SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITEIS EXCHANGE ACT OF 1934
Transition period from July 1, 1996 to December 31, 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.)
1658 State Farm Boulevard
Charlottesville, Virginia 22911
(Address of Principal Executive Offices) (Zip Code)
(804) 970-1100
(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.
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 December 31, 1996 was approximately $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 December 31,
1996 was 924,008.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-KSB - Proxy Statement for the 1996 Annual Meeting
of Stockholders.
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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., now Guaranty Bank, (the "Bank") for the purpose of becoming a unitary
savings and loan holding company. The Bank, which began business in February
1981 and is headquartered in Charlottesville, Virginia, obtained final
regulatory approval on June 30, 1997 to convert from a federally chartered
savings association to a state chartered commercial bank. Prior to the
conversion, Guaranty was a member of the Federal Home Loan Bank System ("FHLBS")
and its deposits were 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"), served as the primary regulator
for thrifts such as the Bank.
After the conversion, Guaranty will be a Federal Reserve member
commercial bank and its deposits will be insured by the Bank Insurance Fund
("BIF") of the FDIC. The Federal Reserve, the Bureau of Financial Institutions
of the Virginia State Corporation Commission and the FDIC will serve as the
Bank's primary regulators.
Effective December 29, 1995, the Bank completed the reorganization of
the Bank and the Corporation acquired all of the issued and outstanding 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 the Corporation, unless otherwise
indicated, at or before December 29, 1995 refer to the Bank and its subsidiaries
on a consolidated basis. The Corporation's Common Stock is quoted on the
National Association of Securities Dealers Automated Quotations ("NASDAQ")
System under the symbol "GSLC".
During 1996, the Bank hired experienced commercial and consumer loan
officers and began offering consumer loans and government insured and
conventional small business loans. As a result of the anticipated conversion,
the Board of Directors of the Corporation and the Bank voted on March 31, 1997
to change the year end of both the Corporation and the Bank from fiscal year end
June 30 to a calendar year end December 31.
Historically, Guaranty's principal business activities have been
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 $81 million of mortgages outstanding at
December 31, 1996, 78% 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
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United States government and agency obligations and other investments permitted
by applicable laws and regulations.
Like all banks, Guaranty's operations are materially affected by
general economic conditions, the monetary and fiscal policies of the federal
government and the policies of the various regulatory authorities. Its results
of operations are largely dependent upon its net interest income, which is the
difference between the interest it receives on its loan portfolio and its
investment securities portfolio and the interest it pays on its deposit accounts
and borrowings.
Guaranty's main office is located at 1658 State Farm Boulevard,
Charlottesville, Virginia 22911 and the telephone number is (804) 970-1100.
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 four 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 was
opened in December 1996. Guaranty also constructed, in the city of Harrisonburg,
a fifth retail branch which opened in May 1997.
Competition
Guaranty faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
commercial banks, mortgage bankers and to a lesser extent other thrift
institutions who also make loans in the Bank's market area. The Bank competes
for 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
investment vehicles. Guaranty competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and being
the only locally based bank in Charlottesville.
Lending Activities
General
Guaranty's loan portfolio consists primarily of mortgage loans, the
majority of which are residential first mortgage loans. Guaranty also holds
commercial real estate mortgages, residential construction loans, second
mortgage home equity loans and consumer loans. The primary lending
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market consists of the City of Charlottesville and Albemarle County, and to a
lesser extent, the surrounding counties of Greene, Fluvanna, Louisa, and Orange.
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 the Bank'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
the Bank, 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 ratio. All real estate is appraised by independent fee
appraisers who have been pre-approved by the Board of Directors. All conforming
loans including HUD/FHA, VA and applicable VHDA loans are underwritten and acted
upon within loan administration requiring two signatures of approval.
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
December 31, 1996, commitments to extend credit totaled $9.4 million. (See
footnote 16 of the financial statements.)
Pursuant to the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), the aggregate amount of loans that Guaranty
is permitted to make to any one borrower, including related entities, and the
aggregate amount that Guaranty may invest in any one real estate project, with
certain exceptions, is 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 secured by readily marketable
collateral. Readily marketable collateral does not include real estate. At
December, 1996, the maximum amount which Guaranty could have loaned to one
borrower was approximately $950,000.
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 are located in the Bank's 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 the Bank 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%
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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 a
higher interest 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, the Bank
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 six-month
period ended December 31, 1996, 29.7% of all one- to four-family residential
loans originated by the Bank 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 December 31, 1996, $26.1 million, or 41.7%, of
the Bank's one- to four-family residential mortgage loan portfolio consisted of
fixed-rate mortgage loans.
The Bank'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. The Bank'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 December 31, 1996, $36.5
million, or 58.3%, of the Bank'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
the Bank contain a "due-on-sale" clause providing that the Bank may declare the
unpaid principal balance due and payable upon the sale of the mortgage property.
It is the Bank'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 the Bank's interest. The
cost of this insurance coverage is paid by the borrower. The Bank does require
escrows for taxes and insurance.
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Construction Lending
As part of its community involvement, the Bank makes local construction
loans, primarily residential and lot loans. The construction loans are secured
by the property for which the loan was obtained. At December 31, 1996,
construction and land loans outstanding was $7.4 million, or 8.7%, of total
gross 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 the Bank in managing its interest rate sensitivity.
Commercial Real Estate Lending
The Bank also originates commercial real estate loans. These loans are
secured by various types of commercial real estate, including multi-family
residential buildings, commercial buildings, small shopping centers and
churches. At December 31, 1996, commercial real estate aggregated $8.0 million
or 9.4% of the Bank's total loans receivable. The Bank's commercial real estate
loans were 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. Beginning in September
1996, the interest rates on commercial real estate loans, in most cases, have
been tied to the prime lending rate. Typically, the Bank charges fees ranging
from 1% to 2% on these loans. At December 31, 1996, the Bank held no fixed- rate
commercial real estate loans. Commercial real estate loans made by the Bank
generally amortize over 20 to 30 years and may have a call provision of 3 or 5
years. The Bank's commercial real estate loans are secured by properties in the
Bank's market area.
In its underwriting of commercial real estate, the Bank may lend, under
federal regulation, up to 100% of the security property's appraised value,
although the Bank's loan to original appraised value ratio on such properties is
80% or less. The Bank'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 the Bank generally
requires personal guarantees or endorsements of borrowers. The Bank 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. After the conversion to a
state chartered bank on June 30, 1997, these restrictions no longer apply to
Guaranty.
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 December 31, 1996, the Bank had $7.0 million of consumer loans,
or 8.2% of total loans. During fiscal year 1996, the
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Bank increased its level of consumer loans. Such loans were generally made to
customers with which the Bank 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 the Bank,
and a borrower may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral. The Bank 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 the Bank 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 a 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.
Commercial Loans
In July 1996, Guaranty began making commercial loans to qualified small
businesses in its market area. Commercial business loans generally have a higher
degree of risk than residential mortgage loans, but have commensurately higher
yields. To manage these risks, Guaranty generally secures appropriate collateral
and carefully monitors the financial condition of its business borrowers.
Commercial loans are typically made on the basis of the borrower's ability to
make repayment from cash flow from its business and are secured by business
assets such as commercial real estate, accounts receivable, equipment and
inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral for commercial business loans may
depreciate
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over time and cannot be appraised with as much precision as residential real
estate. Guaranty has a credit review and monitoring system to regularly review
the cash flow of commercial borrowers.
REGULATION
General
Prior to the conversion to a state chartered bank on June 30, 1997,
Guaranty was a federally chartered savings bank subject to regulation,
supervision and periodic examination by the OTS and the FDIC. The regulations of
these agencies governed most aspects of the Bank's business and operations prior
to June 30, 1997. Prior to July 1, 1997, the Bank's deposits were insured by the
SAIF administered by the FDIC to the maximum amount by law, which is currently
$100,000 per depositor in most cases.
On June 30, 1997, Guaranty received final regulatory approval to
convert from a federal savings bank to a state chartered commercial bank. Upon
conversion, Guaranty became a member of the Federal Reserve system and its
deposits became insured by the Bank Insurance Fund ("BIF") of the FDIC. The
Federal Reserve, the Bureau of Financial Institutions of the Virginia State
Corporation Commission and the FDIC will serve as the Banks primary regulators.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") effected sweeping changes in the regulatory structure applicable to
federally insured savings institutions. FIRREA abolished the Federal Home Loan
Bank Board and the role of its Chairman as the chief regulator of the savings
and loan industry. 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.
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
and BIF, the FDIC may prohibit any activity found to pose a serious risk of loss
to the insurance funds.
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On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was signed into law, which substantially
amended the Federal Deposit Insurance Act ("FDIA"). FDICIA generally provides
for the recapitalization of the federal deposit insurance funds as well as for
supervisory and regulatory reforms to be administered by federal banking
agencies. For a further description of FDICIA, see "-Federal Deposit Insurance
Corporation Improvement Act of 1991."
The Federal Home Loan Bank System
All savings institutions 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, is required to hold 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. Under FIRREA,
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 December 31, 1996, the Bank had $17.5 million in advances from the
FHLB of Atlanta.
Federal Reserve System
Pursuant to the Depository Institutions Deregulation and Monetary
Control Act of 1980, the Board of Governors of the Federal Reserve System
("FRB") adopted regulations that require 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."
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Capital Requirements
FIRREA requires that capital standards applicable to savings
institutions be no less stringent than those applicable to national banks
administered by the Office of the Comptroller of the Currency ("OCC") (except
for special treatment of qualifying supervisory goodwill as discussed below). As
of December 31, 1994, 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. In addition, the OTS has adopted,
but not yet implemented, rules which require savings institutions to incorporate
an interest-rate risk component into the OTS's risk-based capital rules. The OTS
has not indicated when the rules will be implemented.
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. From January 1, 1993 to December 31, 1993, qualifying
supervisory goodwill could not exceed 0.75% of total assets in the institution's
core capital ratio, from January 1, 1994 to December 31, 1994, 0.375%, and
thereafter such percentage decrease to 0%. 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
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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 than
"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 the Bank 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 the Bank 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
A savings and loan which does not meet the capital requirements
described above is required to submit a capital plan to the OTS. The plan must
certify that during the period when the plan is under review by the OTS, the
savings institution will not, without the prior written approval of the District
Director of the OTS, grow beyond net interest credited, make any capital
distribution, or act inconsistently with any other limitation on activities
established for savings associations not meeting capital standards. The capital
plan has to be acceptable to the OTS in order for an institution to obtain
exemptions from the capital standards and exemptions from sanctions for failure
to meet capital requirements. If the plan submitted is not approved by the OTS,
the institution cannot increase its assets beyond the amount held on the day it
received the notice of disapproval, and must comply with any restrictions or
limitations set forth in the written notice of disapproval.
After January 1, 1991, 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.
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An institution not in compliance either with the capital regulations,
individual minimum leverage ratio requirements or requirements included as part
of an agreement between the institution and the OTS, further may be subject to a
capital directive or such other enforcement actions as the OTS deems necessary
for the safety and soundness of the association. 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.
In addition to the OTS minimum regulatory capital requirements, FDICIA
has created capital categories for the purpose of determining when supervisory
or other corrective action is appropriate. See "- Federal Deposit Insurance
Corporation Improvement Act of 1991."
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. The OTS proposed certain amendments to its
capital distribution regulations in December 1994. If the proposed amendments
were adopted, Guaranty would be required to obtain prior approval of any capital
distribution until its regulatory classification is changed.
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 December 31, 1996, the Bank's average liquidity
ratio was 6.3%.
-12-
<PAGE>
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.
FIRREA imposes on savings institutions loans-to-one-borrower
limitations which are also applicable to national banks. Subject to certain
exceptions, FIRREA allows savings institutions to 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.
The Bank believes that it is in compliance with each of the investment
and lending restrictions discussed above.
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.
-13-
<PAGE>
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 December 31, 1996, the Bank met the QTL test and has
always met the test since its effective date. 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.
Federal Deposit Insurance Corporation Improvement Act of 1991
FDICIA generally addresses the safety and soundness of the federal
deposit insurance funds, supervision of and accounting by insured depository
institutions and prompt corrective action by the federal bank regulatory
agencies with respect to troubled institutions. FDICIA gives the FDIC, in its
capacity as federal insurer of deposits, broad authority to promulgate
regulations to assure the viability of the deposit insurance funds. FDICIA also
places restrictions on institutions failing to meet minimum capital standards
and provides enhanced enforcement authority for the federal banking agencies.
FDICIA also strengthened FRB regulations regarding insider transactions.
-14-
<PAGE>
FDICIA established 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 December 31, 1996, Guaranty
was Well Capitalized.
