SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 22911
Charlottesville, Virginia (Zip Code)
(Address of Principal Executive Offices)
(804) 974-1100
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Act:
Common Stock, $1.25 par value
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's gross income for its most recent fiscal year was
$11,393,000.
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, 1997 was approximately $5,107,000. (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,
1997 was 1,501,383.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-KSB - Proxy Statement for the 1998 Annual Meeting of
Stockholders.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS............................................. 3
ITEM 2. DESCRIPTION OF PROPERTY............................................. 11
ITEM 3. LEGAL PROCEEDINGS................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS............................................... 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................... 12
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION................................ 12
ITEM 7. FINANCIAL STATEMENTS................................................ 38
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................ 38
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT......................................... 38
ITEM 10. EXECUTIVE COMPENSATION.............................................. 39
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................. 39
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 39
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.............................. 39
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PART I
Item 1. Description of Business.
General
Guaranty Financial Corporation ("Guaranty") is a Virginia corporation
which was organized in 1995 for the purpose of becoming the holding company of
the Bank. The Bank is a Virginia state chartered bank which began business in
February 1981 and is headquartered in Charlottesville, Virginia.
Effective December 29, 1995, Guaranty acquired all of the issued and
outstanding standing shares of Common Stock of the Bank. The principal asset of
Guaranty is the outstanding stock of the Bank, its wholly owned subsidiary.
Guaranty presently has no separate operations and its business consists only of
the business of the Bank. All references to Guaranty, unless otherwise
indicated, at or before December 29, 1995, refer to the Bank and its
subsidiaries on a consolidated basis. Guaranty's Common Stock is quoted on The
Nasdaq National Market System under the symbol "GSLC".
Guaranty's principal business activities are attracting checking and
savings deposits from the general public through its retail banking offices and
originating, servicing, investing in and selling loans. Of Guaranty's $107.6
million of gross loans outstanding at December 31, 1997, 61.3% 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 has recently begun to offer consumer loans and government-insured and
conventional small business loans. Guaranty invests in certain United States
government and agency obligations and other investments permitted by applicable
laws and regulations.
Guaranty's main office is located at 1658 State Farm Boulevard,
Charlottesville, Virginia 22911 and the telephone number is (804) 970-1100.
Market Area
Guaranty is the only independent community banking organization
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 five full service retail branches, which serve Charlottesville,
Albemarle County, and Harrisonburg, Virginia.
Competition
Guaranty faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from commercial banks and mortgage bankers who also make loans secured
by real estate located in the Bank's market area. The Bank competes for real
estate loans principally on the basis of the interest rates and loan fees it
charges, the types of loans it originates and the quality of services it
provides to borrowers.
Guaranty faces substantial competition in attracting deposits from
commercial banks, money market and mutual funds, credit unions and other
investment vehicles. The ability of Guaranty to attract
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and retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. Guaranty competes for these deposits by offering a
variety of deposit products at competitive rates and convenient business hours.
Guaranty operates in a highly competitive environment, competing for
deposits and loans with commercial banks and other financial institutions, many
of which possess substantially greater financial resources than those available
to Guaranty. Certain of these institutions have significantly higher lending
limits than Guaranty. In addition, there can be no assurance that other
financial institutions, with substantially greater resources than Guaranty, will
not establish operations in Guaranty's service area.
Credit Policies
The principal risk associated with each of the categories of loans in
Guaranty's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased, depending on prevailing economic
conditions. In an effort to manage the risk, Guaranty's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and consumer loans varies,
based on employment levels, consumer confidence, fluctuations in the value of
real estate and other conditions that affect the ability of borrowers to repay
indebtedness. The risk associated with real estate construction loans varies,
based on the supply and demand for the type of real estate under construction.
Guaranty has written policies and procedures to help manage credit
risk. The loan portfolio is managed under a specifically defined credit process.
This process includes formulation of portfolio management strategy, guidelines
for underwriting standards and risk assessment, procedures for ongoing
identification and management of credit deterioration, and regular portfolio
reviews to establish loss exposure and to ascertain compliance with Guaranty's
policies.
Guaranty uses a Management Loan Committee and Directors Loan Committee
to approve loans. The Management Loan Committee, which consists of the President
and two additional loan underwriters, meets as necessary to review all loan
applications. A Directors Loan Committee, which currently consists of all
directors, approves loans in excess of $500,000 that have been previously
approved by the Management Loan Committee. Guaranty's President is responsible
for reporting to the Directors Loan Committee monthly on the activities of the
Management Loan Committee and on the status of various delinquent and
non-performing loans. The Directors Loan Committee also reviews lending policies
proposed by Management.
Residential loan originations come primarily from walk-in customers,
real estate brokers and builders. Commercial real estate loan originations are
obtained through broker referrals, direct solicitation of developers and
continued business from customers. All completed loan applications are reviewed
by Guaranty's salaried loan officers. As part of the application process,
information is obtained concerning the income, financial condition, employment
and credit history of the applicant. If commercial real estate is involved,
information is also obtained concerning cash flow after debt service. Loan
quality is analyzed based on the Bank's experience and guidelines with respect
to credit underwriting, as well as the guidelines issued by the Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA") and other purchasers of loans, depending on the type of loan involved.
The non-conforming one- to four-family adjustable-rate mortgage loans originated
by Guaranty, however, are not readily salable in the secondary market because
they do not meet all of the secondary marketing guidelines. These loans are
evaluated by the loan committee for "overall" merit and will not exceed an 80%
loan to value ratio. Real estate is appraised by independent fee appraisers who
have been pre-approved by the
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Board of Directors. Loans are submitted to the underwriting department for
review. All conforming loans including HUD/FHA, VA and applicable VHDA loans are
underwritten and acted upon within loan administration requiring two signatures
of approval.
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, 1997, commitments to extend credit totaled $16.6 million.
One- to Four-Family Residential Real Estate Lending
Guaranty's primary lending program has been the origination of loans
secured by one- to four-family residences, all of which have been located in its
market area. Guaranty evaluates both the borrower's ability to make principal
and interest payments and the value of the property that will secure the loan.
Federal law permits Guaranty to make loans in amounts of up to 100% of the
appraised value of the underlying real estate. Loans are made with a loan to
value up to 95% for conventional mortgage loans and up to 100% for loans
guaranteed by either the Federal Housing Authority ("FHA") or the Veterans
Administration ("VA"). For conventional loans in excess of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75% loan to
value. In addition to fixed rate mortgage loans, Guaranty makes adjustable rate
mortgages with the primary loan indexed to the one year treasury. Generally if
the loans are not made to credit standards of FHLMC, additional fees and rate
are charged. If the loan to value exceeds 80%, private mortgage insurance is
generally secured.
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, 1997,
$26.5 million, or 24.6%, of Guaranty's loan portfolio consisted of fixed-rate
mortgage loans.
Guaranty's current one- to four-family residential adjustable-rate
mortgage loans ("ARMs") have interest rates that adjust every year, generally in
accordance with the rates on one-year U.S. Treasury Bills. Guaranty's ARMs
generally limit interest rate increases to 2% each rate adjustment period and
have an established ceiling rate at the time the loans are made of up to 6% over
the original interest rate. Borrowers are qualified at the first year interest
rate plus 2%. To compete with other lenders in its market area, Guaranty makes
one-year ARMs at interest rates which, for the first year, are below the index
rate which would otherwise apply to these loans. At December 31, 1997, $39.1
million, or 36.3%, of Guaranty's loan portfolio consisted of ARMs. There are
unquantifiable risks resulting from potential increased costs to the borrower as
a result of repricing. It is possible, therefore, that during periods of rising
interest rates, the risk of defaults on ARMs may increase due to the upward
adjustment of interest costs to borrowers.
All one- to four-family real estate mortgage loans being originated by
Guaranty contain a "due-on-sale" clause providing that Guaranty may declare the
unpaid principal balance due and payable upon the sale of the mortgage property.
It is Guaranty's policy to enforce these due-on-sale clauses concerning
fixed-rate loans and to permit assumptions of ARMs, for a fee, by qualified
borrowers.
Guaranty requires, in connection with the origination of residential
real estate loans, title opinions and fire and casualty insurance coverage, as
well as flood insurance where appropriate, to protect Guaranty's interest. The
cost of this insurance coverage is paid by the borrower. Guaranty does require
escrows for taxes and insurance.
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Construction Lending
Guaranty makes local construction loans, primarily residential and lot
loans. The construction loans are secured by the property for which the loan was
obtained. At December 31, 1997, construction and land loans outstanding were
$18.4 million, or 17.1%, of gross loans. 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 floats with
the market, they help Guaranty in managing its interest rate risk. Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans often involve larger loan balances concentrated with
single borrowers or groups of related borrowers. Construction loans involve
additional risks attributable to the fact that loan funds are advanced upon the
security of the home under construction, which is of uncertain value prior to
the completion of construction. Thus, it is more difficult to evaluate
accurately the total loan funds required to complete a project and related
loan-to-value ratios. To minimize the risks associated with construction
lending, Guaranty limits loan amounts to 80.0% of appraised value, in addition
to its usual credit analysis of its borrowers. Guaranty also obtains a first
lien on the security property as security for its construction loans.
Commercial Real Estate Lending
Guaranty also originates commercial real estate loans. These loans are
secured by various types of commercial real estate, including multi-family
residential buildings, commercial buildings and offices, small shopping centers
and churches. At December 31, 1997, commercial real estate aggregated $16.6
million or 15.5% of Guaranty's gross loans. Guaranty's commercial real estate
loans have been 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
interests rates on commercial real estate loans, in most cases, have been tied
to the prime lending rate. Typically, Guaranty charges fees ranging from 1% to
2% on these loans. Commercial real estate loans made by Guaranty generally
amortize over 15 to 25 years and may have a call provision of 3 or 5 years.
Guaranty's commercial real estate loans are secured by properties in its market
area.
In its underwriting of commercial real estate, Guaranty may lend, under
federal regulation, up to 100% of the security property's appraised value,
although Guaranty's loan to original appraised value ratio on such properties is
80% or less in most cases. Commercial real estate lending entails significant
additional risk, compared with residential mortgage lending. Commercial real
estate loans typically involve larger loan balances concentrated with single
borrowers or groups of related borrowers. Additionally, the payment experience
on loans secured by income producing properties is typically dependent on the
successful operation of a business or a real estate project and thus may be
subject, to a greater extent, to adverse conditions in the real estate market or
in the economy generally. Guaranty's commercial real estate loan underwriting
criteria require an examination of debt service coverage ratios, the borrower's
creditworthiness and prior credit history and reputation, and Guaranty generally
requires personal guarantees or endorsements of borrowers. Guaranty also
carefully considers the location of the security property.
Consumer Lending
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, 1997, Guaranty had consumer loans of $7.0 million
or 6.5% of gross loans. During 1997, Guaranty increased its level of consumer
loans. Such
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loans were generally made to customers with which Guaranty had an pre-existing
relationships and were generally in amounts of under $75,000. Guaranty
originates all of its consumer loans in its market area and intends to continue
its consumer lending in this geographic area.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
lines of credit, or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loan such as Guaranty,
and a borrower may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral. Guaranty adds
general provisions to its loan loss allowance at the time the loans are
originated. Consumer loan delinquencies often increase over time as the loans
age.
The underwriting standards employed by Guaranty for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income for primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes an analysis
of the value of the security in relation to the proposed loan amount.
During 1997, 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.
Residential mortgage loans generally are made on the basis of the borrower's
ability to make repayment from his employment and other income and are secured
by real estate whose value tends to be easily ascertainable. In contrast,
commercial business loans typically are 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 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.
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Employees
At December 31, 1997, Guaranty had the equivalent of 64 full-time
employees, and currently has 65 full-time employees. None of Guaranty's
employees is represented by any collective bargaining unit.
Supervision and Regulation
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework applicable to Guaranty and
the Bank. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport
to be complete and are qualified in their entirety by reference to applicable
laws and regulations.
As a bank holding company, Guaranty is subject to regulation under the
Bank Holding Company Act of 1956 (as amended, the "BHCA") and the examination
and reporting requirements of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may
not directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any additional bank or merge
or consolidate with another bank holding company without the prior approval of
the Federal Reserve Board. The BHCA also generally limits the activities of a
bank holding company to that of banking, managing or controlling banks, or any
other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
As a state-chartered bank, the Bank is subject to regulation,
supervision and examination by the Virginia State Corporation Commission's
Bureau of Financial Institutions (the "Virginia SCC"). The Bank is also subject
to regulation, supervision and examination by the Federal Reserve Board and the
Federal Deposit Insurance Corporation (the "FDIC"). State and federal law also
govern the activities in which the Bank may engage, the investments it may make
and the aggregate amount of loans that may be granted to one borrower. Various
consumer and compliance laws and regulations also affect the Bank's operations.
The earnings of the Bank, and therefore the earnings of Guaranty, are
affected by general economic conditions, management policies and the legislative
and governmental actions of various regulatory authorities, including those
referred to above. The following description summarizes some of the state and
federal laws to which Guaranty and the Bank are subject.
The Virginia SCC and the Federal Reserve Bank of Richmond conduct
regular examinations of the Bank, reviewing such matters as the adequacy of loan
loss reserves, quality of loans and investments, management practices,
compliance with laws, and other aspects of their operations. In addition to
these regular examinations, the Bank must furnish the Virginia SCC and the
Federal Reserve with periodic reports containing a full and accurate statement
of its affairs. Supervision, regulation and examination of banks by these
agencies are intended primarily for the protection of depositors rather than
shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of the Bank are insured by the FDIC up to the limits set forth under
applicable law. The deposits of the Bank are subject to the deposit insurance
assessments of the Bank Insurance Fund ("BIF") of the FDIC.
For the semi-annual period beginning January 1, 1998, the assessments
imposed on all FDIC deposits for deposit insurance have an effective rate
ranging from 0 to 27 basis points per $100 of insured deposits, depending on the
institution's capital position and other supervisory factors. However, because
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the legislation enacted in 1996 requires that both Savings Association Insurance
Fund ("SAIF") insured and BIF-insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO"),
the FDIC is assessing BIF-insured deposits an additional 1.30 basis points per
$100 of deposits to cover those obligations.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances that could result in termination of the Bank's deposit insurance.
Capital. The Federal Reserve Board has issued risk-based and leverage
capital guidelines applicable to banking organizations they supervise. Under the
risk-based capital requirements, Guaranty and the Bank are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit), of 8%. At least half of the total capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital"). At December 31,
1997, Guaranty's Tier 1 capital and total capital ratios were 14.29% and 15.42%,
respectively.
In addition, each of the Federal bank regulatory agencies have
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for banks and bank
holding companies that meet certain specified criteria. All other banks and bank
holding companies will generally be required to maintain a leverage ratio of at
least 100 to 200 basis points above the stated minimum. Guaranty's leverage
ratio at December 31, 1997 was 9.34%.
The risk-based capital standards of the Federal Reserve Board
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The Federal Reserve Board also has
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve Board with respect to bank
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holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so otherwise. In addition, the "cross-guarantee" provisions of Federal
law require insured depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by either the SAIF or
the BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provision if it determines that a waiver is in the
best interests of the SAIF or the BIF or both. The FDIC's claim for
reimbursement is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institution.
The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institution in question is well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law. As of December 31, 1997, Guaranty and the Bank were
classified as well-capitalized.
State regulatory authorities also have broad enforcement powers over
the Bank, including the power to impose fines and other civil and criminal
penalties, and to appoint a receiver in order to conserve the assets of any such
institution for the benefit of depositors and other creditors.
Payment of Dividends. Guaranty is a legal entity separate and distinct
from the Bank. Virtually all of the revenues of Guaranty result from dividends
paid to Guaranty by the Bank. The Bank also is subject to state laws that limit
the amount of dividends it can pay. In addition, both Guaranty and the Bank are
subject to various general regulatory policies relating to the payment of
dividends, including requirements to maintain adequate capital above regulatory
minimums. The Federal Reserve Board has indicated that banking organizations
should generally pay dividends only if (1) the organization's net income
available to common shareholders over the past year has been sufficient to fund
fully the dividends and (2) the prospective rate of earnings retention appears
consistent with the organization's capital needs, asset quality and overall
financial condition. Guaranty does not expect that any of these laws,
regulations or policies will materially impact the ability of the Bank to pay
dividends.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are also applicable to the Bank. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility. To the best knowledge of the Bank, it is meeting
its obligations under the CRA. The Bank's CRA rating is "satisfactory".
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state will be
authorized to merge with a bank headquartered in another state, as long as
neither of the states has opted out of such interstate merger authority prior to
such date. States are authorized to enact laws permitting such interstate bank
merger transactions prior to June 1, 1997, as well as authorizing a bank to
establish "de novo" interstate branches. Virginia has enacted early "opt in"
laws, permitting interstate bank merger transactions. Once a bank has
established branches in a state through an
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interstate merger transaction, the bank may establish and acquire additional
branches at any location in the state where a bank headquartered in that state
could have established or acquired branches under applicable Federal or state
law.
Economic and Monetary Polices. The operations of Guaranty are affected
not only by general economic conditions, but also by the economic and monetary
policies of various regulatory authorities. In particular, the Federal Reserve
regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
Item 2. Description of Property.
Guaranty's current principal office opened in December 1996 and is
located at 1658 State Farm Boulevard, Charlottesville, Virginia.
Guaranty has operated an office on Seminole Trail in Charlottesville
since 1983. Guaranty purchased this office in June 1996 at a cost of $1.15
million.
Guaranty has operated a branch in downtown Charlottesville since 1981,
and has operated its current Main Street location since 1992. The current lease
expires in 2002, subject to Guaranty's right to renew for three additional five
year periods under certain circumstances. Guaranty has operated a branch in
Charlottesville near the University of Virginia since 1985, including the
Arlington Boulevard branch that opened in 1994. The current lease for this
branch expires in 1999, subject to Guaranty's right to renew for three
additional five year periods.
In December 1996, Guaranty opened a new main office, operations center
and fourth retail branch in the Pantops area in Albemarle County, just east of
Charlottesville. Guaranty also opened a branch in Harrisonburg, Virginia in May
1997.
Item 3. Legal Proceedings.
