section 12 of the 1934 Act or the acquiror will be the largest shareholder
after the acquisition.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines which require a minimum ratio of total
capital to risk-weighted assets or 8%. At least half of the total capital
is required to be Tier 1 capital. A bank holding company is obligated by
law to guarantee, subject to certain limits, the bank subsidiary's
compliance with the terms of any capital restoration plan filed with the
subsidiary's federal banking agency. As a result of its ownership of a
North Carolina chartered commercial bank, the Corporation is registered
with and is subject to regulation by the North Carolina Commissioner of
Banks under the state's bank holding company laws.
Guaranty State Bank
- -------------------
Guaranty State Bank was organized and chartered under North Carolina law in
1917 as a Morris Plan Industrial Bank. In 1957 the Bank became a
commercial bank and changed its name to Guaranty State Bank.
The Bank is an independent community bank engaged in the general commercial
banking business at five locations in Durham County, North Carolina.
Competition
- -----------
From its headquarters and four branch offices located in Durham, the Bank
serves substantially all of Durham County, which includes a large segment
of Research Triangle Park. There are 10 banks with offices and or
headquarters in Durham County. Most of the Bank's competitors have broader
geographic markets and higher lending limits than the Bank and are able to
make greater use of large-scale advertising and promotion.
The Bank competes not only with the largest banking organizations in North
Carolina, but also with a wide range of financial service institutions,
credit unions, investment and brokerage firms and small loan or consumer
finance companies. Competition among financial institutions of all types
is virtually unlimited with respect to legal ability and authority to
provide most financial services. Management believes the Bank has certain
advantages over the competition in the area it serves. The Bank seeks to
maintain a distinct local identity and actively sponsors and participates
3
<PAGE>
in local civic affairs. Most lending and other customer related business
decisions can be made without delays normally associated with larger banks.
Diversity of Deposit and Loan Customers
- ---------------------------------------
The majority of the Bank's customers are individuals and small-to-medium
sized businesses headquartered within its service area. Management does
not believe the Bank is dependent on a single customer or group of
customers concentrated in a particular industry whose loss would have a
material adverse impact on the Bank's results of operations. There are no
seasonal factors that would have any material adverse effect on the Bank's
business and the Bank does not rely on foreign sources of funds.
Principal Services and Markets
- ------------------------------
The Bank performs a full range of banking activities, including such
services as checking, savings, NOW accounts, money market and other time
deposits of various types; loans for business, real estate, personal uses,
home improvement, revolving equity lines of credit; IRA's; safe deposit box
rentals; bank money orders; and electronic funds transfer services,
including wire transfers. The Bank provides automated teller machine
service to its customers for cash withdrawals through the services of the
HONOR network, which has approximately 60 automated teller machines in
Durham County. The Bank provides discount brokerage and leasing services
through correspondents. The bank does not provide trust services at the
present time.
No material changes have occurred in the principal services rendered by the
Bank or in the principal markets over the past three fiscal years.
Patents, Trademarks and Research
- --------------------------------
The Bank holds no material patents, trademark, licenses, franchises or
concessions.
No material research activity occurred during the past two fiscal years
relating to the development of new services. There has been no public
announcement nor does the Bank have immediate plans to develop a new
product or service which will require the investment of a material amount
of total assets.
Environmental Impact
- --------------------
The Bank is not aware of any material effects that compliance with Federal,
State and local provisions which have been enacted or adopted regulating
the discharge of materials into the environment or otherwise relating to
the discharge of materials into the environment, may have upon the capital
expenditures, earnings and competitive position of the Bank. The Bank has
in place lending policies and procedures designed to prevent the Bank from
accepting as collateral property which may be environmentally unsafe.
Employment
- ----------
At December 31, 1996, the Corporation and its subsidiary Bank employed 35
full-time and 5 part-time employees. The Corporation is not party to any
collective bargaining agreements and believes its relations with its
employees to be good.
Item 2. Properties
The Corporation's principal executive office at 302 West Main Street in the
downtown business district of Durham is owned by the Corporation.
Improvements consist of a three story attached building with approximately
15,300 square feet of space. This includes 9,300 square feet used by the
Bank for its teller and lobby customer services, data processing, and the
administrative offices; and 6,000 square feet leased to outside tenants.
4
<PAGE>
Guaranty State Bank operates four branch offices in Durham. Two of these
locations, which consist of real estate and constructed branch office
buildings, are owned by the Corporation. The other two locations are
located on land-lease properties. The Corporation owns the branch office
buildings on each of these locations.
Item 3. Legal Proceedings
The Corporation and Bank have no legal proceedings pending other than
ordinary routine litigation incidental to the business.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
Item 9. Changes In & Disagreements with Accountants.
Not applicable
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Forms 8-K
None
5
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Guaranty State Bancorp
March 26, 1997 By: ----------------------------
Charles J. Stewart
President and Chief Executive Officer
March 26, 1997 By: ----------------------------
Jean R. Turner
Senior Vice President
6
<PAGE>
Board of Directors
- ------------------
B. W. Harris, III, Chairman Susan Cranford Ross
Principal Associate Dean and Director of Arts
Harris, Harris and Company, PLLC and Sciences Development
Duke University
Charles J. Stewart Dr. Philip H. Pearce
President and Chief Executive Partner
Officer Durham Women's Clinic, P.A.
Guaranty State Bancorp
Robert F. Baker Stancil B. Roberts
Partner Principal
Spears, Barnes, Baker, Wainio, Knott & Robert Engineering
Brown & Whaley Associates, P.A.
E. Spurgeon Booth, Jr. W. L. Douglas Townsend, Jr.
Secretary-Treasurer Managing Director & CEO
Booth Real Estate and Insurance Townsend, Frew & Company, LLC
N. Wayne Campbell David W. Wiggins
President Staff Systems and Procedures Analyst
Credit Financial Information International Business Machines Corp.
Services, Inc.
Executive Officers
- ------------------
Charles J. Stewart Joseph M. Johnson
President and Chief Executive Officer Senior Vice President
Chief Lending Officer
Jean R. Turner
Senior Vice President J. Edwin Causey, Jr.
Chief Administrative Officer Senior Vice President
Bank Security Officer
Annual Meeting
- --------------
The annual meeting of Guaranty State Bancorp will be held at the Omni
Durham Hotel and Convention Center at 201 Foster Street, Durham, N.C. on
Thursday, May 1, 1997 at 2:00 p.m. All shareholders are cordially invited
to attend.
<PAGE>
Dear Guaranty Shareholder:
Guaranty State Bancorp achieved another year of record earnings with
net income exceeding the million dollar mark for the first time in the
Bank's eighty year history. Total assets reached a record high at $96.6
million on December 31, 1996, a 16.4% increase, representing $13.5 million
growth over the previous year.
Net income was $1,080,447, compared with $972,454 in 1995, an 11.1%
increase. Fully diluted earnings per share for 1996 were $1.18 compared to
$1.09 the previous year. Return on average assets was 1.16% and the return
on average shareholders' equity was 10.72%. These gains reflect strong
loan growth in 1996, continued good expense control and a modest increase
in other operating revenues.
Loan growth continued to be spurred by heavy demand for construction and
home mortgage loans. We closed the year with loans outstanding at $65.1
million, an increase of 10.2% from last year. The loan growth was funded
primarily with the 15.1% increase we experienced in deposit growth. At December
31, 1996, deposits totaled $83.6 million.
Although the charge-off ratio to average loans outstanding increased from
.05% in 1995 to .27% for the past year, Guaranty's performance in this area
still ranks well among its peers. For the last five years loan losses have
ranged from a high of .33% of average loans to .05% in 1995. The reserve for
possible loan losses at 1.64% of loans outstanding is also among the strongest
of our peer banks and contributes to the soundness of the Bank.
Efficiency of operations continues to be an important objective for
Guaranty's management team. Expense management was commendable with an
efficiency ratio of 59.6% in 1996.
A successful community bank must be able to compete with the operating
efficiencies of much larger institutions, while offering attractive
products and superior service to its customers. To meet these challenges,
Guaranty initiated a management realignment in late 1996. The staff changes
noted below are designed to provide us with the means to continue to
achieve record asset and earnings growth while maintaining quality customer
service in our branches.
- - David Clark, Vice President, is responsible for business lending and
new business development in the northern region of our market area.
Eddie Blount, Assistant Vice President, has the same responsibilities
in the southern region.
- - Jack Penny, Vice President, is moving from manager of the Guess Road
office to accept new responsibilities in construction lending, working
with residential developers and with individuals building their homes.
- - Shaun Cox, Assistant Vice President, moves from the Audit Department
to manage loan servicing and credit administration. Ralph Hudson
joined Guaranty in early 1997 as Internal Auditor.
- - Branch Managers at Guaranty are: Caroline Riggsbee, managing our
newest branch in Research Triangle Park at 2313 Highway 54; Roni
Meyers at Guess Road; and Jason Fogle at Roxboro Road.
Guaranty is indeed fortunate to have these experienced bankers. They are
joined by a strong staff of dedicated and capable employees committed to
providing outstanding service for all of our customers.
Initially, increased expenses associated with the management changes and
the opening of our new branch office at Research Triangle Park will affect
earnings. However, this new organizational structure will enhance our
ability to focus on superior quality service which in turn builds
shareholder value.
We celebrate Guaranty's 80th year of providing quality service to the
people in Durham and surrounding counties. This is a milestone of which
few banks can boast. As we look forward to the future, we reflect on the
wisdom and dedication of those who nurtured Guaranty through its early
years so that it could become the outstanding bank it is today. We
remember fondly Laurance D. Kirkland, Jr., who was President of Guaranty
from 1956 until his retirement in 1973. Mr. Kirkland passed away August
18, 1996. Until the very end, he remained a valued advisor to Guaranty.
It is an honor to dedicate this annual report to his memory.
Banking is experiencing significant changes as technology gives customers
flexibility in how they choose to conduct routine banking transactions.
From the evolution of the ATM's, to the electronic payment system and
computer banking, we approach the end of this decade knowing we must
continue to change also. Our challenge and our intent are to evaluate
these changes and make the right investments for the future -- investments
that assure Guaranty remains a high performance community bank. As always,
we appreciate your support.
Sincerely,
Charles J. Stewart
President & CEO
<PAGE>
Selected Financial Information
- ------------------------------
The following is depicted in two bar charts:
Net Income Total Assets
(Thousands) (Millions)
1992 693 1992 65,411
1993 793 1993 71,601
1994 835 1994 75,563
1995 972 1995 83,058
1996 1,080 1996 96,560
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total interest income $7,457 $ 6,549 $ 5,236 $4,855 $5,065
Total interest expense 3,597 2,909 2,000 1,892 2,241
------ ------- ------- ------ ------
Net interest income 3,860 3,640 3,236 2,963 2,824
Provision for possible loan losses 143 183 144 229 365
------ ------- ------- ------ ------
Net interest income after provision 3,717 3,457 3,092 2,734 2,459
for possible loan losses
Other income 444 413 451 586 546
Other expense 2,564 2,453 2,345 2,185 2,010
------ ------- ------- ------ ------
Income before taxes 1,597 1,417 1,198 1,135 995
Income taxes 517 445 363 342 302
------ ------- ------- ------ ------
Net income $1,080 $ 972 $ 835 $ 793 $ 693
====== ======= ======= ====== ======
Net income per share primary and $ 1.18 $ 1.09 $ .95 $ .89 $ .77
fully diluted (1)
Cash dividends declared (1) $ .33 $ .29 $ .24 $ .22 $ .20
Weighted average
shares outstanding 917,899 891,692 883,179 857,702 853,617
BALANCE SHEET DATA:
Assets $96,560 $83,058 $75,563 $71,601 $65,411
Net loans 64,433 58,287 48,216 43,754 43,523
Deposits 83,594 72,623 66,470 61,964 57,329
Shareholders' equity 10,450 9,675 8,597 8,135 7,515
</TABLE>
(1)Per share data has been adjusted to reflect the 50% stock dividend issued
October 18, 1995. Fractional amounts have been rounded to the nearest whole
number.
2
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis highlights the major components affecting the growth
of Guaranty State Bancorp and its subsidiary, Guaranty State Bank, for the
three year period ended December 31, 1996. This presentation includes and
should be reviewed in conjunction with the consolidated financial
statements and related notes elsewhere in this Annual Report.
Earnings Analysis
Guaranty State Bancorp's consolidated net income in 1996 was $1,080,447, a
11.1% increase over 1995 earnings of $972,454. On a per share basis, and
adjusted for the October, 1995 stock dividend, fully diluted net income was
$1.18 in 1996, compared to $1.09 for the prior year. Earnings for 1994
were $835,661 or $ .95 per share.
The improved earnings in 1996 reflected strong loan growth, good expense
control and a modest contribution from noninterest income. Net income
represented returns of 10.7% on average shareholders' equity and 1.16% on
average assets versus 10.6% and 1.22%, respectively in 1995. The equity
and assets used in calculating returns for both years include unrealized
gains or losses, net of tax, on securities available for sale.
Detailed discussion for each of the factors affecting Guaranty's operating
results and the Corporation's overall financial condition are included in
this analysis.
Net Interest Income
Net interest income, the largest component of Guaranty State Bank's
earnings, is the difference between interest and yield related fee income
generated by earning assets and the interest expense associated with
funding these assets. Net interest income is affected by the interest rate
earned or paid and by volume changes in loans, investment securities,
deposits and borrowed funds.
For this discussion, net interest income is presented on a taxable
equivalent basis in order to compare yields on assets having different tax
attributes.
For 1996, net interest income represented 89.7% of net revenues (net
interest income plus noninterest income), comparable to 89.8% in 1995. The
taxable equivalent net yield on average earning assets was 8.57% in 1996,
compared with 8.85% in 1995 and 8.00% in 1994. The average yield on loans
was 9.30% in 1996, down from 9.73% in 1995.
The increased tax equivalent net interest income realized during 1996 was
the result of a 17.2% increase in average earning assets. This increase
offset the effect of a 49 basis points decline in the net yield of earning
assets. In 1996 the average rate paid on interest-bearing liabilities rose
by 20 basis points at the same time the yield on total earning assets
decreased by 28 basis points. The higher cost of funds was primarily a
result of increased competition for core deposits to fund loan growth.
Also, noninterest bearing deposits as a percent of average interest bearing
liabilities decreased in 1996 to 14.2% from 15.5%. Management's focus is
to increase the percentage of lower cost deposits to the total deposit
base. For 1996 Guaranty's tax equivalent net interest income increased by
5.7%, or $218,114 from the previous year.
Strong loan demand led the interest-earning asset growth, with average
loans increasing by 20.5% for the year, but the average loan yield
decreased by 43 basis points. Real estate loans, including residential and
commercial construction loans, paced overall loan growth. On average,
loans constituted 73.3% of earning assets in 1996, compared to 71.3% in
1995. The net interest margin averaged 4.52% in 1996, down from a net
interest margin of 5.01% during 1995.
