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 June 30, 1996
Commission file number 0-18265
GUARANTY FINANCIAL CORPORATION
(Name of Small Business Issuer in its Charter)
Virginia 54-1786496
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
1700 Seminole Trail, 22901
Charlottesville, Virginia (Zip Code)
(Address of Principal Executive Offices)
(804) 974-1100
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Act:
Common Stock, $1.25 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_X_]
The issuer's gross income for its most recent fiscal year was
$8,723,750.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average of the closing bid and asked prices of such
stock as of June 30, 1996 was aproximately $4,382,985. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the registrant that such person is an affiliate of the
registrant.)
The number of shares outstanding of Common Stock as of June 30, 1996
was 919,168.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-KSB - Proxy Statement for the 1996
Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
Guaranty Financial Corporation ("Guaranty" or the "Corporation") is a
Virginia corporation which was organized in 1995 by Guaranty Savings and Loan,
F.A. (the "Bank") for the purpose of becoming a unitary savings and loan holding
company. The Bank is a federally chartered savings association which began
business in February 1981 and is headquartered in Charlottesville, Virginia. The
Bank is a member of the Federal Home Loan Bank System ("FHLBS") and its deposits
are insured by the Savings Associations Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). The Office of Thrift Supervision
("OTS"), created by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA"), serves as the primary regulator for thrifts such as the
Bank.
Effective December 29, 1995, the Corporation acquired all of the issued
and outstanding standing shares of Common Stock of the Bank. The principal asset
of the Corporation is the outstanding stock of the Bank, its wholly owned
subsidiary. The Corporation presently has no separate operations and its
business consists only of the business of the Bank. All references to Guaranty,
unless otherwise indicated, at or before December 29, 1995, refer to the Bank
and its subsidiaries on a consolidated basis. The Corporations' Common Stock is
quoted on the National Association of Securities Dealers Automated Quotations
("NASDAQ") System under the symbol "GSLC".
Guaranty's principal business activities are attracting checking and
savings deposits from the general public through its retail banking offices and
originating, servicing, investing in and selling loans secured by first mortgage
liens on single-family dwellings, including condominium units. Of Guaranty's $85
million of mortgages outstanding at June 30, 1996, 80% represented residential
first mortgages. Guaranty also lends funds to retail banking customers by means
of home equity, installment loans, and, to a lesser extent, originates loans
secured by commercial property and multi-family dwellings. Guaranty invests in
certain United States government and agency obligations and other investments
permitted by applicable laws and regulations.
Guaranty's main office is located at 1700 Seminole Trail,
Charlottesville, Virginia 22906 and the telephone number is (804) 974-1100.
Market Area
Guaranty is the only independent community bank or savings and loan
association headquartered in, or even with an office in, Charlottesville or
Albemarle County, Virginia. This area had a collective population of
approximately 108,000 in 1990 according to census figures, is located in central
Virginia 110 miles southwest of Washington, D.C. and 70 miles west of Richmond,
Virginia, and includes the University of Virginia, the area's largest employer.
Guaranty operates three full service retail branches, which serve
Charlottesville and Albemarle County. In October 1995, construction began on a
combined headquarters and fourth retail branch located on the east side of
Charlottesville in the Pantops area of Albemarle County. The new facility is
expected to be opened in November 1996. Guaranty also purchased land in the city
of Harrisonburg to construct a fifth retail branch. An application was filed and
approved by regulatory authorities. It is anticipated that the branch will begin
construction in early 1997.
Competition
Guaranty faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from commercial banks, mortgage bankers and to a lesser extent other
thrift institutions who also make loans secured by real estate located in the
Bank's market area. The Bank competes for real estate loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Guaranty faces substantial competition in attracting deposits from
commercial banks, money market and mutual funds, credit unions and other
investments vehicles. There are no other thrift institutions in Charlottesville.
The ability of Guaranty to attract and retain deposits depends on its ability to
provide an investment opportunity that satisfies the requirements of investors
as to rate of return, liquidity, risk and other factors. Guaranty competes for
these deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours, and being the only locally based thrift in
Charlottesville.
As a result of negative publicity regarding the thrift industry, there
have been significant deposit outflows from savings institutions nationwide.
Such publicity had made it more difficult for Guaranty to attract and retain
deposits. However, in the year ended June 30, 1996, Guaranty was able to
increase its deposits significantly. Deposits grew 42% over the previous year.
This deposit growth is a reflection of aggressive pricing, increased marketing
and competitive products and services.
Within Charlottesville and Albemarle County there are four statewide
and two regional commercial banks and financial institutions with a larger
deposit base than Guaranty that compete with Guaranty. Accordingly, Guaranty
operates in a highly competitive environment, competing for deposits and loans
with commercial banks, and other financial institutions, including non-savings
and loan competitors, many of which possess substantially greater financial
resources than those available to Guaranty. Certain of these institutions have
significantly higher lending limits than Guaranty. In addition, there can be no
assurance that other financial institutions, with substantially greater
resources than Guaranty, will not establish operations in Guaranty's service
area.
Lending Activities
General
Guaranty's loan portfolio consists primarily of mortgage loans, the
majority of which are residential first mortgage loans.
Residential loan originations come primarily from walk-in customers,
real estate brokers and builders. Commercial real estate loan originations are
obtained through broker referrals, direct solicitation of developers and
continued business from customers. All completed loan applications are reviewed
by Guaranty's salaried loan officers. As part of the application process,
information is obtained concerning the income, financial condition, employment
and credit history of the applicant. If commercial real estate is involved,
information is also obtained concerning cash flow after debt service. Loan
quality is analyzed based on the Bank's experience and guidelines with respect
to credit underwriting as well as the guidelines issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA")
and other purchasers of loans, depending on the type of loan involved. The
non-conforming one- to four-family adjustable-rate mortgage loans originated by
Guaranty, however, are not readily saleable in the secondary market due to the
fact that they do not typically meet all of the secondary marketing guidelines.
These loans are evaluated by the loan committee for "overall" merit and will not
exceed an 80% LTV. Real estate is appraised by independent fee appraisers who
have been pre-approved by the Board of Directors. Loans are submitted to the
underwriting department within loan administration for review. All conforming
loans including HUD/FHA, VA and applicable VHDA loans are underwritten and acted
upon within loan administration requiring two signatures of approval. All
non-conforming loans and loans which have been denied or even denied/canceled
within the branches are to be reconsidered and evaluated by a panel comprised of
the underwriting staff and Guaranty's President and Vice President of Mortgage
Lending. Loans of $350,000.00 or more must also be approved by the Board of
Directors.
Guaranty is the primary provider of residential mortgage loans in the
markets it serves. For conventional loans in excess of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75% loan to
value. In addition to fixed mortgage loans, Guaranty makes adjustable rate
mortgages with the primary loan indexed to the one year treasury. Generally, if
the loans are not made to credit standards of FHLMC, additional fees and rate
are charged and the loans are maintained in Guaranty's portfolio.
In the normal course of business, Guaranty makes various commitments
and incurs certain contingent liabilities which are disclosed but not reflected
in its annual financial statements, including commitments to extend credit. At
June 30, 1996, commitments to extend credit totaled $9.6 million. (See footnote
15 of the financial statements.)
One- to Four-Family Residential Real Estate Lending
Guaranty's primary lending program is the origination of loans secured
by one- to four-family residences, all of which have been located in its market
area. Guaranty evaluates both the borrower's ability to make principal and
interest payments and the value of the property that will secure the loan.
Federal law permits Guaranty to make loans in amounts of up to 100% of the
appraised value of the underlying real estate. Loans are made with a loan to
value up to 95% for conventional mortgage loans and up to 100% for loans
guaranteed by either the Federal Housing Authority ("FHA") or the Veterans
Administration ("VA"). For conventional loans in excess of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75% loan to
value. In addition to fixed rate mortgage loans, Guaranty makes adjustable rate
mortgages with the primary loan indexed to the one year treasury. Generally if
the loans are not made to credit standards of FHLMC, additional fees and rate
are charged and the loans are maintained in Guaranty's portfolio. If the loan to
value exceeds 80%, private mortgage insurance is generally secured.
Most savings institutions, including Guaranty, historically made one-
to four-family residential mortgage loans on a 30-year fixed rate basis. Due to
prepayments and refinancings, the average actual maturity of 30-year loans in
the past has been substantially shorter.
In order to reduce its exposure to changes in interest rates, Guaranty
has de-emphasized the origination of 30-year fixed-rate one- to four-family
residential mortgage loans for retention in its own portfolio. For the year
ended June 30, 1996, 30.5% of all one- to four-family residential loans
originated by Guaranty had adjustable interest rates. Although, due to
competitive market pressures, the Bank does originate fixed-rate mortgage loans,
it currently underwrites and documents all such loans to permit their sale in
the secondary mortgage market. At June 30, 1996, $28.9 million, or 43.7%, of
Guaranty's one- to four-family residential mortgage loan portfolio consisted of
fixed-rate mortgage loans.
Guaranty's current one- to four-family residential adjustable-rate
mortgage ("ARMs") have interest rates that adjust every year, generally in
accordance with the rates on one-year U.S. Treasury Bills. Guaranty's ARMs
generally limit interest rate increases to 2% each rate adjustment period and
have an established ceiling rate at the time the loans are made of up to 6% over
the original interest rate. Borrowers are qualified at the first year interest
rate plus 2%. To compete with other lenders in its market area, Guaranty makes
one-year ARMs at interest rates which, for the first year, are below the index
rate which would otherwise apply to these loans. At June 30, 1996, $37.2
million, or 56.3%, of Guaranty's one- to four-family residential mortgage loan
portfolio consisted of ARMs. There are unquantifiable risks resulting from
potential increased costs to the borrower as a result of repricing. It is
possible, therefore, that during periods of rising interest rates, the risk of
defaults on ARMs may increase due to the upward adjustment of interest costs to
borrowers.
All one- to four-family real estate mortgage loans being originated by
Guaranty contain a "due-on-sale" clause providing that Guaranty may declare the
unpaid principal balance due and payable upon the sale of the mortgage property.
It is Guaranty's policy to enforce these due-on-sale clauses concerning
fixed-rate loans and to permit assumptions of ARMs, for a fee, by qualified
borrowers.
Guaranty requires, in connection with the origination of residential
real estate loans, title opinions and fire and casualty insurance coverage, as
well as flood insurance where appropriate, to protect Guaranty's interest. The
cost of this insurance coverage is paid by the borrower. Guaranty does require
escrows for taxes and insurance.
Construction Lending
As part of its community involvement, Guaranty makes local construction
loans, primarily residential and lot loans. The construction loans are secured
by the property for which the loan was obtained. At June 30, 1996, construction
and land loans outstanding were $8.8 million, or 10%, of total loans
outstanding. The average life of a construction loan is approximately nine
months and they reprice daily to meet the market, normally prime plus two
percent. Because the interest charged on these loans float with the market they
help Guaranty in managing its interest rate sensitivity.
Commercial Real Estate Lending
Guaranty has originated, to a small degree, commercial real estate
loans. These loans are secured by various types of commercial real estate,
including multi-family residential buildings, commercial buildings and offices,
small shopping centers and churches. At June 30, 1996, commercial real estate
aggregated $7.7 million or 8.7% of Guaranty's total loans receivable. Guaranty's
commercial real estate loans are generally made at interest rates that adjust
based on yields for one-year U.S. Treasury securities, with a 2% annual cap on
rate adjustments and a 6% cap on interest rates over the life of the loan.
Typically, Guaranty charges fees ranging from 1% to 2% on these loans. At June
30, 1996, Guaranty's commercial real estate loans were all adjustable.
Commercial real estate loans made by Guaranty generally amortize over 20 to 30
years and may have a call provision of 3 or 5 years. Guaranty's commercial real
estate loans are secured by properties in the Bank's market area.
In its underwriting of commercial real estate, Guaranty may lend, under
federal regulation, up to 100% of the security property's appraised value,
although Guaranty's loan to original appraised value ratio on such properties is
80% or less. Guaranty's commercial real estate loan underwriting criteria
require an examination of debt service coverage ratios, the borrower's
creditworthiness and prior credit history and reputation, and Guaranty generally
requires personal guarantees or endorsements of borrowers. Guaranty also
carefully considers the location of the security property.
Consumer Lending
Federal thrift institutions are permitted to make both secured and
unsecured consumer loans reasonably incident to personal or household purposes.
In general, loans made under these investment powers may not exceed 30% of a
federally-chartered thrift institution's total assets.
Guaranty offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit, share loans, automobile loans,
deposit account loans, installment and demand loans, letters of credit, and home
equity loans. At June 30, 1996, Guaranty had consumer loans of $5.4 million or
6% of total loans. During fiscal year 1996, Guaranty increased its level of
consumer loans. Such loans were generally made to customers with which Guaranty
had an pre-existing relationships and were generally in amounts of under
$75,000. Guaranty originates all of its consumer loans in its market area and
intends to continue its consumer lending in this geographic area.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
lines of credit, or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loan such as Guaranty,
and a borrower may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral. Guaranty adds
general provisions to its loan loss allowance at the time the loans are
originated. Consumer loan delinquencies often increase over time as the loans
age.
The underwriting standards employed by Guaranty for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income for primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes an analysis
of the value of the security in relation to the proposed loan amount.
During fiscal year 1996, Guaranty began offering all types of consumer
loans due to its improved capital position. Generally these loans provide higher
yields than one-to-four-family mortgages.
Regulation
General
As a federally chartered savings association, the Bank is subject to
regulation, supervision and periodic examination by the OTS and the FDIC. The
regulations of these agencies govern most aspects of Guaranty's business and
operations. The Bank's deposits are insured by the SAIF administered by the FDIC
to the maximum amount by law, which is currently $100,000 per depositor in most
cases.
The primary regulator for federal and state savings institutions is now
the Office of Thrift Supervision ("OTS"), an office in the United States
Department of the Treasury. The Director of the OTS is responsible for the
examination and supervision of all savings institutions.
The OTS has authority to issue regulations, conduct examinations and
supervise the operations of savings institutions. The OTS regulatory scheme is
comprehensive and governs, among other things, capital requirements, equity
investments, affordable housing, liquidity, securities issuances, the form of
savings instruments issued by savings institutions, certain aspects of a savings
association's lending activities, including appraisal requirements, maximum loan
amounts, private mortgage insurance coverage, lending authority and
nondiscriminatory lending practices. OTS regulations also restrict transactions
between savings institutions and affiliated parties which are deemed to be a
conflict of interest under the regulations. In addition, the OTS's consent is
required prior to any major corporate reorganization, including a merger or
purchase or disposition of assets.
Deposit accounts of savings associations are insured by the SAIF,
which is administered by the FDIC. The FDIC administers insurance on deposits at
all federally insured institutions. It operates two subfunds: the Bank Insurance
Fund ("BIF") for institutions which paid FDIC insurance in the past; and the
SAIF for those institutions formerly insured by the Federal Savings and Loan
Insurance Corporation ("FSLIC"). The FDIC must segregate assessments, premiums
and administrative expenses between its two subfunds. As administrator of the
SAIF, the FDIC may prohibit any activity found to pose a serious risk of loss to
the insurance funds.
The Federal Home Loan Bank System
All savings associations that make long-term home mortgage loans are
required to be members of the regional Federal Home Loan Banks ("FHLBs"), which
in turn are overseen by the Federal Housing Finance Board. The Bank, as a member
of the Federal Home Loan Bank System, holds shares of capital stock in the FHLB
of Atlanta.
The Bank is authorized to apply for advances from the FHLB of Atlanta,
provided certain standards related to creditworthiness have been met. Advances
are made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses for advances as well as limitations on the size of advances. Long-term
advances may only be made by FHLBs for the purpose of providing funds for
residential housing finance. Additionally, at the time of origination or renewal
of a loan or advance, FHLBs must obtain a security interest in collateral in the
form of the following low-risk assets: whole loans, United States Government or
mortgage-backed securities, FHLB deposits, and certain real estate. At June 30,
1996, the Bank had $17.5 million in advances from the FHLB of Atlanta.
Federal Reserve System
The Board of Governors of the Federal Reserve System ("FRB") requires
savings associations to maintain reserves against their transaction accounts
(primarily NOW accounts) and non-personal time deposits. FRB regulations
generally exempt from reserve requirements the first $3.8 million in net
transaction accounts. Reserves of 3% (subject to adjustment by the FRB) must be
maintained against net transaction accounts from $3.8 to $46.8 million, and a
reserve of $1,404,000 plus 10% against that portion of total transaction
accounts in excess of $46.8 million must be maintained. The FRB regulations do
not presently require reserves to be maintained on time deposits and savings
accounts.
