As filed with the Securities and Exchange Commission on April 2, 1998.
Registration No. 333-48825 and Registration No. 333-48825-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
<S> <C>
GUARANTY FINANCIAL CORPORATION GUARANTY CAPITAL TRUST I
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
Virginia Delaware
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or
organization) organization)
6022 6022
(Primary Standard Industrial Classification Code Number) (Primary Standard Industrial Classification Code Number)
54-1786496 54-6422391
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
1658 State Farm Blvd. c/o Guaranty Financial Corporation
Charlottesville, VA 22911 1658 State Farm Blvd.
(804) 970-1100 Charlottesville, VA 22911
(804) 970-1100
(Address, including zip code, and telephone number, including (Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices) area code, of registrant's principal executive offices)
</TABLE>
Thomas P. Baker
1658 State Farm Blvd.
Charlottesville, VA 22911
(804) 970-1100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of Communications to:
R. Brian Ball, Esquire
Wayne A. Whitham, Jr., Esquire
Williams, Mullen, Christian & Dobbins
1021 East Cary Street, 16th Floor
Richmond, Virginia 23219
(804) 643-1991
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|_________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
|_|____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
|_|____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
PRELIMINARY PROSPECTUS DATED APRIL 2, 1998, SUBJECT TO COMPLETION
PROSPECTUS
GUARANTY CAPITAL TRUST I
$6,000,000
(Aggregate Liquidation Amount)
$ Convertible Preferred Securities
(Liquidation Amount $25.00 per Preferred Security)
guaranteed to the extent set forth herein by
GUARANTY FINANCIAL CORPORATION
The $ Convertible Preferred Securities (the "Preferred Securities")
offered hereby represent preferred undivided beneficial interests in the assets
of GUARANTY CAPITAL TRUST I, a statutory business trust formed under the laws of
the State of Delaware (the "Trust"). GUARANTY FINANCIAL CORPORATION, a Virginia
corporation (the "Corporation"), will own all the common securities representing
undivided beneficial interests in the assets of the Trust (the "Common
Securities" and, together with the Preferred Securities, the "Trust
Securities").
The Preferred Securities are convertible at any time prior to maturity,
unless previously redeemed or conversion rights terminated, into shares of
Common Stock of the Corporation at a conversion price of $ per Preferred
Security, subject to adjustment under certain conditions. The Common Stock of
the Corporation is listed on the NASDAQ National Market ("GSLC") and the closing
price of the Corporation's Common Stock as reported by NASDAQ on March , 1998
was $ per share. The Preferred Securities are redeemable in whole or in part at
the Liquidation Amount after , 2003, and the conversion rights cannot be
terminated until after , 2001 and then only if the closing price of the Common
Stock exceeds 115% of the conversion price for 20 of 30 consecutive trading
days. The Trust reserves the right to increase the Aggregate Liquidation Amount
by not more than $900,000.
(continued on next page)
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE VIRGINIA STATE CORPORATION COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS ANY STATE OR FEDERAL AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
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- ------------------------ --------------------- ------------------------------ ---------------------------
Price to Public Underwriting Discount (1) Proceeds to Trust
(2)(3)(4)
- ------------------------ --------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Per Preferred Security $ (2) $
- ------------------------ --------------------- ------------------------------ ---------------------------
Total $ (2) $
- ------------------------ --------------------- ------------------------------ ---------------------------
</TABLE>
(1) Guaranty Capital Trust I and Guaranty Financial Corporation have agreed to
indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debt Securities as
described herein, Guaranty Financial Corporation has agreed to pay directly
to the Underwriter, as compensation (the "Underwriters' Compensation") for
its arranging the investment therein of such proceeds $ per Preferred
Security (or $ in the aggregate). See "Underwriting."
(3) Expenses of the offering which are payable by Guaranty Financial
Corporation are estimated to be $ .
(4) Assumes the sale of the entire 240,000 Preferred Securities offered hereby.
If the Trust exercises its right to increase the Aggregate Liquidation
Amount by $900,000, total Proceeds to Trust will be increased to $6,900,000
and the total Underwriters' Compensation payable by the Corporation will
increase to $ .
----------------
The Preferred Securities are offered by the Underwriter, as selling
agent for the Trust, subject to prior sale, on a best efforts basis, and subject
to certain other conditions, including the right to reject any order in whole or
in part. This offering will close on or about , 1998. Funds received by the
Underwriter will be deposited at, and held by, Wilmington Trust Company (the
"Escrow Agent") in a noninterest-bearing escrow account in Wilmington, Delaware.
It is expected that such funds will be released from the escrow account and
delivery of the Preferred Securities will be made on or about , 1998.
---------------
McKinnon & Company, Inc.
The date of this Prospectus is April , 1998
---------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any state.
<PAGE>
(cover page continued)
Distributions on the Preferred Securities are payable quarterly March
15, June 15, September 15 and December 15, beginning June 15, 1998 in arrears.
The Preferred Securities offered hereby represent beneficial ownership
interests in Guaranty Capital Trust I, a statutory business trust formed under
the laws of the State of Delaware (the "Trust"). Guaranty Financial Corporation,
a Virginia corporation ("the Corporation"), will be the direct or indirect owner
of all of the beneficial ownership interests represented by common securities of
the Trust (the "Common Securities" and, collectively with the Preferred
Securities, the "Trust Securities"). Wilmington Trust Company is the Property
Trustee of the Trust. The Trust exists for the exclusive purposes of issuing the
Trust Securities, investing the proceeds from the sale of the Trust Securities
in Junior Subordinated Debt Securities (the "Junior Subordinated Debt
Securities") to be issued by the Corporation and certain other limited
activities described herein. The Junior Subordinated Debt Securities will mature
on , 2028 (the "Stated Maturity"). The Preferred Securities will have a
preference under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise over the Common
Securities. See "Description of Preferred Securities-Subordination of Common
Securities."
Holders of the Trust Securities will be entitled to receive cumulative
cash distributions, in each case arising from the payment of interest on the
Junior Subordinated Debt Securities accruing from the date of original issuance
and payable quarterly in arrears on the 15th day of March, June, September and
December of each year, commencing June 15, 1998, at $ per annum per Trust
Security ("Distributions"). Subject to certain exceptions, the Corporation has
the right to defer payments of interest on the Junior Subordinated Debt
Securities at any time or from time to time for a period not exceeding 20
consecutive quarterly periods with respect to each deferral period (each, an
"Extension Period"); provided, however, that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debt Securities. Upon the
termination of any Extension Period and the payment of all interest then accrued
and unpaid (together with interest thereon accumulated at % per annum,
compounded quarterly, to the extent permitted by applicable law), the
Corporation may elect to begin a new Extension Period, subject to the
requirements set forth herein. If interest payments on the Junior Subordinated
Debt Securities are so deferred, during any Extension Period, Distributions on
the Preferred Securities and on the Common Securities will also be deferred and
the Corporation will not be permitted, subject to certain exceptions described
herein, to declare or pay any cash distributions with respect to, or make
purchases of, the Corporation's capital stock (which includes common and
preferred stock) or to make any payment with respect to debt securities of the
Corporation that rank pari passu in all respects with or junior to the Junior
Subordinated Debt Securities. During an Extension Period, interest on the Junior
Subordinated Debt Securities will continue to accrue (and the amount of
Distributions to which holders of the Preferred Securities are entitled will
accumulate) at % per annum, compounded quarterly, and holders of Preferred
Securities will be required to accrue interest income for United States Federal
income tax purposes. See "Description of Junior Subordinated Debt
Securities-Option to Extend Interest Payment Date" and "Certain United States
Federal Income Tax Consequences-Interest Income and Original Issue Discount."
Each Preferred Security is convertible in the manner described herein
at the option of the holder thereof, at any time prior to the earlier of (i)
5:00 p.m. (Richmond, Virginia time) on the Business Day (as defined herein)
immediately preceding the date of repayment of such Preferred Security, whether
at maturity or upon redemption, and (ii) 5:00 p.m. (Richmond, Virginia time) on
the Conversion Termination Date (as defined herein), if any, into a number of
shares of the Corporation's common stock, par value $1.25 per share (the "Common
Stock") that equals the quotient obtained by dividing (i) $25.00 by (ii) $ ,
subject to adjustment in certain circumstances. See "Description of Preferred
Securities -- Conversion Rights." The Common Stock is listed on the NASDAQ
National Market under the symbol "GSLC." On March , 1998, the last reported sale
price of the Common Stock on the NASDAQ National Market was $ per share.
ii
<PAGE>
Taken together, the Corporation's obligations under the Guarantee
Agreement, the Declaration, the Junior Subordinated Debt Securities and the
Indenture (each as defined herein), including the Corporation's obligation to
pay the costs, expenses and liabilities of the Trust (other than the Trust's
obligations to holders of the Trust Securities under such Trust Securities),
provide, in the aggregate, a full irrevocable and unconditional guarantee, as
described herein, of all of the payments of Distributions and other amounts due
on the Preferred Securities. See "Relationship Among the Preferred Securities,
the Junior Subordinated Debt Securities and the Guarantee-Full and Unconditional
Guarantee." The Corporation has agreed to guarantee the payment of Distributions
and payments on liquidation or redemption of the Trust Securities, but only in
each case to the extent of funds held by the Trust, as described herein (the
"Guarantee"). See "Description of Guarantee." If the Corporation does not make
interest payments on the Junior Subordinated Debt Securities held by the Trust,
the Trust will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover the payment of Distributions when the
Trust does not have sufficient funds to pay such Distributions. In event of a
Debenture Event of Default (as hereafter defined), a holder of Preferred
Securities may institute a legal proceeding directly against the Corporation for
enforcement of payment to such holder of the principal of or interest on Junior
Subordinated Debt Securities having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities held by such holder (a "Direct
Action"). See "Description of Junior Subordinated Debt Securities-Enforcement of
Certain Rights by Holders of Preferred Securities." The obligations of the
Corporation under the Guarantee and the Junior Subordinated Debt Securities are
subordinate and junior in right of payment to all Senior Debt (as defined in
"Description of Junior Subordinated Debt Securities-Subordination") of the
Corporation. In addition, because the Corporation is a holding company, the
Junior Subordinated Debt Securities and the Guarantee are effectively
subordinated to all existing and future liabilities of the Corporation's
subsidiaries, including deposits. See "Risk Factors-Ranking of Obligations Under
the Guarantee and the Junior Subordinated Debt Securities" and "Status of the
Corporation as a Bank Holding Company."
The Preferred Securities are subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated Debt
Securities at the Stated Maturity or their earlier redemption in whole upon the
occurrence of a Tax Event, an Investment Company Event or a Capital Treatment
Event (each as defined herein) and (ii) in whole or in part at any time on or
after , 2003 contemporaneously with the optional redemption by the Corporation
of the Junior Subordinated Debt Securities in whole or in part. The Junior
Subordinated Debt Securities are redeemable prior to maturity at the option of
the Corporation (i) on or after , 2003, in whole at any time or in part from
time to time, or (ii) in whole, but not in part, at any time within 90 days
following the occurrence and continuation of a Tax Event, Investment Company
Event or Capital Treatment Event (each as defined herein), in each case at a
redemption price set forth herein, which includes the accrued and unpaid
interest on the Junior Subordinated Debt Securities so redeemed to the date
fixed for redemption. The ability of the Corporation to exercise its rights to
redeem the Junior Subordinated Debt Securities or to cause the redemption of the
Preferred Securities prior to the Stated Maturity may be subject to prior
regulatory approval by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), if then required under applicable Federal Reserve capital
guidelines or policies.
In addition to the rights of the Corporation to redeem the Preferred
Securities under the circumstances described in this Prospectus, the Corporation
also will have the right to terminate the convertibility of the Preferred
Securities into Common Stock as described in this paragraph. If for at least 20
trading days within any period of 30 consecutive trading days ending on or after
, 2001, including the last trading day of such period, the Closing Price (as
defined herein) of the Common Stock exceeds 115% of the then applicable
Conversion Price (as hereafter defined) of the Preferred Securities, the
Corporation may, at its option, terminate the right to convert the Junior
Subordinated Debt Securities into Common Stock, in which case the right to
convert the Preferred Securities into Common Stock will likewise terminate. To
exercise this conversion termination option, the Corporation must cause the
Trust to issue a press release announcing the date upon which conversion rights
will expire (the "Conversion Termination Date"), prior to the opening of
business on the
iii
<PAGE>
second trading day after a period in which the condition in the preceding
sentence has been met, but in no event may such press release be issued prior to
, 2001. The Conversion Termination Date shall be a Business Day not less than 30
and not more than 60 days following the date of the press release. See
"Description of Preferred Securities-Conversion Rights."
The Corporation, as the holder of the outstanding Common Securities,
has the right at any time (including, without limitation, upon the occurrence of
a Tax Event, an Investment Company Event or a Capital Treatment Event (as
defined herein)) to terminate the Trust and cause a Like Amount (as defined
herein) of the Junior Subordinated Debt Securities to be distributed to the
holders of the Trust Securities upon liquidation of the Trust, subject to prior
approval of the Federal Reserve to do so if then required under applicable
capital guidelines or policies of the Federal Reserve. In the event of such
termination of the Trust, after satisfaction of liabilities to creditors of the
Trust as required by applicable law, the holders of the Preferred Securities
generally will be entitled to receive a Liquidation Amount of $25.00 per
Preferred Security plus accumulated and unpaid Distributions thereon to the date
of payment, which may be in the form of a distribution of a Like Amount of
Junior Subordinated Debt Securities in certain circumstances. See "Description
of Preferred Securities-Liquidation of the Trust and Distribution of Junior
Subordinated Debt Securities."
As used herein, (i) the "Indenture" means the Junior Subordinated
Indenture, as amended and supplemented from time to time, between the
Corporation and Wilmington Trust Company, as trustee (the "Debenture Trustee"),
and (ii) the "Declaration means the Amended and Restated Declaration of Trust
relating to the Trust among the Corporation, as Depositor (the "Depositor"),
Wilmington Trust Company, as Property Trustee (the "Property Trustee"),
Wilmington Trust Company, as Delaware Trustee (the "Delaware Trustee"), and the
individuals named as Administrative Trustees therein (the "Administrative
Trustees") (collectively with the Property Trustee and the Delaware Trustee, the
"Trustees").
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR BANK
DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING AFFILIATE OF
GUARANTY FINANCIAL CORPORATION, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
iv
<PAGE>
AVAILABLE INFORMATION
The Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such
information may also be accessed electronically by means of the Commission's
home page on the Internet (http://www.sec.gov.).
No separate financial statements of the Trust have been included
herein. The Corporation and the Trust do not consider that such financial
statements would be material to holders of the Preferred Securities because the
Trust is a newly formed special purpose entity, has no operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Junior Subordinated Debt
Securities and issuing the Trust Securities. See "Guaranty Capital Trust I,"
"Description of Preferred Securities," "Description of Junior Subordinated Debt
Securities" and "Description of Guarantee."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Prospectus are not
historical facts, including, without limitation, statements of future
expectations, projections of results of operations and financial condition,
statements of future economic performance and other forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, are
subject to known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Corporation to
differ materially from those contemplated in such forward-looking statements. In
addition to the specific matters referred to herein, including, without
limitation, those noted under the caption "Risk Factors," important factors
which may cause actual results to differ from those contemplated in such
forward-looking statements include: (i) the results of the Corporation's efforts
to implement its business strategy; (ii) the effect of economic conditions and
the performance of borrowers; (iii) actions of the Corporation's competitors and
the Corporation's ability to respond to such actions; (iv) the cost of the
Corporation's capital, which may depend in part on the Corporation's portfolio
quality, ratings, prospects and outlook; (v) changes in governmental regulation,
tax rates and similar matters; and (vi) other risks detailed in the
Corporation's other filings with the Commission.
1
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
GUARANTY FINANCIAL CORPORATION
Guaranty Financial Corporation, a Virginia bank holding company
("Guaranty" or the "Corporation"), headquartered in Charlottesville, Virginia,
engages in commercial banking through its subsidiary, Guaranty Bank (the "Bank")
which opened for business in 1981. Until June 30, 1997, the Bank operated as a
federally-chartered savings association. The Bank operates five branch offices,
four of which are in Charlottesville/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 75 miles west of Richmond, Virginia, and includes the University of
Virginia, the area's largest employer. The two largest financial institutions
operating in Charlottesville and Albemarle County, with a combined 44% of total
deposits at June 30, 1997, were acquired by the same out-of-state regional bank
at year-end 1997. The fifth branch, in Harrisonburg, Virginia opened in May
1997. Harrisonburg is in the Shenandoah Valley, approximately 70 miles west of
Charlottesville, and is the largest city in the Shenandoah Valley with a diverse
manufacturing base and an unemployment rate consistently among the lowest in
Virginia (currently 1.7%). A sixth branch at Lake Monticello in Fluvanna County,
Virginia is expected to open in 1998. Lake Monticello is a planned community
with approximately 11,000 residents, and the nearest bank branch at this time is
eight miles from Guaranty's site. 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 Hospital in Charlottesville
that an acquired statewide bank will close in mid-1998. The Corporation's total
deposits at December 31, 1997 were $112.9 million, up 38.8% from $81.4 million
at December 31, 1996. At December 31, 1997 total assets were $130.7 million and
shareholders' equity was $11.9 million.
Since December 31, 1996, the Corporation has hired four senior
officers, including two senior loan officers from larger statewide or regional
banks for construction and commercial lending. Management believes that, with
its existing five branch network, two new branch offices opening in 1998, its
new loan officers and the major mergers occurring in its primary market area,
the significant growth in loans and deposits over the last two years will
continue near term. During 1997, the Bank had residential loan closings of $54.4
million, up 62.9% from the $33.4 million in 1996. The most recent loan officer,
hired in December 1997, was a construction lender in Charlottesville and
Richmond for another large regional bank that was acquired by another
out-of-state bank holding company in late 1997.
The Corporation is a legal entity separate and distinct from the Bank
and its nonbanking subsidiaries. Accordingly, the right of the Corporation, and
thus the right of the Corporation's creditors, to participate in any
distribution of the assets or earnings of the Bank or any other subsidiary is
necessarily subject to the prior claims of creditors of the Bank or such
subsidiary, except to the extent that claims of the Corporation in its capacity
as a creditor may be recognized. The principal sources of the Corporation's
revenues are dividends from the Bank. The Corporation is a bank holding company
registered with the Board of Governors of the Federal Reserve under the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Corporation's
executive offices are located at 1658 State Farm Blvd., Charlottesville,
Virginia, 22911. Its mailing address is P. O. Box 7206, Charlottesville,
Virginia 22906-7206 and its telephone number is (804) 970-1100.
2
<PAGE>
GUARANTY CAPITAL TRUST I
The Trust is a statutory business trust formed under Delaware law
pursuant to (i) the Declaration and (ii) the filing of a certificate of trust
with the Delaware Secretary of State on October , 1997. The Trust's business and
affairs are conducted by the Trustees: Wilmington Trust Company, as Property
Trustee, Wilmington Trust Company, as Delaware Trustee, and individual
Administrative Trustees who are employees or officers of or affiliated with the
Corporation. The Trust exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the proceeds from the sale of the Trust
Securities to acquire the Junior Subordinated Debt Securities issued by the
Corporation and (iii) engaging in only those other activities necessary,
advisable or incidental thereto. The Junior Subordinated Debt Securities will be
the sole assets of the Trust, and payments under the Junior Subordinated Debt
Securities will be the sole revenues of the Trust. All of the Common Securities
will be owned directly or indirectly by the Corporation.
THE OFFERING
Securities Offered............. $6,000,000 of Preferred Securities
(liquidation amount $25.00 per Preferred
Security). The Trust reserves the right to
increase the Aggregate Liquidation Amount by
not more than $900,000.
Offering Price................. $25.00 per Preferred Security.
Conversion..................... Each Preferred Security is convertible until
maturity, unless previously redeemed or
conversion rights terminated, into Common
Stock of the Corporation at $ per share,
subject to adjustment under certain
conditions. (See "Preferred Securities -
Conversion Rights").
Distribution Dates............. Quarterly, commencing June 15, 1998.
Extension Periods.............. Distributions on Preferred Securities will
be deferred for the duration of any
Extension Period elected by the Corporation
with respect to the payment of interest on
the Junior Subordinated Debt Securities. No
Extension Period will exceed 20 consecutive
quarterly periods or extend beyond the
Stated Maturity of the Junior Subordinated
Debt Securities. See "Description of Junior
Subordinated Debt Securities-Option to
Extend Interest Payment Date" and "Certain
United States Federal Income Tax
Consequences--Interest Income and Original
Issue Discount."
Ranking........................ As long as there has not been an Event of
Default, the Preferred Securities will rank
pari passu, and payments thereon will be
made pro rata, with the Common Securities.
If there has been an Event of Default, the
Preferred Securities will be senior to, and
payments thereon will be made prior to any
payments with respect to, the Common
Securities. See "Description of Preferred
Securities-Subordination of Common
Securities." The Junior Subordinated Debt
Securities will rank pari passu with all
other junior subordinated debt securities to
be issued by the Corporation pursuant to the
Indenture with substantially similar
subordination terms ("Other Debentures"),
and which may be issued and sold (if at all)
to other trusts to be
3
<PAGE>
established by the Corporation (if any), in
each case similar to the Trust ("Other
Trusts"), and will be unsecured and
subordinate and junior in right of payment
to the extent and in the manner set forth in
the Indenture to all Senior Debt of the
Corporation. See "Description of Junior
Subordinated Debt Securities." The Guarantee
will rank pari passu with all other
guarantees (if any) which may be issued by
the Corporation with respect to capital
securities (if any) which may be issued by
Other Trusts ("Other Guarantees") and will
constitute an unsecured obligation of the
Corporation and will rank subordinate and
junior in right of payment to the extent and
in the manner set forth in the Guarantee to
all Senior Debt of the Corporation. See
"Description of Guarantee." In addition,
because the Corporation is a holding
company, the Junior Subordinated Debt
Securities and the Guarantee are effectively
subordinated to all existing and future
liabilities of the Corporation's
subsidiaries, including deposits. See "Risk
Factors-Status of the Corporation as a Bank
Holding Company."
Option to Terminate
Conversion Rights.............. The Corporation may at its option terminate
the convertibility of the Preferred
Securities into Common Stock after , 2001,
if for at least 20 trading days within any
period of 30 consecutive trading days the
Closing Price of the Common Stock exceeds
115% of the Conversion Price.
Redemption..................... The Trust Securities are subject to
mandatory redemption (i) in whole, but not
in part, at the Stated Maturity upon
repayment of the Junior Subordinated Debt
Securities, (ii) in whole, but not in part,
contemporaneously with the optional
redemption at any time by the Corporation of
the Junior Subordinated Debt Securities at
any time within 90 days following the
occurrence and during the continuation of a
Tax Event, Investment Company Event or
Capital Treatment Event in each case,
subject to possible regulatory approval and
(iii) in whole or in part, at any time on or
after , 2003, contemporaneously with the
optional redemption by the Corporation of
the Junior Subordinated Debt Securities in
whole or in part, in each case at the
applicable Redemption Price (as defined
herein). See "Description of Preferred
Securities-Redemption."
No Rating...................... The Preferred Securities are not expected to
be rated by any rating service, nor is any
other security issued by the Corporation so
rated.
ERISA Considerations........... Prospective purchasers must carefully
consider the restrictions on purchase set
forth. under "Notice to Investors" and
"Certain -ERISA Considerations."
Proposed Nasdaq OTC Bulletin
Board Symbol................... Application has been made to have the
Preferred Securities approved for quotation
on the Nasdaq OTC Bulletin Board under the
symbol "GSLCP".
4
<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of the Trust Securities will be
invested by the Trust in the Junior Subordinated Debt Securities. The
Corporation intends to apply the net proceeds from the sale of the Junior
Subordinated Debt Securities to its general funds and for general corporate
purposes, including making advances to the Bank to support its continued growth.
Pending any such application by the Corporation, the net proceeds may be
invested in interest-bearing securities.
RISK FACTORS
Prospective investors should carefully consider the matters set forth
under "Risk Factors."
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to
fixed charges for the Corporation for each of the years in the four-year period
ended June 30, 1996, for the six months ended December 31, 1996 and for the year
ended December 31, 1997. For purposes of computing these ratios, earnings
represent net income, plus total taxes based on income, plus fixed charges.