The overall cost of interest-bearing liabilities increased by $688,463 or
23.7%, due primarily to growth in the time deposit category and the new MAX
savings account that pays market rates of interest. Time deposits on
average in 1996 rose by 8.3%. Savings deposits increased by 28.0% as a
result of the popularity of the MAX savings account. The average yield
paid for time deposits in 1996 was 5.77% compared to 5.71% in 1995,
reflecting the competitive nature of funding strong loan demand in a
competitive interest rate environment.
3
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Cont.
The following Tables 1 and 2 reflect an analysis of net income and related
changes in 1996 compared to 1995.
TABLE 1
Net Interest Income and Average Balances
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
Interest Average Interest Average
Average Income Yield Average Income Yield
Balance (Expense) (Cost) Balance (Expense) (Cost)
------- --------- ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Taxable investment securities (1) $17,099,145 $1,084,810 6.34% $14,285,911 $ 904,151 6.33%
Nontaxable investment securities (1) 3,197,583 288,570 9.02% 3,543,286 313,352 8.84%
Federal Home Loan Bank Stock 300,958 20,396 6.78% - - -
Federal funds sold 3,111,848 163,707 5.26% 3,924,154 228,514 5.82%
Loans (2) 65,162,324 6,060,796 9.30% 54,091,306 5,265,685 9.73%
----------- ---------- ----------- ---------
Total interest-earning assets 88,871,858 7,618,279 75,844,657 6,711,702
Average yield on interest
earning assets 8.57% 8.85%
Noninterest-earning assets:
Cash and due from banks 2,288,411 2,240,591
Premises and equipment 1,797,420 1,737,823
Allowance for loan losses (1,140,384) (1,037,811)
Interest receivable and other 1,369,407 1,155,114
----------- -----------
Total noninterest-earning assets 4,314,854 4,095,717
----------- -----------
Total assets $93,186,712 $79,940,374
=========== ===========
Interest-bearing liabilities:
Demand deposits $4,111,374 80,573 1.96% $ 4,401,162 88,265 2.01%
Savings deposits 23,496,740 936,942 3.99% 18,351,771 654,297 3.57%
Time deposits 41,095,883 2,372,665 5.77% 37,945,266 2,166,339 5.71%
FHLB borrowings 3,395,551 207,184 6.10% - -
----------- ---------- ----------- ---------
Total interest-bearing liabilities 72,099,548 3,597,364 60,698,199 2,908,901
----------- ---------- ----------- ---------
Average cost on interest-bearing liabilities 4.99% 4.79%
Noninterest-bearing liabilities:
Demand deposits 10,247,268 9,417,673
Interest payable and other 757,469 640,654
----------- -----------
Total noninterest-bearing liabilities 11,004,737 10,058,327
----------- -----------
Total liabilities 83,104,285 70,756,526
----------- -----------
Stockholders' equity 10,082,427 9,183,848
----------- -----------
Total liabilities and stockholders' equity $93,186,712 $79,940,374
=========== ===========
Net interest income $4,020,915 $3,802,801
========== ==========
Net yield on interest-earning assets 4.52% 5.01%
Interest rate spread (earning asset yield minus
interest-bearing liability) 3.58% 4.06%
</TABLE>
1 Nontaxable income on securities and the related yields are shown on a fully
taxable equivalent basis computed using the Federal statutory tax rate of
34% and the state tax rate of 7%. Taxable income on securities are shown
adjusted for the state tax rate of 7%.
2 For the purpose of calculating loan yield, average balances include
nonaccrual and impaired loans.
4
<PAGE>
Table 2 shows the variance in rate and volume. Allocation between changes
in rate and changes in volume are on a proportional basis.
TABLE 2
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis
1996 Compared to 1995 1995 Compared to 1994
--------------------- ---------------------
Interest Interest
Income/ Variance Income/ Variance
Expense Attributable to Expense Attributable to
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Taxable investment securities $180,659 $ 2,181 $ 178,478 $ 136,416 $ 66,859 $ 69,557
Nontaxable investment securities(1) (24,782) 6,416 (31,198) (61,570) (15,001) (46,569)
Federal Home Loan Bank Stock 20,396 - 20,396 - - -
Federal funds sold (64,807) (22,073) (42,734) 60,944 81,943 (20,999)
Loans 795,111 (234,613) 1,029,724 1,159,560 446,986 712,573
-------- ---------- --------- --------- -------- --------
Total 906,577 (248,089) 1,154,666 1,295,350 580,787 714,562
-------- ---------- --------- --------- -------- --------
Interest bearing liabilities:
Demand deposits (7,692) (2,013) (5,679) (7,257) 408 (7,665)
Savings deposits 282,645 77,487 205,158 109,378 100,589 8,789
Time deposits 206,326 24,426 181,900 823,098 505,428 317,670
Short-term debt and Other 207,184 - 207,184 (16,387) - (16,387)
-------- ---------- --------- --------- -------- --------
Total 688,463 99,900 588,563 908,832 606,425 302,407
-------- ---------- --------- --------- -------- --------
Net interest income $218,114 (347,989) $ 566,103 $ 386,518 $ (25,638) $ 412,155
======== ========== ========= ========= ======== ========
</TABLE>
(1) Tax exempt income on investments and related yields are presented on a
taxable equivalent basis computed using the Federal statutory tax rate of
34% and the state tax rate of 7%.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Cont.
Provision and Allowance for Loan Losses
Guaranty State Bank maintains an allowance for loan losses to absorb
possible losses in the loan portfolio. The level of the allowance is
determined by internally generated credit quality ratings, the general
economic condition in the Bank's market and historical loan loss
experience. Guaranty's commitment to maintain a strong allowance and to
have early recognition of possible problems requires an ongoing review of
loans to identify credit weaknesses.
The allowance for loan losses totaled $1,073,274 at December 31, 1996,
which was 1.64% of loans outstanding on that date. The allowance equaled
365.0% of nonperforming assets. These ratios at December 31, 1995 were
1.86% and 260.0% respectively.
Table 3 presents the relationship of the allowance to the loan portfolio.
In 1996 the loan committee appropriated an amount to each loan category
according to grading of loans within the category with the remaining
amount allocated to the general category. The entire allowance is
available to be used for charge-offs in any category.
TABLE 3
Allocation of the Allowance for Loan Losses (Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1997
--------------------- -------------------
Percent in Percent in
each each
category category
to total to total
Amount loans Amount loans
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 200 5.45% $ 318 6.69%
Real estate-construction 100 16.94% 135 19.42%
Real estate-mortgage 250 68.38% 594 65.76%
Loans to individuals 50 9.06% 54 7.92%
General 473 .18% 2 .21%
------ ----- ------ -----
Total $1,073 100.0% $1,103 100.0%
====== ===== ====== =====
</TABLE>
Table 4 summarizes transactions in the allowance for loan losses and
details the charge-offs, recoveries and net loan losses by loan category
for the last three years. Net charge-offs as a percentage of average loans
increased to .27% for 1996 compared to .05% for the year ended December 31,
1995, one of the lowest annual charge-off percentages in the Bank's
history, and .20% for the year ended December 31, 1994.
6
<PAGE>
TABLE 4
Analysis of Allowance for Loan Losses (Dollars in Thousands)
1996 1995 1994
---- ---- ----
Balance, beginning $1,103 $ 947 $ 894
Charge-offs:
Commercial,financial and agricultural (190) - (28)
Real estate, mortgage - (25) (37)
Loans to individuals (19) (52) (50)
Other (3) (1) (3)
------ ------ -----
Total charge-offs (212) (78) (118)
------ ------ -----
Recoveries:
Commercial, financial and agricultural 2 26 14
Real estate, mortgage 25 - -
Loans to individuals 13 25 13
------ ------ -----
Total recoveries 40 51 27
Net charge-offs (172) (27) (91)
------ ------ -----
Provision charged against income 142 183 144
------ ----- -----
Balance, ending $1,073 $1,103 $ 947
====== ====== =====
Ratio of net charge-offs during the
period to average loans outstanding
during the period .27% .05% .20%
In 1996 a commercial customer declared bankruptcy. The significant increase
in commercial charge-offs was a result of this loan relationship.
Nonperforming Assets
Nonperforming assets consist of nonaccruing loans, foreclosed assets and
loans which are 90 days or more past due but are still accruing interest.
Loans are placed on nonaccrual status when, in the judgment of Bank
management, serious doubt exists as to the collectibility of additional
interest within a reasonable period of time.
Management's review of the loan portfolio based on SFAS 114 resulted in no
additional provision for credit losses in 1996. Statement of Financial
Standards No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of
a Loan" states that a loan is impaired when current information and events
make it probable the Bank will be unable to collect the schedule payments
of principal and interest when due.
Table 5 provides a summary of nonperforming assets and contractually past
due loans for the most recent three years. Nonperforming assets equaled
.45% of total loans and foreclosed properties at the end of 1996, down from
.71% a year earlier. Real estate secured loans comprise over 63% of the
nonperforming loans. Management has reviewed the properties and believes
the collateral values are sufficient to prevent any substantial losses
should the loans go into foreclosure.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Cont.
TABLE 5
Analysis of Nonperforming Assets (Dollars in Thousand)
1996 1995 1994
---- ---- ----
Accruing loans past due 90 days or more $ 147 $ 166 $ 57
Nonaccruing loans 147 259 506
----- ----- -----
Total $ 294 $ 425 $ 563
===== ===== =====
There was no commitment to lend additional funds to any customer whose loan
was classified as nonperforming at December 31, 1996.
Noninterest Income
Noninterest income at Guaranty consists primarily of service charges on
deposit accounts, origination fees for loans sold in the secondary market,
and fees and charges for various other financial services provided to
customers. Total noninterest income increased by 7.3% in 1996, totaling
$444,528. This compares to $413,545 in 1995, which was an 8.4% decrease
from 1994's total of $451,309. Fee income for mortgage loans originated for
sale to correspondents totaled $116,628 in 1996 compared with $82,721 in
1995. In 1994, mortgage loan origination fees were $113,141.
Service charges on deposit accounts have historically represented the
largest single item of noninterest income and remained at the same level in
1996 and 1995, at $223,245 and $223,509, respectively. Service charge fees
did not increase in 1996.
Management continues to evaluate sources of growth in noninterest fee
income. New products and services which will enable the Bank to achieve
higher revenues are judged for their worth and value to the customer and the
Corporation. In 1997 the Bank will introduce an accounts receivable
financing program that is projected to increase noninterest income.
Noninterest Expense
Noninterest expenses increased by 4.5% to $2,563,992 in 1996, from
$2,453,546 in 1995. Personnel expense increased by 4.9% in 1996 over 1995.
Salaries increased by 5.1% and employee benefits increased by 3.8%. With
the exception of staff related expenses, other noninterest expenses
increased 4.0% in 1996, totaling $1,060,754 compared to $1,020,178 in 1995.
Guaranty continues to look for new methods to provide excellent service to
all customers while managing its operations more efficiently.
Income tax as a percentage of net income before taxes increased slightly
from 31.4% in 1995 to 32.4% in 1996, principally as a result of a decline in
nontaxable interest income from securities.
Balance Sheet Analysis
Total assets were $96.6 million at the end of 1996, a 16.3% increase from
the 1995 amount of $83.1 million. For the year 1996, assets averaged $93.2
million compared to an average of $79.9 million for 1995. Average earning
assets in 1996 were $88.9 million or 92.0% of total average assets, compared
with $75.8 million in 1995 and a ratio of 94.9%. Premises and equipment
totaled 1.9% of average assets in 1996 and 2.2% in 1995.
8
<PAGE>
During 1996, interest bearing liabilities averaged $72.1 million, up 18.8%
from the 1995 average of $60.7 million. Time deposits on average increased
by 8.3%. The components of the Bank's average earning assets and interest
bearing liabilities are presented in Table 1.
Loans
The loan portfolio constitutes the Bank's largest earning asset. Average
loans outstanding grew by $11.1 million in 1996 to $65.2 million from $54.1
million in 1995, representing an increase of 20.5%. Table 6 presents a
detailed analysis of loans at December 31, 1996 and 1995, based on the
collateral securing the loan.
TABLE 6
Loan Portfolio (Dollars in Thousands)
1996 1995
---- ----
Commercial, financial and agricultural $ 3,567 $ 3,973
Real estate-construction and development 11,095 11,533
Real estate-mortgage (1) 44,796 39,056
Loans to individuals 5,932 4,705
Other 116 124
------- -------
Total $65,506 $59,391
======= =======
(1) Includes loans held for sale of $354,600 in 1996 and $210,700 in 1995.
The following table shows the Bank's loan maturities by types of loans
indicated, exclusive of residential and commercial real estate loans and
consumer loans as of December 31, 1996.
TABLE 7
Loan Maturities (Dollars in Thousands)
Maturing
--------------------------------------------
After One
Within One But Within After Five
Year Five years Years Total
---------- ---------- ---------- -------
Commercial, financial
and agricultural $ 1,061 $ 1,051 $ 1,455 $ 3,567
Construction and development 11,095 - - 11,095
------- ------- ------- -------
Total $12,156 $ 1,051 $ 1,455 $14,662
======= ======= ======= =======
The average rate earned on loans during 1996 decreased to 9.30% 43 basis
points below the 1995 yield of 9.73%. Interest income and fees on loans
grew by $795,110 in 1996, up 15.1% from the amount earned in 1995. Real
estate and construction loans have shown the strongest growth over the last
three years, as illustrated in Table 6. This has been a deliberate
strategy, particularly in the category of construction loans, designed to
utilize the special expertise of Guaranty's real estate loan staff, to
develop more permanent loan business and to benefit from the profitability
of these loans. Over 85% of the Bank's loan portfolio was secured by real
estate at December 31, 1996.
Guaranty strives to maintain a diverse loan portfolio in which there are no
industry concentrations. The majority of the Bank's customers are
individuals and small-to-medium sized companies headquartered within Durham
County.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Cont.
Investments and Federal Funds Sold
Investments and Federal Funds sold at the end of 1996 totaled $22.4 million
and $3.7 million, respectively, and $18.7 million and $655 thousand in
1995, respectively. The investment portfolio is concentrated primarily in
U.S. Treasury securities and N.C. Municipal bonds with an average maturity
of 2 years and provides an appropriate liquidity level for the Bank. Table
8 provides a detailed analysis of investment securities. In 1995, Guaranty
joined the Federal Home Loan Bank, which requires purchase of stock. Book
value of the stock was $270,600 at December 31, 1996.
TABLE 8
<TABLE>
<CAPTION>
Investment Securities
Amortized Cost
----------------------------------------------------------
After One After Five Estimated
In One Year Year Through Years Through Market Maturity
Or Less Five Years Ten Years Total Value in Years
----------- ------------ ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury $ 2,502,780 $13,458,782 $ - $15,961,563 $15,974,196 1.75
U.S. Government agencies 1,498,988 500,758 - 1,999,746 1,995,569 .50
States and political subs. 1,052,043 2,179,905 1,085,181 4,317,129 4,434,749 3.58
----------- ----------- ---------- ----------- ----------- ----
Total $ 5,053,811 $16,139,445 $1,085,181 $22,278,438 $22,404,514 2.00
=========== =========== ========== =========== =========== ====
*Weighted average yields
U.S. Treasury 6.60% 6.40% - 6.43%
U.S. Government agencies 6.55% 4.88% - 6.13%
States and political subs. 7.95% 9.58% 7.21% 8.58%
Consolidated 6.87% 6.78% 7.21% 6.82%
Book Value Market Value
December 31, 1995 ---------- ------------
U.S. Treasury $11,529,935 $11,617,031
U.S. Government agencies 2,997,533 2,999,138
States and political subs. 3,890,620 4,049,057
----------- -----------
Total $18,418,088 $18,665,226
=========== ===========
</TABLE>
* Yields are presented at December 31, 1996 on a taxable equivalent basis
using the Federal statutory tax rate of 34% and the state tax rate of 7%.