The balances on deposits to meet the reserve requirements imposed by
the FRB may also be used to satisfy the liquidity requirements that are imposed
by the OTS. See "-Liquidity Requirements."
Capital Requirements
OTS regulations set the minimum risk-based capital requirements at 8%
of risk-weighted assets, the minimum leverage capital requirements at 3% of
adjusted total assets and the minimum tangible capital requirements at 1.5% of
adjusted total assets.
Under OTS regulations, total capital consists of two types of capital:
"core capital elements" and "supplementary capital elements." Core capital
consists of common and qualifying preferred shareholders' equity, minority
interests in the equity accounts of fully consolidated subsidiaries,
nonwithdrawable accounts and certain pledged deposits and certain qualifying
supervisory goodwill. Supplementary capital, with certain limitations, may
consist of the allowance for loans and lease losses (which cannot exceed 1.25%
of a savings bank's risk-weighted assets), perpetual preferred stock, term
subordinated debt and intermediate term preferred stock, certain hybrid capital
instruments, and mandatory convertible debt securities. The maximum amount of
supplemental capital that may be included in an institution's qualifying capital
is limited to 100% of core capital.
Tangible capital includes core capital less qualifying supervisory
goodwill and other intangible assets, plus purchased mortgage servicing rights.
Risk-weighted assets equal total assets plus consolidated off-balance sheet
items where each asset or item is multiplied by a risk-weight assigned by the
OTS. Off-balance sheet items are converted to on-balance sheet equivalents and
then assigned a risk-weight.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating the risk-based capital requirement. As a
result, such an institution will be required to maintain additional capital in
order to comply with the risk-based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio value exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease (with
certain minor exceptions) in interest rates. The interest rate risk component
will be calculated on a quarterly basis, as one-half of the difference between
an institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject to a two quarter "lag" time between the reporting date of the data
used to calculate an institution's interest rate risk and the effective date of
each quarter's interest rate risk component. However, in October 1994 and March
1995, the Director of the OTS indicated that it would waive the capital
deductions for institutions with a greater that "normal" risk until the OTS
publishes an appeals process, which the OTS expects will occur shortly. The OTS
indicated in the final rule that it intended to lower the leverage ratio
requirement to be "adequately capitalized" (as defined in its prompt corrective
action regulation) to 3.0% from the current level of 4.0% on July 1, 1994.
Management of Guaranty does not believe that the OTS' adoption of an interest
rate risk component to the risk-based capital requirement will have an adverse
affect on Guaranty if it becomes effective in its current form.
Higher individual capital requirements may be imposed by the OTS on
savings institutions on a case-by-case basis if the OTS determines it to be
necessary or appropriate, pursuant to the regulations and guidelines issued by
the OTS for this purpose.
For a discussion of the Bank's risk-based and capital ratios, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Capital Requirements."
Failure to Meet Capital Requirements
Federal law establishes five capital categories for insured depository
institutions: (a) Well Capitalized; (b) Adequately Capitalized; (c)
Undercapitalized; (d) Significantly Undercapitalized; and (e) Critically
Undercapitalized. Regulations which became effective December 19, 1992, define
the relevant capital measures for the four highest capital categories to be the
ratio of total Tier 1 capital to risk-weighted assets (the total risk-based
ratio), the ratio of Tier 1 to risk-weighted assets (the Tier 1 risk-based
ratio) and the ratio of Tier 1 capital to total average assets (the leverage
ratio).
Well-Capitalized means a financial institution with a total risk-based
ratio of 10% or more, a Tier 1 risk-based ratio of 6% or more and a leverage
ratio of 5% or more, so long as the institution is not subject to an order,
written agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. Adequately
Capitalized means a total risk-base ratio of 8% or more, a Tier 1 risk-based
ratio of 4% or more and a leverage ratio of 4% or more (3% or more if the
institution has received the highest corporate rating in its most recent report
of examination) and does not meet the definition of a Well-Capitalized
institution. Undercapitalized means a financial institution with a total
risk-based ratio of less than 8%, a Tier 1 risk-based ratio of less than 4% or a
leverage ratio of less than 4%. Significantly Undercapitalized means a financial
institution with a total risk-based ratio of less than 6%, a Tier 1 risk-based
ratio of less than 3% or a leverage ratio of less than 3%. Critically
Undercapitalized means a financial institution with a ratio of tangible equity
to total assets that is equal to or less than 2%. At June 30, 1996, Guaranty was
Well Capitalized.
Undercapitalized institutions are subject to the following mandatory
supervisory actions: (1) increase monitoring and periodic review of the
institution's efforts to restore its capital; (2)requirements that the
institution submit a capital restoration plan, which must include (a) the steps
the institution will take to become adequately capitalized, (b) the levels of
capital to be attained during each year in which the plan will be in effect, (c)
how the institution will comply with restrictions or requirements imposed on its
activities, and (d) the types and levels of activities in which the institution
will engage; (3) restrictions on growth of the institution's total assets; and
(4) limitations on the institution's ability to make any acquisition, open any
new branch offices or engage in any new line of business.
Significantly Undercapitalized institutions and Undercapitalized
institutions that fail to submit and implement adequate capital restoration
plans and subject to the four mandatory provisions applicable to
Undercapitalized institutions and, in addition, will be required to do or comply
with one or more of the following: (1) sell enough additional capital, including
voting shares, to bring the institution to an Adequately Capitalized level; (2)
restrict transactions with affiliates; (3) restrict interest rates paid on
deposits to the prevailing rates in the region where the institution is located;
(4) restrict asset growth or reduce total assets; (5) terminate, reduce or alter
any activity (including any activity conducted by a subsidiary of the
institution) determined by banking regulatory agency to pose an excessive risk
to the institution; (6) hold a new election for the institution's board of
directors; (7) dismiss directors or senior officers and/or employ new officers,
subject to agency approval; (8) cease accepting deposits from correspondent
depository institutions; (9) divest or liquidate any subsidiary that is in
danger of becoming insolvent and poses a significant risk to the institutions or
that is likely to cause significant dissipation of the institution's assets or
earnings; or (10) any Bank that controls the institution may be required to
divest itself of any affiliate of the institution (other than another depository
institution) if the federal banking agency for the holding Bank determines that
the affiliate is in danger of becoming insolvent and poses a significant risk to
the institution or is likely to cause significant dissipation of the
institution's assets or earnings.
In addition, Significantly Undercapitalized institutions are prohibited
from paying any bonus or raise to a senior executive officer without prior
agency approval. No such approval will be granted to an institution which is
required to but has failed to submit an acceptable restoration plan.
A Critically Undercapitalized institution faces even more severe
restrictions. In addition to those steps that can be taken with respect to
Significantly Undercapitalized institutions, a Critically Undercapitalized
institution must be placed in conservatorship or receivership within 90 days of
becoming Critically Undercapitalized, unless the appropriate federal banking
agency determines, with FDIC concurrence, that other action would be more
appropriate. In addition, Critically Undercapitalized institutions are
prohibited from taking a number of actions, including making payments on
subordinated debt, financing highly leveraged transactions, adopting charter or
by-laws amendments, materially changing accounting methods, or paying excessive
compensation or bonuses, without obtaining prior written regulatory approval.
The OTS must prohibit any asset growth by savings institutions not in
compliance with capital standards, except for specific growth expressly approved
according to certain guidelines. In addition, through enforcement proceedings or
otherwise, the OTS may require any savings institution not in compliance with
the minimum capital requirements to take one or more of the following corrective
actions, which include: (1) increasing the amount of regulatory capital to a
specified level; (2) reducing interest payable on savings account; (3) ceasing
or limiting acceptance of new accounts; (4) ceasing or limiting lending or the
making of a particular type of category of loan; (5) ceasing or limiting the
purchase of loans or the making of specified other investments; (6) limiting
operational expenditures; (7) increasing liquid assets; or (8) taking such other
actions as the OTS may deem appropriate for the safety and soundness of the
institution, its depositors and investors.
Failure to meet OTS capital requirements can serve as a basis for
placing an institution in conservatorship or in receivership. Failure to satisfy
an individual capital ratio constitutes a legal basis for a capital directive
against an institution, which may contain those restrictions the OTS deems
appropriate. A savings institution may apply for an exemption from the
provisions of a capital directive, which must be accompanied by a capital plan
acceptable to the OTS. The OTS District Director will treat as an unsafe and
unsound practice any material failure by a savings association to comply with
any plan, regulation or written agreement undertaken to comply with these
requirements.
Restrictions on Capital Distributions
Savings institutions have limitations imposed on all "capital
distributions," including cash dividends, payments to repurchase or otherwise
acquire its shares, payments to shareholders or another institution in a
cash-out merger and other distributions charged against capital. OTS regulations
generally create a safe harbor for specified levels of capital distribution by
most savings institutions meeting at least their minimum capital requirements,
so long as such institutions notify the OTS and receive no objection to the
distribution from the OTS. Savings institutions which make distribution that do
not qualify for the safe harbor are required to obtain prior OTS approval before
making any capital distribution.
Liquidity Requirements
The OTS requires savings institution to maintain for each calendar
month an average daily balance of "liquid assets" (cash, certain time deposits,
bankers' acceptances, certain corporate obligations and specified United States
Government, state or federal agency obligations) of not less than 5% of the
average daily balance of the institution's "liquidity base" (net withdrawable
savings deposits plus short-term borrowings) during the preceding calendar
month. In addition, savings associations must maintain an average daily balance
of short-term liquid assets of not less than 1% of the average daily balance of
its liquidity base during the preceding calendar month.
For the month ending June 30, 1996, the Bank's average liquidity ratio
was 8.46%.
Investment and Lending Restrictions
Under the Home Owner's Act of 1933, as amended, the Bank is subject to
limitations on the nature and amount of some types of investments and loans it
may make. Under the regulations of the OTS, savings institutions are permitted
to invest up to 30% of assets in state housing corporations, provided that such
loans are secured by an insured first lien on improved real estate which is
insured under the National Housing Act, as amended. The ability of savings
institutions to invest in the accounts of commercial banks of other savings
institutions, and debt securities hedged with a firm forward commitment, is
limited.
Federal law imposes on savings institutions loans-to-one-borrower
limitations which are also applicable to national banks. Subject to certain
exceptions, savings institutions may lend up to 15% of the institution's
unimpaired capital and unimpaired surplus to a single borrower, plus an
additional 10% of unimpaired capital and unimpaired surplus for loans fully
secured by readily marketable collateral. Readily marketable collateral does not
include real estate.
A savings institution authorized to make loans in excess of 90% of
value on the security of real estate comprising single-family dwellings or
dwelling units for four or fewer families may do so only if such loans are
insured or guaranteed by various government agencies or if such loans comply
with real estate lending standards as set forth in written policies adopted and
maintained by the institution. The policies must establish appropriate limits
and standards for extensions of credit that are secured by liens on or interest
in real estate, or that are made for the purpose of financing permanent
improvements to real estate. This does not apply to loans to facilitate the sale
of real estate owned as a result of foreclosure, or acquired by deed in lieu of
foreclosure.
Real estate lending policies adopted by a savings and loan must, among
other things, reflect safe and sound banking practices, be appropriate to the
size, nature and scope of the operations of the institution, and be reviewed and
approved by the board of directors at least annually. The policies must
establish loan portfolio diversification standards, prudent underwriting
standards, loan administration procedures and documentation, approval and
reporting requirements to adequately monitor compliance.
Qualified Thrift Lender Test
All savings associations, including the Bank are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (which consists of total assets less intangibles, properties
used to conduct the savings association's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a monthly
average for nine out of every twelve months on a rolling basis. Such assets
primarily consist of residential housing related loans and investments.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an association that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the association is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company, and become subject to all restrictions on
bank holding companies. At June 30, 1996, the Bank met the test and has always
met the test since its effectiveness. See - "Holding Company Regulation".
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions are restricted to a percentage of the association's capital.
Affiliates of Guaranty include any company which is under common control. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however,
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statues also impose restriction on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Deposit Insurance
The FDIA to require the FDIC to establish a risk-based assessment
system for calculating a depository institution's semi-annual deposit insurance
premiums. Under regulations adopted by the FDIC, the risk which each insured
depository institution poses to its insurance fund is determined on the basis of
capital and supervisory evaluations. For purposes of the risk-based assessment
system, insured institutions are divided into three main capital groups: Well
Capitalized, Adequately Capitalized and Undercapitalized. Each of the three
capital categories are further subdivided by three supervisory subgroups:
healthy, supervisory concern and substantial supervisory concern. Each
institution is assigned an assessment based on its placement in the resulting
nine cell matrix. Assessments range from $0.23 per $100 of deposits for healthy,
Well Capitalized institutions to $0.31 per $100 of deposits for Undercapitalized
institutions for which there is substantial supervisory concern.
This risk-based system includes factors intended to assess the
probability that the deposit insurance fund will incur a loss with respect to
the institution. In determining the probability of loss, different categories
and concentrations of assets and liabilities (both insured and uninsured,
contingent and noncontingent) and any other factors that the FDIC determines are
relevant to assessing such probability will be taken into consideration.
Guaranty's deposit insurance premium is currently $0.26 per $100 of deposits.
The Administration and Congress have resolved the premium difference
through a one-time special assessment to recapitalize the SAIF. The
recapitalization of SAIF will result in an assessment against the Bank of
approximately $235,000 on an after tax basis, based upon deposit balances as of
March 31, 1995 and will be charged to earnings in the quarter ended September
30, 1996. The Bank expects its deposit insurance premiums to be reduced from
current levels.
Holding Company Regulation
The Corporation is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Corporation is required to file
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Corporation and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association. This relation and oversight is intended primarily for the
protection of the depositors of the Corporation's subsidiary savings association
and not for stockholders of the Corporation.
As a unitary savings and loan holding company, the Corporation
generally is not subject to activity restrictions, provided the Corporation
satisfies the QTL test. If the Corporation acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of the Corporation and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
The Corporation must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisition are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
In March 1995, the FASB issued its Statements of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lives
Assets and for And if Assets to Be disposed Of." SFAS 121 requires that
long-lived assets and certain intangibles to be held and used by an entity be
reviewed for impairment when events or changes in circumstances indicate that
the carrying amount may not be recoverable. In addition, SFAS 121 long-lived
assets and certain intangibles to be disposed of to be reported at the lower of
carrying amount or fair value less cost to sell. SFAS 121 is effective for
fiscal years beginning after December 15, 1995. Management does not expect the
application of this pronouncement to have a material effect on the financial
statements of the Bank.
In May 1995, the FASB issued its Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights an
Amendment of FASB Statement No. 65." SFAS requires entities that acquire
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with the servicing rights retained
should allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. In addition, SFAS 122 requires entities to assess their
capitilized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995. The Bank elected early adoption and recorded a gain of $161,000 in
fiscal year 1996 on the sale of $12.2 million mortgage loans.
In October 1995, SFAS No. 123, "Accounting for Stock-based
Compensation," was issued. The statement is effective for fiscal years beginning
after December 15, 1995. The statement encourages, but does not require,
companies to expense the fair value of employee stock options, based on the fair
value on the date of the grant. Companies that elect to continue to follow
existing accounting rules (the intrinsic value method which often results in no
compensation expense) must provide pro forma disclosures of net income and
earnings per share which would have been had the new fair value method been
used. In addition, SFAS 123 requires all companies to make significantly more
disclosures regarding employee stock options than is currently required. The
Corporation plans to adopt the disclosure requirements only, of SFAS 123
effective July 1, 1997.
In June 1996, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of the Corporation.
Personnel
At June 30, 1996, Guaranty had a total of 40 employees, including 3
part-time employees. None of the Corporation's employees are represented by a
collective bargaining group. Guaranty believes that its relationship with its
employees is good.
Item 2. Description of Property
Owned or Lease
Lease Renewal
Location Expiration Options
- -------------------------------------------------------------------------------
Executive Offices and Main Branch
1700 Seminole Trail
Charlottesville, Virginia Owned
Downtown Charlottesville Branch Three
520 E. Main Street five-year
Charlottesville, Virginia August 31, 1997 options
Arlington Boulevard Branch Three
1924 Arlington Blvd. five-year
Charlottesville, Virginia September 30, 1999 options
Warehouse
1110 East Market Street
Charlottesville, Virginia February 28, 1997
Future Headquarters and Branch
1658 State Farm Blvd.
Charlottesville, Virginia Owned
Land for Future Branch
Neff Ave. & Reservoir St.
Harrinsonburg, Virginia Owned
At June 30, 1996, the net book value of the Corporation's investment in
premises and equipment was approximately $3.5 million.