Fixed charges include interest expense (ratios are presented both excluding and
including interest on deposits), the estimated interest component of net rental
expense and amortization of debt expense.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31 December 31 Years Ended June 30
----------- ----------- ------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Excluding interest on deposits 2.24x .99x 1.48x 1.21x .83x 1.52x
Including interest on deposits 1.23x 1.00x 1.19x 1.10x .90x 1.29x
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following unaudited consolidated summary sets forth selected
financial data for the Corporation and its subsidiaries for the periods and at
the dates indicated. The following summary is qualified in its entirety by the
detailed information and the financial statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31 December 31 Year Ended June 30
----------- ----------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data (Dollars in thousands, except per share data)
Gross interest income................ $9,520 $4,276 $7,617 $6,788 $6,684 $7,717
Gross interest expense............... 6,038 2,940 5,192 4,663 5,073 5,094
Net interest income.................. 3,482 1,336 2,425 2,125 1,611 2,623
Provision (credit) for possible
loan losses........................ 122 92 57 (9) 74 37
Net interest income after
provision for loan losses.......... 3,360 1,244 2,368 2,134 1,537 2,586
Non-interest income.................. 1,867 462 1,107 872 126 828
Non-interest expense................. 3,843 1,716 2,487 2,530 2,182 1,958
Income (loss) before income taxes 1,384 (10) 988 476 (519) 1,456
Income taxes......................... 486 (4) 344 101 (235) 483
Income before cumulative effect of
change in accounting principle..... 898 (6) 644 375 (284) 973
Cumulative effect of change in
accounting for income taxes........ - - - - (196) -
------- ------- ------- ------- ------- -------
Net income (loss).................... $898 $(6) $644 $375 $(480) $973
==== ==== ==== ==== ====== ====
Per Share Data (1)
Basic and diluted net income
(loss) (2)......................... $.61 $(.01) $.70 $.70 $(.90) $1.81
Cash dividends....................... .12 .05 .05 - - .25
Book value at period end............. 7.90 7.12 6.91 6.57 6.57 7.47
Tangible book value at period end.... 7.90 7.12 6.91 6.57 6.57 7.47
Period-End Balance Sheet Data
Total assets......................... $130,708 $116,020 $110,161 $89,461 $88,256 $92,832
Total loans.......................... 99,675 81,270 84,081 75,221 77,755 70,195
Total deposits....................... 112,947 81,401 74,687 52,461 53,467 50,020
Long-term debt....................... 2,360 2,706 3,144 3,981 4,834 9,499
Shareholders' equity................. 11,860 6,576 6,349 6,016 3,531 4,001
Shares outstanding...................1,501,383 924,008 919,168 915,568 537,168 537,168
Performance Ratios
Return on average assets............. .71% (.01%) .64% .41% (.49%) 1.00%
Return on average shareholders'
equity............................. 9.11 (.11) 10.24 9.67 (12.00) 26.31
Average shareholders' equity to
average total assets............... 7.77 5.68 6.24 4.22 4.07 3.80
Net interest margin (3).............. 2.96 2.50 2.54 2.38 1.68 2.82
Asset Quality Ratios
Net charge-offs to average loans..... .06% .01% .02% .00% .09% (.03%)
Allowance to period-end gross loans.. .93 1.02 .89 .93 .93 1.02
Allowance to non-performing loans.... 65.11 51.75 52.82 47.61 42.74 32.91
Nonaccrual loans to gross loans...... 1.42 1.97 1.67 1.94 1.31 1.27
Nonperforming assets to gross loans
and foreclosed properties.......... 1.49 2.04 1.72 2.11 1.60 2.83
Capital and Liquidity Ratios
Risk-based
Tier 1 capital..................... 14.29% 11.64% 12.13% 13.31% 7.75% 9.05%
Total capital...................... 15.42 12.89 13.28 14.56 9.01 10.31
Leverage capital ratio............... 9.34 5.81 6.01 6.72 4.00 4.32
Total equity to total assets......... 9.07 5.66 5.76 6.72 4.00 4.32
</TABLE>
- -------------------
(1) All per share figures have been adjusted to reflect a two-for-one stock
split on January 15, 1996.
(2) Net income per share is computed using the weighted average outstanding
shares.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Corporation's net
yield on its earning assets.
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Preferred Securities should consider
carefully, in addition to the other information contained in this Prospectus,
the following risk factors before purchasing shares of the Preferred Securities
offered hereby. This Prospectus contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which statements can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other comparable
terminology. The Corporation cautions readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Corporation's actual results and could cause the Corporation's
actual results in 1998 and beyond to differ materially from those expressed in
any forward-looking statements made herein.
Ranking of Obligations Under the Guarantee and the Junior Subordinated Debt
Securities
The obligations of the Corporation under the Guarantee issued by the
Corporation for the benefit of the holders of Preferred Securities and under the
Junior Subordinated Debt Securities are unsecured and rank subordinate and
junior in right of payment to all Senior Debt (which, as defined, includes all
outstanding subordinated debt of the Corporation). At December 31, 1997, the
Corporation had no aggregate outstanding Senior Debt on an unconsolidated basis.
The obligations of the Corporation under the Guarantee also rank subordinate and
junior in right of payment to creditors of the Bank and the Corporation's other
subsidiaries. See "Status of the Corporation as a Bank Holding Company." Upon
the issuance of the Junior Subordinated Debt Securities, the Corporation will
not have any indebtedness that ranks pari passu with or junior to its
obligations under the Guarantee and the Junior Subordinated Debt Securities.
None of the Indenture, the Guarantee or the Declaration places any limitation on
the amount of secured or unsecured debt, including Senior Debt, that may be
incurred by the Corporation or any subsidiary. See "Description of Junior
Subordinated Debt Securities-Subordination" and "Description of Guarantee-Status
of the Guarantee."
The ability of the Trust to pay amounts due on the Preferred Securities
is solely dependent upon the Corporation making payments on the Junior
Subordinated Debt Securities as and when required.
Status of the Corporation as a Bank Holding Company
The Corporation is a legal entity separate and distinct from the Bank,
although the principal source of the Corporation's cash revenues is dividends
from the Bank. The right of the Corporation to participate in the distribution
of assets of any subsidiary, including the Bank, upon the latter's liquidation,
reorganization or otherwise (and thus the ability of the holders of Preferred
Securities to benefit indirectly from any such distribution) will be subject to
the prior claims of such subsidiary's creditors, which will take priority except
to the extent that the Corporation may itself be a creditor of such subsidiary
with a recognized claim. Accordingly, the Junior Subordinated Debt Securities
will be effectively subordinated to all existing and future liabilities of the
Corporation's subsidiaries, and holders of Junior Subordinated Debt Securities
should look only to the assets of the Corporation for payments on the Junior
Subordinated Debt Securities. Because the Corporation is a holding company with
limited assets and liabilities, a substantial portion of the consolidated
liabilities of the Corporation are liabilities of its subsidiaries. The
Guarantee will constitute an unsecured obligation of the Corporation and will
rank subordinate and junior in right of payment to all Senior Debt in the same
manner as the Junior Subordinated Debt Securities.
As a holding company, the Corporation conducts its operations through
its subsidiaries and, therefore, its principal source of cash is receipt of
dividends from the Bank. However, there are legal limitations on the source and
amount of dividends that a Virginia-chartered, Federal Reserve member bank such
as the Bank is
7
<PAGE>
permitted to pay. A Virginia-chartered bank may pay dividends only from net
undivided profits. Additionally, a dividend may not be paid if it would impair
the paid-in capital of the bank. In addition, prior approval of the Federal
Reserve is required if the total of all dividends declared by a member bank in
any calendar year will exceed the sum of that bank's net profits for that year
and its retained net profits for the preceding two calendar years, less any
required transfers to either surplus or any fund for retirement of any preferred
stock. At January 1, 1998, the Bank could have paid approximately $1.7 million
in dividends to the Corporation without prior Federal Reserve approval. The
payment of dividends by the Bank may also be affected by other factors, such as
requirements for the maintenance of adequate capital. In addition, the Federal
Reserve is authorized to determine, under certain circumstances relating to the
financial condition of a member bank, whether the payment of dividends would be
an unsafe or unsound banking practice and to prohibit payment thereof.
Rapid Growth
It is the intention of Guaranty's management to expand Guaranty's asset
base. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Overview." In particular, Guaranty hopes to utilize the
capital raised in the Offering to support anticipated increases in its deposit
base and loans. Additional capital also would increase Guaranty's legal lending
limit under federal law, which in turn would allow Guaranty to compete more
actively in its market area for larger construction, land development,
commercial real estate and business loans. Guaranty's ability to manage growth
successfully will depend on its ability to maintain cost controls and asset
quality while attracting additional loans and deposits, as well as on factors
beyond Guaranty's control, such as economic conditions and interest rate trends.
If Guaranty grows too quickly and is not able to control costs and maintain
asset quality, Guaranty's growth could materially adversely affect its financial
performance.
Option to Extend Interest Payment Date; Tax Consequences; Market Price
Consequences
So long as no Debenture Event of Default (as defined herein) has
occurred and is continuing, the Corporation has the right under the Indenture to
defer the payment of interest on the Junior Subordinated Debt Securities at any
time or from time to time for a period not exceeding 20 consecutive quarterly
periods with respect to each Extension Period, provided, however, that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debt Securities. As a consequence of any such deferral, quarterly
Distributions on the Preferred Securities by the Trust will also be deferred
(and the amount of Distributions to which holders of the Preferred Securities
are entitled will accumulate additional Distributions thereon at % per annum
thereof, compounded quarterly from the relevant payment date for such
Distributions during any such Extension Period). During any Extension Period,
the Corporation may not (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
the Corporation's capital stock (which includes common and preferred stock),
(ii) make any payment of principal, interest or premium, if any, on, or repay,
repurchase or redeem any debt securities of the Corporation (including Other
Debentures) that rank pari passu with or junior in interest to, the Junior
Subordinated Debt Securities or (iii) make any guarantee payments with respect
to any guarantee by the Corporation of the debt securities of any subsidiary of
the Corporation (including Other Guarantees) if such guarantee ranks pari passu
with or junior in interest to the Junior Subordinated Debt Securities (other
than (a) dividends or distributions in Common Stock of the Corporation, (b) any
Declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (c)
payments under the Guarantee, (d) purchases or acquisitions of shares of the
Corporation's Common Stock in connection with the satisfaction by the
Corporation of its obligations under any employee benefit plan or any other
contractual obligation of the Corporation (other than a contractual obligation
ranking pari passu with or junior to the Junior Subordinated Debt Securities),
(e) as a result of a reclassification of the Corporation's capital stock or the
exchange or conversion of one class or series of the Corporation's capital stock
for another class or series of the Corporation's capital stock or (f) the
purchase of fractional
8
<PAGE>
interests in shares of the Corporation's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged). Prior to the termination of any Extension Period, the
Corporation may further extend such Extension Period, provided, however, that
such extension does not cause such Extension Period to exceed 20 consecutive
quarterly periods or to extend beyond the Stated Maturity. Upon the termination
of any Extension Period and the payment of all interest then accrued and unpaid
on the Junior Subordinated Debt Securities (together with interest thereon
accrued at % per annum, compounded quarterly, to the extent permitted by
applicable law), and subject to the foregoing limitations, the Corporation may
elect to begin a new Extension Period. There is no limitation on the number of
times that the Corporation may elect to begin an Extension Period. See
"Description of Preferred Securities-Distributions" and "Description of Junior
Subordinated Debt Securities-Option to Extend Interest Payment Date."
If an Extension Period occurs, for United States federal income tax
purposes, a holder of Preferred Securities will continue to include income (in
the form of original issue discount) in respect of its pro rata share of the
Junior Subordinated Debt Securities held by the Trust as long as the Junior
Subordinated Debt Securities remain outstanding. As a result, during an
Extension Period a holder of Preferred Securities will include such income in
gross income for United States federal income tax purposes in advance of the
receipt of cash, and will not receive the cash related to such income from the
Trust if the holder disposes of the Preferred Securities prior to the record
date for the payment of Distributions thereafter. See "Certain United States
Federal Income Tax Consequences-Interest Income and Original Issue Discount" and
"Sales or Redemption of the Preferred Securities."
Should the Corporation elect to exercise its right to defer payments of
interest on the Junior Subordinated Debt Securities in the future, the market
price of the Preferred Securities is likely to be adversely affected. A holder
that disposes of its Preferred Securities during an Extension Period, therefore,
might not receive the same return on its investment as a holder that continues
to hold its Preferred Securities. In addition, as a result of the existence of
the Corporation's right to defer interest payments on the Junior Subordinated
Debt Securities, the market price of the Preferred Securities (which represent
beneficial ownership interests in the Trust holding the Junior Subordinated Debt
Securities as its sole assets) may be more volatile than the market prices of
other securities that are not subject to such deferrals.
Tax Event, Investment Company Event or Capital Treatment Event Redemption
Upon the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event, the Corporation has the
right to redeem the Junior Subordinated Debt Securities in whole, but not in
part, at any time within 90 days following the occurrence of such Tax Event,
Investment Company Event or Capital Treatment Event and thereby cause a
mandatory redemption of the Preferred Securities and Common Securities. The
ability of the Corporation to exercise its rights to redeem the Junior
Subordinated Debt Securities prior to the stated maturity may be subject to
prior regulatory approval by the Federal Reserve, if then required under
applicable Federal Reserve capital guidelines or policies. See "Description of
Junior Subordinated Debt Securities-Optional Redemption" and "Description of
Preferred Securities-Mandatory Redemption" and "Description of Preferred
Securities-Liquidation of the Trust and Distribution of Junior Subordinated Debt
Securities."
A "Tax Event" means the receipt by the Trust of an opinion of counsel
to the Corporation experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Trust is, or will be within 90 days of the delivery of such
opinion,
9
<PAGE>
subject to United States federal income tax with respect to income received or
accrued on the Junior Subordinated Debt Securities (ii) interest payable by the
Corporation on the Junior Subordinated Debt Securities is not, or within 90 days
of the delivery of such opinion will not be, deductible by the Corporation, in
whole or in part, for United States federal income tax purposes or (iii) the
Trust is, or will be within 90 days of the delivery of the opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
The Corporation believes that under current law it is entitled to
deduct the interest accruing on the Junior Subordinated Debt Securities. Under
the Taxpayer Relief Act of 1997, enacted on August 5, 1997, issuers of certain
convertible debt instruments are not entitled to deduct interest thereon. For
example, interest is not deductible if the debt instrument is convertible into
equity of the issuer (or a related party) at the option of the holder and there
is a substantial certainty that the holder will exercise the conversion option.
Similarly, interest is not deductible if the debt instrument is part of an
arrangement which is reasonably expected to result in a conversion at the option
of the issuer (or a related party). The Corporation believes that this
legislation should not apply to the Junior Subordinated Debt Securities. The
Internal Revenue Service (the "Service"), however, has not yet issued any
guidance regarding its interpretation of the new legislation. There can be no
assurance that the Service will not take the position that interest on the
Junior Subordinated Debt Securities is not deductible. Accordingly, there can be
no assurance that an audit or future interpretation by the Service of the new
legislation will not result in a Tax Event and an early redemption of the
Preferred Securities before, or after, , 2001 at the Redemption Price.
In addition, in recent years, there have been several proposals to
adopt legislation which, if enacted and made applicable to the Junior
Subordinated Debt Securities, would preclude the Corporation from deducting
interest thereon. The most recent proposal was made by the Clinton
Administration in 1997. Such proposals have not been adopted by Congress, but
there can be no assurance that similar proposals will not be adopted in the
future and made applicable to the Junior Subordinated Debt Securities.
Accordingly, there can be no assurance that any such legislation will not result
in a Tax Event which would permit the Corporation to cause a redemption of the
Preferred Securities before, or after, , 2001 at the Redemption Price.
"Investment Company Event" means the receipt by the Trust of an opinion
of counsel to the Corporation experienced in such matters to the effect that, as
a result of the occurrence of a change in law or regulation or a written change
(including any announced prospective change) in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, there is more than an insubstantial risk that the Trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), which change or prospective change becomes effective or would become
effective, as the case may be, on or after the date of the issuance of the
Preferred Securities.
A "Capital Treatment Event" means the reasonable determination by the
Corporation that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the
Corporation will not be entitled to treat an amount up to the Liquidation Amount
of the Preferred Securities as 25% of the Corporation's "Tier I Capital" (or the
then equivalent thereof) for purposes of the risk-based capital adequacy
guidelines of the Federal Reserve, as then in effect and applicable to the
Corporation. See "Description of Junior Subordinated Debt Securities -Optional
Redemption," "Description of Preferred Securities-Mandatory Redemption" and
"Description of Preferred Securities-Liquidation of the Trust and Distribution
of Junior Subordinated Debt Securities."
10
<PAGE>
Liquidation of the Trust and Distribution of Junior Subordinated Debt Securities
The Corporation, as the holder of the outstanding Common Securities,
will have the right at any time to terminate the Trust and cause the Junior
Subordinated Debt Securities to be distributed to the holders of the Trust
Securities. Under current United States federal income tax law, a distribution
of Junior Subordinated Debt Securities upon the dissolution of the Trust would
not be a taxable event to holders of the Preferred Securities. If, however, the
Trust is characterized for United States federal income tax purposes as an
association taxable as a corporation at the time of dissolution of the Trust,
the distribution of the Junior Subordinated Debt Securities may constitute a
taxable event to holders of Preferred Securities. See "Certain United States
Federal Income Tax Consequences-Distribution of the Junior Subordinated Debt
Securities to Holders of Preferred Securities."
There can be no assurance as to the market prices for Preferred
Securities or Junior Subordinated Debt Securities that may be distributed in
exchange for Preferred Securities if a liquidation of the Trust occurs.
Accordingly, the Preferred Securities or the Junior Subordinated Debt Securities
may trade at a discount to the price that the investor paid to purchase the
Preferred Securities offered hereby. Because holders of Preferred Securities may
receive Junior Subordinated Debt Securities on termination of the Trust,
prospective purchasers of Preferred Securities are also making an investment
decision with regard to the Junior Subordinated Debt Securities and should
carefully review all the information regarding the Junior Subordinated Debt
Securities contained herein. See "Description of Preferred
Securities-Liquidation of the Trust and Distribution of the Junior Subordinated
Debt Securities" and "Description of Junior Subordinated Debt
Securities-General."
Termination of Conversion Rights
On and after , 2001, the Corporation may, subject to certain conditions
including advance public notice, at its option, cause the conversion rights of
holders of Junior Subordinated Debt Securities to terminate, provided that the
Closing Price of the Common Stock exceeds 115% of the then applicable Conversion
Price of the Preferred Securities for a specified period, in which case the
right to convert the Preferred Securities into Common Stock will likewise
terminate. See "Description of Preferred Securities-Conversion
Rights-Termination of Conversion Rights."
Rights Under the Guarantee
The Guarantee guarantees to the holders of the Trust Securities the
following payments, to the extent not paid by the Trust: (i) any accumulated and
unpaid Distributions required to be paid on the Trust Securities, to the extent
that the Trust has funds on hand available therefor at such time, (ii) the
Redemption Price with respect to any Trust Securities called for redemption, to
the extent that the Trust has funds on hand available therefor at such time, and
(iii) upon a voluntary or involuntary dissolution, winding-up or liquidation of
the Trust (unless the Junior Subordinated Debt Securities are distributed to
holders of the Trust Securities or all of the Preferred Securities are
redeemed), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Trust has funds on hand available therefor at such time, and (b) the amount
of assets of the Trust remaining available for distribution to holders of the
Trust Securities after the satisfaction of liabilities to creditors of the Trust
as required by applicable law.
The holders of not less than a majority in aggregate Liquidation Amount
of the Preferred Securities have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Guarantee Trustee
(as defined herein) in respect of the Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Guarantee. Any holder
of the Trust Securities may institute a legal proceeding directly against the
Corporation to enforce its rights under the Guarantee without first instituting
a legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity. If the Corporation were to default on its obligation to pay amounts
payable under the Junior Subordinated Debt
11
<PAGE>
Securities, the Trust would lack funds for the payment of Distributions or
amounts payable on redemption of the Preferred Securities or otherwise, and, in
such event, holders of the Preferred Securities would not be able to rely upon
the Guarantee for payment of such amounts. Instead, in the event a Debenture
Event of Default shall have occurred and be continuing, and such event is
attributable to the failure of the Corporation to pay principal of or interest
on the Junior Subordinated Debt Securities on the applicable payment date, then
a holder of Preferred Securities may institute a Direct Action. Notwithstanding
any payments made to a holder of Preferred Securities by the Corporation in
connection with a Direct Action, the Corporation shall remain obligated to pay
the principal of and interest on the Junior Subordinated Debt Securities, and
the Corporation shall be subrogated to the rights of the holder of such
Preferred Securities with respect to payments on the Preferred Securities to the
extent of any payments made by the Corporation to such holder in any Direct
Action. Except as described herein, holders of Preferred Securities will not be
able to exercise directly any other remedy available to the holders of the
Junior Subordinated Debt Securities or assert directly any other rights in
respect of the Junior Subordinated Debt Securities. See "Description of Junior
Subordinated Debt Securities-Enforcement of Certain Rights by Holders of
Preferred Securities," "Description of Junior Subordinated Debt
Securities-Debenture Events of Default" and "Description of Guarantee." The
Declaration provides that each holder of Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Indenture. Wilmington
Trust Company will act as Guarantee Trustee under the Guarantee Agreement and
will hold the Guarantee for the benefit of the holders of the Preferred
Securities. Wilmington Trust Company will also act as Property Trustee under the
Declaration and as Debenture Trustee under the Indenture.
Limited Voting Rights
Holders of Preferred Securities will generally have limited voting
rights relating only to the modification of the Preferred Securities, the
dissolution, winding-up or liquidation of the Trust, and the exercise of the
Trust's rights as holder of Junior Subordinated Debt Securities. The right to
vote to appoint, remove or replace the Property Trustee, the Delaware Trustee or
the Administrative Trustees is vested exclusively in the holder of the Common
Securities except, with respect to the Property Trustee and the Delaware
Trustee, upon the occurrence of certain events described herein. The Property
Trustee, the Administrative Trustees and the Corporation may amend the
Declaration without the consent of holders of Preferred Securities to ensure
that the Trust will not be classified for United States Federal income tax
purposes as an association taxable as a corporation or, as other than a grantor
trust, even if such action adversely affects the interests of such holders. See
"Description of Preferred Securities-Removal of Trustees" and "Voting Rights;
Amendment of the Declaration."
Regulatory Capital Requirements
The Corporation and the Bank are subject to regulatory capital
guidelines. At December 31, 1997, the Bank was in compliance with applicable
regulatory capital requirements. The Corporation, at that date, had a total
capital to risk-weighted assets ratio of 15.4% and a Tier I Capital to
risk-weighted assets ratio of 14.3%, both above the minimum requirements of 8.0%
and 4.0%, respectively. The Corporation's leverage ratio at that date was 9.3%.
Although the minimum leverage ratio requirement is 3.0%, most bank
holding companies, including the Corporation, are expected to maintain an
additional cushion of at least 100 to 200 basis points above the minimum.
However, the Federal Reserve may assign a specific capital ratio to an
individual bank holding company, including the Corporation, based on its
assessment of asset quality, earnings performance, interest-rate risk and
liquidity. As of the date of this Prospectus, the Federal Reserve has not
advised the Corporation of a specific leverage ratio requirement.
There can be no assurance that either the Corporation or the Bank will
continue to be able to meet their respective minimum capital ratios. In the
event that the Corporation or the Bank falls below the minimum
12
<PAGE>
capital requirements described above, agencies may take regulatory action
including, in the case of the Bank, "prompt corrective action." Such actions
could impair the Corporation's ability to make principal and interest payments
on the Junior Subordinated Debt Securities.
Trading Price
The Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debt Securities. A holder using the accrual method of
accounting (and a cash method holder, during and after an Extension Period or if
the Junior Subordinated Debt Securities are deemed to have been issued with OID)
who disposes of its Preferred Securities between Distribution Record Dates (as
defined herein) will be required to include accrued but unpaid interest (or OID)
on the Junior Subordinated Debt Securities through the date of disposition in
income as ordinary income and to add such amount to its adjusted tax basis in
its share of the underlying Junior Subordinated Debt Securities deemed disposed
of. To the extent the selling price is less than the holder's adjusted tax
basis, a holder will recognize a capital loss. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes. See "Certain United States Federal
Income Tax Consequences-Interest Income and Original Issue Discount" and "Sales
or Redemption of the Preferred Securities."
Absence of Public Market and Transfer Restrictions
There is no existing market for the Preferred Securities and there can
be no assurance as to the liquidity of any markets that may develop for the
Preferred Securities, the ability of the holders to sell their Preferred
Securities or at the price at which holders of the Preferred Securities will be
able to sell their Preferred Securities. Future trading prices of the Preferred
Securities will depend on many factors including, among other things, prevailing
interest rates, the Corporation's operating results, and the market for similar
securities. Although the Corporation intends to apply to have the Preferred
Securities approved for trading on the Nasdaq Over-the-Counter Bulletin Board,
there can be no assurance that such application will be approved, that an active
trading market for the Preferred Securities will develop or, if one does
develop, that it will be maintained. In addition, notwithstanding the
registration of the Preferred Securities, holders who are "affiliates" of the
Corporation or the Trust as defined under Rule 405 of the Securities Act may
publicly offer for sale or resell the Preferred Securities only in compliance
with the provisions of Rule 144 under the Securities Act.