Deposits
The increase in the earning assets over the last several years has been
funded primarily with increases in the deposit base. In 1996 average
deposits rose by $8.8 million for a 12.6% growth over 1995. Guaranty
borrowed from the Federal Home Loan Bank to provide additional funding for
the loan growth in 1996. All loans from FHLB were short-term and loans
outstanding averaged $3.4 million during 1996.
Average noninterest demand deposits increased by 8.1% in 1996, while
certificates of deposit rose by 8.3%. Savings, which includes the money
market accounts, rose on average by 28.0% in 1996. The Bank's average cost
of interest-bearing liabilities was .20% higher in 1996. Management faces
an ongoing challenge in attracting new deposits as competition from both
financial and nonfinancial institutions continues to increase. Guaranty
continually evaluates its product offerings against those of competitors to
determine the need to enhance or add to the services currently being
provided.
10
<PAGE>
The Bank does not solicit brokered deposits and virtually all of its
deposits are generated from its local market area. Table 9 provides
maturity information relating to certificates of deposit of $100,000 or
more.
TABLE 9
Large Time Deposit Maturities (Dollars in Thousands)
Analysis of time deposits of $100,000
or more at December 31, 1996:
Remaining maturity of three months or less $ 5,625
Remaining maturity of three through six months 5,576
Remaining maturity of 12 months or greater 1,322
-------
Total time deposit of $100,00 or more $12,523
=======
Short-Term Debt
During 1996, all of the Corporation's short-term borrowings were with the
Federal Home Loan Bank and averaged $3.4 million. Short-term debt was used
to maintain an appropriate liquidity during periods of the year with high
loan demand. Table 10 provides information relating to Guaranty's short-
term debt.
TABLE 10
Short-Term Borrowings
(Dollars in Thousands)
Securities Sold
Under Agreements
to Repurchase
-------------------
1996 1995
End of year: ------ ------
Amount outstanding, end of year $ 1,800 $ -
------- -----
Weighted average interest rate, end of year 5.71% -
------- -----
Maximum amounts:
Maximum amount outstanding at any $3,800 $ -
month-end during the year ------- -----
Averages:
Average outstanding balance during the year $3,396 $ -
------- -----
Weighted average interest rate during the year 6.10% -
------- -----
Capital
The Bank endeavors to maintain equity capital at a level adequate to
support future growth as well as payment of dividends to its shareholders.
The primary source of new capital funds has been through retained earnings.
Total shareholders' equity averaged $10.1 million in 1996, a 9.8% increase
over the prior year. The 1995 average of $9.2 million represented a 7.0%
growth over 1994. Average equity as a percentage of total assets was 10.6%
in 1996 and 11.5% in 1995.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Cont.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
required the establishment of a capital- based supervisory system of prompt
corrective action for all depository institutions. FDICIA defines "well
capitalized" institutions as those whose capital to asset ratios equal or
exceed the minimum ratios:
Tier 1 Capital (primarily shareholder equity) 4%
Total Risk Based Capital (calculated on the 8%
liquidity and credit risks of asset category)
Guaranty's core capital (Tier 1) was 10.8% on December 31, 1996, which
exceeded all regulatory guidelines.
Market Price and Cash Dividends
At December 31, 1996, Guaranty State Bancorp had 880,053 shares of common
stock outstanding which were held by 286 shareholders of record. On
October 18, 1995, a 50% stock dividend was issued to shareholders of record
as of September 18, 1995. All per share dividends and market quotations
have been adjusted for the 50% stock dividend. Fractional amounts are
rounded.
Morgan Keegan serves as the principal market maker for the Corporation's
common stock in the over the counter market. Monroe Securities, Rochester,
New York, also serves as a market maker. The following table sets forth
cash dividends declared and the range of high and low market quotations for
each quarterly period as indicated.
TABLE 11
Market Price and Cash Dividends
<TABLE>
<CAPTION>
1996 1995
--------------------------------------- ----------------------------------------
Bid Ask Bid Ask
-------------- ------------- --------------- --------------
High Low High Low Dividend High Low High Low Dividend
------ ------ ------ ----- -------- -------- ------ ------ ----- --------
Quarter
- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st $17.50 $17.00 $20.00 $19.75 $.08 $ 9.67 $ 9.33 $10.67 $10.33 $.07
2nd 18.00 17.25 19.75 19.50 .08 13.17 9.67 16.00 10.67 .07
3rd 21.00 18.00 25.00 19.50 .09 16.00 13.00 20.00 15.00 .07
4th 22.38 21.00 25.00 25.00 .09 17.00 16.00 20.00 19.50 .08
</TALBE>
Cash dividends per share were $ .34, $ .29 and $ .24 in 1996, 1995, and
1994, respectively. Dividends declared as a percentage of net income
amounted to 27.6% in 1996, 25.7% in 1995, and 24.8% in 1994.
Asset and Liability Management
The largest component of the Bank's earnings is net interest income, which
can fluctuate widely when significant interest rate movements occur. The
Bank's management team is responsible for minimizing the Bank's exposure to
interest rate risk and assuring an adequate level of liquidity. This is
accomplished by developing objectives, goals and strategies designed to
enhance profitability and performance.
Ongoing management of the Bank's interest rate sensitivity limits the
interest rate risk by controlling the mix and maturity of assets and
liabilities. Management regularly reviews the Bank's position and
evaluates alternative sources and uses of funds as well as changes in
external factors. Various methods are used to achieve and maintain the
desired rate-sensitivity position, including the sale or purchase of assets
and product pricing.
In order to ensure that sufficient funds are available for loan growth and
deposit withdrawals, as well as to provide for general needs, the Bank must
maintain an adequate level of liquidity. Both assets and liabilities
provide sources of liquidity. Asset liquidity comes from the Bank's ability
12
<PAGE>
to convert short-term investments into cash and from the maturity and
repayment of loans and investment securities. Liability liquidity is
provided by the Bank's ability to attract deposits. The primary source of
liability liquidity is the Bank's customer base which provides core deposit
growth. As a member of the Federal Home Loan Bank, Guaranty State Bank has
the ability to borrow as another funding source. The overall liquidity
position of the Bank is closely monitored and evaluated regularly.
Management believes the Bank's liquidity sources at December 31, 1996 are
adequate to meet its operating needs.
Because actual and projected repricing volumes may differ, it should be
noted that Table 12 reflects the sensitivity of the balance sheet as of a
specific date and is not necessarily indicative of the Bank's position on
other dates. At December 31, 1996, Guaranty had a cumulative liability
sensitive static gap position (interest-bearing liabilities subject to
interest rate changes exceeded earning assets subject to changes in
interest rates) of $23.0 million for one year. This is due to the
inclusion of transaction accounts as repricing immediately. Such funds
have been invested in longer term interest-earning assets. Experience has
shown that the Bank and other peer banks see relatively modest repricing of
their transaction accounts. Management takes this into consideration in
trying to determine acceptable levels of interest sensitivity and
accordingly, developing appropriate strategies. It is Guaranty's policy to
maintain portfolios of earning assets and liabilities with maturities or
repricing opportunities that will afford protection, to the extent
practical, from unanticipated changes in interest rates.
TABLE 12
Interest Rate Sensitivity
(Dollars in thousands)
</TABLE>
<TABLE>
<CAPTION>
1-3 4-12 13-60 Over 60
Months Months Months Months Total
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Earning assets (1)
Loans - adjustable rate $ 23,629 $ 7,103 $ - $ - $ 30,732
Loans - fixed rate 1,916 4,538 27,271 902 34,627
Investments 2,349 3,710 15,748 597 22,404
Federal Home Loan Bank Stock 271 - - - 271
-------- -------- -------- -------- --------
Total $ 28,165 $ 15,351 $ 43,019 $ 1,499 $ 88,034
======== ======== ======== ======== ========
Interest-bearing liabilities:
NOW $ 5,221 $ 5,221
Money market 7,867 7,867
Savings 17,796 17,796
Certificates of deposit 12,058 21,814 7,976 41,848
Federal Home Loan Bank Borrowings - 1,800 - - 1,800
-------- -------- -------- -------- --------
Total $ 42,942 $ 23,614 $ 7,976 $ - $ 74,532
======== ======== ======== ======== ========
Interest sensitivity gap $(14,777) $ (8,263) $ 35,043 $ 1,499
Cumulative gap $(14,777) $(23,040) $ 12,003 $ 13,502
Ratio of interest sensitive assets
to interest sensitive liabilities 65.6% 65.0% 539.4% 100.0%
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities 65.6% 65.4% 116.1% 118.1%
</TABLE>
(1) Nonaccrual loans totaling $147,000 are omitted as they are not interest
bearing assets.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations, Cont.
Effect of Changing Prices
The results of operations and financial conditions presented in this report
are based on historical cost information, and are unadjusted for the effects
of inflation.
Since the assets and liabilities of banks are primarily monetary in nature
(payable in fixed determinable amounts) the performance of the Bank is
affected more by changes in interest rates than by inflation. Interest
rates generally increase as the rate of inflation increases, but the
magnitude of the change in rates may not be the same.
The effect of inflation on banks is normally not as significant as its
influence on those businesses which have large investments in plants and
inventories. During periods of high inflation there are normally
corresponding increases in the money supply, and banks will normally
experience above-average growth in assets, loans and deposits. Also,
increases in the price of goods and services generally will result in
increased operating expenses.
Comparison of Key Financial Ratios
1996 1995 1994
---- ---- ----
Return on assets 1.16% 1.22% 1.17%
Return on equity 10.72% 10.59% 9.76%
Dividend payout ratio 27.57% 25.72% 24.83%
Equity to assets ratio 10.82% 11.49% 11.92%
* Ratios are computed on average balances
14
<PAGE>
GUARANTY STATE BANCORP
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1996 and 1995
and for the three years then ended
GUARANTY STATE BANCORP
INDEX TO FINANCIAL STATEMENTS
Page(s)
Report of Independent Accountants 1
Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 23
<PAGE>
Independent Auditor's Report
Coopers & Lybrand L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Guaranty State Bancorp
Durham, North Carolina
We have audited the accompanying consolidated balance sheets of Guaranty
State Bancorp and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of
the Corporation'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 consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Guaranty
State Bancorp and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Raleigh, North Carolina
January 17, 1997
1
<PAGE>
GUARANTY STATE BANCORP
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
---- ----
<S> <C> <C>
Cash and due from banks $ 2,445,899 $ 2,575,816
Federal funds sold 3,744,000 655,000
Securities available for sale 22,404,514 18,665,226
Loans held for sale 354,600 210,700
Loans, less allowance for loan
losses of $1,073,274 in 1996
and $1,102,709 in 1995 64,078,398 57,987,851
Federal Home Loan Bank of Atlanta stock 270,600 226,700
Premises and equipment, net 2,155,017 1,757,217
Interest receivable 700,199 644,057
Other assets 406,769 335,419
------------ -----------
Total assets $96,559,996 $83,057,986
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $10,232,604 $10,026,166
Interest-bearing demand 5,221,254 4,150,956
Savings 25,662,273 18,753,457
Large denomination
certificates of deposit 12,523,084 13,665,346
Other time 29,954,367 26,027,458
------------ -----------
Total deposits 83,593,582 72,623,383
Short term borrowings 1,800,000 -
Interest payable 542,766 603,556
Other liabilities 174,092 156,296
------------ -----------
Total liabilities 86,110,440 73,383,235
------------ -----------
Commitments and contingencies (Notes 2, 5 and 13)
Stockholders' equity:
Common stock, $1 par value, 2,500,000
shares authorized; 880,053 shares and
871,262 shares issued and outstanding
in 1996 and 1995, respectively 880,053 871,262
Surplus 4,722,289 4,661,964
Undivided profits 4,772,831 3,990,771
Net unrealized gains on securities
available for sale 74,383 150,754
------------ -----------
Total stockholders' equity 10,449,556 9,674,751
------------ -----------
Total liabilities and stockholders' equity $96,559,996 $83,057,986
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
GUARANTY STATE BANCORP
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $6,060,795 $5,265,685 $4,106,125
Federal funds sold 163,707 228,514 167,570
Securities, taxable 1,055,090 862,627 750,183
Securities, non-taxable 177,125 192,336 212,212
---------- ---------- ----------
Total interest income 7,456,717 6,549,162 5,236,090
---------- ---------- ----------
Interest expense:
Large denomination certificates of deposit 697,731 658,855 297,394
Other deposits 2,692,449 2,250,046 1,686,288
Other interest expense 207,184 - 16,387
---------- ---------- ----------
Total interest expense 3,597,364 2,908,901 2,000,069
---------- ---------- ----------
Net interest income 3,859,353 3,640,261 3,236,021
Provision for loan losses 142,836 183,268 143,556
---------- ---------- ----------
Net interest income after provision
for loan losses 3,716,517 3,456,993 3,092,465
---------- ---------- ----------
Other income:
Service charges on deposit accounts 223,245 223,509 226,386
Other service charges, commissions and fees 177,868 158,484 158,196
Other operating income 43,415 31,552 66,727
---------- ---------- ----------
Total other income 444,528 413,545 451,309
---------- ---------- ----------
Other expenses:
Salaries 1,266,439 1,205,289 1,113,121
Employee benefits 236,799 228,079 193,629
Occupancy expense 270,775 248,417 238,227
Equipment and fixtures expense 100,687 121,889 125,856
FDIC assessment 2,000 78,670 134,607
Other operating expenses 687,292 571,202 539,809
---------- ---------- ----------
Total other expense 2,563,992 2,453,546 2,345,249
---------- ---------- ----------
Income before income taxes 1,597,053 1,416,992 1,198,525
Income taxes 516,606 444,538 362,864
---------- ---------- ----------
Net income $1,080,447 $ 972,454 $ 835,661
========== ========== ==========
Net income primary and fully-diluted per share $1.18 $1.09 $.95
========== ========== ==========
Cash dividends declared per share $.33 $.29 $.24
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
GUARANTY STATE BANCORP
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
Common Stock on Securities Total
------------------- Undivided Available Stockholders'
Shares Amount Surplus Profits for Sale Equity
------ ------ ------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 574,725 $574,725 $4,629,168 $2,930,669 $ - $8,134,562
Adjustment to beginning balance
for change in accounting
principle, net of income taxes
of $198,645 - - - - 310,571 310,571
Exercise of stock options 3,613 3,613 15,644 - - 19,257
Cash dividends - - - (207,517) - (207,517)
Net income - - - 835,661 - 835,661
Change in unrealized gains
(losses), net of income taxes
of $317,196 - - - - (495,997) (495,997)
------- -------- ---------- ---------- -------- ----------
Balance at December 31, 1994 578,338 578,338 4,644,812 3,558,813 (185,426) 8,596,537
Exercise of stock options 2,520 2,520 17,152 - - 19,672
Cash dividends - - - (250,092) - (250,092)
Three for two stock dividend 290,404 290,404 - (290,404) - -
Net income - - - 972,454 - 972,454
Change in unrealized gains
(losses), net of income taxes
of $214,935 - - - - 336,180 336,180
------- -------- ---------- ---------- -------- ----------
Balance at December 31, 1995 871,262 871,262 4,661,964 3,990,771 150,754 9,674,751
Exercise of stock options 8,791 8,791 60,325 - - 69,116
Cash dividends - - - (298,387) - (298,387)
Net income - - - 1,080,447 - 1,080,447
Change in unrealized gains (losses),
(losses), net of income taxes of
of $44,693 - - - - (76,371) (76,371)
------- -------- ---------- ---------- -------- ----------
Balance at December 31, 1996 880,053 $880,053 $4,722,289 $4,772,831 $ 74,383 $10,449,556
======= ======== ========== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
GUARANTY STATE BANCORP
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,080,447 $972,454 $835,661
Adjustment to reconcile net income to net cash
provided by operations:
Depreciation and amortization 154,761 147,038 177,991
Amortization of premiums on securities, net
of accretion of discounts 18,523 73,544 77,039
Provision for loan losses 142,836 183,268 143,556
Realized loss (gain) on sale of securities 3,390 780 (12,633)
Gain on sale of foreclosed assets - - (30,500)
Provision for deferred taxes 37,635 (73,369) (23,894)
Loans held for sale:
Originations (8,195,182) (5,333,950) (1,222,600)
Proceeds 8,051,282 5,279,250 1,066,600
Changes in assets and liabilities:
Interest receivable (56,142) (45,538) (158,774)
Other assets (12,600) 183,592 1,504
Interest payable (60,790) 217,082 99,596
Other liabilities (33,895) 29,160 5,335
----------- ----------- ----------
Net cash provided by operating activities 1,130,265 1,633,311 958,881
----------- ----------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 1,001,172 4,156 1,266,563
Proceeds from maturity of securities available for sale 7,440,000 6,160,000 1,390,000
Purchase of securities available for sale (12,323,438) (6,103,989) (7,502,764)
Purchase of FHLB-Atlanta stock (43,900) (226,700) -
Net increase in loans (6,233,383) (10,199,406) (4,461,815)
Capital expenditures (552,561) (49,306) (120,613)
Proceeds from sale of foreclosed assets - - 177,500
----------- ----------- ----------
Net cash used by investing activities (10,712,110) (10,415,245) (9,251,129)
----------- ----------- ----------
Cash flows from financing activities:
Net increase in deposits 10,970,199 6,152,889 4,506,766
Proceeds from exercise of stock options 69,116 19,672 19,257
Dividends paid (298,387) (232,441) (207,192)
Net proceeds from borrowed funds 1,800,000 - -
Repayments of borrowed funds and obligations
under capital leases - - (1,112,198)
----------- ----------- ----------
Net cash provided by financing activities 12,540,928 5,940,120 3,206,633
----------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents 2,959,083 (2,841,814) (5,085,615)
Cash and cash equivalents at beginning of year 3,230,816 6,072,630 11,158,245
----------- ----------- ----------
Cash and cash equivalents at end of year $6,189,899 $3,230,816 $6,072,630
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Guaranty State Bancorp (the
"Corporation") follow generally accepted accounting principles and
general practices within the financial services industry. The
Corporation operates four branches in Durham, North Carolina. The
Corporation's primary source of revenue is derived from loans to
customers. These loans are predominately real estate loans secured by
1-4 family residences. Following is a summary of the more significant
policies.