The Bank uses the service of an outside processing firm for its data
processing and record keeping functions as to loan accounts, deposit accounts,
and ATM services.
See Notes 3 and 11 of Notes to Consolidated Financial Statements on
pages 21 and 29 of the Annual Report.
Item 3. Legal Proceedings
No legal proceedings are pending at this time involving the Corporation
as a party or affecting any property of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock has been listed on the NASDAQ SmallCap Market under
the symbol "GSLC" since June 29, 1995. Prior to listing on NASDAQ, there was no
established trading market. At June 30, 1996, the Corporation had approximately
628 shareholders of record.
The following table lists the high and low prices for the common stock
for the four quarters ended June 30, 1996. Prices have been adjusted to reflect
the two for one stock split paid in January 1996.
1996 HIGH LOW
1st Quarter $7.38 $6.38
2nd Quarter $7.75 $7.13
3rd Quarter $8.50 $7.75
4th Quarter $8.50 $7.50
The Corporation paid a cash dividend on its Common Stock of 5 cents per
share in June, 1996. That was the first dividend paid since July 1993, when the
Corporation paid 50 cents per share on its Common Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
At the 1995 Annual Meeting, stockholders approved a plan providing for
the formation of a holding company with Guaranty Savings and Loan, F.A. (the
"Bank") as the subsidiary.
Pursuant to the approved plan, which was consummated in December 1995,
each existing share of Guaranty Savings and Loan, F.A. common stock was
converted into one share of common stock in the new holding company known as
Guaranty Financial Corporation (the "Corporation"). As result of the
reorganization, the Bank's stockholders became the owners of the newly formed
holding company, which in turn owns all the outstanding stock of the Bank. The
Corporation's only direct subsidiary is the Bank and the Corporation has no
material assets or liabilities other than the stock of the Bank.
Following consummation of the holding company reorganization, the Board
of Directors declared a two (2) for one (1) stock split, paid on January 31,
1996 to holders of record January 15, 1996. Following the stock split, the Board
of Directors declared a $0.05 per share dividend, paid on June 26, 1996 to
holders of record June 12, 1996.
For the fiscal year ended June 30, 1996, the Corporation experienced a
71% improvement in earnings over 1995. During 1996, the Corporation's net income
was $643,250 compared to earnings of $376,248 for 1995. The increase in net
earnings was primarily the result of growth in average earning assets which were
generated from growth in core deposits. The increase in net earnings in 1995
from 1994 was primarily the result of both an increased net interest margin and
other non interest income from the sale of loans and other securities.
In October 1995, construction began on a combined headquarters and
retail branch located on the east side of Charlottesville in the Pantops area of
Albemarle County. At June 30, 1996, approximately $1.4 million of the $2.1
million project had been disbursed. The new facility will contain 20,000 sq. ft.
of which Guaranty will occupy 15,500 sq. ft., with the remainder to be leased.
The new facility is expected to open in November 1996. In addition Guaranty
purchased its Rio Road office which had previously been leased. This office
contains $36.8 million in deposits and has been the headquarters of Guaranty for
the past twelve years. The building contains 11,000 sq. ft. of which Guaranty
will maintain a 2,500 sq. ft. retail branch with the remainder to be leased
after the move to the new facility. Renovations of approximately $150,000 will
begin in October 1996 to modernize the site and make it more attractive and
accessible for tenants and customers. In addition to the new headquarters and
Rio Road purchase, Guaranty purchased land at the intersection of Neff Avenue
and Reservoir Street in the city of Harrisonburg to construct a new retail
branch. A branch application was filed with regulatory authorities and was
approved in June 1996. It is anticipated that the branch will open in April
1997.
During the fourth quarter of fiscal year 1995, Guaranty successfully
completed a common stock offering of 180,000 shares resulting in net proceeds of
$2.0 million. The net proceeds have enhanced the Bank's regulatory capital and
supported the growth of deposits and assets.
Financial Condition
Guaranty experienced significant growth in fiscal year 1996. Total
assets increased 23% or approximately $20.1 million at June 30, 1996 from 1995.
Securities and loans increased $8.562 million and $8.860 million, respectively.
On the liabilities side of the balance sheet, deposits increased $22.2 million
or 42% while bonds payable decreased by $988,000. Borrowings from the Federal
Home Loan Bank decreased approximately $7.6 million with other borrowings
increasing $6.1 million.
Results of Operations
Comparison of Years Ended June 30, 1996 and 1995
The Bank's results of operations depend primarily on the level of its
net income and noninterest income and the level of its operating expenses. Net
interest income depends upon the balance of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
Interest Income
Interest income was $7.6 million for the year ended June 30, 1996, up
$800,000, or 12% from $6.8 million for fiscal 1995. Volume increases in loans
and investment securities, and an increase in the average rate earned on
interest earning assets were the primary reasons for the increase in income.
Average loans increased 3.7% to $79.2 million and average investment securities
increased 56% from $6.7 million in fiscal 1995 to $10.4 million in fiscal 1996.
Total average interest earning assets increased 9% to $93.8 million. Interest
rates were higher on average in fiscal 1996 than in fiscal 1995. Guaranty
experienced significant growth in deposits in fiscal year 1996. This growth was
invested in loans and supplemented with mortgaged-backed securities. The average
yield on loans increased 48 basis points to 8.20% in fiscal year 1996 from 7.72%
in 1995. The average yield on securities decreased 103 basis points to 7.90%
from 8.93%. The yields on interest earning assets, due to the increase in volume
in loans and investment securities, coupled with the increase in rates on loans,
increased 27 basis points to 8.18% from 7.91%.
Interest Expense
Management's shift in emphasis beginning in 1995 from FHLB advances and
borrowings to interest bearing deposits, particularly certificates of deposits,
resulted in the average rate paid on interest bearing liabilities remaining
stable from fiscal year 1995 through 1996. The average interest rate paid on
interest bearing liabilities was 5.63% in fiscal year 1995 and 5.64% in fiscal
year 1996. Average interest bearing deposits rose 20% from $52.3 million in
fiscal year 1995 to $62.8 million in 1996. The average rates paid on deposits
increased 32 basis points to 4.99% in fiscal year 1996 from 4.67% in 1995.
Average FHLB advances and other borrowings decreased slightly from 1995 to 1996.
More significant was the decrease in the average rate paid on those borrowings.
The average rate paid on borrowings in 1995 was 6.46% compared to 6.03% in 1996.
Provision for Loan Losses
The provision increased to $56,700 for the fiscal year ended June 30,
1996 from a credit of $9,000 for the fiscal year ended June 30, 1995. Guaranty
monitors its loan loss reserve monthly and makes allocations as necessary.
Management believes that the level of its loan loss reserve is adequate. As of
June 30, 1996 the total allowance for loan losses amounted to $788,000 of which
$631,000 was not specifically allocated to identified problem loans.
Net Interest Income
Net interest income was $2.4 million for fiscal year 1996 versus the
$2.1 million reported for fiscal year 1995. The improvement in net interest
income was primarily due to the volume increase in loans and investment
securities, and the shift from higher interest bearing FHLB advances and other
borrowings to certificates of deposit as a funding source.
Non-Interest Income
Non-interest income for fiscal year ended June 30, 1996, increased by
$235,000 or 27% over fiscal year 1995. Included in non-interest income are fees
for mortgage loans serviced for others, a significant business for Guaranty as
discussed below, and a by-product of its residential lending. Also included are
gains and losses on the sale of loans and securities. Gains increase $250,000 in
fiscal 1996 over 1995. The majority of this gain was due to the early adoption
of SFAS 122, Accounting for Mortgage Servicing Rights an Amendment of FASB
Statement No. 65. Income of $161,000 was recognized on $12.2 million of loans
sold in fiscal year 1996.
Guaranty derives fees from originated and purchased mortgage servicing
rights ("MSRs"). Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow funds for payment of taxes
and insurance, making required inspections of the mortgaged premises, contacting
delinquent mortgagors, supervising foreclosures in the event of unremitted
defaults and generally administering the loans for the investors to whom they
have been sold. MSRs are intangible assets that represent the rights to service
mortgage loans and in turn to receive the service fee income associated with the
mortgage loans. MSRs are volatile assets if the loans being serviced prepay
faster than the intangible asset is amortized. See "Financial Statements -
Summary of Accounting Policies." Guaranty serviced loans for others aggregating
approximately $168.4 million, of which 70% was originated locally, and $169.6
million, of which 67% was originated locally at June 30, 1996 and 1995,
respectively. Revenues recognized from these activities amounted to $515,654 and
$549,790 at June 30, 1996 and 1995, respectively.
Non-Interest Expenses
Non-interest expenses were $2.49 million for the year ended June 30,
1996, compared to $2.53 million for fiscal year 1995, a 2% decrease. This slight
decrease is the result of management closely monitoring expenses in order to
increase profitability.
Income Taxes
Reported income tax expense for the year ended June 30, 1996, was
$344,000 compared to a $100,000 for 1995. The increase was attributed to the
Corporation's increased earnings in 1996 compared to 1995.
Comparison of Years Ended June 30, 1995 and 1994
Interest Income
Interest income was $6.8 million for the year ended June 30, 1995, up
$100,000, or 1.5% from $6.7 million for fiscal 1994. Volume increases in loans,
and an increase in the average rate earned on interest earning assets were the
primary reasons for the increase. Average loans increased 3% to $76.4 million
while investment securities on average declined 47% from $12.6 million in fiscal
1994 to $6.7 million in fiscal 1995. Total interest earning assets declined 3%
to $85.8 million. Interest rates were higher on average in fiscal 1995 than in
fiscal 1994. Management deliberately shifted earning assets from lower yielding
securities, particularly federal agency securities and mortgage backed
securities, to higher yielding mortgage loans. The average yield on loans
actually increased 64 basis points to 7.72% in fiscal year 1995 from 7.08% in
1994. The average yield on securities decreased 151 basis points to 8.93% from
10.44%. The yields on interest earning assets, due to the increase in volume in
loans and the decrease in volume in securities, coupled with the increase in
rates on loans, increased 34 basis points to 7.91% from 7.57%.
Interest Expense
The average interest rate paid on interest bearing liabilities
increased in fiscal 1995 from fiscal 1994, due to the sharp decline in the
average rates paid on REMIC bonds payable, which fell 929 basis points from
21.43% in 1994 to 12.14% in 1995. This decline in rates reflects the reduction
in the discount amortization on the REMIC bonds which, under rising interest
rates reduces repayments of mortgages supporting the REMIC bonds, declined to
$535,000 in fiscal 1995 from $1.535 million in fiscal 1994, or 69%. The average
balance of REMIC bonds, net of amortization, declined 38.5% from $7.367 million
in 1994 to $4.408 million in 1995. This decline in REMIC bonds was the result of
rapid repayments of mortgages supporting the REMIC bonds under falling interest
rates in 1992 and 1993. During the second half of fiscal 1995, there was a shift
in emphasis by management from FHLB advances and borrowings to interest bearing
deposits, particularly certificates of deposits. The average rates paid on total
interest bearing deposits increased 89 basis points in 1995 to 4.67% up from
3.78% in 1994, while the average rates paid on total interest bearing
liabilities, due to the significant reduction in rates paid on REMIC bonds,
actually declined 31 basis points to 5.63% in 1995, from 5.94% in 1994.
Net Interest Income
Net interest income was $2.1 million for fiscal year 1995 versus the
$1.6 million reported for fiscal year 1994. The improvement in net interest
income was primarily due to a volume increase in loans, reduction in reliance
upon higher interest bearing FHLB advances and a shift by management to
certificates of deposit as a funding source, and a significant reduction in the
rapid repayment of mortgages supporting the REMIC bonds from 1994 to 1995.
Non-Interest Income
Non-interest income for fiscal year ended June 30, 1995, increased by
$745,000 or 591% over fiscal year 1994. Included in non-interest income are fees
for mortgage loans serviced for others, a significant business for the Bank as
discussed below, and a by-product of its residential lending. In addition, in
1994, the Bank lost $491,000 on the sale of mortgage loan and investment
securities and broke even in 1995.
The Bank serviced loans for others aggregating approximately $169.6
million, of which 67% was originated locally, $158.8 million, of which 62% was
originated locally and $113.0 million, of which 82% was originated locally at
June 30, 1995, 1994 and 1993, respectively. Revenues recognized from these
activities amounted to $549,790, $400,132 and $368,574 at June 30, 1995, 1994,
and 1993 respectively.
Non-Interest Expenses
Non-interest expenses were $2.5 million for the year ended June 30,
1995, compared to $2.2 million for fiscal year 1994, an increase of 13.6%. This
increase is primarily a result of the full impact of costs incurred this year
with respect to Guaranty's Richmond mortgage origination office, which
management closed because of unprofitability.
Provision for Loan Losses
The provision decreased to a credit of $9,000 for the fiscal year ended
June 30, 1995 from $74,000 for the fiscal year ended June 30, 1994. As of June
30, 1995 the total allowance for loan losses amounted to $747,000 of which
$650,000 was not specifically allocated to identified problem loans.
The following table describes the impact on Guaranty's interest income
resulting from changes in average balances and average rates for the periods
indicated. The change in interest due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994 1994 compared to 1993
Increase Change Due To: Increase Change Due To: Increase Change Due To:
(Dollars in thousands) (Decrease) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Securities:
U.S treasury securities $0 $0 $0 $0 $0 $0 0 0 0
Federal agency securities 0 0 0 (418) (209) (209) 242 274 (32)
Federal Home Loan Bank stock 3 6 (3) 24 23 1 1 5 (4)
Mortgage-backed securities 223 (62) 285 (328) 110 (438) (667) (176) (491)
Total Securities 226 (56) 282 (722) (76) (646) (424) 103 (527)
Loans:
Residential real estate 519 391 128 383 278 105 (646) (806) 160
Commercial real estate 87 (5) 92 85 92 (7) (53) (46) (7)
Construction & land (7) (100) 93 215 99 116 88 85 3
Consumer (1) (2) 1 (40) (22) (18) (4) (551) 547
Total Loans 598 284 314 643 447 196 (615) (1,318) 703
Interest bearing deposits in other banks 57 (41) 98 184 47 137 6 16 (10)
Total interest income 881 188 693 105 418 (313) (1,033) (1,199) 166
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts (35) (7) (28) (51) (18) (33) (85) (46) (39)
Savings (41) 8 (49) (24) (17) (7) 34 (26) 60
Certificates of deposit 768 47 721 576 353 223 (298) (192) (106)
Total interest bearing deposits 692 48 644 501 318 183 (349) (264) (85)
FHLB advances and other (135) (112) (23) 90 167 (77) 290 240 50
Bonds payable (28) 252 (280) (1,001) (547) (454) 38 102 (64)
Total interest expense 529 188 341 (410) (62) (348) (21) 78 (99)
Net interest income $352 ($0) $352 $515 $480 $35 ($1,012) ($1,277) $265
</TABLE>
The following table illustrates average balances of total interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the average distribution of assets, liabilities, stockholders' equity
and the related income, expense, and corresponding weighted average yields and
costs. The average balances used in these tables and other statistical data were
calculated using daily average balances.
<TABLE>
<CAPTION>
Years ended June 30
(Dollars in thousands) 1996 1995 1994
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate balance expense rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Securities:
U.S Treasury $0 $0 0.00% $0 $0 0.00% $0 $0 0.00%
Federal agency 0 0 0.00% 0 0 0.00% 1,498 418 27.91%
Federal Home Loan Bank stock 1,360 101 7.43% 1,399 98 7.01% 1,373 74 5.39%
Mortgage-backed 9,014 719 7.98% 5,255 496 9.44% 9,738 824 8.46%
Total Securities 10,374 820 7.90% 6,654 594 8.93% 12,609 1,316 10.44%
Loans:
Residential real estate 59,298 4,802 8.10% 60,390 4,460 7.39% 60,191 4,301 7.15%
Commercial real estate 6,089 480 7.88% 4,493 393 8.75% 4,603 308 6.69%
Construction and land 8,850 629 7.11% 7,353 527 7.17% 5,360 312 5.82%
Consumer 4,983 531 10.66% 4,133 517 12.51% 4,074 333 8.17%
Total Loans 79,220 6,442 8.13% 76,368 5,897 7.72% 74,226 5,254 7.08%
Interest bearing deposits
in other banks 4,187 355 8.48% 2,756 298 10.81% 1,403 114 8.13%
Total interest-earning
assets/total interest income 93,780 7,617 8.12% 85,778 6,789 7.91% 88,238 6,684 7.57%
Noninterest earning assets:
Cash and due from banks 1,634 1,202 1,222
Non accrued loans 1,339 1,222 911
Purchased mortgage servicing 833 803 562
Other assets 1,070 540 384
Less: Allowance for loan losses (768) (751) (750)
Less: Deferred loan fees (319) (353) (413)
Fixed Assets 1,981 415 389
Total noninterest earning assets 5,770 3,078 2,304
Total Assets 99,550 88,855 90,542
</TABLE>
(1) Interest spread is the average yield earned on earning assets, less the
average rate incurred on interest bearing liabilities.