Deposit Insurance
Federal law requires 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.
Pursuant to the Economic Growth and Paper Work Reduction Act of 1996
(the "Act"), the FDIC imposed a special assessment on SAIF members to capitalize
the SAIF at the designated
-15-
<PAGE>
reserve level of 1.25% as of September 30, 1996. Based on Guaranty's deposits at
March 31, 1995, the date for measuring the amount of the special assessment
pursuant to the Act, Guaranty paid a special assessment of approximately
$347,000 to capitalize the SAIF. In January 1997, Guaranty's insurance premium
was reduced to approximately $0.09 per $100 of deposits.
Holding Company Regulation
Prior to the conversion to a state chartered bank on June 30, 1997, the
Corporation was a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, the Corporation was required to file with the OTS
and is subject to regulation and examination by the OTS. In addition, the OTS
had 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 was 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.
After the charter conversion, Guaranty will be subject to the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
will be subject to regulation by the Federal Reserve with respect to its
operations as a bank holding company. The Bank also will be subject to
regulation by the Bureau of Financial Institutions of the Virginia State
Corporation Commission, the Federal Reserve, and the FDIC. The powers of state
member banks and bank holding companies differ from those of federally chartered
savings associations. However, Guaranty does not anticipate any material changes
in its operations as a result of the changes in applicable laws and regulations
that will result from the charter conversion.
Charter Conversion
On June 30, 1997 Guaranty obtained final approval from the Virginia
State Corporation Commission, the Board of Governors of the Federal Reserve
System, the FDIC and the OTS to convert from a federally-chartered savings
association to a Virginia-chartered, Federal Reserve member commercial bank.
Federal and state banking regulators obtained a commitment from Guaranty to
reduce its ratio of loans-to-deposits, which was approximately 100% at December
31, 1996. Guaranty already is in the process of reducing such ratio and does not
expect that such requirement will materially affect its operations.
After the charter conversion, Guaranty will be subject to the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
will be subject to regulation by the
-16-
<PAGE>
Federal Reserve with respect to its operations as a bank holding company. The
Bank also will be subject to regulation by the Bureau of Financial Institutions
of the Virginia State Corporation Commission, the Federal Reserve, and the FDIC.
The powers of state member banks and bank holding companies differ from those of
federally chartered savings associations. However, Guaranty does not anticipate
any material changes in its operations as a result of the changes in applicable
laws and regulations that will result from the charter conversion.
As a federally chartered savings association, the Bank may not hold
secured or unsecured loans for commercial, corporate or agricultural purposes in
excess of 20% of its assets. The sum of consumer loans and certain investments
in corporate obligations may not exceed 35% of the Bank's assets. The Bank also
is required to meet the qualified thrift lender test, which generally requires
the Bank to invest the majority of its assets in mortgage loans. After the
charter conversion, there would be no such limits on the commercial and consumer
lending authority of the Bank, nor would the Bank be subject to the qualified
thrift lender test. Recently, the Bank has emphasized and expanded its small
business and consumer lending programs. As these programs evolve, the Bank
expects to reduce its reliance on permanent residential mortgage loans. While
loans secured by real estate are expected to remain an important part of the
Bank's business, it expects that in several years its loan portfolio will more
closely resemble that of a commercial bank than a thrift. Consequently, the Bank
believes that operating under a commercial bank charter will better suit the
Bank's business plan than will the federal savings association charter.
Recent Tax Legislation
For tax years beginning prior to January 1, 1996, savings banks that
met certain definitional tests and other conditions prescribed by the Internal
Revenue Code were allowed, within limitations, to deduct form taxable income an
allowance for bad debts using the "percentage of taxable income" method. Section
1616 of the Small Business Job Protection Act of 1996 repealed the percentage of
taxable income method of computing bad debt reserves, and requires the recapture
into taxable income of "excess reserves", on a ratable basis over the next six
years. Excess reserves are defined, in general, as the excess of the balance of
tax bad reserve (using the percentage of taxable income method) as of the close
of the last tax year beginning before January 1, 1988. The recapture of the
reserves is deferred if the Bank meets the "residential loan requirement"
exception during either or both of the first two years beginning after December
31, 1995. The residential loan requirement is met, in general, if the principal
amount of residential loans made by the Bank during the year is not less than
the Bank's "base amount". The base amount is defined as the average of the
principal amounts of residential loans made during the six most recent tax years
beginning January 1, 1996.
As a result of this law change, Guaranty must recapture into taxable
income approximately $387,000 ratably over the next six years ($64,500 per
year), beginning with the year ending June 30, 1997. If the residential loan
requirement exception is met, as discussed above, the income will be includable
in the third through eighth years following the year ended June 30, 1996.
-17-
<PAGE>
Personnel
As of June 30, 1997, Guaranty had a total of 47 employees, including 2
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
1658 State Farm Boulevard
Charlottesville, Virginia Owned
Rio Road Branch
1700 Seminole Trail
Charlottesville, Virginia Owned
Downtown Charlottesville Branch
520 E. Main Street Three
Charlottesville, Virginia August 31, 1997 five-year options
Arlington Boulevard Branch
1924 Arlington Boulevard Three
Charlottesville, Virginia September 30, 1997 five-year options
Harrisonburg Branch
Neff Ave. & Reservoir St.
Harrisonburg, Virginia Owned
Warehouse
1110 East Market Street
Charlottesville, Virginia February 28, 1998
At December 31, 1996, the net book value of the Corporation's
investment in premises and equipment was approximately $4.9 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.
-18-
<PAGE>
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
The Annual Meeting of Shareholders of Guaranty Financial Corporation
was held December 11, 1996 in Charlottesville Virginia for the purposes of
electing four individuals to the Board of Directors and amending Guaranty's
1991 Incentive Plan (the "Plan"). Proxies for the meeting were solicited
pursuant to Regulation 14(a) of the Securities and Exchange Act of 1934, as
amended.
There was no solicitation in opposition to management's nominees to the
Board of Directors as listed in the proxy statement, and all of such nominees
were elected with the following vote:
<TABLE>
<CAPTION>
Shares Shares Shares
voted for withheld not voted Total
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
For 3 - Year Term
Thomas P. Baker 468,728 3,180 447,260 919,168
Charles R. Borchardt 467,928 3,980 447,260 919,168
Harry N. Lewis 468,828 3,080 447,260 919,168
For 1 - Year Term
James R. Sipe, Jr. 468,828 3,080 447,260 919,168
</TABLE>
There were no abstentions or broker non-votes in the election of
directors.
In addition, Guaranty's shareholders voted on a proposal to amend the
Plan. The Plan initially authorized the issuance of up to 50,000 shares of
Common Stock. Options to purchase 36,000 shares have been granted and 14,000
share remain available for grants and awards under the Plan. The Plan, as
amended, reserves 111,000 shares, increasing the shares available for new grants
under the Plan from 14,000 to 75,000 shares. To date, none of the options have
been exercised. The Plan, as amended, was approved with 295,762 shares voting
for, 46,280 shares voting against, 6,814 shares abstaining, and 123,052 shares
counting as broker non-votes, and 447,260 shares did not vote.
-19-
<PAGE>
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. As of December 31, 1996, the Corporation
has approximately 533 shareholders of record.
The following table lists the high and low prices for the common stock
for the four quarters ended December 31, 1996. Prices have been adjusted to
reflect the two for one stock split paid in January 1996.
1996 HIGH LOW
---- ---- ---
1st Quarter $8.50 $7.75
2nd Quarter $8.50 $7.50
3rd Quarter $9.25 $7.25
4th Quarter $9.50 $8.25
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. In December 1996, the
Corporation paid a dividend on its Common Stock of 5 cents per share.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages four to twenty of the 1996 Annual Report is incorporated herein by
reference. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the six-month transition period ended December 31,
1996 follows.
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. as the
subsidiary. On November 26, 1996, the board of directors during a regularly
scheduled meeting voted to change the name of Guaranty Savings and Loan, F.A. to
Guaranty Bank (the "Bank").
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 a result of the
reorganization, the Bank's stock holders became the owners of the newly formed
holding company, which in turns owns all the outstanding stock of the Bank.
-20-
<PAGE>
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 January 31, 1996
to holders of record January 15, 1996.
For the six months ended December 31, 1996, the Corporation experienced
a 102% decrease in earnings from the same period in 1995. During the six months
ended December 31, 1996, the Corporation's net loss was $6,382 compared to
earnings of $298,821 for the same period in 1995. Income decreased during the
six months ended December 31, 1996, due to a loss of $237,000 when it
restructured its investment portfolio and a one time special assessment of
$347,000 to recapitalize the Savings Association Insurance Fund ("SAIF"). In
order for Guaranty to convert to a commercial bank, securities classified as
available for sale had to be reclassified as trading securities. This resulted
in a mark to market loss of $237,000 which was charged against net income and
adjusted the basis of the securities. Without these losses, Guaranty would have
reported an after tax net income of $376,000 for the six months ended December
31, 1996.
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. This facility was completed in the fall of 1996 and was opened
to the public for business December 9, 1996. Guaranty occupies approximately
15,500 sq. ft. of the building's 20,000 sq. ft., with the remainder split into
two offices for lease, one of which is currently being leased. In addition, in
June 1996 Guaranty purchased its Rio Road office which had previously been
leased. After renovations are completed to modernize the site and make it more
attractive and accessible for tenants and customers Guaranty will maintain a
2,500 sq. ft. retail branch with the remainder to be leased. As of May 1997,
100% of this space was leased. In addition to the opening of the new
headquarters and the Rio Road purchase, construction has begun on a new retail
branch at the intersection of Neff Avenue and Reservoir Street in the city of
Harrisonburg. The branch opened on May 21, 1997.
RESULTS OF OPERATIONS
Comparison of Six Months Ended December 31, 1996 and 1995
General
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.
-21-
<PAGE>
Interest Income
Interest income was $4.3 million for the six months ended December 31,
1996, an increase of $570,000, or 15% from $3.7 million for the same period in
1995. Volume increases in the average bearing assets were the primary reasons
for the increase in interest income. Average loans were 7.6% higher, at $83.8
million, and average investment securities were 124.7% higher, at $17.6, for the
six month period ended December 1996 over the same six month period in 1995.
Total average interest earning assets were 19% higher, at $106.7 million, for
the six months ended December 1996 compared to the same period in 1995. Interest
rates were lower during the six months ended December 31, 1996 compared to the
same period in 1995. Yet, Guaranty still experienced moderate growth in deposits
during the six months ended December 31, 1996. This growth was invested in loans
and supplemented with mortgage-backed securities. The average yield on loans was
4 basis points higher, at 8.24%, during the six months ended December 31, 1996
compared to 8.20% for the same period in 1995. The average yield on investment
securities was lower by 182 basis points, at 7.15%, compared to 8.97% for the
same period in 1995. Interest income was greater due to the increase in the
average interest-earning assets despite the overall yield paid on those assets
being 26 basis points lower, at 8.01%, compared to 8.27% for the same period in
1995.
Interest Expense
Interest expense was $2.9 million for the six months ended December 31,
1996, an increase of $396,000, or 16%, from $2.5 million for the same period in
1995. While the overall rate paid on average interest bearing liabilities was 38
basis points lower, at 5.55%, compared to 5.93% for the six months ended
December 31, 1995, net interest expense increased due to an increase in overall
volume. Average interest bearing deposits were $22 million, or 40%, higher for
the six months ended December 31, 1996 compared to the same period in 1995. The
average rate paid on these deposits was 5 basis points lower at 5.09% for the
six months ended December 1996 compared to the six months ended December 1995.
The most significant change was in time deposits. The average balance of time
deposits was $22.2 million, or 53.8%, higher with the average rate paid being 32
basis points lower at 5.54% during the six months ended December 1996 compared
to the same period in 1995. Average FHLB advances and other borrowings were
lower by $1.2 million, at $25.9 million, while the rate paid on these borrowings
was 57 basis points lower, at 5.76%, during the six months ended December 31,
1996 compared to the six months ended December 31, 1995.
Provision for Loan Losses
The provision increased to $91,800 for the six months ended December
31, 1996 compared to a provision of $10,900 for the same period in 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 December 31, 1996 the total allowance for loan losses amounted
to $870,000, of which $709,000 was not specifically allocated to identified
problem loans.
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<PAGE>
Net Interest Income
Net interest income was $1.34 million for the six months ended December
31, 1996 compared to $1.16 million for the same period in 1995. The improvement
in net interest income was primarily due to the volume increase in investment
securities and loans, and a shift from higher interest bearing FHLB advances and
other borrowings to certificates of deposit as a funding source.