Basis of Presentation
The consolidated financial statements of the Corporation, a bank
holding company established under the laws of the State of North
Carolina, include the accounts of Guaranty State Bank (the "Bank"), its
wholly owned subsidiary. All significant intercompany transactions
have been eliminated.
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
December 31, 1996 and 1995 and the reported amounts of revenues and
expenses for each of the three years in the period ended December 31,
1996. Actual results could differ from those estimates.
Securities
Securities are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires
certain securities to be classified into three categories:
(a) Securities Held-to-Maturity - Debt securities that the entity has
the positive intent and ability to hold to maturity are reported at
amortized cost.
(b) Trading Securities - Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are
reported at fair value, with unrealized gains and losses included
in earnings.
(c) Securities Available-for-Sale - Debt and equity securities not
classified as either securities held to maturity or trading
securities are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component
of stockholders' equity.
Premiums are amortized and discounts accreted using the interest method
over the remaining terms of the related debt securities. Gains and
losses on the sale of securities are determined using the specific-
identification method and are included in noninterest income at the
time of sale.
6
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans Held for Sale
Loans held for sale are carried at the lower of cost or estimated
market value, determined on an aggregate basis. Net unrealized losses
are recognized in a valuation allowance by charges to income.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest on loans is calculated by using
the simple interest method on daily balances of the principal amount
outstanding. Deferred loan origination fees and costs are amortized to
interest income over the contractual life of the loan using a method
that approximates the level yield method.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the
allowance for possible loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current
economic conditions and trends that may affect the borrowers' ability
to pay.
The Corporation adopted Statement of Financial Accounting Standards No.
114 ("SFAS 114"), "Accounting by Creditors for Impairment of a Loan",
as amended by Statement of Financial Accounting Standards No. 118
("SFAS 118"), "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure", on January 1, 1995. Under the new
standards, a loan is considered impaired, based on current information
and events, if it is probable that the Corporation will be unable to
collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement.
Uncollateralized loans are measured for impairment based on the present
value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. The
adoption of SFAS 114 and 118 resulted in no additional provision for
credit losses at January 1, 1995.
7
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans and Allowance for Loan Losses (continued)
At December 31, 1996, and 1995 the recorded investment in loans for
which impairment has been recognized in accordance with SFAS 114
totaled $0 and $455,934, respectively. The impaired loans were
measured for impairment using the fair value of the collateral as all
of these loans were collateral dependent. These loans did not warrant
a valuation allowance at December 31, 1995 as the fair value of the
underlying collateral, less estimated costs to sell (discounted where
appropriate), exceeded their carrying value. For the year ended
December 31, 1995, the average recorded investment in impaired loans
was approximately $699,000. The Corporation recognized approximately
$72,000 of interest (including non-accrual interest recognized from the
partial sale of collateral) during 1995 on impaired loans during the
portion of the year that they were impaired.
The Corporation uses several factors in determining if a loan is
impaired under SFAS 114. The internal asset classification procedures
include a thorough review of significant loans and lending
relationships and include the accumulation of related data. This data
includes loan payment status, borrowers' financial data and borrowers'
operating factors such as cash flows, operating income or loss, etc.
Loans with a principal balance of less than $150,000 are considered
small balance loans and evaluated collectively for impairment.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest
for a period of more than 90 days, unless such loans are well-secured
and in the process of collection. If a loan or a portion of a loan is
classified as doubtful or is partially charged off, the loan is
generally classified as nonaccrual. Loans that are on a current
payment status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured
of repayment within a acceptable period of time, and there is a
sustained period of repayment performance by the borrower, generally a
minimum of six months, in accordance with the contractual terms of
interest and principal.
8
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Recognition on Impaired and Nonaccrual Loans (Continued)
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled amortizations
where the payment is generally applied to the oldest payment due. When
the future collectibility of the recorded loan balance is expected,
interest income may be recognized on a cash basis. In the case where a
nonaccrual loan has been partially charged-off, recognition of interest
on a cash basis is limited to that which would have been recognized on
the recorded loan balance at the contractual interest rate. Receipts in
excess of that amount are recorded as recoveries to the allowance for
loan losses until prior charge-off's have been fully recovered.
Foreclosed Assets
Assets acquired as a result of foreclosure are valued at the lower of
the recorded investment in the loan or fair value less estimated costs
to sell. The recorded investment is the sum of the outstanding
principal loan balance and foreclosure costs associated with the loan.
Any excess of the recorded investment over the fair value of the
property received is charged to the allowance for loan losses. Any
subsequent write-downs are charged against other expenses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed primarily
by the straight-line method based on estimated service lives of assets.
Useful lives range from 10 to 40 years for premises and from 5 to 25
years for equipment and fixtures. Repairs and maintenance costs are
charged to expense.
Upon retirement or other disposition of the assets, the cost and the
related accumulated depreciation and amortization are removed from the
accounts and any gains or losses are included in other income.
Income Taxes
The Corporation and its subsidiary file a consolidated Federal income
tax return. Separate state income tax returns are filed for each
entity. The Corporation's consolidated federal income tax returns are
subject to examination by taxing authorities for the years 1994 and
thereafter.
9
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes (Continued)
Deferred tax asset and liability balances are determined by application
to temporary differences of the tax rate expected to be in effect when
taxes will become payable or receivable. Temporary differences are
differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in
taxable or deductible amounts in future years.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125"). This statement
establishes new criteria for determining whether a transfer of
financial assets should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. This statement also establishes new
accounting requirements for pledged collateral. The statement is
effective for certain transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
Statement of Financial Accounting Standards No. 127 defers the
effective date of certain provisions of SFAS No. 125 until January 1,
1998. The Corporation does not anticipate a significant effect on net
income or its financial position from the adoption of these statements.
Net Income and Cash Dividends per Share
Net income per common and common equivalent share is based upon the
weighted average of common and common equivalent shares outstanding
during the year. Primary and fully-diluted net income per share are
the same. The number of common and common equivalent shares utilized
in the per share computations were 917,899, 891,692, and 883,179 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Reclassifications
Certain items included in the 1995 and 1994 financial statements have
been reclassified to conform to the 1996 presentation. These
reclassifications had no effect on the net income or stockholders'
equity previously reported.
9
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
2. SECURITIES
The amortized cost and estimated market values of available-for-sale
securities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996:
U. S. Treasury $15,961,563 $ 60,549 $(47,916) $15,974,196
U. S. Government 1,999,746 2,857 (7,034) 1,995,569
corporations and
agencies obligations
State and political
subdivisions 4,317,129 121,102 (3,482) 4,434,749
----------- -------- -------- -----------
$22,278,438 $184,508 $(58,432) $22,404,514
=========== ======== ======== ===========
1995:
U. S. Treasury $11,529,935 $104,194 $(17,098) $11,617,031
U. S. Government
corporations and
agencies obligations 2,997,533 14,664 (13,059) 2,999,138
State and political
subdivisions 3,890,620 160,898 (2,461) 4,049,057
----------- -------- -------- -----------
$18,418,088 $279,756 $(32,618) $18,665,226
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1996, by contractual maturities, are shown below:
<TABLE>
<CAPTION>
After After
In One One Year Five Years
Year Through Through
or Less Five Years Ten Years Total
------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury $2,502,780 $13,458,783 $ - $15,961,563
U. S. Government
corporations and
agencies obligations 1,498,988 500,758 - 1,999,746
States and political
subdivisions 1,052,043 2,179,905 1,085,181 4,317,129
---------- ----------- ---------- -----------
Amortized cost $5,053,811 $16,139,446 $1,085,181 $22,278,438
========== =========== ========== ===========
Estimated market value $5,064,728 $16,241,713 $1,098,073 $22,404,514
========== =========== ========== ===========
</TABLE>
11
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
2. SECURITIES (Continued)
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of securities during the year ended December 31,
1996 were $1,001,172 with gross losses of $3,390 on those sales.
Proceeds from sales of securities during the year ended December 31,
1995 were $4,156 with gross losses of $780 on those sales. Proceeds
from sales of securities during the year ended December 31, 1994 were
$1,266,563 with gross gains of $28,675 and gross losses of $16,042
realized on those sales.
Securities with a book value of $2,414,681 and $1,709,106 as of
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits and for other banking purposes.
3. LOANS
Major classifications of loans as of December 31, 1996 and 1995, are
summarized as follows:
1996 1995
---- ----
(in thousands)
Commercial $3,567 $3,973
Real estate:
Construction and land development 11,096 11,533
Residential, 1-4 families 29,747 26,333
Residential, 5 or more families 903 503
Nonfarm, nonresidential 13,884 12,009
Consumer 5,927 4,705
Other 119 124
------- -------
Total loans outstanding 65,243 59,180
Less deferred fees (92) (89)
Less allowance for loan losses (1,073) (1,103)
------- -------
$64,078 $57,988
======= =======
At December 31, 1996, the Corporation had entered into a security
agreement with a blanket floating lien pledging all of its real estate
loans to secure actual or potential borrowings for the Federal Home
Loan Bank of Atlanta (see Note 6).
12
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
3. LOANS (Continued)
A summary of changes in the allowance for loan losses for the years
ended December 31, 1996, 1995 and 1994, is as follows:
1996 1995 1994
---- ---- ----
Balance, beginning $1,102,709 $ 947,022 $894,285
Provision charged against income 142,836 183,268 143,556
Recoveries 40,338 50,419 27,086
Loans charged off (212,609) (78,000) (117,905)
---------- ---------- --------
Balance, ending $1,073,274 $1,102,709 $947,022
========== ========== ========
Nonperforming assets at December 31, 1996 and 1995, consist of the
following:
1996 1995
---- ----
Loans ninety days or more past due $ 146,361 $ 166,233
Nonaccrual loans 146,672 259,317
--------- ---------
$ 293,033 $ 425,550
========= =========
Foregone interest on nonaccrual loans was $43,225, $20,040 and $27,671
for the years ended December 31, 1996, 1995 and 1994, respectively.
There were no commitments to lend additional funds to customers whose
loans were classified as nonperforming at December 31, 1996 and 1995.
4. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995, are stated at
cost, less accumulated depreciation and amortization, as follows:
1996 1995
---- ----
Premises $1,724,681 $1,614,697
Equipment and fixtures 764,451 730,518
Software 185,024 176,614
Construction in progress 400,234 -
---------- ----------
3,074,390 2,521,829
Less accumulated depreciation and amortization (1,441,308) (1,286,547)
---------- ----------
1,633,082 1,235,282
Land 521,935 521,935
---------- ----------
$2,155,017 $1,757,217
========== ==========
13
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
5. LEASES
The Corporation leases premises under operating leases. Rental expense
related to operating leases was $36,732, $36,732 and $36,401 for 1996,
1995 and 1994, respectively.
The future minimum lease payments under noncancelable operating leases
at December 31, 1996 are as follows:
1997 $60,932
1998 65,680
1999 65,680
2000 65,680
2001 65,680
Thereafter 737,852
----------
Total minumum lease payments $1,061,504
==========
6. SHORT TERM BORROWINGS
Short term borrowings represent advances from the Federal Home Loan
Bank of Atlanta and advances totaled $1,800,000 and $0 at December 31,
1996 and 1995, respectively.
The Corporation has pledged all of its stock in the Federal Home Loan
Bank of Atlanta and entered into a security agreement with a blanket
floating lien pledging qualifying real estate loans to secure actual or
potential borrowings. At December 31, 1996, the Corporation had an
additional $8.2 million of credit available with the Federal Home Loan
Bank of Atlanta.