In the course of its operations, Guaranty is a party to various legal
proceedings. Based upon information currently available, management believes
that such legal proceedings, in the aggregate, will not have a material adverse
effect on Guaranty's business, financial position, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of Guaranty.
-11-
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Guaranty's Common Stock has been listed on the Nasdaq National Market
under the symbol "GSLC" since June 1997. From June 1995 to June 1997, the Common
Stock had been listed on the Nasdaq SmallCap Market. The following table sets
forth, for the quarters indicated, the high and low sales prices for Guaranty's
Common Stock and per share dividends for the periods indicated. All prices and
dividends are adjusted for a two-for-one stock split effective in November 1996.
Market Price and Dividends
<TABLE>
<CAPTION>
Sales Price ($) Dividends ($)
--------------- -------------
High Low
<S> <C> <C> <C>
Fiscal Year Ended June 30, 1996:
1st quarter 7.375 6.375 -
2nd quarter 7.75 7.00 -
3rd quarter 8.50 7.25 -
4th quarter 8.50 7.50 .05
Transition Period Ended December 31, 1996:
July 1 through September 30 9.25 7.25 -
October 1 through December 31 9.50 8.25 .05
Fiscal Year Ended December 31, 1997:
1st quarter 11.00 8.25 -
2nd quarter 11.00 9.25 .06
3rd quarter 12.75 10.00 .03
4th quarter 15.25 10.75 .03
</TABLE>
_______________________
During the third quarter of 1997, Guaranty decided to begin paying
dividends on a quarterly basis. However, the final determination of the timing,
amount and payment of dividends on Guaranty's Common Stock is at the discretion
of Guaranty's Board of Directors and will depend upon the earnings of Guaranty
and its subsidiaries, principally the Bank, the financial condition of Guaranty
and other factors, including general economic conditions and applicable
governmental regulations and policies.
Guaranty is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from the Bank. The
Bank is subject to certain legal restrictions on the amount of dividends it is
permitted to pay to Guaranty. At December 31, 1997, the Bank had available for
distribution as dividends to Guaranty approximately $1.7 million.
As of December 31, 1997, Guaranty has approximately 1,288 shareholders
of record.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following commentary discusses major components of Guaranty's
business and presents an overview of its consolidated financial position and
results of operations at and for the fiscal year ended
-12-
<PAGE>
December 31, 1997, the six months ended December 31, 1996 and the fiscal years
ended June 30, 1996 and 1995. This discussion should be reviewed in conjunction
with the consolidated financial statements and accompanying notes and other
statistical information presented elsewhere in this report. All income statement
data for calendar year 1996 are unaudited.
Guaranty is not aware of any current recommendations by regulatory
authorities, which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between Guaranty and the Federal Reserve, the Virginia State Corporation
Commission (the "SCC") or the FDIC, nor has any regulatory agency made any
recommendations concerning the operations of Guaranty that could have a material
effect on its liquidity, capital resources or results of operations.
Overview
On June 30, 1997, Guaranty Bank, the operating subsidiary of Guaranty,
converted from a federally-chartered savings association to a
Virginia-chartered, federal reserve member commercial bank. In anticipation of
the charter conversion, in early 1997, Guaranty began to implement a strategy to
gradually increase its net interest margin and profitability to levels more
characteristic of community banks operating in Virginia. In the second half of
1997, three statewide banks were acquired by out-of-state banks. Two of these
three acquired banks had a combined 44% share of bank deposits in
Charlottesville and Albemarle County at June 30, 1997. After the acquisitions
were announced, Guaranty immediately began to experience an increase in deposits
and, just as importantly, has been able to recruit experienced loan officers
with loyal customers who were displaced by the acquisitions. Guaranty's
strategy, is influenced by the consolidation occurring in its markets and is
expected to result in substantial loan and deposit growth in 1998. Because
growth in the amounts anticipated would significantly alter the size and
structure of Guaranty's balance sheet, Guaranty believes it is appropriate to
describe its strategy and expectations, which include the following:
o In January 1997, to reduce interest rate risk and improve liquidity,
Guaranty began to sell all newly originated fixed-rate residential
mortgage loans. To further reduce interest rate risk and provide
liquidity for anticipated growth in portfolio loans, Guaranty sold an
additional $9.2 million in fixed-rate mortgage loans and
mortgage-backed securities in January 1998. Management anticipates that
these funds, deposit growth, sales of loans and loan participations
and, if necessary, FHLB advances will provide the liquidity needed to
fund loan growth.
o Guaranty is focusing new originations of portfolio loans on commercial,
consumer, residential construction and land development loans, which
are currently priced approximately 175 to 250 basis points above
fixed-rate residential mortgage loans. Guaranty hired a commercial loan
officer in May 1997 and a construction loan officer in December 1997,
both of whom previously were with large banks in Virginia. Loans in the
above categories increased to an aggregate 42.6% of gross loans at
December 31, 1997 from 26.7% at December 31, 1996. A significant
portion of this increase is attributable to hiring these two loan
officers and to business shifting to Guaranty following the 1997
acquisitions of statewide banks by out-of-state banks. Guaranty expects
substantial loan growth in 1998 and has budgeted a $12.0 million
increase in commercial real estate loan balances, an increase of $30.0
million to $45.0 million in construction and land development loan
balances, an increase of $4.6 million in consumer loans, and an
additional $4.2 million in small business loans in 1998. Budgeted
amounts are merely estimates and a variety
-13-
<PAGE>
of factors, including inadequate deposit growth, general economic
conditions and competition for loans could cause Guaranty to fall short
of these targets.
o Guaranty has emphasized deposit growth to fund loan growth and has
de-emphasized Federal Home Loan Bank advances and other short term
borrowings. Deposits increased from $81.4 million at December 31, 1996
to $112.9 million at December 31, 1997. Growth resulted from new
branches that opened in December 1996 and May 1997, as well as from
customer migration after the 1997 acquisitions of two statewide banks
by out-of-state banks that, in the aggregate, held 44% of bank deposits
in Charlottesville and Albemarle County at June 30, 1997. Despite its
deposit growth, Guaranty held only 7.0% of bank deposits in
Charlottesville and Albemarle County at June 30, 1997. Federal Home
Loan Bank advances and other short term borrowings decreased from $24.2
million at December 31, 1996 to $3.0 million at December 31, 1997.
o In February 1998, a senior officer was recruited from an acquired
statewide bank to manage and reorganize Guaranty's branch network.
Guaranty's focus in its branch network for 1998 will be both to improve
installment lending programs to individuals and to continue the
emphasis on deposit growth. Guaranty expects significant growth in
deposits, primarily from customer migration and one or two new
branches. Having budgeted $30.0 million for deposit growth during 1998,
Guaranty had already experienced a growth of $5.0 million in
certificates of deposit and $3.0 million in checking accounts by the
end of February 1998. Although substantial deposit growth will be
necessary to fund anticipated loan growth and may restrain efforts to
reduce deposit costs, Guaranty plans to lower interest rates on its
certificates of deposit, and to aggressively promote customer checking
accounts in 1998.
o Guaranty plans to establish monthly sales goals for each branch for
loan and deposit products. Guaranty also plans to provide an improved
array of products for customers, including additional checking account
options, sweep accounts for business customers and debit cards.
Guaranty has received regulatory approval to open a sixth full-service
retail branch at Lake Monticello, a planned community in Fluvanna
County, Virginia. Opening is anticipated to occur in mid-summer of
1998. In addition, Guaranty has entered into a letter of intent,
subject to regulatory approval, to lease a seventh branch site on West
Main Street near the University of Virginia in Charlottesville that an
acquired statewide bank will close in mid-1998.
Net Income
Net income for the year ending December 31, 1997 was $898,000, ($.61
per share), a 161.8% increase when compared to calendar year 1996 earnings of
$343,000 ($.37 per share). These increased earnings were primarily a result of
an increased net interest margin and gains on the sale of loans and securities
resulting from a favorable interest rate environment during a restructuring of
the balance sheet. These increased revenues were partially offset by expenses
relating to the conversion to a state-chartered commercial bank in June 1997 and
costs relating to the expansion of the branch network. Calendar 1997 was
positively impacted by the first full year of operations for the combined
corporate headquarters and branch that was opened on the east side of
Charlottesville, Virginia in December 1996. Also, in May 1997, a fifth
full-service branch was opened in Harrisonburg, Virginia.
In calendar year 1996, earnings were adversely affected by the one-time
SAIF assessment and reclassification of investment securities resulting in a
charge to earnings of approximately $325,000 (net of
-14-
<PAGE>
tax effect). The return on average assets was 0.7% for the year ended December
31, 1997, compared to 0.3% for the calendar year ended December 31, 1996.
For the six months ended December 31, 1996, Guaranty experienced a 102%
decrease in earnings from the same period in 1995. During the six months ended
December 31, 1996, Guaranty's net loss was $6,000 compared to earnings of
$299,000 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 items, Guaranty would have reported an
after tax net income of $376,000 for the six months ended December 31, 1996.
Guaranty's performance in its fiscal year ended June 30, 1996 showed
improvement over the year ended June 30, 1995. Net income increased 71.0% in
fiscal 1996 to $643,000 compared to $376,000 in fiscal 1995. After a 69.4%
increase in average shares outstanding following a 360,000 share public offering
completed on June 22, 1995, earnings per share were constant at $.70. Return on
average equity during fiscal 1996 increased to 10.2% from 9.7% for fiscal 1995.
The return on average assets was 0.6% in fiscal 1996, compared to 0.4% in fiscal
1995. Fiscal 1996 marked the first year since 1989 that Guaranty's average
earning assets have increased significantly over the prior fiscal year. From
1989 through fiscal 1995, due to capital constraints, management was forced to
downsize the Bank. Average interest earning assets increased 6.9% from $89.42
million in fiscal 1995 to $95.57 million in fiscal 1996. Total interest bearing
deposits on average increased 13.8% from $54.43 million in fiscal 1995 to $61.9
million in fiscal 1996. Average balances of securities increased 38.0% while, on
average, loans were relatively flat, up only 2.0% from fiscal 1995 to fiscal
1996.
Net Interest Income
Net interest income is the major component of Guaranty's earnings and
is equal to the amount by which interest income exceeds interest expense.
Earning assets consist primarily of loans and securities, while deposits and
borrowings represent the major portion of interest bearing liabilities. Changes
in the volume and mix of assets and liabilities, as well as changes in the
yields and rates paid, determine changes in net interest income. The net
interest margin is calculated by dividing net interest income by average earning
assets.
Net interest income was $3.5 million for the year ended December 31,
1997, 33.9% greater than the $2.6 million earned during calendar year 1996. This
improvement in net interest income was primarily due to volume increases in the
securities and loan portfolios. Average loans increased 9.6% for the year ended
December 31, 1997. The average balance of the securities portfolio was $22.6
million in 1997, up $7.7 million, or 51.9% over calendar year 1996. Although
market interest rates declined during the year ended December 31, 1997, the
yield on average loans increased 20 basis points from 8.3% in 1996 to 8.5% in
1997. The average yield on securities declined from 7.4% in calendar 1996 to
7.0% in 1997. Also contributing to the improvement in net interest income for
the year ended December 31, 1997 was a decline in the cost of average total
interest bearing liabilities from 5.6% in 1996 to 5.3% in 1997. The average rate
paid on interest bearing deposits decreased 7 basis points. The increase in net
interest margin was achieved from both volume gains and widening spreads. The
increase in average securities was a result of loan demand not keeping pace with
increases in deposits through the summer of 1997. This trend reversed in late
1997 as a result of the expanded branch network and additional loan officers.
-15-
<PAGE>
Net interest income was $1.3 million for the six month period ended
December 31, 1996, 15.5% greater than the $1.2 million reported for the same
period in 1995. This improvement in net interest income was primarily due to
volume increases in the securities portfolio and to higher average yields on the
loan portfolio. The average balance of the securities portfolio was $17.6
million for the six month period ended December 31, 1996, up 124.7% over the
same period in 1995. The average balance of the loan portfolio was $83.8 million
for the six month period ended December 31, 1996, up 7.6% over the same period
in 1995. The yield on average loans increased 4 basis points from 8.2% during
the six month period ended December 31, 1995 to 8.2% for the same period in
1996, while the yield on securities declined 182 basis points to 7.2% for the
six month period ended December 31, 1996 from 9.0% for the same period in 1995.
Also contributing to the improved net interest margin was a 38 basis point
decrease in the rate paid on average interest bearing liabilities to 5.6% for
the six month period ended December 31, 1996 from 5.9% for the same period in
1995.
Net interest income was $2.4 million in fiscal 1996, 14.1% greater than
the $2.1 million reported during fiscal 1995. This improvement in net interest
income was primarily due to volume increases in the securities portfolio and to
higher average yields on the loan portfolio. The average balance of the
securities portfolio was $10.5 million in fiscal 1996, up $3.0 million, or 40.2%
over fiscal 1995. The average balance of the loan portfolio was $79.9 million in
fiscal 1996, up $1.5 million, or 2.0% over fiscal 1995. The yield on average
loans increased 54 basis points from 7.5% in fiscal 1995 to 8.1% in fiscal 1996,
while the yield on securities declined 12 basis points to 7.8% in fiscal 1996
from 7.9% in fiscal 1995. Also contributing to the improvement in net interest
income in fiscal 1996 was a decline in the average amount of FHLB advances and
borrowings of $1.2 million, or 4.5%, to $25.8 million in fiscal 1996, from $27.0
million in fiscal 1995, and a decline in the average rates paid on such
borrowings of 22 basis points from 6.3% in fiscal 1995 to 6.0% in fiscal 1996. A
$9.5 million, or 24.5% increase in the average balances of certificates of
deposits from $38.9 million in fiscal 1995 to $48.5 million in fiscal 1996, more
than offset a slight decline in other deposit accounts and enabled Guaranty to
reduce FHLB advances and increase balances of investment securities. The average
rate paid on interest bearing deposits increased 58 basis points to 5.1% in
fiscal 1996 from 4.5% in fiscal 1995 but, with the decline in volume and rates
on FHLB advances, the average rates paid on all interest bearing liabilities
increased only 25 basis points to 5.7% in fiscal 1996 from 5.4% in fiscal 1995.
The following table sets forth 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.
-16-
<PAGE>
Average Balances, Interest Income and Expenses, and Average Yields and Rates
<TABLE>
<CAPTION>
Six Months
Year Ended December 31 Ended December 31
---------------------- -----------------
1997 1996
---- ----
Average Average
Average Income/ Yield/ Average Income/ Yield/
Balance(1) Expense Rate(2) Balance(1) Expense Rate(2)
---------- ------- ------- ---------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest Earning Assets:
Securities............... $22,637 $1,590 7.02% $17,640 $631 7.15%
Loans(3)................. 89,222 7,584 8.50% 83,816 3,455 8.24%
Interest bearing deposits
in other banks.......... 5,605 346 6.17% 5,257 190 7.23%
----- --- ----- ---
Total interest earning
assets................ 117,464 9,520 8.10% 106,713 4,276 8.01%
------- ----- ------- -----
Noninterest earning assets:
Cash and due from banks.. 1,898 1,082
Premises and equipment... 5,508 4,038
Other assets............. 2,624 2,680
Less: Allowance for loan
losses.................. (890) (826)
----- -----
Total noninterest earning
assets................ 9,140 6,974
----- -----
Total assets.......... $126,604 $113,687
======== ========
Liabilities and
Stockholders' Equity
Interest Bearing Liabilities:
Interest bearing deposits:
Demand/MMDA accounts.... $11,110 $289 2.60% $8,765 $121 2.76%
Savings................. 5,654 190 3.36% 4,870 83 3.41%
Certificates of deposits 80,779 4,443 5.50% 63,346 1,756 5.54%
------ ----- ------ -----
Total interest bearing
deposits.............. 97,543 4,922 5.05% 76,981 1,960 5.09%
FHLB advances and other
borrowings............. 14,070 804 5.71% 25,871 745 5.76%
Bonds payable........... 2,583 312 12.08% 3,060 235 15.36%
----- --- ----- ---
Total interest bearing
liabilities/total
interest expense...... 114,196 6,038 5.29% 105,912 2,940 5.55%
------- ----- ------- -----
Noninterest bearing
liabilities:
Demand deposits......... 1,658 1,324
Other liabilities....... 903 809
--- ---
Total liabilities...... 116,757 108,045
Stockholders' equity...... 9,847 5,642
----- -----
Total liabilities and
stockholders' equity.. $126,604 $113,687
======== ========
Interest spread (4)....... 2.82% 2.46%
Net interest income/net
interest margin (5)...... $3,482 2.96% $1,336 2.50%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30
---------------------------------------------------------------
1996 1995
---- ----
Average Average
Average Income/ Yield/ Average Income/ Yield/
Balance(1) Expense Rate(2) Balance(1) Expense Rate(2)
---------- ------- ------- ---------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest Earning Assets:
Securities................ $10,523 $820 7.79% $7,506 $594 7.91%
Loans(3).................. 79,885 6,442 8.06% 78,382 5,897 7.52%
Interest bearing deposits
in other banks........... 5,163 355 6.88% 3,531 298 8.44%
----- --- ----- ---
Total interest earning
assets................. 95,571 7,617 7.97% 89,419 6,789 7.59%
------ ----- ------ -----
Noninterest earning assets:
Cash and due from banks... 2,011 1,290
Premises and equipment.... 1,427 415
Other assets.............. 2,377 1,876
Less: Allowance for loan
losses................... (756) (749)
----- -----
Total noninterest earning
assets................. 5,059 2,832
----- -----
Total assets........... $100,630 $92,251
======== =======
Liabilities and
Stockholders' Equity
Interest Bearing Liabilities:
Interest bearing deposits:
Demand/MMDA accounts..... $8,927 $245 2.74% $9,895 $280 2.83%
Savings.................. 4,541 152 3.35% 5,596 193 3.45%
Certificates of deposits 48,460 2,735 5.64% 38,938 1,967 5.05%
------ ----- ------ -----
Total interest bearing
deposits............... 61,928 3,132 5.06% 54,429 2,440 4.48%
FHLB advances and other
borrowings.............. 25,773 1,553 6.03% 26,991 1,688 6.25%
Bonds payable............ 3,520 507 14.40% 4,275 535 12.51%
----- --- ----- ---
Total interest bearing
liabilities/total
interest expense....... 91,221 5,192 5.69% 85,695 4,663 5.44%
------ ----- ------ -----
Noninterest bearing
liabilities:
Demand deposits.......... 1,066 787
Other liabilities........ 2,062 1,880
----- -----
Total liabilities....... 94,349 88,362
Stockholders' equity....... 6,281 3,889
----- -----
Total liabilities and
stockholders' equity $100,630 $92,251
======== =======
Interest spread (4)........ 2.28% 2.15%
Net interest income/net
interest margin (5)....... $2,425 2.54% $2,126 2.38%
====== ======
</TABLE>
(1) Average balances are computed on daily balances and Management believes
such balances are representative of the operations of the Corporation.