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>
Six months ended December 31, Years ended June 30,
1996 compared to 1995 1996 compared to 1995 1995 compared to 1994
-----------------------------------------------------------------------------------------------
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 $279 ($143) $422 $226 ($9) $235 ($722) $403 ($1,125)
Loans 262 31 231 545 430 115 643 273 370
Interest bearing deposits
in other banks 30 (39) 69 57 (38) 95 184 78 106
-- --- -- -- --- -- --- -- ---
Total interests income 571 (151) 722 828 383 445 105 754 (649)
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts (6) (2) (4) (35) (9) (26) (51) (18) (33)
Savings 3 (0) 3 (41) (5) (36) (24) (17) (7)
Certificates of deposit 550 (132) 682 768 248 520 576 353 223
--- ---- --- --- --- --- --- --- ---
Total interest bearing deposits 547 (134) 681 692 234 458 501 318 183
FHLB advances and other (111) (154) 43 (135) (129) (6) 90 167 (77)
Bonds payable (40) 35 (75) (28) 166 (194) (1001) (547) (454)
--- -- --- --- --- ---- ----- ---- ----
Total interest expense 396 (253) 649 529 271 258 (410) (62) (348)
--- ---- --- --- --- --- ---- --- ----
Net interest income $175 $102 $73 $299 $112 $187 $515 $816 ($301)
------------------------------ ------------------------------ -----------------------------
</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.
-23-
<PAGE>
<TABLE>
<CAPTION>
Six months ended
December 31, Years ended June 30,
- --------------------------------------------------------------------------------- ---------------------------------
(Dollars in thousands) 1996 1996
- --------------------------------------------------------------------------------- ---------------------------------
Interest Average Interest Average
Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate
- --------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Securities $17,640 $631 7.15% $10,374 $820 7.90%
Loans 83,816 3,455 8.24% 79,220 6,495 8.20%
Interest bearing deposits
in other banks 5,257 190 7.23% 4,187 355 8.48%
- --------------------------------------------------------------------------------- ---------------------------------
Total interest-earning
assets/total interest income 106,713 4,276 8.01% 93,781 7,670 8.18%
- --------------------------------------------------------------------------------- ---------------------------------
Noninterest earning assets:
Cash and due from banks 1,082 1,634
Non accrued loans 1,618 1,339
Purchased mortgage servicing 933 833
Other assets 447 1,070
Less: Allowance for loan losses (826) (768)
Less: Deferred loan fees (318) (319)
Fixed Assets 4,038 1,981
- --------------------------------------------------------------------------------- ---------------------------------
Total noninterest earning assets 6,974 5,770
- --------------------------------------------------------------------------------- ---------------------------------
Total Assets $113,687 $99,551
================================================================================= =================================
Liabilities and stockholders equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts 8,765 121 2.76% 8,975 245 2.73%
Savings 4,870 83 3.41% 4,677 152 3.25%
Certificates of deposit 63,346 1,756 5.54% 49,102 2,735 5.57%
- --------------------------------------------------------------------------------- ---------------------------------
Total interest bearing deposits 76,981 1,960 5.09% 62,754 3,132 4.99%
- --------------------------------------------------------------------------------- ---------------------------------
FHLB advances and other borrowings 25,871 745 5.76% 25,766 1,553 6.03%
Bonds payable 3,060 235 15.36% 3,562 507 14.23%
- --------------------------------------------------------------------------------- ---------------------------------
Total interest bearing
liabilities/total interest expense 105,912 2,940 5.55% 92,082 5,192 5.64%
- --------------------------------------------------------------------------------- ---------------------------------
Non interest bearing liabilities:
Demand deposits 1,324 621
Other liabilities 809 645
- --------------------------------------------------------------------------------- ---------------------------------
Total liabilities 108,045 93,348
- --------------------------------------------------------------------------------- ---------------------------------
Stockholders equity 5,642 6,203
- --------------------------------------------------------------------------------- ---------------------------------
Total liabilities and stockholders
equity $113,687 $99,551
================================================================================= =================================
Interest spread (1) 2.46% 2.54%
Net interest income/net interest
margin (2) $1,336 2.50% $2,478 2.64%
================================================================================= =================================
</TABLE>
(1) Interest spread is the average yield earned on earning assets, less the
average rate incurred on noninterest bearing liabilities.
(2) Net interest margin is net interest income, expressed as a percentage of
average earning assets.
<TABLE>
<CAPTION>
Years ended June 30,
- ------------------------------------------------ --------------------------------
(Dollars in thousands) 1995
- ------------------------------------------------ --------------------------------
Interest Average
Average income/ yield/
balance expense rate
- ------------------------------------------------ --------------------------------
<S> <C> <C> <C>
Assets
Interest earning assets:
Securities $8,225 $698 8.49%
Loans 76,193 6,193 8.13%
Interest bearing deposits
in other banks 3,532 304 8.61%
- ------------------------------------------------ --------------------------------
Total interest-earning
assets/total interest income 87,950 7,195 8.18%
- ------------------------------------------------ --------------------------------
Noninterest earning assets:
Cash and due from banks 1,284
Non accrued loans 1,635
Purchased mortgage servicing 779
Other assets 141
Less: Allowance for loan losses (748)
Less: Deferred loan fees (345)
Fixed Assets 619
- ------------------------------------------------ --------------------------------
Total noninterest earning assets 3,365
- ------------------------------------------------ --------------------------------
Total Assets $91,315
================================================ ================================
Liabilities and stockholders equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts 9,400 260 2.77%
Savings 4,901 166 3.39%
Certificates of deposit 39,523 2,212 5.60%
- ------------------------------------------------ --------------------------------
Total interest bearing deposits 53,824 2,638 4.90%
- ------------------------------------------------ --------------------------------
FHLB advances and other borrowings 27,648 1,761 6.37%
Bonds payable 3,987 520 13.04%
- ------------------------------------------------ --------------------------------
Total interest bearing
liabilities/total interest expense 85,459 4,919 5.76%
- ------------------------------------------------ --------------------------------
Non interest bearing liabilities:
Demand deposits 883
Other liabilities 769
- ------------------------------------------------ --------------------------------
Total liabilities 87,111
- ------------------------------------------------ --------------------------------
Stockholders equity 4,204
- ------------------------------------------------ --------------------------------
Total liabilities and stockholders
equity $91,315
================================================ ================================
Interest spread (1) 2.42%
Net interest income/net interest
margin (2) $2,276 2.59%
================================================ ================================
</TABLE>
(1) Interest spread is the average yield earned on earning assets, less the
average rate incurred on noninterest bearing liabilities.
(2) Net interest margin is net interest income, expressed as a percentage of
average earning assets.
Non-Interest Income
Non-interest income was $462 thousand for the six months ended December
31, 1996 compared to $515 thousand for the same period in 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 decreased $84 thousand for the six months ended December 31,
1996 to
-24-
<PAGE>
$72 thousand compared to the same period in 1995. The majority of the decrease
is due to the restructuring of the investment portfolio. Because of this
restructuring, Guaranty took a one time loss of $237 thousand. Offsetting the
one time investment portfolio loss was the gain on the sale of $11.8 million of
loans of $217 thousand.
Guaranty derives fees from originated servicing and purchased mortgage
service 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 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 $172.8 million, of which 70% was originated
locally, and $174.4 million, of which 67% was originated locally at December 31,
1996 and 1995, respectively. Revenues recognized from these activities amounted
to $267,000 and $263,000 for the six months ended December 31, 1996 and 1995,
respectively.
Non-Interest Expenses
Non-interest expenses were $1.72 million for the six months ended
December 31, 1996 compared to $1.21 million for the same period in 1995, a 42%
increase. Part of this increase is directly connected to the opening of the
fourth retail branch office and the relocation of the corporate headquarters.
Although additional personnel have been hired to staff the new retail branch
office that opened in December 1996, the majority of this increase was due to
the federal legislation enacted in September 1996 to recapitalize the Savings
and Loan Association Insurance Fund ("SAIF"). With out the SAIF assessment,
non-interest expenses for the six months ended December 31, 1996 would have been
$1.4 million.
Income Taxes
Guaranty recognized an income tax benefit of $4 thousand for the six
months ended December 31, 1996 compared to an income tax expense of $158
thousand for the same period in 1995. Guaranty's net income was significantly
lower for the six months ended December 31, 1996 compared to the same period in
1995 due to the one time SAIF assessment and the restructuring of the investment
portfolio.
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
-25-
<PAGE>
the amount of assets and liabilities repricing in the same time interval helps
to hedge the risk and minimize the impact on net interest in period of rising or
falling interest rates.
Guaranty evaluates interest rate 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 December 31, 1996, Guaranty had $16 million more in liabilities than
assets that reprice within one year or less and therefore was in a
liability-sensitive position. A negative gap 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 asset maturities. Guaranty
will also increase its prime based lending products going forward which will
also improve this negative position.
Guaranty has an Asset/Liability Committee ("ALCO"). The ALCO meets to
discuss deposit pricing, changes in borrowed money, investment trading activity,
loan sale activities, liquidity levels and the overall interest sensitivity. The
actions of this committee are reported to the Board of Directors. 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 following table presents the amounts of Guaranty's interest
sensitive assets and liabilities that mature or reprice in the periods
indicated.
-26-
<PAGE>
<TABLE>
<CAPTION>
December 31, 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 $19,656 $32,154 $3,301 $24,751
Investments and mortgage-backed securities(1) 1,718 2,079 4,941 12,532
Deposits at other institutions 5,038 0 0 0
- ---------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets 26,412 34,233 8,242 37,283
- ---------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets 26,412 60,645 68,887 106,170
- ---------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
NOW accounts (2) 0 0 0 6,936
Money market deposit accounts 3,410 0 0 0
Savings accounts (3) 1,194 669 573 2,341
Certificates of deposit 13,321 43,985 9,018 0
Borrowed money 9,181 5,000 10,000 0
Bonds payable 61 184 800 2,021
- ---------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities 27,167 49,838 20,391 11,298
- ---------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive liabilities $27,167 $77,005 $97,396 $108,694
- ---------------------------------------------------------------------------------------------------------------
Period gap (755) (15,605) (12,149) 25,985
Cumulative gap (755) (16,360) (28,509) (2,524)
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 97.22% 78.75% 70.73% 97.68%
Ratio of cumulative gap to total assets -0.65% -14.10% -24.57% -2.17%
</TABLE>
(1) Includes Federal Home Loan Bank stock.
(2) The Corporation has found that NOW accounts are generally not sensative to
changes in interest rstes 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.
FINANCIAL CONDITION
General
Guaranty experienced moderate growth during the six months ended
December 31, 1996. Total assets increased 5.3%, or approximately $5.9 million,
to $116.0 million at December 31, 1996 from June 30, 1996. Securities increased
50% or $6.6 million to $21.2 million while loans decreased 3% or $2.8 million to
$81.3 million at December 31, 1996. On the liability side of the balance sheet,
deposits increased $6.7 million or 9% to $81.4 million while bonds payable
decreased $438,000 to $2.7 million at December 31, 1996. Borrowings from the
Federal Home Loan Bank remained unchanged at $17.5 million with other borrowings
increasing $577,000 to $6.7 million.
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
-27-
<PAGE>
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. As a result of a federal and state examination relating to
the anticipated conversion to a state chartered commercial bank, securities
classified as available for sale valued at $15.7 million were reclassified as
trading securities. At December 31, 1996, Guaranty had $3.2 million of
mortgage-backed securities classified as held to maturity, which are the
securities collateralizing the bonds issued in 1987.
Mortgage-backed securities increased during the six months ended
December 31, 1996 due to the 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
at the dates indicated.