7. INCOME TAXES
The components of income taxes for the years ended December 31, 1996,
1995 and 1994, are as follows:
1996 1995 1994
---- ---- ----
Current $478,971 $517,907 $386,758
Deferred 37,635 (73,369) (23,894)
-------- -------- --------
$516,606 $444,538 $362,864
======== ======== ========
14
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
7. INCOME TAXES (Continued)
Reconciliation of expected income tax at the statutory Federal rate
with income tax expense for the years ended December 31, 1996, 1995 and
1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense at
statutory rate $ 542,998 $ 481,777 $ 407,499
Increase (decrease) in income tax expense
resulting from:
Tax exempt interest (55,355) (68,215) (69,887)
State income taxes, net of federal benefit 22,973 20,366 15,440
Other, net 5,990 10,610 9,812
--------- --------- ---------
Income tax expense $ 516,606 $ 444,538 $ 362,864
========= ========= =========
</TABLE>
The components of net deferred tax assets included in other assets at
December 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Allowance for loan losses $ 359,084 $ 383,237
Unrealized securities (gains) losses (51,691) (96,384)
Accumulated depreciation (29,005) (41,453)
Deferred loan fees 35,831 34,628
Other, net 21,603 (26,534)
--------- ---------
$ 335,822 $ 253,494
========= =========
8. EMPLOYEE BENEFIT PLAN
The Corporation has a qualified profit sharing 401(K) plan for
employees 21 years of age or over with at least one year of service,
which covers substantially all employees. Under the plan, employees
may contribute from 1% to 15% of compensation, subject to an annual
maximum as determined under the Internal Revenue Code. The Corporation
matches 50% of such contributions not exceeding 2% and 100% of such
contributions between 2% and 4% of the participants' compensation.
Further, the Corporation may make additional contributions on a
discretionary basis. The plan provides that employees' contributions
are 100% vested at all times and the Corporation's contributions vest
at 20% each year after the first year of service. The expense related
to this plan for the years ended December 31, 1996, 1995 and 1994, was
$74,844, $58,953 and $46,716, respectively.
15
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
9. STOCK DIVIDEND
On August 20, 1995, the Corporation declared a three for two stock
split for all shares outstanding as of September 18, 1995, which was
paid on October 18, 1995, and effected as a stock dividend. The
dividend was charged to undivided profits in the aggregate amount of
$290,404, the par value of the shares paid. All references to the
outstanding number of shares and earnings per share amounts have been
restated to reflect the dividend.
10. STOCK OPTIONS
The Corporation has a qualified incentive stock option plan (the
"Plan") under which the Corporation may grant options to its employees
for up to 82,500 shares of common stock. Under the Plan, the exercise
price of each option equals the market price of the Corporation's stock
on the date of grant and an option's maximum term is ten years.
Generally, the options are exercisable one year after the date of
grant.
On January 1, 1996 the Corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation"
(SFAS 123). As permitted by SFAS 123, the Corporation has chosen to
continue to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its
Plans. Accordingly, no compensation cost has been recognized for
options granted under the Plan. Had compensation cost for the
Corporation's Plan been determined based on the fair value at the grant
dates for awards under the Plan consistent with the method of SFAS 123,
the impact on the Corporation's net income and net income per share
would not have been material.
A summary of the changes during the years ending December 31, 1996,
1995 and 1994, of the Corporation's Plan is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 73,218 $ 7.44 61,098 $ 7.49 66,518 $ 6.65
Granted - - 15,900 10.17 - -
Exercised (8,791) 7.83 (3,780) 7.81 (5,420) 5.33
------ ------ ------
Outstanding at end of year 64,427 7.54 73,218 7.58 61,098 6.65
====== ====== ======
Options exercisable at year-end 64,427 7.54 57,319 6.86 61,098 6.65
====== ====== ======
</TABLE>
At December 31, 1996 the option exercise prices ranged from $5.17 -
$10.17 and had a weighted average remaining contractual life of 4.4
years.
16
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
11. REGULATORY MATTERS AND RESTRICTIONS
The Corporation is subject to various regulatory capital requirements
administered by the federal and state 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 Corporation's
financial statements. Quantitative measures established by regulation
to ensure capital adequacy require the Corporation to maintain minimum
amounts and ratios, as set forth in the table below. Management
believes, as of December 31, 1996, that the Corporation meets all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Corporation as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Corporation must maintain minimum amounts and ratios,
as set forth in the table below. There are no conditions or events
since that notification that management believes have changed the
Corporation's category.
The Corporation's actual capital amounts and ratios are also presented
in the table below (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- --------------------
As of December 31, 1996: Amount Ratio Amount Ratio Amount Ratio
------------------------ --------- ------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) $ 11,147 18.1% $ 4,938 8.0% $ 6,173 10.0%
Tier I Capital (to Risk Weighted Assets) 10,375 16.8 2,469 4.0 3,704 6.0
Tier I Capital (to Average Assets) 10,375 10.6 3,907 4.0 4,883 5.0
As of December 31, 1995:
------------------------
Total Capital (to Risk Weighted Assets) 10,018 25.3 3,165 8.0 3,956 10.0
Tier I Capital (to Risk Weighted Assets) 9,524 24.1 1,583 4.0 2,374 6.0
Tier I Capital (to Average Assets) 9,524 11.3 3,366 4.0 4,208 5.0
</TABLE>
17
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
12. UNAUDITED INTERIM FINANCIAL INFORMATION
The following unaudited interim financial information data includes, in
the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the results of
operations for such periods. The aggregate of the interim information
may not agree to annual information due to rounding:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
---------- --------- ------------ -----------
(In thousands of dollars except per share data)
<S> <C> <C> <C> <C>
1996:
Interest income $ 1,751 $ 1,859 $ 1,918 $ 1,928
Interest expense 813 881 959 944
Provision for loan losses 34 36 41 32
Other income 106 115 109 115
Other expense 606 650 642 666
------- ------- ------- -------
Income before taxes 404 407 385 401
Income taxes 132 132 123 130
------- ------- ------- -------
Net income $ 272 $ 275 $ 262 $ 271
======= ======= ======= =======
Net income per share:
Primary and fully-diluted $ .30 $ .30 $ .28 $ .30
======= ======= ======= =======
1995:
Interest income $ 1,497 $ 1,624 $ 1,721 $ 1,708
Interest expense 627 719 780 783
Provision for loan losses 43 43 43 54
Other income 81 97 110 126
Other expense 610 630 587 628
------- ------- ------- -------
Income before taxes 298 329 421 369
Income taxes 90 102 138 114
------- ------- ------- -------
Net income $ 208 $ 227 $ 283 $ 255
======= ======= ======= =======
Net income per share:
Primary and fully-diluted $ 0.24 $ 0.25 $ 0.32 $ 0.28
======= ======= ======= =======
</TABLE>
18
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
13. COMMITMENTS AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to
extend credit, lines of credit and standby letters of credit. These
instruments involve elements of credit risk in excess of amounts
recognized in the accompanying financial statements.
The Corporation's risk of loss with the commitments to extend credit,
lines of credit and standby letters of credit is represented by the
contractual amount of these instruments. The Corporation uses the same
credit policies in making commitments to borrowers under such
instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation
of the borrower. Collateral held varies, but may include accounts
receivable, inventory, real estate and time deposits with financial
institutions. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Outstanding financial instruments whose contract amounts represent
credit risk were approximately as follows:
1996 1995
---- ----
Unfunded loans and lines of credit $8,604,802 $13,701,000
========== ===========
Standby letters of credit $ 232,634 $ 42,000
========== ===========
The Corporation's lending is concentrated primarily in Durham, North
Carolina and the surrounding communities in which it operates. Credit
has been extended to certain of the Corporation's customers through
multiple lending transactions.
14. RELATED PARTY TRANSACTIONS
In the normal course of business, certain directors and executive
officers of the Corporation, including their immediate families and
companies in which they have a 10% or more beneficial interest, were
loan customers. Activity during the years ended December 31, 1996 and
1995, is summarized as follows:
1996 1995
---- ----
Balance, beginning $1,111,391 $ 993,496
Loans made 794,533 710,104
Payments received (623,876) (592,209)
---------- ----------
Balance, ending $1,282,048 $1,111,391
========== ==========
19
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
15. PARENT CORPORATION FINANCIAL STATEMENTS
The Corporation's principal asset is its investment in the Bank. The
balance sheets as of December 31, 1996 and 1995 and statements of
income and cash flows for the three years ended December 31, 1996, for
the parent corporation only, are presented below.
<TABLE>
<CAPTION>
Guaranty State Bancorp (Parent Corporation Only)
Balance Sheets
1996 1995
---- ----
<S> <C> <C>
Assets:
Cash and due from depository institutions
with subsidiary $ 24,454 $ 12,321
Investment in Guaranty State Bank 10,414,703 9,639,149
Other assets 15,077 25,270
Dividends receivable from subsidiary 79,205 69,701
----------- -----------
Total assets $10,533,439 $ 9,746,441
=========== ===========
Liabilities and stockholders' equity:
Other liabilities $ 4,678 $ 1,989
----------- -----------
Dividends payable to stockholders 79,205 69,701
----------- -----------
Common stock and surplus 5,602,342 5,533,226
Undivided profits 4,772,831 3,990,771
Net unrealized gains on securities 74,383 150,754
----------- -----------
Stockholders' equity 10,449,556 9,674,751
----------- -----------
Total liabilities and stockholders' equity $10,533,439 $ 9,746,441
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Dividends from wholly-owned subsidiary $ 330,754 $ 277,893 $ 276,451
Amortization expense (9,443) (10,515) (9,818)
Franchise tax (22,922) (7,603) (10,531)
Other expense (750) (10,192) (10,000)
----------- --------- ---------
Income before equity in undistributed income
of wholly-owned subsidiary 297,639 249,583 246,102
Equity in undistributed income of subsidiary 782,808 722,871 589,559
----------- --------- ---------
Net income $ 1,080,447 $ 972,454 $ 835,661
=========== ========= =========
</TABLE>
20
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
15. PARENT CORPORATION FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Statements of Cash Flows
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,080,447 $ 972,454 $ 835,661
Equity in undistributed income of
subsidiary (782,808) (722,871) (589,559)
Amortization expense 9,443 10,515 9,818
Increase in receivables and
other assets (8,754) (7,136) (750)
Increase (decrease) in other liabilities 2,689 18,538 (46,876)
----------- --------- ---------
Net cash provided by operating
activities 301,017 271,500 208,294
----------- --------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 69,116 19,672 19,257
Increase in investment in subsidiary (69,116) (47,512) (19,257)
Dividends paid (288,884) (232,441) (207,192)
----------- --------- ---------
Net cash used in financing activities (288,884) (260,281) (207,192)
----------- --------- ---------
Net increase in cash 12,133 11,219 1,102
Cash at beginning of year 12,321 1,102
----------- --------- ---------
Cash at end of year $ 24,454 $ 12,321 $ 1,102
=========== ========= =========
Non-cash investing and financing activities:
Unrealized securities gains (losses), net $ (76,371) $ 336,180 $(185,426)
=========== ========= =========
Dividends declared but not paid $ 79,205 $ 69,701 $ 52,050
=========== ========= =========
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair values of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments." The estimated fair values have been determined
by the Corporation using the methods and assumptions described below.
However, considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Corporation could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair values.
21
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Cash Equivalents
-------------------------
The carrying amount is a reasonable estimate of fair value.
Securities Available-for-Sale
-----------------------------
For securities available-for-sale, fair values are based on quoted
market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans Receivable
----------------
The fair value of loans receivable is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities.
Interest Receivable and Payable and Federal Home Loan Bank of Atlanta stock
---------------------------------------------------------------------------
The carrying amount approximates fair value.
Deposits
--------
The fair value of noninterest-bearing demand, interest-bearing demand
and savings accounts is the amount payable on demand at the reporting
date. The fair value of fixed maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities.
Short Term Borrowings
---------------------
These borrowings mature and are renewed at a new rate monthly.
Therefore, the carrying amount approximates the fair value.
Off-Balance Sheet Financial Instruments
---------------------------------------
The fair value of off-balance sheet financial instruments has not been
considered in determining on balance sheet fair value. As discussed in
Note 13, these off-balance sheet financial instruments are commitments
to extend credit and are either short term in nature or subject to
immediate repricing.
22
<PAGE>
GUARANTY STATE BANCORP
Notes to Financial Statements
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amount and estimated fair value of the Corporation's
financial instruments at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,189,899 $ 6,189,899 $ 3,230,816 $ 3,230,816
Securities available for sale 22,404,514 22,404,514 18,665,226 18,665,226
Loans held for sale 354,600 354,600 210,700 210,700
Loans less allowance for loan
losses 64,078,398 63,850,105 57,987,851 57,739,224
Federal Home Loan Bank of
Atlanta stock 270,600 270,600 226,700 226,700
Interest receivable 700,199 700,199 644,057 644,057
----------- ----------- ----------- -----------
Total $93,998,210 $93,769,917 $80,965,350 $80,716,723
=========== =========== =========== ===========
Financial liabilities:
Deposits $83,593,582 $83,739,436 $72,623,383 $72,900,505
Short-term borrowings 1,800,000 1,800,000 - -
Interest payable 542,766 542,766 603,556 603,556
----------- ----------- ----------- -----------
Total $85,936,348 $86,082,202 $73,226,939 $73,504,061
=========== =========== =========== ===========
</TABLE>
17. CONSOLIDATED STATEMENTS OF CASH FLOWS - SUPPLEMENTAL DISCLOSURES
The following is supplemental information regarding the consolidated
cash flows for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest $ 3,658,154 $ 2,691,819 $ 1,900,473
=========== =========== ===========
Income taxes $ 503,806 $ 512,817 $ 393,507
=========== =========== ===========
Schedule of non-cash investing and
financing activities:
Transfer of investment securities to
available for sale $ - $ - $13,770,784
=========== =========== ===========
Foreclosure of collateral in partial
satisfaction of debt $ - $ - $ 12,000
=========== =========== ===========
Dividends declared but not paid $ 79,205 $ 69,701 $ 52,050
=========== =========== ===========
</TABLE>
23
<PAGE>
Banking Offices
- ---------------
302 West Main Street
3400 Westgate Drive
2101 Guess Road
3732 North Roxboro Road
2313 Highway 54
Stock Transfer Agent
- --------------------
Guaranty State Bank
P.O. Box 1731
Durham, North Carolina 27702
Independent Auditors
- --------------------
Coopers & Lybrand L.L.P.
Suite 2300
150 Fayetteville Street Mall
Raleigh, North Carolina 27601
This Annual Report has not been reviewed, or confirmed for accuracy
or relevance, by the Federal Deposit Insurance Corporation.
<PAGE>
Guaranty State Bancorp
302 West Main Street
Durham, North Carolina 27702
March 31, 1997
Dear Shareholders:
It is a pleasure to invite you to Guaranty State Bancorp's 1997 Annual Meeting
of Shareholders to be held on May 1, 1997, at the Omni Durham Hotel and
Convention Center, 201 Foster Street, Durham, North Carolina. The annual
meeting is scheduled to begin at 2:00 p.m., local time.