(2) Net interest margin is net interest income, expressed as a percentage of
average earning assets.
<TABLE>
<CAPTION>
June 30, 1996
Maturing or Repricing In:
3 Months 4-12 1-5 Over
(Dollars in thousands) or less Months Years 5 Years
<S> <C> <C> <C> <C>
Interest-sensitive assets:
Loans $11,692 $39,147 $3,936 $28,184
Investments and mortgage-backed securities(1) 1,601 719 3,441 8,880
Deposits at other institutions 3,769 0 0 0
Total interest-sensitive assets 17,062 39,866 7,377 37,064
Cumulative interest-sensitive assets 17,062 56,928 64,305 101,369
Interest-sensitive liabilities:
NOW accounts (2) 0 0 0 5,097
Money market deposit accounts 3,213 0 0 0
Savings accounts (3) 1,164 652 558 2,280
Certificates of deposit 11,796 39,326 9,155 0
Borrowed money 6,104 12,500 5,000 0
Bonds payable 63 189 820 2,072
Total interest-sensitive liabilities 22,339 52,666 15,534 4,353
Cumulative interest-sensitive liabilities $22,339 $75,005 $90,539 $94,891
Period gap (5,278) (12,800) (8,157) 32,711
Cumulative gap (5,278) (18,077) (26,234) 6,477
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 76.38% 75.90% 71.02% 106.83%
Ratio of cumulative gap to total assets -5.90% -20.21% -29.32% 7.24%
</TABLE>
- ---------------------------------
(1) Includes Federal Home Loan Bank stock
(2)The Corporation has found that NOW accounts are generally not sensitive to
changes in interest rates and therefore has placed such deposits
in the "over 5 years" category
(3)In accordance with standard industry practice, decay factors have been
applied to savings accounts
Interest Sensitivity
An important element of both earnings performance and liquidity is
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
at a specific time interval. The gap can be managed by repricing assets or
liabilities, by selling investments held for sale, by replacing an asset or
liability prior to maturity, or by adjusting the interest rate during the life
of an asset or liability. Matching the amounts of assets and liabilities
repricing in the same time interval helps to hedge the risk and minimize the
impact on net interest in periods of rising or falling interest rates.
Guaranty evaluates interest risk and then formulates guidelines
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
At June 30, 1996, Guaranty had $5.3 million more in liabilities than
assets that reprice within three months or less and therefore was in an
liability-sensitive position. A negative gap generally adversely impacts
earnings in a period of rising interest rates. This negative position is the
result of fixed rate borrowings and certificates of deposit reaching maturity
and short term borrowings used to fund mortgage-backed securities. As these
fixed rate borrowings mature, they will be extended to match the assets
maturities. Guaranty will also increase its prime based lending products going
forward which will also improve this negative position.
Guaranty's primary business is to provide residential mortgages. Such
mortgages have fixed or adjustable rates and while it is in the interest of
Guaranty to maintain adjustable loans on its books, it also from time to time
holds some fixed rate mortgages.
Guaranty has an Asset/Liability Committee ("ALCO"). The ALCO meets
weekly to discuss deposit pricing, changes in borrowed money, investment and
trading activity, loan sale activities, liquidity levels and the overall
interest sensitivity. The actions of this committee are reported to the Board of
Directors monthly. The daily monitoring of interest rate risk, investment and
trading activity, along with any other significant transactions are managed by
the CEO with input from other ALCO members. The CFO is responsible for the
recording and settlement of all activity with the broker or third party on a
daily basis.
In the past, Guaranty has engaged in trading securities in an attempt
to take advantage of price movements. Both long and short trading positions have
been maintained with the securities being designated as trading at the time of
purchase. To the extent short positions were maintained, Guaranty temporarily
reduced its overall interest rate risk exposure. Losses were incurred in 1994,
1995 and 1996. Also, reducing this loss for the periods was the interest earned
on the long positions offset by the interest paid on the short positions.
Investments
As of July 1, 1995, Guaranty adopted Statement of Financial Accounting
Standards ("SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which requires investments to be classified as held to maturity,
trading or available for sale. Upon adoption of SFAS 115, existing investments
were classified based on Guaranty's intent. Guaranty held no investments
classified as "trading" at June 30, 1996 or 1995. Since implementation of SFAS
115, no transfers between portfolios has occurred. Investment securities
classified as available for sale are reported on a fair value basis, with any
unrealized gains or losses excluded from earnings, but reported as a separate
component of stockholders' equity, net of any related deferred income taxes.
Management believes, in general, that the available for sale classification is
the most appropriate as it provides the greatest flexibility in meeting interest
rate risk management and liquidity needs. Guaranty does have some
mortgage-backed securities classified as held to maturity which are the
securities collateralizing the bonds issued in 1987.
Mortgage-backed securities available for sale increased in fiscal 1996
due to the rapid growth in deposits. Since loan growth was not increasing at the
rate of deposit growth, the excess funds were invested in mortgage-backed
securities.
The following table shows the carrying value of investment securities
and mortgage-backed securities at June 30, 1996, 1995 and 1994.
(Dollars in thousands) 1996 1995 1994
Held-to-maturity
Mortgage-backed securities 3,731 4,733 5,776
3,731 4,733 5,776
Available for sale
Federal National Mortgage Assoc. stock 3 3 3
Mortgage-backed securities 9,564 - -
9,567 3 3
Restricted
Federal Home Loan Bank stock 1,360 1,360 1,438
Total 14,658 6,096 7,217
Investment Activities
Federal thrift institutions have authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of various
federal agencies, certificates of deposit at insured institutions, bankers'
acceptances and federal funds.
Historically, Guaranty has maintained its liquid assets above the
minimum requirements imposed by federal regulations and at a level believed
adequate to meet requirements of normal daily activities, repayment of maturing
debt and potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is provided. As of June
30, 1996, Guaranty's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was 8.46%. See "Regulation -
Federal Home Loan Bank System."
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
Book % of Book % of Book % of
(Dollars in thousands) Value Total Value Total Value Total
Interest-bearing
<S> <C> <C> <C> <C> <C> <C>
deposits with banks $3,779 100.00% $4,022 100.00% 0 0.00%
Investment securities:
FHLMC mortage-backed
securities 7,459 50.90% 4,733 77.68% 5,776 80.07%
GNMA mortage-backed
securities 5,836 39.82% 0 0.00% 0 0.00%
Subtotal 13,295 90.72% 4,733 77.68% 5,776 80.07%
FHLB stock 1,360 9.28% 1,360 22.32% 1,438 19.93%
Total investment and
securities and stock $14,655 100.00% $6,093 100.00% $7,214 100.00%
</TABLE>
Lending
Guaranty's loan portfolio consists primarily of mortgage loans, the
majority of which are residential first mortgage loans. Of the $85.1 million of
mortgages outstanding at June 30, 1996, 80% represent residential first
mortgages. The primary lending market consists of the City of Charlottesville
and Albemarle County, and to a lesser extent, the surrounding counties of
Greene, Fluvanna, Louisa, and Orange. Management closed loan production offices
in Richmond and the Waynesboro-Staunton area due to unprofitability and
management's decision to concentrate on full service retail branches.
Net loans consist of total loans minus deferred loan fees and the
allowance for loan losses. Net loans were $84.1 million at June 30, 1996, 12%
increase in net loans of $75.2 million at June 30, 1995. Net loans decreased
3.3% in the fiscal year ended June 1995 from a balance of $77.8 million at June
30, 1994. The average balance of total loans as a percentage of average assets
was 79.58% at June 30, 1996, down from 85.95% at June 30, 1995, and up from
81.98% at June 30, 1994.
The following table sets forth the composition of Guaranty's total loan
portfolio in dollars and percentages as the dates indicated.
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994 1993 1992
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential $66,136 75.15% $62,175 77.57% $67,385 83.05% $59,845 81.57% $62,502 81.94%
Commercial 7,670 8.72% 4,508 5.62% 4,251 5.24% 4,155 5.66% 4,617 6.05%
Construction and land loans 8,813 10.01% 8,887 11.09% 5,819 7.17% 4,900 6.68% 4,422 5.80%
Total real estate 82,619 93.88% 75,570 94.29% 77,455 95.46% 68,900 93.92% 71,541 93.79%
Consumer Loans 5,386 6.12% 4,580 5.71% 3,685 4.54% 4,462 6.08% 4,733 6.21%
Total loans receivable 88,005 100.00% 80,150 100.00% 81,140 100.00% 73,362 100.00% 76,274 100.00%
Less:
Undisbursed loans in process 2,824 3,858 2,249 1,978 949
Deferred fees and unearned
discounts 314 323 382 442 601
Allowance for losses 786 747 754 746 689
Total net items 3,924 4,928 3,385 3,166 2,239
Total loans receivable, net $84,081 $75,222 $77,755 $70,196 $74,035
</TABLE>
The following table shows the composition of Guaranty's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994 1993 1992
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed - Rate Loans:
Real Estate
Residential $28,907 32.85% $23,577 29.42% $27,796 34.26% $22,105 30.13% $26,455 34.68%
Commercial 0 0.00% 0 0.00% 0 0.00% 0 0.00% 203 0.27%
Construction and land loans 339 0.39% 69 0.09% 0 0.00% 0 0.00% 0 0.00%
Total real estate 29,246 33.23% 23,646 29.50% 27,796 34.26% 22,105 30.13% 26,658 34.95%
Consumer Loans 597 0.68% 736 0.92% 691 0.85% 1,547 2.11% 1,227 1.61%
Total fixed-rate loans 29,843 33.91% 24,382 30.42% 28,487 35.11% 23,652 32.24% 27,885 36.56%
Adjustable-Rate Loans:
Real Estate
Residential 37,229 42.30% 38,598 48.16% 39,590 48.79% 37,740 51.44% 36,046 47.26%
Commercial 7,670 8.72% 4,508 5.62% 4,251 5.24% 4,155 5.66% 4,414 5.79%
Construction and land loans 8,474 9.63% 8,818 11.00% 5,819 7.17% 4,900 6.68% 4,422 5.80%
Total real estate 53,373 60.65% 51,924 64.78% 49,660 61.20% 46,795 63.79% 44,882 58.84%
Consumer Loans 4,789 5.44% 3,844 4.80% 2,993 3.69% 2,915 3.97% 3,507 4.60%
Total adjustable-rate loans 58,162 66.09% 55,768 69.58% 52,653 64.89% 49,710 67.76% 48,389 63.44%
Total loans receivable 88,005 100.00% 80,150 100.00% 81,140 100.00% 73,362 100.00% 76,274 100.00%
Less:
Undisbursed loans in process 2,824 3,858 2,249 1,978 949
Deferred fees and unearned
discounts 314 323 382 442 601
Allowance for losses 786 747 754 746 689
Total net items 3,924 4,928 3,385 3,166 2,239
Total loans receivable, net $84,081 $75,222 $77,755 $70,196 $74,035
</TABLE>
Asset quality is an important factor in the successful operation of a
financial institution. The loss of interest income and principal that may result
from nonperforming assets has an adverse effect on earnings, and the resolution
of those assets requires the use of capital and management resources. Guaranty
maintains a conservative philosophy regarding its underwriting guidelines. It
also maintains loan monitoring policies and systems that require detailed
monthly analysis of delinquencies, nonperforming loans, nonaccrual loans and
repossessed assets. Reports of such loan and asset categories are reviewed by
management and the Board of Directors.
Guaranty places loans on a nonaccrual status after being delinquent
greater than 90 days, or earlier in situations in which the loans have developed
inherent problems that indicate payment of principal and interest may not be
made in full. Whenever the accrual of interest is stopped, previously accrued
but uncollected interest income is reversed. Thereafter, interest is recognized
only as cash is received. The loan is reinstated to an accrual basis after it
has been brought current as to principal and interest under the contractual
terms of the loan.
The following table reflects the composition of nonperforming assets
for the past five years.
<TABLE>
<CAPTION>
Years ended June 30,
(Dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,458 $1,556 $887 $934 $513
Restructured loans 11 12 415 1,143 1,143
Total non-performing loans 1,469 1,568 1,302 2,077 1,656
Foreclosed assets 41 122 0 0 0
Total non-performing assets 1,510 1,690 1,302 2,077 1,656
Loans past due 90 or more days and accruing interest $19 $1 $288 $190 $434
Non-performing loans to total loans, at period end 1.67% 2.06% 1.65% 2.91% 2.20%
Non-performing loans to period
end total loans and foreclosed assets 1.67% 2.05% 1.65% 2.91% 2.20%
</TABLE>
Reserves are established based on historical loss experience and a
review of significant larger credits. A loss experience percentage is
established for each loan type and is reviewed annually. Each quarter the loss
percentage is applied to the portfolio, by product type, to determine the
minimum amount of reserves required. After the minimum reserve requirement has
been met, the Bank targets 1.25% of risk-weighted assets to be the goal for
reserves. The long term goal is to maintain reserves at 1% of total loans. This
methodology for reserves was implemented in 1990 by management when reserves
were found to be inadequate. With the growth in loans in fiscal year 1994 and
1996, the provision for loan losses charged against operations was $74,000 and
$80,000, respectively, to increase the reserves to approximately 1% of total
loans. In fiscal year 1995, reserves were not increased because they were
considered adequate based on the concentration of low risk residential loans.
The following table provides an analysis of the allowance for loan
losses for the past five years.
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $747 $754 $746 $689 $712
Provision (credit) charged to operations 57 (10) 74 37 0
Charge-offs:
Real estate 39 0 66 0 5
Consumer 0 1 0 0 18
Recoveries:
Real Estate 19
Consumer 4 4 0 20 0
Net Charge-offs 16 (3) 66 (20) 23
Balance, end of period $788 $747 $754 $746 $689
Allowance for loan losses to period end total loans 0.94% 0.98% 0.96% 1.05% 0.91%
Allowance for loan losses to nonaccrual loans 54.05% 48.01% 85.01% 79.87% 134.31%
Net charge-offs to average loans 0.02% 0.00% 0.09% -0.03% 0.03%
</TABLE>
Loan Maturity and Repricing
The following schedule illustrates the interest rate sensitivity of
Guaranty's loan portfolio at June 30, 1996. Mortgages which have adjustable
interest rates are shown as maturing based on contractual maturity and demand
loans are shown as maturing in one year or less. This schedule does not reflect
the effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
RESIDENTIAL COMMERCIAL CONSTRUCTION CONSUMER TOTAL
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Due During Years Ended
7/1/96-6/30/97 $105 $647 $4,673 $1,151 $6,576
7/1/97-6/30/98 85 466 693 873 2,117
7/1/98-6/30/99 71 $64 420 877 1,432
7/1/99-6/30/01 901 317 207 2,255 3,680
7/1/01-6/30/06 2,592 1,494 0 226 4,312
7/1/06-6/30/11 7,017 305 0 0 7,322
7/1/11 and following 55,365 4,377 0 0 59,742
Total $66,136 $7,670 $5,993 $5,382 $85,181
</TABLE>
The total amount of loans due after June 30, 1997 which have
predetermined interest rates is $29.8 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $51.7
million.
Loan Originations, Purchases and Sales
Federal regulations authorize Guaranty to make real estate loans
anywhere in the United States. However, at June 30, 1996, all Guaranty's real
estate loans were secured by real estate located in Guaranty's market area.
Management generally does not purchase loans. When local mortgage
demand is less than the supply of funds available for local mortgage
originations, management invests in mortgage backed securities.
For the year ended June 30, 1996, Guaranty originated $23.9 million in
first mortgage loans.
Income From Lending Activities
Guaranty realizes interest and loan fee income from its lending
activities. Guaranty receives loan fees on both construction and one- to
four-family residential loans. Guaranty receives loan fees and charges related
to existing loans, which include late charges. Interest on loans, loan and
servicing income together comprise 81% of Guaranty's total revenues for the year
ended June 30, 1996. Income from loan fees and other fees is a volatile source
of income, varying with the volume and type of loans and commitments made and
with competitive and economic conditions.
Generally accepted accounting principles ("GAAP") allow the inclusion
of loan fees in current income to an amount limited to the Bank's loan
underwriting and closing costs. The remaining deferred fees are amortized into
income over the estimated remaining lives of the loans to which they relate,
using a method which approximates level yield. Guaranty had deferred fees net of
direct underwriting costs of $313,669 at June 30, 1996.