December 31, June 30,
----------------------
(Dollars in thousands) 1996 1996 1996
------------------------------------
Held-to-maturity
Mortgage-backed securities ............... $ 3,157 $ 3,731 $ 4,733
------------------------------------
Available for sale
Federal National Mortgage Assoc. stock ..... 3 3 3
Mortgage-backed securities ................. -- 9,564 --
------------------------------------
Total available for sale ...... 3 9,567 3
------------------------------------
Trading
Mortgage-backed securities ................. 15,726 -- --
Treasury Notes ............................. 1,007 -- --
------------------------------------
Total trading ................. 16,733 -- --
------------------------------------
Restricted
Federal Home Loan Bank stock ............... 1,360 1,360 1,360
------------------------------------
Total securities .............. $21,253 $14,658 $ 6,096
====================================
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, banker's
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, repaying of maturing
debt and potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is provided. As of
December
-28-
<PAGE>
31, 1996, Guaranty's liquidity ratio was 6.3%. 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>
Six months ended Years ended June 30,
December 31, 1996 1996 1995
Book % of Book % of Book % of
(Dollars in thousands) Value Total Value Total Value Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits with banks $ 5,038 100.00% $ 3,779 100.00% $ 4,022 100.00%
Investment securities:
FHLMC mortgage-backed
securities 6,819 32.08% 7,459 50.89% 4,733 77.64%
GNMA mortgage-backed
securities 11,967 56.31% 5,836 39.81% - 0.00%
Treasury notes 1,104 5.19% - 0.00% - 0.00%
Subtotal 19,890 93.59% 13,295 90.70% 4,733 77.64%
FHLB stock 1,360 6.40% 1,360 9.28% 1,360 22.31%
FNMA stock 3 0.01% 3 0.02% 3 0.05%
-------------------------------------------------------------------------------
Total Investment securities $ 21,253 100.00% $14,658 100.00% $ 6,096 100.00%
===============================================================================
</TABLE>
Lending
Guaranty's loan portfolio consists primarily of mortgage loans, the
majority of which are residential first mortgage loans. Of the $81 million of
mortgages outstanding at December 31, 1996, 78.4% represent residential first
mortgages. The primary lending market consists of the City of Charlottesville
and Albermarle County, and to a lesser extent, the surrounding counties of
Greene, Fluvanna, Louisa, and Orange.
Net loans consist of total loans minus deferred loan fees (net of
origination costs) and the allowance for loan losses. Net loans were $81.3
million at December 31, 1996, a 3% decrease in net loans of $84.1 million at
June 30, 1996. The decrease is the result of the sale of loans with a value of
$11.8 million, offset by new loan originations. The average balance of total
loans as a percentage of average assets was 73.7% at December 31, 1996, down
from 79.6% at June 30, 1996.
The following table sets forth the composition of Guaranty's total loan
portfolio in dollars as well as percentages for the dates indicated.
-29-
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
------------------------- --------------------------------------------------
1996 1996 1995
---- ---- ----
Percent Percent Percent
of Gross of Gross of Gross
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate
Residential $ 62,602 73.74% $ 66,136 75.15% $ 62,175 77.57%
Commercial 7,962 9.38% 7,670 8.72% 4,508 5.62%
Construction and land loans 7,369 8.68% 8,813 10.01% 8,887 11.09%
------ ------ ------
Total real estate 77,933 91.80% 82,619 93.88% 75,570 94.29%
------ ------ ------
Consumer Loans: 6,964 8.20% 5,386 6.12% 4,580 5.71%
------ ------ ------
Total adjustable-rate loans 84,897 100.00% 88,005 100.00% 80,150 100.00%
------ ------ ------
Less:
Undispersed loans in process 2,467 2,824 3,858
Deferred fees and unearned
discounts 290 314 323
Allowance for losses 870 786 747
------ ------ ------
Total net items 3,627 3,924 4,928
------ ------ ------
Total loans receivable, net $81,270 $84,081 $75,222
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1994 1993
---- ----
Percent Percent
of Gross of Gross
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real Estate
Residential $ 67,385 83.05% $ 59,845 81.57%
Commercial 4,251 5.24% 4,155 5.66%
Construction and land loans 5,819 7.17% 4,900 6.68%
------ ------
Total real estate 77,455 95.46% 68,900 93.92%
------ ------
Consumer Loans: 3,685 4.54% 4,462 6.08%
------ ------
Total adjustable-rate loans 81,140 100.00% 73,362 100.00%
------ ------
Less:
Undispersed loans in process 2,249 1,978
Deferred fees and unearned
discounts 382 442
Allowance for losses 754 746
------ ------
Total net items 3,385 3,166
------ ------
Total loans receivable, net $77,755 $70,196
======= =======
</TABLE>
The following table shows the composition of Guaranty's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------- -----------------------------------------------------
1996 1996 1995
---- ---- ----
Percent Percent Percent
of Gross of Gross of Gross
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate
Residential $26,061 30.70% $28,907 32.85% $23,577 29.42%
Commercial 0 0.00% 0 0.00% 0 0.00%
Construction and land loans 138 0.16% 339 0.39% 69 0.09%
------- ------- -------
Total real estate 26,199 30.86% 29,246 33.23% 23,646 29.50%
------- ------- -------
Consumer Loans: 1,396 1.64% 597 0.68% 736 0.92%
------- ------- -------
Total fixed-rate loans 27,595 32.50% 29,843 33.91% 24,382 30.42%
------- ------- -------
Adjustable-Rate Loans:
Real Estate
Residential 36,541 43.04% 37,229 42.30% 38,598 48.16%
Commercial 7,962 9.38% 7,670 8.72% 4,508 5.62%
Construction and land loans 7,231 8.52% 8,474 9.63% 8,818 11.00%
------- ------- -------
Total real estate 51,734 60.94% 53,373 60.65% 51,924 64.78%
------- ------- -------
Consumer Loans: 5,568 6.56% 4,789 5.44% 3,844 4.80%
------- ------- -------
Total adjustable-rate loans 57,302 67.50% 58,162 66.09% 55,768 69.58%
------- ------- -------
Total loans receivable 84,897 100.00% 88,005 100.00% 80,150 100.00%
------- ------- -------
Less:
Undispersed loans in process 2,467 2,824 3,858
Deferred fees and unearned
discounts 290 314 323
Allowance for losses 870 786 747
------- ------- -------
Total net items 3,627 3,924 4,928
------- ------- -------
Total loans receivable, net $81,270 $84,081 $75,222
------- ------- -------
</TABLE>
*
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1994 1993
---- ----
Percent Percent
of Gross of Gross
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate
Residential $27,796 34.26% $22,105 30.13%
Commercial 0 0.00% 0 0.00%
Construction and land loans 0 0.00% 0 0.00%
------- ------
Total real estate 27,796 34.26% 22,105 30.13%
------- ------
Consumer Loans: 691 0.85% 1,547 2.11%
------- ------
Total fixed-rate loans 28,487 35.11% 23,652 32.24%
------- ------
Adjustable-Rate Loans:
Real Estate
Residential 39,590 48.79% 37,740 51.44%
Commercial 4,251 5.24% 4,155 5.66%
Construction and land loans 5,819 7.17% 4,900 6.68%
------- ------
Total real estate 49,660 61.20% 46,795 63.79%
------- ------
Consumer Loans: 2,993 3.69% 2,915 3.97%
------- ------
Total adjustable-rate loans 52,653 64.89% 49,710 67.76%
------- ------
Total loans receivable 81,140 100.00% 73,362 100.00%
------- ------
Less:
Undispersed loans in process 2,249 1,978
Deferred fees and unearned
discounts 382 442
Allowance for losses 754 746
------- ------
Total net items 3,385 3,166
------- ------
Total loans receivable, net $77,755 $70,196
------- -------
</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
-30-
<PAGE>
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 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 its principal and interest under the contractual term
of the loan.
At June 30, 1996, Guaranty had two commercial loans to one borrower
that were considered impaired under the criteria established by SFAS 114. Due to
a significant principal paydown during the six-month period ended December 31,
1996 and the current status of this relationship, these loans were no longer
considered impaired at December 31, 1996. In addition, Guaranty had no other
loans considered impaired under SFAS 114 as of December 31, 1996.
The following table reflects the composition of nonperforming assets at
the dates indicated.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years ended June 30,
(Dollars in thousands) 1996 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,670 $1,458 $1,556 $887 $934
Restructured loans 11 11 12 415 1,143
Total non-performing loans 1,681 1,469 1,568 1,302 2,077
Foreclosed assets 51 41 122 - -
Total non-performing assets 1,732 1,510 1,690 1,302 2,077
Loans past due 90 or more days and accruing interest - 19 1 288 190
Non-performing loans to total loans, at period end 1.91% 1.67% 2.06% 1.65% 2.91%
Non-performing loans to period
end total loans and foreclosed assets 1.91% 1.67% 2.05% 1.65% 2.91%
</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. Management determined that a provision for loan
losses of $91,800 should be charged against operations during the six months
ended December 31, 1996 to maintain the reserve level at approximately 1% of
loans. The total allowance of approximately $870,000 at December 31, 1996 was
deemed adequate by management.
-31-
<PAGE>
The following table provides an analysis of the allowance for loan
losses for the dates indicated.
<TABLE>
<CAPTION>
Years ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $788 $747 $754 $746 $689
- ---------------------------------------------------------------------------------------------------------------------------
Provision (credit) charged to operations 92 57 (10) 74 37
- ---------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 10 39 0 66 0
Consumer 0 0 1 0 0
Recoveries:
Real Estate 0 19
Consumer 0 4 4 0 20
- ---------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 10 16 (3) 66 (20)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $870 $788 $747 $754 $746
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to period end total loans 1.07% 0.94% 0.98% 0.96% 1.05%
Allowance for loan losses to nonaccrual loans 52.10% 54.05% 48.01% 85.01% 79.87%
Net charge-offs to average loans 0.01% 0.02% 0.00% 0.09% -0.03%
</TABLE>
Loan Maturity and Repricing
The following schedule illustrates the interest rate sensitivity of
Guaranty's loan portfolio at December 31, 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>
Balance
Outstanding Principal Repayment Contractually Due
December 31, in 12-Month Periods Ending December 31,
-------------------------------------------------------------------------------------------------------
2000- 2002- 2007 and
(In thousands) 1996 1997 1998 1999 2001 2006 Thereafter
---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Residential and
commercial real estate $ 70,564 $ 1,994 $ 146 $ 18 $ 2,548 $ 2,660 $ 63,198
Construction 7,369 5,952 1,061 65 291 - -
Consumer and other loans 6,964 1,619 923 1,036 2,583 803 -
-------------------------------------------------------------------------------------------------------
Total $ 84,897 $ 9,565 $ 2,130 $ 1,119 $ 5,422 $ 3,463 $ 63,198
=======================================================================================================
</TABLE>
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $27.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $57.2
million.
-32-
<PAGE>
Loan Originations, Purchases and Sales
Federal regulations authorize the Bank to make real estate loans
anywhere in the United States. However, at December 31, 1996, all the Bank's
real estate loans were secured by real estate located in the Bank'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 six month period ended December 31, 1996, the Bank originated
$11.9 million in first mortgage loans.
Income From Lending Activities
Guaranty realizes interest and loan fee income from its lending
activities. The Bank receives loan fees on both construction and one- to
four-family residential loans. The Bank receives loan fees and charges related
to existing loans, which include late charges. Interest on loans, loan fees and
service charges together comprise 75% of the Bank's total revenues for the six
months ended December 31, 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. The Bank had deferred fees net of
direct underwriting costs of approximately $290,000 at December 31, 1996.
An ancillary function of lending is the mortgage servicing operation.
When mortgage loans are sold the Bank generally retains the right to service the
loans for a servicing fee. A typical servicing agreement requires the Bank 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 the Bank it has also acquired the rights to
service other mortgage loans. At December 31, 1996 the Bank serviced loans for
others aggregating approximately $172.8 million and generated fees of
approximately $247,600 thousand for the six months ended December 31, 1996.
Delinquent and Problem Loans
When a borrower fails to make a required payment on a loan, the Bank
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, the Bank issues a notice of intent to foreclose on the
-33-
<PAGE>
property and if the delinquency is not cured within 60 days, the Bank may
institute foreclosure action. If foreclosed on, real property is sold at a
public sale and may be purchased by the Bank. 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 December 31, 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 0 $0 5 $11
60-89 days 9 1,248 0 0 1 82 0 0
90 days and over 15 1,253 0 0 0 0 3 44
- --------------------------------------------------------------------------------------------------------------------------------
Total delinquent loans 24 $2,501 0 $0 1 $82 8 $55
- --------------------------------------------------------------------------------------------------------------------------------
</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,
the Bank 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 December 31, 1996, Guaranty had
classified approximately $2,980,000 of its assets as substandard, approximately
$157,000 as loss and none as doubtful. Not all of the Bank'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, the Bank had approximately $779,000 in special
mention assets.
-34-
<PAGE>
Non-Performing Assets
The table below sets forth the amounts and categories of non-performing
assets in the Bank'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 dept. Accruing
mortgage loans delinquent more than 90 days are loans that the Bank considers to
be well secured and in the process of collection.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Years ended June 30,
(Dollars in thousands) 1996 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,670 $1,458 $1,556 $887 $934
Restructured loans 11 11 12 415 1,143
Total non-performing loans 1,681 1,469 1,568 1,302 2,077
Foreclosed assets 51 41 122 - -
Total non-performing assets 1,732 1,510 1,690 1,302 2,077
Loans past due 90 or more days and accruing interest - 19 1 288 190
Non-performing loans to total loans, at period end 1.91% 1.67% 2.06% 1.65% 2.91%
Non-performing loans to period
end total loans and foreclosed assets 1.91% 1.67% 2.05% 1.65% 2.91%
</TABLE>
At December 31, 1996, the Bank's non-accrual loans were comprised of:
twenty one (19) single-family mortgage loans and three (3) consumer loans. Based
on current market values of the properties securing these loans, management
anticipates no significant losses.