The matters scheduled for consideration at the meeting are described in detail
in the enclosed Notice of Annual Meeting of Shareholders and Proxy Statement.
Whether you own a few or many shares of stock, and whether or not you plan to
attend the meeting in person, it is important that your shares be voted on the
matters that come before the meeting. If you are unable to attend the meeting or
prefer to vote by proxy, please complete the enclosed proxy and return it to us
no later than April 30, 1997. A shareholder who gives a proxy may revoke it any
time before it is voted, and any shareholder who attends in person may vote in
person at the meeting, if he or she wishes to do so, even though he or she may
have previously sent in a proxy. Proxies may be revoked in person or in writing
any time prior to or at the meeting by contacting J. Edwin Causey, Jr.,
Secretary.
We hope your schedule allows you to be at the Omni Durham Hotel and Convention
Center for the annual meeting. We look forward to seeing you on May 1.
Very truly yours,
Charles J. Stewart
President and Chief Executive Officer
<PAGE>
GUARANTY STATE BANCORP
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
To The Shareholders of Guaranty State Bancorp:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Guaranty
State Bancorp will be held at the Omni Durham Hotel and Convention Center, 201
Foster Street, Durham, North Carolina 27701, at 2:00 p.m. on Thursday, May 1,
1997, for the following purposes:
1. To amend Article IV of the Articles of Incorporation of the
Corporation to provide for both common stock and preferred stock.
2. To amend the Articles of Incorporation of the Corporation by
adding Article XIV to provide that directors may be removed only
for "cause".
3. To elect three directors with terms expiring in 2000.
4. To consider and act upon a proposal to ratify the selection of
Coopers & Lybrand, L.L.P. as independent public accountants to
audit the books of the Corporation for the fiscal year ending
December 31, 1997.
5. To act upon such other business as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on March 14, 1997 will
be entitled to notice of and to vote at the annual meeting or any adjournment
thereof. You are requested to date, sign, and return the enclosed proxy
promptly so that if you are unable to attend the meeting your shares can
nevertheless be voted at the meeting. If you attend, your proxy will be
returned to you upon request.
BY ORDER OF THE BOARD OF DIRECTORS
J. Edwin Causey, Jr., Secretary
Durham, North Carolina
March 31, 1997
Guaranty State Bancorp
Annual Meeting of Shareholders
Location: Omni Durham Hotel and Convention Center
201 Foster Street
Durham, North Carolina 27701
Date: Thursday, May 1, 1997
Time: 2:00 p.m
<PAGE>
GUARANTY STATE BANCORP
POST OFFICE BOX 1731
302 W. MAIN STREET
DURHAM, NORTH CAROLINA 27702
PROXY STATEMENT
This Proxy Statement is furnished to the shareholders of Guaranty State
Bancorp (the "Corporation") in connection with the solicitation by the Board of
Directors of the Corporation of proxies for the Annual Meeting of Shareholders
to be held at 2:00 p.m., Thursday, May 1, 1997, or any adjournment thereof, at
the Durham Omni Hotel and Convention Center, 201 Foster Street, Durham, North
Carolina 27701, for the purposes set forth in the Notice of Annual Meeting of
Shareholders, which is enclosed along with the form of proxy.
All proxies that are properly executed and received prior to the meeting
will be voted at the meeting. If a shareholder specifies how the proxy is to be
voted on any of the business to come before the meeting, the proxy will be voted
in accordance with such specification. If no specification is made, the proxy
will be voted in favor of (1) approval of the amendment to the Articles of
Incorporation to provide for both common and preferred stock; (2) approval of
the amendment to the Articles of Incorporation to provide for directors removal
only for "cause"; (3) the election of each of the nominees for director; and (4)
for the ratification of the selection of independent certified public
accountants. The Board of Directors does not know of any other matter which
will be presented for action at the meeting, but the persons named in the proxy
intend to vote or act with respect to any proposal which may be presented for
action in accordance with their best judgment. A shareholder who gives a proxy
may revoke it at any time before it is voted, and any shareholder who attends
the meeting in person may vote in person at the meeting, if he or she wishes to
do so, even though he or she sent in a proxy. Proxies may be revoked in person
or in writing at any time prior to or at the meeting by contacting J. Edwin
Causey, Jr., Secretary.
This Proxy Statement and accompanying proxy are being mailed to
shareholders on or about March 31, 1997.
The Corporation will bear the entire cost of preparing this Proxy Statement
and of soliciting proxies. Proxies may be solicited by employees of the
Corporation personally, by special letter or by telephone. The Corporation may
also request brokers and others to send solicitation material to beneficial
owners of stock and may reimburse them for this purpose.
VOTING SECURITIES
Only shareholders of record at the close of business on March 14, 1997 (the
"Record Date") are entitled to vote at the meeting. As of the Record Date, the
Corporation had outstanding 881,553 shares of common stock, par value $1.00 per
share (the "Common Stock"), which shares constitute the only class of stock of
the Corporation entitled to notice of and to vote at the meeting. As of the
same date, the Corporation had approximately 286 shareholders of record.
The representation in person or by proxy of a majority of the votes
entitled to be cast is necessary to provide a quorum at the Annual Meeting. At
the Annual Meeting, each shareholder will be entitled to cast one vote for each
share of Common Stock held of record on the Record Date for each matter
submitted for voting and, in the election of directors, for each director to be
elected.
In voting for directors under Proposal 3, the three nominees receiving the
highest number of votes will be elected. Votes may be cast in favor of director
nominees or withheld. Withheld votes are not treated as votes cast and,
therefore, will have no effect on the election of directors. There is no
cumulative voting with respect to the election of directors. In the case of the
other proposals, for each such proposal to be approved, the number of votes cast
for approval must exceed the number of votes cast against approval. Under the
<PAGE>
rules of the New York Stock Exchange (the "NYSE"), broker-dealers who hold
shares in street name have the authority to vote on certain routine items when
they have not received voting instructions from beneficial owners. Proposals 1
and 2 are not considered routine matters under the rules of the NYSE.
Accordingly, broker-dealers who hold shares in street name and have not received
instructions from beneficial owners will not have authority to vote on these two
proposals ("broker non- votes"). Under North Carolina law, broker non-votes are
not treated as votes cast and, therefore, will have no effect on the vote for
Proposals 1 and 2. Similarly, abstentions are not treated as votes cast and,
therefore, will have no effect on the vote for any proposal.
Guaranty State Bancorp was incorporated under North Carolina law on March
26, 1993 for the purpose of becoming the holding corporation of Guaranty State
Bank (the "Bank"). The Corporation's business activities consist solely of the
operation of the Bank as a wholly-owned subsidiary commercial bank.
The principal executive offices of the Corporation and the Bank are located
at 302 W. Main Street, Durham, North Carolina 27701, telephone (919) 688-9361.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning beneficial
ownership of the Common Stock by (i) each person known by the Corporation to be
a beneficial owner of more than five percent (5%) of the outstanding Common
Stock, (ii) each director and nominee for director of the Corporation, (iii)
each of the executive officers named in the Summary Compensation Table, and (iv)
all directors and executive officers of the Corporation as a group, as of March
14, 1997. The percentages are based on total shares outstanding as well as
immediately exercisable stock options. Except as otherwise noted, the person
named had sole voting and investment power with respect to the shares reflected
in the table.
Amount and Nature
of Beneficial Percent of
Name Ownership Common Stock
- ---- --------- ------------
Dwight G. Howard 119,996(1) 12.73%
Frank A. Ward 56,222(2) 5.96%
Wachovia Bank of N. C., NA 45,000(3) 4.77%
Executor of the Estate of
Laurance D. Kirkland, Jr.
Charles J. Stewart 67,984(4) 7.21%
David W. Wiggins 24,136(5) 2.56%
B. W. Harris, III 19,190(6) 2.04%
N. Wayne Campbell 14,290(7) 1.52%
Robert F. Baker 5,049(8) *
Stancil B. Roberts 3,347(9) *
2
<PAGE>
W. L. Douglas Townsend, Jr. 2,550(10) *
Susan Cranford Ross 800(11) *
E. Spurgeon Booth, Jr. 500(12) *
Phillip H. Pearce, M.D. 300(13) *
All Directors and Executive
Officers as a Group 167,124(14) 17.73%
(13 persons)
___________________________________
* Less than one percent.
(1) Mr. Howard's address is Post Office Box 1962, Durham, North Carolina 27702.
(2) Mr. Ward's address is 518 South Duke Street, Durham, North Carolina 27701.
(3) Wachovia's address is Post Office Box 2252, Durham, North Carolina 27702.
As executor, Wachovia has sole voting power for the shares held in the
estate. Wachovia does not have voting power for 2,250 shares held in the
name of Eva D. Kirkland. Mrs. Kirkland is beneficiary of the Estate of Mr.
Kirkland.
(4) Includes 41,880 shares subject to a presently exercisable stock option and
900 shares held by Mr. Stewart's spouse.
(5) Includes 300 shares held by Mr. Wiggins' children under the North Carolina
Uniform Transfers to Minors Act, and 750 shares held by Mr. Wiggins'
spouse. Mr. Wiggins' address is Post Office Box 71244, Durham, North
Carolina 27722.
(6) Includes 4,500 shares subject to a presently exercisable stock option. Mr.
Harris' address is 3942 Nottaway Road, Durham, North Carolina 27707.
(7) Includes 825 shares held by Mr. Campbell's spouse. Mr. Campbell's address
is 1920 Redding Lane, Durham, North Carolina 27712.
(8) Mr. Baker's address is Post Office Box 891, Durham, North Carolina 27702.
(9) Mr. Roberts' address is 2202 Thunder Road, Durham, North Carolina 27712.
(10) Includes 360 shares held by Mr. Townsend's spouse. Mr. Townsend's address
is 2204 Whitley Drive, Durham, North Carolina 27707.
(11) Mr. Booth's address is Post Office Box 2916, Durham, North Carolina 27715.
(12) Ms. Ross' address is 4102 Westfield Drive, Durham, North Carolina 27705.
(13) Dr. Pearce's address is 30 Brookside Place, Durham, North Carolina 27705.
(14) Includes 61,005 shares subject to presently exercisable stock options.
3
<PAGE>
INTRODUCTION TO PROPOSALS 1 AND 2
Proposals 1 and 2 have been unanimously approved by the Board of Directors
and, under North Carolina law, must be approved by the shareholders to become
effective. Proposal 1 seeks an amendment to the Articles of Incorporation of
the Corporation to provide for both common stock and a separate class of
preferred stock that may be issued from time to time at the direction of the
Board of Directors. Proposal 2 seeks an additional amendment to the Articles of
Incorporation (collectively, Proposal 1 and Proposal 2 are referred to as the
"Charter Amendments") to permit directors to be removed only for "cause" as
defined in the amendment. Because the Charter Amendments have an impact upon
the rights of shareholders and could be characterized as anti-takeover measures
which, if adopted, may tend to insulate management and make the accomplishment
of certain transactions involving a potential change of control of the
Corporation more difficult, each shareholder should carefully study the
description of the proposals contained herein and the text of the amendments as
set forth in Exhibits A and B to this Proxy Statement. The Board of Directors
has no present intention to put before the shareholders any additional proposals
which would operate as a significant impediment to an attempt by a third party
to obtain control of the Corporation.
Existing Anti-takeover Provisions
Statutory Provisions. The Corporation, as a bank holding company
incorporated under the laws of the State of North Carolina, presently has
certain statutory anti-takeover provisions in effect. The Corporation and the
Bank are subject to the Change in Bank Control Act, administered by the Board of
Governors of the Federal Reserve System as to the Corporation and the Federal
Deposit Insurance Corporation as to the Bank, which requires federal regulatory
approval before any one person can acquire 10% or more of the outstanding Common
Stock. North Carolina banking law has similar prior approval requirements which
are administered by the North Carolina Commissioner of Banks. The Corporation
has elected to be subject to the North Carolina Shareholder Protection Act,
which generally requires the affirmative vote of at least 95% of the voting
shares of a corporation to adopt or authorize most business combinations unless
certain fair price and procedural requirements are satisfied. The Corporation
also has elected to be subject to the North Carolina Control Share Acquisition
Act, which generally provides that in the event a potential acquiror acquires a
certain percentage of the total voting power of a corporation, the power to vote
such shares is subject to approval by a majority of the shares held by persons
other than the potential acquiror. If the potential acquiror obtains voting
powers in this manner, under certain circumstances the other shareholders will
have the right to have their shares redeemed by the Corporation at fair market
value.
Articles of Incorporation and Bylaw Provisions. The Corporation's Articles
of Incorporation and Bylaws also contain certain provisions which may have an
anti-takeover effect. The Articles of Incorporation provide that shareholders of
the Corporation shall not have preemptive rights to acquire additional shares.
The existence of preemptive rights would significantly restrict the
Corporation's flexibility to enter into friendly or "white knight" acquisitions
involving the issuance of large blocks of additional shares to repel a hostile,
unsolicited potential acquiror. The Articles of Incorporation do not authorize
cumulative voting for directors, which makes it more difficult for minority
shareholders to gain representation on the Board of Directors. The Bylaws
include a super-majority voting provision which has been approved by the
shareholders and which requires approval of certain business combinations by
66.7% of all outstanding shares of voting stock. The Bylaws of the Corporation
do not permit special meetings of shareholders to be called other than by the
Chairman, any Vice Chairman, President or the Board of Directors.
Other Agreements. The Corporation's 1986 Incentive Stock Option Plan
provides for the grant of options pursuant to Section 422 of the Internal
Revenue Code to officers and other key employees of the Corporation. The Plan
provides that upon a change of control of the Corporation, all outstanding
options that have not vested will immediately vest and become exercisable. Such
immediate vesting could make more difficult a change in control of the
4
<PAGE>
Corporation through an unsolicited or hostile proposal to acquire control. (See
"Executive Compensation")
PROPOSAL 1: AMENDMENT OF THE ARTICLES OF INCORPORATION TO PROVIDE FOR COMMON
AND PREFERRED STOCK.
The Proposed Amendment
The Board of Directors has unanimously approved and recommends that the
shareholders approve the amendment to the Articles of Incorporation which
would amend Article IV in its entirety to provide for both Common Stock and
Preferred Stock. The text of the amendment to Article IV is provided in
Exhibit A to this Proxy Statement. The Articles of Incorporation currently
authorize the issuance of 2,500,000 shares of capital stock, all of which
are in a single class designated "Common Stock" having a par value of $1.00
per share. The amendment would authorize the Corporation to issue up to
5,000,000 shares of capital stock, 4,000,000 of which will be $1.00 par
value Common Stock and 1,000,000 will be Serial Preferred Stock. The
Corporation has no present intention to issue any additional shares of
Common Stock or to authorize and issue any shares of Preferred Stock. There
will be no difference in the presently authorized and issued Common Stock
and the Common Stock that will be authorized in the future, assuming the
amendment is approved. Preferred Stock may be issued from time to time with
such rights, privileges and preferences as the Board of Directors may
determine to be in the best interest of the Corporation. If additional
shares of common stock or new shares of preferred stock are issued, there
will be a dilutive effect on the then outstanding shares of common stock.