(2) Yield and rate percentages are all computed through the annualization
of interest income and expenses versus the average balances of their
respective accounts.
(3) Non-accrual loans are included in the average loan balances, and income
on such loans is recognized on a cash basis.
(4) Interest spread is the average yield earned on interest earning assets,
less the average rate incurred on interest bearing liabilities.
(5) Net interest margin is net interest income, expressed as a percentage
of average earning assets.
-17-
<PAGE>
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.
Volume and Rate Analysis
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1996
Year Ended December 31, 1997 compared to Year Ended June 30, 1996
compared to Six Months Ended compared to
Year Ended December 31, 1996 December 31, 1995 Year Ended June 30, 1995
Change Due To: Change Due To: Change Due To:
---------------------------- ---------------------------- ---------------------------
Increase Increase Increase
(Decrease) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume
---------- ---- ------ ---------- ---- ------ ---------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Securities.................. $490 ($54) $544 $279 ($143) $422 $226 ($9) $235
Loans....................... 827 163 664 262 31 231 545 430 115
Interest bearing deposits in
other banks............... (38) (49) 11 30 (39) 69 57 (38) 95
---- ---- -- -- ---- -- -- ---- -------
Total interest income..... 1,279 60 1,219 571 (151) 722 828 383 445
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts........ 50 (13) 63 (6) (2) (4) (35) (9) (26)
Savings..................... 34 (1) 35 3 (0) 3 (41) (5) (36)
Certificates of deposits.... 1,159 (59) 1,218 550 (132) 682 768 248 520
----- ---- ----- --- ----- --- --- --- ---
Total interest bearing
deposits................ 1,243 (73) 1,316 547 (134) 681 692 234 458
FHLB advances and other....... (638) (10) (628) (111) (154) 43 (135) (129) (6)
Bonds payable................. (154) (78) (76) (40) 35 (75) (28) 166 (194)
---- ---- ---- --- -- --- --- --- -----
Total interest expense.... 451 (161) 612 396 (253) 649 529 271 258
--- ----- --- --- ----- --- --- ------- -------
Net interest income........... $828 $221 $607 $175 $102 $73 $299 $112 $187
==== ==== ==== ==== ==== === ==== ======= =======
</TABLE>
Interest Sensitivity
An important element of both earnings performance and liquidity is the
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
maturing or repricing within a specific time interval. The gap can be managed by
repricing assets or liabilities, by selling investments held for sale, by
replacing an asset or liability prior to maturity, or by adjusting the interest
rate during the life of an asset or liability. Matching the amounts of assets
and liabilities repricing in the same time interval helps to hedge the risk and
minimize the impact on net income of changes in market 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, 1997, Guaranty had $19.0 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 primarily a result of
maturing certificates of deposit. As a result of loan and security sales in
January 1998, Guaranty's ratio of cumulative rate sensitive assets to rate
sensitive liabilities was 99.3% in a one year time frame. This trend
-18-
<PAGE>
is expected to continue as prime rate lending is increased. In addition, a
principal focus of deposit marketing programs will be the attraction of low rate
transaction accounts.
Guaranty has an Asset/Liability Committee ("ALCO"). The ALCO meets to
discuss deposit pricing, changes in borrowed money, investment and trading
activity, loan sale activities, liquidity levels and the overall interest
sensitivity. The actions of this committee are reported to the Board of
Directors monthly. The daily monitoring of interest rate risk, investment and
trading activity, along with any other significant transactions are managed by
the CEO and CFO 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.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1997
Maturing or Repricing In:
--------------------------------------------------
3 Months 4-12 1-5 Over
or less Months Years 5 Years
------- ------ ----- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-sensitive assets:
Loans..................................................... $35,586 $28,562 $6,765 $31,594
Investments and mortgage-backed securities(1)............. 1,066 270 1,016 13,324
Deposits at other institutions............................ 3,078 - - -
----- - - -
Total interest-sensitive assets......................... 39,730 28,832 7,781 44,918
====== ====== ===== ======
Cumulative interest-sensitive assets........................ 39,730 68,562 76,343 121,261
Interest-sensitive liabilities:
NOW accounts (2).......................................... - - - 9,266
Money market deposit accounts............................. 4,001 - - -
Savings accounts (3)...................................... 1,608 901 772 3,152
Certificates of deposit................................... 22,147 55,509 12,820 -
Borrowed money............................................ 2,989 - - -
Bonds payable............................................. 95 283 1,023 1,118
-- --- ----- -----
Total interest-sensitive liabilities.................... $30,840 $56,693 $14,615 $13,536
======= ======= ======= =======
Cumulative interest-sensitive liabilities................... $30,840 $87,533 $102,148 $115,684
Period gap.................................................. 8,890 (27,861) (6,834) 31,382
Cumulative gap.............................................. 8,890 (18,971) (25,805) 5,577
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities.................. 128.83% 78.33% 74.74% 104.82%
Ratio of cumulative gap to total assets..................... 6.80% (14.52%) (19.76%) 4.27%
</TABLE>
- --------------------
(1) Includes Federal Home Loan Bank stock.
(2) The Corporation has found that NOW accounts are generally not sensitive
to changes in interest rates and therefore has placed such deposits in
the "over 5 years" category.
(3) In accordance with standard industry practice, decay factors have been
applied to savings accounts.
-19-
<PAGE>
Investments
Total available for sale and trading securities decreased 24.4% to
$12.6 million at December 31, 1997 from $16.7 million at December 31, 1996. The
overall decrease was primarily a result of securities sales to provide liquidity
to fund anticipated loan closings during the first half of 1998. At December 31,
1996, as a result of a combined federal and state examination relating to the
banks conversion to a state chartered commercial bank, $15.7 million of
available for sale securities were reclassified as trading. Subsequently, on
January 1, 1997, these securities were transferred back to available for sale,
at the then current market value.
Mortgage-backed securities available for sale increased in fiscal 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 amortized cost and fair market value of
investment securities and mortgage-backed securities at the dates indicated.
Investments
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1997 1996 1996 1995
------------------ ------------------ ------------------ ----------------
Cost Market Cost Market Cost Market Cost Market
---- ------ ---- ------ ---- ------ ---- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity
Mortgage-backed securities.... $2,745 $2,759 $3,157 $3,349 $ 3,731 $ 3,879 $ 4,733 $ 4,887
Other......................... 100 100 - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total held-to-maturity...... 2,845 2,859 3,157 3,349 3,731 3,879 4,733 4,887
Available for sale
Bonds......................... 11,415 11,474 - - - - - -
U.S. Government Obligations .. 50 50 - - - - - -
Mortgage-backed securities.... - - - - 9,993 9,564 - -
------- ------- ------- ------- ------- ------- ------- -------
Total available for sale.... 11,465 11,524 - - 9,993 9,564 - -
Trading
Mortage Backed Securities..... - - 16,937 16,736 - - - -
U.S. Government Obligations... 1,031 1,032 - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total trading............... 1,031 1,032 - - - - - -
Federal Reserve Bank stock...... 72 72 - - - - - -
Federal Home Loan Bank stock.... 860 860 1,360 1,360 1,360 1,360 1,360 1,360
Other........................... 7 7 - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total..................... $16,280 $16,354 $21,454 $21,445 $15,084 $14,803 $ 6,093 $ 6,247
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
-20-
<PAGE>
The table below shows the weighted average expected yields, maturities
and expected principal repayments, at carrying value, of held to maturity and
available for sale debt securities at December 31, 1997:
Maturities of Investments
<TABLE>
<CAPTION>
Maturity or Expected After One But After Five But
Principal Repayment Within One Year Within Five Years Within Ten Years After Ten Years Total
----------------- ------------------ ----------------- ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Mortgage-backed
securities........ $165 8.00% $883 8.26% $411 8.53% $1,286 8.53% $2,745 8.46%
Other............... 100 5.25% - - - - - - 100 5.25%
Available for sale.... 50 5.00% 1,014 6.75% 3,039 6.65% 7,421 7.98% 11,524 7.52%
---- ----- ------ ----- ----- ----- ----- ----- ------- -----
Total............... $ 315 $1,897 $3,450 $8,707 $ 14,369
===== ====== ===== ===== =======
</TABLE>
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
Portfolio of Investment Securities
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
------------ ------------ -----------------------------------------
1997 1996 1996 1995
------------------ ----------------- ------------------- --------------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
FHLMC mortgage-backed
securities........... $2,745 16.73% $6,819 32.08% $7,459 50.89% $4,733 77.68%
GNMA mortgage-backed
securities........... - 0.00% 11,967 56.31% 5,836 39.81% - 0.00%
Corporate bonds ....... 11,474 70.23% - 0.00% - 0.00% - 0.00%
Treasury notes ........ 1,082 6.29% 1,104 5.19% - 0.00% - 0.00%
Other................. 100 .58% - 0.00% - 0.00% - 0.00%
------ ------ ------ ------ ------ ------ ----- ------
Subtotal............. 15,401 93.83% 19,980 93.58% 13,295 90.70% 4,733 77.68%
------ ------ ------ ------ ------ ------ ----- ------
Other:
FHLB stock............... 860 5.24% 1,360 6.42% 1,360 9.28% 1,360 22.32%
FRB Stock................ 72 0.44% - 0.00% - 0.00% - 0.00%
Other.................... 7 0.49% 3 0.01% 3 0.02% - 0.00%
------ ------ ------ ------ ------ ------ ----- -------
Total investment
securities .............. $16,340 100.00% $21,250 100.00% $14,658 100.00% $6,093 100.00%
======= ======= ======= ======= ======= ======= ====== =======
</TABLE>
-21-
<PAGE>
Loans
Net loans consist of total loans minus undisbursed loan funds, deferred
loan fees and the allowance for loan losses. Net loans were $99.7 million at
December 31, 1997, an increase of 22.65% over December 31, 1996. Net loans were
$84.1 million at June 30, 1996, an 11.8% increase over net loans of $75.2
million at June 30, 1995. Net loans decreased 3.3% in the fiscal year ended June
1995 from a balance of $77.8 million at June 30, 1994. The average balance of
total loans as a percentage of average assets was 70.5%, 73.7%. and 79.4% for
the year ended December 31, 1997, the six month period ended December 31, 1996
and the fiscal year ended June 30, 1996, respectively.
The following tables set forth the composition of Guaranty's loan
portfolio in dollars and percentages at the dates indicated.
Loan Portfolio by Amount
<TABLE>
<CAPTION>
December 31, December 31, June 30,
------------ ------------ ----------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential...................... $66,035 $67,016 $66,136 $62,175 $67,385 $59,845
Commercial....................... 16,641 8,486 7,670 4,508 4,251 4,155
Construction and land loans...... 18,263 5,220 8,813 8,887 5,819 4,900
------ ----- ----- ----- ----- -----
Total real estate.............. 100,939 80,722 82,619 75,570 77,455 68,900
Consumer loans (1)................. 6,705 4,175 5,386 4,580 3,685 4,462
Total loans receivable....... 107,644 84,897 88,005 80,150 81,140 73,362
------- ------ ------ ------ ------ ------
Less:
Undisbursed loans in
process........................ 6,752 2,467 2,824 3,858 2,249 1,978
Deferred fees and unearned
discounts...................... 282 290 314 323 382 442
Allowance for losses............. 935 870 786 747 754 746
--- --- --- --- --- ---
Total net items................ 7,969 3,627 3,924 4,928 3,385 3,166
----- ----- ----- ----- ----- -----
Total loans receivable, net.. $99,675 $81,270 $84,081 $75,222 $77,755 $70,196
======= ======= ======= ======= ======= =======
</TABLE>
- -------------------
(1) Includes commercial business loans of approximately $503,000.
Loan Portfolio by Percent of Gross Loans
<TABLE>
<CAPTION>
December 31, December 31, June 30,
------------ ------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential................. 61.34% 78.94% 75.15% 77.57% 83.05% 81.57%
Commercial.................. 15.45 10.00 8.72 5.62 5.24 5.67
Construction and land loans. 16.97 6.15 10.01 11.09 7.17 6.68
----- ---- ----- ----- ---- ----
Total real estate......... 93.76 95.09 93.88 94.29 95.46 93.92
Consumer and other loans...... 6.24 4.91 6.12 5.71 4.54 6.08
---- ---- ---- ---- ---- ----
Total loans receivable.. 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
-22-
<PAGE>
The following tables show the composition of Guaranty's loan portfolio
by fixed and adjustable rate at the dates indicated.
Fixed Rate and Adjustable Rate Loans by Amount
<TABLE>
<CAPTION>
December 31, December 31, June 30,
------------ ------------ ---------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed - Rate Loans:
Real Estate
Residential................. $26,514 $26,061 $28,907 $23,577 $27,796 $22,105
Construction and land
loans..................... 37 138 339 69 - -
-- --- --- -- - -
Total real estate......... 26,551 26,199 29,246 23,646 27,796 22,105
Consumer loans.................. 3,099 1,396 597 736 691 1,547
----- ----- --- --- --- -----
Total fixed-rate loans.... 29,650 27,595 29,843 24,382 28,487 23,652
Adjustable-Rate Loans:
Real Estate
Residential................. 39,521 40,955 37,229 38,598 39,590 37,740
Commercial.................. 16,641 8,486 7,670 4,508 4,251 4,155
Construction and land
loans..................... 18,226 5,082 8,474 8,818 5,819 4,900
------ ----- ----- ----- ----- -----
Total real estate......... 74,388 54,523 53,373 51,924 49,660 46,795
Consumer loans.................. 3,606 2,779 4,789 3,844 2,993 2,915
----- ----- ----- ----- ----- -----
Total adjustable-rate
loans................... 77,994 57,302 58,162 55,768 52,653 49,710
------ ------ ------ ------ ------ ------
Total loans receivable.. 107,644 84,897 88,005 80,150 81,140 73,362
------- ------ ------ ------ ------ ------
Less:
Undisbursed loans in
process..................... 6,752 2,467 2,824 3,858 2,249 1,978
Deferred fees and
unearned discounts.......... 282 290 314 323 382 442
Allowance for losses.......... 935 870 786 747 754 746
--- --- --- --- --- ---
Total net items............. 7,969 3,627 3,924 4,928 3,385 3,166
----- ----- ----- ----- ----- -----
Total loans receivable,
net..................... $99,675 $81,270 $84,081 $75,222 $77,755 $70,196
======= ======= ======= ======= ======= =======
</TABLE>
-23-
<PAGE>
Fixed Rate and Adjustable Rate Loans By Percentage
<TABLE>
<CAPTION>
December 31, December 31, June 30,
------------ ------------ ----------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed - Rate Loans:
Real Estate
Residential............... 24.63% 30.70% 32.84% 29.41% 34.26% 30.13%
Construction and land
loans................... .03% .16% 0.39% 0.09% 0.00% 0.00%
---- ---- ----- ----- ----- -----
Total real estate 24.66% 30.86% 33.23% 29.50% 34.26% 30.13%
Consumer loans................ 2.88% 1.64% 0.68% 0.92% 0.85% 2.11%
----- ----- ----- ----- ----- -----
Total fixed-rate loans.. 27.54% 32.50% 33.91% 30.42% 35.11% 32.24%
Adjustable-Rate Loans:
Real Estate
Residential............... 36.71% 43.04% 42.30% 48.16% 48.79% 51.45%
Commercial................ 15.46% 9.38% 8.72% 5.62% 5.24% 5.66%
Construction and land
loans................... 16.93% 8.52% 9.63% 11.00% 7.17% 6.68%
------ ----- ----- ------ ----- -----
Total real estate....... 69.10% 60.94% 60.65% 64.78% 61.20% 63.79%
Consumer loans................ 3.36% 6.56% 5.44% 4.80% 3.69% 3.97%
----- ----- ----- ----- ----- -----
Total adjustable-rate
loans................. 72.46% 67.50% 66.09% 69.58% 64.89% 67.76%
------ ------ ------ ------ ------ ------
Total loans receivable 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
The following tables summarize the contractual repayment terms of gross
loans as of December 31, 1997, as well as the amount of fixed rate and variable
rate loans due after December 31, 1997. The tables have not been adjusted for
estimates of prepayments and do not reflect periodic repricing of adjustable
rate loans.
Loan Portfolio Maturity Schedule
<TABLE>
<CAPTION>
Balance Principal Repayment Contractually Due
Outstanding in 12-Month Period Ending December 31,
----------- ------------------------------------------------------------------
December 31, 2001- 2003- 2008 and
1997 1998 1999 2000 2002 2007 Thereafter
---- ---- ---- ---- ---- ---- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential and
commercial real estate... $82,676 $6,758 $1,760 $2,048 $6,944 $16,646 $48,520
Construction............... 18,263 18,263 - - - - -
Consumer and other
loans.................... 6,705 431 545 837 4,140 588 164
------- ------- ---- ----- ------ ------- -------
Total.................... $107,644 $25,452 $2,305 $2,885 $11,084 $17,234 $48,684
======== ======= ====== ====== ======= ======= =======
</TABLE>
Contractual principal repayments of loans do not necessarily reflect
the actual term of Guaranty's loan portfolio. The average life of mortgage loans
is substantially less than their contractual terms because of loan prepayments
and enforcement of due-on-sale clauses, which gives Guaranty the right to
declare a loan immediately due and payable in the event, among other things, the
borrower sells the real property subject to the mortgage and the loan is not
repaid. In addition, certain borrowers increase their equity in the security
property by making payments in excess of those required under the terms of the
mortgage.