As of December 31, 1996, there were approximately $779,000 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
The Bank 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, the Bank 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
-35-
<PAGE>
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, the Bank had increased its allowance for losses
on loans due to general economic downturns in the real estate market. At
December 31, 1996, the Bank had an allowance for loan losses of $870 thousand,
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>
Years ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $788 $747 $754 $746 $689
- ---------------------------------------------------------------------------------------------------------------------------
Provision (credit) charged to operations 92 57 (10) 74 37
- ---------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 10 39 0 66 0
Consumer 0 0 1 0 0
Recoveries:
Real Estate 0 19
Consumer 0 4 4 0 20
- ---------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 10 16 (3) 66 (20)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $870 $788 $747 $754 $746
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to period end total loans 1.07% 0.94% 0.98% 0.96% 1.05%
Allowance for loan losses to nonaccrual loans 52.10% 54.05% 48.01% 85.01% 79.87%
Net charge-offs to average loans 0.01% 0.02% 0.00% 0.09% -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.
-36-
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Years ended June 30,
1996 1996 1995 1994 1993
-------------------- ----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate $ 710 $ 675 $ 620 $ 625 $ 617
Non-residential real estate 160 113 127 129 129
Total allowance for loan losses $ 870 $ 788 $ 747 $ 754 $ 746
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Years ended June 30,
1996 1996 1995 1994 1993
-------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate 81.6% 85.7% 83.0% 82.9% 82.7%
Non-residential real estate 18.4% 14.3% 17.0% 17.1% 17.3%
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 the Bank formed a Real Estate Mortgage Investment Conduit
("REMIC"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Bank sells insurance annuities through GICO. GICO
had a net income of $2,547 for the six months ended December 31, 1996.
In 1987, the Bank's prior management formed GMSC and entered into a
REMIC in order to create liquidity. The Bank 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 six months ended December 31, 1996, Guaranty
amortized $97,000 of REMIC expenses. The amortization of the REMIC expenses is
treated as interest expense.
SOURCES 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, the Bank 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.
-37-
<PAGE>
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
The Bank attracts both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. The Bank
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. The Bank does
not solicit brokered deposits.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank for the periods indicated.
<TABLE>
<CAPTION>
December 31, June 30,
---------------------------------------------------------------------
(Dollars in thousands) 1996 1996 1995 1994
----------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Statement savings accounts $4,738 $4,654 $4,688 $7,610
Now accounts 6,929 6,440 5,818 6,005
Money market accounts 3,410 3,213 4,131 5,392
30- to 180-day certificates 250 227 324 528
One- to five-year
fixed-rate certificates 66,013 52,698 29,987 33,932
Eighteen-month prime rate
certificate 61 7,455 7,513 0
----------------------- ----------------------------------------------------------------------
Total $81,401 $74,687 $52,461 $53,467
----------------------- ----------------------------------------------------------------------
</TABLE>
The following table sets forth the changes in the dollar amount of
savings deposits in the various types of deposit programs offered by the Bank
for the periods indicated.
<TABLE>
<CAPTION>
Six months
Ended Dec. 31, Years ended June 30,
----------------------- ----------------------------------------------------------------------
(Dollars in thousands) 1996 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement savings accounts $84 ($34) ($2,922) $1,549
Now accounts 489 622 (187) 281
Money market accounts 197 (918) (1,261) (2,014)
30- to 180-day certificates 23 (97) (204) (291)
One- to five-year
fixed-rate certificates 13,315 22,711 (3,945) 3,921
Eighteen-month prime rate
certificate (7,394) (58) 7,513 0
----------------------- ----------------------------------------------------------------------
Total $6,714 $22,226 ($1,006) $3,446
----------------------- ----------------------------------------------------------------------
</TABLE>
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.
-38-
<PAGE>
<TABLE>
<CAPTION>
Six months ended
December 31, Years ended June 30,
--------------------------------------------------------------------------
1996 1996 1995 1994
------------------------ --------------------------------------------------------------------------
Average Average Average Average
Average Rate Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid Balance Paid
------------------------ --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 1,324 0.00% $ 621 0.00% $ 744 0.00% $ 554 0.00%
Interest bearing
demand deposits 8,765 2.76% 8,975 2.73% 9,924 2.77% 11,709 2.81%
Savings deposits 4,870 3.41% 4,677 3.25% 6,155 3.39% 6,836 3.05%
Time deposits 63,346 5.54% 49,102 5.57% 36,142 5.71% 32,646 4.54%
------------------------ --------------------------------------------------------------------------
Total deposits $ 78,305 5.00% $ 63,375 4.94% $52,965 4.81% $ 51,745 3.90%
======================== ==========================================================================
</TABLE>
The variety of deposit accounts offered by the Bank 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, the Bank has become much more subject to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. The
ability of the Bank 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 the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Six months
Ended Dec 31, Years ended June 30,
(Dollars in thousands) 1996 1996 1995 1994
------------- -------------------------------------------
<S> <C> <C> <C> <C>
Opening balance $74,687 $52,461 $53,467 $50,021
Net deposits (withdrawals) 4,754 19,093 (3,446) 1,507
Interest credited 1,960 3,133 2,440 1,939
==========================================================
Ending balance 81,401 74,687 52,461 53,467
==========================================================
Net increase (decrease) $6,714 $22,226 ($1,006) $3,446
Percent increase (decrease) 8.99% 42.37% -1.88% 6.89%
</TABLE>
In 1995, Guaranty has 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 the Guaranty. To the extent that the
Guaranty may rely on sources of funds other than deposits, the Bank's earnings
may be adversely affected. The Bank 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.
-39-
<PAGE>
<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>
December 31, 1996 $84 $446 $61,045 $4,749 $0 $0 $66,324
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 the
Guaranty's certificates of deposits as of December 31, 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>
March 31, 1997 $23 $12,128 $994 $0 $13,145 19.82%
June 30, 1997 0 10,692 716 0 11,408 17.20%
September 30, 1997 0 13,274 1,304 0 14,578 21.98%
December 31, 1997 0 17,530 645 0 18,175 27.40%
March 31, 1998 0 1,110 1,320 0 2,430 3.66%
June 30, 1998 61 624 597 0 1,282 1.93%
September 30, 1998 0 465 138 0 603 0.91%
December 31, 1998 0 780 0 0 780 1.18%
March 31, 1999 0 525 21 0 546 0.82%
June 30, 1999 0 168 8 0 176 0.27%
September 30, 1999 0 65 234 0 299 0.45%
December 31, 1999 0 51 309 0 360 0.54%
Thereafter 0 461 2,081 0 2,542 3.83%
- ----------------------------------------------------------------------------------------------------------------
$84 $57,873 $8,367 $0 $66,324 100.00%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposits by time remaining until maturity as of December 31, 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 $12,051 $11,203 $22,967 $8,536 $54,757
Certificates of deposit of $100,000 or more 1,094 205 9,786 482 11,567
-----------------------------------------------------------------
Total of certificates of deposits $13,145 $11,408 $32,753 $9,018 $66,324
-----------------------------------------------------------------
</TABLE>
The Corporation's principal use of its deposits is to originate loans
and to fund investment securities. Guaranty experienced moderate deposit growth
during the six months ended December 31, 1996. Net deposits increased 9.0% to
$81.4 million from $74.7 million at June 30,
-40-
<PAGE>
1996. The deposit growth is a reflection of continued marketing and the opening
of a new branch.
Borrowings
Guaranty also uses non-deposit borrowings to fund its residential
lending 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.
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. At December 31, 1996, Guaranty owed $17.5 million to the FHLB,
unchanged from June 30, 1996. The $17.5 million outstanding at December 31, 1996
were at fixed rates ranging from 5.59% to 7.10%, with maturities through 1999.
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 the Bank for
general corporate purposes. At December 31, 1996, Guaranty had $6.7 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>
Six months ended
December 31, 1996 Year ended June 30,
----------------------- ------------------------------------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
Maximum Balance:
<S> <C> <C> <C> <C>
FHLB Advances $22,500 $28,050 $28,250 $28,750
Securities sold under
agreements to repurchase 9,957 9,930 4,230 11,630
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted Weighted Weighted
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLB Advances $19,550 5.79% $22,829 6.21% $26,208 6.67% $26,017 6.63%
Securities sold under
agreements to repurchase 6,321 5.66% 3,112 5.65% 783 7.98% 7,201 3.85%
</TABLE>
The following table sets forth information as the Bank's short-term
borrowings at the dates indicated.
-41-
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended Dec. 31, Years Ended June 30,
----------------- -------------------------------------------
1996 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLB advances $7,500 $12,500 $19,550 $13,950
Securities sold under agreements
to repurchase 6,681 6,104 0 0
----------------- -------------------------------------------
Total short-term borrowings $14,181 $18,604 $19,550 $13,950
----------------- -------------------------------------------
Weighted average interest rate of
short-term FHLB advances 6.35% 6.02% 4.52% 3.24%
Weighted average interest rate of
securities sold under agreements to
repurchase 5.66% 5.65% 0.00% 0.00%
</TABLE>
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 into 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 the 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 for the six months ended December 31, 1996 was
$97,000. At December 31, 1996, $3.1 million of bonds remain outstanding versus
$3.7 at June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to meet present and future financial
obligations either through the sale of existing assets or through 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 December 31, 1996, Guaranty's liquidity ratio was
6.3%.
Guaranty's primary sources of funds are deposits, borrowings and
amortization, prepayments and maturities of outstanding loans and
mortgage-backed securities. While scheduled payments from the amortization of
loans and mortgage-backed securities are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
-42-
<PAGE>
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 through its borrowings.
Guaranty uses its sources of funds primarily to meet its on-going
operating expenses, to pay deposit withdrawals and to fund loan commitments. At
December 31, 1996, the total approved loan commitments outstanding amounted to
$3.0 million. At the same date, commitments under unused lines of credit
amounted to $6.4 million. Certificates of deposit scheduled to mature in one
year or less at December 31, 1996 totaled $57.3 million. Management believes
that a significant portion of maturing deposits will remain with Guaranty.
In January 1997, Guaranty completed a secondary offering of its common
stock at a price of $8.50 per share. Proceeds to the corporation from the
offering (net of offering expenses of approximately $280,000) were approximately
$3,970,000.
Guaranty 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 December 31, 1996, Guaranty exceeded all such regulatory capital requirements
as shown in the following table.
<TABLE>
<CAPTION>
Percent of
(Dollars in thousands) Amount Adjusted Assets
---------------------------------------
<S> <C> <C>
Tangible Capital:
Reulatory capital $ 6,639 5.72%
Minimum capital requirement 1,743 1.50%
Excess regulatory capital $ 4,896 4.22%
Core Capital:
Reulatory capital
Minimum capital requirement $ 6,639 5.72%
Excess regulatory capital 3,490 3.00%
$ 3,149 2.72%
Risk-based Capital:
Reulatory capital $ 7,345 13.00%
Minimum capital requirement 4,519 8.00%
Excess regulatory capital $ 2,826 5.00%
</TABLE>
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.
-43-
<PAGE>
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued its Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). 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 that it controls and the
liabilities that 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 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 Corporation.
In February 1997, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 provides a different method for calculating earnings per share
than is currently used in accordance with APB 15, "Earnings per Share." SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in earnings of an entity, similar to
fully diluted earnings per share. Management does not expect the application of
this pronouncement to have a material effect of the financial statements of the
Corporation.
-44-
<PAGE>
Item 7. Financial Statements
The following financial statements are filed as a part of this report
following Item 13 below:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1996
and 1995
Consolidated Statements of Income for the Six-month period ending
December 31, 1996 and the Years Ended June 30, 1996 , 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Six-month
period ending December 31, 1996 and the Years Ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Six-month period ending
December 31, 1996 and the Years Ended June 30, 1996, 1995 and 1994
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.
-45-
<PAGE>
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 captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive 1996
Proxy Statement of the Corporation filed with the SEC and furnished to
shareholders in connection with the Annual Meeting of Shareholders (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 52, 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 36, 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 42, 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 33, 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 "Directors' Fees," and
"Employment Agreements" in the 1996 Proxy Statement is hereby incorporated by
reference.