Reasons for the Proposed Amendment
While the Corporation has no present intention to issue any additional
shares of Common Stock or to authorize a series or class of Preferred Stock to
be issued and outstanding, the ability to issue additional shares of Common
Stock and one or more series of Preferred Stock will give the Corporation
flexibility in its future capital planning. With approval of the Amendment, the
Board of Directors will have the authority to act quickly, should the best
interests of the Corporation be deemed to be served, to issue additional shares
of Common or to create one or more series of Preferred Stock, should capital
needs of the Corporation arise. With the authority to create one or more series
of Preferred Stock, the Articles of Incorporation will be modernized and give
the Corporation the same powers other bank holding companies have in structuring
their capital accounts.
The overall effect of the Amendment also may be considered to have an
anti-takeover effect since the Board of Directors would have the authority to
issue a large block of Common Stock or to create one or more series of Preferred
Stock and to sell them to a friendly party should the Corporation be faced with
a hostile, unsolicited offer which the Board of Directors believes not to be in
the best interest of the Corporation and its shareholders. The ability, without
the necessity of obtaining prior shareholder approval, to issue large blocks of
additional shares of Common or Preferred stock which may have differing voting
requirements (such as a series of Preferred Stock which would be required, under
North Carolina law, to vote its majority shares in favor of any change in
control proposal) can deter unsolicited, hostile offers and other attempts at
gaining control of the Corporation due to the dilutive effect such issuance
would have on existing shareholders. If the Amendment is adopted, the Board of
Directors has no present intention to issue any additional shares of Common
Stock or any series of Preferred Stock but could do so if it deemed such
issuance and sale to be in the best interest of the Corporation.
Recommendation
The Board of Directors recommends a vote "FOR" approval of the Amendment
and all proxies received will be voted in favor thereof unless directed
otherwise on the proxy by the shareholder.
5
<PAGE>
PROPOSAL 2: AMENDMENT OF THE ARTICLES OF INCORPORATION REGARDING
REMOVAL OF DIRECTORS
The Proposed Amendment
The Board of Directors has unanimously approved and recommends that the
shareholders approve an Amendment to the Articles of Incorporation which adds a
new Article XIV to provide for removal of directors only for "cause" as set
forth therein. Under North Carolina law, only a charter provision recommended
by the Board of Directors and approved by the shareholders is effective to
permit directors to be removed only for "cause" . At the present time,
directors may be removed with or without "cause". The Amendment would provide
that directors may only be removed for one or more of the following reasons
defined as "cause": (i) the criminal prosecution and conviction of the director
of an act of fraud, embezzlement, theft or personal dishonesty; (ii) prosecution
and conviction of a criminal offense involving dishonesty or breach of trust
described by the Federal Deposit Insurance Act; (iii) the occurrence of an event
causing such director to be "unbondable" under any of the Corporation's fidelity
bonds or insurance policies covering its directors; or (iv) such director being
absent without excuse from 25% of the Board of Director's meetings held during
any 12 consecutive month period.
Reasons for the Proposed Amendment
At the present time directors may be removed with or without "cause". The
current Bylaws provide for a classified or "staggered" board of directors with
terms of three years. Such a classified board structure can be nullified
without a provision in the Articles of Incorporation that directors may only be
removed for "cause". The primary intent of a classified board is to delay the
takeover of a majority of the positions on the Board of Directors beyond the
elapse of one year's time. By eliminating the shareholder's right to remove
directors "without cause", a potential acquiror of a controlling interest of the
Common Stock of the Corporation could not gain control of the Board of Directors
unless, with respect to a majority of incumbent directors, there exist
circumstances which constitute "cause" as defined in the Amendment. Accordingly,
the Amendment makes the classification of the Board of Directors effective.
Otherwise, an acquiring shareholder could remove the entire board of directors
without "cause" and thereby gain total control of the Corporation by obtaining
only a majority of the ownership of the Corporation.
Recommendation
The Board of Directors recommends a vote "FOR" approval of the Amendment
and all proxies received will be voted in favor thereof unless directed
otherwise on the proxy by the shareholder.
PROPOSAL 3: ELECTION OF DIRECTORS
The Corporation's Bylaws provide that the number of directors constituting
the Board of Directors shall be not less than nine nor more than fifteen, which
are divided into three classes, as nearly equal in number as possible. As of
the date hereof, there are ten directors and the Board is divided into three
staggered classes. Members serving on the Corporation's Board of Directors are
appointed to the Bank's Board in the same class in which they serve on the
Corporation's Board. There are three nominees for election as directors. Each
of the nominees upon election will serve for a three year term expiring in 2000
or until his successor is elected and qualified.
Of the nominees for directors, all are members of the present Board of
Directors and were elected in 1994. In the absence of any specification to the
contrary, proxies will be voted for the election of all three of the nominees
listed in the table below by casting an equal number of votes for each such
nominee. If, at any time before the meeting, any of the nominees listed below
have become unavailable for any reason, the proxy holders have the discretion to
6
<PAGE>
vote for a substitute nominee or nominees. The Board currently knows of no
reason why any nominee listed below is likely to become unavailable.
Set forth below is a table showing the name, age, initial year of election
to the Board and principal occupation and employment for the past five years of
each of the three nominees for election to three year terms to the Board of
Directors.
Director Principal Occupations
Name Age Since During the Past Five Years
- ---- --- -------- --------------------------
Nominees
Susan Cranford Ross 41 1994 Associate Dean and Director of
Arts and Sciences Development,
Duke University
David W. Wiggins 51 1994 Staff Systems and Procedures
Analyst, International Business
Machines Corporation
Charles J. Stewart 47 1993 President and Chief Executive
*1979 Officer, Guaranty State
Bancorp and Guaranty State Bank
Terms Expiring in 1998
E. Spurgeon Booth, Jr. 64 1993 Secretary-Treasurer, Booth Real
*1977 Estate and Insurance, Inc.
N. Wayne Campbell 54 1993 President, Credit Financial
*1980 Information Service Inc. (credit
reporting agency)
W. L. Douglas Townsend, Jr. 38 1993 Managing Director and CEO,
*1988 Townsend Frew & Co.,
L.L.C.(January, 1996-present;
investment banking); Senior Vice
President, Corporate Development,
Coastal Physician Group, Inc.
(1991- 1995)
Stancil B. Roberts 55 1995 Principal, Knott & Roberts,
Engineering Associates, P.A.
Terms Expiring in 1999
Robert F. Baker 61 1993 Partner, Spears, Barnes,
*1972 Baker, Wainio, Brown
and Whaley (law firm)
B. W. Harris, III 58 1993 Principal, Harris, Harris
*1968 & Company, CPA's,
PLLC(November, 1995 -present);
Principal, Bailey, Self, Harris
and Company (certified public
accountants, 1960-1995)
Philip H. Pearce, M.D. 61 1993 Partner, The Durham Women's
Clinic, P.A. (OB/GYN clinic
______________________
* Director of Bank since year stated.
7
<PAGE>
Meetings of the Board of Directors and Committees of the Board
During the fiscal year ended December 31, 1996, there were twelve meetings
of the Board of Directors of the Corporation and twelve meetings of the Board of
Directors of the Bank. No director of the Corporation attended fewer than 75%
of the number of meetings of the Board and of standing committees of the
Corporation to which they were elected.
The Board of Directors of the Corporation has established an Executive
Committee to serve as an advisory committee to the Board of Directors on matters
relating to the policies and business affairs of the Corporation and the Bank.
During the intervals between meetings of the Board, the Executive Committee has
the same authority as the Board of the Corporation. The Executive Committee
also acts as the Loan Committee authorized by applicable North Carolina law in
reviewing and approving loans. The members of the Executive Committee are B.W.
Harris, III, N. Wayne Campbell, W. L. Douglas Townsend, Jr. and Charles J.
Stewart. The Executive Committee meets on a monthly basis and held twelve
meetings in fiscal year 1996. The Board of Directors of the Bank has
established an Executive Committee, whose members are the same as the members of
the Executive Committee of the Corporation. The Executive Committee of the Bank
meets on a monthly basis and held 12 meetings in fiscal year 1996.
The Board of Directors of the Corporation has established an Audit
Committee, which is vested with the authority to cause audits to be made at the
Corporation, to review the scope of internal and external audits, and to report
directly to the Board of Directors with respect to these functions. The Audit
Committee does not select the independent accountants for the Corporation. Such
selection is made by the Board of Directors. The members of the Audit Committee
are Robert F. Baker, E. Spurgeon Booth, Jr. and Philip H. Pearce. The Audit
Committee meets quarterly and held four meetings in fiscal year 1996. The Board
of Directors of the Bank has established an Audit Committee, whose members are
the same as the members of the Audit Committee of the Corporation. The Audit
Committee of the Bank also meets on a quarterly basis and held four meetings in
fiscal year 1996.
In 1996, the Corporation and the Bank did not have a nominating committee
or compensation committee. Functions typically performed by such committees are
performed by the respective Board of Directors.
Members of the Boards of Directors of the Corporation and the Bank are paid
$225 for each meeting they attend. If the Boards and committees of the
Corporation and the Bank are held concurrently, members of both Boards and
committees are paid for one meeting. All Board and committee meetings were held
concurrently in 1996. Executive and Audit Committee members of the Corporation
and the Bank are paid $400 and $225, respectively, for each committee meeting
they attend.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Corporation, each of which serves in the same capacity
for the Bank:
Name Age Position
- ---- --- --------
Charles J. Stewart 47 President and
Chief Executive Officer
Jean R. Turner 51 Senior Vice President
Joseph M. Johnson 41 Senior Vice President
J. Edwin Causey, Jr. 53 Senior Vice
President and Secretary
8
<PAGE>
Charles J. Stewart has been employed by the Bank since 1972. Mr. Stewart
has served as President and Chief Executive Officer of the Bank since 1979 and
of the Corporation since 1993.
Jean R. Turner joined the Bank in 1986 and serves as Chief Administrative
Officer. Ms. Turner was appointed a Senior Vice President of the Bank in 1987
and of the Corporation in 1993.
Joseph M. Johnson joined the Bank in 1987 and serves as the Bank's Chief
Lending Officer. Mr. Johnson was appointed a Senior Vice President of the Bank
in 1991 and of the Corporation in 1993.
J. Edwin Causey, Jr. has been employed by the Bank since 1967 and has
served as a Senior Vice President of the Bank since 1986. Mr. Causey was
appointed a Senior Vice President of the Corporation in 1993. He serves as the
Bank's security officer.
EXECUTIVE COMPENSATION
Mr. Charles J. Stewart has entered into an Employment Agreement with
the Bank effective January 14, 1988 to serve in a principal executive and
management capacity under the title of President and Chief Executive
Officer. The Agreement is for a term of one year and is automatically
renewable on a year-to-year basis, subject to the termination provisions.
The Board of Directors establishes the base salary on an annual basis and
the Agreement provides for the normal and customary benefits for persons
serving in similar bank executive capacities. The Agreement may be
terminated by either party and if terminated by the Bank without cause, the
Bank shall be obligated to give twelve (12) months' notice or the Bank may
remove Mr. Stewart prior to the expiration of the twelve-month notice period
in which event the Bank shall pay the compensation and benefits which would
have been paid and provided to Mr. Stewart during the balance of the
twelve-month notice period, subject to reduction should Mr. Stewart obtain
employment with a bank in Durham County, North Carolina. Additionally, the
Bank has purchased a split-dollar life insurance policy and contract as part
of a supplemental executive retirement benefit for Mr. Stewart. The
contract provides for up to $1,200,000 in death benefit in the event of Mr.
Stewart's death prior to age 60 and declines thereafter at varying age
levels. Upon the payment of death benefits the Bank recovers all premiums
paid, plus interest.
The following table sets forth certain information relating to
compensation received by the Corporation's Chief Executive Officer for
fiscal years 1994, 1995 and 1996. No other executive officer of the
Corporation received total annual salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------- ------------
Name and Securities Underlying All Other
Principal Position Year Salary ($) Bonus ($) Options Compensation ($)1
- ------------------ ---- ---------- ---------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
Charles J. Stewart 1996 117,480 44,000 - 8,173
President and Chief 1995 111,881 40,000 6,000 9,056
Executive Officer 1994 106,723 30,000 - 7,495
___________________
</TABLE>
(1) Consists of the Corporation's matching and discretionary contributions to
the Corporation's 401(k) profit-sharing plan. In 1996, the Board of Directors
approved a non-qualified Executive Retirement Plan for Mr. Stewart. No expense
was incurred in 1996 for this plan.
The following table summarizes options exercised by Charles J. Stewart during
the fiscal year ended December 31, 1996 and presents the value of unexercised
options held by Mr. Stewart as of December 31, 1996. No options were granted to
Mr. Stewart or any other executive officer in 1996.
9
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal Year 1996
and Fiscal Year-End Option Values
---------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Shares Acquired Value Fiscal Year-End (#) at Fiscal Year-End ($)
Name on Exercise (#) Realized ($) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---- --------------- ------------ --------------------------- ---------------------------
<C> <S> <S> <S> <S>
Charles J. Stewart 1,650 12,840 41,880/0 657,602/0
President and Chief
Executive Officer
</TALBE>
Profit-Sharing Plan
The Corporation's Section 401(k) profit-sharing plan is designed to
encourage participants to save on a regular basis and to provide such
participants with deferred compensation and additional performance incentives.
Employee participants may elect to contribute from 1% to 15% of compensation
with the Corporation matching 50% of each participant's contribution up to 2% of
the participant's salary and 100% of the participant's contribution between 2%
and 4% of his or her salary. The plan provides for additional discretionary
employer contributions, as approved annually by the Board of Directors. Any
such discretionary contributions are allocated among all eligible employees,
including those who have not elected to make voluntary contributions through
salary reduction.
CERTAIN TRANSACTIONS
The Bank has engaged in, and expects to continue to engage in, lending
transactions with the Corporation's directors and officers and with corporations
and other entities with which such individuals are shareholders or principals.
During the last two years, all of such loans were made in the ordinary course of
business, were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectibility
or present other unfavorable features.
RATIFICATION OF SELECTION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has selected the firm of Coopers & Lybrand, L.L.P.,
independent certified public accountants, to audit the accounts of the
Corporation for fiscal year 1997. Management is not aware that any member of
this firm or any of its associates had any direct financial interest or any
material indirect financial interest in the Corporation or any of its affiliates
during 1996.
Representatives of Coopers & Lybrand, L.L.P., are expected to be present at
the shareholders' meeting with the opportunity to make a statement, if they
desire to do so, and are expected to be available to respond to appropriate
questions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Corporation's directors and executive officers, and persons who own more than
10% of a registered class of the Corporation's equity securities, file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the
Corporation. Officers, directors and greater than 10% shareholders are required
by the Securities and Exchange Commission regulations to furnish the Corporation
with copies of all Section 16(a) forms that they file.