GUARANTY CAPITAL TRUST I
The Trust is a statutory business trust formed under Delaware law
pursuant to (i) the original Declaration of Trust executed by the Corporation,
as Depositor, Wilmington Trust Company, as Delaware Trustee, and the
Administrative Trustees named therein, which original Declaration of Trust will
be amended and restated and executed by the Corporation, as Depositor,
Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as
Delaware Trustee, and the Administrative Trustees named therein (the
"Declaration"), and (ii) the filing of a certificate of trust with the Delaware
Secretary of State on October , 1997. The Trust exists for the exclusive
purposes of (i) issuing and selling the Trust Securities, (ii) using the
proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debt Securities and (iii) engaging in only those other activities
necessary or incidental thereto. Accordingly, the Junior Subordinated Debt
Securities will be the sole assets of the Trust, and payments under the Junior
Subordinated Debt Securities will be the sole revenues of the Trust. All of the
Common Securities will be owned directly or indirectly by the Corporation. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Preferred Securities, except that upon the occurrence and
continuance of any Debenture Event of Default (or an event that, with notice or
the passage of time, would become such an Event of Default) or an Event of
Default under the Declaration, the rights of the Corporation as holder of the
Common Securities to payment in respect of
13
<PAGE>
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Preferred Securities. See
"Description of Preferred Securities--Subordination of Common Securities." The
Corporation will acquire Common Securities in an aggregate Liquidation Amount
equal to approximately 3% of the total capital of the Trust. The Trust has a
term of 40 years, but may terminate earlier as provided in the Declaration. The
Trust's business and affairs are conducted by its trustees, each appointed by
the Corporation as holder of the Common Securities. The trustees for the Trust
will be Wilmington Trust Company, as the Property Trustee, Wilmington Trust
Company, as the Delaware Trustee, and individual trustees as Administrative
Trustees who are employees or officers of or affiliated with the Corporation
(collectively, the "Trustees"). Wilmington Trust Company, as Property Trustee,
will act as sole indenture trustee under the Declaration. Wilmington Trust
Company will also act as trustee under the Guarantee Agreement and the
Indenture. See "Description of Junior Subordinated Debt Securities" and
"Description of Guarantee." The holder of the Common Securities, or the holders
of a majority in Liquidation Amount of the Preferred Securities if an Event of
Default under the Declaration resulting from a Debenture Event of Default has
occurred and is continuing, will be entitled to appoint, remove or replace the
Property Trustee and/or Delaware Trustee. In no event will the holders of the
Preferred Securities have the right to vote to appoint, remove or replace the
Administrative Trustees; such voting rights are vested exclusively in the holder
of the Common Securities. The duties and obligations of each Trustee are
governed by the Declaration. Pursuant to the expense provisions under the
Indenture, the Corporation, as obligor on the Junior Subordinated Debt
Securities, will pay all fees and expenses related to the Trust and the offering
of the Preferred Securities and will pay, directly or indirectly, all ongoing
costs, expenses and liabilities of the Trust. See "Description of Preferred
Securities-Expenses and Taxes." The address and telephone number of the
principal executive office of the Trust is c/o:
Guaranty Financial Corporation
1658 State Farm Blvd.
Charlottesville, Virginia 22911
(804) 970-1100
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The following unaudited consolidated summary sets forth selected
financial data for the Corporation and its subsidiaries for the periods and at
the dates indicated. The following summary is qualified in its entirety by the
detailed information and the financial statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31 December 31 Year Ended June 30
----------- ----------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
Income Statement Data (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Gross interest income................ $9,520 $4,276 $7,617 $6,788 $6,684 $7,717
Gross interest expense............... 6,038 2,940 5,192 4,663 5,073 5,094
Net interest income.................. 3,482 1,336 2,425 2,125 1,611 2,623
Provision (credit) for possible
loan losses........................ 122 92 57 (9) 74 37
Net interest income after
provision for loan losses.......... 3,360 1,244 2,368 2,134 1,537 2,586
Non-interest income.................. 1,867 462 1,107 872 126 828
Non-interest expense................. 3,843 1,716 2,487 2,530 2,182 1,958
Income (loss) before income taxes 1,384 (10) 988 476 (519) 1,456
Income taxes......................... 486 (4) 344 101 (235) 483
Income before cumulative effect of
change in accounting principle..... 898 (6) 644 375 (284) 973
Cumulative effect of change in
accounting for income taxes........ - - - - (196) -
------- ------- ------- ------- ------- -------
Net income (loss).................... $898 $(6) $644 $375 $(480) $973
==== ==== ==== ==== ====== ====
Per Share Data (1)
Basic and diluted net income
(loss) (2)......................... $.61 $(.01) $.70 $.70 $(.90) $1.81
Cash dividends....................... .12 .05 .05 - - .25
Book value at period end............. 7.90 7.12 6.91 6.57 6.57 7.47
Tangible book value at period end.... 7.90 7.12 6.91 6.57 6.57 7.47
Period-End Balance Sheet Data
Total assets......................... $130,708 $116,020 $110,161 $89,461 $88,256 $92,832
Total loans.......................... 99,675 81,270 84,081 75,221 77,755 70,195
Total deposits....................... 112,947 81,401 74,687 52,461 53,467 50,020
Long-term debt....................... 2,360 2,706 3,144 3,981 4,834 9,499
Shareholders' equity................. 11,860 6,576 6,349 6,016 3,531 4,001
Shares outstanding...................1,501,383 924,008 919,168 915,568 537,168 537,168
Performance Ratios
Return on average assets............. .71% (.01%) .64% .41% (.49%) 1.00%
Return on average shareholders'
equity............................. 9.11 (.11) 10.24 9.67 (12.00) 26.31
Average shareholders' equity to
average total assets............... 7.77 5.68 6.24 4.22 4.07 3.80
Net interest margin (3).............. 2.96 2.50 2.54 2.38 1.68 2.82
Asset Quality Ratios
Net charge-offs to average loans..... .06% .01% .02% .00% .09% (.03%)
Allowance to period-end gross loans.. .93 1.02 .89 .93 .93 1.02
Allowance to non-performing loans.... 65.11 51.75 52.82 47.61 42.74 32.91
Nonaccrual loans to gross loans...... 1.42 1.97 1.67 1.94 1.31 1.27
Nonperforming assets to gross loans
and foreclosed properties.......... 1.49 2.04 1.72 2.11 1.60 2.83
Capital and Liquidity Ratios
Risk-based
Tier 1 capital..................... 14.29% 11.64% 12.13% 13.31% 7.75% 9.05%
Total capital...................... 15.42 12.89 13.28 14.56 9.01 10.31
Leverage capital ratio............... 9.34 5.81 6.01 6.72 4.00 4.32
Total equity to total assets......... 9.07 5.66 5.76 6.72 4.00 4.32
</TABLE>
- -------------------
(1) All per share figures have been adjusted to reflect a two-for-one stock
split on January 15, 1996.
(2) Net income per share is computed using the weighted average outstanding
shares.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Corporation's net
yield on its earning assets.
15
<PAGE>
THE CORPORATION
The following discussion includes selected financial and other data for
the Corporation and its subsidiaries and is qualified in its entirety by the
detailed information, and should be read in conjunction with the financial
statements and other information included elsewhere in this Prospectus.
Guaranty Financial Corporation, a Virginia corporation (the
"Corporation"), is a bank holding company that was formed in 1995 and is
headquartered in Charlottesville, Virginia. The Corporation's only subsidiary is
Guaranty Bank (the "Bank"), which opened for business in 1981.
The Bank operates four full service banking offices in
Charlottesville/Albemarle County, Virginia and is the only community bank
headquartered or with a branch in Albemarle County or Charlottesville. 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 75 miles west of Richmond, Virginia, and includes the University of
Virginia, the area's largest employer. The two largest financial institutions
operating in Charlottesville and Albemarle County, with 44% of total deposits at
June 30, 1997, were acquired by the same out-of-state regional bank at year-end
1997.
A fifth branch, in Harrisonburg, Virginia opened in May 1997.
Harrisonburg is in the Shenandoah Valley, approximately 70 miles west of
Charlottesville. The Harrisonburg/Rockingham County area is the largest area in
the Shenandoah Valley, which extends from Winchester to Lexington, Virginia. The
Harrisonburg/Rockingham County area is a manufacturing center with an
unemployment rate consistently among the lowest in Virginia (currently 1.7%)
located on Interstate 81 between Interstates 64 and 66. Major manufacturers
include WLR Foods, Inc.; Rocco, Inc.; Merck & Co., Inc.; Tenneco-Walker; Banta
Corporation; and Reynolds Metals Company. James Madison University, with 13,000
students, is located in Harrisonburg.
A sixth branch at Lake Monticello in Fluvanna County, Virginia is
expected to open in 1998. Fluvanna County is immediately east of Albemarle
County. The Lake Monticello area has a population of approximately 11,000 and
the nearest bank branch today is approximately eight miles from the Bank's
location. In addition, Guaranty has entered into a letter of intent, subject to
regulatory approval, to lease a seventh branch site near the University of
Virginia Hospital in Charlottesville that an acquired regional bank will close
in mid-1998.
When the Corporation decided to convert the Bank from a federal savings
association to a Virginia-chartered commercial bank, it also decided to
restructure the Bank's balance sheet. Historically, the Bank funded a
significant percentage of its loans with borrowings, primarily Federal Home Loan
Bank advances, and a significant percentage of its loan portfolio consisted of
long term, fixed rate residential mortgage loans. From June 30, 1995 to December
31, 1997, deposits increased from $52.5 million to $112.9 million. Over the same
period FHLB advances and other borrowings declined from 47.7% of deposits to
2.7%.
Fixed-rate residential mortgage loans comprised 29.4% and 24.6% of
gross loans at June 30, 1995 and December 31, 1997, respectively. In January
1997 the Bank adopted a policy of selling all new fixed-rate residential
mortgage loans and has emphasized originations of commercial mortgage, consumer
and construction loans.
The Corporation's total deposits at December 31, 1997 were $112.9
million, up 38.7% from $81.4 million at December 31, 1996. Net income for 1997
was $898,000, up 161.8% from the $343,000 in calendar year 1996 which included a
one-time SAIF assessment of $225,000. At December 31, 1997 total assets were
$130.7 million and shareholders' equity was $11.9 million.
16
<PAGE>
Since December 31, 1996, the Corporation has hired four senior
officers, including two senior loan officers from larger regional banks for
construction and commercial lending. Management believes that, with its existing
five branch network, two new branch offices opening in 1998, its new loan
officers and the major mergers occurring in its primary market area, the
significant growth in loans and deposits over the last two years will continue
near term. During 1997, the Bank had residential loan closings of $54.4 million,
up 62.9% from the $33.4 million in 1996. The most recent loan officer, hired in
December 1997, was a construction lender in Charlottesville and Richmond for
another large regional bank acquired by another out-of-state bank holding
company in late 1997.
The Corporation is a legal entity separate and distinct from the Bank
and its nonbanking subsidiaries. Accordingly, the right of the Corporation, and
thus the right of the Corporation's creditors, to participate in any
distribution of the assets or earnings of the Bank or any other subsidiary is
necessarily subject to the prior claims of creditors of the Bank or such
subsidiary, except to the extent that claims of the Corporation in its capacity
as a creditor may be recognized. The principal sources of the Corporation's
revenues are dividends from the Bank.
The Corporation is a bank holding company registered with the Federal
Reserve under the BHCA. The Corporation's executive offices are located at 1658
State Farm Blvd., Charlottesville, Virginia 22911. Its mailing address is P. O.
Box 7206, Charlottesville, Virginia 22906-7206, and its telephone number is
(804) 970-1100.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 Prospectus. 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 the
Corporation, 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:
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.
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 of factors, including
inadequate deposit growth,
18
<PAGE>
general economic conditions and competition for loans could cause
Guaranty to fall short of these targets.
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.
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.
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 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.
19
<PAGE>
For the six months ended December 31, 1996, the Corporation experienced
a 102% decrease in earnings from the same period in 1995. During the six months
ended December 31, 1996, the Corporation's net loss was $6,000 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.
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
20
<PAGE>
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.
21
<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.
22
<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 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.
23
<PAGE>
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.
24
<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 - - - - - -
Restricted...................... 7 7 - - - - - -
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........................... 71 80 - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total..................... $16,280 $16,354 $21,454 $21,445 $15,084 $14,803 $ 6,093 $ 6,247
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
25
<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:
Bonds............... - - 1,014 6.75% 3,039 6.65% 7,421 7.98% 11,474 7.52%
---- ---- ------ ----- ----- ----- ----- ----- ------- -----
Total............... $ 265 $1,897 $3,450 $8,707 $ 14,319
===== ====== ===== ===== =======
</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>
26
<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>
27
<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>
28
<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.
29
<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.
30
<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.
31
<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.
32
<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 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
33
<PAGE>
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.
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,
34
<PAGE>
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 the Corporation.
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, the Corporation 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.
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 the Corporation's reliance on high cost time deposits
and
35
<PAGE>
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
the Corporation'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.
36
<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.
37
<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.
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
38
<PAGE>
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 this 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.
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 the
Corporation. 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 the date
of this Prospectus, no outstanding balances existed under this line nor was this
line
39
<PAGE>
used during the period January 1, 1998 through the date of this Prospectus to
fund short term cash needs of the Corporation.
No assurances can be made that management's plans to provide for the
Corporation's liquidity needs will be successful, or if successful, will
generate the cash needed to fund operations or reduce the Corporation'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.
The Corporation and the Bank are subject to Federal Reserve
regulations, including the BHCA. At December 31, 1997, the Corporation exceeded
all such regulatory capital requirements as shown in the following table.
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.
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<PAGE>
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 February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"). SFAS 128 is effective for financial statements, including interim
periods, issued for periods ending after December 15, 1997. SFAS 128 provides a
different method for calculating earnings per share than is currently used in
accordance with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in earnings of an entity, similar to fully diluted earnings per
share.
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 financial statements of the Corporation.
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
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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 the Corporation. Presently, the Corporation is still in the discovery
stage of identifying all areas and processes rendering exposure to the Year 2000
problem. However, the Corporation, in conjunction with its outside service
bureau, has developed a plan to address Year 2000 exposure surrounding the
Corporation's computer and data processing systems. Since early 1997, the
Corporation 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, the Corporation plans to
test its other systems that are not related to the service bureau. Management
anticipates the Corporation will be Year 2000 compliant, thus satisfying all
regulatory requirements.
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<PAGE>
BUSINESS
General
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 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.
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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 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.
44
<PAGE>
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.
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
45
<PAGE>
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 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
46
<PAGE>
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.
Properties
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.
47
<PAGE>
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.
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.
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.
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<PAGE>
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
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
holding company operations, a bank holding
49
<PAGE>
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 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.
50
<PAGE>
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.
51
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following information sets forth the names, ages, principal
occupations and business experience for all directors and executive officers of
the Corporation. The date shown for first election as a director in the
information below represents the year in which the nominee or incumbent director
was first elected to the Board of Directors of the Corporation or previously to
the Board of Directors of the Bank. Unless otherwise indicated, the business
experience and principal occupations shown for each individual has extended five
or more years.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
Douglas E. Caton 55 Chairman of the Board 1981
Harry N. Lewis 70 Vice Chairman of the Board 1976
Thomas P. Baker 51 President, Chief Executive 1990
Officer and Director
Henry J. Browne 65 Director 1976
Robert P. Englander 78 Director 1976
John R. Metz 60 Director 1980
James R. Sipe, Jr. 42 Director 1996
Oscar W. Smith, Jr. 67 Director 1976
John B. Syer 54 Director 1998
Vincent B. McNelley 32 Senior Vice President, Chief
Financial Officer and Treasurer
Donna W. Richards 34 Senior Vice President - Mortgage Lending
Rex L. Smith 39 Senior Vice President - Retail Operations
</TABLE>
Douglas E. Caton has been Chairman of the Corporation's Board of
Directors since 1989. Mr. Caton is a commercial real estate developer and has
been President of Management Services Corp., a real estate management company,
since 1972. Mr. Caton is a member of the Virginia State Bar and is a Major
General in the United States Army Reserve.
Harry N. Lewis has served as the Vice Chairman of the Corporation's
Board of Directors since 1976. Mr. Lewis has been President of Lewis Insurance
Agency, Inc., an insurance sales company in Charlottesville, Virginia, since
July 1952. Mr. Lewis is an alumnus of the Colgate Darden Graduate School of
Business Administration and is a member of the Board of Directors of the United
Way. He is also a member of the Board of Directors of Keller & George and is the
past president of the Central Virginia Chapter of the C.P.C.U.
52
<PAGE>
Thomas P. Baker has served as the President and Chief Executive Officer
of the Bank since January 1, 1990.
Henry J. Browne is an architect in private practice with studios in
Keswick, Virginia and Boca Grande, Florida. He was President of Browne, Eichmon,
Dalgliesh, Gilpin & Paxton, an architecture firm in Charlottesville, Virginia,
from March 1958 to April 1996. Mr. Browne is a past director of Farmington
Country Club, past president of the Virginia Chapter of the American Institute
of Architects and past president of Downtown Charlottesville, Inc.
Robert P. Englander is President of the Englander Agency, a life
insurance company in Charlottesville, Virginia. Mr. Englander has been an
insurance agent since 1949.
John R. Metz has been a pharmacist at Martha Jefferson Hospital in
Charlottesville, Virginia, since October 1967. Mr. Metz is a member of the Board
of Directors of the Virginia Pharmaceutical Association Research and Education
Foundation.
James R. Sipe, Jr. is an associate broker with Prudential Funkhouser &
Associates, a real estate sales company in Harrisonburg, Virginia.
Oscar W. Smith, Jr. is President of K-B Management Co.,
Charlottesville, Virginia. Mr. Smith is a director of Smith/Eastman, Inc. and is
the past president of the Albemarle County Rotary Club. He is a master mason and
the past president of the University of Virginia Touchdown Club.
John B. Syer has been the Executive Director of the University of
Virginia Alumni Association and UVA Fund since 1994. Mr. Syer was formerly the
owner and Chief Executive Officer of S&N Transportation in Norfolk, Virginia,
President and Chief Operating Officer of Essex Financial Group, Inc. and its
affiliates in Norfolk, Virginia, and Managing Partner of Home Health of
Tidewater.
Vincent B. McNelley was appointed Senior Vice President and Chief
Financial Officer in July 1997. From June 1993 to June 1997, he was a Senior
Audit Associate with BDO Seidman, LLP.
Donna W. Richards was appointed Senior Vice President of Mortgage
Lending in April 1995. Ms. Richards has been employed by the Corporation since
April 1993 and has served in the past as Manager of Loan Originations and a Loan
Officer. From December 1991 to April 1993, she was a Senior Loan Processor for
Virginia Federal.
Rex L. Smith, III has been Senior Vice President - Retail Operations
since February 1998 and was Senior Vice President - Commerical from September
1996 to February 1997. Between March 1997 and January 1998, Mr. Smith was a Vice
President with Central Fidelity National Bank. From March 1993 until August
1996, he was Vice President/Senior Business Manager of Crestar Financial
Corporation.
53
<PAGE>
Security Ownership of Management
The following table sets forth information as of March 1, 1998
regarding the number of shares of Common Stock beneficially owned by all
directors and by all directors and executive officers as a group. Beneficial
ownership includes shares, if any, held in the name of the spouse, minor
children or other relatives of the nominee living in such person's home, as well
as shares, if any, held in the name of another person under an arrangement
whereby the director or executive officer can vest title in himself at once or
at some future time.
Common Stock
Name Beneficially Owned Percentage of Class
---- ------------------ -------------------
Directors
Thomas P. Baker (1) 9,215 0.61%
Henry J. Browne 32,462 2.16%
Douglas E. Caton 253,640 16.88%
Robert P. Englander 10,560 0.70%
Harry N. Lewis 5,688 0.38%
John R. Metz 13,992 0.93%
James R. Sipe, Jr. 1,500 0.10%
Oscar W. Smith, Jr. 20,034 1.33%
John B. Syer 1,000 0.06%
All present executive
officers and directors
as a group (12 Persons) 350,221 23.30%
- --------------------
(1) Includes beneficial ownership of shares issuable upon the exercise of
stock options exercisable within 60 days of March 1, 1998.
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of March 1, 1998
regarding the number of shares of Common Stock beneficially owned by all persons
who own five percent or more of Common Stock of the Corporation:
<TABLE>
<CAPTION>
Common Stock
Name and Address Beneficially Owned Percentage of Class
---------------- ------------------ -------------------
<S> <C> <C>
Douglas E. Caton 253,640 16.88%
4 Deer Park
Earlysville, Virginia
Ferguson, Andrews Investment Advisers, Inc. 88,600 5.90%
2560 Ivy Road
Charlottesville, Virginia 22903
</TABLE>
54
<PAGE>
Executive Compensation
Summary of Cash and Certain Other Compensation
The following table shows, for the fiscal year ended December 31, 1997,
the six months ended December 31, 1996 and the fiscal years ended June 30, 1996
and 1995, the cash compensation paid by the Corporation, as well as certain
other compensation paid or accrued for those years, to the named Executive
Officer in all capacities in which he served:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation(1)
----------------------
All Other
Name and Principal Position Year Salary Bonus Compensation (2)
- --------------------------- ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
Thomas P. Baker 1997 $115,200 $3,252 $2,869
President and 1996 (3) 56,850 - 568
Chief Executive Officer 1996 (4) 113,700 - 1,137
1995 113,700 - 1,137
</TABLE>
- --------------------
(1) All benefits that might be considered of a personal nature did not
exceed the lesser of $50,000 or 10% of total annual salary and bonus
for the officer named in the table.
(2) Amounts reflect the Corporation's matching contribution under its
Section 401(k) retirement plan.
(3) Six months ended December 31, 1996.
(4) Fiscal year ended June 30, 1996.
Options Grants in Last Fiscal Year
The following table sets forth for the year ended December 31, 1997,
the grants of stock options to the named Executive Officer:
<TABLE>
<CAPTION>
Option Grants In Last Fiscal Year
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name Granted (#) (a) Year (%) (b) Price ($/Share) Expiration Date
<S> <C> <C> <C> <C>
Thomas P. Baker 2,000 5.0 12.00 8/28/00
2,000 5.0 13.20 8/28/01
2,000 5.0 14.52 8/28/02
2,000 5.0 15.97 8/28/03
2,000 5.0 17.57 8/28/04
- --------------------
</TABLE>
(a) Stock options were awarded at or above the fair market value of the shares
of Common Stock at the date of award. The options with an exercise price of
$12.00 are immediately exercisable. The options with exercise prices of
$13.20, $14.52, $15.97 and $17.57 will become exercisable on August 28,
1998, 1999, 2000 and 2001, respectively.
(b) Options to purchase 40,000 shares of Guaranty Common Stock were granted to
employees during the year ended December 31, 1997.
55
<PAGE>
Option Exercises and Holdings
Set forth in the table below is information concerning each exercise of
stock options during the fiscal year ended December 31, 1997 by the named
Executive Officer and the year end value of unexercised options.
Aggregated Options/SAR Exercises in Last Fiscal Year
and FY-End Options/SAR Value
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARS In-The-Money Options/SARs
at FY-End(#) (1) at FY-End ($) (2)
---------------- -----------------
Shares Acquired Value
Name On Exercise (#) Realized ($)(3) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Baker 2,375 28,500 2,000 8,000 5,000 2,600
</TABLE>
- --------------------
(1) Each of these options relates to Common Stock.
(2) These values are based on $14.50, the closing price of Common Stock on
December 31, 1997.
(3) The total number of options exercised was 4,000. However, in accordance
with the plan document, this was done using a "cashless exercise" which
resulted in 2,375 shares of stock being awarded to Mr. Baker and no
money being received by the Corporation.
Directors' Fees
Directors, excluding directors who are officers of the Corporation,
received fees of $450 for each meeting of the Board of Directors attended and
$300 for each Compensation, Planning and Audit Committee meeting attended during
fiscal 1997. Mr. Caton, who is an ex officio of all Committees and devotes
additional time to the Corporation's affairs as Chairman of the Board of
Directors, received a fee of $25,200 in the fiscal year ended December 31, 1997
in lieu of any fees for attending Board of Directors and Committee meetings.