-24-
<PAGE>
Asset Quality
Asset quality is an important factor in the successful operation of a
financial institution. Federal 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. On the basis of management's review of its
assets, at December 31, 1997, Guaranty had classified $2.9 million of its assets
as substandard, $8,000 as loss and none as doubtful. Not all of Guaranty's
assets that have been classified are included in the table of non-performing
assets set forth below. Several of these loans are classified because of
previous credit problems but are performing.
Unless well secured and in the process of collection, Guaranty places
loans on a nonaccrual status after being delinquent greater than 90 days, or
earlier in situations in which the loans have developed inherent problems that
indicate payment of principal and interest may not be made in full. Whenever the
accrual of interest is stopped, previously accrued but uncollected interest
income is reversed. Thereafter, interest is recognized only as cash is received.
The loan is reinstated to an accrual basis after it has been brought current as
to principal and interest under the contractual terms of the loan.
The following table reflects the composition of nonperforming assets at
the dates indicated.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31 December 31 June 30
----------- ----------- --------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans........................... $1,436 $1,670 $1,458 $1,556 $ 887 $934
Restructured loans......................... - 11 11 12 415 1,143
- -- -- -- --- -----
Total non-performing loans............. 1,436 1,681 1,469 1,568 1,302 2,077
----- ----- ----- ----- ----- -----
Foreclosed assets.......................... 65 51 41 122 - -
-- -- -- --- - -
Total non-performing assets............ 1,501 1,732 1,510 1,690 1,302 2,077
----- ----- ----- ----- ----- -----
Loans past due 90 or more days and
accruing interest........................ $189 $ - $19 $1 $288 $190
Non-performing loans to total loans
at period end............................ 1.42% 1.98% 1.67% 2.06% 1.65% 2.91%
Non-performing assets to period end
total loans and foreclosed assets........ 1.49% 2.04% 1.72% 2.21% 1.65% 2.91%
</TABLE>
Delinquent and Problem Loans
When a borrower fails to make a required payment on a loan, Guaranty
attempts to cure the delinquency by contacting the borrower. A notice is mailed
to the borrower after a payment is 17 days past due and again when the loan is
30 days past due. For most loans, if the delinquency is not cured within 60
days, Guaranty issues a notice of intent to foreclose on the property and if the
delinquency is not cured within 90 days, Guaranty may institute foreclosure
action. If foreclosed on, real property is sold at a public sale and may be
purchased by Guaranty. In most cases, deficiencies are cured promptly.
-25-
<PAGE>
The following table sets forth information concerning delinquent
mortgage and other loans at December 31, 1997. The amounts presented represent
the total remaining principal balances of the related loans, rather that the
actual payment amounts which are overdue.
Delinquent Loans
<TABLE>
<CAPTION>
Residential Commercial Construction
Real Estate Real Estate and Land Consumer
----------------- ----------------- ----------------- -----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
31-59 days........... 16 $1,260 - $- - $- 6 $ 65
60-89 days........... 3 515 - - - - 1 68
90 days and over..... 11 862 - - - - 1 140
-- --- - - - - - ---
Total delinquent loans 30 $2,637 - $- - $- 8 $273
== ====== = == = == = ====
</TABLE>
Allowance for Losses on Loans and Real Estate
Guaranty provides valuation allowances for anticipated losses on loans
and real estate when its management determines that a significant decline in the
value of the collateral has occurred, if the value of the collateral is less
than the amount of the unpaid principal of the related loan plus estimated costs
of acquisition and sale. In addition, Guaranty also provides reserves based on
the dollar amount and type of collateral securing its loans, in order to protect
against unanticipated losses. 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. Although management believes that it uses the best
information available to make such determinations, future adjustments to
reserves may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations.
-26-
<PAGE>
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated.
Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, December 31, Year Ended June 30,
------------ ------------ -----------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period......... $870 $788 $747 $754 $746 $689
Provision (credit) charged to
operations.......................... 122 92 57 (10) 74 37
Charge-offs:
Real estate.......................... 57 10 39 - 66 -
Consumer............................. - - - 1 - -
Recoveries:
Real Estate.......................... - - 19 - - -
Consumer............................. - - 4 4 - 20
Net Charge-offs........................ 57 10 16 (3) 66 (20)
-- -- -- --- -- ----
Balance, end of period................. $935 $870 $788 $747 $754 $746
==== ==== ==== ==== ==== ====
Allowance for loan losses to period
end total loans...................... 0.93% 1.06% 0.93% 0.98% 0.96% 1.05%
Allowance for loan losses to
nonaccrual loans.................... 67.20% 52.10% 54.05% 48.01% 85.01% 79.87%
Net charge-offs to average loans....... 0.06% 0.01% 0.02% 0.00% 0.09% (0.03%)
</TABLE>
Provision for Loan Losses
For the year ended December 31, 1997, the provision for loan losses was
$122,000, compared to $138,000 for calendar year 1996 and $92,000 for the six
month period ended December 31, 1996. The provision for loan losses increased to
$57,000 for the fiscal year ended June 30, 1996 from a credit of $9,000 for the
fiscal year ended June 30, 1995. Guaranty monitors its loan loss allowance
monthly and makes provisions as necessary. Management believes that the level of
Guaranty's loan loss reserve is adequate. The provision decreased to a credit of
$9,000 for the fiscal year ended June 30, 1995 from $74,000 for the fiscal year
ended June 30, 1994.
-27-
<PAGE>
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.
Because all of these factors are subject to change, the breakdown is not
necessarily predictive of future loan losses in the indicated categories.
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31 December 31 Year Ended June 30
1997 1996 1996
----------------------- ----------------------- -----------------------
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Total Total
Gross Gross Gross
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate.......... $ 523 57.40% $ 471 73.74% $ 327 75.15%
Commercial real estate........... 166 8.12 179 9.38 194 8.72
Construction..................... 52 17.10 38 8.68 70 10.01
Consumer and other loans......... 43 17.38 13 8.20 40 6.12
Unallocated...................... 115 - 8 - - -
--- - - - - -
Total general allowance........ 899 100.00% 709 100.00% 631 100.00%
======= ======= =======
Total specific allowance....... 36 161 157
-- --- ---
Total allowance............. $935 $870 $788
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- ------------------------
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Total Total
Gross Gross Gross
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate............. $311 77.58% $300 83.05% $185 81.58%
Commercial real estate.............. 220 5.62 253 5.24 270 5.66
Construction........................ 86 11.09 62 7.17 108 6.68
Consumer and other loans............ 32 5.71 30 4.54 15 6.08
-- ---- -- ---- -- ----
Total general allowance........... 649 100.00% 645 100.00% 578 100.00%
======= ======= =======
Total specific allowance.......... 98 109 168
-- --- ---
Total allowance............... $747 $754 $746
==== ==== ====
</TABLE>
Non-Interest Income
Guaranty's non-interest income consists primarily of loan fees and
servicing income, net gains on the sale of loans and securities, and fees and
service charges on deposit accounts. For the year ended December 31, 1997,
non-interest income totaled $1.9 million. Loan fees and servicing income were
$456,000, gains on sales of loans and securities were $907,000, service charges
on checking accounts totaled $166,000, gain on the sale of purchased servicing
was $160,000, and other income was $178,000. Management concluded that the costs
associated with managing the purchased servicing portfolio, which was secured by
property located outside of Guaranty's market area, exceeded the benefits
derived from the monthly servicing income. After this sale, primarily all of
Guaranty's servicing portfolio is secured by property located in Guaranty's
market area. Guaranty intends to continue to service all residential mortgage
loans sold in the secondary market that it originates. This is consistent with
its focus on a
-28-
<PAGE>
customer service approach to banking. Management does not anticipate purchasing
any material servicing rights. Loan and securities sales were a result of the
continued strategy of selling all newly originated fixed rate mortgage loans in
the secondary market and a restructuring of the balance sheet to reduce interest
rate risk relating to fixed rate mortgages and to provide liquidity to fund
anticipated loan closings during the first half of 1998.
For the six months ended December 31, 1996, non-interest income was
$462,000. Loan fees and servicing income, gains on the sale of loans and
securities, and service charges on checking comprised 57.8%, 15.8% and 11.3%,
respectively, of total non-interest income for the six months ending December
31, 1997.
In the years ended June 30, 1996, 1995 and 1994, loan fees and
servicing income accounted for 55.1%, 74.8% and 317.3%, respectively, of
non-interest income. Gains on sales of loans and securities were 21.9% and 0.0%
of non-interest income in fiscal 1996 and fiscal 1995, respectively. In the year
ended June 30, 1994, Guaranty had a loss of $491,000 on sales of loans and
securities. Service charges on checking accounts were $90,000 in fiscal 1996 and
$78,000 in each of the years ended June 30, 1995 and 1994.
Non-interest income in fiscal year ended June 30, 1996 was $1.1
million, an increase of $235,000 or 27.0% over non-interest income of $872,000
in fiscal year 1995. Non-interest income for fiscal year ended June 30, 1995,
increased by $745,000 or 591.0% over fiscal year 1994.
Mortgage loan servicing is a significant business for Guaranty, and a
by-product of its residential lending business. Guaranty derives fees from
mortgage servicing rights ("MSRs"). Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, holding escrow
funds for payment of taxes and insurance, making required inspections of the
mortgaged premises, contacting delinquent mortgagors, supervising foreclosures
in the event of unremitted defaults and generally administering the loans for
the investors to whom they have been sold. MSRs are assets that represent the
rights to service mortgage loans and in turn to receive the service fee income
associated with the mortgage loans. MSRs are amortized against income over the
estimated average lives of the loans serviced. If loans are prepaid at rates
faster than those originally assumed, adjustments may be required to the
unamortized balance, which could result in charges to current earnings.
Conversely, slower prepayment rates could result in increases in mortgage loan
servicing income in future periods. At December 31, 1997, MSRs totaled $904,000.
The weighted average note rate of mortgage loans serviced for others was 7.94%
and 7.77% at December 31, 1997 and 1996, respectively. See "Financial
Statements-Summary of Accounting Policies." At December 31, 1997 and 1996 loans
serviced for others totaled $123.8 million and $172.8 million, respectively.
Guaranty serviced loans for others aggregating approximately $168.4 million at
June 30, 1996 and $169.6 million at June 30, 1995.
Guaranty sells fixed rate residential production on an individual loan
basis and securitizes loans through the creation of Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
Government National Mortgage Association ("GNMA") mortgage-backed securities.
During the year ended December 31, 1997 and the six month period ended
December 31, 1996, Guaranty sold $24.4 million and $11.8, respectively, of loans
and securitized loans. Guaranty sold $7.3 million of fixed rate mortgage loans
and securitized loans during fiscal year 1996, compared to $17.2 million in
fiscal year 1995. The sale of fixed rate product creates liquidity and an income
stream from servicing fees on loans sold.
-29-
<PAGE>
Guaranty also trades treasury securities in an effort to take advantage
of short term movements in market interest rates. It is Guaranty's policy not to
hold trading securities with a cost in excess of $5 million at one time. Trading
securities are marked to market monthly. Sale of trading account securities
totaled $89.5 million, $35.3 million, $107.3 million and $43.1 million during
the year ended December 31, 1997, the six month period ended December 31, 1996
and the years ended June 30, 1996 and 1995, respectively. Guaranty experienced a
gain of $5,000 and $24,000 on such sales in the year ended December 31, 1997 and
fiscal 1995, respectively, and net losses of $255,000 and $64,000 during the six
month period ended December 31, 1996 and the year ended June 30, 1996,
respectively.
Generally accepted accounting principles ("GAAP") allow the inclusion
of loan fees in current income to an amount limited to 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. Guaranty had
deferred fees, net of direct underwriting costs, of $283,000, $290,000 and
$314,000 at December 31, 1997 and 1996, and June 30, 1996, respectively.
Non-Interest Expenses
For the year ended December 31, 1997, non-interest expenses were $3.9
million, compared to $3.0 million for calendar year 1996. The $860,000 increase
was due primarily to increased costs associated with the expanded branch network
and costs associated with conversion to a state chartered bank effective June
30, 1997. For the six-month period ended December 31, 1996, non-interest
expenses were $1.7 million compared to $1.2 million for the same period in 1995.
This increase was primarily due to overall growth of Guaranty.
Non-interest expenses were $2.5 million for the year ended June 30,
1996, compared to $2.5 million for fiscal year 1995, a 1.6% decrease, that
resulted primarily from a reduction in personnel expense after loan production
offices in Richmond, Virginia, and Waynesboro, Virginia, were closed.
Income Taxes
Income tax expense for the year ended December 31, 1997 and the fiscal
years ended June 30, 1996 and 1995 was $486,000, $344,000 and $100,000,
respectively. The increases are a direct result of increased earnings. For the
six month period ended December 31, 1996, Guaranty reported an income tax
benefit of $4,000 due to a loss before taxes of $10,000.
Sources of Funds
Deposits
Deposits have traditionally been the principal source of Guaranty's
funds for use in lending and for other general business purposes. In addition to
deposits, Guaranty derives funds from loan repayments, cash flows generated from
operations, which includes interest credited to deposit accounts, and from
repurchase agreements entered into with commercial banks and FHLB of Atlanta
advances. Contractual loan payments are a relatively stable source of funds,
while deposit inflows and outflows and the related cost of such funds have
varied widely. Borrowings may be used to compensate for reductions in deposits
or deposit-inflows at less than projected levels and have been used on a
longer-term basis to support expanded lending activities.
-30-
<PAGE>
Guaranty attracts both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. Guaranty
offers statement savings accounts, various checking accounts, various money
market accounts, fixed-rate certificates with varying maturities, individual
retirement accounts and is expanding to provide products and services for small
businesses. Guaranty does not solicit brokered deposits. Guaranty's principal
use of deposits is to originate loans and fund investment securities.
At December 31, 1997, deposits were $112.9 million, up 38.8% from $81.4
million at December 31, 1996. Deposits increased 42.3% to $74.7 million at June
30, 1996 from $52.5 million at June 30, 1995. In order to reduce the overall
cost of funds and reduce Guaranty's reliance on high cost time deposits and
short term borrowings as a funding source, management plans extensive marketing
efforts towards attracting lower cost transaction accounts. However, there is no
assurance that these efforts will be successful, or if successful, will reduce
Guaranty's reliance on time deposits and short term borrowings.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by Guaranty at the dates indicated.
Deposits
<TABLE>
<CAPTION>
December 31 December 31 June 30 June 30
1997 1996 1996 1995
-------------- -------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statement savings accounts............ $6,434 $4,738 $4,654 $4,688
Now accounts.......................... 12,037 6,929 6,440 5,818
Money market accounts................. 4,000 3,410 3,213 4,131
30- to 180-day certificates........... 1,326 250 227 324
Nine-month certificate................ 1,638 - - -
One- to five-year fixed-rate
certificates........................ 87,467 66,013 52,698 29,987
Eighteen-month prime rate certificate. 45 61 7,455 7,513
------ ------ ------ ------
Total............................... $112,947 $81,401 $74,687 $52,461
======== ======= ======= =======
</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.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31 December 31 Years Ended June 30
----------- ----------- -------------------
1997 1996 1996 1995
---- ---- ---- ----
Average Average Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
deposits $1,658 0.00% $1,324 0.00% $1,066 0.00% $787 0.00%
Interest bearing demand
deposits 2.59% 2.76% 2.74% 2.83%
11,110 8,765 8,927 9,895
Savings deposits 3.36% 3.41% 3.35% 3.45%
5,654 4,870 4,541 5,596
Time deposits 80,779 5.51% 63,346 5.54% 48,460 5.64% 38,938 5.05%
------- ----- ------- ----- ------- ----- ------- -----
Total deposits $99,201 4.97% $78,305 5.00% $62,994 5.06% $55,216 4.81%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
The variety of deposit accounts offered by Guaranty has allowed it to
be competitive in obtaining funds and has allowed it to respond with flexibility
to, although not eliminate, the threat of disintermediation (the flow of funds
away from depository institutions into direct investment vehicles such as
government and corporate securities). The ability of Guaranty to attract and
maintain deposits, and its cost of funds, has been, and will continue to be,
significantly affected by money market conditions.
-31-
<PAGE>
The following table sets forth the deposit flows of Guaranty during the
periods indicated.
Deposit Flows
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31 December 31 Year Ended June 30
----------------- ------------------ -------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Opening balance................. $81,401 $74,687 $52,461 $53,467
Net deposits (withdrawals)...... 26,624 4,754 19,093 (3,446)
Interest credited............... 4,922 1,960 3,133 2,440
----- ----- ----- -----
Ending balance.................. $112,947 $81,401 $74,687 $52,461
======== ======= ======= =======
Net increase (decrease)......... $31,546 $6,714 $22,226 ($1,006)
Percent increase (decrease)..... 38.75% 8.99% 42.37% (1.88%)
</TABLE>
The following table indicates the amount of Guaranty's certificates of
deposits by time remaining until maturity as of December 31, 1997.
Maturities of CDs
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------------------
3 Months Over 3 to Over 6 to Over
or less 6 months 12 months 12 months Total
------- -------- --------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000................................ $16,452 $19,070 $31,879 $11,967 $79,368
Certificates of deposit of $100,000 or
more.................................... 5,715 649 3,895 849 11,108
------ ------ ------- ------ -------
Total of certificates of deposits....... $22,167 $19,719 $35,774 $12,816 $90,476
======= ======= ======= ======= =======
</TABLE>
Borrowings
As a member of the FHLB of Atlanta, Guaranty is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which may
be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe
the acceptable uses to which these advances may be put, as well as on the size
of the advances and repayment provisions. The advances are collateralized by
Guaranty's investment in Federal Home Loan Bank stock and certain mortgage
loans. See Note 9 of the Notes to Consolidated Financial Statements for
information regarding the maturities and rate structure of Guaranty's FHLB
advances. At December 31, 1997, no advances were outstanding to the FHLB.
Guaranty's borrowings also include securities sold under agreements to
repurchase, with mortgage-backed securities or Treasury securities pledged as
collateral. The proceeds are used by Guaranty for general corporate purposes. At
December 31, 1997, Guaranty had $3.0 million outstanding in securities sold
under agreement to repurchase.
Guaranty uses 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.
-32-
<PAGE>
The following table sets forth the maximum month-end balances, average
balances and weighted average rates, of FHLB advances and securities sold under
agreements to repurchase for the periods indicated.