-46-
<PAGE>
Summary of Cash and Certain Other Compensation
The following table shows, for the periods indicated, the cash
compensation paid by Guaranty, as well as certain other compensation paid or
accrued in those periods, to the named executive officer inn all capacities in
which he served.
<TABLE>
<CAPTION>
Annual Compensation (1)
--------------------------------
Name and Year or Period Other
Principal Position Ended Salary Bonus Compensation (2)
- ---------------------- --------------------- -------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Thomas P. Baker December 31, 1996 $ 56,850 $ - $ 568
President and June 30, 1996 113,700 - 1,137
Chief Executive June 30, 1995 113,700 - 1,137
Officer June 30, 1994 113,700 - 1,421
</TABLE>
(1) All benefits that might be considered of a personal nature did not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus for the
officer named in the table.
(2) Amounts reflect Guaranty's matching contribution under it Section 401 (k)
retirement plan.
Stock Option Grants
Guaranty's named Executive Officer was not granted stock options or
stock appreciation rights during the six-month period ended December 31, 1996.
Option Exercises and Holdings
Set forth in the table below is information concerning each exercise
of stock options during the six-month period ended December 31, 1996.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The-Money
Unexercised Options at year end (1) Options at Year End ($) (2)
Shares ----------------------------------- -------------------------------------
Acquired On Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Baker 10,000 43,000 4,000 - 35,000 -
</TABLE>
(1) Each of these options relates to Common Stock
(2) These values are based are based on $8.75, the closing price of Common Stock
on December 31, 1996.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Management
The following table sets forth information as of December 31, 1996
regarding the number of shares of Common Stock beneficially owned by all
directors and by all directors and executive
-47-
<PAGE>
officers as a group. Beneficial ownership includes shares, if any, held in the
name of the spouse, minor children or other relatives of the nominee living in
such person's home, as well as shares, if any, held in the name of another
person under an arrangement whereby the director or executive officer can vest
title in himself at once or at some future time.
<TABLE>
<CAPTION>
Common Stock Percentage Of
Name Beneficially Owned Class
- ---------------------- ---------------------- ------------------
<S> <C> <C>
Directors
Thomas P. Baker (1) 15,640 1.69%
Charles R. Borchardt 23,564 2.56%
Henry J. Browne 31,662 3.44%
Douglas E. Caton 252,840 27.51%
Robert P. Englander 9,760 1.06%
Harry N. Lewis 4,888 0.53%
John R. Metz 13,192 1.44%
James R. Sipe, Jr. 100 0.01%
Oscar W. Smith, Jr. 19,234 2.09%
All present executive
officers and directors
as a group (12 persons) 371,860 40.07%
</TABLE>
(1) Includes beneficial ownership of 4,000 shares issuable upon the excercise
of stock options excercisable within 60 days of December 31, 1996.
Security Ownership of Certain Beneficial Owners
Douglas E. Caton, 4 Deer Park, Earlysville, Virginia owns 252,840
shares or 27.51% of the Common Stock of Guaranty as of December 31, 1996. To the
knowledge of Guaranty, no other person owns 5% or more of the Common Stock of
Guaranty.
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.
At December 31, 1996, loans outstanding to directors, executive
officers and their associates was approximately $163,000, or 4.1% of
stockholder's equity at that date.
Item 13. Exhibits and Reports on Form 8-K
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
-48-
<PAGE>
(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 the 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 December 31,
1996.
-49-
<PAGE>
Guaranty Financial Corporation
Financial Statements
For the Six Months Ended December 31, 1996 and
for the Years Ended June 30, 1996, 1995, and 1994
BDO Seidman, LLP
Accountants and Consultants
<PAGE>
GUARANTY FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance Sheets as of December 31, 1996 and June 30,
1996 and 1995 4
Statements of Operations for the Six Months Ended
December 31, 1996 and for the Years Ended June 30,
1996, 1995 and 1994 5-6
Statements of Stockholders' Equity for the Six Months
Ended December 31, 1996 and for the Years Ended
June 30, 1996, 1995 and 1994 7
Statements of Cash Flows for the Six Months Ended
December 31, 1996 and for the Years Ended June 30,
1996, 1995 and 1994 8-10
Summary of Accounting Policies 11-19
Notes to Consolidated Financial Statements
20-42
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 December 31, 1996, and June 30, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for six months ended December 31, 1996, and 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 December 31, 1996, and June
30, 1996 and 1995, and the results of their operations and their cash flows for
the six months ended December 31, 1996 and 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.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Richmond, Virginia
May 22, 1997
3
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 6,076,315 $ 5,431,483 $ 5,752,735
Investment securities (Notes 1 and 7)
Held-to-maturity 3,156,857 3,730,589 4,732,638
Available for sale - 9,563,605 -
Trading 16,736,295 - -
Investment in Federal Home Loan Bank stock, at
cost (Note 9) 1,360,200 1,360,200 1,360,200
Loans receivable, net (Notes 2, 9 and 11) 81,270,173 84,081,110 75,220,673
Accrued interest receivable 671,211 711,842 584,242
Real estate owned 50,964 32,898 122,043
Deferred income taxes (Note 10) 33,000 30,000 -
Office properties and equipment, net (Note 3) 4,946,153 3,525,199 436,909
Other assets (Note 2) 1,718,757 1,693,840 1,251,543
- -----------------------------------------------------------------------------------------------------------------------------
$116,019,925 $110,160,766 $89,460,983
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $ 81,401,071 $ 74,687,446 $52,460,639
Bonds payable (Notes 1 and 7) 2,705,813 3,143,844 3,980,562
Advances from Federal Home Loan Bank
(Note 9) 17,500,000 17,500,000 25,050,000
Securities sold under agreement to
repurchase (Notes 1 and 8) 6,681,000 6,104,000 -
Accrued interest payable 60,989 99,297 86,279
Deferred income taxes (Note 10) - - 120,000
Prepayments by borrowers for taxes and insurance 105,901 145,730 306,346
Other liabilities 989,402 2,131,300 1,441,418
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 109,444,176 103,811,617 83,445,244
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11, 12, 14 and 15)
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 13 and 14)
Preferred stock, par value $1 per share,
500,000 shares authorized, none issued - - -
Common stock, par value $1.25 per share,
4,000,000 shares authorized, 924,008,
919,168 and 915,568 shares issued and
outstanding 1,155,010 1,148,960 1,144,460
Additional paid-in capital 1,975,695 1,981,745 1,970,945
Unrealized loss on available for sale
securities (Note 1) - (279,182) -
Retained earnings - substantially restricted 3,445,044 3,497,626 2,900,334
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,575,749 6,349,149 6,015,739
- -----------------------------------------------------------------------------------------------------------------------------
$116,019,925 $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>
Six Months Ended
December 31, Year Ended June 30,
1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $3,454,559 $6,441,903 $5,897,002 $5,254,214
Mortgage-backed securities 564,079 652,639 495,620 824,082
Investment securities 254,833 498,686 383,555 554,881
Trading account assets 2,911 23,390 12,176 50,695
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 4,276,382 7,616,618 6,788,353 6,683,872
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 1,960,029 3,132,660 2,439,585 1,939,300
Borrowings (Notes 7, 8 and 9) 979,936 2,059,402 2,223,267 3,133,871
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,939,965 5,192,062 4,662,852 5,073,171
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 1,336,417 2,424,556 2,125,501 1,610,701
Provision (credit) for loan losses
(Note 2) 91,850 56,665 (9,443) 74,047
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,244,567 2,367,891 2,134,944 1,536,654
- -----------------------------------------------------------------------------------------------------------------------------
Other income
Loan fees and servicing income 266,505 610,020 651,852 400,133
Net gain (loss) on sale of loans
and securities 72,547 242,866 206 (490,706)
Service charges on checking 52,058 90,156 77,542 78,429
Other 70,977 164,090 142,034 138,244
- -----------------------------------------------------------------------------------------------------------------------------
Total other income 462,087 1,107,132 871,634 126,100
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
5
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
(continued)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other expenses
Personnel (Notes 14 and 15) $ 748,083 $1,013,674 $1,194,410 $ 941,866
Occupancy (Note 12) 131,593 302,139 310,114 321,456
Data processing (Note 12) 165,548 257,038 210,110 199,922
BIF/SAIF premium disparity
assessments (Note 12) 346,851 - - -
Deposit insurance premiums 100,908 190,263 195,818 172,894
Other 223,553 724,321 619,373 545,515
- -----------------------------------------------------------------------------------------------------------------------------
Total other expenses 1,716,536 2,487,435 2,529,825 2,181,653
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes and cumulative effect of
change in accounting principle (9,882) 987,588 476,753 (518,899)
Provision for income taxes (Note 10) (3,500) 344,338 100,508 (234,986)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle (6,382) 643,250 376,245 (283,913)
Cumulative effect of change in
accounting for income taxes - - - (196,000)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (6,382) $ 643,250 $ 376,245 $ (479,913)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per common share
Income (loss) before cumulative
effect of change in accounting
principle $ (.01) $ .70 $ .70 $ (.53)
Cumulative effect of change in
accounting for income taxes - - - (.37)
- -----------------------------------------------------------------------------------------------------------------------------
$ (.01) $ .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 14) 23,000 57,200 - - 80,200
Issuance of common stock
(Note 13) 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 14) 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
Cash dividend - - - (46,200) (46,200)
Realized loss on available
for sale securities (Note 1) - - 279,182 - 279,182
Stock options exercised (Note 14) 12,500 32,000 - - 44,500
Repurchase of common stock (6,450) (38,050) - - (44,500)
Net loss - - - (6,382) (6,382)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $1,155,010 $1,975,695 $ - $3,445,044 $6,575,749
- -----------------------------------------------------------------------------------------------------------------------------
</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>
Six Months Ended
December 31, Year Ended June 30,
1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $(6,382) $ 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 91,850 56,665 (9,443) 74,047
Depreciation and amortization 76,160 95,511 93,775 109,250
Amortization of deferred loan fees 63,841 (136,086) (123,528) (148,992)
Net amortization of premiums
and accretion of discounts 84,606 199,060 54,822 662,379
Loss (gain) on sale of loans (216,537) (204,901) 60,367 (152,931)
Originations of loans held
for sale (11,773,561) (7,203,819) (11,765,459) (23,211,491)
Proceeds from sale of loans 11,822,300 7,160,241 11,825,826 23,364,422
Loss (gain) on sale of
mortgage-backed securities (111,039) - (36,418) 214,800
Originations of loans securitized - - (5,596,082) (4,992,057)
Purchase of mortgage backed
securities (23,980,081) - - -
Proceeds from sale of
mortgage-backed securities 17,844,790 - 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 255,030 63,720 (24,155) 168,437
Purchases of trading account
securities (36,330,973) (107,346,227) (43,113,114) (73,546,348)
Sales of trading account
securities 35,305,544 107,282,507 43,137,269 73,377,911
</TABLE>
continued...
8
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities (cont'd)
Changes in
Accrued interest receivable $40,631 $ (127,600) $ (27,424) $ 44,109
Other assets (24,917) (442,298) (192,025) (310,844)
Accrued interest payable (38,308) 13,018 (21,951) (82,399)
Deferred income taxes (3,000) - (87,000) (307,277)
Prepayments by borrowers
for taxes and insurance (39,829) (160,616) 181,671 (156,412)
Other liabilities (1,141,898) 689,882 (592,864) (531,024)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by operating activities (8,081,773) 479,281 (445,311) 876,967
- -----------------------------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from sales of held
to maturity securities - - - 2,890,700
Net (increase) decrease in
loans 2,752,812 (8,486,970) 2,484,824 (7,331,860)
Principal repayments on held
to maturity securities 776,007 998,457 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 (1,515,180) (3,186,982) (152,668) (115,878)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by investing activities 2,013,639 (20,562,075) 3,684,921 1,332,569
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
9
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
1996 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financing activities
Net increase (decrease)
in deposits $6,713,625 $22,226,807 $(1,006,244) $ 3,446,397
Repayment of Federal Home
Loan Bank advances (10,000,000) (31,510,000) (15,200,000) (15,800,000)
Proceeds from Federal Home
Loan Bank advances 10,000,000 23,960,000 16,300,000 14,000,000
Principal payments on bonds
payable, including
unapplied payments (531,459) (988,607) (968,556) (5,475,702)
Increase (decrease) in
securities sold under
agreements to repurchase 577,000 6,104,000 - -
Proceeds from issuance of
common stock - 15,300 2,108,215 -
Dividends paid (46,200) (45,958) - -
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by financing activities 6,712,966 19,761,542 1,233,415 (3,829,305)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 644,832 (321,252) 4,473,025 (1,619,769)
Cash and cash equivalents,
beginning of period 5,431,483 5,752,735 1,279,710 2,899,479
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $6,076,315 $ 5,431,483 $ 5,752,735 $ 1,279,710
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
10
<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
Bank (the "Bank"). The 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".