An ancillary function of lending is the mortgage servicing operation.
When mortgage loans are sold Guaranty generally retains the right to service the
loans for a servicing fee. A typical servicing agreement requires Guaranty to
carry out the servicing function, including billing and collection of borrower's
payments, remittance of payments to the investor, insurers, and taxing
authorities, maintenance of custodial bank accounts; and related activities. In
addition to loans originated by Guaranty it has also acquired the rights to
service other mortgage loans. At June 30, 1996 Guaranty serviced loans for
others aggregating approximately $168.4 million and generated net fees of
$515,654 for the year ended June 30, 1996.
Delinquent and Problem Loans
When a borrower fails to make a required payment on a loan, Guaranty
attempts to cause the deficiency to be cured by contacting the borrower. A
notice is mailed to the borrower after a payment is 16 days past due and again
when the loan is 28 days past due. For most loans, if the delinquency is not
cured within 30 days, Guaranty issues a notice of intent to foreclose on the
property and if the delinquency is not cured within 60 days, Guaranty may
institute foreclosure action. If foreclosed on, real property is sold at a
public sale and may be purchased by Guaranty. In most cases, deficiencies are
cured promptly.
Loans are generally placed on nonaccrual status when the collection of
principal or interest is 90 days or more past due, or earlier if collection is
uncertain based upon evaluation of the collateral and the financial strength of
the borrower. Loans may be reinstated to accrual status when all payments are
brought current and, in the opinion of management, collection of the remaining
balances can be reasonably expected. Loans greater than 90 days past due may
remain on accrual status if management determines it has adequate collateral to
cover the principal and interest.
The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 1996. The amounts presented represent the
total remaining principal balances of the related loans, rather that the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Residential Commercial Construction
Real Estate Real Estate and Land Consumer
(Dollars in thousands) Number Amount Number Amount Number Amount Number Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
31-59 days 0 $0 0 $0 1 $105 0 $0
60-89 days 13 1,201 2 242 1 82 4 4
90 days and over 10 637 0 0 1 19 0 0
Total delinquent loans 23 $1,838 2 $242 3 $206 4 $4
</TABLE>
Federal regulations provide for the classification of loans, debt,
equity securities and other assets considered to be of lesser quality as
"substandard," "doubtful" or "loss" assets. The regulations require insured
institutions to classify their own assets and to establish prudent general
allowances for losses for assets classified "substandard" or "doubtful." For the
portion of assets classified as "loss," an institution is required to either
establish specific allowances of 100% of the amount classified or charge such
amounts off its books. Assets which do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess potential weaknesses are required to be
designated "special mention" by management. In addition, the OTS may require the
establishment of a general allowance for losses based on assets classified as
"substandard" and "doubtful" or based on the general quality of the asset
portfolio of an institution. In connection with the filing of its periodic
reports with the OTS and in accordance with its classification of assets policy,
Guaranty regularly reviews the loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at June 30, 1996, Guaranty had
classified $2,157,019 of its assets as substandard, $165,296 as loss and none as
doubtful. Not all of Guaranty's assets that have been classified are included in
the table below of non-performing assets. Several of these loans are classified
because of previous credit problems but are performing. In addition, Guaranty
had $947,000 in special mention assets. See - "Non-Performing Assets."
Non-Performing Assets
The table below sets forth the amounts and categories of non-performing
assets in Guaranty's loan portfolio. Non-performing assets include accruing
loans delinquent 90 days or more and real estate acquired through foreclosure,
which include assets acquired in settlement of loans. All consumer loans more
than 120 days delinquent are charged against the expense for bad debt. Accruing
mortgage loans delinquent more than 90 days are loans that Guaranty considers to
be well secured and in the process of collection.
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,458 $1,556 $887 $934 $513
Restructured loans 11 12 415 1,143 1,143
Total non-performing loans 1,469 1,568 1,302 2,077 1,656
Foreclosed assets 41 122 0 0 0
Total non-performing assets 1,510 1,690 1,302 2,077 1,656
Loans past due 90 or more days and accruing interest $19 $1 $288 $190 $434
Non-performing loans to total loans, at period end 1.67% 2.06% 1.65% 2.91% 2.20%
Non-performing loans to period
end total loans and foreclosed assets 1.67% 2.05% 1.65% 2.91% 2.20%
</TABLE>
At June 30, 1996, Guaranty's non-accrual loans were comprised of: one
(1) home-equity loan, fifteen (15) single-family mortgage loans and two (2)
commercial real estate loans. Based on current market values of the properties
securing these loans, management anticipates no significant losses.
As of June 30, 1996, there were $947,000 in loans with respect to which
known information about the possible credit problems of the borrowers or the
cash flows of the security properties have caused management to have doubts as
to the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories. These loans have been classified as special mention.
Although management believes that these loans are adequately secured
and no material loss is expected, certain circumstances may cause the borrower
to be unable to comply with the present loan repayment terms at some future
date.
Allowance for Losses on Loans and Real Estate
Guaranty provides valuation reserves for anticipated losses on loans
and real estate when its management determines that a significant decline in the
value of the collateral has occurred, as a result of which the value of the
collateral is less than the amount of the unpaid principal of the related loan
plus estimated costs of acquisition and sale. In addition, Guaranty also
provides reserves based on the dollar amount and type of collateral securing its
loans, in order to protect against unanticipated losses. Although management
believes that it uses the best information available to make such
determinations, future adjustments to reserves may be necessary, and net income
could be significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. In recent years, Guaranty
had increased its allowance for losses on loans due to general economic
downturns in the real estate market. At June 30, 1996, Guaranty had an allowance
for loan losses of $788,146, which is predominantly a general allowance.
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the years indicated.
<TABLE>
<CAPTION>
Year ended June 30,
(Dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $747 $754 $746 $689 $712
Provision (credit) charged to operations 57 (10) 74 37 0
Charge-offs:
Real estate 39 0 66 0 5
Consumer 0 1 0 0 18
Recoveries:
Real Estate 19
Consumer 4 4 0 20 0
Net Charge-offs 16 (3) 66 (20) 23
Balance, end of period $788 $747 $754 $746 $689
Allowance for loan losses to period end total loans 0.94% 0.98% 0.96% 1.05% 0.91%
Allowance for loan losses to nonaccrual loans 54.05% 48.01% 85.01% 79.87% 134.31%
Net charge-offs to average loans 0.02% 0.00% 0.09% -0.03% 0.03%
</TABLE>
A breakdown of the allowance for loan losses in dollars and loans in
each category to total loans in percentages is provided in the following tables.
However, Guaranty's management does not believe that the allowance for loan
losses can be fragmented by category with a degree of precision that would be
useful to investors. Because all of these factors are subject to change, the
breakdown is not necessarily predictive of future loan losses in the indicated
categories.
<TABLE>
<CAPTION>
Years ended June 30,
(Dollars in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Residential real estate $675 $620 $625 $617 $568
Non-residential real estate 113 127 129 129 121
Total allowance for loan losses $788 $747 $754 $746 $689
<CAPTION>
Years ended June 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Residential real estate 85.7% 83.0% 82.9% 82.7% 82.4%
Non-residential real estate 14.3% 17.0% 17.1% 17.3% 17.6%
Total allowance for loan losses 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Subsidiary Activities
The Bank has two wholly owned subsidiaries, GMSC, Inc. ("GMSC") and
Guaranty Investments Corporation ("GICO"). GMSC is a financing subsidiary
through which Guaranty formed a Real Estate Mortgage Investment Conduit
("REMIC"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Guaranty sells insurance annuities through GICO. GICO
had a net income of $1,004 for the year ended June 30, 1996.
In 1987, Guaranty formed GMSC and entered into a REMIC in order to
create liquidity. Guaranty utilized the REMIC to pool $19.9 million of fixed
rate mortgages into mortgage backed securities, which were used as collateral
for bonds sold to private investors. The bonds bore a coupon of 8% and were sold
at a discount and costs of issuance of approximately $3.3 million. The bond
discount and issuance costs are amortized against income as mortgage underlying
the bonds repay. In the fiscal years ended June 30, 1996, 1995, and 1994, with
rapidly falling interest rates, Guaranty experienced significant repayment of
mortgages, resulting in an amortization expense of $160,000, $124,000, and
$968,000, respectively. The amortization of the REMIC expenses is treated as
interest expense.
Income Taxes
Reported income tax expense for the year ended June 30, 1995, was
$100,000 compared to a credit of $235,000 for 1994. The increase was attributed
to Guaranty's increased earnings in 1995 compared to a loss in 1994.
In addition, in 1994 Guaranty took a charge of $196,000 for the
cumulative effect of change in accounting for income taxes. This change was
adopted at June 1994. As required by the Financial Accounting Standards Board's
Statement of Financial Account Standards No. 109 ("SFAS 109") accounting for
income taxes which required a change from the deferred method to the asset and
liability method of accounting for income taxes.
Source of Funds
General. Deposit accounts have traditionally been the principal source
of the Bank's funds for use in lending and for other general business purposes.
In addition to deposits, Guaranty derives funds from loan repayments, cash flows
generated from operations, which includes interest credited to deposit accounts,
repurchase agreements entered into with commercial banks and FHLB of Atlanta
advances. Contractual loan payments are a relatively stable source of funds,
while deposit inflows and outflows and the related cost of such funds have
varied widely. Borrowings may be used on a short-term basis to compensate for
reductions in deposits or deposit-inflows at less than projected levels and has
been used on a longer-term basis to support expanded lending activities.
Deposits. Guaranty attracts both short-term and long-term deposits from
the general public by offering a wide assortment of accounts and rates. Guaranty
offers statement savings accounts, various checking accounts, various money
market accounts, fixed-rate certificates with varying maturities, $100,000 or
above certificates of deposit and individual retirement accounts. Guaranty does
not solicit brokered deposits.
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by Guaranty for the periods
indicated.
Years ended June 30,
(Dollars in thousands) 1996 1995 1994
Statement savings accounts $4,654 $4,688 $7,610
Now accounts 6,440 5,818 6,005
Money market accounts 3,213 4,131 5,392
30- to 180-day certificates 227 324 528
One- to five-year
fixed-rate certificates 52,698 29,987 33,932
Eighteen-month prime rate
certificate 7,455 7,513 0
Total $74,687 $52,461 $53,467
The following table sets forth the changes in the dollar amount of
savings deposits in the various types of deposit programs offered by Guaranty
for the periods indicated.
Years ended June 30,
(Dollars in thousands) 1996 1995 1994
Statement savings accounts ($34) ($2,922) $1,549
Now accounts 622 (187) 281
Money market accounts (918) (1,261) (2,014)
30- to 180-day certificates (97) (204) (291)
One- to five-year
fixed-rate certificates 22,711 (3,945) 3,921
Eighteen-month prime rate
certificate (58) 7,513 0
Total $22,226 ($1,006) $3,446
The following table contains information pertaining to the average
amount of and the average rate paid on each of the following deposit categories
for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1995 1994
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $621 0.00% $744 0.00% $554 0.00%
Interest bearing
demand deposits 8,975 2.73% 9,924 2.77% 11,709 2.81%
Savings deposits 4,677 3.25% 6,155 3.39% 6,836 3.05%
Time deposits 49,102 5.57% 36,142 5.71% 32,646 4.54%
Total deposits $63,375 4.99% $52,965 4.90% $51,745 3.92%
</TABLE>
The variety of deposit accounts offered by Guaranty has allowed it to
be competitive in obtaining funds and has allowed it to respond with flexibility
(by paying rates of interest more closely approximating market rates of
interest) to, although not eliminate the threat of, disintermediation (the flow
of funds away from depository institutions such as thrift institutions into
direct investment vehicles such as government and corporate securities). In
addition, Guaranty has become much more subject to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. The
ability of Guaranty to attract and maintain deposits, and its cost of funds, has
been, and will continue to be, significantly affected by money market
conditions.
The following table sets forth the deposit flows of Guaranty during the
periods indicated.
<TABLE>
<CAPTION>
Years ended June 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Opening balance $52,461 $53,467 $50,021
Net deposits (withdrawals) 19,093 (3,446) 1,507
Interest credited 3,133 2,440 1,939
Ending balance 74,687 52,461 53,467
Net increase (decrease) $22,226 ($1,006) $3,446
Percent increase (decrease) 42.37% -1.88% 6.89%
</TABLE>
In 1995, Guaranty had a savings deposit outflow before interest
credited due to a pricing policy attributable to management's decision that
additional savings deposits were not needed during those periods and borrowings
were available at a lower overall cost to Guaranty. To the extent that Guaranty
may rely on sources of funds other than deposits, the Bank's earnings may be
adversely affected. Guaranty may use borrowings as an alternative source of
funds. See "Borrowings".
The following table shows rate information for Guaranty's certificates
of deposits as indicated.
<TABLE>
<CAPTION>
0.00- 4.01- 5.01- 6.01- 7.01- 8.01-
(Dollars in thousands) 4.00% 5.00% 6.00% 7.00% 8.00% 10.00% Total
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1996 $136 $193 $55,491 $4,560 $0 $0 $60,380
June 30, 1995 53 7,076 18,868 11,827 0 0 37,824
June 30, 1994 8,565 16,738 7,580 1,577 0 0 34,460
</TABLE>
The following table shows rate and maturity information for Guaranty's
certificates of deposits as of June 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- Percent
(Dollars in thousands) 3.99% 5.99% 7.99% 9.99% Total of Total
Certificate Accounts
Maturing in
Quarter Ending
<S> <C> <C> <C> <C> <C> <C>
September 30, 1996 $0 $7,243 $4,688 $0 $11,931 19.76%
December 31, 1996 0 11,198 1,923 0 13,121 21.73%
March 31, 1997 23 12,514 952 0 13,489 22.34%
June 30, 1997 0 11,976 693 0 12,669 20.98%
September 30, 1997 0 330 1,265 0 1,595 2.64%
December 31, 1997 0 1,075 709 0 1,784 2.95%
March 31, 1998 0 1,098 116 0 1,214 2.01%
June 30, 1998 0 599 0 0 599 0.99%
September 30, 1998 0 38 137 0 175 0.29%
December 31, 1998 0 235 0 0 235 0.39%
March 31, 1999 0 527 21 0 548 0.91%
June 30, 1999 0 167 8 0 175 0.29%
Thereafter 0 192 2,653 0 2,845 4.71%
$23 $47,192 $13,165 $0 $60,380 100.00%
</TABLE>
The following table indicates the amount of Guaranty's certificates of
deposits by time remaining until maturity as of June 30, 1996.
<TABLE>
<CAPTION>
Maturity
3 Months Over 3 to Over 6 to Over 12
(Dollars in thousands) or less 6 months 12 months months Total
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000 $11,607 $12,338 $24,640 $7,208 $55,793
Certificates of deposit
of $100,000 or more 317 742 1,566 1,962 4,587
Total of certificates of deposits $11,924 $13,080 $26,206 $9,170 $60,380
</TABLE>
Borrowings
As a member of the FHLB of Atlanta, Guaranty is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which may
be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe
the acceptable uses to which these advances may be put, as well as limitations
on the size of the advances and repayment provisions. The advances are
collateralized by the investment in Federal Home Loan Bank stock and certain
mortgage loans. See Note 8 of the Notes to Consolidated Financial Statements for
information regarding the maturities and rate structure of Guaranty's FHLB
advances.
Guaranty's borrowings, from time to time, also include securities sold
under agreements to repurchase, with mortgage-backed securities or Treasury
securities pledged as collateral. The proceeds are utilized by Guaranty for
general corporate purposes. At June 30, 1996, Guaranty had $6.1 million
outstanding in securities sold under agreement to repurchase.
Guaranty utilizes borrowings to supplement deposits when they are
available at a lower overall cost to Guaranty or they can be invested at a
positive rate of return.