Employment Agreements
The Corporation and Thomas P. Baker are parties to an employment
agreement that provides for Mr. Baker to serve as President and Chief Executive
Officer of the Corporation. The agreement is for a period ending December 31,
2000 and provides for a base salary of $115,300, which the Board of Directors
may increase. If Mr. Baker's employment is terminated for reasons other than
cause, he will be entitled to receive severance pay equal to one-half of his
annual base salary in effect at the time.
If termination of employment due to a change in control had occurred in
fiscal 1997, Mr. Baker would be entitled to severance payments amounting to
approximately $115,000.
Transactions with Management
Some of the directors and officers of the Corporation are at present,
as in the past, customers of the Corporation and, the Corporation has had, and
expects to have in the future, banking transactions in the ordinary course of
its business with directors, officers, principal shareholders and their
associates, on substantially the same terms, including interest rates and
collateral on loans, as those prevailing at the same time for comparable
transactions with others. These transactions do not involve more than the normal
risk of collectibility or present other unfavorable features. The largest
aggregate outstanding balance of loans to directors, executive officers and
their associates, as a group in the fiscal year ended December 31, 1997 was
approximately $386,000. Such balances totaled $386,000 at December 31, 1997, or
3.3% of the Corporation's equity capital at that date.
56
<PAGE>
There are no legal proceedings to which any director, officer,
principal shareholder or associates is a party that would be material and
adverse to the Bank.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Corporation at December 31, 1997. See "Use of Proceeds." This table is based on,
and is qualified in its entirety by, the historical consolidated financial
statements of the Corporation, including the related notes thereto, which are
included in documents incorporated by reference herein, and should be read in
conjunction therewith.
<TABLE>
<CAPTION>
December 31,
1997
------------------
(Dollars in
Thousands)
<S> <C>
Long-term debt $2,360
Capitalized lease obligations
Shareholders' Equity
Common Stock, par value $1.25 per share, authorized
4,000,000 shares, shares outstanding - 1,501,383 1,876
Capital surplus 5,725
Retained earnings 4,208
Unrealized gains on securities available for sale, net of
income taxes 51
------
Total shareholders' equity 11,860
Total capitalization $14,220
=======
Consolidated Capital Ratios
Equity to assets 9.07%
Tier 1 Capital 14.29%
Total Capital 15.42%
</TABLE>
ACCOUNTING TREATMENT
The financial statements of the Trust will be consolidated into the
Corporation's consolidated financial statements, with the Preferred Securities
treated as minority interest and shown in the Corporation's consolidated balance
sheet as "Corporation-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust." The financial statement footnotes of the Corporation will
reflect that the sole asset of the Trust will be the amount of the Junior
Subordinated Debt Securities maturing on , 2028. All future reports filed
by the Corporation under the Exchange Act will present information regarding the
Trust and any other similar trusts in the manner described above.
57
<PAGE>
REGULATORY TREATMENT
As a registered bank holding company, the Corporation is required by
the Federal Reserve to maintain certain levels of capital for bank regulatory
purposes. The Corporation expects that the Preferred Securities will be treated
as "Tier I Capital" of the Corporation for such purposes; provided that
Preferred Securities can only comprise 25% of the Corporation's Tier I Capital.
Based on the Corporation's Tier I Capital at December 31, 1997, approximately
$3.9 million of the Preferred Securities would be initially included in the
Corporation's Tier I Capital.
DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Declaration, the Trustees on behalf of the
Trust will issue the Preferred Securities and the Common Securities. The
Preferred Securities will represent beneficial ownership interests in the Trust
and the holders thereof will be entitled to a preference in certain
circumstances with respect to Distributions and amounts payable on redemption of
the Trust Securities or liquidation of the Trust over the Common Securities, as
well as other benefits as described in the Declaration. See "Subordination of
Common Securities." The Declaration will be qualified under the Trust Indenture
Act of 1939 (the "Trust Indenture Act"). This summary of certain provisions of
the Preferred Securities, the Common Securities and the Declaration does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Declaration, including the definitions
therein of certain terms. The form of the Declaration is available upon request
from the Trustees.
General
The Preferred Securities will be limited to $6.0 million Aggregate
Liquidation Amount at any one time outstanding. The Trust reserves the right to
increase the Aggregate Liquidation Amount by not more than $900,000. The
Preferred Securities will rank pari passu, and payments will be made thereon pro
rata, with the Common Securities, except as described under "Subordination of
Common Securities." Legal title to the Junior Subordinated Debt Securities will
be held by the Property Trustee on behalf of the Trust in trust for the benefit
of the holders of the Preferred Securities and Common Securities. The Guarantee
Agreement executed by the Corporation for the benefit of the holders of the
Preferred Securities (the "Guarantee Agreement") will provide for the Guarantee
on a subordinated basis with respect to the Preferred Securities but will not
guarantee payment of Distributions or amounts payable on redemption of the
Preferred Securities or on liquidation of the Trust when the Trust does not have
funds on hand available to make such payments. See "Description of Guarantee."
Distributions
The Preferred Securities represent beneficial ownership interests in
the Trust, and Distributions on each Preferred Security will be payable at $___
per annum, and will be payable quarterly in arrears on the 15th day of March,
June, September and December of each year to the holders of the Preferred
Securities at the close of business on the Business Day (as defined herein)
immediately preceding such Distribution Date (each, a "Record Date").
Distributions on the Preferred Securities will be cumulative. Distributions will
accumulate from the Issue Date. The first Distribution Date for the Preferred
Securities will be June 15, 1998. The amount of Distributions payable for any
period will be computed on the actual number of days elapsed in a year of twelve
30-day months. In the event that any date on which Distributions are payable on
the Preferred Securities is not a Business Day, payment of the Distributions
payable on such date will be made on the next succeeding day that is a Business
Day (and without any additional Distributions or other payments in respect to
any such delay) with the same force and effect as if made on the date such
payment was originally payable (each date on which Distributions are payable in
accordance with the foregoing. a "Distribution Date"). A "Business Day"
58
<PAGE>
shall mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in Richmond, Virginia are authorized or required by law or
executive order to remain closed, or a day on which the corporate trust office
of the Property Trustee or the Debenture Trustee is closed for business.
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debt Securities at any time or
from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Junior Subordinated Debt Securities. As
a consequence of any such election, quarterly Distributions on the Preferred
Securities by the Trust will be deferred during any such Extension Period.
Distributions to which holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at __% per annum thereof, compounded
quarterly from the relevant payment date for such Distributions during any such
Extension Period, to the extent permitted by applicable law. The term
"Distributions" as used herein shall include any such additional Distributions.
During any such Extension Period, the Corporation may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(which includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Corporation (including Other Debentures) that rank pari passu
with or junior in interest to the Junior Subordinated Debt Securities, or (iii)
make any guarantee payments with respect to any guarantee by the Corporation of
the debt securities of any subsidiary of the Corporation (including Other
Guarantees) if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debt Securities (other than (a) dividends or distributions
in Common Stock of the Corporation, (b) any Declaration of a dividend in
connection with the implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the
Guarantee, (d) purchases or acquisitions of shares of the Corporation's Common
Stock in connection with the satisfaction by the Corporation of its obligations
under any employee benefit plan or any other contractual obligation of the
Corporation (other than a contractual obligation ranking pari passu with or
junior to the Junior Subordinated Debt Securities), (e) as a result of a
reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock or (f) the purchase of
fractional interests in shares of the Corporation's stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged). Prior to the termination of any such Extension Period,
the Corporation may further extend such Extension Period, provided that such
extension does not cause such Extension Period to exceed 20 consecutive
quarterly periods or to extend beyond the Stated Maturity of the Junior
Subordinated Debt Securities. Upon the termination of any such Extension Period
and the payment of all amounts then accrued and unpaid on the Junior
Subordinated Debt Securities (together with interest thereon accrued at __% per
annum, compounded quarterly, to the extent permitted by applicable law), and
subject to the foregoing limitations, the Corporation may elect to begin a new
Extension Period. No interest or other amounts shall be due and payable during
an Extension Period, except at the end thereof. The Corporation must give the
Property Trustee, the Administrative Trustees and the Debenture Trustee notice
of its election of any such Extension Period at least three Business Days prior
to the earlier of (i) the date the Distributions on the Preferred Securities
would have been payable except for the election to begin such Extension Period
or (ii) the date the Administrative Trustees are required to give notice to any
automated quotation system or to holders of such Preferred Securities of the
record date or the date such Distributions are payable, but in any event not
less than three Business Days prior to such record date. The Debenture Trustee
shall give notice of the Corporation's election to begin or extend an Extension
Period to the holders of the Preferred Securities. There is no limitation on the
number of times that the Corporation may elect to begin an Extension Period. See
"Description of Junior Subordinated Debt Securities--Option to Extend Interest
Payment Date" and "Certain United States Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
59
<PAGE>
The Corporation has no current intention of exercising its right to
defer payments of interest on the Junior Subordinated Debt Securities.
The revenue of the Trust available for distribution to holders of the
Preferred Securities will be limited to payments under the Junior Subordinated
Debt Securities in which the Trust will invest the proceeds from the issuance
and sale of the Trust Securities. See "Description of Junior Subordinated Debt
Securities-General." If the Corporation does not make interest payments on the
Junior Subordinated Debt Securities, the Property Trustee will not have funds
available to pay Distributions on the Preferred Securities. The payment of
Distributions (if and to the extent the Trust has funds legally available for
the payment of such Distributions and cash sufficient to make such payments) is
guaranteed by the Corporation on a limited basis as set forth herein under
"Description of Guarantee."
Conversion Rights
General. Preferred Securities will be convertible at any time prior to
the earlier of (i) 5:00 p.m. (Richmond, Virginia time) on the Business Day
immediately preceding the date of redemption or repayment of such Preferred
Securities, whether at maturity or upon redemption, and (ii) 5:00 p.m.
(Richmond, Virginia time) on the Conversion Termination Date (if any), at the
option of the holders thereof and in the manner described below, into a number
of shares of Common Stock that equals the quotient obtained by dividing (i) $25
(ii) the Conversion Price referred to on the cover page of this Prospectus,
subject to adjustment as described below under "-- Conversion Price
Adjustments." The Trust will covenant in the Declaration not to convert Junior
Subordinated Debt Securities held by it except pursuant to a notice of
conversion delivered to the Property Trustee, as initial conversion agent (the
"Conversion Agent"), by a holder of Preferred Securities.
A holder of Preferred Securities wishing to exercise its conversion
right will be required to deliver an irrevocable conversion request, together
with the certificate evidencing such Preferred Security, to the Conversion Agent
which will exchange such Preferred Security for an equivalent amount of the
Junior Subordinated Debt Securities (based on an exchange ratio of $25.00 in
principal amount of Junior Subordinated Debt Securities for each $25.00 in
Liquidation Amount of Preferred Securities) on behalf of such holder and
immediately convert such Junior Subordinated Debt Securities into Common Stock.
Holders may obtain copies of the required form of the conversion request from
the Conversion Agent.
Holders of Preferred Securities at 5:00 p.m. (Richmond, Virginia time)
on a Distribution Record Date will be entitled to receive the Distribution
payable on such Preferred Securities on the corresponding Distribution Date
notwithstanding the conversion of such Preferred Securities following such
Distribution Record Date but on or prior to such Distribution Date. Except as
provided in the immediately preceding sentence, neither the Trust nor the
Corporation will make, or be required to make, any payment, allowance or
adjustment for accumulated and unpaid Distributions, whether or not in arrears,
on converted Preferred Securities; provided, however, that if notice of
redemption of Preferred Securities is mailed or otherwise given to holders of
Preferred Securities or the Trust issues a press release announcing a Conversion
Termination Date, then, if any holder of Preferred Securities converts any
Preferred Securities into Common Stock on any date on or after the date on which
such notice of redemption is mailed or otherwise given or the date of such press
release, as the case may be, and if such date of conversion falls on any day
from and including the first day of an Extension Period and on or prior to the
Distribution Date upon which such Extension Period ends, such converting holder
shall be entitled to receive either (i) if the date of such conversion falls
after a Distribution Record Date and on or prior to the next succeeding
Distribution Date, all accrued and unpaid Distributions on such Preferred
Securities (including interest thereon, if any, to the extent permitted by
applicable law) to such Distribution Date or (ii) if the date of such conversion
does not fall on a date described in clause (i) above, all accrued and unpaid
Distributions on such Preferred Securities (including interest thereon, if any,
to the extent permitted by applicable law) to the most recent Distribution Date
prior to the date of such conversion, which
60
<PAGE>
Distributions shall, in either such case, be paid to such converting holder
unless the date of conversion of such Preferred Securities is on or prior to the
Distribution Date upon which such Extension Period ends and after the
Distribution Record Date for such Distribution Date, in which case such
Distributions shall be paid to the person who was the holder of such Preferred
Securities (or one or more predecessor Preferred Securities) at 5:00 p.m.
(Richmond, Virginia time) on such Distribution Record Date. The Corporation will
make no payment or allowance for distributions on the shares of Common Stock
issued upon such conversion, except to the extent that such shares of Common
Stock are held of record on the record date for any such distributions. Each
conversion will be deemed to have been effected immediately prior to 5:00 p.m.
(Richmond, Virginia time) on the day on which the related conversion request was
received by the Conversion Agent.
No fractional shares of Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional interest will be paid by the
Corporation in cash based on the Closing Price of the Common Stock on the date
such Preferred Securities are converted.
Conversion Price Adjustments - General. The Conversion Price is subject
to adjustment in certain events, including (a) the issuance after the Issue Date
of shares of Common Stock as a dividend or a distribution with respect to Common
Stock, (b) subdivisions, combinations and reclassifications of Common Stock
effected after the Issue Date, (c) the issuance to all holders of Common Stock
after the Issue Date of rights or warrants entitling them (for a period not
exceeding 45 days) to subscribe for or purchase shares of Common Stock at less
than the then Current Market Price (as defined below) of the Common Stock, (d)
the distribution to all holders of Common Stock after the Issue Date of
evidences of its indebtedness, capital stock, cash or assets (including
securities, but excluding those rights, warrants, dividends and distributions
referred to above and dividends and distributions paid exclusively in cash), (e)
the payment of dividends (and other distributions) on Common Stock after the
Issue Date paid exclusively in cash, excluding cash dividends if the annualized
per share amount thereof does not exceed 15% of the Current Market Price of
Common Stock as of the trading day immediately preceding the date of declaration
of such dividend, and (f) payment to holders of Common Stock after the Issue
Date in respect of a tender or exchange offer (other than an odd-lot offer) by
the Corporation for Common Stock at a price in excess of 110% of the then
Current Market Price of Common Stock as of the trading day next succeeding the
last date tenders or exchanges may be made pursuant to such tender or exchange
offer.
"Current Market Price" means, in general, the average of the daily
Closing Prices (as defined below) for the five consecutive trading days selected
by the Corporation commencing not more than 20 trading days before, and ending
not later than, the earlier of the day in question or, if applicable, the day
before the "ex" date (as defined) with respect to the issuance or distribution
in question.
The Corporation from time to time may reduce the conversion price of
the Junior Subordinated Debt Securities (and thus the Conversion Price of the
Preferred Securities) by any amount selected by the Corporation for any period
of at least 20 days, in which case the Corporation shall give at least 15 days'
notice of such reduction. The Corporation may, at its option, make such
reductions in the Conversion Price, in addition to those set forth above, as the
Corporation deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. See
"Certain United States Federal Income Tax Consequences-Adjustment of Conversion
Price."
No adjustment of the Conversion Price will be made upon the issuance of
any shares of Common Stock pursuant to any present or future plan providing for
the reinvestment of dividends or interest payable on securities of the
Corporation and the investment of additional optional amounts in shares of
Common Stock under any such plan, or upon the issuance of any shares of Common
Stock or options or rights to purchase such shares pursuant to any employee
benefit plan or program, or pursuant to any option, warrant, right or any
exercisable, exchangeable or convertible security outstanding as of the date on
which the Junior Subordinated
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Debt Securities are first issued. No adjustment of the Conversion Price will be
made upon the issuance of rights under any shareholder rights plan. No
adjustment in the Conversion Price will be required unless adjustment would
require a change of at least one percent (1%) in the Conversion Price then in
effect; provided, however, that any adjustment that would not be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. If any action would require adjustment of the Conversion Price
pursuant to more than one of the provisions described above, only one adjustment
shall be made with respect to that action and such adjustment shall be the
amount of adjustment that has the highest absolute value to the holder of the
Preferred Securities.
Conversion Price Adjustment-Merger, Consolidation or Sale of Assets of
the Corporation. In the event that the Corporation shall be a party to any
transaction, including, without limitation, and with certain exceptions, (a) a
recapitalization or reclassification of the Common Stock, (b) consolidation of
the Corporation with, or merger of the Corporation into, any other person, or
any merger of another person into the Corporation, (c) any sale, transfer or
lease of all or substantially all of the assets of the Corporation or (d) any
compulsory share exchange pursuant to which the Common Stock is converted into
the right to receive other securities, cash or other property (each of the
foregoing being referred to as a "Transaction"), then the holders of Preferred
Securities then outstanding will have the right to convert the Preferred
Securities into the kind and amount of securities, cash or other property
receivable upon the consummation of such Transaction by a holder of the number
of shares of Common Stock issuable upon conversion of such Preferred Securities
immediately prior to such Transaction.
In the case of a Transaction, each Preferred Security would become
convertible into the securities, cash or property receivable by a holder of the
number of shares of the Common Stock into which such Preferred Security was
convertible immediately prior to such Transaction. This change could
substantially lessen or eliminate the value of the conversion privilege
associated with the Preferred Securities in the future. For example, if the
Corporation was acquired in a cash merger, each Preferred Security would become
convertible solely into cash and would no longer be convertible into securities
which value would vary depending on the future prospects of the Corporation and
other factors.
Conversion Price adjustments or omissions in making such adjustments
may, under certain circumstances, be deemed to be distributions that could be
taxable as dividends to holders of Preferred Securities or to the holders of
Common Stock. See "Certain United States Federal Income Tax
Consequences-Adjustment of Conversion Price."
Termination of Conversion Rights. In addition to the rights of the
Corporation to redeem the Preferred Securities under the circumstances described
in this Prospectus, the Corporation also will have the right to terminate the
convertibility of the Preferred Securities into Common Stock as described in
this paragraph. On and after , 2001 and provided the Trust is current in the
payment of Distributions on the Preferred Securities (except to the extent that
the payment of Distributions may have been duly deferred as the result of an
Extension Period), the Corporation may, at its option, terminate the right to
convert the Junior Subordinated Debt Securities into Common Stock, in which case
the right to convert the Preferred Securities into Common Stock will likewise
terminate. The Corporation may exercise this option only if for at least 20
trading days within any period of 30 consecutive trading days ending on or after
, 2001, including the last trading day of such period, the Closing Price of the
Common Stock exceeds 115% of the then applicable Conversion Price of the
Preferred Securities. To exercise this conversion termination option, the
Corporation must cause the Trust to issue a press release for publication on the
Dow Jones News Service or on a comparable news service announcing the Conversion
Termination Date prior to the opening of business on the second trading day
after a period in which the condition in the preceding sentence has been met,
but in no event may such press release be issued prior to , 2001. The press
release shall announce the Conversion Termination
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Date and provide the Conversion Price and the Closing Price of the Preferred
Securities and the Common Stock, in each case as of the close of business on the
trading day next preceding the date of the press release.
Notice of the termination of conversion rights will be given by
first-class mail to the holders of the Preferred Securities not more than four
Business Days after the Trust issues the press release. The Conversion
Termination Date will be a Business Day selected by the Corporation not less
than 30 nor more than 60 days after the date on which the Trust issues the press
release announcing its intention to terminate conversion rights of Preferred
Security holders. In the event that the Corporation exercises its conversion
termination option, conversion rights will expire at 5:00 p.m. (Richmond,
Virginia time) on the Conversion Termination Date. In the event the Corporation
has not exercised its conversion termination option and the Preferred Securities
are otherwise called for redemption, the Preferred Securities will be
convertible at any time prior to 5:00 p.m. (Richmond, Virginia time) on the
Business Day immediately preceding the date of such redemption.
"Closing Price" of any security on any day means the last reported sale
price, regular way, on such day or, if no sale takes place on such day, the
average of the reported closing bid and asked prices on such day, regular way,
in either case as reported on the NYSE Composite Tape, or, if such security is
not listed or admitted to trading on the NYSE, on the principal national
securities exchange on which such security is listed or admitted to trading, or
if such security is not listed or admitted to trading on a national securities
exchange, on the National Market System of the National Association of
Securities Dealers, Inc. or, if such security is not quoted or admitted to
trading on such quotation system, on the principal quotation system on which
such security is listed or admitted to trading or quoted, or, if not listed or
admitted to trading or quoted on any national securities exchange or quotation
system, the average of the closing bid and asked prices of such security in the
over-the-counter market on the day in question as reported by the National
Quotation Bureau Incorporated, or a similar generally accepted reporting
service, or, if not so available in such manner, as furnished by any NYSE member
firm selected from time to time by the Board of Directors of the Corporation for
that purpose or, if not so available in such manner, as otherwise determined in
good faith by the Board of Directors of the Corporation.
Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debt Securities, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Trust Securities, upon not less than 30 nor more than
60 days' notice, at a redemption price (the "Redemption Price") equal to the
aggregate Liquidation Amount of such Preferred Securities plus accumulated but
unpaid Distributions thereon to the date of redemption (the "Redemption Date").
See "Description of Junior Subordinated Debt Securities-Optional Redemption." If
less than all the Junior Subordinated Debt Securities are to be repaid or
redeemed on a Redemption Date, then the proceeds from such repayment or
redemption shall be allocated to the redemption pro rata of the Preferred
Securities and the Common Securities.
The Corporation has the right to redeem the Junior Subordinated Debt
Securities (i) on or after , 2003, in whole at any time or in part from time to
time, or (ii) in whole, but not in part, at any time within 90 days following
the occurrence and during the continuation of a Tax Event, Investment Company
Event or Capital Treatment Event (each as defined below), in each case subject
to possible regulatory approval. A redemption of the Junior Subordinated Debt
Securities would cause a mandatory redemption of a Like Amount of the Preferred
Securities and Common Securities at the Redemption Price.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a
day on which banking institutions in the City of Richmond, Virginia are
authorized or required by law or executive order to remain
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closed, or (c) a day on which the Property Trustee's Corporate Trust Office or
the Corporate Trust Office of the Debenture Trustee is closed for business.
"Like Amount" means (i) with respect to a redemption of Trust
Securities, Trust Securities having a Liquidation Amount (as defined below)
equal to that portion of the principal amount of Junior Subordinated Debt
Securities to be contemporaneously redeemed in accordance with the Junior
Subordinated Indenture, allocated to the Common Securities and to the Preferred
Securities based upon the relative Liquidation Amounts of such classes and (ii)
with respect to a distribution of Junior Subordinated Debt Securities to holders
of Trust Securities in connection with a dissolution or liquidation of the
Trust, Junior Subordinated Debt Securities having a principal amount equal to
the Liquidation Amount of the Trust Securities of the holder to whom such Junior
Subordinated Debt Securities are distributed.
"Liquidation Amount" means the stated amount of $25.00 per Trust
Security.
"Tax Event" means the receipt by the Trust of an opinion of counsel to
the Corporation experienced in such matters to the effect that, as a result of
any amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Trust is, or will be within 90 days of the delivery of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debt Securities, (ii) interest
payable by the Corporation on the Junior Subordinated Debt Securities is not, or
within 90 days of the delivery of such opinion, will not be, deductible by the
Corporation, in whole or in part, for United States federal income tax purposes
or (iii) the Trust is, or will be within 90 days of the delivery of such
opinion, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
"Investment Company Event" means the receipt by the Trust of an opinion
of counsel to the Corporation experienced in such matters to the effect that, as
a result of the occurrence of a change in law or regulation or a written change
(including any announced prospective change) in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, there is more than an insubstantial risk that the Trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act, which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Preferred Securities.
"Capital Treatment Event" means the reasonable determination by the
Corporation that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the
Corporation will not be entitled to treat an amount equal to the Liquidation
Amount of the Preferred Securities as 25% of the Corporation's "Tier I Capital"
(or the then equivalent thereof) for purposes of the risk-based capital adequacy
guidelines of the Federal Reserve, as then in effect and applicable to the
Corporation.
Payment of Additional Sums. If a Tax Event described in clause (i) or
(iii) of the definition of Tax Event above has occurred and is continuing and
the Trust is the holder of all the Junior Subordinated Debt Securities, the
Corporation will pay Additional Sums (as defined below), if any, on the Junior
Subordinated Debt Securities.
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"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Trust on the
outstanding Preferred Securities and Common Securities of the Trust will not be
reduced as a result of any additional taxes, duties and other governmental
charges to which the Trust has become subject as a result of a Tax Event.