As of December 31, 1996, the Bank has filed applications with the appropriate
federal and state regulatory agencies to convert from a federal savings
association to a Virginia Chartered Federal Reserve member bank. As a result,
the Corporation has changed their year end from June 30, to December 31.
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
specific 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.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of September 30, 1996. Based on the
Company's deposits as of March 31, 1995, the date for measuring the amount of
special assessments pursuant to the Act, the Company paid a special assessment
of approximately $347,000 to capitalize the SAIF.
Principles of
Consolidation
The consolidated financial statements include the accounts of Guaranty Financial
Corporation and Guaranty Bank, (a wholly-owned subsidiary), and GMSC, Inc. and
Guaranty Investment Corp., wholly-owned subsidiaries of the Bank. All material
intercompany accounts and transactions have been eliminated in the
consolidation.
Reorganization
On December 29, 1995, the Bank and the Parent Company consummated the
reorganization of the Bank into a unitary-thrift holding company structure
whereby the Bank became the wholly-owned subsidiary of the Parent Company. Each
outstanding share of the common stock of the Bank became one share of the common
stock of the Parent Company. This transaction was accounted for as a pooling of
interests.
11
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
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.
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.
12
<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.
13
<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.
14
<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.
15
<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.
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.
For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable income" method. The cumulative bad
debt reserve, upon which no taxes have been paid, was approximately $1,086,000
at June 30, 1996.
16
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Income Taxes
(continued)
Section 1616 of the Small Business Job Protection Act of 1996 (the "Act")
repealed the percentage of taxable income method of computing bad debt reserve,
and requires the recapture into taxable income of "excess reserves", on a
ratable basis over the next six years. Excess reserves are defined, in general,
as the excess of the balance of the tax bad debt reserve (using the percentage
of taxable income method) as of the close of the last tax year beginning before
January 1, 1996 over the balance of the reserve as of the close of the last tax
year beginning before January 1, 1988. The recapture of the reserves is deferred
if the Corporation meets the "residential loan requirement" exception, during
either or both of the first two years beginning after December 31, 1995. The
residential loan requirement is met, in general, if the principal amount of
residential loans made by the Corporation during the year is not less than the
Corporation's "base amount". The base amount is defined as the average of the
principal amounts of residential loans made during the six most recent tax years
beginning before January 1, 1996.
As a result of the Act, the Corporation must recapture into taxable income
approximately $387,000 ratably over the next six years, beginning with the year
ending June 30, 1997. If the residential loan requirement exception is met, as
discussed above, the income will be includable over the 3rd through 8th years
following the year ended June 30, 1996.
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
were 920,681 for the six month period ended December 31, 1996, and 917,668,
541,768 and 537,168 for the years ended June 30, 1996, 1995 and 1994,
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 $2,978,000 for the six
month period ended December 31, 1996, and $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 $277,000 for the six month period ended December
31, 1996, and $180,000, $42,000 and $159,000 for the years ended June 30, 1996,
1995 and 1994, respectively. There was no real estate acquired in settlement of
loans for the six month period ended December 31, 1996, and approximately
$33,000 and $122,000 for the years ended June 30, 1996 and 1995, respectively.
17
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Reclassifications
Certain reclassifications have been made in the prior year consolidated
financial statements and notes to conform to the December 31, 1996 presentation.
New Accounting
Pronouncements
Effective July 1, 1996, the Corporation adopted 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. The
application of this pronouncement did not have a material effect on the
financial statements of the Corporation.
Effective July 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
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. The application of this pronouncement did not have a material effect on
the financial statements of the Corporation.
18
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
New Accounting
Pronouncements
(continued)
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. Except for certain provisions affecting
repurchase agreements, 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. The effective date of the provisions
affecting repurchase agreements and similar transactions, including related
transfers of collateral, is delayed for one year, to allow more time for
accounting systems to be put in place to properly reflect the requirements and
guidance of SFAS No. 125. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of the
Corporation.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share ("SFAS 128"). SFAS 128 is
effective for financial statements, including interim periods, issued for
periods ending after December 15, 1997. SFAS 128 provides a different method for
calculating earnings per share than is currently used in accordance with APB 15,
"Earnings per Share." SFAS 128 provides for the calculation of Basic and Diluted
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in earnings
of an entity, similar to fully diluted earnings per share. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of the Corporation.
19
<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:
December 31, 1996
- -------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------
Held to Maturity
Mortgage-backed
securities $ 3,156,857 $ 191,817 $ - $ 3,348,674
- -------------------------------------------------------------------------
3,156,857 191,817 $ - 3,348,674
- -------------------------------------------------------------------------
Trading
Mortgage-backed
securities 16,936,529 - 200,234 16,736,295
- -------------------------------------------------------------------------
16,936,529 - 200,234 16,736,295
- -------------------------------------------------------------------------
$20,093,386 $ 191,817 $ 200,234 $20,084,969
=========================================================================
20
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
1. Investment
Securities
(continued)
June 30, 1996
- -------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------
Held to Maturity
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 $148,301 $428,911 $13,442,495
- -------------------------------------------------------------------------------
June 30, 1995
- -------------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
- -------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed
securities $4,732,638 $154,750 $ - $4,887,388
- -------------------------------------------------------------------------------
21
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
1. Investment
Securities
(continued)
Proceeds from sales of securities available for sale was approximately
$18,508,000 and $6,839,000 for the years ended June 30, 1996 and 1994,
respectively. The Corporation had no sales of available for sale securities
during the period ending December 31, 1996 and 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 the sale of trading securities was approximately $35,306,000 for
the six months ended December 31, 1996, and $107,283,000, $43,137,000 and
$73,378,000 for the years ended June 30, 1996, 1995 and 1994, respectively.
Gross gains of approximately $265,000 and gross losses of approximately $9,900
were realized on those sales for the six months ended December 31, 1996. 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.
Proceeds from the sale of mortgage backed securities was approximately
$17,845,000, $5,416,000 and $6,575,000 for the six months ended December 31,
1996 and the years ended June 30, 1995 and 1994, respectively. Gross gains of
approximately $111,000, $41,000 and $142,000 were realized on those sales for
the six months ended December 31, 1996 and the years ended June 30, 1995 and
1994, respectively. Gross losses on the sales of mortgage-backed securities were
$0, $4,000 and $357,000 for the six months ended December 31, 1996 and the years
ended June 30, 1995 and 1994, respectively. The Corporation had no sales of
mortgage backed securities during the year ended June 30, 1996.
At December 31, 1996 and June 30, 1996, mortgage-backed securities of
approximately $3,157,000 and $3,731,000, respectively, were pledged for bonds
payable (Note 7). At December 31, 1996 and June 30, 1996, mortgage backed
securities with a market value of $7,349,000 and $6,633,000, respectively, were
pledged as collateral under repurchase agreements (Note 8).
22
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
2. Loans Receivable
Loans receivable are summarized as follows:
December 31, June 30,
1996 1996 1995
- -------------------------------------------------------------------------------
Residential real estate $62,602,132 $66,137,277 $62,174,694
Commercial real estate 7,961,867 7,670,148 4,507,978
Construction and land 7,368,767 8,813,170 8,886,956
Consumer 6,963,897 5,386,104 4,579,977
- -------------------------------------------------------------------------------
84,896,663 88,006,699 80,149,605
- -------------------------------------------------------------------------------
Less
Undisbursed loan funds 2,466,623 2,823,774 3,858,164
Deferred loan fees 290,016 313,669 323,282
Allowance for loan losses 869,851 788,146 747,486
- -------------------------------------------------------------------------------
3,626,490 3,925,589 4,928,932
- -------------------------------------------------------------------------------
$81,270,173 $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
Provision charged to expense 91,850
Net charge-offs or reductions (10,145)
- -------------------------------------------------------------------------------
Balance at December 31, 1996 $869,851
===============================================================================
23
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
2. Loans Receivable
(continued)
The Corporation serviced loans for others aggregating approximately $172,771,000
at December 31, 1996, and $168,437,000 and $169,621,000 at June 30, 1996 and
1995, respectively. Mortgage servicing rights, included in other assets, was
approximately $974,000 at December 31, 1996, and $787,000 and $721,000 at June
30, 1996 and 1995, respectively. Mortgage servicing rights of approximately
$226,000 and $160,000 were capitalized during six months ended December 31, 1996
and the year ended June 30, 1996, respectively. 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
$283,000 and $67,000 were realized during the six months ended December 31,
1996, and $205,000 and $0, $51,000 and $112,000 and $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 December 31, 1996 and June 30, 1996
and 1995.
At December 31, 1996, the Corporation had no loans that were considered as
impaired.
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 -
24
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
3. Office Properties
and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $1,880,950 $1,873,386 $ -
Building and leasehold improvements 2,407,983 1,388,741 305,574
Furniture and fixtures 599,367 288,575 365,773
Equipment 821,606 661,020 637,998
- ------------------------------------------------------------------------------------------
5,709,906 4,211,722 1,309,345
Less accumulated depreciation
and amortization 763,753 686,523 872,436
- ------------------------------------------------------------------------------------------
Net office properties and equipment $4,946,153 $3,525,199 $ 436,909
==========================================================================================
</TABLE>
4. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
- ------------------------------------------------------------------------------------------
Amount Percent
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Passbook, statement savings and interest
checking accounts
Non-interest bearing $ 1,505,640 1.9%
2.00 to 3.00% 5,400,365 6.6
3.01 to 4.00% 8,170,916 10.0
- ------------------------------------------------------------------------------------------
15,076,921 18.5
- ------------------------------------------------------------------------------------------
Certificates:
0 to 4.00% 61,423 .1
4.01 to 5.00% 198,405 .2
5.01 to 6.00% 66,064,322 81.2
- ------------------------------------------------------------------------------------------
66,324,150 81.5
- ------------------------------------------------------------------------------------------
$81,401,071 100.0%
==========================================================================================
</TABLE>
25
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
4. Deposits
(continued)
<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 certificates of deposit with a minimum denomination of
$100,000 was approximately $9,663,000 at December 31, 1996, and $4,606,000 and
$1,432,000 at June 30, 1996 and 1995, respectively.
Scheduled maturities of certificates are as follows:
December 31, June 30,
1996 1996 1995
- ------------------------------------------------------------------------------
Within one year $57,305,347 $51,209,732 $27,682,073
One to two years 5,095,223 5,191,895 8,189,909
Two to three years 1,381,536 1,129,936 957,106
Three to four years 1,178,064 1,212,076 419,047
Five years and thereafter 1,363,980 1,636,804 576,064
- ------------------------------------------------------------------------------
$66,324,150 $60,380,443 $37,824,199
==============================================================================
26
<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 are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term
investments $ 6,076,315 $ 6,076,000 $ 5,431,483 $5,431,000
Securities 19,872,610 20,085,000 13,294,194 13,442,000
Loans, net of allowance
for loan losses 81,270,173 80,858,000 84,081,110 82,710,000
Financial liabilities
Deposits 81,401,071 81,345,000 74,687,446 74,590,000
Advances from Federal
Home Loan Bank 17,500,000 17,500,000 17,500,000 17,500,000
Securities sold under
agreement to
repurchase 6,681,000 6,681,000 6,104,000 6,104,000
Bonds payable 2,705,813 N/A 3,143,844 N/A
</TABLE>
<TABLE>
<CAPTION>
Notional Fair Notional Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrecognized financial
instruments
Commitments to
extend credit $9,356,000 $9,356,000 $9,300,000 $9,300,000
Forward commitments
to purchase
mortgage-backed
securities 6,054,000 6,041,000 5,795,000 5,822,000
</TABLE>
27
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of
Financial
Instruments
(continued)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and 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.
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.
28
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of
Financial
Instruments
(continued)
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 7) of the bonds payable held by GMSC, Inc. at
December 31, 1996 and June 30, 1996, it was not deemed practicable to estimate
the fair value.
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.
29
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
6. Results of
Operations for
the Six Months
Ended December
31, 1995
Unaudited results of operations of the Corporation for the six months ended
December 31, 1995 (unaudited) are as follows:
Six month period ended December 31, 1995
- --------------------------------------------------------------------------------
Net interest income $1,161,197
Income before income taxes 456,659
Provision for income taxes 157,838
Net income 298,821
7. 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>
December 31, June 30,
1996 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Serial Bonds
Class A-2, maturing January 20,
2012, at 8.0% $1,066,586 $1,556,846 $2,778,641
Class A-3, maturing January 20,
2019, at 8.0% 2,444,544 2,352,811 2,173,634
Unapplied payments (326,479) (200,337) (254,348)
- -------------------------------------------------------------------------------------
3,184,651 3,709,320 4,697,927
Less unamortized discount (478,838) (565,476) (717,365)
- -------------------------------------------------------------------------------------
$2,705,813 $3,143,844 $3,980,562
=====================================================================================
</TABLE>
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.