The following table sets forth the maximum month-end balance, average
balance and weighted average rate, of FHLB advances and securities sold under
agreements to repurchase for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
Maximum Balance:
FHLB $28,050 $28,250 $28,750
Securities sold under
agreements to
repurchase 9,930 4,230 11,630
<CAPTION>
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Average Balance:
FHLB $22,829 6.21% $26,208 6.67% $26,017 6.63%
Securities sold under
agreements to
repurchase 3,112 5.65% 783 7.98% 7,201 3.85%
</TABLE>
The following table sets forth information as Guaranty's short-term
borrowings at the dates indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
(Dollars in thousands) 1996 1995 1994
<S> <C> <C> <C>
FHLB advances $12,500 $19,550 $13,950
Securities sold under agreements
to repurchase 6,104 0 0
Total short-term borrowings $18,604 $19,550 $13,950
Weighted average interest rate of
short-term FHLB advances 6.02% 4.52% 3.24%
Weighted average interest rate of
securities sold under agreements to
repurchase 5.65% 0.00% 0.00%
</TABLE>
Deposits
The Corporation's principal use of deposits is to originate loans and
fund investment securities. Guaranty experienced significant deposit growth in
fiscal year 1996. Net deposits increased 42% to $74.7 million from $52.5 million
at June 30, 1995 and decreased 2% in fiscal year 1995 from $53.5 in fiscal year
1994. The deposit growth is a reflection of aggressive pricing, increased
marketing, and the need for a local bank to provide competitive products and
services to the community. Guaranty offers individuals a variety of deposit
accounts, including checking, savings, money market, and certificates of
deposit, and is expanding to provide products and services for small businesses.
The following table details the average amount of, and the average rate
paid on, the primary deposit categories for the past three years.
<TABLE>
<CAPTION>
Years ended June 30,
(Dollars in thousands) 1996 1995 1994
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits:
NOW/MMDA accounts $8,975 2.74% $9,986 2.98% $11,772 2.81%
Savings 4,677 3.39% 6,167 3.13% 6,849 3.17%
Certificates of deposit 49,102 5.75% 36,142 5.44% 32,646 4.26%
Total interest bearing deposits 62,754 5.14% 52,295 4.70% 51,267 3.78%
Noninterest bearing 621 669 477
Total deposits 63,375 52,964 51,744
</TABLE>
Borrowings
Guaranty also uses non-deposit borrowings to fund its residential
lending business primarily through its membership in the Federal Home Loan Bank
("FHLB"). The FHLB was established to provide funds to savings institutions that
originate residential loans. At June 30, 1996, Guaranty owed $17.5 million to
the FHLB and $25.05 million at June 30, 1995. The $17.5 million outstanding at
June 30, 1996 were fixed rates ranging from 5.41% to 7.10%, with maturities in
1996 and 1997.
Guaranty may from time to time also borrow against U.S. government
agency and mortgage backed securities using repurchase agreements. Such
borrowings are normally short in duration. At June 30, 1996, Guaranty has $6.1
million outstanding with a variable rate of 5.6% and the option to repay at any
time without penalty.
Included in borrowings are the REMIC bonds. In 1987, the Bank entered
into a financing transaction known as a REMIC for liquidity purposes. In lieu of
selling mortgages for cash, $19.9 million in fixed rate below market mortgages
were put in mortgage backed securities, which were then used as collateral for
mortgage backed bonds to private investors. The bonds bore a coupon of 8% and
were sold at a substantial discount of approximately $3 million. In addition to
the discount, approximately $300,000 of expenses were incurred in connection
with the transaction. Both the discount and associated expenses were deferred by
the Bank in 1987 and are being amortized against income as the underlying
mortgages in the mortgage backed bonds repay. The mortgages had an average
interest rate of 8.875%. At the time the transaction was entered into it was
assumed that the mortgages would repay over a normal repayment period of
approximately 12 - 15 years. The total costs charged against net income
associated with the REMIC in fiscal years 1996, 1995 and 1994 were $160,000,
$124,000 and $968,000 respectively. At June 30, 1996, $3.7 million of bonds
remain outstanding versus $4.7 million at June 30, 1995.
See notes 6, 7 and 8 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial
obligations either through the sale of existing assets or the acquisition of
additional funds through asset and liability management. By regulatory
definition, liquid assets include cash, interest bearing deposits with banks,
federal funds sold, and government agency and high rated corporate securities
with maturities of five years or less. Guaranty is required to maintain liquid
assets on an average monthly basis equal to at least 5% of its liquidity base.
Liquidity base is further defined as total deposits plus all short term
borrowings. At June 30, 1996, Guaranty's liquidity ratio was 8.46%.
Guaranty's primary sources of funds are deposits, borrowings, and
amortization, prepayments and maturities of outstanding loans and
mortgaged-backed securities. While scheduled payments from the amortization of
loans and mortgaged-backed securities are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. Excess funds are invested
in overnight deposits to fund cash requirements experienced in the normal course
of business. Guaranty has been able to generate sufficient cash through its
deposits as well as borrowings.
Guaranty uses its sources of funds primarily to meet its on going
commitments, to pay deposit withdrawals and fund loan commitments. At June 30,
1996, the total approved loan commitments outstanding amounted to $3.9 million.
At the same date, commitments under unused lines of credit amounted to $5.4
million. Certificate of deposits scheduled to mature in one year or less at June
30, 1996 totaled $51.2 million. Management believes that a significant portion
of maturing deposits will remain with Guaranty.
The Bank is subject to OTS regulations requiring savings institutions
to meet the following minimum levels of regulatory capital (1) tangible capital
of at least 1.5% of total adjusted assets, (2) core capital of 3% of total
adjusted assets and (3) risk-based capital of 8% of total risk-weighted assets.
At June 30, 1996, the Bank exceeded all such regulatory capital requirements as
shown in the following table.
Percent of
(Dollars in thousands) Amount Adjusted Assets
Tangible Capital:
Regulatory capital $6,628 6.01%
Minimum capital requirement 1,655 1.50%
Excess regulatory capital $4,973 4.51%
Core Capital:
Regulatory capital $6,628 6.01%
Minimum capital requirement 3,309 3.00%
Excess regulatory capital $3,319 3.01%
Risk-based Capital:
Regulatory capital $7,171 13.12%
Minimum capital requirement 4,372 8.00%
Excess regulatory capital $2,799 5.12%
Impact of Inflation and Changing Prices and Seasonality
The financial statements in this document have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation.
Item 7. Financial Statements
The following financial statements are filed as a part of this report
following Item 13 below:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Income for the Years Ended June 30, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended June 30,
1996, 1995 and 1994
Summary of Accounting Policies
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last two fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person: Compliance
with Section 16(a) of the Exchange Act
Information set forth under the caption "Election of Directors" in the
definitive 1996 Proxy Statements of the Corporation to be subsequently filed
with the SEC and furnished to shareholders in connection with its Annual Meeting
of Stockholders (the "1996 Proxy Statement") is hereby incorporated by
reference.
Executive Officers
The following information as to the business experience during the past
five years is supplied with respect to executive officers of Guaranty. Except as
otherwise indicated, the persons named have served as officers of Guaranty since
it became the holding company of the Bank, and all offices and positions
described below are also with the Bank. There are no arrangements or
understandings between the persons named and any other person pursuant to which
such officers were selected.
Thomas P. Baker. Mr. Baker, age 50, is Guaranty's President and Chief
Executive Officer and Director, a position he has held since 1990. Prior to
joining Guaranty, Mr. Baker served as the President of Investors Savings Bank.
Kathleen M. Focht. Ms. Focht, age 35, is Guaranty's Chief Financial
Officer. She was elected in April 1995. Ms. Focht has been Secretary and
Treasurer of Guaranty since 1990. Ms. Focht served as Assistant Vice President
and Controller of Guaranty from 1988 until 1991, when she was promoted to Vice
President and retained her position as Controller.
Rita J. Lynch. Ms. Lynch, age 41, is Guaranty's Vice President of
Retail Operations. She was elected in May 1995. Ms. Lynch has been employed by
Guaranty since October 1989 and prior to her promotion to Vice President, was
the Manager of Retail Services. Prior to joining Guaranty, Ms. Lynch was
employed by First Union National Bank of N.C.
Donna W. Richards. Ms. Richards, age 34, is Guaranty's Vice President
of Mortgage Lending. She was elected in May 1995. Ms. Richards has been employed
by Guaranty since April 1993 and prior to her promotion to Vice President, was
the Manager of Loan Originations and Loan Officer. Prior to joining Guaranty,
Ms. Richards was employed by Virginia Federal.
Item 10. Executive Compensation
Information set forth under the headings "Summary of Cash and Certain
Other Compensation," "Stock Option Grants," "Option Exercises and Holdings,"
"Aggregated Options/SAR Exercises in Last Fiscal Year and FY-End Options/SAR
Value," "Directors' Fees," and "Employment Agreements" in the 1996 Proxy
Statement is hereby incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information set forth under the heading "Security Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" in the 1996
Proxy Statement, is incorporated by reference.
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Transactions with Management"
in the 1996 Proxy Statement is hereby incorporated by reference.
Item 13. Exhibits and Reports on Form 8-K
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Guaranty
Financial Corporation, attached as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-4, as
amended, Registration No. 33-76064, incorporated herein by
reference.
3.2 Bylaws of Guaranty Financial Corporation, attached as
Exhibit 3.2 to Registrant's Registration Statement on Form
S-4, as amended, Registration No. 33-76064, incorporated
herein by reference.
10.1 Guaranty Savings and Loan, F.A. 1991 Incentive Plan,
attached as Exhibit 10.1 to the Registrant's Registration
Statement on Form S-4, as amended, Registration No.
33-76064, incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Financial Statements
As of June 30, 1996 and 1995 and
for the Years Ended June 30, 1996, 1995 and 1994
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Contents
Report of Independent Certified Public Accountants 3
Financial Statements
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5 - 6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 8 - 9
Summary of Accounting Policies 10 - 18
Notes to Consolidated Financial Statements 19 - 37
2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
Guaranty Financial Corporation
Charlottesville, Virginia
We have audited the consolidated balance sheets of Guaranty Financial
Corporation and subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Guaranty Financial Corporation and subsidiary as of June 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1996 in conformity with generally accepted
accounting principles.
As explained in the Summary of Accounting Policies, Guaranty Financial
Corporation adopted Statement of Financial Accounting Standards No. 122 and
Statement of Financial Accounting Standards No. 109 in the years ended June 30,
1996 and 1994, respectively.
August 22, 1996 /s/ BDO Seidman, LLP
3
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1996 1995
- ----------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 5,431,483 $ 5,752,735
Investment securities (Notes 1 and 6)
Held-to-maturity 3,730,589 4,732,638
Available for sale 9,563,605 -
Investment in Federal Home Loan Bank stock at
cost (Note 8) 1,360,200 1,360,200
Loans receivable, net (Notes 2, 8 and 10) 84,081,110 75,220,673
Accrued interest receivable 711,842 584,242
Real estate owned 32,898 122,043
Deferred income taxes (Note 9) 30,000 -
Office properties and equipment, net (Note 3) 3,525,199 436,909
Other assets (Note 2) 1,693,840 1,251,543
- ----------------------------------------------------------------------------------------
$110,160,766 $89,460,983
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities
Deposits (Note 4) $ 74,687,446 $52,460,639
Bonds payable (Notes 1 and 6) 3,143,844 3,980,562
Advances from Federal Home Loan Bank
(Note 8) 17,500,000 25,050,000
Securities sold under agreement to
repurchase (Note 1 and 7) 6,104,000 -
Accrued interest payable 99,297 86,279
Deferred income taxes (Note 9) - 120,000
Prepayments by borrowers for taxes and insurance 145,730 306,346
Other liabilities 2,131,300 1,441,418
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 103,811,617 83,445,244
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11, 14 and 15)
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 12 and 13)
Preferred stock, par value $1 per share, 500,000
shares authorized, none issued - -
Common stock, par value $1.25 per share, 2,000,000
shares authorized, 919,168 and 915,568 shares issued
and outstanding 1,148,960 1,144,460
Additional paid-in capital 1,981,745 1,970,945
Unrealized loss on available for sale securities (Note 1) (279,182) -
Retained earnings - substantially restricted 3,497,626 2,900,334
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,349,149 6,015,739
- -------------------------------------------------------------------------------------------------------------------
$110,160,766 $89,460,983
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
<PAGE>
-------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Interest income
<S> <C> <C> <C>
Loans $6,441,903 $5,897,002 $5,254,214
Mortgage-backed securities 652,639 495,620 824,082
Investment securities 498,686 383,555 554,881
Trading account assets 23,390 12,176 50,695
- -------------------------------------------------------------------------------------------------------------------
Total interest income 7,616,618 6,788,353 6,683,872
- -------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 3,132,660 2,439,585 1,939,300
Borrowings (Notes 7 and 8) 2,059,402 2,223,267 3,133,871
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 5,192,062 4,662,852 5,073,171
- -------------------------------------------------------------------------------------------------------------------
Net interest income 2,424,556 2,125,501 1,610,701
Provision (credit) for loan losses (Note 2) 56,665 (9,443) 74,047
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,367,891 2,134,944 1,536,654
- -------------------------------------------------------------------------------------------------------------------
Other income
Loan fees and servicing income 610,020 651,852 400,133
Net gain (loss) on sale of loans and securities 242,866 206 (490,706)
Service charges on checking 90,156 77,542 78,429
Other 164,090 142,034 138,244
- -------------------------------------------------------------------------------------------------------------------
Total other income 1,107,132 871,634 126,100
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
5
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
(continued)
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Other expenses
<S> <C> <C> <C>
Personnel (Notes 13 and 14) $1,013,674 $1,194,410 $ 941,866
Occupancy (Note 11) 302,139 310,114 321,456
Data processing (Note 11) 257,038 210,110 199,922
Deposit insurance premiums 190,263 195,818 172,894
Other 724,321 619,373 545,515
- -------------------------------------------------------------------------------------------------------------------
Total other expenses 2,487,435 2,529,825 2,181,653
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle 987,588 476,753 (518,899)
Provision for income taxes (Note 9) 344,338 100,508 (234,986)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle 643,250 376,245 (283,913)
Cumulative effect of change in accounting
for income taxes - - (196,000)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 643,250 $ 376,245 $(479,913)
- -------------------------------------------------------------------------------------------------------------------
Earnings per common share
Income (loss) before cumulative effect of
change in accounting principle $ .70 $ .70 $ (.53)
Cumulative effect of change in accounting
for income taxes - - (.37)
- -------------------------------------------------------------------------------------------------------------------
$ .70 $ .70 $ (.90)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Additional Loss on Total
Common Paid-in Available for Retained Stockholders'
Stock Capital Sale Securities Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $ 671,460 $ 335,730 $ - $3,004,002 $4,011,192
Net loss - - - (479,913) (479,913)
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 671,460 335,730 - 2,524,089 3,531,279
Stock options exercised
(Note 13) 23,000 57,200 - - 80,200
Issuance of common stock
(Note 12) 450,000 1,578,015 - - 2,028,015
Net income - - - 376,245 376,245
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 1,144,460 1,970,945 - 2,900,334 6,015,739
Stock options exercised
(Note 13) 4,500 10,800 - - 15,300
Cash dividend - - - (45,958) (45,958)
Unrealized loss on
available for sale
securities (Note 1) - - (279,182) - (279,182)
Net income - - - 643,250 643,250
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $1,148,960 $1,981,745 $(279,182) $3,497,626 $6,349,149
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
7
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income (loss) $ 643,250 $ 376,245 $ (479,913)
Adjustments to reconcile net income (loss) to net
cash provided (absorbed) by operating activities
Provision (credit) for loan losses 56,665 (9,443) 74,047
Depreciation and amortization 95,511 93,775 109,250
Amortization of deferred loan fees (136,086) (123,528) (148,992)
Net amortization of premiums and accretion
of discounts 199,060 54,822 662,379
Loss (gain) on sale of loans (204,901) 60,367 (152,931)
Originations of loans held for sale (7,203,819) (11,765,459) (23,211,491)
Proceeds from sale of loans 7,160,241 11,825,826 23,364,422
Loss (gain) on sale of mortgage-backed
securities - (36,418) 214,800
Originations of loans securitized - (5,596,082) (4,992,057)
Proceeds from sale of mortgage-backed securities - 5,415,983 6,574,500
(Gain) loss on sale of securities available for sale (101,685) - 155,100
(Gain) loss on disposal of office properties
and equipment (1,341) (1,806) -
Federal Home Loan Bank stock dividends - - (53,600)
Loss on sale of held to maturity securities - - 105,300
(Gain) loss on sale of trading account securities 63,720 (24,155) 168,437
Purchases of trading account securities (107,346,227) (43,113,114) (73,546,348)
Sales of trading account securities 107,282,507 43,137,269 73,377,911
Changes in
Accrued interest receivable (127,600) (27,424) 44,109
Other assets (442,298) (192,025) (310,844)
Accrued interest payable 13,018 (21,951) (82,399)
Deferred income taxes - (87,000) (307,277)
Prepayments by borrowers for taxes and insurance (160,616) 181,671 (156,412)
Other liabilities 689,882 (592,864) (531,024)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 479,281 (445,311) 876,967
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
8
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Investing activities
<S> <C> <C> <C>
Proceeds from sales of held to maturity securities $ - $ - $2,890,700
Net (increase) decrease in loans (8,486,970) 2,484,824 (7,331,860)
Principal repayments on held to maturity securities 998,457 1,260,076 6,128,157
Purchase of securities available for sale (28,399,062) - (7,000,000)
Proceeds from sales of securities available for sale 18,507,960 - 6,838,750
Purchases of FHLB stock - - (77,300)
Sale of FHLB stock - 77,300 -
Proceeds from sale of office properties and equipment 4,522 15,389 -
Purchases of office properties and equipment (3,186,982) (152,668) (115,878)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities (20,562,075) 3,684,921 1,332,569
- -------------------------------------------------------------------------------------------------------------------
Financing activities
Net increase (decrease) in deposits 22,226,807 (1,006,244) 3,446,397
Repayment of Federal Home Loan Bank advances (31,510,000) (15,200,000) (15,800,000)
Proceeds from Federal Home Loan Bank advances 23,960,000 16,300,000 14,000,000
Principal payments on bonds payable, including
unapplied payments (988,607) (968,556) (5,475,702)
Increase (decrease) in securities sold under
agreements to repurchase 6,104,000 - -
Proceeds from issuance of common stock 15,300 2,108,215 -
Dividends paid (45,958) - -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (abosrbed) by financing activities 19,761,542 1,233,415 (3,829,305)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (321,252) 4,473,025 (1,619,769)
Cash and cash equivalents, beginning of year 5,752,735 1,279,710 2,899,479
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,431,483 $ 5,752,735 $1,279,710
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
9
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
Nature of Business and Regulatory Environment
Guaranty Financial Corporation (the "Parent Company") is a unitary thrift
holding company whose principal asset is its wholly-owned subsidiary, Guaranty
Savings & Loan, F.A. (the "Savings Bank"). The Savings Bank provides a full
range of banking services to individual and corporate customers. In these
financial statements the consolidated group is referred to collectively as "the
Corporation".