Borrowings
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31 December 31 Year Ended June 30
----------- ----------- ------------------
1997 1996 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Maximum Balance:
FHLB advances............... $17,500 $22,500 $28,050 $28,250
Securities sold under
agreements to repurchase.. 5,867 9,957 9,930 4,230
</TABLE>
<TABLE>
<CAPTION>
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................. $10,869 6.23% $19,550 5.79% $22,829 6.21% $26,208 6.67%
Securities sold under
agreements to repurchase.... 3,200 3.97% 6,321 5.66% 3,112 5.65% 783 7.98%
</TABLE>
The following table sets forth the balances of Guaranty's short-term
borrowings at the dates indicated.
Short-Term Borrowings
<TABLE>
<CAPTION>
December 31 December 31 June 30
--------------- ---------------- ------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLB advances..................................... $0 $7,500 $12,500 $19,550
Securities sold under agreements to repurchase.... 2,989 6,681 6,104 0
----- ----- ----- -
Total short-term borrowings................... $2,989 $14,181 $18,604 $19,550
====== ======= ======= =======
Weighted average interest rate of
short-term FHLB advances........................ 0.00% 6.35% 6.02% 4.52%
Weighted average interest rate of
securities sold under agreements to repurchase.. 6.29% 6.50% 5.65% 0.00%
</TABLE>
See notes 6, 7 and 8 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial
obligations either through the sale of existing assets or the acquisition of
additional funds through asset and liability management. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
provided. As a result of Guaranty's management of liquid assets and the ability
to generate liquidity through increasing deposits, Management believes that
Guaranty maintains overall liquidity that is sufficient to satisfy its
depositors' requirements and meet its customers' credit needs.
-33-
<PAGE>
Guaranty's primary sources of funds are deposits, borrowings, and
amortization, prepayments and maturities of outstanding loans and investments
and loan sales. While scheduled payments from the amortization of loans and
securities are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition. Excess funds are invested in overnight deposits to
fund cash requirements experienced in the normal course of business. Guaranty
has been able to generate sufficient cash through its deposits as well as
borrowings.
The following information should be read in conjunction with the
statements of cash flows, which appear on pages F-8 through F-10 of Guaranty's
consolidated financial statements.
Cash and cash equivalents were approximately $6.0 million at December
31, 1997 and 1996. The $16.0 million of net cash provided by operating
activities was primarily a result of $898,000 of net income, proceeds from loan
sales of $24.8 million, and proceeds from the sale of securities of $114.5
million. In addition, financing activities provided $14.3 million primarily as a
result of a net increase in deposits of $31.5 million, and net proceeds of $4.5
million from a secondary stock offering that closed in January 1997. Total cash
provided by operating and financing activities of $30.3 million was absorbed by
investing activities consisting primarily of a net increase in loans of $18.5
million, expenditures of $1.4 million for property and equipment (primarily for
the new Harrisonburg branch that opened in May 1997), and purchases of available
for sale securities totaling $33.3 million (offset by sales of available for
sale securities of $21.9 million).
For the year ended June 30, 1995, cash and cash equivalents increased
$4.5 million to $5.8 million, as the net cash provided by investing and
financing activities exceeded the cash used in operating activities. The $3.7
million of net funds provided by investing activities resulted mainly from a
$2.5 million decrease in loans and $1.3 million in principal payment on held to
maturity securities. The $1.2 million of net cash provided by financing
activities resulted primarily from proceeds from the issuance of common stock of
$2.1 million.
Guaranty uses its sources of funds primarily to meet operating needs,
to pay deposit withdrawals and fund loan commitments. At December 31, 1997 and
1996, total approved loan commitments were $3.8 million and $3.0 million,
respectively. In addition, at December 31, 1997 and 1996, commitments under
unused lines of credit were $14.3 million and $6.4 million, respectively. At
June 30, 1996, the total approved loan commitments outstanding amounted to $3.9
million. At the same date, commitments under unused lines of credit amounted to
$5.4 million. Certificates of deposits scheduled to mature in one year or less
at December 31, 1997 and 1996, and June 30, 1996 totaled $77.7 million, $57.3
million and $51.2 million, respectively. Management believes that a significant
portion of maturing deposits will remain with Guaranty.
Management intends to fund anticipated loan closings and operating
needs during 1998 through cash on hand, proceeds from the sale of an offering,
proceeds from the sale of loans and securities, cash generated from operations
and anticipated increases in deposits. Through February 28, 1998, net deposits
were $121.4 million, an increase of $8.5 million in comparison to total deposits
at December 31, 1997 of $112.9 million. This increase consisted primarily of
increases in time deposits (primarily with a one-year maturity at origination)
of $3.4 million and demand deposits of $2.2 million. Current and anticipated
marketing programs will be primarily targeted at the attraction of lower cost
transaction accounts. Concurrent with the strategies employed to attract these
accounts, management plans to gradually reduce the rate paid on time deposits in
comparison to the competition. However, the pricing of time deposits will be
balanced against upcoming maturities to ensure that liquidity is not adversely
impacted by a large run off of time deposits.
-34-
<PAGE>
Proceeds from the sale of securitized loans and fixed rate loans
originated for sale in the secondary market were $11.6 million through February
28, 1998. In addition, at February 28, 1998, loans available for sale in the
secondary market were $10.6 million (cost approximates market at this date).
Although management has no plans to sell adjustable rate mortgages (ARMs),
approximately $24.0 million of conforming ARMs are currently carried in the loan
portfolio and could be sold if needed to meet liquidity needs of Guaranty. The
need to sell portfolio loans to meet liquidity requirements is mitigated by the
Bank's $20.0 million line of credit at the FHLB. As of March 31, 1998, no
outstanding balances existed under this line nor was this line used during the
period January 1, 1998 through March 31, 1998 to fund short term cash needs of
Guaranty.
No assurances can be made that management's plans to provide for
Guaranty's liquidity needs will be successful, or if successful, will generate
the cash needed to fund operations or reduce Guaranty's historical reliance on
higher cost time deposits and FHLB advances as the primary funding source.
Capital represents funds, earned or obtained, over which financial
institutions can exercise greater control in comparison with deposits and
borrowed funds. The adequacy of Guaranty's capital is reviewed by management on
an ongoing basis with reference to size, composition, and quality of Guaranty's
resources and consistent with regulatory requirements and industry standards.
Management seeks to maintain a capital structure that will support anticipated
asset growth and absorb any potential losses.
Guaranty and the Bank are subject to Federal Reserve regulations,
including the BHCA. At December 31, 1997, Guaranty exceeded all such regulatory
capital requirements as shown in the following table.
-35-
<PAGE>
Capital
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31 December 31 Year Ended June 30
--------------- ----------------- ---------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 Capital:
Common stock............................... $1,877 $1,155 $1,149 $1,144
Capital surplus............................ 5,725 1,976 1,981 1,971
Retained earnings.......................... 4,208 3,445 3,498 2,900
Unrealized Loss on available for sale
securities............................... - - - -
------ ----- ----- -----
Total Tier 1 Capital..................... 11,810 6,576 6,628 6,015
------ ----- ----- -----
Tier 2 Capital:
Allowance for loan losses (1).............. 935 706 631 565
Allowable long-term debt................... - - - -
------ ----- ----- -----
Total Tier 2 Capital..................... 935 706 631 565
------ ----- ----- -----
Total Risk-Based Capital............... $12,745 $7,282 $7,259 $6,580
======= ====== ====== ======
Risk-weighted assets......................... $82,666 $56,500 $54,650 $45,200
Capital Ratios:
Tier 1 Risk-Based Capital ratio............ 14.29% 11.64% 12.13% 13.31%
Total Risk-Based Capital ratio............. 15.42% 12.89% 13.28% 14.56%
Tier 1 Capital to average adjusted total
assets.................................. 9.57% 5.81% 6.59% 6.52%
</TABLE>
- ------------------
(1) The allowance for loan losses included in Tier 1 Capital calculation is
limited by regulation to 1.25% of Risk-weighted assets.
Impact of Inflation and Changing Prices and Seasonality
The financial statements in this document have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation.
Accounting Rules
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a
-36-
<PAGE>
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of Guaranty.
Subsidiary Activities
The Bank has two wholly owned subsidiaries, GMSC, Inc. ("GMSC") and
Guaranty Investments Corporation ("GICO"). GMSC is a financing subsidiary
through which Guaranty formed a Real Estate Mortgage Investment Conduit
("REMIC"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Guaranty sells non-deposit investment products through
GICO. GICO had a net loss of $27,000 for the year ended December 31, 1997 and
net income of $3,000 and $1,000 for the six month period ended December 31, 1996
and the year ended June 30, 1996, respectively.
In 1987, Guaranty formed GMSC and entered into a REMIC in order to
create liquidity. Guaranty utilized the REMIC to pool $19.9 million of fixed
rate mortgages into mortgage backed securities, which were used as collateral
for bonds sold to private investors. The bonds bore a coupon of 8.0% and were
sold at a discount and costs of issuance of approximately $3.3 million. The bond
discount and issuance costs are amortized against income as mortgage underlying
the bonds repay. In the fiscal years ended June 30, 1996, 1995, and 1994, with
rapidly falling interest rates, Guaranty experienced significant repayment of
mortgages, resulting in an amortization expense of $160,000, $124,000, and
$968,000, respectively. For the year ended December 31, 1997 and the six month
period ended December 31, 1996, amortization expense was $64,000 and $39,000,
respectively. The amortization of the REMIC expenses is treated as interest
expense.
Year 2000 Project
The Year 2000 presents problems for businesses that are dependent on
computer hardware and software to perform date dependent calculations and logic
comparisons. A great deal of software and microchip technology was developed
utilizing two digit years rather than four digit years (example: 97 instead of
1997). Technology utilizing two digit years most likely will not be able to
distinguish the year 2000 from 1900, and therefore may shut down or perform
miscalculations and comparisons as much as 100 years off.
Management is fully aware this presents a potential business disruption
and has begun a program of due diligence in addressing the impact of the Year
2000 on Guaranty. Presently, Guaranty is still in the discovery stage of
identifying all areas and processes rendering exposure to the Year 2000 problem.
However, Guaranty, in conjunction with its outside service bureau, has developed
a plan to address Year 2000 exposure surrounding Guaranty's computer and data
processing systems. Since early 1997,
-37-
<PAGE>
Guaranty has been updating its systems hardware to be Year 2000 compliant. The
next step involves testing system software, which is scheduled to begin in mid
to late 1998, and it is estimated that the process will cost approximately
$25,000 to complete. In conjunction with this testing, Guaranty plans to test
its other systems that are not related to the service bureau. Management
anticipates Guaranty will be Year 2000 compliant, thus satisfying all regulatory
requirements.
Item 7. Financial Statements.
The following financial statements are filed as a part of this report
following Item 13 below:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997 and June 30, 1996 and 1995 and the six months ended December
31, 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997 and June 30, 1996 and 1995 and the six months
ended December 31, 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and June 30, 1996 and 1995 and the six months ended December
31, 1996
Summary of Accounting Policies
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last two fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Information set forth under the headings "Election of Directors,"
"Executive Officers Who Are Not Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in Guaranty's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders, which Proxy Statement will be filed with
the Securities and Exchange Commission within 120 days of the end of Guaranty's
1997 fiscal year (the "1998 Proxy Statement"), is hereby incorporated by
reference.
-38-
<PAGE>
Item 10. Executive Compensation
Information set forth under the headings "Executive Compensation --
Summary of Cash and Certain Other Compensation," "-- Stock Option Grants," "--
Option Exercises and Holdings," "-- Directors' Fees," and "-- Employment
Agreements" in the 1998 Proxy Statement is hereby incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information set forth under the headings "Security Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" in the 1998
Proxy Statement is incorporated by reference.
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Transactions with Management"
in the 1998 Proxy Statement is hereby incorporated by reference.
Item 13. Exhibits and Reports on Form 8-K
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of
Guaranty Financial Corporation. (restated in electronic
format).
3.2 Bylaws of Guaranty Financial Corporation.
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, 1997.
-39-
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Financial Statements
For the Year Ended December 31, 1997,
the Six Months Ended December 31, 1996 and
the Years Ended June 30, 1996 and 1995
<PAGE>
GUARANTY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Balance Sheets as of December 31, 1997 and 1996 F-4
Statements of Operations for the years ended December 31, 1997 and
June 30, 1996 and 1995 and the six months ended December 31, 1996 F-5 - F-6
Statements of Stockholders' Equity for the years ended December 31, 1997
and June 30, 1996 and 1995 and the six months ended December 31, 1996. F-7
Statements of Cash Flows for the years ended December 31, 1997 and June 30, 1996
and 1995 and the six months ended December 31, 1996 F-8 - F-10
Summary of Accounting Policies F-11 - F-17
Notes to Consolidated Financial Statements F-18 - F-39
</TABLE>
F-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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997 and the six months ended December 31, 1996, and
for each of the two 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, 1997 and 1996,
and the results of their operations and their cash flows for the year ended
December 31, 1997, the six months ended December 31, 1996 and for each of the
two 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 1995, respectively.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Richmond, Virginia
January 30, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,916,504 $ 6,076,315
Investment securities (Notes 1 and 7)
Held-to-maturity 2,845,560 3,156,857
Available for sale 11,523,908 -
Trading 1,032,188 16,736,295
Investment in Federal Home Loan Bank stock, at
cost (Note 9) 860,100 1,360,200
Other investments 79,000 -
Loans receivable, net (Notes 2 and 11) 99,674,549 81,270,173
Accrued interest receivable 844,212 671,211
Real estate owned 64,985 50,964
Office properties and equipment, net (Note 3) 5,999,778 4,946,153
Other assets (Note 2) 1,867,693 1,751,757
- --------------------------------------------------------------------------------------------------------
$130,708,477 $116,019,925
========================================================================================================
</TABLE>
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities
Deposits (Note 4) $112,947,012 $81,401,071
Bonds payable (Notes 1 and 7) 2,360,083 2,705,813
Advances from Federal Home Loan Bank (Note 9) - 17,500,000
Securities sold under agreement to repurchase (Notes 1 and 8) 2,989,000 6,681,000
Accrued interest payable 58,404 60,989
Income taxes payable (Note 10) 181,100 -
Prepayments by borrowers for taxes and insurance 80,824 105,901
Other liabilities 231,900 989,402
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 118,848,323 109,444,176
- ------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 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, 1,501,383, and 924,008 shares issued and
outstanding 1,876,729 1,155,010
Additional paid-in capital 5,724,954 1,975,695
Unrealized gain on available for sale securities (Note 1) 50,971 -
Retained earnings - substantially restricted 4,207,500 3,445,044
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,860,154 6,575,749
- ------------------------------------------------------------------------------------------------------------------------
$130,708,477 $116,019,925
========================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $7,584,732 $3,454,559 $6,441,903 $5,897,002
Mortgage-backed securities 1,045,831 564,079 652,639 495,620
Investment securities 889,245 254,833 498,686 383,555
Trading account assets - 2,911 23,390 12,176
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 9,519,808 4,276,382 7,616,618 6,788,353
- ------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 4,922,258 1,960,029 3,132,660 2,439,585
Borrowings (Notes 7, 8 and 9) 1,116,152 979,936 2,059,402 2,223,267
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,038,410 2,939,965 5,192,062 4,662,852
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 3,481,398 1,336,417 2,424,556 2,125,501
Provision (credit) for loan losses
(Note 2) 122,320 91,850 56,665 (9,443)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,359,078 1,244,567 2,367,891 2,134,944
- ------------------------------------------------------------------------------------------------------------------------
Other income
Loan fees and servicing income 456,515 266,505 610,020 651,852
Net gain on sale of loans
and securities 1,067,348 72,547 242,866 206
Service charges on checking 166,072 52,058 90,156 77,542
Other 177,837 70,977 164,090 142,034
- ------------------------------------------------------------------------------------------------------------------------
Total other income 1,867,772 462,087 1,107,132 871,634
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
F-5
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
(continued)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other expenses
Personnel (Notes 14 and 15) $2,010,794 $ 748,083 $1,013,674 $1,194,410
Occupancy (Note 12) 523,502 131,593 302,139 310,114
Data processing (Note 12) 422,851 165,548 257,038 210,110
BIF/SAIF premium disparity
assessment - 346,851 - -
Deposit insurance premiums 87,298 100,908 190,263 195,818
Other 798,650 223,553 724,321 619,373
- -----------------------------------------------------------------------------------------------------------------------
Total other expenses 3,843,095 1,716,536 2,487,435 2,529,825
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 1,383,755 (9,882) 987,588 476,753
Provision for income taxes (Note 10) 486,040 (3,500) 344,338 100,508
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 897,715 $ (6,382) $ 643,250 $ 376,245
=======================================================================================================================
Basic and Diluted Earnings Per Share $ .61 $ (.01) $ .70 $ .70
=======================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Additional Gain (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, 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
Issuance of common stock (Note 13) 718,750 3,752,228 - - 4,470,978
Cash dividend - - - (135,259) (135,259)
Unrealized gain on available for
sale securities (Note 1) - - 50,971 - 50,971
Stock options exercised (Note 14) 5,000 14,520 - - 19,520
Repurchase of common stock (2,031) (17,489) - - (19,520)
Net income - - - 897,715 897,715
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $1,876,729 $5,724,954 $ 50,971 $4,207,500 $11,860,154
====================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 897,715 $ (6,382) $ 643,250 $ 376,245
Adjustments to reconcile net
income (loss) to net cash
provided (absorbed) by
operating activities
Provision (credit) for loan losses 122,320 91,850 56,665 (9,443)
Depreciation and amortization 354,005 76,160 95,511 93,775
Amortization of deferred loan fees (89,564) (63,841) (136,086) (123,528)
Net amortization of premiums
and accretion of discounts 64,154 84,606 199,060 54,822
Loss (gain) on sale of loans (518,736) (216,537) (204,901) 60,367
Originations of loans held
for sale (24,280,323) (11,773,561) (7,203,819) (11,765,459)
Proceeds from sale of loans 24,799,059 11,822,300 7,160,241 11,825,826
Gain on sale of
mortgage-backed securities (236,761) (111,039) - (36,418)
Originations of loans securitized - - - (5,596,082)
Purchase of mortgage backed
securities (24,754,127) (23,980,081) - -
Proceeds from sale of
mortgage-backed securities 24,990,888 17,844,790 - 5,415,983
Gain on sale of securities
available for sale (147,433) - (101,685) -
Gain on disposal of office
properties and equipment - - (1,341) (1,806)
(Gain) loss on sale of trading
account securities (5,520) 255,030 63,720 (24,155)
Purchases of trading account
securities (73,838,893) (36,330,973) (107,346,227) (43,113,114)
Sales of trading account
securities 89,548,520 35,305,544 107,282,507 43,137,269
</TABLE>
continued...