30
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
8. Securities Sold
Under Agreements
to Repurchase
The following is a summary of certain information regarding the Bank's
repurchase agreements:
Six Months Ended Year Ended
December 31, June 30,
1996 1996 1995
- ------------------------------------------------------------------------------
Balance at end of period $6,681,000 $6,104,000 $ -
Weighted average interest rate
at end of period 6.50% 5.65% -
Average amount outstanding
during the period $6,321,040 $3,111,583 $ 782,500
Maximum amount outstanding
at any month end during the
period $9,957,000 $9,930,000 $4,230,000
9. Advances From
Federal Home
Loan Bank
Advances from the Federal Home Loan Bank are summarized as follows:
Due in Year Ending
December 31,
---------------------------------------------------
1997 $ 7,500,000
1998 5,000,000
1999 5,000,000
---------------------------------------------------
$17,500,000
---------------------------------------------------
The weighted average interest rate of advances was 6.35% at December 31, 1996,
and 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 $31,557,000 and
$35,097,000 at December 31, 1996 and June 30, 1996, respectively.
31
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
9. Advances From
Federal Home
Loan Bank
(continued)
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
1996 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum amount
outstanding
during the
period $22,500,000 $28,050,000 $28,250,000 $28,750,000
- ----------------------------------------------------------------------------------------------
Average amount
outstanding
during the period $19,550,000 $22,829,000 $26,208,000 $26,017,000
- ----------------------------------------------------------------------------------------------
Average interest
rate during the
period 5.79% 6.21% 6.67% 6.63%
- ----------------------------------------------------------------------------------------------
</TABLE>
10. Income Taxes
The provision for income taxes as presented in the consolidated statements of
operations are as follows:
Six Months Ended December 31, 1996
- --------------------------------------------------------------
Currently payable (benefit) $(3,500)
Deferred income tax expense (benefit) -
- --------------------------------------------------------------
$(3,500)
- --------------------------------------------------------------
32
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
10. Income Taxes
(continued)
Year Ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------
Currently payable $344,338 $187,885 $ 16,200
Deferred income tax expense (benefit) - (87,377) (251,186)
- -------------------------------------------------------------------------------
$344,338 $100,508 $(234,986)
- -------------------------------------------------------------------------------
Reconciliations of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
Six Months Ended December 31, 1996
- -----------------------------------------------------------------------
Tax expense (benefit) at statutory rate $(3,360)
Adjustments
Effect of state taxes (395)
Other 255
- -----------------------------------------------------------------------
$(3,500)
- -----------------------------------------------------------------------
<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>
33
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
10. Income Taxes
(continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Deferred tax asset
Bad debt reserves $164,000 $152,000 $169,000
Deferred loan fees 54,000 70,000 123,000
Excess servicing 38,000 48,000 68,000
Available for sale securities - 150,000 -
Trading securities 90,000 - -
Other 136,000 65,000 18,000
-------------------------------------------------------
Total deferred tax asset 482,000 485,000 378,000
-------------------------------------------------------
Deferred tax liability
GMSC REMIC 204,000 230,000 277,000
FHLB stock 187,000 187,000 187,000
Other 58,000 38,000 34,000
-------------------------------------------------------
Total deferred tax liability 449,000 455,000 498,000
-------------------------------------------------------
Net deferred tax liability (asset) $(33,000) $(30,000) $120,000
-------------------------------------------------------
</TABLE>
11. Related Party
Transactions
In the normal 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 loans with related parties outstanding at December 31,
1996, and June 30, 1996 and 1995 are approximately $163,000, $227,000 and
$291,000, respectivly.
34
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
12. Commitments
and
Contingencies
The Corporation leases office space under operating leases expiring at various
dates through 2002 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
December 31, 1996, are as follows:
Amount
Data
Year Ending December 31, Leases Processing
- --------------------------------------------------------------
1997 $ 47,400 $ 97,200
1998 42,400 97,200
1999 35,800 40,500
2000 18,500 -
Thereafter 30,900 -
- --------------------------------------------------------------
$175,000 $234,900
==============================================================
Total rental expense amounted to approximately $23,000 for the six months ended
December 31, 1996 and $168,000, $187,000 and $180,000 for the years ended June
30, 1996, 1995 and 1994, respectively. Total data processing expense amounted to
approximately $165,000 for the six months ended December 31, 1996 and $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.
35
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
13. 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.
On January 23, 1997, the Corporation completed a secondary offering of its
common stock through the sale of 500,000 shares of common stock at a price of
$8.50 per share. Proceeds to the Corporation from the offering (net of offering
expenses of approximately $280,000) were approximately $3,970,000.
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 3.0% of adjusted total assets. The risk-based capital standard
requires risk-based capital of not less than 8.0% of risk-weighted assets.
At December 31, 1996, the 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.
36
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
13. Stockholders'
Equity
(continued)
The following table presents the Bank's regulatory capital levels at December
31, 1996 and June 30, 1996, relative to the OTS requirements applicable at that
date:
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
December 31, 1996 Required Required Amount Percent Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible capital $1,743,000 1.50% $6,639,000 5.70% $4,896,000
Core capital 3,490,000 3.00 6,639,000 5.70 3,149,000
Risk-based capital 4,519,000 8.00 7,345,000 13.00 2,826,000
</TABLE>
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
June 30, 1996 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 7,259,000 13.28 2,887,000
</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.
14. Stock Option
Plan
The Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to key employees.
The Corporation applies Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for these plans against earnings. For those companies applying APB 25, FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires certain
proforma disclosures of net income and earnings per share. Net income and
earnings per share computed under FASB Statement No. 123 do not materially
differ from the amounts reported in consolidated financial statements.
The following table summarizes vested options outstanding:
Six Months Ended December 31, 1996
- -------------------------------------------------------------------
Option Price
- -------------------------------------------------------------------
Outstanding at beginning of
period $4.25 - 4.88 14,000
Options vested during period - -
Options exercised during period (10,000)
- -------------------------------------------------------------------
Outstanding at end of period $4.88 4,000
- -------------------------------------------------------------------
37
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
14. Stock Option
Plan
(continued)
<TABLE>
<CAPTION>
Year Ended 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 - 4.88 4,000 8,000 8,000
Options exercised during year 4.25 - 4.88 (3,600) (18,400) -
- -----------------------------------------------------------------------------------------
Outstanding at end of year $4.25 - 4.88 14,000 13,600 24,000
- -----------------------------------------------------------------------------------------
</TABLE>
15. 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, and $5,500 for the six months ended December 31, 1996.
16. 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.
38
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
16. 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
December 31, 1996 June 30, 1996
-----------------------------------
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit $9,356,000 $9,300,000
Standby letters of credit written 463,000 218,000
Financial instruments whose contract
amount represent interest rate risk
Forward commitment to purchase
mortgage-backed securities $6,054,000 $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.
39
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
17. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
Condensed financial information is shown for the Parent Company only as follows:
Condensed Statements of Financial Condition
December 31, June 30,
1996 1996
- ----------------------------------------------------------------------------
Assets
Investment in the Bank, at equity $6,657,155 $6,693,752
Cash 10,000 10,000
Prepaid expenses and other assets 90,680 68,979
- ----------------------------------------------------------------------------
$6,757,835 $6,772,731
- ----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities $ 182,086 $ 144,400
- ----------------------------------------------------------------------------
Stockholders' Equity
Common stock 1,155,010 1,148,960
Additional paid-in capital 1,975,695 1,981,745
Retained earnings 3,445,044 3,497,626
- ----------------------------------------------------------------------------
Total stockholders' equity 6,575,749 6,628,331
- ----------------------------------------------------------------------------
$6,757,835 $6,772,731
- ----------------------------------------------------------------------------
40
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
17. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
(continued)
Condensed Statements of Operations
- -------------------------------------------------------------------------------
Six Months Ended Year Ended
December 31, June 30,
1996 1996
- -------------------------------------------------------------------------------
Income
Dividends received from Bank $ 46,200 $ 10,000
- -------------------------------------------------------------------------------
Total income 46,200 10,000
- -------------------------------------------------------------------------------
Noninterest expenses (52,582) (41,463)
- -------------------------------------------------------------------------------
Loss before income tax benefit and
equity in undistributed net income
of the Bank (6,382) (31,463)
Income tax benefit - 12,000
- -------------------------------------------------------------------------------
(Income) loss before equity in undistributed
net income of the Bank (6,382) (19,463)
Equity in undistributed net income
of the Bank - 662,713
- -------------------------------------------------------------------------------
Net income (loss) $ (6,382) $643,250
- -------------------------------------------------------------------------------
41
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
17. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
(continued)
Condensed Statements of Cash Flows
- -------------------------------------------------------------------------------
Six Months Ended Year Ended
December 31, June 30,
1996 1996
- -------------------------------------------------------------------------------
Operating activities
Net income (loss) $ (6,382) $643,250
Adjustments
Equity in income of the Savings Bank (43,562) (672,713)
(Increase) decrease in prepaid and
other assets (21,701) (68,979)
Increase in other liabilities 37,686 144,400
Other 33,959 -
- -------------------------------------------------------------------------------
Net cash provided by operating
activities - 45,958
- -------------------------------------------------------------------------------
Investing activities
Dividends received from Savings Bank 46,200 10,000
- -------------------------------------------------------------------------------
Net cash provided by investing
activities 46,200 10,000
- -------------------------------------------------------------------------------
Financing activities
Cash dividends paid on common stock (46,200) (45,958)
- -------------------------------------------------------------------------------
Net cash absorbed by financing
activities (46,200) (45,958)
- -------------------------------------------------------------------------------
Increase in cash - 10,000
Cash, beginning of period 10,000 -
- -------------------------------------------------------------------------------
Cash, end of period $ 10,000 $ 10,000
- -------------------------------------------------------------------------------
42
<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: June 30, 1997 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 July 09, 1997
- ------------------------------------- and Director
Thomas P. Baker (Principal Executive Officer)
/s/ Kathleen M. Focht Chief Financial Officer, Vice President, July 09, 1997
- ------------------------------------- President and Secretary/Treasurer
Kathleen M. Focht (Principal Financial and
Accounting Officer)
/s/ Douglas E. Caton Chairman of the Board July 09, 1997
- -------------------------------------
Douglas E. Caton
/s/ Harry N. Lewis Vice Chairman of the Board July 09, 1997
- -------------------------------------
Harry N. Lewis
/s/ Charles R. Borchardt Director
- -------------------------------------
Charles R. Borchardt
Director
- -------------------------------------
Henry J. Browne
/s/ Robert P. Englander Director July 09, 1997
- -------------------------------------
Robert P. Englander
/s/ John R. Metz Director July 09, 1997
- -------------------------------------
John R. Metz
Director
- -------------------------------------
James R. Sipe, Jr.
Director
- -------------------------------------
Oscar W. Smith, Jr.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,712,877
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,363,438
<TRADING-ASSETS> 16,736,295
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 3,156,857
<INVESTMENTS-MARKET> 3,348,674
<LOANS> 82,140,024
<ALLOWANCE> (869,851)
<TOTAL-ASSETS> 116,019,925
<DEPOSITS> 81,401,071
<SHORT-TERM> 14,181,000
<LIABILITIES-OTHER> 1,156,292
<LONG-TERM> 12,705,813
0
0
<COMMON> 1,155,010
<OTHER-SE> 5,420,739
<TOTAL-LIABILITIES-AND-EQUITY> 116,019,925
<INTEREST-LOAN> 3,721,064
<INTEREST-INVEST> 821,823
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,542,887
<INTEREST-DEPOSIT> 1,960,029
<INTEREST-EXPENSE> 2,939,965
<INTEREST-INCOME-NET> 1,602,922
<LOAN-LOSSES> 91,850
<SECURITIES-GAINS> 72,547
<EXPENSE-OTHER> 1,593,501
<INCOME-PRETAX> (9,882)
<INCOME-PRE-EXTRAORDINARY> (6,382)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,382)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
<YIELD-ACTUAL> 8.01
<LOANS-NON> 1,669,636
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 788,146
<CHARGE-OFFS> (10,045)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 869,851
<ALLOWANCE-DOMESTIC> 160,410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 709,441
</TABLE>