The Office of Thrift Supervision ("OTS"), is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
effective January 1, 1993. FDICIA contained provisions which allow regulators to
impose prompt corrective action on undercapitalized institutions in accordance
with a categorized capital-based system.
Principles of Consolidation
The consolidated financial statements include the accounts of Guaranty Financial
Corporation and Guaranty Savings & Loan, F.A., its wholly-owned subsidiary, and
GMSC, Inc. and Guaranty Investment Corp., wholly-owned subsidiary of the Savings
Bank. All material intercompany accounts and transactions have been eliminated
in the consolidation. Prior year accounts are reclassified when necessary to
conform to current year classifications.
Reorganization
On December 29, 1995, the Savings Bank and the Corporation consummated the
reorganization of the Savings Bank into a unitary-thrift holding company
structure whereby the Savings Bank became the wholly-owned subsidiary of the
Corporation. Each outstanding share of the common stock of the Savings Bank
became one share of the common stock of the Corporation. This transaction was
accounted for as a pooling of interests.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
10
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Investment Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". The Corporation adopted the
provisions of SFAS 115 during the year ended June 30, 1995. The adoption of this
Statement had no effect on the operations of the Corporation. SFAS 115 addresses
the accounting and reporting of investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
Investments in securities are to be classified as either held-to-maturity,
trading, or available for sale.
Investments in debt securities classified as held-to-maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts using the
level yield method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their market value below amortized cost. Investment in Federal Home
Loan Bank stock is stated at cost.
Investments in debt and equity securities classified as available-for-sale are
stated at market value with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax effect, until realized.
Investments in debt and equity securities classified as trading are stated at
market value. Unrealized holding gains and losses for trading securities are
included in the statement of operations.
Gains and losses on the sale of securities are determined using the specific
identification method.
Options
Premiums received for writing put and call options are recorded as a liability
and are taken into income if the option is closed prior to maturity or expires.
Upon exercise of the option, the premium is treated as an adjustment to the
basis of the underlying security.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
11
<PAGE>
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loans receivable consists primarily of long-term real estate loans secured by
first deeds of trust on single family residences, other residential property,
commercial property and land located primarily in the state of Virginia.
Interest income on mortgage loans is recorded when earned and is recognized
based on the level yield method. The Corporation provides an allowance for
accrued interest deemed to be uncollectible, which is netted against accrued
interest receivable in the consolidated balance sheets.
The Corporation defers loan origination and commitment fees, net of certain
direct loan origination costs, and the net deferred fees are amortized into
interest income over the lives of the related loans as yield adjustments. Any
unamortized net fees on loans fully repaid or sold are recognized as income in
the year of repayment or sale.
Sale of Loans and Participation in Loans
The Corporation is able to generate funds by selling loans and participations in
loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and to other
insured investors. Under participation servicing agreements, the Corporation
continues to service the loans and the participant is paid its share of
principal and interest collections.
Effective July 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing
Rights an Amendment of FASB Statement No. 65". SFAS 122 requires entities to
allocate the cost of acquiring or originating mortgage loans between the
mortgage servicing rights and the loans, based on their relative fair values, if
the bank sells or securitizes the loans and retains the mortgage servicing
rights. In addition, SFAS 122 requires entities to assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights.
12
<PAGE>
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Sale of Loans and Participation in Loans (continued)
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
Allowance for Possible Loan Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan
portfolio. Management's assessment of the adequacy of the allowance is based
upon type and volume of the loan portfolio, past loan loss experience, existing
and anticipated economic conditions, and other factors which deserve current
recognition in estimating future loan losses. Additions to the allowance are
charged to operations. Loans are charged-off partially or wholly at the time
management determines collectibility is not probable. Management's assessment of
the adequacy of the allowance is subject to evaluation and adjustment by the
Corporation's regulators.
Loans are generally placed on nonaccrual status when the collection of principal
or interest is 90 days or more past due, or earlier if collection is uncertain
based upon an evaluation of the value of the underlying collateral and the
financial strength of the borrower. Loans may be reinstated to accrual status
when all payments are brought current and, in the opinion of management,
collection of the remaining balance can be reasonably expected. Loans greater
than 90 days past due may remain on accrual status if management determines it
has adequate collateral to cover the principal and interest.
Effective July 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment
of a Loan (as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures"). The effect of adopting these new
accounting standards were immaterial to the operating results of the Corporation
for the year ended June 30, 1996.
13
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Allowance for Possible Loan Losses (continued)
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Corporation will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. A
performing loan may be considered impaired. The allowance for loan losses
related to loans identified as impaired is primarily based on the excess of the
loan's current outstanding principal balance over the estimated fair market
value of the related collateral. For a loan that is not collateral-dependent,
the allowance is recorded at the amount by which the outstanding principal
balance exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's original effective interest rate. Prior to 1995, the
allowance for loan losses for all loans which would have qualified as impaired
under the new accounting standards was primarily based upon the estimated fair
market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of
fair value, less selling costs, or the balance of the loan on the property at
date of foreclosure. Costs relating to the development and improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated fair value.
14
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability in the consolidated statements of condition. The dollar
amount of securities underlying the agreements remain in the asset accounts.
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated depreciation
and amortization. Provisions for depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the individual
assets or the terms of the related leases, if shorter, for leasehold
improvements. Expenditures for betterments and major renewals are capitalized
and ordinary maintenance and repairs are charged to expense as incurred.
Income Taxes
During the year ended June 30, 1994, the Corporation adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
required a change from the deferred method to the asset and liabilities method
of accounting for income taxes.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
In computing Federal income taxes, savings banks that meet certain definitional
tests and other conditions prescribed by the Internal Revenue Code are allowed,
within limitations, to deduct from taxable income an allowance for bad debts
based on actual loss experience, a percentage of taxable income (8%) before such
deduction or an amount based on a percentage of eligible loans. The cumulative
bad debt reserve, upon which no taxes have been paid, was approximately
$1,086,000 as of June 30, 1996.
The Corporation has reported the cumulative effect of change in the method of
accounting for income taxes as of the beginning of the 1994 fiscal year in the
consolidated statement of operations.
15
<PAGE>
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Earnings Per Share
Earnings per share is computed based on the weighted average number of shares of
common stock outstanding during each period including the assumed exercise of
dilutive stock options, and is retroactively adjusted for stock dividends and
stock splits. The weighted average number of shares of common stock outstanding
for the years ended June 30, 1996, 1995 and 1994 were 917,668, 541,768 and
537,168, respectively.
Statement of Cash Flows
Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $5,179,000, $4,685,000 and
$5,156,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Cash
paid for income taxes was approximately $180,000, $42,000 and $159,000 for the
years ended June 30, 1996, 1995 and 1994, respectively. Real estate acquired in
settlement of loans during the years ended June 30, 1996 and 1995 was
approximately $33,000 and $122,000, respectively.
Reclassifications
Certain reclassifications have been made in the prior year consolidated
financial statements and notes to conform to the 1996 presentation.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 121 requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, SFAS 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. SFAS 121 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the financial statements of the Corporation.
16
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
New Accounting Pronouncements (continued)
In October 1995, the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for StockBased
Compensation." SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the adoption
of a new accounting method based on the estimated fair value of employee stock
options. Companies electing not to follow the new fair value based method are
required to provide expanded footnote disclosures, including pro forma net
income and earnings per share, determined as if the company had applied the new
method. SFAS No. 123 is required to be adopted by the Corporation prospectively
beginning July 1, 1996. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Corporation.
In June 1996, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of the Corporation.
Regulatory Supervisory Agreement
During May 1995, the Savings Bank entered into a Supervisory Agreement with the
OTS that required Savings Bank to take specific actions and placed limitations
on its growth. Among the actions the Savings Bank agreed to undertake were:
revise its business plan to indicate how it will increase its capital levels and
review and revise its policies related to interest rate risk, investment
activities and liquidity maintenance. In addition, the Savings Bank was required
by the agreement to obtain OTS approval prior to making any distribution to the
holders of its common stock.
17
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Regulatory Supervisory Agreement (continued)
On June 28, 1995, the Savings Bank completed an initial public offering of its
common stock resulting in the Corporation being considered "well capitalized"
under the prompt corrective action framework of FDICIA (Note 11).
On August 11, 1995, the Savings Bank was granted a waiver of the growth
limitations of the Supervisory Agreement allowing growth in accordance with the
Corporation's approved business plan.
On May 14, 1996, the May 1995 Supervisory Agreement with the OTS was terminated.
18
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
1. Investment
Securities
A summary of the carrying value and estimated market value of mortgage-backed
securities is as follows:
<TABLE>
<CAPTION>
June 30, 1996
- ------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
Held to Maturity
<S> <C> <C> <C> <C>
Mortgage-backed
securities $ 3,730,589 $148,301 $ - $ 3,878,890
- ------------------------------------------------------------------------------------------------------
3,730,589 148,301 - 3,878,890
- ------------------------------------------------------------------------------------------------------
Available for Sale
Mortgage-backed
securities 9,992,516 - 428,911 9,563,605
- ------------------------------------------------------------------------------------------------------
9,992,516 - 428,911 9,563,605
- ------------------------------------------------------------------------------------------------------
$13,723,105 $111,979 $428,911 $13,442,495
- ------------------------------------------------------------------------------------------------------
June 30, 1995
- ------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Carrying Realized Unrealized Market
Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed
securities $4,732,638 $154,750 $ - $4,887,388
- ------------------------------------------------------------------------------------------------------
$4,732,638 $154,750 $ - $4,887,388
- ------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
1. Investment Securities (continued)
Proceeds from sales of securities available for sale during the years ended June
30, 1996 and 1994 were approximately $18,508,000 and $6,839,000, respectively.
The Corporation had no sales of available for sale securities during the year
ending June 30, 1995. Gross gains of approximately $101,700 and gross losses of
approximately $155,100 were realized on those sales during the years ended June
30, 1996 and 1994, respectively.
Proceeds from sales of trading securities during the years ended June 30, 1996,
1995 and 1994 were approximately $107,283,000, $43,137,000 and $73,378,000,
respectively. Gross gains of approximately $209,000, $142,600 and $389,100 and
gross losses of approximately $272,700, $118,400 and $557,500 were realized on
those sales during the years ended June 30, 1996, 1995, and 1994, respectively.
At June 30, 1996, mortgage-backed securities of approximately $3,731,000 were
pledged for bonds payable (Note 6). At June 30, 1996, mortgage-backed securities
classified as available for sale with a market value of approximately $6,633,000
were pledged as collateral under repurchase agreements (Note 7).
20
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
2. Loans Receivable
Loans receivable are summarized as follows:
June 30, 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate $66,137,277 $62,174,694
Commercial real estate 7,670,148 4,507,978
Construction and land 8,813,170 8,886,956
Consumer 5,386,104 4,579,977
- ------------------------------------------------------------------------------------------
88,006,699 80,149,605
- ------------------------------------------------------------------------------------------
Less
Undisbursed loan funds 2,823,774 3,858,164
Deferred loan fees 313,669 323,282
Allowance for loan losses 788,146 747,486
- ------------------------------------------------------------------------------------------
3,925,589 4,928,932
- ------------------------------------------------------------------------------------------
$84,081,110 $75,220,673
- ------------------------------------------------------------------------------------------
The allowance for loan losses is summarized
as follows:
Balance at June 30, 1993 $745,797
Provision charged to expense 74,047
Net charge-offs or reductions (66,258)
- ------------------------------------------------------------------------------------------
Balance at June 30, 1994 753,586
Credit to operations (9,443)
Net recoveries 3,343
- ------------------------------------------------------------------------------------------
Balance at June 30, 1995 747,486
Provision charged to expense 56,665
Net charge-offs or reductions (16,005)
- ------------------------------------------------------------------------------------------
Balance at June 30, 1996 $788,146
- ------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
2. Loans Receivable (continued)
The Corporation serviced loans for others aggregating approximately $168,437,000
and $169,621,000 at June 30, 1996 and 1995, respectively. Mortgage servicing
rights, included in other assets, was approximately $787,000 and $721,000 at
June 30, 1996 and 1995, respectively. Mortgage servicing rights of approximately
$160,000 were capitalized during the year ended June 30, 1996. No mortgage
servicing rights were capitalized during the year ended June 30, 1995.
Gross gains and gross losses on the sale of loans totalling approximately
$205,000 and $0, $51,000 and $112,000, $203,000 and $50,000, were realized for
the years ended June 30, 1996, 1995 and 1994, respectively. There were no loans
classified as held for sale at June 30, 1996 and 1995.
The following information relates to the Corporation's impaired loans which
includes troubled debt restructurings that meet the definition of impaired loans
as of and for the year ended June 30, 1996:
Impaired loans with a specific allowance $493,000
Impaired loans with no specific allowance -
- -------------------------------------------------------------------------------
Total impaired loans $493,000
- -------------------------------------------------------------------------------
Total allowance related to impaired loans $123,000
Average balance of impaired loans for the period 496,000
Interest income on impaired loans for the period
recorded on a cash basis -
3. Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Land $1,873,386 $ -
Building and leasehold improvements 1,388,741 305,574
Furniture and fixtures 288,575 365,773
Equipment 661,020 637,998
- ----------------------------------------------------------------------------------------------
4,211,722 1,309,345
Less accumulated depreciation and amortization 686,523 872,436
- ----------------------------------------------------------------------------------------------
Net office properties and equipment $3,525,199 $ 436,909
- ----------------------------------------------------------------------------------------------
</TABLE>
Commitments for the construction of a new operations center and branch were
approximately $924,000 at June 30, 1996.
22
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
4. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook, statement savings
and interest checking
accounts
Non-interest bearing $ 1,349,508 1.8% $ 805,902 1.5%
2.00 to 3.00% 5,094,991 6.8 5,011,503 9.6
3.01 to 4.00% 7,862,504 10.5 8,819,035 16.8
- -------------------------------------------------------------------------------------------
14,307,003 19.1 14,636,440 27.9
- -------------------------------------------------------------------------------------------
Certificates:
0 to 4.00% 135,997 .2 53,341 .1
4.01 to 5.00% 192,804 .3 7,076,118 13.5
5.01 to 6.00% 55,491,113 74.3 18,868,053 36.0
6.01 to 7.00% 4,560,529 6.1 11,826,687 22.5
- -------------------------------------------------------------------------------------------
60,380,443 80.9 37,824,199 72.1
- -------------------------------------------------------------------------------------------
$74,687,446 100.0% $52,460,639 100.0%
- -------------------------------------------------------------------------------------------
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $4,606,000 and $1,432,000 at June 30,
1996 and 1995, respectively.