F-8
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities (cont'd)
Changes in
Accrued interest receivable $ (173,001) $ 40,631 $ (127,600) $ (27,424)
Other assets (115,936) (24,917) (442,298) (192,025)
Accrued interest payable (15,698) (38,308) 13,018 (21,951)
Income taxes 214,100 (3,000) - (87,000)
Prepayments by borrowers
for taxes and insurance (25,077) (39,829) (160,616) 181,671
Other liabilities (777,389) (1,141,898) 689,882 (592,864)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by operating activities 16,012,303 (8,209,455) 479,281 (445,311)
- -----------------------------------------------------------------------------------------------------------------------------------
Investing activities
Net (increase) decrease in
loans (18,451,153) 2,880,494 (8,486,970) 2,484,824
Principal repayments on held
to maturity securities 309,815 776,007 998,457 1,260,076
Purchase of securities
available for sale (33,334,183) - (28,399,062) -
Proceeds from sales of
securities available for sale 21,929,679 - 18,507,960 -
Sale of FHLB stock 500,100 - - 77,300
Proceeds from sale of office
properties and equipment - - 4,522 15,389
Purchases of office properties
and equipment (1,407,630) (1,515,180) (3,186,982) (152,668)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by investing activities (30,453,372) 2,141,321 (20,562,075) 3,684,921
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
F-9
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financing activities
Net increase (decrease)
in deposits $31,545,941 $ 6,713,625 $22,226,807 $(1,006,244)
Repayment of Federal Home
Loan Bank advances (21,000,000) (10,000,000) (31,510,000) (15,200,000)
Proceeds from Federal Home
Loan Bank advances 3,500,000 10,000,000 23,960,000 16,300,000
Principal payments on bonds
payable, including
unapplied payments (408,402) (531,459) (988,607) (968,556)
Increase (decrease) in
securities sold under
agreements to repurchase (3,692,000) 577,000 6,104,000 -
Proceeds from issuance of
common stock 4,470,978 - 15,300 2,108,215
Dividends paid (135,259) (46,200) (45,958) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided
by financing activities 14,281,258 6,712,966 19,761,542 1,233,415
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (159,811) 644,832 (321,252) 4,473,025
Cash and cash equivalents,
beginning of period 6,076,315 5,431,483 5,752,735 1,279,710
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 5,916,504 $ 6,076,315 $ 5,431,483 $ 5,752,735
===================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-10
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
Nature of Business Guaranty Financial Corporation (the "Parent Company")
and Regulatory is a bank holding company whose principal asset is its
Environment 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".
At June 30, 1997, the Bank was converted from a federal
savings association to a Virginia chartered Federal
Reserve member bank. As a result, the Corporation
changed their year end from June 30, to December 31.
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 financial institutions that
pose a serious threat to the Bank Insurance Fund
("BIF").
Pursuant to the Economic Growth and Paperwork Reduction
Act of 1996 (the "Act"), the FDIC imposed a special
assessment on Savings Association Insurance Fund
("SAIF") members to capitalize the SAIF to a designated
reserve level. Prior to the Bank's conversion to a
state chartered bank, it was a member of SAIF and
therefore, subject to the SAIF special assessment.
Based on the Bank's deposits as of March 31, 1995, the
date for measuring the special assessment, the Bank was
assessed approximately $347,000 during the six months
ended December 31, 1996.
Principles of The consolidated financial statements include the
Consolidation 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.
F-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 requires
that 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 Mortgage loans originated and intended for sale in the
Sale 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.
The Corporation had approximately $9,200,000 of loans
held for sale at December 31, 1997. The estimated
market value of these loans exceeded the carrying cost
at December 31, 1997. The Corporation had no loans held
for sale at December 31, 1996.
F-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, construction 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 The Corporation is able to generate funds by selling
and Participation loans and participations in loans to the Federal Home
in Loans 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.
F-13
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Sale of Loans The cost of mortgage servicing rights is amortized in
and Participation proportion to, and over the period of, estimated net
in Loans servicing revenues. Impairment of mortgage servicing
(continued) 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 The allowance for loan losses is maintained at a level
Possible Loan considered by management to be adequate to absorb
Losses 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.
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.
F-14
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Allowance for For impaired loans that are on nonaccrual status, cash
Possible Loan payments received are generally applied to reduce the
Losses outstanding principal balance. However, all or a
(continued) 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 Real estate acquired through foreclosure is initially
Owned 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, less selling costs.
Securities Sold The Corporation enters into sales of securities under
Under Agreements agreements to repurchase (reverse repurchase
to 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 Office properties and equipment are stated at cost less
and Equipment 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 Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years
to differences between the financial statement carrying
amounts and the tax bases of existing assets and
liabilities.
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 $926,000 at December 31, 1997.
F-15
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
Income Taxes Section 1616 of the Small Business Job Protection Act
(continued) 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 $354,000 ratably over
the next six years, beginning December 31, 1998, since
the Corporation met the residential loan requirement
exemption for the period ended December 31, 1997.
Basic and Diluted Basic earnings per share includes no dilution and is
Earnings Per Share 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 the earnings of an entity. The
weighted average number of shares of common stock
outstanding were 1,466,843 for the year ended December
31, 1997 and 920,681 for the six month period ended
December 31, 1996, and 917,668 and 541,768 for the
years ended June 30, 1996, and 1995, respectively.
Statements of Cash Cash and cash equivalents include Federal funds sold
Flows with original maturities of three months or less.
Interest paid was approximately $6,060,000 for the year
ended December 31, 1997 and $2,978,000 for the six
month period ended December 31, 1996, and $5,179,000
and $4,685,000 for the years ended June 30, 1996 and
1995, respectively. Cash paid for income taxes was
approximately $350,000 for the year ended December 31,
1997 and $277,000 for the six month period ended
December 31, 1996, and $180,000 and $42,000 for the
years ended June 30, 1996 and 1995, respectively. There
was no real estate acquired in settlement of loans for
the six month period ended December 31, 1996, and
approximately $64,000, $33,000 and $122,000 for the
years ended December 31, 1997 and June 30, 1996 and
1995, respectively.
F-16
<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, 1997 presentation.
New Accounting In February 1997, the Financial Accounting Standards
Pronouncements 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.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130"), which
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include
all changes in equity except those resulting from
investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current
accounting standards as components of comprehensive
income be reported in a financial statement that is
displayed with the same prominence as other financial
statements. SFAS 130 is effective for financial
statements for periods beginning after December 15,
1997 and requires comparative information for earlier
years to be restated. Management does not expect the
application of this pronouncement to have a material
effect on the financisal statements of the Corporation.
F-17
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
1. Investment A summary of the carrying value and estimated market
Securities value of investment securities is as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
Mortgage-backed
securities $ 2,745,560 $ 13,440 $ - $ 2,759,000
Other 100,000 - - 100,000
-----------------------------------------------------------------------------------
2,845,560 13,440 - 2,859,000
-----------------------------------------------------------------------------------
Available for sale
Bonds 11,415,793 66,590 8,444 11,473,939
US Government
obligations 49,836 133 - 49,969
-----------------------------------------------------------------------------------
11,465,629 66,723 8,444 11,523,908
-----------------------------------------------------------------------------------
Trading
US Government
obligations 1,030,625 1,563 - 1,032,188
-----------------------------------------------------------------------------------
1,030,625 1,563 - 1,032,188
-----------------------------------------------------------------------------------
$15,341,814 $81,726 $8,444 $15,415,096
===================================================================================
</TABLE>
F-18
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
1. Investment December 31, 1996
Securities -----------------------------------------------------------------------------------
(continued) Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
Mortgage-backed
securities $ 3,156,857 $ 192,143 $ - $ 3,349,000
-----------------------------------------------------------------------------------
3,156,857 192,143 - 3,349,000
-----------------------------------------------------------------------------------
Trading
Mortgage-backed
securities 16,936,529 - 200,234 16,736,295
-----------------------------------------------------------------------------------
16,936,529 - 200,234 16,736,295
-----------------------------------------------------------------------------------
$20,093,386 $ 192,143 $ 200,234 $20,085,295
===================================================================================
</TABLE>
The amortized cost and estimated market value of
investment securities at December 31, 1997 by maturity
is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
-----------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity
Mortgage-backed securities $ 2,745,560 $ 2,759,000
Other 100,000 100,000
-----------------------------------------------------------------------------------
2,845,560 2,859,000
-----------------------------------------------------------------------------------
Available for Sale
Due in one year or less 149,836 149,969
Due in one through five years 1,013,547 1,015,000
Due after five years 10,302,246 10,358,939
-----------------------------------------------------------------------------------
11,465,629 11,523,908
-----------------------------------------------------------------------------------
$14,311,189 $14,382,908
===================================================================================
</TABLE>
F-19
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
1. Investment Proceeds from sales of securities available for sale
Securities was approximately $21,930,000 for the year ended
(continued) December 31, 1997 and $18,508,000 for the year ended
June 30, 1996. The Corporation had no sales of
available for sale securities during the period ending
December 31, 1996. Gross gains of approximately
$147,400 and $101,700 were realized on those sales
during the years ended December 31, 1997 and June 30,
1996, respectively.
Proceeds from the sale of trading securities was
approximately $89,549,000 for the year ended December
31, 1997 and $35,306,000 for the six months ended
December 31, 1996, and $107,346,000,and $43,113,000 for
the years ended June 30, 1996, and 1995, respectively.
Gross gains of approximately $134,000 and gross losses
of approximately $128,000 were realized on those sales
for the year ended December 31, 1997. Gross gains of
approximately $9,900 and gross losses of approximately
$265,000 were realized on those sales for the six
months ended December 31, 1996. Gross gains of
approximately $209,000, and $142,600 and gross losses
of approximately $272,700, and $118,400 were realized
on those sales during the years ended June 30, 1996 and
1995, respectively.
Proceeds from the sale of mortgage backed securities
was approximately $24,991,000 for the year ended
December 31, 1997 and $17,845,000, and $5,416,000 and
for the six months ended December 31, 1996 and the year
ended June 30, 1995, respectively. Gross gains of
approximately $237,000 were realized on those sales for
the year ended December 31, 1997 and $111,000, and
$40,000 were realized on those sales for the six months
ended December 31, 1996 and the year ended June 30,
1995, respectively. Gross losses on the sales of
mortgage-backed securities were $0 for the year ended
December 31, 1997, $0 and $4,000 for the six months
ended December 31, 1996 and the years ended June 30,
1995, respectively. The Corporation had no sales of
mortgage backed securities during the year ended June
30, 1996.
Mortgage backed securities of approximately $2,838,000
and $3,157,000 at December 31, 1997 and 1996,
respectively, were pledged for bonds payable (Note 7).
At December 31, 1997 and 1996 investment securities
with a market value of approximately $3,141,000 and
$7,349,000, respectively were pledged as collateral
under repurchase agreements (Note 8).
F-20
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
2. Loans Receivable Loans receivable are summarized as follows:
December 31, 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Residential real estate $66,035,224 $67,015,734
Commercial real estate 16,641,057 8,485,966
Construction and land 18,263,062 5,219,979
Commercial non-real estate 503,002 -
Consumer 6,202,021 4,174,984
-----------------------------------------------------------------------
107,644,366 84,896,663
-----------------------------------------------------------------------
Less
Undisbursed loan funds 6,752,222 2,466,623
Deferred loan fees 282,618 290,016
Allowance for loan losses 934,977 869,851
-----------------------------------------------------------------------
7,969,817 3,626,490
-----------------------------------------------------------------------
$99,674,549 $81,270,173
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
The allowance for loan losses is summarized as follows:
<S> <C>
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 (16,005)
-----------------------------------------------------------------------
Balance at June 30, 1996 788,146
Provision charged to expense 91,850
Net charge-offs (10,145)
-----------------------------------------------------------------------
Balance at December 31, 1996 869,851
Provision charged to expense 122,320
Net charge-offs (57,194)
-----------------------------------------------------------------------
Balance at December 31, 1997 $934,977
=======================================================================
</TABLE>
F-21
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
2. Loans Receivable The Corporation serviced loans for others aggregating
(continued) approximately $123,834,000 and $172,771,000 at December
31, 1997 and 1996, respectively. Mortgage servicing
rights, included in other assets, was approximately
$904,000 and $974,000 at December 31, 1997 and 1996,
respectively. Mortgage servicing rights of
approximately $507,000 and $226,000 were capitalized
during the year ended December 31, 1997 and six months
ended December 31, 1996, respectively.
Gross gains and gross losses on the sale of loans
totalling approximately $520,000 and $1,000 were
realized during the year ended December 31, 1997,
$283,000 and $67,000 during the six months ended
December 31, 1996, and $205,000 and $0, and $51,000 and
$112,000 for the years ended June 30, 1996 and 1995
respectively. There were no loans classified as held
for sale at December 31, 1997 and 1996.
At December 31, 1997 and 1996, the Corporation had no
loans that were considered as impaired.
3. Office Properties Office properties and equipment are summarized as
and Equipment follows:
<TABLE>
<CAPTION>
December 31 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Land $1,910,922 $1,880,950
Building and leasehold improvements 3,084,362 2,407,983
Furniture and fixtures 823,234 599,367
Equipment 1,147,688 821,606
Automobiles 55,362 -
-----------------------------------------------------------------------
7,021,568 5,709,906
Less accumulated depreciation
and amortization 1,021,790 763,753
-----------------------------------------------------------------------
Net office properties and equipment $5,999,778 $4,946,153
=======================================================================
</TABLE>
F-22
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
4. Deposits Deposits are summarized as follows:
December 31 1997 1996
-------------------------------------------------------------------------------------
Amount Percent Amount Percent
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook, statement savings and
interest checking accounts
Non-interest bearing $ 2,771,114 2.4% $ 1,505,640 1.9%
1.00 to 2.00% 8,318,148 7.4 - -
2.01 to 3.00% 953,976 .9 5,400,365 6.6
3.01 to 4.00% 6,433,351 5.7 8,170,916 10.0
4.01 to 5.00% 3,994,110 3.5 - -
-------------------------------------------------------------------------------------
22,470,699 19.9 15,076,921 18.5
-------------------------------------------------------------------------------------
Certificates:
0 to 5.00% 65,962 .1 259,828 .3
5.01 to 6.00% 75,747,649 67.1 66,064,322 81.2
6.01 to 7.00% 14,662,702 12.9 - -
-------------------------------------------------------------------------------------
90,476,313 80.1 66,324,150 81.5
-------------------------------------------------------------------------------------
$112,947,012 100.0% $ 81,401,071 100.0%
=====================================================================================
</TABLE>
The aggregate amount of certificates of deposit with a
minimum denomination of $100,000 was approximately
$11,108,000 and $9,663,000 at December 31, 1997 and
1996, respectively.
Scheduled maturities of certificates are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $77,659,702 $57,305,347
One to two years 6,565,313 5,095,223
Two to three years 1,743,083 1,381,536
Three to four years 2,427,116 1,178,064
Five years and thereafter 2,081,099 1,363,980
-------------------------------------------------------------------------------------
$90,476,313 $66,324,150
=====================================================================================
</TABLE>
F-23
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of The estimated fair values of the Corporation's
Financial financial instruments are as follows:
Instruments
<TABLE>
<CAPTION>
December 31, 1997 1996
------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term
investments $ 5,916,504 $ 5,917,000 $ 6,076,315 $ 6,076,000
Securities 15,566,382 15,587,000 19,984,374 20,085,000
Loans, net of allowance
for loan losses 99,674,549 100,595,000 81,270,173 80,858,000
Financial liabilities
Deposits 112,947,012 113,117,000 81,401,071 81,345,000
Advances from Federal
Home Loan Bank - - 17,500,000 17,500,000
Securities sold under
agreement to
repurchase 2,989,000 2,989,000 6,681,000 6,681,000
Bonds payable 2,360,083 N/A 2,705,813 N/A
Notional Fair Notional Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------
Unrecognized financial
instruments
Commitments to
extend credit $ 18,145,000 $18,145,000 $9,356,000 $9,356,000
Forward commitments
to purchase
mortgage-backed
securities - - 6,054,000 6,041,000
</TABLE>
F-24
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of The following methods and assumptions were used to
Financial estimate the fair value of each class of financial
Instruments instruments for which it is practicable to estimate
(continued) 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.
F-25
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
5. Fair Value of Securities sold under agreement to repurchase
Financial ---------------------------------------------
Instruments
(continued) 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, 1997 and
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.
6. Results of Unaudited results of operations of the Corporation for
Operations for the six months ended December 31, 1995 (unaudited) are
the Six Months as follows:
Ended December
31, 1995
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
F-26
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
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, 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Serial Bonds
Class A-2, maturing January 20,
2012, at 8.0% $ 285,701 $1,066,586
Class A-3, maturing January 20,
2019, at 8.0% 2,649,648 2,444,544
Unapplied payments (159,100) (326,479)
------------------------------------------------------------------------------
2,776,249 3,184,651
Less unamortized discount (416,166) (478,838)
------------------------------------------------------------------------------
$2,360,083 $2,705,813
==============================================================================
</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.