Redemption Procedures
Trust Securities shall be redeemed, if at all, at the Redemption Price
with the proceeds from the contemporaneous repayment or redemption of the Junior
Subordinated Debt Securities. Redemptions of the Trust Securities shall be made
and the Redemption Price shall be payable on each Redemption Date (as defined
below) only to the extent that the Trust has funds on hand available for the
payment of such Redemption Price. See also "Subordination of Common Securities."
If the Trust gives a notice of redemption in respect of the Preferred
Securities, then, by 12:00 noon, Richmond, Virginia time, on the date fixed for
redemption (the "Redemption Date"), to the extent funds are available, with
respect to the Preferred Securities held in global form, the Property Trustee
will deposit rrevocably with DTC funds sufficient to pay the Redemption Price
and will give DTC irrevocable instructions and authority to pay the Redemption
Price to the holders of the Preferred Securities. See "Form, Denomination,
Book-Entry Procedures and Transfer." With respect to the Preferred Securities
held in certificated form, the Property Trustee, to the extent funds are
available, will irrevocably deposit with the paying agent for the Preferred
Securities funds sufficient to pay the Redemption Price and will give such
paying agent irrevocable instructions and authority to pay the Redemption Price
to the holders thereof upon surrender of their certificates evidencing the
Preferred Securities. See "Payment and Paying Agency." Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date shall be
payable to the holders of the Preferred Securities on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then upon the date of such deposit, all
rights of the holders of the Preferred Securities will cease, except the right
of the holders of the Preferred Securities to receive the Redemption Price, but
without interest on such Redemption Price, or to convert the holder's Preferred
Securities into Common Stock as described under "Conversion Rights" above and
the Preferred Securities will cease to be outstanding. In the event that any
date fixed for redemption of Preferred Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price is
improperly withheld or refused and not paid either by the Trust or by the
Corporation pursuant to the Guarantee as described under "Description of
Guarantee," Distributions on Preferred Securities will continue to accrue at the
then applicable rate, from the Redemption Date originally established by the
Trust to the date such Redemption Price is actually paid, in which case the
actual payment date will be the date fixed for redemption for purposes of
calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender in the
open market or by private agreement.
Notice of any redemption (other than at the Stated Maturity of the
Junior Subordinated Debt Securities) will be mailed at least 30 days but not
more than 60 days before the Redemption Date to each holder of Trust Securities
at its registered address. Unless the Corporation defaults in payment of the
Redemption Price on, or in the repayment of, the Junior Subordinated Debt
Securities, on and after the Redemption Date, Distributions will cease to accrue
on the Trust Securities called for redemption.
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Liquidation of the Trust and Distribution of Junior Subordinated Debt Securities
The Corporation, as the holder of the outstanding Common Securities,
will have the right at any time (including, without limitation, upon the
occurrence of a Tax Event, an Investment Company Event or Capital Treatment
Event) to terminate the Trust and cause a Like Amount of the Junior Subordinated
Debt Securities to be distributed to the holders of the Trust Securities upon
liquidation of the Trust. Such right to terminate is subject to prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve.
Upon liquidation of the Trust and certain other events, the Junior
Subordinated Debt Securities may be distributed to holders of the Preferred
Securities. Under current United States federal income tax law, a distribution
of Junior Subordinated Debt Securities upon the dissolution of the Trust would
not be a taxable event to holders of the Preferred Securities. If, however, the
Trust is characterized for United States federal income tax purposes as an
association taxable as a corporation at the time of dissolution of the Trust,
the distribution of the Junior Subordinated Debt Securities may constitute a
taxable event to holders of Preferred Securities. See "Certain United States
Federal Income Tax Consequences--Distribution of Junior Subordinated Debt
Securities to Holders of Preferred Securities."
The Trust shall automatically terminate upon the first to occur of: (i)
certain events of bankruptcy, dissolution or liquidation of the Corporation;
(ii) the distribution of a Like Amount of the Junior Subordinated Debt
Securities to the holders of the Trust Securities if the Corporation, as
Depositor, has given written direction to the Property Trustee to terminate the
Trust (which direction is optional and, except as described above, wholly within
the discretion of the Corporation, as Depositor); (iii) redemption of all of the
Trust Securities as described under "Mandatory Redemption" above; (iv)
expiration of the term of the Trust; and (v) the entry of an order for the
dissolution of the Trust by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii), (iv)
or (v) above, the Trust shall be liquidated by the Trustees as expeditiously as
the Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Junior Subordinated Debt
Securities, unless such distribution would not be practical, in which event such
holders will be entitled to receive out of the assets of the Trust available for
distribution to holders, after satisfaction of liabilities to creditors of the
Trust as provided by applicable law, an amount equal to, in the case of holders
of Preferred Securities, the aggregate of the Liquidation Amount plus
accumulated and unpaid Distributions thereon to the date of payment (such amount
being the "Liquidation Distribution"). If such Liquidation Distribution can be
paid only in part because the Trust has insufficient assets available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by the Trust on the Preferred Securities shall be paid on a pro rata basis. The
holder(s) of the Common Securities will be entitled to receive distributions
upon any such liquidation pro rata with the holders of the Preferred Securities,
except that if a Debenture Event of Default (or an event that, with notice or
passage of time, would become such an Event of Default) or an Event of Default
under the Declaration has occurred and is continuing, the Preferred Securities
shall have a priority over the Common Securities with respect to any such
distributions. See "Subordination of Common Securities." If an early termination
occurs as described in clause (v) above, the Junior Subordinated Debt Securities
will be subject to optional redemption in whole (but not in part).
"Like Amount" means (i) with respect to a redemption of Preferred
Securities, Preferred Securities having a Liquidation Amount equal to that
portion of the principal amount of Junior Subordinated Debt Securities to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of the Preferred Securities and (ii) with respect to a
distribution of Junior Subordinated Debt Securities to holders of Preferred
Securities in connection with a
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dissolution or liquidation of the Trust, Junior Subordinated Debt Securities
having a principal amount equal to the Liquidation Amount of the Trust
Securities of the holder to whom such Junior Subordinated Debt Securities are
distributed.
If the Corporation elects not to redeem the Junior Subordinated Debt
Securities prior to maturity and the Trust is not liquidated and the Junior
Subordinated Debt Securities are not distributed to holders of the Trust
Securities, the Preferred Securities will remain outstanding until the repayment
of the Junior Subordinated Debt Securities at the Stated Maturity.
On and after the liquidation date is fixed for any distribution of
Junior Subordinated Debt Securities to holders of the Trust Securities, (i) the
Preferred Securities will no longer be deemed to be outstanding, (ii) DTC or its
nominee, as the record holder of the Preferred Securities, will receive a
registered global certificate or certificates representing the Junior
Subordinated Debt Securities to be delivered upon such distribution with respect
to Preferred Securities held by DTC or its nominee and (iii) any certificates
representing Preferred Securities not held by DTC or its nominee will be deemed
to represent Junior Subordinated Debt Securities having a principal amount equal
to the Liquidation Amount of such Preferred Securities and bearing accrued and
unpaid interest in an amount equal to the accumulated and unpaid Distributions
on such Preferred Securities until such certificates are presented to the
Administrative Trustees or their agent for cancellation, whereupon the
Corporation will issue to such holder, and the Debenture Trustee will
authenticate, a certificate representing such Junior Subordinated Debt
Securities.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debt Securities that may be distributed in
exchange for the Trust Securities if a dissolution and liquidation of the Trust
were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debt Securities that the investor may
receive on dissolution and liquidation of the Trust, may trade at a discount to
the price that the investor paid to purchase the Preferred Securities offered
hereby.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, shall be made pro rata to the
holders of Preferred Securities and Common Securities based on the Liquidation
Amount of the Trust Securities, provided that, if on any Distribution Date or
Redemption Date any Debenture Event of Default (or an event that, with notice or
passage of time, would become such an Event of Default) or an Event of Default
under the Declaration shall have occurred and be continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, shall be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or, in
the case of payment of the Redemption Price, the full amount of such Redemption
Price on all of the outstanding Preferred Securities, shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or the
Redemption Price of, the Preferred Securities then due and payable.
In the case of any Event of Default under the Declaration resulting
from a Debenture Event of Default, the Corporation as holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default under the Declaration until the effect of all such Events
of Default have been cured, waived or otherwise eliminated. Until all such
Events of Default under the Declaration have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the holders of
such Preferred Securities and not on behalf of the Corporation as holder of the
Common Securities, and only the holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
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Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under
the Declaration (an "Event of Default") (whatever the reason for such Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see
"Description of Junior Subordinated Debt Securities-Debenture Events of
Default"); or
(ii) default by the Trust in the payment of any
Distribution when it becomes due and payable, and continuation of such
default for a period of 30 days; or
(iii) default by the Trust in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any
material respect, of any covenant or warranty of the Trustees in the
Declaration (other than a covenant or warranty, a default in the
performance of which or the breach of which is addressed in clause (ii)
or (iii) above), and continuation of such default or breach for a
period of 60 days after there has been given, by registered or
certified mail, to the defaulting Trustee or Trustees by the holders of
at least 25% in aggregate Liquidation Amount of the outstanding
Preferred Securities, a written notice specifying such default or
breach and requiring it to be remedied and stating that such notice is
a "Notice of Default" under the Declaration; or
(v) the occurrence of certain events of bankruptcy or
insolvency with respect to the Property Trustee and the failure by the
Corporation to appoint a successor Property Trustee within 60 days
thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Corporation, as Depositor, unless such Event of
Default shall have been cured or waived. The Corporation, as Depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Declaration.
If a Debenture Event of Default (or an event that with notice or the
passage of time, would become such an Event of Default) or an Event of Default
under the Declaration has occurred and is continuing, the Preferred Securities
shall have a preference over the Common Securities as described above. See
"Liquidation of the Trust and Distribution of Junior Subordinated Debt
Securities" and "Subordination of Common Securities."
Removal of Trustees
Unless a Debenture Event of Default shall have occurred and be
continuing, any Trustee may be removed at any time by the holder of the Common
Securities. If a Debenture Event of Default has occurred and is continuing, the
Property Trustee and the Delaware Trustee may be removed at such time by the
holders of a majority in Liquidation Amount of the outstanding Preferred
Securities. In no event will the holders of the Preferred Securities have the
right to vote to appoint, remove or replace the Administrative Trustees, which
voting rights are vested exclusively in the Corporation as the holder of the
Common Securities. No resignation
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or removal of a Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Declaration.
Co-trustees and Separate Property Trustee
Unless an Event of Default shall have occurred and be continuing, at
any time or times, for the purpose of meeting the legal requirements of the
Trust Indenture Act or of any jurisdiction in which any part of the Trust's
property may at the time be located, the Corporation, as the holder of the
Common Securities, and the Administrative Trustees shall have power to appoint
one or more persons either to act as a co-trustee, jointly with the Property
Trustee, of all or any part of such Trust's property, or to act as separate
trustee of any such property, in either case with such powers as may be provided
in the instrument of appointment, and to vest in such person or persons in such
capacity any property, title, right or power deemed necessary or desirable,
subject to the provisions of the Declaration. In case a Debenture Event of
Default has occurred and is continuing, the Property Trustee alone shall have
power to make such appointment.
Merger or Consolidation of Trustees
Any person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Declaration,
provided such person shall be otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below or as otherwise set forth in the Declaration. The Trust may, at
the request of the Corporation, as Depositor, with the consent of the
Administrative Trustees but without the consent of the holders of the Preferred
Securities, the Property Trustee or the Delaware Trustee, merge with or into,
consolidate, amalgamate or be replaced by, or convey, transfer or lease its
properties and assets substantially as an entirety to, a trust organized as such
under the laws of any State; provided, however, that (i) such successor entity
either (a) expressly assumes all of the obligations of the Trust with respect to
the Preferred Securities or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities (the
"Successor Securities") so long as the Successor Securities rank the same as the
Preferred Securities rank in priority with respect to distributions and payments
upon liquidation, redemption and otherwise, (ii) the Corporation expressly
appoints a trustee of such successor entity possessing the same powers and
duties as the Property Trustee as the holder of the Junior Subordinated Debt
Securities, (iii) the Successor Securities are listed or traded, or any
Successor Securities will be listed or traded upon notification of issuance, on
any national securities exchange or other organization on which the Preferred
Securities are then listed or traded, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, (v)
such successor entity has a purpose identical and limited to that of the Trust,
(vi) prior to such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, the Corporation has received an opinion from independent
counsel to the Trust experienced in such matters to the effect that (a) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Preferred Securities (including any Successor Securities) in any material
respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act of 1940 (the "Investment Company Act") and
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(vii) the Corporation or any permitted successor or assignee owns all of the
common securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not,
except with the consent of holders of 100% in Liquidation Amount of the Trust
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to any other entity or permit any other entity to consolidate, amalgamate, merge
with or into, or replace it, if such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity to be classified as an association taxable as a corporation or
as other than a grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of the Declaration
Except as provided below and under "Description of
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Declaration, the holders of the Preferred Securities will have no voting rights.
The Declaration may be amended from time to time by the Corporation,
the Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provision in the Declaration that may be inconsistent with any
other provision, or to make any other provisions with respect to matters or
questions arising under the Declaration, which shall not be inconsistent with
the other provisions of the Declaration, or (ii) to modify, eliminate or add to
any provisions of the Declaration to such extent as shall be necessary to ensure
that the Trust will be classified for United States federal income tax purposes
as a grantor trust or as other than an association taxable as a corporation at
all times that any Trust Securities are outstanding or to ensure that the Trust
will not be required to register as an "investment company" under the Investment
Company Act; provided, however, that in the case of clause (i), such action
shall not adversely affect in any material respect the interests of any holder
of Trust Securities, and any amendments of the Declaration shall become
effective when notice thereof is given to the holders of the Trust Securities.
The Declaration may be amended by the Trustees and the Corporation with (i) the
consent of holders representing not less than a majority (based upon Liquidation
Amounts) of the outstanding Preferred Securities, and (ii) receipt by the
Trustees of an opinion of counsel to the effect that such amendment or the
exercise of any power granted to the Trustees in accordance with such amendment
will not cause the Trust to be classified as an association taxable as a
corporation or affect the Trust's status as a grantor trust for United States
federal income tax purposes or the Trust's exemption from status as an
"investment company" under the Investment Company Act. In addition, without the
consent of each holder of Trust Securities, the Declaration may not be amended
to (i) change the amount or timing of any Distribution on the Trust Securities
or otherwise adversely affect the amount of any Distribution required to be made
in respect of the Trust Securities as of a specified date or (ii) restrict the
right of a holder of Trust Securities to institute suit for the enforcement of
any such payment on or after such date.
So long as any Junior Subordinated Debt Securities are held by the
Trust, the Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debt Securities, (ii) waive any past default that is
waivable under Section 5.13 of the Indenture, (iii) exercise any right to
rescind or annul a declaration that the principal of all the Junior Subordinated
Debt Securities shall be due and payable or (iv) consent to any amendment,
modification or termination of the Indenture or the Junior Subordinated Debt
Securities, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Preferred Securities; provided, however,
that where a consent under the Indenture would require the consent of each
holder of Junior Subordinated Debt Securities affected thereby, no such consent
shall be given by the Property Trustee without the prior consent of each holder
of the Preferred Securities. The Trustees shall not revoke any action previously
authorized or approved by a vote of the holders of the Preferred Securities
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except by subsequent vote of such holders. The Property Trustee shall notify
each holder of Preferred Securities of any notice of default with respect to the
Junior Subordinated Debt Securities. In addition to obtaining the foregoing
approvals of such holders of the Preferred Securities, prior to taking any of
the foregoing actions, the Trustees shall obtain an opinion of counsel
experienced in such matters to the effect that the Trust will not be classified
as an association taxable as a corporation for United States federal income tax
purposes as a result of such action and such action would not cause the Trust to
be classified as other than a grantor trust for United States federal income tax
purposes.
Any required approval of holders of Preferred Securities may be given
at a meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of Preferred Securities are entitled to vote, or of any matter upon
which action by written consent of such holders is to be taken, to be given to
each holder of record of Preferred Securities in the manner set forth in the
Declaration.
No vote or consent of the holders of Preferred Securities will be
required for the Trust to redeem and cancel the Preferred Securities in
accordance with the Declaration.
Notwithstanding that holders of the Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Corporation, the Trustees or any
affiliate of the Corporation or any Trustees, shall, for purposes of such vote
or consent, be treated as if they were not outstanding.
Expenses and Taxes
In the Indenture, the Corporation, as borrower, has agreed to pay all
debts and other obligations (other than with respect to payments of
Distributions, amounts payable upon redemption and the Liquidation Amount of the
Trust Securities) and all costs and expenses of the Trust (including costs and
expenses relating to the organization of the Trust, the fees and expenses of the
Trustees and the costs and expenses relating to the operation of the Trust) and
the offering of the Preferred Securities, and to pay any and all taxes and all
costs and expenses with respect to the foregoing (other than United States
withholding taxes) to which the Trust might become subject. The foregoing
obligations of the Corporation under the Indenture are for the benefit of, and
shall be enforceable by, any person to whom any such debts, obligations, costs,
expenses and taxes are owed (a "Creditor") whether or not such Creditor has
received notice thereof. Any such Creditor may enforce such obligations of the
Corporation directly against the Corporation, and the Corporation has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Corporation. The Corporation has also agreed in the Indenture to execute such
additional agreement(s) as may be necessary or desirable to give full effect to
the foregoing.
Form, Denomination, Book-Entry Procedures and Transfer
Preferred Securities may be transferred or exchanged in the manner and
at the offices described below.
The Preferred Securities initially will be evidenced by certificates in
fully registered form (each, a "Certificate"). The Property Trustee will from
time to time register the transfer of any outstanding Certificate upon surrender
thereof at the office of the Property Trustee which is currently located at 1100
N. Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust
Administration (the "Property Trustee's Office"), duly endorsed by, or
accompanied by a written instrument or instruments of transfer in a form
satisfactory to the Property Trustee duly executed by the holder thereof, a duly
appointed legal representative or a duly authorized attorney. Such signature
must be guaranteed by a bank or trust company having a correspondent office in
New York City or by a broker or dealer that is a member of the National
Association of Securities Dealers, Inc. (the
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"NASD") or a member of a national securities exchange. A new Certificate will be
issued to the transferee upon any such registration of transfer.
At the option of a holder, Certificates may be exchanged for other
Certificates representing a like number of Preferred Securities, upon surrender
to the Property Trustee at the Property Trustee's Office of the Certificates to
be exchanged. The Corporation will thereupon execute, and the Property Trustee
will authenticate and deliver, one or more new Certificates representing such
like number of Preferred Securities.
If any Certificate is mutilated, lost, stolen or destroyed, the
Corporation shall execute, and the Property Trustee shall authenticate and
deliver, in exchange and substitution for such mutilated Certificate, or in
replacement for such lost, stolen or destroyed Certificate, a new Certificate
representing the same number of Preferred Securities represented by such
Certificate, but only upon receipt of evidence satisfactory to the Corporation
and to the Property Trustee of loss, theft or destruction of such Certificate
and security or indemnity, if requested, satisfactory to them. Holders
requesting replacement Certificates must also comply with such other reasonable
regulations as the Corporation or the Property Trustee may prescribe.
No service charge will be made for any registration of transfer or
exchange of Certificates, but the Corporation may require the payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection therewith, other than exchanges not involving any transfer. In the
case of the replacement of mutilated, lost, stolen or destroyed Certificates,
the Corporation may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith and any
other expenses (including the fees and expenses of the Property Trustee)
connected therewith.
Possible Exchange for Book-Entry Preferred Securities
Following the issuance of the Preferred Securities, the Corporation
will make the Preferred Securities available in book-entry form ("Book-Entry
Preferred Securities"). Holders may (but are not required to) exchange
Certificates for Book-Entry Preferred Securities, which will be represented by a
beneficial interest in a Global Security (as defined below), by causing the
Certificates to be delivered to Depository Trust Company ("DTC"), in proper form
for deposit into DTC's book-entry system, on or after the Initial Exchange Date
(as defined below). Certificates received by DTC for exchange during the period
commencing on a date designated by the Corporation (the "Initial Exchange Date")
and ending on the fifth day after the Initial Exchange Date (the "Initial
Exchange Period") will be exchanged for Book-Entry Preferred Securities by the
close of business on the Business Day on which they are received by DTC (if
received by DTC by its then applicable cut-off time for same-day credit) or on
the following Business Day (if received by DTC by its then applicable cut-off
time for next-day credit).
After the last day of the Initial Exchange Period, DTC will not be
required to accept delivery of Certificates in exchange for Book-Entry Preferred
Securities, but DTC may permit such Certificates to be so exchanged on a
case-by-case basis. It is anticipated that after the Initial Exchange Period,
Certificates delivered to DTC in good order and in proper form for deposit will
be accepted by DTC for exchange for Book-Entry Preferred Securities generally
within three to four Business Days after delivery to DTC. However, there can be
no assurance that such Certificates will be accepted for exchange or, if
accepted, that such exchange will occur within such time period. Certificates
surrendered at any time for exchange for Book-Entry Preferred Securities may not
be delivered for settlement or transfer until such exchange has been effected.
Accordingly, persons purchasing Preferred Securities in secondary market trading
after the Initial Exchange Date may wish to make specific arrangements with
brokers or DTC's participants if they wish to purchase only Book-Entry Preferred
Securities and not Certificates.
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The Corporation will notify DTC, the Property Trustee and each holder
of a Certificate by first-class mail that exchanges of Certificates for
Book-Entry Preferred Securities will commence on the Initial Exchange Date,
which will be approximately one Business Day after the date on which the
Corporation notifies DTC that it has elected to permit such exchanges. The
Initial Exchange Date will not be later than one day after , 1998.
In order to be exchanged for Book-Entry Preferred Securities, a
Certificate must be delivered to DTC, in proper form for deposit, by a
Participant. Accordingly, holders of Preferred Securities that are not
Participants must deliver their Certificates, in proper form for deposit, to a
Participant, either directly or through a brokerage firm that maintains an
account with a Participant, in order to have their Certificates exchanged for
Book-Entry Preferred Securities. Holders of Preferred Securities that desire to
exchange their Certificates for Book-Entry Preferred Securities should contact
their broker or a Participant to obtain information on procedures for submitting
their Certificates to DTC, including the proper form for submission and (during
the Initial Exchange Period) the cut-off times for same-day and next-day
exchange. A Certificate that is held on behalf of a beneficial owner in nominee
or "street name" may be automatically exchanged for Book-Entry Preferred
Securities by the broker or other entity that is the registered holder of such
Preferred Securities, without any action of or consent by the beneficial owner
of the Preferred Securities.
Book-Entry System
Any Book-Entry Preferred Securities will be represented by a single
global security (a "Global Security"), which will be deposited with, or on
behalf of, DTC, and registered in the name of a nominee of DTC. Certificates
that have been exchanged for Book-Entry Preferred Securities may not be
re-exchanged for Certificates, except under the limited circumstances described
in "Description of Preferred Securities-Form, Denomination, Book-Entry
Procedures and Transfer-Exchange of Book-Entry Preferred Securities for
Certificated Preferred Securities." Unless and until it is exchanged in whole or
in part for Certificates, the Global Security may not be transferred except as a
whole by DTC to a nominee of DTC or by a nominee of DTC to DTC.
Transfer of beneficial interests in the Global Preferred Securities
will be subject to the applicable rules and procedures of DTC and its direct or
indirect participants which may change from time to time.
Depositary Procedures
DTC has advised the Trust and the Corporation as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
to accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers
(including the Underwriter), banks, trust companies, clearing corporations and
certain other organizations. Indirect access to DTC's system is also available
to other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interest
and transfer of ownership interest of each actual purchaser of each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Trust and the Corporation that, pursuant to
procedures established by it, (i) upon deposit of the Global Preferred
Securities, DTC will credit the accounts of Participants with portions of
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the principal amount of the Global Preferred Securities and (ii) ownership of
such interests in the Global Preferred Securities will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC (with respect to the Participants) or by the Participants and the
Indirect Participants (with respect to other owners of beneficial interests in
the Global Preferred Securities).
Investors in the Global Preferred Securities may hold their interests
therein directly through DTC, if they are Participants in DTC, or indirectly
through organizations which are Participants in such system. All interests in a
Global Preferred Security will be subject to the procedures and requirements of
DTC. The laws of some states require that certain persons take physical delivery
in certificated form of certain securities, such as the Preferred Securities,
that they own. Consequently, the ability to transfer beneficial interests in a
Global Preferred Security to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants and certain banks, the ability of a person having
beneficial interests in a Global Preferred Security to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests. For certain other restrictions on the
transferability of the Preferred Securities, see "Exchange of Book-Entry
Preferred Securities for Certificated Preferred Securities."