Scheduled maturities of certificates are as follows:
June 30, 1996 1995
- ---------------------------------------------------------------------
Within one year $51,209,732 $27,682,073
One to two years 5,191,895 8,189,909
Two to three years 1,129,936 957,106
Three to four years 1,212,076 419,047
Five years and thereafter 1,636,804 576,064
- ---------------------------------------------------------------------
$60,380,443 $37,824,199
- ---------------------------------------------------------------------
23
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments as of June
30, 1996, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets
Cash and short-term investments $ 5,431,483 $5,431,000
Securities 13,294,194 13,442,000
Loans, net of allowance for loan losses 84,081,110 82,710,000
Financial liabilities
Deposits 74,687,446 74,590,000
Advances from Federal Home Loan Bank 17,500,000 17,500,000
Securities sold under agreement to
repurchase 6,104,000 6,104,000
Bonds payable 3,143,844 N/A
Notional Fair
Amount Value
- ---------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to extend credit $3,884,850 $3,885,000
Forward commitments to purchase
mortgage-backed securities 5,795,000 5,822,000
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
24
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of Financial Instruments (continued)
Loan receivables
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
For advances that mature within one year of the balance sheet date, carrying
value is considered a reasonable estimate of fair value.
The fair values of all other advances are estimated using discounted cash flow
analysis based on the Corporation's current incremental borrowing rate for
similar types of advances.
Securities sold under agreement to repurchase
Fixed-coupon reverse repurchase agreements are treated as short-term financings.
The carrying value is considered a reasonable estimate of fair value.
Bonds payable
Due to the nature and terms (Note 6) of the bonds payable held by GMSC, Inc.
at June 30, 1996, it was not deemed practicable to estimate the fair value.
25
<PAGE>
- -----------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of Financial Instruments (continued)
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases.
Forward Commitments to purchase mortgage-backed securities
Fair values are based on quoted market prices or dealer quotes.
6. Bonds Payable
In October 1987, GMSC, Inc. issued serial bonds ("the Bonds") collateralized by
mortgage-backed securities which are treated as a real estate mortgage
investment conduit ("REMIC") under the Internal Revenue Code of 1986 for federal
tax purposes. The Bonds are secured by an indenture between GMSC, Inc. and the
Bank of New York, acting as trustee for the bondholders. The Bonds are
summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Serial Bonds
Class A-2, maturing January 20, 2012, at 8.0% $1,556,846 $2,778,641
Class A-3, maturing January 20, 2019, at 8.0% 2,352,811 2,173,634
Unapplied payments (200,337) (254,348)
- ----------------------------------------------------------------------------------------------
3,709,320 4,697,927
Less unamortized discount (565,476) (717,365)
- ----------------------------------------------------------------------------------------------
$3,143,844 $3,980,562
- ----------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
6. Bonds Payable (continued)
The Bonds are repaid in conjunction with the net cash flow from the
mortgage-backed securities together with the reinvestment income thereon. As a
result, the actual life of the Bonds is less than their stated maturities.
Interest is paid as incurred on the Class A-2 Bonds and is accrued and added to
the principal amount due on the Class A-3 Bonds. The indenture also provides for
the establishment of two trust accounts to insure the timely payment of
interest, debt maturities, trustee and accounting fees and other expenses. The
account established for payment of trustee and accounting fees is included in
cash on the statement of condition. The account established for payment of
interest and debt maturities is netted with cash and bonds payable on the
statement of condition.
7. Securities Sold Under Agreements to Repurchase
The following is a summary of certain information regarding Guaranty's
repurchase agreements:
<TABLE>
<CAPTION>
June 30, 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at end of year $6,104,000 $ -
Weighted average interest rate at end of year 5.65% -
Average amount outstanding during the year $3,111,583 $ 782,500
Maximum amount outstanding at any month
end during the year $9,930,000 $4,230,000
</TABLE>
8. Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank are summarized as follows:
Due in Year Ending
June 30,
- --------------------------------------------------------------------
1997 $12,500,000
1998 5,000,000
- --------------------------------------------------------------------
$17,500,000
- --------------------------------------------------------------------
The weighted average interest rate of these advances was 5.93% and 6.67% at June
30, 1996 and 1995, respectively. The advances are collateralized by investment
in Federal Home Loan Bank stock and certain mortgage loans with an unpaid
balance of approximately $35,097,000 at June 30, 1996.
27
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
8. Advances From Federal Home Loan Bank (continued)
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
<TABLE>
<CAPTION>
Year Ending June 30, 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding during
the year $28,050,000 $28,250,000 $28,750,000
- --------------------------------------------------------------------------------------
Average amount outstanding during
the year $22,829,000 $26,208,000 $26,017,000
- --------------------------------------------------------------------------------------
Average interest rate during the year 6.21% 6.67% 6.63%
- --------------------------------------------------------------------------------------
</TABLE>
9. Income Taxes
The provision for income taxes as presented in the consolidated statements of
operations for the years ended June 30, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $344,338 $187,885 $ 16,200
Deferred income tax expense (benefit) - (87,377) (251,186)
- ---------------------------------------------------------------------------------------
$344,338 $100,508 $(234,986)
- ---------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $335,780 $162,096 $(176,426)
Adjustments
Effect of state taxes 39,504 18,880 (20,860)
Other (30,946) (80,468) (37,700)
- ---------------------------------------------------------------------------------------
$344,338 $100,508 $(234,986)
- ---------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
9. Income Taxes (continued)
The components of deferred income tax liability are as follows:
<TABLE>
<CAPTION>
June 30, 1996 1995
- -----------------------------------------------------------------------------------
Deferred tax asset
<S> <C> <C>
Bad debt reserves $152,000 $169,000
Deferred loan fees 70,000 123,000
Excess servicing 48,000 68,000
Available for sale securities 150,000 -
Other 65,000 18,000
- -----------------------------------------------------------------------------------
Total deferred tax asset 485,000 378,000
- -----------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 230,000 277,000
FHLB stock 187,000 187,000
Other 38,000 34,000
- -----------------------------------------------------------------------------------
Total deferred tax liability 455,000 498,000
- -----------------------------------------------------------------------------------
Net deferred tax liability (asset) $(30,000) $120,000
- -----------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
10. Related Party Transactions
In the course of business, the Corporation makes loans to directors, officers
and other related parties. These loans are made on substantially the same terms
as those prevailing at the time for comparable transactions with the other
borrowers.
The following is a summary of loan transactions with directors, officers and
other related parties:
<TABLE>
<CAPTION>
June 30, 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance, at the beginning of year $291,124 $615,267
Loans to former officers and other
related parties - (233,270)
Additional loans 197,741 -
Loan reductions 222,244 (90,873)
- -------------------------------------------------------------------------------
Balance, at end of year $266,621 $291,124
- -------------------------------------------------------------------------------
</TABLE>
11. Commitments and Contingencies
Continuing uncertainty exists as to the sufficiency of the Federal Deposit
Insurance Corporation's ("FDIC") Savings Association Insurance Fund ("SAIF").
Legislators and thrift regulators are considering alternative methods of
strengthening this fund. Virtually all of the existing proposals will require
additional funding from the thrifts whose deposits are insured by the FDIC. At
June 30, 1996, possible future increases in FDIC insurance costs for the Savings
Bank cannot be estimated.
30
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
11. Commitments and Contingencies (continued)
The Corporation leases office space under operating leases expiring at various
dates through December 1998 and has a contract for the performance of data
processing services whose initial term expires in May 1999 and requires minimum
payments of $8,100 per month. Future minimum rental and data processing payments
required that have initial or remaining noncancelable terms in excess of one
year as of June 30, 1996, are as follows:
Amount
- ------------------------------------------------------------
Data
Year Ending June 30, Leases Processing
- ------------------------------------------------------------
1997 $40,698 $ 97,200
1998 25,655 97,200
1999 22,956 89,100
2000 5,763 -
- ------------------------------------------------------------
$95,072 $283,500
- ------------------------------------------------------------
Total rental expense amounted to approximately $168,000, $187,000 and $180,000
and total data processing expense amounted to approximately $257,000, $210,000
and $199,900 for the years ended June 30, 1996, 1995 and 1994, respectively.
The Corporation is defendant in various lawsuits incidental to its business.
Management is of the opinion that its financial position will not be materially
affected by the ultimate resolution of any litigation pending or threatened at
June 30, 1996.
12. Stockholders' Equity
On June 28, 1995, the Corporation completed an initial public offering of its
common stock through the sale of 180,000 shares of common stock at a price of
$13.00 per share. Proceeds to the Corporation from the offering (net of offering
expenses of approximately $312,000) were approximately $2,028,000.
On November 30, 1995, the Board of Directors declared a two-for-one stock split
to be distributed on January 31, 1996, to all shareholders of record as of
January 15, 1996.
31
<PAGE>
- --------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
12. Stockholders' Equity (continued)
Savings institutions must maintain specific capital standards that are no less
stringent than the capital standards applicable to national banks. The OTS
regulations currently have three capital standards including (i) a tangible
capital requirement, (ii) a core capital requirement, and (iii) a risk-based
capital requirement. The tangible capital standard requires savings institutions
to maintain tangible capital of not less than 1.5% of adjusted total assets. The
core capital standard requires a savings institution to maintain core capital of
not less than 4.0% of adjusted total assets. The risk-based capital standard
requires risk-based capital of not less than 8.0% of risk-weighted assets.
At June 30, 1996, the Savings Bank met all three regulatory capital requirements
applicable to it under Financial Institutions Reform, Recovery and Enforcement
Act ("FIRREA") and was considered "well capitalized" under the prompt corrective
action framework of FDICIA.
The following table presents the Savings Bank's regulatory capital levels at
June 30, 1996, relative to the OTS requirements applicable at that date:
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
Required Required Amount Percent Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible capital $1,655,000 1.50% $6,628,000 6.01% $4,973,000
Core capital 3,309,000 3.00 6,628,000 6.01 3,319,000
Risk-based capital 4,372,000 8.00 7,171,000 13.12 2,799,000
</TABLE>
The Corporation may not declare or pay a cash dividend, or repurchase any of its
capital stock if the effect thereof would cause the net worth of the Corporation
to be reduced below the net worth requirement imposed by federal regulations.
13. Stock Option Plan
The Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to key employees.
32
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
13. Stock Option Plan (continued)
The following table summarizes vested options outstanding:
<TABLE>
<CAPTION>
Year Ending June 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------
Option Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year $4.25 13,600 24,000 16,000
Options vested during year 4.25 - 4.75 4,000 8,000 8,000
Options exercised during year 4.25 - 4.75 (3,600) (18,400) -
- ------------------------------------------------------------------------------------------
Outstanding at end of year $4.25 - 4.75 14,000 13,600 24,000
- ------------------------------------------------------------------------------------------
</TABLE>
14. Employee Benefit Plans
Effective February 16, 1989, the Corporation adopted a 401(k) profit-sharing
plan in which all employees are eligible to participate after one year of
service and are at least twenty-one years of age. Participants may elect to
contribute a percentage of their compensation to the plan. The Corporation may
make contributions to the plan at its discretion. Corporation contributions are
allocated to employee accounts using a systematic formula based on participant
compensation. The Corporation contributed approximately $4,600, $5,800 and
$4,700 to the plan for the years ended June 30, 1996, 1995 and 1994,
respectively.
15. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, options written and
purchased, forward commitments to purchase mortgage-backed securities and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statement of condition. The contract or notional amounts of these
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual notional
amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. For options purchased, the contract or notional amounts do not
represent exposure to credit loss.
33
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
15. Financial Instruments With Off-Balance-Sheet Risk (continued)
Unless noted otherwise, the Corporation does not require collateral or other
security to support financial instruments with credit risk.
Contract
Notional Amount
at June 30, 1996
- ----------------------------------------------------------------------
Financial instruments whose contract amounts
represent credit risk
Commitments to extend credit $9,300,000
Standby letters of credit written 218,000
Financial instruments whose contract amount
represent interest rate risk
Forward commitment to purchase mortgage-
backed securities $5,795,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Substantially all of the Corporation's loan activity was with customers located
in Charlottesville, Virginia and surrounding counties, with approximately 81% of
the loans collateralized by one to four family residential properties.
34
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
16. Condensed Financial Information of the Corporation (Parent Company Only)
Condensed financial information is shown for the parent company only as follows:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
June 30, 1996
- -----------------------------------------------------------------------
Assets
<S> <C>
Investment in the Savings Bank, at equity $6,693,752
Cash 10,000
Prepaid expenses and other assets 68,979
- -----------------------------------------------------------------------
$6,772,731
- -----------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities $ 144,400
- -----------------------------------------------------------------------
Stockholders' Equity
Common stock 1,148,960
Additional paid-in capital 1,981,745
Retained earnings 3,497,626
- -----------------------------------------------------------------------
Total stockholders' equity 6,628,331
- -----------------------------------------------------------------------
$6,772,731
- -----------------------------------------------------------------------
</TABLE>
35
<PAGE>
- ------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
16. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
<TABLE>
<CAPTION>
Condensed Statements of Income
Year Ended June 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
Income
Dividends received from Savings Bank $ 10,000
- --------------------------------------------------------------------------------
Total income 10,000
- --------------------------------------------------------------------------------
Noninterest expenses (41,463)
- --------------------------------------------------------------------------------
Loss before income tax benefit and equity
in undistributed net income of the Savings Bank (31,463)
Income tax benefit 12,000
- --------------------------------------------------------------------------------
Loss before equity in undistributed net income
of the Savings Bank (19,463)
Equity in undistributed net income of the
Savings Bank 662,713
- --------------------------------------------------------------------------------
Net income $643,250
- --------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
16. Condensed Financial Information of the Corporation (Parent Company Only)
(continued)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year Ended June 30, 1996
- ------------------------------------------------------------------------------
<S> <C>
Operating activities
Net income $643,250
Adjustments
Equity in income of the Savings Bank (672,713)
(Increase) decrease in prepaid and other assets (68,979)
Increase in other liabilities 144,400
- ------------------------------------------------------------------------------
Net cash provided by operating activities 45,958
- ------------------------------------------------------------------------------
Investing activities
Dividends received from Savings Bank 10,000
- ------------------------------------------------------------------------------
Net cash provided by investing activities 10,000
- ------------------------------------------------------------------------------
Financing activities
Cash dividends paid on common stock (45,958)
- ------------------------------------------------------------------------------
Net cash absorbed by financing activities (45,958)
- ------------------------------------------------------------------------------
Increase in cash 10,000
Cash, beginning of year -
- ------------------------------------------------------------------------------
Cash, end of year $ 10,000
- ------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: October 15, 1996 By: /s/ Thomas P. Baker
--------------------------------------
Thomas P. Baker
President, Chief Executive Officer
and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thomas P. Baker President, Chief Executive Officer and October 15, 1996
- -------------------------------------
Thomas P. Baker Director
(Principal Executive Officer)
/s/ Kathleen M. Focht Chief Financial Officer, Vice President, October 15, 1996
- -------------------------------------
Kathleen M. Focht and Secretary/Treasurer (Principal
Financial and Accounting Officer)
Chairman of the Board
- -------------------------------------
Douglas E. Caton
/s/ Harry N. Lewis Vice Chairman of the Board October 15, 1996
- -------------------------------------
Harry N. Lewis
/s/ Charles Borchardt
- ------------------------------------- Director October 15, 1996
Charles R. Borchardt
/s/ Henry J. Browne
- ------------------------------------- Director October 15, 1996
Henry J. Browne
/s/ Robert P. Englander
- ------------------------------------- Director October 15, 1996
Robert P. Englander
- ------------------------------------- Director
John R. Metz
- ------------------------------------- Director
James R. Sipe, Jr.
/s/ Oscar W. Smith, Jr.
- ------------------------------------- Director October 15, 1996
Oscar W. Smith, Jr.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000919967
<NAME> Guaranty Financial Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,431
<INT-BEARING-DEPOSITS> 2,164
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,714
<INVESTMENTS-CARRYING> 3,731
<INVESTMENTS-MARKET> 3,879
<LOANS> 84,081
<ALLOWANCE> 788
<TOTAL-ASSETS> 110,161
<DEPOSITS> 74,687
<SHORT-TERM> 18,604
<LIABILITIES-OTHER> 2,131
<LONG-TERM> 8,144
0
0
<COMMON> 1,149
<OTHER-SE> 5,201
<TOTAL-LIABILITIES-AND-EQUITY> 110,161
<INTEREST-LOAN> 6,442
<INTEREST-INVEST> 1,175
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,617
<INTEREST-DEPOSIT> 3,133
<INTEREST-EXPENSE> 5,192
<INTEREST-INCOME-NET> 2,425
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</TABLE>