F-27
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
8. Securities Sold The following is a summary of certain information
Under Agreements regarding the Bank's repurchase agreements:
to Repurchase
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1997 December 31, 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Balance at end of period $2,989,000 $6,681,000
Weighted average interest rate
at end of period 6.29% 6.50%
Average amount outstanding
during the period $2,006,792 $6,321,040
Maximum amount outstanding
at any month end during the
period $5,867,000 $9,957,000
</TABLE>
9. Advances From Information related to borrowing activity from the
Federal Home Federal Home Loan Bank is as follows:
Loan Bank
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1997 December 31, 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Maximum amount
outstanding
during the
period $17,500,000 $22,500,000
=======================================================================================
Average amount
outstanding
during the period $10,956,000 $19,550,000
=======================================================================================
Average interest
rate during the
period 6.23% 5.79%
=======================================================================================
</TABLE>
F-28
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
10. Income Taxes The provision for income taxes as presented in the
consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1997 December 31, 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Current income tax (benefit) $458,040 $(3,500)
Deferred income tax 28,000 -
---------------------------------------------------------------------------------------
$486,040 $(3,500)
=======================================================================================
Year Ended June 30 1996 1995
---------------------------------------------------------------------------------------
Current income tax $344,338 $187,885
Deferred income tax (benefit) - (87,377)
---------------------------------------------------------------------------------------
$344,338 $100,508
=======================================================================================
</TABLE>
Reconciliations of the provision for income taxes
computed at the federal statutory income tax rate to
the effective rate follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1997 December 31, 1996
---------------------------------------------------------------------------------------
<S> <C> <C>
Tax expense (benefit) at statutory rate $470,477 $(3,360)
Adjustments
Effect of state taxes 55,350 (395)
Other (39,787) 255
---------------------------------------------------------------------------------------
$486,040 $(3,500)
=======================================================================================
Year Ended June 30, 1996 1995
---------------------------------------------------------------------------------------
Tax expense at statutory rate $335,780 $162,096
Adjustments
Effect of state taxes 39,504 18,880
Other (30,946) (80,468)
---------------------------------------------------------------------------------------
$344,338 $100,508
=======================================================================================
</TABLE>
F-29
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
10. Income Taxes The components of deferred income taxes are as follows:
(continued)
<TABLE>
<CAPTION>
December 31, 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset
Bad debt reserves $243,000 $164,000
Deferred loan fees 43,000 54,000
Excess servicing 16,000 38,000
Trading securities - 90,000
Other 60,000 136,000
---------------------------------------------------------------------------------
Total deferred tax asset 362,000 482,000
---------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 185,000 204,000
FHLB stock 118,000 187,000
Fixed Assets 42,000 -
Other 12,000 58,000
---------------------------------------------------------------------------------
Total deferred tax liability 357,000 449,000
---------------------------------------------------------------------------------
Net deferred tax asset $ 5,000 $ 33,000
=================================================================================
</TABLE>
11. Related Party In the normal course of business, the Corporation makes
Transactions 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, 1997 and
1996, are approximately $191,000 and $163,000,
respectively.
F-30
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
12. Commitments The Corporation leases office space under operating
and leases expiring at various dates through 2002 and has a
Contingencies 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, 1997, are as
follows:
<TABLE>
<CAPTION>
Amount
-----------------------------
Data
Year Ending December 31, Leases Processing
---------------------------------------------------------------------------
<S> <C> <C>
1998 $ 49,700 $ 97,200
1999 50,000 40,500
2000 20,200 -
2001 20,200 -
Thereafter 10,700 -
---------------------------------------------------------------------------
$150,800 $137,700
===========================================================================
</TABLE>
Total rental expense amounted to approximately $47,000
for the year ended December 31, 1997 and $23,000 for
the six months ended December 31, 1996, and $168,000,
and $187,000 for the years ended June 30, 1996 and
1995, 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
pending or threatened litigation.
F-31
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
13. Stockholders' On June 28, 1995, the Corporation completed an initial
Equity 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 575,000 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
$416,000) were approximately $4,471,000.
The following table represents the Bank's regulatory
capital levels at December 31, 1997 relative to the
Federal Reserve requirements.
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
December 31, 1997 Required Required Amount Percent Amount
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Leverage $3,306,000 4.00% $ 7,911,000 9.57% $4,605,000
Tier 1 risk based 3,306,000 4.00 11,810,000 14.29 8,504,000
Total risk based
capital 6,613,000 8.00 12,745,000 15.42 6,132,000
</TABLE>
The following table presents the Bank's regulatory
capital levels at December 31, 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>
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.
F-32
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
14. Stock Option The Corporation has a noncompensatory stock option plan
Plan (the "Plan") designed to provide long-term incentives
to key employees. All options are exercisable upon date
of vesting.
The Corporation applies Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees, and related interpretations in accounting
for its plan. Accordingly, no compensation cost has
been recognized for this plan 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 the consolidated financial
statements.
The following table summarizes options outstanding:
<TABLE>
<CAPTION>
Six months
Year Ending ending
December 31, 1997 December 31, 1996
------------------------------------------------------------------------------------------------
Weighted - Weighted -
average average
exercise exercise
Shares price Shares price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period 4,000 $ 4.88 14,000 $4.75
Granted 72,000 15.25 - -
Forfeited (800) 12.00 - -
Exercised (4,000) 4.88 (10,000) 4.70
------------------------------------------------------------------------------------------------
Options outstanding at end
of period 71,200 $15.25 4,000 $4.88
================================================================================================
Options exercisable at end
of period 9,600 4,000
================================================================================================
</TABLE>
The weighted average fair value of options granted
during the year ended December 31, 1997 was $1.14.
F-33
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
14. Stock Option Year Ending June 30, 1996 1995
Plan -----------------------------------------------------------------------------------------------
(continued) Weighted - Weighted -
average average
exercise exercise
Shares price Shares price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period 17,600 $4.65 36,000 $4.50
Granted - - - -
Forfeited - - - -
Exercised (3,600) 4.25 (18,400) 4.36
-----------------------------------------------------------------------------------------------
Options outstanding at end
of period 14,000 $4.75 17,600 $4.65
===============================================================================================
Options exercisable at end
of period 14,000 13,600
===============================================================================================
</TABLE>
The Corporation applies Accounting Principals Board
Opinion 25 in accounting for stock options granted to
employees. Had compensation expense been determined
based upon the fair value of the awards at the grant
date and consistent with the method under Statement of
Financial Accounting Standards 123, the Corporation's
net earnings and net earnings per share for the year
ended December 31, 1997 would have been decreased to
the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
Net income
------------------------------------------------------------
<S> <C>
As reported $897,715
Pro forma 844,363
------------------------------------------------------------
Net income per share (basic and diluted)
------------------------------------------------------------
As reported $ 0.61
Pro forma 0.58
</TABLE>
F-34
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
14. Stock Option There were no options granted for the six months ended
Plan December 31, 1996 and for the years ended June 30, 1996
(continued) and 1995, therefore there are no pro forma effects on
net income and net income per share.
The fair value of each option granted is estimated on
the date of grant using the Black-Sholes option pricing
model with the following assumptions used for grants
for the year ended December 31, 1997: a risk free
interest rate of 5.85%, dividend yield of 1.00%,
expected weighted average term of 2.48 years, and a
volatility of 25.00%.
The follow table summarizes information about stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
remaining exercise exercise
Range of exercise Number of contractual price Number of price
prices Shares life (years) per share Shares per share
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$12.00 - 17.57 65,200 2.21 $14.87 9,600 $12.00
$19.33 - 21.26 6,000 5.83 20.29 - -
------------------------------------------------------------------------------------------------
71,200 2.48 $15.25 9,600 $12.00
================================================================================================
</TABLE>
15. Employee Benefit Effective February 16, 1989, the Corporation adopted a
Plans 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 $10,300 for the
year ended December 31, 1997 and $4,600 and $5,800 for
the years ended June 30, 1996 and 1995, respectively,
and $5,500 for the six months ended December 31, 1996,
respectively.
F-35
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
16. Financial The Corporation is a party to financial instruments
Instruments With with off-balance-sheet risk in the normal course of
Off-Balance-Sheet business to meet the financing needs of its customers
Risk 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.
Unless noted otherwise, the Corporation does not
require collateral or other security to support
financial instruments with credit risk.
<TABLE>
<CAPTION>
Contract
Notional Amount
December 31, 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit $18,145,000 $9,356,000
Standby letters of credit written 944,000 463,000
Financial instruments whose contract
amount represent interest rate risk
Forward commitment to purchase
mortgage-backed securities - 6,054,000
</TABLE>
F-36
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
16. Financial Commitments to extend credit are agreements to lend to
Instruments With a customer as long as there is no violation of any
Off-Balance-Sheet condition established in the contract. Commitments
Risk generally have fixed expiration dates or other
(continued) 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.
17. Condensed Condensed financial information is shown for the Parent
Financial Company only as follows:
Information of the
Corporation
(Parent Company Condensed Statements of Financial Condition
Only)
<TABLE>
<CAPTION>
December 31, 1997 1996
----------------------------------------------------------------------------------
Assets
<S> <C> <C>
Investment in the Bank, at equity $11,758,347 $6,657,155
Cash 10,000 10,000
Prepaid expenses and other assets 40,836 90,680
----------------------------------------------------------------------------------
$11,809,183 $6,757,835
==================================================================================
</TABLE>
F-37
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
17. Condensed December 31, 1997 1996
Financial ----------------------------------------------------------------------------------
Information of the
Corporation Liabilities and Stockholders' Equity
(Parent Company
Only) Liabilities $ - $ 182,086
(continued) ----------------------------------------------------------------------------------
Stockholders' Equity
Common stock 1,876,729 1,155,010
Additional paid-in capital 5,724,954 1,975,695
Retained earnings 4,207,500 3,445,044
----------------------------------------------------------------------------------
Total stockholders' equity 11,809,183 6,575,749
----------------------------------------------------------------------------------
$11,809,183 $6,757,835
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Operations
----------------------------------------------------------------------------------
Year Ended Six Months Ended
December 31, December 31,
1997 1996
----------------------------------------------------------------------------------
<S> <C> <C>
Income
Dividends received from Bank $135,259 $46,200
----------------------------------------------------------------------------------
Total income 135,259 46,200
----------------------------------------------------------------------------------
Noninterest expenses (7,028) (52,582)
----------------------------------------------------------------------------------
Income (loss) before undistributed
net income of the Bank 128,231 (6,382)
Undistributed net income 769,484 43,562
----------------------------------------------------------------------------------
Net income $897,715 $ 37,180
==================================================================================
</TABLE>
F-38
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
17. Condensed Condensed Statements of Cash Flows
Financial -----------------------------------------------------------------------------------------------
Information of the Year Ended Six Months Ended
Corporation December 31, December 31,
(Parent Company 1997 1996
Only) -----------------------------------------------------------------------------------------------
(continued)
Operating activities
Net income $ 897,715 $ 37,180
Adjustments
Undistributed earnings of the Bank (769,484) (43,562)
(Increase) decrease in prepaid and
other assets 49,844 (21,701)
(Decrease) increase in other liabilities (182,086) 37,686
Other 4,011 (9,603)
-----------------------------------------------------------------------------------------------
Net cash absorbed by operating
activities - -
-----------------------------------------------------------------------------------------------
Investing activities
Dividends received from Bank 135,259 46,200
Investment in the Bank (4,470,978) -
-----------------------------------------------------------------------------------------------
Net cash provided (absorbed) by
investing activities (4,335,719) 46,200
-----------------------------------------------------------------------------------------------
Financing activities
Cash dividends paid on common stock (135,259) (46,200)
Issuance of common stock 4,470,978 -
-----------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing
activities 4,335,719 (46,200)
-----------------------------------------------------------------------------------------------
Increase in cash - -
Cash, beginning of period 10,000 10,000
-----------------------------------------------------------------------------------------------
Cash, end of period $ 10,000 $ 10,000
===============================================================================================
</TABLE>
F-39
<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: April 13, 1998 By:/s/ Thomas P. Baker
----------------------------------
Thomas P. Baker
President, Chief Executive Officer
and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thomas P. Baker President, Chief Executive
- ------------------------------------- Officer and Director April 13, 1998
Thomas P. Baker (Principal Executive Officer)
/s/ Vincent B. McNelley Senior Vice President and Chief Financial April 13, 1998
- ------------------------------------- Officer (Principal Financial and
Vincent B. McNelley Accounting Officer)
Chairman of the Board April __, 1998
- -------------------------------------
Douglas E. Caton
Vice Chairman of the Board April __, 1998
- -------------------------------------
Harry N. Lewis
Director April __, 1998
- -------------------------------------
Henry J. Browne
/s/ Robert P. Englander Director April 13, 1998
- -------------------------------------
Robert P. Englander
/s/ John R. Metz Director April 13, 1998
- -------------------------------------
John R. Metz
<PAGE>
Director April __, 1998
- -------------------------------------
James R. Sipe, Jr.
/s/ Oscar W. Smith, Jr. Director April 13, 1998
- -------------------------------------
Oscar W. Smith, Jr.
/s/ John B. Syer Director April 13, 1998
- -------------------------------------
John B. Syer
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
- ----------- --------
3.1 Amended and Restated Articles of Incorporation of Guaranty
Financial Corporation. (restated in electronic format).
3.2 Bylaws of Guaranty Financial Corporation.
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.
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
GUARANTY FINANCIAL CORPORATION
(restated in electronic format)
ARTICLE I
NAME
The name of the corporation is Guaranty Financial Corporation.
ARTICLE II
CAPITAL STOCK
Paragraph A. The aggregate number of shares of stock which the
Corporation shall have the authority to issue and the par value per share is as
follows:
Number of
Class Shares Par Value
----- --------- ---------
Common Stock 4,000,000 $1.25
Preferred Stock 500,000 $1.00
Paragraph B. No holders of any class of stock of the Corporation shall
have any preemptive or other preferential right to purchase or subscribe to (i)
any shares of any class of stock of the Corporation, whether now or hereafter
authorized, (ii) any warrants, rights or options to purchase any such stock, or
(iii) any obligations convertible into any such stock or into warrants, rights
or options to purchase any such stock.
Paragraph C. The holders of the Common Stock shall, to the exclusion of
the holders of any other class of stock of the Corporation, have the sole and
full power to vote for the election of directors and for all other purposes
without limitation except only as otherwise provided in any articles of
amendment applicable to any series of Preferred Stock, and as otherwise
expressly provided by the then existing statutes of Virginia. The holders of the
Common Stock shall have one vote for each share of Common Stock held by them.
Except as may be set forth in any articles of amendment applicable to shares of
Preferred Stock, the holders of the Common Stock shall be entitled to receive
the net assets of the Corporation upon dissolution.
Paragraph D. Authority is expressly vested in the Board of Directors to
divide the Preferred Stock into and issue the same in series and, to the fullest
extent permitted by law, to fix and determine the preferences, limitations and
relative rights of the shares of any series so established, and to provide for
the
<PAGE>
issuance thereof.
Prior to the issuance of any share of a series of Preferred Stock, the
Board of Directors shall establish such series by adopting a resolution setting
forth the designation and number of shares of the series and the preferences,
limitations and relative rights thereof, and the Corporation shall file with the
Commission articles of amendment as required by law, and the Commission shall
have issued a certificate of amendment.
ARTICLE III
INDEMNIFICATION AND LIMITS ON LIABILITY
OF DIRECTORS AND OFFICERS
Paragraph A. The Corporation shall indemnify any Director or Officer
made a Party to a Proceeding (including without limitation any Proceeding by or
in the right of the Corporation in which the Director or Officer is adjudged
liable to the Corporation) because he or she is or was a Director or Officer of
the Corporation against any Liability incurred in the Proceeding to the fullest
extent permitted by Virginia law, as it may be amended from time to time.
Paragraph B. The Corporation shall not indemnify a Director or Officer
under Paragraph A above (unless authorized or ordered by a court) unless in each
specific case a determination pursuant to Virginia law, as it may be amended
from time to time, has been made that indemnification is permissible under the
circumstances. The termination of a Proceeding by judgment, order, settlement or
conviction is not, of itself, determinative that Director or Officer is not
entitled to indemnification under this Article III.
Paragraph C. Expenses incurred by a Director or Officer in a Proceeding
shall be paid by the Corporation in advance of the final disposition of the
Proceeding if:
1. The Director or Officer furnishes the Corporation a written
statement of his good faith belief that he or she is entitled to
indemnification pursuant to this Article III;
2. The Director or Officer furnishes the Corporation a written
undertaking, executed personally or on his or her behalf, to
repay the advance if it is ultimately determined that he or she
did not meet the standard for indemnification pursuant to this
Article III; and
3. A determination pursuant to Virginia law, as it may be amended
from time to time, is made that the facts then known to those
making the determination would not preclude indemnification under
this Article III.
The undertaking required by subsection 2 of this Paragraph C
<PAGE>
shall be an unlimited general obligation of the Director or Officer but need not
be secured and may be accepted without reference to his or her financial ability
to make repayment.
Paragraph D. The indemnification provided by this Article III shall
not be exclusive of any other rights to which any Director or Officer may be
entitled, including without limitation rights conferred by applicable law and
any right under policies of insurance that may be purchased and maintained by
the Corporation or others, even as to liabilities against which the Corporation
would not have the power to indemnify such Director or Officer under the
provisions of this Article III.
Paragraph E. The Corporation may purchase and maintain at its sole
expense insurance, in such amounts and on such terms and conditions as the Board
of Directors may deem reasonable, against all liabilities or losses it may
sustain in consequence of the indemnification provided for in this Article III.
Paragraph F. The Board of Directors shall have the power but not the
obligation, generally and in specific cases, to indemnify employees and agents
of the Corporation to the same extent as provided in this Article III with
respect to Directors or Officers. The Board of Directors is hereby empowered by
a majority vote of a quorum of disinterested Directors to contract in advance to
indemnify any Director or Officer. The Board of Directors is further empowered,
by majority vote of a quorum of disinterested Directors, to cause the
Corporation to contract in advance to indemnify any person who is not a Director
or Officer who was or is a party to any Proceeding, by reason of the fact that
he or she is or was an employee or agent of the Corporation, or was serving at
the request of the Corporation as Director, Officer, employee or agent of
another corporation, partnership, joint venture trust, employee benefit plan or
other enterprise, to the same extent as if such person were a Director or
Officer.
Paragraph G. To the full extent that Virginia law, as it exists on the
date hereof or may hereafter be amended, permits the limitation or elimination
of the liability of Directors and Officers, a Director or Officer shall not be
liable to the Corporation or its shareholders for any monetary damages in excess
of one dollar.
Paragraph H. In this Article III:
"Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation,
is or was serving at the Corporation's request as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. A director is considered to be serving an employee
benefit plan at the Corporation's request if his
<PAGE>
duties to the corporation also impose duties on, or otherwise involve
services by, him to the plan or to participants in or beneficiaries of
the plan. "Director" includes the estate or personal representative of
a director.