Except as described below, owners of beneficial interests in the Global
Preferred Securities will not be entitled to have Preferred Securities
registered in their names, will not receive or be entitled to receive physical
delivery of Preferred Securities in certificated form and will not be considered
the registered owners or holders thereof under the Declaration for any purpose.
Payments in respect of the Global Preferred Security registered in the
name of DTC or its nominee will be payable by the Property Trustee to DTC or its
nominee as the registered holder under the Declaration by wire transfer in
immediately available funds on each Distribution Date. Under the terms of the
Declaration, the Property Trustee will treat the persons in whose names the
Preferred Securities, including the Global Preferred Securities, are registered
as the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Property Trustee nor
any agent thereof has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to, or payments made on account of, beneficial ownership interests in
the Global Preferred Securities, or for maintaining, supervising or reviewing
any of DTC's records or any Participant's or Indirect Participant's records
relating to the beneficial ownership interests in the Global Preferred
Securities, or (ii) any other matter relating to the actions and practices of
DTC or any of its Participants or Indirect Participants. DTC has advised the
Trust and the Corporation that its current practice, upon receipt of any payment
in respect of securities such as the Preferred Securities, is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in Liquidation Amount of
beneficial interests in the Global Preferred Security, as shown on the records
of DTC, unless DTC has reason to believe it will not receive payment on such
payment date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Preferred Securities represented by Global Preferred
Securities held through such Participants will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Property Trustee or the Trust. Neither the Trust nor the Property
Trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the Preferred Securities, and the Trust and
the Property Trustee may conclusively rely on and will be protected in relying
on instructions from DTC or its nominee for all purposes.
Interests in the Global Preferred Securities will trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
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DTC has advised the Trust and the Corporation that it will take any
action permitted to be taken by a holder of Preferred Securities (including,
without limitation, the presentation of Preferred Securities for exchange as
described below) only at the direction of one or more Participants to whose
account with DTC interests in the Global Preferred Securities are credited and
only in respect of such portion of the aggregate Liquidation Amount of the
Preferred Securities represented by the Global Preferred Securities as to which
such Participant or Participants has or have given such direction. However, if
there is an Event of Default under the Declaration, DTC reserves the right to
exchange the Global Preferred Securities for legended Preferred Securities in
certificated form and to distribute such Preferred Securities to its
Participants.
So long as DTC or its nominee is the registered owner of the Global
Preferred Securities, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Preferred Securities represented by
the Global Preferred Security for all purposes under the Declaration.
Neither DTC nor its nominee will consent or vote with respect to the
Preferred Securities. Under its usual procedures, DTC would mail an omnibus
proxy to the Trust as soon as possible after the record date. The omnibus proxy
assigns the consenting or voting rights of DTC or its nominee to those
Participants to whose accounts the Preferred Securities are credited on the
record date (identified in a listing attached to the omnibus proxy).
The information in this section concerning DTC and its book-entry
system has been obtained from sources that the Trust and the Corporation believe
to be reliable, but neither the Trust nor the Corporation takes responsibility
for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interest in the Global Preferred Securities among Participants in
DTC, it is under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trust nor the Property Trustee will have any responsibility for the performance
by DTC or its Participants or Indirect Participants of their respective
obligations under the rules and procedures governing their operations.
Exchange of Book-Entry Preferred Securities for Certificated Preferred
Securities
A Global Preferred Security is exchangeable for Preferred Securities in
registered certificated form if (i) DTC (x) notifies the Trust that it is no
longer willing or able to properly discharge its responsibilities with respect
to the Preferred Securities and the Corporation is unable to locate a qualified
successor, or (y) has ceased to be a "clearing agency" registered under the
Exchange Act; (ii) the Trust at its sole option elects to terminate the
book-entry system through DTC; or (iii) there shall have occurred and be
continuing a Debenture Event of Default. In addition, beneficial interests in a
Global Preferred Security may be exchanged by or on behalf of DTC for
certificated Preferred Securities upon request by DTC, but only upon at least 20
days prior written notice given to the Property Trustee in accordance with DTC's
customary procedures. In all cases, certificated Preferred Securities delivered
in exchange for any Global Preferred Security or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of DTC (in accordance with its customary procedures)
and will bear the restrictive legend referred to in "Notice to Investors,"
unless the Property Trustee (based on an opinion of counsel) determines
otherwise in compliance with applicable law.
Payment and Paying Agency
Payments in respect of the Preferred Securities held in global form
shall be made to DTC, which shall credit the relevant accounts at DTC on the
applicable Distribution Dates or in respect of the Preferred Securities that are
not held by DTC, such payments shall be made by check mailed to the address of
the holder entitled
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thereto as such address shall appear on the register. The paying agent (the
"Paying Agent") shall initially be the Property Trustee and any co-paying agent
chosen by the Property Trustee and acceptable to the Administrative Trustees and
the Corporation. The Paying Agent shall be permitted to resign as Paying Agent
upon 30 days' written notice to the Property Trustee, the Administrative
Trustees and the Corporation. In the event that the Property Trustee shall no
longer be the Paying Agent, the Administrative Trustees shall appoint a
successor (which shall be a bank or trust company acceptable to the
Administrative Trustees and the Corporation) to act as Paying Agent.
Wilmington Trust Company has informed the Trust that so long as it
serves as paying agent for the Preferred Securities, it anticipates that
information regarding Distributions on the Preferred Securities, including
payment date, record date and redemption information, will be made available
through Wilmington Trust Company at 1100 N. Market Street, Wilmington, Delaware,
Attention: Corporate Trust Administration.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of the Preferred Securities will be effected
without charge by or on behalf of the Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Trust will not be required to register or cause to be
registered the transfer or exchange of the Preferred Securities after they have
been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Declaration and, during the existence of an Event
of Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Declaration at the request of any holder of Trust
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby. If no Event of Default has
occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action or to construe ambiguous provisions in the
Declaration or is unsure of the application of any provision of the Declaration,
and the matter is not one on which holders of the Preferred Securities or the
Common Securities are entitled under the Declaration to vote, then the Property
Trustee shall take such action as is directed by the Corporation and, if not so
directed, shall take such action as it deems advisable and in the best interests
of the holders of the Trust Securities and will have no liability except for its
own bad faith, negligence or willful misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes or as other than a grantor trust
for United States federal income tax purposes, and so that the Junior
Subordinated Debt Securities will be treated as indebtedness of the Corporation
for United States federal income tax purposes. In this connection, the
Corporation and the Administrative Trustees are authorized to take any action,
not inconsistent with applicable law, the certificate of trust of the Trust or
the Declaration, that the Corporation and the Administrative Trustees determine
in their discretion to be necessary or desirable for such purposes, as long as
such action does not materially adversely affect the interests of the holders of
the Trust Securities.
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Holders of the Trust Securities have no preemptive or similar rights.
The Trust may not borrow money or issue debt or mortgage or pledge any
of its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES
The Junior Subordinated Debt Securities are to be issued as a separate
series under a Junior Subordinated Indenture, as supplemented from time to time
(as so supplemented, the "Indenture"), between the Corporation and Wilmington
Trust Company, as trustee (the "Debenture Trustee"). The Indenture will be
qualified under the Trust Indenture Act. This summary of certain terms and
provisions of the Junior Subordinated Debt Securities and the Indenture does not
purport to be complete, and where reference is made to particular provisions of
the Indenture, such provisions, including the definitions of certain terms, some
of which are not otherwise defined herein, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a part
of the Indenture by the Trust Indenture Act.
General
Concurrently with the issuance of the Trust Securities, the Trust will
invest the proceeds thereof in Junior Subordinated Debt Securities issued by the
Corporation. The Junior Subordinated Debt Securities will bear interest at __%
per annum of the principal amount thereof, payable quarterly in arrears on the
15th day of March, June, September and December of each year (each, an "Interest
Payment Date"), commencing June 15, 1998, to the person in whose name each
Junior Subordinated Debt Security is registered, subject to certain exceptions,
at the close of business on the Business Day next preceding such Interest
Payment Date. It is anticipated that, until the liquidation of the Trust, each
Junior Subordinated Debt Security will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
amount of interest payable for any period will be computed on the basis of the
actual number of days elapsed in a year of twelve 30-day months. In the event
that any date on which interest is payable on the Junior Subordinated Debt
Securities is not a Business Day, then payment of the interest payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay), with the same force
and effect as if made on the date such payment was originally payable. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
__% per annum thereof, compounded quarterly from the relevant Interest Payment
Date. The term "interest" as used herein shall include quarterly payments,
interest on quarterly interest payments not paid on the applicable Interest
Payment Date and Additional Sums, as applicable.
The Junior Subordinated Debt Securities will be issued as a series of
Junior Subordinated Debt Securities under the Indenture. Unless previously
redeemed or repurchased, the Junior Subordinated Debt Securities will mature on
, 2028. See "Optional Redemption."
The Junior Subordinated Debt Securities will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Debt. Because the
Corporation is a bank holding company, the right of the Corporation to
participate in any distribution of assets of any subsidiary, including the Bank,
upon such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Preferred Securities to benefit indirectly from such
distribution), is subject to the prior claims of creditors of such subsidiary,
except to the extent that the Corporation may itself be recognized as a creditor
of such subsidiary. Accordingly, the Junior Subordinated Debt Securities will be
subordinated to all Senior Debt and effectively subordinated to all existing and
future liabilities of the Corporation's subsidiaries, and holders of Junior
Subordinated Debt Securities should look only to the assets of the Corporation
for payments on the Junior Subordinated Debt
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Securities. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of the Corporation, including Senior Debt, whether
under the Indenture or any existing or other indenture that the Corporation may
enter into in the future or otherwise. See "Subordination."
The Junior Subordinated Debt Securities will rank pari passu with all
Other Debentures issued under the Indenture and will be unsecured and
subordinate and junior in right of payment to the extent and in the manner set
forth in the Indenture to all Senior Debt of the Corporation. See
"Subordination." As a holding company, the Corporation conducts its operations
principally through the Bank and, therefore, its principal source of cash, other
than its investing and financing activities, is receipt of dividends from the
Bank. The Corporation is a legal entity separate and distinct from the Bank and
its other subsidiaries. See "Risk Factors-Ranking of Obligations Under the
Guarantee and the Junior Subordinated Debt Securities" and "Status of the
Corporation as a Bank Holding Company." The Bank is subject to certain
restrictions imposed by federal law on any extensions of credit to, and certain
other transactions with, the Corporation and certain other affiliates, and on
investments in stock or other securities thereof. Such restrictions prevent the
Corporation and such other affiliates from borrowing from the Bank unless the
loans are secured by various types of collateral. In addition, payment of
dividends to the Corporation by the Bank is subject to ongoing review by banking
regulators and is subject to various statutory limitations and in certain
circumstances requires approval by banking regulatory authorities. The Other
Debentures will be issuable in one or more series pursuant to an indenture
supplemental to the Indenture or a resolution of the Corporation's Board of
Directors or a committee thereof.
Denominations, Registration and Transfer
The Junior Subordinated Debt Securities will be represented by one or
more global certificates registered in the name of Cede & Co. as the nominee of
DTC if, and only if, distributed to the holders of the Trust Securities. Until
such time, the Junior Subordinated Debt Securities will be held in the name of
the Property Trustee in trust for the benefit of the holders of the Trust
Securities. Should the Junior Subordinated Debt Securities be distributed to
holders of the Trust Securities, beneficial interests in the Junior Subordinated
Debt Securities will be shown on, and transfers thereof will be effected only
through, records maintained by Participants in DTC. Except as described below,
Junior Subordinated Debt Securities in certificated form will not be issued in
exchange for the global certificates.
A global security shall be exchangeable for Junior Subordinated Debt
Securities registered in the names of persons other than Cede & Co. only if (i)
DTC notifies the Corporation that it is unwilling or unable to continue as a
depositary for such global security and no successor depositary shall have been
appointed, or if at any time DTC ceases to be a "clearing agency" registered
under the Exchange Act, at a time when DTC is required to be so registered to
act as such depositary, (ii) the Corporation in its sole discretion determines
that such global security shall be so exchangeable, or (iii) there shall have
occurred and be continuing a Debenture Event of Default. Any global security
that is exchangeable pursuant to the preceding sentence shall be exchangeable
for certificates registered in such names as DTC shall direct. It is expected
that such instructions will be based upon directions received by DTC from its
Participants with respect to ownership of beneficial interests in such global
security.
Payments on Junior Subordinated Debt Securities represented by a global
security will be made to DTC, as the depositary for the Junior Subordinated Debt
Securities. In the event Junior Subordinated Debt Securities are issued in
certificated form, principal and interest will be payable, the transfer of the
Junior Subordinated Debt Securities will be registrable, and Junior Subordinated
Debt Securities will be exchangeable for Junior Subordinated Debt Securities of
other denominations of a like aggregate principal amount, at the corporate
office of the Debenture Trustee in Wilmington, Delaware, or at the offices of
any paying agent or transfer agent appointed by the Corporation, provided that
payment of interest may be made at the option of the Corporation by check mailed
to the address of the persons entitled thereto or by wire transfer.
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For a description of DTC and the terms of the depositary arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Description of Preferred Securities-Form, Denomination,
Book-Entry Procedures and Transfer." If the Junior Subordinated Debt Securities
are distributed to the holders of the Trust Securities upon the termination of
the Trust, the form, denomination, book-entry and transfer procedures with
respect to the Preferred Securities as described under "Description of Preferred
Securities-Form, Denomination, Book-Entry Procedures and Transfer," shall apply
to the Junior Subordinated Debt Securities mutatis mutandis.
Payment and Paying Agents
Payment of principal of and any interest on Junior Subordinated Debt
Securities will be made at the office of the Debenture Trustee in Wilmington,
Delaware or at the office of such Paying Agent or Paying Agents as the
Corporation may designate from time to time, except that at the option of the
Corporation payment of any interest may be made (except in the case of Junior
Subordinated Debt Securities in global form), (i) by check mailed to the address
of the person entitled thereto as such address shall appear in the register for
Junior Subordinated Debt Securities or (ii) by wire transfer to an account
specified by the person entitled thereto as specified in such register, provided
that proper transfer instructions have been received by the relevant Record
Date. Payment of any interest on any Junior Subordinated Debt Security will be
made to the person in whose name such Junior Subordinated Debt Security is
registered at the close of business on the Record Date for such interest, except
in the case of defaulted interest. The Corporation may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent; however
the Corporation will at all times be required to maintain a Paying Agent in each
Place of Payment for the Junior Subordinated Debt Securities.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Corporation in trust, for the payment of the principal of or
interest on any Junior Subordinated Debt Security and remaining unclaimed for
two years after such principal or interest has become due and payable shall, at
the request of the Corporation, be repaid to the Corporation and the holder of
such Junior Subordinated Debt Security shall thereafter look, as a general
unsecured creditor, only to the Corporation for payment thereof.
Option to Extend Interest Payment Date
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation has the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debt Securities at any time or
from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each Extension Period, provided, that no Extension Period may
extend beyond the Stated Maturity of the Junior Subordinated Debt Securities. At
the end of an Extension Period, the Corporation must pay all interest then
accrued and unpaid on the Junior Subordinated Debt Securities (together with
interest thereon accrued at __% per annum, compounded quarterly from the
relevant Interest Payment Date, to the extent permitted by applicable law).
During an Extension Period and for so long as the Junior Subordinated Debt
Securities remain outstanding, interest will continue to accrue and holders of
Junior Subordinated Debt Securities (and holders of the Preferred Securities
while Preferred Securities are outstanding) will be required to accrue interest
income (in the form of OID) for United States federal income tax purposes. See
"Certain United States Federal Income Tax Consequences-Interest Income and
Original Issue Discount."
During any Extension Period, the Corporation may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(which includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Corporation (including any Other Debentures) that rank pari
passu with or junior in interest to the Junior Subordinated Debt Securities or
(iii) make any
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guarantee payments with respect to any guarantee by the Corporation of the debt
securities of any subsidiary of the Corporation (including any Other Guarantees)
if such guarantee ranks pari passu with or junior in interest to the Junior
Subordinated Debt Securities (other than (a) dividends or distributions in
Common Stock of the Corporation, (b) any declaration of a dividend in connection
with the implementation of a stockholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Guarantee, (d) purchases or
acquisitions of shares of the Corporation's Common Stock in connection with the
satisfaction by the Corporation of its obligations under any employee benefit
plan or any other contractual obligation of the Corporation (other than a
contractual obligation ranking pari passu with or junior to the Junior
Subordinated Debt Securities), (e) as a result of a reclassification of the
Corporation's capital stock or the exchange or conversion of one class or series
of the Corporation's capital stock for another class or series of the
Corporation's capital stock or (f) the purchase of fractional interests in
shares of the Corporation's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged).
Prior to the termination of any Extension Period the Corporation may further
extend such Extension Period, provided, however, that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods or to
extend beyond the Stated Maturity of the Junior Subordinated Debt Securities.
Upon the termination of any Extension Period and the payment of all interest
then accrued and unpaid on the Junior Subordinated Debt Securities (together
with interest thereon accrued at __% per annum, compounded quarterly, to the
extent permitted by applicable law), and subject to the foregoing limitations,
the Corporation may elect to begin a new Extension Period. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Corporation must give the Property Trustee, the Administrative Trustees and the
Debenture Trustee notice of its election to begin any Extension Period (or an
extension thereof) at least three Business Days prior to the earlier of (i) the
date the Distributions on the Preferred Securities would have been payable
except for the election to begin or extend such Extension Period or (ii) the
date the Administrative Trustees are required to give notice to any automated
quotation system or to holders of Preferred Securities of the record date or the
date such Distributions are payable, but in any event not less than three
Business Days prior to such record date. The Debenture Trustee shall give notice
of the Corporation's election to begin or extend a new Extension Period to the
holders of the Preferred Securities. There is no limitation on the number of
times that the Corporation may elect to begin an Extension Period.
Optional Redemption
The Junior Subordinated Debt Securities are redeemable prior to
maturity at the option of the Corporation (i) on or after , 2003, in whole at
any time or in part from time to time, or (ii) in whole, but not in part, at any
time within 90 days following the occurrence and during the continuation of a
Tax Event, Investment Company Event or Capital Treatment Event (each as defined
under "Description of Preferred Securities-Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Trust to redeem the Preferred Securities.
The Federal Reserve's risk-based capital guidelines, which are subject
to change, currently provide that redemptions of permanent equity or other
capital instruments before stated maturity could have a significant impact on a
bank holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on the level or composition of the organization's
capital base (unless the equity or capital instrument were redeemed with the
proceeds of, or replaced by, a like amount of a similar or higher quality
capital instrument and the Federal Reserve considers the organization's capital
position to be fully adequate after the redemption).
The redemption of the Junior Subordinated Debt Securities by the
Corporation prior to their Stated Maturity would constitute the redemption of
capital instruments under the Federal Reserve's current risk-based capital
guidelines and may be subject to the prior approval of the Federal Reserve.
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The Redemption Price for Junior Subordinated Debt Securities shall
equal 100% of the principal amount to be prepaid, plus accrued interest thereon
to the date of redemption.
Additional Sums
The Corporation has covenanted in the Junior Subordinated Indenture
that, if and for so long as (i) the Trust is the holder of all Junior
Subordinated Debt Securities and (ii) the Trust is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Corporation will pay as additional sums on the Junior Subordinated
Debt Securities such amounts as may be required so that the Distributions
payable by the Trust will not be reduced as a result of any such additional
taxes, duties or other governmental charges. See "Description of Preferred
Securities-Mandatory Redemption."
Interest
The Junior Subordinated Debt Securities shall bear interest at __% per
annum, from the original date of issuance, payable quarterly in arrears on the
15th day of March, June, September and December of each year, commencing June
15, 1998, to the person in whose name such Junior Subordinated Debt Security is
registered, subject to certain exceptions, at the close of business on the
Business Day next preceding, such Interest Payment Date. The term "interest" as
used herein, as such term relates to the Junior Subordinated Debt Securities,
includes any compounded interest or Additional Sums payable unless otherwise
stated. In the event the Junior Subordinated Debt Securities are not held solely
in book-entry only form, the Corporation will select relevant record dates,
which shall be 15 days prior to the relevant Interest Payment Date.
The amount of interest payable for any period will be computed on the
basis of the actual number of days elapsed in a year of twelve 30-day months. In
the event that any date on which interest is payable on the Junior Subordinated
Debt Securities is not a Business Day, then payment of the interest payable on
such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay) with the
same force and effect as if made on such date.
Additional Sums
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Corporation will pay as
additional amounts on the Junior Subordinated Debt Securities such amounts as
shall be required so that the Distributions payable by the Trust shall not be
reduced as a result of any such additional taxes, duties or other governmental
charges. The Corporation has covenanted in the Indenture that, if and so long as
(i) the Trust is the holder of all Junior Subordinated Debt Securities and (ii)
a Tax Event in respect of the Trust has occurred and is continuing, it will pay
Additional Sums (as defined under "Description of Preferred Securities-Mandatory
Redemption") in respect of such Trust Securities to the Trust.
Restrictions on Certain Payments
The Corporation will also covenant that it will not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock
(which includes common and preferred stock), (ii) make any payment of principal,
interest or premium, if any, on or repay or repurchase or redeem any debt
securities of the Corporation (including Other Debentures) that rank pari passu
with or junior in interest to the Junior Subordinated Debt Securities or (iii)
make any guarantee payments with respect to any guarantee by the Corporation of
the debt securities of any subsidiary of the Corporation (including under Other
Guarantees) if such guarantee ranks pari passu with or junior in interest to the
Junior Subordinated Debt Securities (other than (a) dividends or distributions
in Common Stock of the
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Corporation, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) purchases or
acquisitions of shares of the Corporation's Common Stock in connection with the
satisfaction by the Corporation of its obligations under any employee benefit
plan or any other contractual obligation of the Corporation (other than a
contractual obligation ranking pari passu with or junior in interest to the
Junior Subordinated Debt Securities), (e) as a result of a reclassification of
the Corporation's capital stock or the exchange or conversion of one class or
series of the Corporation's capital stock for another class or series of the
Corporation's capital stock or (f) the purchase of fractional interests in
shares of the Corporation's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged),
if at such time (i) there shall have occurred a Debenture Event of Default, (ii)
the Corporation shall be in default with respect to its payment of any
obligations under the Guarantee or (iii) the Corporation shall have given notice
of its election of an Extension Period as provided in the Indenture and shall
not have rescinded such notice, or such Extension Period, or any extension
thereof, shall be continuing.
Modification of Indenture
From time to time the Corporation and the Debenture Trustee may,
without the consent of the holders of Junior Subordinated Debt Securities,
amend, waive or supplement the Indenture for specified purposes, including,
among other things, curing ambiguities, defects or inconsistencies (provided
that any such action does not materially adversely affect the interest of the
holders of Junior Subordinated Debt Securities or the holders of the Preferred
Securities so long as they remain outstanding) and maintaining the qualification
of the Indenture under the Trust Indenture Act. The Indenture contains
provisions permitting the Corporation and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of
outstanding Junior Subordinated Debt Securities, to modify the Indenture in a
manner affecting the rights of the holders of Junior Subordinated Debt
Securities; provided, however, that no such modification may, without the
consent of the holder of each outstanding Junior Subordinated Debt Security so
affected, change the Stated Maturity, or reduce the principal amount of the
Junior Subordinated Debt Securities, or reduce the rate or extend the time of
payment of interest thereon or reduce the percentage of principal amount of
Junior Subordinated Debt Securities, or have certain other effects as set forth
in the Indenture.