10
<PAGE>
To the Corporation's knowledge, based solely on its review of the copies of
such reports furnished to the Corporation, and written representations that no
other reports were required, all Section 16(a) filing requirements applicable to
the Corporation's officers, directors and greater than 10% shareholders were met
during the fiscal year ended December 31, 1996.
SHAREHOLDER PROPOSALS
Under regulations of the Securities and Exchange Commission, any
shareholder desiring to make a proposal to be acted upon at the 1998 annual
meeting of shareholders must present such proposal to the Corporation at its
principal office at 302 W. Main Street, Durham, North Carolina, by November 14,
1997, for the proposal to be considered for inclusion in the Corporation's proxy
statement.
ANNUAL REPORT
Accompanying this proxy statement is a copy of the Corporation's 1996
Annual Report to Shareholders, which includes the Company's financial statements
as of and for the fiscal year ended December 31, 1996 and certain other
information.
The Corporation's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, as filed with the Securities and Exchange Commission, will be
furnished to any shareholder without charge (other than a reasonable fee for
inclusion of exhibits to such Annual Report), if requested in writing. Written
requests for this Annual Report should be directed to Jean R. Turner, Senior
Vice President, Guaranty State Bancorp, Post Office Box 1731, Durham, North
Carolina 27702.
You are encouraged to promptly execute the enclosed Proxy and return it in
the enclosed envelope that requires no postage if mailed in the United States.
For the Board of Directors,
J. Edwin Causey, Jr., Secretary
March 31, 1997
11
<PAGE>
Exhibit A
---------
Proposal 1
----------
RESOLVED, that the Board of Directors hereby proposes and adopts the
following amendments to the Articles of Incorporation of the Corporation,
subject to the approval of the shareholders at the 1997 Annual Meeting, by
eliminating Article IV in its entirety and replacing it as follows:
ARTICLE IV
The total number of shares of capital stock which the Corporation has
authority to issue is 5,000,000, of which 4,000,000 shall be common stock,
$1.00 par value, and 1,000,000 shall be serial preferred stock. The shares
may be issued from time to time as approved by the Board of Directors
without further approval of the shareholders, except as otherwise provided
in this Article IV or to the extent that such approval is required by North
Carolina law. The consideration for the issuance of the shares shall be
paid in full before their issuance and shall not be less than the par value
per share, or if designated as no par value, the stated value as determined
by the Board of Directors. Neither promissory notes nor future services
shall constitute payment or part payment for the issuance of shares of the
Corporation. The consideration for the shares shall be cash, tangible or
intangible property, labor or services actually performed for the
Corporation or any combination of the foregoing. In the absence of actual
fraud in the transaction, the value of such property, labor or services,
shall be conclusive. Upon payment of such consideration, such shares shall
be deemed to be fully paid and nonassessable. In the case of a stock
dividend, that part of the surplus of the Corporation which is transferred
to stated capital upon the issuance of shares as a stock dividend shall be
deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock and a statement of the designations, relative
rights, preferences and limitations of the shares of each class and series
of capital stock are as follows:
A. Common Stock. Except as provided in this Article IV (or in
any supplementary sections hereto), the holders of the common stock
exclusively shall possess all voting power. Each holder of shares of
common stock shall be entitled to one (1) vote for each share held by such
holder.
Whenever there shall have been paid, or declared and set
aside for payment, to the holders of the outstanding shares of any class of
stock having preference over the common stock as to the payment of
dividends, the full amount of dividends and of sinking fund or retirement
fund or other retirement payments, if any, to which such holders are
respectively entitled in preference to the common stock, then dividends may
be paid on the common stock and on any class or series of stock entitled to
participate therewith as to dividends out of any assets legally available
for the payment of dividends.
In the event of any liquidation, dissolution or winding up
of the affairs of the Corporation, the holders of the common stock (and the
holders of any class or series of stock entitled to participate with the
common stock in the distribution of assets) shall be entitled to receive,
in cash or in kind, the assets of the Corporation available for
distribution remaining after (i) payment or provision for payment of the
Corporation's debts and liabilities, and (ii) distributions or provision
for distributions to holders of any class or series of stock having
preference over the common stock in the liquidation, dissolution or winding
up of the affairs of the Corporation. Each share of common stock shall
have the same relative rights as, and be identical in all respects with,
all other shares of common stock.
12
<PAGE>
B. Preferred Stock. The Corporation may provide in
supplementary sections to these Articles of Incorporation for one or more
classes of preferred stock, each of which shall be separately identified.
The shares of any class may be divided into and issued in series, with each
series separately designated so as to distinguish the shares thereof from
the shares of all other series and classes. The terms of each series shall
be set forth in a supplementary section to the Articles of Incorporation.
All shares of the same class shall be identical except as to the following
designations, relative rights, preferences and limitations, as to which
there may be variations between different series:
(1) The distinctive serial designation and the number of
shares constituting such series;
(2) The dividend rates or the amount of dividends to be
paid on the shares of such series, whether dividends shall be cumulative
and, if so, from which date or dates, the payment date or dates for
dividends and the participating or other special rights, if any, with
respect to dividends;
(3) The voting powers, full or limited, if any, of shares
of such series;
(4) Whether the shares of such series shall be redeemable
and, if so, the price or prices at which, and the terms and conditions on
which, such shares may be redeemed;
(5) The amount or amounts payable upon the shares of such
series in the event of voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation;
(6) Whether the shares of such series shall be entitled to
the benefit of a sinking or retirement fund to be applied to the purchase
or redemption of such shares, and if so entitled, the amount of such fund
and the manner of its application, including the price or prices at which
such shares may be redeemed or purchased through the application of such
fund;
(7) Whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes of stock of
the Corporation and, if so, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made and any other terms and conditions of
such conversion or exchange;
(8) The price or other consideration for which the shares
of such series shall be issued; and,
(9) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of the
same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have
the same designations, relative rights, preferences and limitations as, and
be identical in all respects with, all the other shares of the same series.
The directors shall have authority to divide, by the adoption of
supplementary sections to these Articles of Incorporation, any authorized
class or preferred stock into series and, within the limitations set forth
in this Article IV or otherwise in these Articles of Incorporation, to fix
13
<PAGE>
and determine the designations, relative rights, preferences and
limitations of the shares of any series so established.
Prior to the issuance of any preferred shares of a series
established by a supplementary section to the Articles of Incorporation
adopted by the directors, the Corporation shall file with the North
Carolina Secretary of State a dated copy of that supplementary section of
these Articles of Incorporation establishing and designating the series and
fixing and determining the designations, relative rights, preferences and
limitations thereof.
Exhibit B
---------
Proposal 2
----------
RESOLVED, that the Board of Directors hereby proposes and adopts the
following amendment to the Articles of Incorporation of the Corporation,
subject to the approval of the shareholders of the 1997 Annual Meeting, by
adding a new Article XIV which shall read in its entirety as follows:
ARTICLE XIV
Any person serving as a director of this Corporation may only be
removed for "cause" by the shareholders represented by a majority of all
shares entitled to vote at an annual or special meeting of this
Corporation. The term "cause" for the purposes of this Section shall mean
(i) the criminal prosecution and conviction during the course of the
director's service as a director of this Corporation of an act of fraud,
embezzlement, theft or personal dishonesty (excepting minor traffic and
similar violations in the nature of a misdemeanor under North Carolina
law); (ii) the prosecution and conviction of any criminal offense involving
dishonesty or breach of trust described in the Federal Deposit Insurance
Act, as amended, or any successor federal statute that would disqualify
such director from serving as a director of the Corporation or any of its
wholly owned depository institution subsidiaries; (iii) the occurrence of
any event resulting in a director being excluded from coverage, or having
coverage limited as to the director when compared to other covered
directors, under any of the Corporation's fidelity bonds or insurance
policies covering its directors, officers or employees; or (iv) such
director being absent without excuse from 25% of the Board of Directors
meetings held during any 12 consecutive month period.
Exhibit C
---------
RESOLVED, that the Board of Directors hereby adopts the following
amendments to the bylaws of the Corporation, such amendments being adopted,
upon advice of counsel, to modernize and streamline the bylaws of the
Corporation without the necessity of shareholder approval:
ARTICLE II
Section 4. Special Meetings. Shall be amended in its entirety to
read as follows: "Special meetings of the shareholders may be called at any
time by the Chairman, any Vice Chairman, President, Secretary or by the
Board of Directors of the Corporation."
14
<PAGE>
Section 9. Informal Action by Shareholders. Shall be amended by
eliminating Section 9 in its entirety and Section 10 shall be renumbered as
Section 9.
ARTICLE III
NOMINATING COMMITTEE
Article III shall be amended by adding new Sections 11 and 12 to read
as follows:
Section 11. Nominating Committee. Only persons who are
nominated in accordance with the provisions set forth in these bylaws shall
be eligible to be elected as directors at an annual or special meeting of
shareholders. Nomination for election to the Board of Directors shall be
made by or at the direction of the Board of Directors or a Nominating
Committee appointed by the Board of Directors. Such Nominating Committee
shall meet at the request of the President at least annually and shall
include at least three (3) directors.
Nomination for election of any person to the Board of Directors
may also be made by a shareholder entitled to vote on such election if
written notice of the nomination of such person shall have been delivered
to the Secretary of the Corporation at the principal office of the
Corporation not less than 60 days nor more than 90 days prior to any annual
or special meeting called for the purpose of electing directors; provided,
however, that if less than 70 days' notice or prior public disclosure of
the date of such meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the
date of such meeting or such public disclosure was made. Each such notice
shall set forth: (a) the name and address of the shareholder who intends
to make the nomination; (b) a representation that such shareholder is a
holder of record of shares of the Corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) as to each
person to be nominated (i) such person's name and address, employment
history for the past five years, affiliations, if any, with the Corporation
and other corporations, the class and number of shares of the Corporation
that are owned of record or beneficially by such person and information
concerning any transactions in such shares within the prior 60 days,
whether such person has been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) within the past five years and
the details thereof, whether such person has been a party to any proceeding
or subject to any judgment, decree or final order with respect to
violations of federal or state securities laws within the past five years
and the details thereof, and the details of any contract, arrangement,
understanding or relationships with any person with respect to any
securities of the Corporation, (ii) such person's written consent to being
named as a nominee and to serving as a director if elected, and (iii) a
description of all arrangements or understandings between the shareholder
and each nominee and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are to be made by
the shareholder. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing
procedure.
Section 12. Retirement Policy for Directors. Each director
shall retire at the regularly scheduled meeting of shareholders following
his attainment of the age of 70 years whether or not such director's term
as a director has expired.
15
<PAGE>
GUARANTY STATE BANCORP
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF GUARANTY STATE BANCORP
The undersigned, revoking all prior proxies, hereby appoints Robert F. Baker, E.
Spurgeon Booth, Jr. and N. Wayne Campbell, or any of them, with full power of
substitution, attorneys-in-fact and proxies to appear and vote, as indicated
below, all of the true and lawful shares of Common Stock of Guaranty State
Bancorp (the "Corporation") that the undersigned would be entitled to vote at
the annual meeting of shareholders to be held at 2:00 p.m. on May 1, 1997, at
the Omni Durham Hotel and Convention Center, 201 Foster Street, Durham, North
Carolina, and at any and all adjournments thereof, as follows:
1. AMENDMENT OF ARTICLE IV OF THE ARTICLES OF INCORPORATION TO PROVIDE FOR
COMMON AND PREFERRED STOCK.
The amendment in its entirety of Article IV of the Articles of Incorporation
of the Corporation to increase the number of authorized shares from
2,500,000 shares of common stock to 4,000,000, and to authorize the issuance
of up to 1,000,000 shares of serial preferred stock which may be issued from
time to time by the Board of Directors.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
2. AMENDMENT OF THE ARTICLES OF INCORPORATION TO PROVIDE FOR REMOVAL OF
DIRECTORS ONLY FOR "CAUSE".
To provide for a new Article XIV to the Articles of Incorporation whereby
directors may only be removed for "cause".
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
<PAGE>
3. ELECTION OF DIRECTORS.
The election to the Board of Directors of the following three nominees of the
Board of Directors of the Corporation, all of whom have consented to being
nominated and all of whom will serve, if elected, for a term of three years or
until his successor is duly elected.
Susan C. Ross
Charles J. Stewart
David W. Wiggins
[ ] FOR the nominees listed as a group.
[ ] FOR the nominees listed except as marked to the contrary.
[ ] WITHHOLD AUTHORITY to vote for the nominees listed as a
group.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THE NOMINEE'S NAME.)
4. RATIFICATION OF SELECTION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
The ratification of the selection by the Board of Directors of Coopers &
Lybrand, L.L.P. as the Corporation's independent certified public accountants to
audit its accounts and financial statements for the fiscal year ending December
31, 1997.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
5. OTHER BUSINESS.
In their discretion the proxies are authorized to vote upon such other business
as may properly come before the meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS
MARKED HEREIN. IF INSTRUCTIONS ARE NOT INCLUDED HEREIN, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2 AND 4 AND FOR THE ELECTION OF EACH OF THE NOMINEES FOR
DIRECTOR AS LISTED IN PROPOSAL 3 BY CASTING AN EQUAL NUMBER OF VOTES FOR EACH
SUCH NOMINEE. IF, AT OR BEFORE THE TIME OF THE MEETING, ANY NOMINEE LISTED IN
PARAGRAPH 3 BECOME UNAVAILABLE FOR ANY REASON, THE PROXIES ARE AUTHORIZED TO
VOTE FOR A SUBSTITUTE NOMINEE.
<PAGE>
Please sign exactly as your name appears on your stock certificate(s). If the
holder is a corporation or partnership, please sign its name and add your own
name and title. When signing as attorney, executor, administrator, trustee or
guardian, please also give your full title. If shares are held jointly, EACH
holder should sign. Persons signing in any capacity other than as an individual
should give full title and authority.
The undersigned hereby further acknowledges receipt of the Notice of Annual
Meeting of Shareholders, dated March 26, 1997, and the Proxy Statement furnished
therewith.
Sign: _________________________________________________________
Sign: _________________________________________________________
Please type or print
Name: ________________________________________________________
Date: ________________________________________________________
IMPORTANT: Please MARK, SIGN AND DATE this Proxy and return it promptly in the
enclosed envelope. No postage is required if mailed in the United States.
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GUARANTY STATE BANCORP FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,189,899
<SECURITIES> 22,675,417
<RECEIVABLES> 66,206,471
<ALLOWANCES> 1,073,274
<INVENTORY> 0
<CURRENT-ASSETS> 406,769
<PP&E> 3,596,325
<DEPRECIATION> (1,441,308)
<TOTAL-ASSETS> 96,559,996
<CURRENT-LIABILITIES> 86,110,440
<BONDS> 0
0
0
<COMMON> 880,053
<OTHER-SE> 9,596,503
<TOTAL-LIABILITY-AND-EQUITY> 96,559,996
<SALES> 0
<TOTAL-REVENUES> 7,901,245
<CGS> 0
<TOTAL-COSTS> 3,597,364
<OTHER-EXPENSES> 2,563,992
<LOSS-PROVISION> 142,836
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,597,053
<INCOME-TAX> 516,606
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,080,447
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