"Officer" means an individual who is or was an officer of the
Corporation or an individual who is or was serving at the Corporation's
written request as a director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise. An officer
is considered to be serving an employee benefit plan at the
Corporation's request if his duties to the Corporation also impose
duties on, or otherwise involve services by, him to the plan or to
participants in or beneficiaries of the plan. "Officer" includes the
estate or personal representative of an officer. Except as set forth
above "Officer" does not include officers of corporations controlled by
the Corporation.
"Expenses" includes but is not limited to counsel fees.
"Liability" means the obligation to pay a judgment,
settlement, penalty, fine, including without limitation any excise tax
assessed with respect to an employee benefit plan, or reasonable
Expenses incurred with respect to a Proceeding.
"Party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in any Proceeding.
"Proceeding" means any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal.
ARTICLE IV
DIRECTORS
Paragraph A. Except as otherwise fixed by any articles of amendment
adopted by the Board of Directors pursuant to Paragraph D of Article II relating
to the rights of the holders of any series of Preferred Stock to elect
additional directors under specified circumstances, the number of the directors
of the Corporation shall be fixed from time to time by or pursuant to the Bylaws
of the Corporation. The initial directors, whose terms shall expire at the first
shareholders' meeting at which directors are elected, shall be:
<PAGE>
Thomas P. Baker Charles R. Borchardt
P.O. Box 26 240 Inglecress Drive
Cobham, VA 22929-0026 Charlottesville, VA 22901
Henry J. Browne Douglas E. Caton
P.O. Box 1464 4 Deer Park
Charlottesville, VA 22902 Earlysville, VA 22903
Robert P. Englander Harry N. Lewis
515 Wiley Drive 1313 Hilltop Road
Charlottesville, VA 22901 Charlottesville, VA 22903
Barry L. Musselman John E. Metz
10006 Walsham Court 106 Meadowbrook Court
Richmond, VA 23233 Charlottesville, VA 22901
Oscar W. Smith, Jr.
759 Bedford Hills Drive
Earlysville, VA 22936
Commencing with the first shareholders' meeting at which directors are
elected, the directors, other than those who may be elected by the holders of
any series of Preferred Stock, shall be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1994, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1995 and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1996, with each class to
hold office until its successor is elected and qualified. At each annual meeting
of the stockholders of the Corporation, the successors of the class of directors
whose term expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election.
Paragraph B. Advance notice of stockholder nominations for the election
of directors shall be given in the manner provided in the Bylaws of the
Corporation.
Paragraph C. Except as otherwise fixed by any articles of amendment
adopted by the Board of Directors pursuant to Paragraph D of Article II relating
to the rights of the holders of any series of Preferred Stock to elect directors
under specified circumstances, newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled only by
<PAGE>
issued and outstanding shares of the Corporation's Common Stock
vote in favor of such action.
This Paragraph C shall not affect the power of the Board of Directors
to condition its submission of any plan of merger, share exchange or direct or
indirect sale, lease, exchange or other disposition of all or substantially all
of the Corporation's property, otherwise than in the usual and regular course of
business, on any basis, including the requirement of a greater vote.
Paragraph E. For purposes of these Articles of Incorporation an
abstention or failure to vote shall not be considered a vote in favor of or
opposing any particular action.
Paragraph F. For purposes of this Article VI, a Continuing Director is
(i) any individual who is an initial director named in these Articles of
Incorporation, (ii) any individual who has been elected to the Board of
Directors of the Corporation at an annual meeting of the stockholders of the
Corporation more than one time or (iii) any individual who was elected to fill a
vacancy on the Board of Directors and received the affirmative vote of a
majority of the Continuing Directors then on the Board of Directors and
thereafter elected to the Board of Directors at an annual meeting of the
stockholders of the Corporation at least one time
ARTICLE VII
REGISTERED OFFICE AND AGENT
The post office address of the initial registered office is Two James
Center, 1021 East Cary Street, Richmond, Virginia 23219, which is located in the
City of Richmond. The name of the initial registered agent is Wayne A. Whitham,
Jr., who is a resident of Virginia and a member of the Virginia State Bar, and
whose business office is the same as the registered office of the Corporation.
Exhibit 3.2
BYLAWS
OF
GUARANTY FINANCIAL CORPORATION
ARTICLE I
Shareholder Matters
Section 1.1. Annual Meetings.
A. The annual meeting of the shareholders of the Corporation shall
be held at such a place as may be decided by the Board of Directors on a date
during the months of September, October or November of each and every year, the
exact date, place and hour to be fixed by the Board of Directors.
B. At the annual meeting of the shareholders of the Corporation,
Directors shall be elected and reports of the affairs of the Corporation shall
be received and considered. Any other business may be transacted which is within
the powers of the shareholders.
C. The Board of Directors may designate any place, either within or
without the Commonwealth of Virginia, as the place of meeting for any annual
meeting or for any special meeting. If no place is designated by the Board, the
place of meeting shall be the principal office of the Corporation.
Section 1.2. Special Meetings. A special meeting of the shareholders
may be called for any purpose or purposes whatsoever at any time, but only by
the President, the Chairman of the Board of Directors, or the Board of
Directors.
Section 1.3. Notice of Meetings. Notice of the time and place of
every annual meeting or special meeting shall be mailed to each Shareholder of
record entitled to vote at the meeting at his address as it appears on the
records of the Corporation not less than ten (10) nor more than sixty (60) days
before the date of such meeting (except as a different time may be specified by
law).
Section 1.4. Quorum. A majority of the votes entitled to be cast on
a matter by a voting group constitutes a quorum of such voting group for action
on such matter. If there is not a quorum at the time for which a meeting shall
have been called, the meeting may be adjourned from time to time by a majority
of the shareholders present or represented by proxy without notice, other than
by announcement at the meeting, until there is a quorum.
Section 1.5. Voting. Except as the Articles of Incorporation
otherwise provide, at any meeting of the shareholders, each outstanding share,
regardless of class, is entitled to one vote on each matter voted on at a
shareholders' meeting.
<PAGE>
Section 1.6. Notice of Shareholder Business. At an annual meeting of
the shareholders of the Corporation, only such business shall be conducted as
shall have been properly brought before the meeting. To be brought before an
annual meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise bought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the Shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided, however,
that in the event that less than seventy (70) days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made, notice
by a shareholder, to be timely, must be so received not later than the close of
business on the tenth (10th) day following the earlier of the day on which such
notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. A shareholder's notice to the Secretary
of the Corporation shall set forth as to each matter the shareholder proposes to
bring before the annual meeting (a) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on the
Corporation's books of the shareholder proposing such business and of any other
person or entity who is the record or beneficial owner of any shares of the
Corporation and who, to the knowledge of the shareholder proposing such
business, supports such proposal, (c) the class and number of shares of the
Corporation which are beneficially owned and owned of record by the shareholder
proposing such business on the date of his notice to the Corporation and the
number of shares so owned by any person or entity who, to the knowledge of the
shareholder proposing such business, supports such proposal and (d) any material
interest (financial or other) of such shareholder in such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 1.6. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the provisions of this Section
1.6. and if he should so determine, he shall so declare to the meeting and any
such business not properly brought before the meeting shall not be transacted.
-2-
<PAGE>
Section 1.7. Order of Business. All meetings of shareholders shall
be conducted in accordance with such rules as are prescribed by the Chairman of
the meeting and he shall determine the order of business at all meetings of the
shareholders.
Section 1.8. Inspectors. The Board of Directors, in advance of any
meeting of shareholders, may, but shall not be required to, appoint one or more
inspectors to act at such meeting or any adjournment thereof. If any of the
inspectors so appointed shall fail to appear or act, the chairman of the meeting
may appoint one or more inspectors. The inspectors shall determine the number of
shares of capital stock of the Corporation outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the results, and do such acts as are proper to conduct the election or
vote with fairness to all shareholders. On request of the Chairman of the
meeting, the inspectors shall make a report of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as an inspector of an
election of directors. Inspectors need not be shareholders.
ARTICLE II
Directors
Section 2.1. General Powers. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors and,
except as otherwise expressly provided by law or by the Articles of
Incorporation, or by these Bylaws, all of the powers of the Corporation shall be
exercised by or under the authority of said Board of Directors.
Section 2.2. Number and Qualification. The Board of Directors shall
consist of not less than five (5) nor more than fifteen (15) Directors. Each
Director shall a resident of the Commonwealth of Virginia.
Section 2.3. Election of Directors. The Directors shall be elected
at the annual meeting of shareholders, and shall hold their offices until their
successors are elected in accordance with the Articles of Incorporation.
Nominations for the election of Directors shall be given in the manner provided
in Section 2.5.
Section 2.4. Honorary and Advisory Directors. The Board may appoint
to the position of Honorary Director or the position
-3-
<PAGE>
of Advisory Director such person or persons as it deems appropriate. Honorary
Directors shall be entitled to receive notice of, and to attend all meetings of
the Board, but they shall not be Directors and shall not be entitled to vote,
nor shall they be counted in determining a quorum of the Board. Advisory
Directors shall be entitled only to notice of meetings of Advisory or other
Boards of the Corporation to which they shall be appointed. Honorary and
Advisory Directors, shall receive such compensation as may be authorized by the
Board of attendance at meetings of Advisory or other Boards to which such
Advisory or Honorary Directors are appointed.
Section 2.5. Nominations. Only persons who are nominated in
accordance with the procedures set forth in this Section 2.5 shall be eligible
for election as Directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made by or at the direction of the Board of
Directors, or by any shareholder of the Corporation entitled to vote for the
election of Directors who complies with the notice procedures set forth in this
Section 2.5. Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporations not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of postponements,
deferrals, or adjournments of that meeting to a later date; provided, however,
in the event that less than seventy (70) days' notice or prior pubic disclosure
of the date of the meeting is given or made, notice by the shareholder to be
timely must be so received not later than the close of business on the 10th day
following the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such public disclosure
was made. Such shareholder's notice shall set forth (a) as to each person whom
the shareholder proposes to nominate for election as a Director, (1) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended; and (b) as to the shareholder giving the notice (i) the name and
address of such shareholder and of any other person or entity who is the record
or beneficial owner of shares of the Corporation and who, to the knowledge of
the shareholder giving notice, supports such nominee(s) and (ii) the class and
number of shares of the Corporation which are beneficially owned and owned of
record by such shareholder and by any other person or entity
-4-
<PAGE>
who is the record or beneficial owner of shares of the Corporation an who, to
the knowledge of the shareholder giving the notice, supports such nominee(s). At
the request of the Board of Directors any person nominated by the Board of
Directors for election as a Director shall furnish to the Secretary of the
Corporation the information required to be set forth in a shareholder's notice
of nomination which pertains to the nominee. No person shall be eligible for
election as a Director of the Corporation unless in accordance with the
procedures set forth in this Section 2.5. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by the Bylaws, and if
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 2.6. Meetings of Directors. Meetings of the Board of
Directors shall be held at places within or without the Commonwealth of Virginia
and at times fixed by resolution of the Board of Directors, or upon call of the
Chairman of the Board of Directors or the President. The Secretary, or officer
performing his duties, shall give at least twenty-four (24) hours' notice by
telegraph, letter, telephone or in person, of all meetings of the Directors;
provided, that notice need not be given of regular meetings held at times and
places fixed by resolution of the Board. Regular meetings of the Board of
Directors shall be held at least once in every calendar month. Meetings may be
held at any time without notice if all of the Directors are present, or if those
not present waive notice either before or after the meeting. Neither the
business to be transacted nor the purpose of any annual or special meeting of
the Board of Directors need be specified in the notice or waiver of notice of
such meeting.
Section 2.7. Quorum. A majority of the members of the Board of
Directors shall constitute a quorum.
Section 2.8. Compensation. The Board of Directors shall fix the
compensation of the Directors.
Section 2.9. Committees. The Board of Directors may create
committees and appoint members of committees in accordance with Virginia law.
There shall be an Executive Committee and such committee may exercise the
authority of the Board of Directors to the fullest extent permitted by law.
ARTICLE III
Officers
Section 3.1. Election. The Officers of the Corporation shall consist
of the Chairman of the Board of Directors, the President, one or more Executive
Vice Presidents, one or more
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<PAGE>
senior Vice Presidents, one or more additional Vice Presidents, a Secretary, a
Treasurer, one or more Assistant Secretaries, and such other officers as may be
elected as provided in Section 3.3 of this Article. All Officers shall be
elected by the Board of Directors, and shall hold office until their successors
are elected and qualify. Vacancies may be filled at any meeting of the Board of
Directors. Subject to any applicable provision of Virginia law, more than one
office may be combined in the same person as the Board of Directors may
determine.
Section 3.2. Removal of Officers. Any Officer of the Corporation may
be summarily removed with or without cause, at any time, by a resolution passed
by affirmative vote of a majority of all of the Directors; provided that any
such removal shall not affect an Officer's right to any compensation to which he
is entitled under any employment contract between him and the Corporation.
Section 3.3. Other Officers. Other Officers may from time to time be
appointed by the Board of Directors, and such Officers shall hold office for
such term as may be designated by the said Board of Directors.
Section 3.4. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Directors and all meetings of the shareholders.
He shall appoint all standing committees and temporary committees. He shall be a
member ex officio of all standing committees and shall have all other powers and
duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 3.5. President. The President shall be the Chief Executive
Officer of the Corporation. In the absence or disability of the Chairman of the
Board, the President shall preside at all meetings of the Directors and at
meetings of the shareholders and in the absence or disability of the Chairman of
the Board the duties and responsibilities of his office shall devolve upon the
President. The President shall have such other powers and duties as may be
prescribed by the Chairman of the Board of Directors, the Board of Directors or
by the Bylaws.
Section 3.6. Vice Presidents. Executive Vice Presidents, Senior Vice
Presidents and Vice Presidents shall perform such duties as may be prescribed
for them from time to time by the Chairman of the Board of Directors, the Board
of Directors or the Bylaws.
Section 3.7. Secretary. The Secretary shall have the duties and
responsibilities prescribed by law for the secretary of a Virginia corporation.
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<PAGE>
Section 3.8. Surety Bonds. All Officers and employees who shall have
charge or possession of money, securities or property of the Corporation must,
before entering upon their duties, be covered by a bond with a surety company
approved by the Board of Directors and state and federal authorities. The costs
of such bond shall be borne by the Corporation.
ARTICLE IV
Capital Stock
Section 4.1. Issues of Certificate of Stock. Certificates of capital
stock shall be in such form as may be prescribed by law and by the Board of
Directors. All certificates shall be signed by the President and by the
Secretary or an Assistant Secretary, or by any other two Officers authorized by
resolution of the Board of Directors.
Section 4.2. Transfer of Stock. The stock of the corporation shall
be transferable or assignable on the books of the Corporation by the holders in
person or by attorney on surrender of the certificate or certificates for such
shares duly endorsed, and, if sought to be transferred by attorney, accompanied
by a written power of attorney to have such stock transferred on the books of
the Corporation.
Section 4.3. Restrictions on Transfer of Stock. Any restrictions
that may be imposed by law, by the Articles of Incorporation or Bylaws of the
Corporation, or by an agreement among shareholders of the Corporation, or by an
agreement among shareholders of the Corporation, shall be noted conspicuously on
the front or back of all certificates representing shares of stock of the
Corporation.
Section 4.4. Lost, Destroyed or Mutilated Certificates. The holder
of stock of the Corporation shall immediately notify the Corporation of any
loss, destruction, or mutilation of the certificate therefor, and the
Corporation may in its discretion cause one or more new certificates for the
same aggregate number of shares to be issued to such Stockholder upon the
surrender of the mutilated certificate, or upon satisfactory proof of such loss
or destruction accompanied by the deposit of a bond in such form and amount and
with such surety as the Corporation may require.
Section 4.5. Holder of Record. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder thereof
in fact and shall not be bound to recognize any equitable or other claim to or
interest in such shares of stock on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise expressly
provided by law.
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<PAGE>
Section 4.6. Record Date. The Board of Directors shall fix in
advance the record date in order to make a determination of shareholders for any
purpose, including the determination of shareholders entitled to notice of or to
vote at any shareholders' meeting or entitled to payment of any dividend or
distribution to shareholders. Such record date shall not be more than seventy
(70) days prior to the date on which the particular action requiring such
determination of shareholders is to be taken.
Section 4.7. Control Share Acquisitions. Article 14.1 of the
Virginia Stock Corporation Act shall not apply to the Corporation.
ARTICLE V
Miscellaneous Provisions
Section 5.1. Seal. The seal of the Corporation shall be circular in
shape with the name of the Corporation around the circumference thereof, and the
word "SEAL" in the center thereof.
Section 5.2. Examination of the Books and Records. The books and
records of account of the Corporation, the minutes of the proceedings of the
shareholders, the Board and Committees appointed by the Board of Directors and
the records of the shareholders showing the names and addresses of all
shareholders and the number of shares held by each, shall be subject to
inspection during the normal business hours by any person who is a duly
qualified Director of the Corporation at the time he makes such inspection.
shareholders shall have such rights to inspect records of the Corporation as are
prescribed by applicable law.
Section 5.3. Checks, Notes and Drafts. Checks, notes, drafts, and
other orders for the payment of money shall be signed by such persons as the
Board of Directors from time to time may authorize.
Section 5.4. Amendments to By-Laws. These Bylaws may be altered,
amended or repealed in accordance with the Articles of Incorporation.
Section 5.5. Voting of Stock Held. Unless otherwise provided by
resolution of the Board of Directors, the Chairman of the Board of Directors,
the President or any Executive Vice President may from time to time appoint an
attorney or attorneys as agent or agents of the Corporation to cast in the name
of the Corporation the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose stock or
securities may be held by the Corporation, at meetings of the holders of the
stock or other securities of such other corporation, or to consent in writing to
any action by any
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<PAGE>
such other corporation; and such Officers may instruct the person or persons so
appointed as to the manner of casting such votes or giving such consent, and may
execute or cause to be executed on behalf of the Corporation and under its
corporate seal, or otherwise, such written proxies, consents, waivers, or other
instruments as may be necessary or proper in the premises; or any of such
Officers may himself attend any meeting of the holders of stock or other
securities of any such other corporation and there vote or exercise any or all
other powers of the Corporation as the holder of such stock or other securities
of such other corporation.
-9-
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