In addition, the Corporation and the Debenture Trustee may execute,
without the consent of any holder of Junior Subordinated Debt Securities, any
supplemental Indenture for the purpose of creating any Other Debentures.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debt Securities that has occurred
and is continuing constitutes a "Debenture Event of Default":
(i) failure for 30 days to pay any interest on the Junior
Subordinated Debt Securities when due (subject to the deferral of any
due date in the case of an Extension Period); or
(ii) failure to pay any principal on the Junior
Subordinated Debt Securities when due, whether at maturity, upon
redemption, by declaration of acceleration or otherwise; or
(iii) failure to observe or perform in any material respect
certain other covenants contained in the Indenture for 90 days after
written notice to the Corporation from the Debenture Trustee or the
holders of at least 25% in aggregate outstanding principal amount of
the Junior Subordinated Debt Securities; or
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(iv) certain events in bankruptcy, insolvency or
reorganization of the Corporation; or
(v) the voluntary or involuntary dissolution, winding-up
or termination of the Trust, except in connection with the distribution
of the Junior Subordinated Debt Securities to the holder of Trust
Securities in liquidation of the Trust, the redemption of all of the
Trust Securities of the Trust, or certain mergers, consolidations or
amalgamations, each as permitted by the Declaration.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debt Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate outstanding principal amount of the Junior Subordinated Debt
Securities may declare the principal due and payable immediately upon a
Debenture Event of Default and, should the Debenture Trustee or such holders of
Junior Subordinated Debt Securities fail to make such declaration, the holders
of at least 25% in aggregate Liquidation Amount of the Preferred Securities
shall have such right. The holders of a majority in aggregate outstanding
principal amount of the Junior Subordinated Debt Securities may annul such
declaration and waive the default if the default (other than the nonpayment of
the principal of the Junior Subordinated Debt Securities which has become due
solely by such acceleration) has been cured and a sum sufficient to pay all
matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee. Should the holders
of Junior Subordinated Debt Securities fail to annul such declaration and waive
such default, the holders of a majority in aggregate Liquidation Amount of the
Preferred Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debt Securities affected thereby may, on behalf of the
holders of all the Junior Subordinated Debt Securities, waive any past default,
except a default in the payment of principal of or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) on the Junior Subordinated Debt Securities or a default in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each outstanding Junior
Subordinated Debt Security. Should the holders of such Junior Subordinated Debt
Securities fail to annul such declaration and waive such default, the holders of
a majority in aggregate Liquidation Amount of the Preferred Securities shall
have such right. The Corporation is required to file annually with the Debenture
Trustee a certificate as to whether or not the Corporation is in compliance with
all the conditions and covenants applicable to it under the Indenture.
In case a Debenture Event of Default shall occur and be continuing, the
Property Trustee will have the right to declare the principal of and the
interest on the Junior Subordinated Debt Securities, and any other amounts
payable under the Indenture, to be forthwith due and payable and to enforce its
other rights as a creditor with respect to the Junior Subordinated Debt
Securities.
Conversion of the Junior Subordinated Debt Securities
Junior Subordinated Debt Securities will be convertible at any time
prior to the earlier of (i) 5:00 p.m. (Richmond, Virginia time) on the Business
Day immediately preceding the date of repayment of such Junior Subordinated Debt
Securities, whether at maturity or upon redemption or prepayment, and (ii) 5:00
p.m. (Richmond, Virginia time) on the Conversion Termination Date (if any), into
Common Stock at the option of the holders of the Junior Subordinated Debt
Securities at the Conversion Price referred to on the cover page of this
Prospectus, subject to the Conversion Price adjustments described under
"Description of Preferred Securities-Conversion Rights." The Trust will covenant
not to convert Junior Subordinated Debt Securities held by it except pursuant to
a notice of conversion delivered to the Conversion Agent by a holder of
Preferred Securities.
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Upon surrender of a Preferred Security to the Conversion Agent for conversion,
the Trust will distribute $25.00 principal amount of the Junior Subordinated
Debt Securities to the Conversion Agent on behalf of the holder of the Preferred
Security so converted, whereupon the Conversion Agent will convert such Junior
Subordinated Debt Securities into Common Stock on behalf of such holder. The
Corporation's delivery to the holders of the Junior Subordinated Debt Securities
(through the Conversion Agent) of the fixed number of shares of Common Stock
into which the Junior Subordinated Debt Securities are convertible (together
with the cash payment, if any, in lieu of fractional shares) will be deemed to
satisfy the Corporation's obligation to pay the principal amount of the Junior
Subordinated Debt Securities so converted, and the accrued and unpaid interest
thereon attributable to the period from the last date to which interest has been
paid or duly provided for; provided, however, that if any Junior Subordinated
Debenture is converted after a Payment Record Date, the interest payable on the
related Interest Payment Date with respect to such Junior Subordinated Debenture
shall be paid to the Trust (which will distribute such interest to the holder of
such Junior Subordinated Debt Securities on the Payment Record Date) or other
holder of such Junior Subordinated Debenture on the Payment Record Date, as the
case may be, despite such conversion; provided, further, that if notice of
prepayment of Junior Subordinated Debt Securities is mailed or otherwise given
to holders of Junior Subordinated Debt Securities or the Trust issues a press
release announcing a Conversion Termination Date, then, if any holder of Junior
Subordinated Debt Securities converts any Junior Subordinated Debt Securities
into Common Stock on any date on or after the date on which such notice of
prepayment is mailed or otherwise given or the date of such press release, as
the case may be, and if such date of conversion falls on any day from and
including the first day of an Extension Period and on or prior to the Interest
Payment Date on which such Extension Period ends, such converting holder shall
be entitled to receive either (i) if the date of such conversion falls after a
Payment Record Date and on or prior to the next succeeding Interest Payment
Date, all accrued and unpaid interest on such Junior Subordinated Debt
Securities to such Interest Payment Date or (ii) if the date of such conversion
does not fall on a date described in clause (i) above, all accrued and unpaid
interest on such Junior Subordinated Debt Securities to the most recent Interest
Payment Date prior to the date of such conversion, which interest shall, in
either such case, be paid to such converting holder, unless the date of
conversion of such Junior Subordinated Debt Securities is on or prior to the
Interest Payment Date upon which such Extension Period ends and after the
Payment Record Date for such Interest Payment Date, in which case such interest
shall be paid to the person who was the holder of such Junior Subordinated Debt
Securities (or one or more predecessor Junior Subordinated Debt Securities) at
5:00 p.m. (Richmond, Virginia time) on such Payment Record Date, which amount
shall be simultaneously distributed to the holders of the Preferred Securities
so that any holder of Preferred Securities who delivers such Preferred
Securities for conversion (or who held such converted Preferred Securities at
5:00 p.m. (Richmond, Virginia time) on the Payment Record Date for the Interest
Payment Date upon which such Extension Period ends, as the case may be) under
the circumstances and during the periods described above will be entitled to
receive accumulated and unpaid Distributions in a corresponding amount. See
"Description of Preferred Securities-Conversion Rights" and "Redemption."
On and after , 2001, the Corporation may, at its option, terminate the
conversion rights of holders of the Junior Subordinated Debt Securities if (i)
the Corporation is then current in the payment of interest on the Junior
Subordinated Debt Securities (except to the extent that the payment of interest
has been duly deferred as the result of an Extension Period) and (ii) for at
least 20 trading days within any period of 30 consecutive trading days ending on
or after , 2001, including the last trading day of such period, the Closing
Price of the Common Stock shall have exceeded 115% of the then applicable
Conversion Price of the Junior Subordinated Debt Securities. In order to
exercise this conversion termination option, the Corporation must cause the
Trust to issue (or, if the Junior Subordinated Debt Securities shall have been
distributed to holders of the Preferred Securities following a Tax Event, an
Investment Company Event or a Capital Treatment Event, the Corporation must
issue) a press release for publication on the Dow Jones News Service or on a
comparable news service announcing the Conversion Termination Date prior to the
opening of business on the second trading day after a period in which the
condition in the preceding sentence has been met, but in no event prior to ,
2001. The press release shall announce the Conversion Termination Date and
provide the
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Conversion Price and the Closing Price of the Preferred Securities and the
Common Stock, in each case as of the close of business on the trading day next
preceding the date of the press release. The Corporation is also required to
give notice by first-class mail to holders of the Junior Subordinated Debt
Securities in the manner provided for holders of Preferred Securities under
"Description of Preferred Securities-Conversion Rights-Termination of Conversion
Rights." The Conversion Termination Date will be a Business Day selected by the
Corporation which is not less than 30 nor more than 60 calendar days after the
date on which such press release is issued. In the event that the Corporation
exercises its conversion termination option, conversion rights will expire at
5:00 p.m. (Richmond, Virginia time) on the Conversion Termination Date. In the
event that the Corporation has not exercised its conversion termination option
and the Junior Subordinated Debt Securities are otherwise called for prepayment,
the Junior Subordinated Debt Securities will be convertible at any time prior to
5:00 p.m. (Richmond, Virginia time) on the Business Day immediately preceding
the date of such redemption and in any other case at any time prior to 5:00 p.m.
(Richmond, Virginia time) on the Business Day immediately preceding the Stated
Maturity Date of the Junior Subordinated Debt Securities.
Enforcement of Certain Rights by Holders of Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Corporation to pay interest or
principal on the Junior Subordinated Debt Securities on the date such interest
or principal is otherwise payable, a holder of Preferred Securities may
institute a Direct Action. The Corporation may not amend the Indenture to remove
the foregoing right to bring a Direct Action without the prior written consent
of the holders of all of the Preferred Securities. Notwithstanding any payments
made to a holder of Preferred Securities by the Corporation in connection with a
Direct Action, the Corporation shall remain obligated to pay the principal of
and interest on the Junior Subordinated Debt Securities, and the Corporation
shall be subrogated to the rights of the holder of such Preferred Securities
with respect to payments on the Preferred Securities to the extent of any
payments made by the Corporation to such holder in any Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debt Securities unless there
shall have been an Event of Default under the Declaration. See "Description of
Preferred Securities-Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Indenture provides that the Corporation shall not consolidate with
or merge with or into any other person or convey, transfer or lease its
properties and assets substantially as an entirety to any person, and no person
shall consolidate with or merge with or into the Corporation or convey, transfer
or lease its properties and assets substantially as an entirety to the
Corporation, unless (i) in case the Corporation consolidates with or merges with
or into another person or conveys or transfers its properties and assets
substantially as an entirety to any person, the successor person is organized
under the laws of the United States or any state or the District of Columbia,
and such successor person expressly assumes the Corporation's obligations on the
Junior Subordinated Debt Securities issued under the Indenture; (ii) immediately
after giving effect thereto, no Debenture Event of Default, and no event which,
after notice or lapse of time or both, would become a Debenture Event of
Default, shall have occurred and be continuing; (iii) if at the time any
Preferred Securities are outstanding, such transaction is permitted under the
Declaration and the Guarantee and does not give rise to any breach or violation
of the Declaration or the Guarantee; and (iv) certain other conditions as
prescribed in the Indenture are met.
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The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debt Securities protection in the event of a highly
leveraged or other transaction involving the Corporation that may adversely
affect holders of the Junior Subordinated Debt Securities.
Subordination
In the Indenture, the Corporation has covenanted and agreed that any
Junior Subordinated Debt Securities issued thereunder shall be subordinate and
junior in right of payment to all Senior Debt to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, the holders of Senior Debt will first
be entitled to receive payment in full of principal of and interest, if any, on
such Senior Debt before the holders of Junior Subordinated Debt Securities, or
the Property Trustee on behalf of the holders, will be entitled to receive or
retain any payment or distribution in respect thereof.
In the event of the acceleration of the maturity of the Junior
Subordinated Debt Securities, the holders of all Senior Debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of the Junior Subordinates Debt Securities will be entitled to receive
or retain any payment in respect of the principal of or interest, if any, on the
Junior Subordinated Debt Securities.
In the event that the Corporation shall default in the payment of any
principal of or interest, if any, on any, Senior Debt when the same becomes due
and payable, whether at maturity or at a date fixed for prepayment or by
declaration of acceleration or otherwise, then, unless and until such default
shall have been cured or waived or shall have ceased to exist or all Senior Debt
shall have been paid, no direct or indirect payment (in cash, property,
securities, by set-off or otherwise) shall be made or agreed to be made for
principal or interest, if any, on the Junior Subordinated Debt Securities, or in
respect of any redemption, repayment, retirement, purchase or other acquisition
of any of the Junior Subordinated Debt Securities.
"Senior Debt" means (a) the principal of, and premium, if any, and
interest on all indebtedness of the Corporation for money borrowed, whether
outstanding on the date of execution of the Indenture or thereafter created,
assumed or incurred, (b) all obligations to make payment pursuant to the terms
of financial instruments, such as (i) securities contracts and foreign currency
exchange contracts, (ii) derivative instruments, such as swap agreements
(including interest rate and foreign exchange rate swap agreements), cap
agreements, floor agreements, collar agreements, interest rate agreements,
foreign exchange agreements, options, commodity futures contracts and commodity
options contracts, and (iii) similar financial instruments; except, in the case
of both (a) and (b) above, such indebtedness and obligations that are expressly
stated to rank junior in right of payment to, or pari passu in right of payment
with, the Junior Subordinated Debt Securities, and (c) indebtedness or
obligations of others of the kind described in both (a) and (b) above for the
payment of which the Corporation is responsible or liable as guarantor or
otherwise, and (d) any deferrals, renewals or extensions of any such Senior
Debt; provided, however, that Senior Debt shall not be deemed to include (i) any
debt of the Corporation which, when incurred and without respect to any election
under Section 1111 (b) of the United States Bankruptcy Code of 1978, was without
recourse to the Corporation, (ii) any debt of the Corporation to any of its
subsidiaries, (iii) debt to any employee of the Corporation, (iv) debt which by
its terms is subordinated to trade accounts payable or accrued liabilities
arising in the ordinary course of business to the extent that payments made to
the holders of such debt by the holders of the Junior Subordinated Debt
Securities as a result of the subordination provisions of the Indenture would be
greater than such payments otherwise would have been as a result of any
obligation of such holders of such debt to pay amounts over to the obligees on
such trade accounts payable or accrued liabilities arising in the ordinary
course of business as a result of subordination
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provisions to which such debt is subject, (v) trade accounts payable or accrued
liabilities arising in the ordinary course of business and (vi) any other debt
securities issued pursuant to the Indenture.
The Indenture places no limitation on the amount of Senior Debt that
may be incurred by the Corporation. The Corporation may from time to time incur
indebtedness constituting Senior Debt. At December 31, 1997 the Corporation had
no aggregate outstanding Senior Debt on an unconsolidated basis. The Indenture
also places no limitation on the indebtedness of the Corporation's subsidiaries,
which rank senior in right of payment to the Junior Subordinated Debt
Securities.
Governing Law
The Indenture and the Junior Subordinated Debt Securities will be
governed by and construed in accordance with the laws of the State of Virginia.
Information Concerning the Debenture Trustee
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debt Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Corporation
concurrently with the issuance by the Trust of the Trust Securities for the
benefit of the holders from time to time of such Trust Securities. Wilmington
Trust Company will act as trustee (the "Guarantee Trustee") under the Guarantee
Agreement. The Guarantee Agreement will be qualified under the Trust Indenture
Act. This summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Guarantee, including the definitions therein of certain
terms, and the Trust Indenture Act. The Guarantee Trustee will hold the
Guarantee for the benefit of the holders of the Trust Securities.
General
The Corporation will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined
herein) to the holders of the Trust Securities, as and when due, regardless of
any defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Trust Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee: (i) any accrued and
unpaid Distributions required to be paid on the Trust Securities, to the extent
that the Trust has funds on hand available therefor at such time, (ii) the
Redemption Price with respect to Trust Securities called for redemption, to the
extent that the Trust has funds on hand available therefor at such time, and
(iii) upon a voluntary or involuntary dissolution, winding up or liquidation of
the Trust (other than in connection with the distribution of Junior Subordinated
Debt Securities to the holders of the Trust Securities or the redemption of all
of the Preferred Securities) the lesser of (a) the Liquidation Distribution, to
the extent the Trust has funds available therefor and (b) the amount of assets
of the Trust remaining available for distribution to holders of the Trust
Securities upon liquidation of the Trust after satisfaction of liabilities to
creditors of the Trust as required by applicable law.
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The Corporation's obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by the Corporation to the holders of the
Trust Securities or by causing the Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis
of the Trust's obligations under the Trust Securities, although it will apply
only to the extent that the Trust has funds sufficient to make such payments,
and is not a guarantee of collection. If the Corporation does not make interest
payments on the Junior Subordinated Debt Securities held by the Trust, the Trust
will not be able to pay Distributions on the Preferred Securities and will not
have funds legally available therefor.
The Guarantee will rank subordinate and junior in right of payment to
all Senior Debt. See "Status of the Guarantee." As a holding company, the
Corporation conducts its operations principally through its subsidiaries and,
therefore, its principal source of cash is receipt of dividends from the Bank.
However, there are legal limitations on the source and amount of dividends that
a Virginia-chartered, Federal Reserve member bank such as the Bank is permitted
to pay. A Virginia-chartered bank may pay dividends only from net undivided
profits. Additionally, a dividend may not be paid if it would impair the paid-in
capital of the bank. In addition, prior approval of the Federal Reserve is
required if the total of all dividends declared by a member bank in any calendar
year will exceed the sum of that bank's net profits for that year and its
retained net profits for the preceding two calendar years, less any required
transfers to either surplus or any fund for the retirement of any preferred
stock. At January 1, 1998, the Bank could have paid approximately $1.7 million
in dividends to the Corporation without prior Federal Reserve approval. The
payment of dividends by the Bank may also be affected by other factors, such as
requirements for the maintenance of adequate capital. In addition, the Federal
Reserve is authorized to determine, under certain circumstances relating to the
financial condition of a member bank, whether the payment of dividends would be
an unsafe or unsound banking practice and to prohibit payment thereof. See "The
Corporation." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Corporation, including Senior Debt, whether
under the Indenture, any other indenture that the Corporation may enter into in
the future or otherwise.
Taken together, the Corporation's obligations under the Guarantee, the
Declaration, the Junior Subordinated Debt Securities and the Indenture,
including the Corporation's obligation to pay the costs, expenses and other
liabilities of the Trust (other than the Trust's obligations to the holders of
the Trust Securities under the Trust Securities), provide, in the aggregate, a
full, irrevocable and unconditional guarantee of all of the Trust's obligations
under the Preferred Securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debt Securities and the
Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Debt in the same manner as Junior Subordinated Debt Securities.
The Guarantee will rank pari passu with all Other Guarantees issued by
the Corporation. The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Corporation to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Trust Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payments
in full to the extent not paid by the Trust or upon distribution to the holders
of the Trust Securities of the Junior Subordinated Debt Securities. The
Guarantee does not place a limitation on the amount of additional
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Senior Debt that may be incurred by the Corporation. The Corporation expects
from time to time to incur additional indebtedness constituting Senior Debt.
Amendments and Assignment
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Trust Securities (in which case no vote will
be required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of such
outstanding Preferred Securities. The manner of obtaining any such approval will
be as set forth under "Description of Preferred Securities-Voting Rights;
Amendment of the Declaration." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Corporation and shall inure to the benefit of the holders
of the Preferred Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
the Corporation to perform any of its payment or other obligations thereunder;
provided, however, that except with respect to a default in payment of any
Guarantee payment, the Corporation shall have received notice of default and
shall not have cured such default within 60 days after receipt of such notice;
and provided, further, that no event of default under the Guarantee shall occur
unless an Event of Default under the Declaration or a Debenture Event of Default
shall have occurred. The holders of not less than a majority in aggregate
Liquidation Amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of the Guarantee or to direct the exercise of
any trust or power conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Preferred Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other person or entity.
The Corporation, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Corporation in performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after default with respect to the Guarantee, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of the Trust Securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred
thereby.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Trust Securities, upon full payment
of the amounts payable upon liquidation of the Trust or upon distribution of
Junior Subordinated Debt Securities to the holders of the Trust Securities. The
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any holder of the Trust Securities must restore payment of
any sums paid under the Trust Securities or the Guarantee.
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Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of Virginia.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBT SECURITIES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Corporation as and to the
extent set forth under "Description of Guarantee." Taken together, the
Corporation's obligations under the Junior Subordinated Debt Securities, the
Indenture, the Declaration and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of Distributions and other
amounts due on the Preferred Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Preferred Securities. If and to the extent that
the Corporation does not make payments on the Junior Subordinated Debt
Securities, the Trust will not pay Distributions or other amounts due on the
Preferred Securities. The Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds to pay such Distributions. In such
event, the remedy of a holder of Preferred Securities is to institute a Direct
Action. The obligations of the Corporation under the Guarantee are subordinate
and junior in right of payment to all Senior Debt.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debt Securities, such payments will be sufficient to
cover Distributions and other payments due on the Preferred Securities,
primarily because (i) the aggregate principal amount or Redemption Price of the
Junior Subordinated Debt Securities will be equal to the sum of the aggregate
Liquidation Amount or Redemption Price, as applicable, of the Trust Securities;
(ii) the interest rate and interest and other payment dates on the Junior
Subordinated Debt Securities will match the Distribution rate and Distribution
and other payment dates for the Preferred Securities; (iii) the Corporation
shall pay for all costs, expenses and liabilities of the Trust except the
Trust's obligations to holders of Trust Securities under such Trust Securities;
and (iv) the Declaration further provides that the Trust will not engage in any
activity that is not consistent with the limited purposes thereof.
Notwithstanding anything to the contrary in the Indenture, the
Corporation has the right to set off any payment it is otherwise required to
make thereunder with and to the extent the Corporation has theretofore made, or
is concurrently on the date of such payment making, any payment under the
Guarantee used to satisfy the related payment of indebtedness under the
Indenture.
Enforcement Rights of Holders of Preferred Securities
A holder of any Preferred Security may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person or entity.
A default or event of default under any Senior Debt would not
constitute a default or Event of Default under the Declaration. However, in the
event of payment defaults under, or acceleration of, Senior Debt, the
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subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debt Securities until such Senior Debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on Junior Subordinated Debt Securities would
constitute an Event of Default under the Declaration.
Limited Purpose of the Trust
The Preferred Securities evidence a beneficial interest in the Trust,
and the Trust exists for the sole purpose of issuing the Preferred Securities
and Common Securities, investing the proceeds of the Trust Securities in Junior
Subordinated Debt Securities and engaging in other activities necessary or
incidental thereto.
Rights Upon Termination
Upon any voluntary or involuntary termination, winding-up or
liquidation of the Trust involving the liquidation of the Junior Subordinated
Debt Securities, after satisfaction of the liabilities of creditors of the Trust
as required by applicable law, the holders of the Trust Securities will be
entitled to receive, out of assets held by the Trust, the Liquidation
Distribution in cash. See "Description of Preferred Securities-Liquidation of
the Trust and Distribution of Junior Subordinated Debt Securities." Upon any
voluntary or involuntary liquidation or bankruptcy of the Corporation, the
Property Trustee, as holder of the Junior Subordinated Debt Securities, would be
a subordinated creditor of the Corporation, subordinated in right of payment to
all Senior Debt as set forth in the Indenture, but entitled to receive payment
in full of principal and interest, before any stockholders of the Corporation
receive payments or distributions. Since the Corporation is the guarantor under
the Guarantee and has agreed to pay for all costs, expenses and liabilities of
the Trust (other than the Trust's obligations to the holders of its Trust
Securities), the positions of a holder of Preferred Securities and a holder of
Junior Subordinated Debt Securities relative to other creditors and to
stockholders of the Corporation in the event of liquidation or bankruptcy of the
Corporation are expected to be substantially the same.
DESCRIPTION OF GUARANTY FINANCIAL CORPORATION CAPITAL STOCK
The Corporation's authorized capital stock consists of 4,000,000 shares
of Common Stock, par value $1.25 per share ("Common Stock") and 500,000 shares
of preferred stock. The Corporation had 1,501,383 issued and outstanding shares
of Common Stock held by 427 stockholders of record, at December 31, 1997. All
outstanding shares of Common Stock are fully paid and nonassessable. The
Corporation's Board of Directors has not authorized the issuance of any class or
series of preferred stock.
Common Stock
Holders of shares of Common Stock are entitled to receive dividends
when and as declared by the Board of Directors out of funds legally available
therefor, provided, however, that the payment of dividends to holders of shares
of Common Stock is subject to the preferential dividend rights of any preferred
stock that the Board of Directors authorizes for issuance in the future.
In the event of any liquidation, dissolution or winding up of the
Corporation, the holders of Common Stock (and the holders of any class or series
of stock entitled to participate with the Common Stock in the distribution of
assets) shall be entitled to receive, in cash or in kind, the assets of the
Corporation available for distribution remaining after (i) payment or provision
for payment of the Corporation's debts and liabilities and (ii) distributions or
provisions for distributions to holders of any class or series of stock having
preference over the Common Stock in the liquidation, dissolution or winding up
of the Corporation.
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Holders of Common Stock are entitled to one vote per share on all
matters submitted to stockholders. There are no cumulative voting rights in the
election of directors. The Corporation's stockholders do not have preemptive
rights to purchase additional shares of any class of the Corporation's capital
stock. Holders of Common Stock have no conversion or redemption rights. The
shares of Common Stock presently outstanding are, and any Common Stock issued
upon conversion of Preferred Securities will be when issued, fully paid and
nonassessable. Registrar and Transfer Company is the transfer agent and
registrar for the Common Stock.
Preferred Stock
The Corporation's Articles of Incorporation authorize the Board of
Directors to determine the preferences, limitations and relative rights of any
class or series of preferred stock before the issuance of any shares of that
class or series. To date, the Corporation's Board of Directors has not
authorized the issuance of any class or series of preferred stock.
Limitations on Liability of Officers and Directors
The Articles of Incorporation of the Corporation provide that to the
full extent that Virginia law permits the limitation or elimination of the
liability of directors and officers, they will not be liable to the Corporation
or its shareholders for any money damages in excess of one dollar. At this time
Virginia law does not permit any limitation of liability if a director engages
in willful misconduct or a knowing violation of the criminal law or any federal
or state securities law.
To the fullest extent permitted by Virginia law, the Corporation's
Articles of Incorporation require it to indemnify any director or officer of the
Corporation who is made a party to any proceeding because he was or is a
director or officer of the Corporation against any liability, including
reasonable expenses and legal fees, incurred in the proceeding. Under the
Corporation's Articles of Incorporation, "proceeding" is broadly defined to
include pending, threatened or completed actions of all types, including actions
by or in the right of the Corporation. Similarly, "liability" is defined to
include, not only judgments, but also settlements, penalties, fines and certain
excise taxes. The Corporation's Articles of Incorporation also provide that the
Corporation may, but is not obligated to, indemnify its other employees or
agents. The Corporation must indemnify any person who is or was serving at the
written request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, to
the full extent provided by Virginia law. The indemnification provisions also
require the Corporation to pay reasonable expenses incurred by a director of
officer of the Corporation in a proceeding in advance of the final disposition
of any such proceeding, provided that the indemnified person undertakes to repay
the Corporation if it is ultimately determined that such person was not entitled
to indemnification. At this time, Virginia law does not permit indemnification
against willful misconduct or a knowing violation of the criminal law.
The rights of indemnification provided in the Corporation's Articles of
Incorporation are not exclusive of any other rights which may be available under
any insurance or other agreement, by vote of shareholders or disinterested
directors or otherwise. In addition, the Articles of Incorporation authorize the
Corporation to maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, whether or not the
Corporation would have the power to provide indemnification to such person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Corporation pursuant to the foregoing provisions, the Corporation has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
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CERTAIN ERISA CONSIDERATIONS
ERISA pension plans, qualified retirement plans, and IRAs (collectively
referred to as retirement plans) are subject to certain transactional
restrictions under ERISA and/or the Internal Revenue Code. For example, a
fiduciary (generally, someone who has discretionary control over plan assets or
receives money for investment advice) is prohibited under these restrictions
from (1) engaging in transactions in its own interest or for its own account or
(2) from receiving consideration from any party dealing with a plan with regard
to its assets. In addition, a plan may not enter into purchase, sale, or loan
transaction with a disqualified person. A disqualified person includes, among
other things, a fiduciary, the plan sponsor, and any entity providing services
(for example, custodial or administrative services) to a plan. Violation of
these transactional restrictions can result in the imposition of federal excise
taxes, federal and state income tax on otherwise exempt retirement trusts, and
accelerated federal and state income tax on the otherwise deferred income
accounts of retirement plan participants.
In the usual case, when a retirement plan invests plan assets in a
security, the security purchased replaces the purchase money as a plan asset and
the purchase money becomes an asset of the entity who offered the security for
sale. Because of a concern that certain enterprises were in reality functioning
as investment mangers to plans, but avoiding classification as a fiduciary under
ERISA through the device of issuing participation units in, for example, limited
partnerships, the Department of Labor issued regulations (the "Plan Asset
Regulations" or "Regulations") which provide that when certain equity interests
(including a beneficial interest in a trust as well as participation in a
limited partnership) are acquired by a plan, both the equity interest acquired
in the hands of the purchasing plan and the purchase money in the hands of the
issuer of the equity interest constitute plan assets. Since the issuer has
discretionary control over these assets, the issuer becomes a fiduciary under
ERISA with respect to the investing plan. As a result, unless an exception
applies, the Trust's purchase of the Junior Subordinated Debt Securities from
the Corporation with assets invested by retirement plans would constitute an
instance of the Trust as a fiduciary dealing on its own account and in its own
interest with plan assets or receiving consideration from an entity (the
Corporation) engaged in a transaction involving plan assets.
The Plan Asset Regulations provide certain exemptions to its plan asset
characterization rules.
It appears that one of the exemptions provided by the Regulations,
namely, the publicly-offered exemption, applies to Junior Subordinated Debt
Securities purchased by the Trust as consequence of a retirement plan's
investment in Preferred Securities with the result that the purchase money or
Junior Subordinated Debt Securities will not be deemed to be plan assets in the
hands of the Trustee. Under the Regulations, a publicly-offered equity interest
in a trust or other non-operating entity purchased by a plan does not constitute
a plan asset if the interest is freely transferable and widely held. The
Regulations provide that a security is publicly-offered if it is sold to a plan
as part of an offering of securities to the public pursuant to an effective
registration statement under the Securities Act of 1933 and the class of
securities of which such security is part is registered under the Securities
Exchange Act of 1934 within 120 days (or such later time as may be allowed by
the Securities and Exchange Commission) after the end of the fiscal year of the
issuer during which the offering of such securities to the public occurred. The
Corporation intends to cause the Preferred Securities to be so registered under
the Securities Exchange of 1934. Further, although ultimately under the
Regulations it is a question of fact, a security will be generally be deemed to
be freely transferable if its purchase price is $25,000 or less at the time of
the public offering. If, in addition, the securities when offered initially to
the public will be held by 100 or more persons independent of the issuer or of
one another, they will generally be deemed to be widely held. It is anticipated
that with regard to these criteria provided by the Plan Asset Regulations, the
Preferred Securities at the time of being initially offered constitute
securities which are publicly-offered, widely held, and freely transferable.
Retirement plans should, nevertheless, consult with their own counsel regarding
the application of the Plan Asset Regulations to the purchase of Preferred
Securities from the Trust.
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If the Corporation or the Bank provides any services to an investing
retirement plan, then it is a disqualified person with respect to that plan
irrespective of whether the Trust qualifies under the publicly-offered
securities exemption to the Plan Asset Regulations. Consequently, the purchase
of Junior Subordinated Debt Securities by the Trust would be an indirect loan
made by the retirement plan to the Corporation and, as such, would constitute a
prohibited transaction under ERISA.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal
income tax consequences of the purchase, ownership and disposition of Preferred
Securities. Unless otherwise stated, this summary addresses only the tax
consequences to a "U.S. Holder" (as defined below) that acquires Preferred
Securities on their original issue at their original offering price and does not
address the tax consequences to persons that may be subject to special treatment
under United States federal income tax law, such as banks, insurance companies,
thrift institutions, regulated investment companies, real estate investment
trusts, tax-exempt organizations, dealers in securities or currencies, persons
that hold Preferred Securities as part of a position in a "straddle" or as part
of a "hedging", "conversion" or other integrated investment transaction for
United States federal income tax purposes, persons whose functional currency is
not the United States dollar or persons that do not hold Preferred Securities as
capital assets. For purposes of this summary, a U.S. Holder is a Securityholder
(as defined below) who or that is (i) an individual citizen or resident of the
United States, (ii) a domestic corporation or partnership organized under the
laws of the United States or any State thereof or the District of Columbia or
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of source.
The statements of law or legal conclusions set forth in this summary
constitute the opinion of Williams Mullen Christian & Dobbins, tax counsel to
the Corporation and the Trust. This summary is based upon the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue
Service rulings and pronouncements and judicial decisions now in effect, all of
which are subject to change at any time. Such changes may be applied
retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below, possibly adversely
affecting a beneficial owner of the Preferred Securities. The authorities on
which this summary is based are subject to various interpretations, and it is
therefore possible that the United States federal income tax treatment of the
purchase, ownership and disposition of the Preferred Securities may differ from
the treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX
ADVISORS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The Corporation intends to take the position that, under current law,
the Junior Subordinated Debt Securities constitute indebtedness for federal
income tax purposes and, by acceptance of a Preferred Security, each holder
covenants to treat the Junior Subordinated Debt Securities as indebtedness and
the Preferred Securities as evidence of an indirect beneficial interest in the
Junior Subordinated Debt Securities. No assurances can be given, however, that
such position of the Corporation will not be challenged by the Internal Revenue
Service (the "Service") or, if challenged, that such challenge will not be
successful. The remainder of this discussion assumes that the Junior
Subordinated Debt Securities are classified as indebtedness for federal income
tax purposes.
94
<PAGE>
Classification of the Junior Subordinated Debt Securities and the Trust
Under current law and assuming compliance with the terms of the
Declaration, the Trust will not be classified as an association taxable as a
corporation for United States federal income tax purposes. Moreover, the Trust
should be classified as a grantor trust, and if not so classified will be
classified as a partnership, for United States federal income tax purposes. As a
result, each beneficial owner of Preferred Securities (a "Securityholder") that
is a U.S. Holder will be required to include in its gross income its pro rata
share of the interest income, including OID, paid or accrued with respect to the
Junior Subordinated Debt Securities, whether or not cash is actually distributed
to the Securityholders. See "Interest Income and Original Issue Discount,"
below. The Junior Subordinated Debt Securities will be classified as
indebtedness of the Corporation for United States federal income tax purposes.
Interest Income and Original Issue Discount
Under applicable Treasury regulations (the "Regulations"), a "remote"
contingency that stated interest will not be timely paid will be ignored in
determining whether a debt instrument is issued with OID. The Corporation
believes that the likelihood of its exercising its option to defer payments of
interest is remote. Based on the foregoing, the Corporation believes that the
Junior Subordinated Debt Securities will not be considered to be issued with OID
at the time of their original issuance.
Because the discount at which the Junior Subordinated Debt Securities
are being issued is less than 1/4 of 1 percent of the Junior Subordinated Debt
Securities stated redemption price at maturity times the number of complete
years to maturity of the Junior Subordinated Debt Securities, such discount will
constitute de minimis OID and will not be required to be taken into account on a
current basis. The following discussion assumes that unless and until the
Corporation exercises its option to defer interest on the Junior Subordinated
Debt Securities, the Junior Subordinated Debt Securities will not be treated as
issued with OID other than de minimis OID.
Under the Regulations, if the Corporation exercised its option to defer
any payment of interest, the Junior Subordinated Debt Securities would be
treated as reissued with OID, and, thereafter, all stated interest on the Junior
Subordinated Debentures would be treated as OID as long as the Junior
Subordinated Debt Securities remained outstanding. In such event, all of a U.S.
Holder's taxable interest income with respect to the Junior Subordinated Debt
Securities would be accounted for as OID on an economic accrual basis regardless
of such U.S. Holder's method of tax accounting, and actual distributions of
stated interest would not be reported separately as taxable income.
Consequently, a U.S. Holder would be required to include OID in gross income
even though the Corporation would not make any actual cash payments during an
Extension Period.
The Regulations have not been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take the
position that the Junior Subordinated Debt Securities were issued with OID at
the time of their original issuance.
Because income on the Preferred Securities will constitute interest or
OID, corporate U.S. Holders will not be entitled to the dividends-received
deduction with respect to any income recognized with respect to the Preferred
Securities. If any Special Interest or Additional Distributions are paid on the
Preferred Securities it is possible that such Special Interest or Additional
Distributions might constitute OID (whether or not an Extension Period has
occurred).
Subsequent uses of the term "interest" in this summary shall include
income in the form of OID.
95
<PAGE>
Distribution of the Junior Subordinated Debt Securities to Holders of Preferred
Securities
Under current law, a distribution by the Trust of the Junior
Subordinated Debt Securities, as described under the caption "Description of
Preferred Securities--Liquidation of the Trust and Distribution of Junior
Subordinated Debt Securities," will be nontaxable and will result in a U.S.
Holder receiving directly its pro rata share of the Junior Subordinated Debt
Securities previously held indirectly through the Trust, with a holding period
and aggregate adjusted tax basis equal to the holding period and aggregate
adjusted tax basis such U.S. Holder had in its Preferred Securities immediately
before such distribution. If, however, the liquidation of the Trust were to
occur because the Trust were subject to United States federal income tax with
respect to income accrued or received on the Junior Subordinated Debt
Securities, the distribution of Junior Subordinated Debt Securities to U.S.
Holders by the Trust would be a taxable event to the Trust and each U.S. Holder,
and each U.S. Holder would recognize gain or loss as if the U.S. Holder had
exchanged its Preferred Securities for the Junior Subordinated Debt Securities
it received upon the liquidation of the Trust. A U.S. Holder will include
interest in respect of the Junior Subordinated Debt Securities received from the
Trust in the manner described above under "Interest Income and Original Issue
Discount."
Sales or Redemption of the Preferred Securities
Gain or loss will be recognized by a U.S. Holder on a sale, exchange,
or other disposition of the Preferred Securities (including a redemption for
cash) in an amount equal to the difference between the amount realized and the
U.S. Holder's adjusted tax basis in the Preferred Securities sold or so
redeemed. Assuming that the Corporation does not exercise its option to defer
payment of interest on the Junior Subordinated Debt Securities, a U.S. Holder's
adjusted tax basis in the Preferred Securities generally will be its initial
purchase price. If the Junior Subordinated Debentures are deemed to be issued
with OID (as a result of the Corporation's deferral of any interest payment), a
U.S. Holder's adjusted tax basis in the Preferred Securities generally will be
its initial purchase price, increased by OID previously included in such U.S.
Holder's gross income to the date of disposition and decreased by distributions
or other payments received on the Preferred Securities other than payments of
stated interest that are not treated as OID. Gain or loss recognized by a U.S.
Holder on the Preferred Securities generally will be taxable as capital gain or
loss (except to the extent any amount realized is treated as a payment of
accrued interest with respect to such U.S. Holder's pro rata share of the Junior
Subordinated Debt Securities required to be included in income) and generally
will be long-term capital gain or loss if the Preferred Securities have been
held for more than one year.
Should the Corporation exercise its option to defer any payment of
interest on the Junior Subordinated Debt Securities, the Preferred Securities
may trade at a price that does not fully reflect the value of accrued but unpaid
interest with respect to the underlying Junior Subordinated Debt Securities. In
the event of such a deferral, a Securityholder that disposes of its Preferred
Securities between record dates for payments of Distributions (and consequently
does not receive a Distribution from the Trust for the period prior to such
disposition) will nevertheless be required to include in income as ordinary
income accrued but unpaid interest on the Junior Subordinated Debt Securities
through the date of disposition and to add such amount to its adjusted tax basis
in its Preferred Securities disposed of Such U.S. Holder will recognize a
capital loss on the disposition of its Preferred Securities to the extent the
selling price (which may not fully reflect the value of accrued but unpaid
interest) is less than the U.S. Holder's adjusted tax basis in the Preferred
Securities (which will include accrued but unpaid interest). Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
Conversion of Preferred Securities
A holder of Preferred Securities generally will not recognize income,
gain or loss upon the conversion, through the Conversion Agent, of its Preferred
Securities into Common Stock. A holder will, however, recognize
96
<PAGE>
gain upon the receipt of cash in lieu of a fractional share of Common Stock
equal to the amount of cash received less the holder's tax basis in such
fractional share. A holder's tax basis in the Common Stock received upon
exchange and conversion will generally be equal to the holder's tax basis in the
Preferred Securities delivered to the Conversion Agent for exchange less that
basis allocated to any fractional share for which cash is received, and a
holder's holding period in the Common Stock received upon exchange and
conversion will generally begin on the date the holder acquired the Preferred
Securities delivered to the Conversion Agent for exchange.
Adjustment of Conversion Price
Treasury Regulations promulgated under Section 305 of the Internal
Revenue Code would treat holders of Preferred Securities as having received a
constructive distribution from the Corporation in the event the Conversion Price
of the Junior Subordinated Debt Securities were adjusted if (i) as a result of
such adjustment, the proportionate interest (measured by the quantum of Common
Stock into or for which the Junior Subordinated Debt Securities are convertible
or exchangeable) of the holders of the Preferred Securities in the assets or
earnings and profits of the Corporation were increased, and (ii) the adjustment
was not made pursuant to a bona fide, reasonable antidilution formula. An
adjustment in the Conversion Price would not be considered made pursuant to such
a formula if the adjustment was made to compensate for certain taxable
distributions with respect to the Common Stock. Thus, under certain
circumstances, a reduction in the Conversion Price for the holders may result in
deemed dividend income to holders to the extent of the current or accumulated
earnings and profits of the Corporation. Holders of the Preferred Securities
would be required to include their allocable share of such deemed dividend
income in gross income but would not receive any cash related thereto.
United States Alien Holders
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a nonresident alien individual, a foreign
partnership or a nonresident fiduciary of a foreign estate or trust.
Under current United States federal income tax law, and subject to the
discussion of backup withholding below: (i) payments by the Trust or any of its
paying agents to any Securityholder who or that is a United States Alien Holder
will not be subject to United States federal withholding tax; provided that (a)
the Securityholder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Corporation entitled
to vote, (b) the Securityholder is not a controlled foreign corporation that is
related to the Corporation through stock ownership and (c) either (A) the
Securityholder certifies to the Trust or its agent, under penalties of perjury,
that it is not a United States holder and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"Financial Institution"), and holds the Preferred Security in such capacity,
certifies to the Trust or its agent, under penalties of perjury, that such
statement has been received from the Securityholder by it or by a Financial
Institution holding such security for the Securityholder and furnishes the Trust
or its agent with a copy thereof, and (ii) a United States Alien Holder of a
Preferred Security will not be subject to United States federal withholding tax
on any gain realized upon the sale or other disposition of a Preferred Security.
Recently proposed Internal Revenue Service Treasury regulations (the
"Proposed Regulations") would provide alternative methods for satisfying the
certification requirement described in clause (i)(c) above. The Proposed
Regulations also would require, in the case of Preferred Securities held by a
foreign partnership, that (x) the certification described in clause (i)(c) above
be provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. The Proposed Regulations are proposed to be effective for payments
made after December 31, 1997. There can be no assurance that the
97
<PAGE>
Proposed Regulations will be adopted or as to the provisions that they will
include if and when adopted in temporary or final form.
Information Reporting to Securityholders
Generally, income on the Preferred Securities will be reported to
Securityholders on Forms 1099, which forms should be mailed to Securityholders
by January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, the Preferred
Securities may be subject to a "backup" withholding tax of 31% unless the
Securityholder complies with certain certification requirements. Any withheld
amounts will be allowed as a credit against the Securityholder's United States
federal income tax, provided the required information is furnished to the
Internal Revenue Service on a timely basis.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
THE ALTERNATIVE MINIMUM TAX AND THE STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND
THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
UNDERWRITING
The Underwriter, McKinnon & Company, Inc., 555 Main Street, Norfolk,
Virginia, has agreed, subject to the terms and conditions contained in an
Underwriting Agreement with the Trust and the Corporation, to sell, as selling
agent, on a best efforts basis, up to $6.0 million of Preferred Securities. The
Trust reserves the right to increase the Aggregate Liquidation Amount by not
more than $900,000. The Underwriter is not obligated to purchase the Preferred
Securities if they are not sold to the public.
The Underwriter has informed the Trust and the Corporation that it
proposes to sell the Preferred Securities as selling agent for the Trust,
subject to prior sale, when, as and if issued by the Trust, in part to the
public at the public offering price set forth on the cover page of this
Prospectus and, in part, through certain selected dealers, who are members of
the National Association of Securities Dealers, Inc., to customers of such
selected dealers at such public offering price, for which each selected dealer
will receive a commission of $ , for each $25.00 of Preferred Securities that it
sells. The Underwriter reserves the right to reject any order for the purchase
of Preferred Securities through it in whole or in part.
The public offering is not contingent upon the occurrence of any event
or the sale of a minimum or maximum number of Preferred Securities. Funds
received by the Underwriter from investors in the public offering will be
deposited with and held by the Escrow Agent in a non-interest bearing account
until the closing of the public offering. Closing is expected to occur on or
about , 1998.
As the proceeds of the sale of the Preferred Securities will ultimately
be used to purchase the Junior Subordinated Debt Securities, the Underwriting
Agreement provides that the Corporation will pay as compensation ("Underwriter's
Compensation") an amount directly to the Underwriter for its arranging the
98
<PAGE>
investment therein of such proceeds $ per Preferred Security (or up to
$ in the aggregate) for the account of the Underwriter.
The Underwriting Agreement provides that Corporation and the Trust will
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act or contribute to payments the Underwriter may be
required to make in respect thereof.
The Preferred Securities are a new issue of securities with no
established trading market. The Corporation and the Trust do not intend to apply
for listing of the Preferred Securities on any securities exchange. The
Corporation and the Trust have been advised by the Underwriter that it may make
a market in the Preferred Securities. The Underwriter, however, is not obligated
to make a market in the Preferred Securities and may discontinue any market
making at any time without notice. Neither the Corporation nor the Trust can
provide any assurance that a secondary market for the Preferred Securities will
develop.
The Underwriter provides or has provided investment banking services to
the Corporation from time to time in the ordinary course of business.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the
Preferred Securities, the enforceability of the Declaration and the formation of
the Trust will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Corporation and the Trust. The validity of the Guarantee, the
Junior Subordinated Debt Securities, the Common Stock issuable upon conversion
of the Preferred Securities and certain matters relating to United States
federal income tax considerations, will be passed upon for the Corporation by
Williams, Mullen, Christian & Dobbins, P.C., Richmond, Virginia. Williams,
Mullen, Christian & Dobbins, P.C. will rely on the opinion of Richards, Layton &
Finger as to matters of Delaware law.
ACCOUNTANTS
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 are included herein in reliance
on the report of BDO Seidman, LLP, independent certified public accountants, and
upon the authority of said firm as experts in accounting and auditing.
99
<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>
<TABLE>
<CAPTION>
======================================================== ========================================================
<S> <C>
No dealer, salesperson or other person has been
authorized to give any information or to make any
representations in connection with the offer made
hereby except as contained in this Prospectus and, if
given or made, no such information or representations
should be relied upon as having been authorized by
the Corporation, the Trust, the Underwriter or any of
their respective agents. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under $6,000,000
any circumstances, create an implication that there GUARANTY CAPITAL TRUST I
has been no change in the information set forth 240,000
herein or in the affairs of the Corporation or the $ Convertible Preferred Securities
Trust since the date hereof. This Prospectus does not (Liquidation Amount $25.00
constitute an offer to sell, or a solicitation of an per Preferred Security)
offer to buy, the Preferred Securities by anyone in
any jurisdiction in which such offer or solicitation Fully and Unconditionally Guaranteed, as
is not authorized or in which the person making such described herein, by
offer or solicitation is not qualified to do so or to
any person to whom it is unlawful to make such offer
or solicitation. GUARANTY FINANCIAL CORPORATION
--------------
TABLE OF CONTENTS
TABLE OF CONTENTS
Page
Available Information..................................1
Summary................................................2
Use of Proceeds........................................5 McKinnon & Company, Inc.
Risk Factors...........................................5
Ratio of Earnings to Fixed Charges.....................5
Summary Financial Information..........................6
Risk Factors...........................................7
Guaranty Capital Trust I..............................13
Selected Historical Financial Information.............15 Prospectus
The Corporation.......................................16
Management's Discussion and Analysis of Dated April , 1998
Financial Condition and Results of Operations.......18
Business..............................................43
Management............................................52
Capitalization........................................57
Accounting Treatment..................................57
Regulatory Treatment..................................58
Description of Preferred Securities...................58
Description of Junior Subordinated Debt Securities....77
Description of Guarantee..............................87
Relationship Among the Capital Securities, the
Junior Subordinated Debt Securities and
the Guarantee.......................................90
Description of Guaranty Financial Corporation
Capital Stock.......................................91
Certain ERISA Considerations..........................93
Certain United States Federal Income Tax
Consequences........................................94
Underwriting..........................................98
Validity of Securities................................99
Accountants...........................................99
======================================================== ========================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16. Exhibits
The following exhibits are filed on behalf of the Registrant as part of
this Registration Statement:
1.1 Form of Underwriting Agreement for offering of Convertible
Preferred Securities*
3.1 Articles of Incorporation of Guaranty Financial Corporation*
3.2 Bylaws of Guaranty Financial Corporation*
4.1 Certificate of Trust of Guaranty Capital Trust I*
4.2 Trust Agreement between Guaranty Financial Corporation and
Wilmington Trust Company*
4.3 Form of Amended and Restated Declaration of Trust for Guaranty
Capital Trust I
4.4 Form of Junior Subordinated Indenture between Guaranty Financial
Corporation and Wilmington Trust Company, as Trustee
4.5 Form of Convertible Preferred Security (included in Exhibit 4.3
above)
4.6 Form of Junior Subordinated Debt Security (included in Exhibit
4.4 above)
4.7 Form of Guarantee Agreement with respect to Trust Securities
issued by Guaranty Capital Trust I
4.8 Form of Escrow Agreement among McKinnon & Company, Inc., Guaranty
Capital Trust I, Guaranty Financial Corporation and Wilmington
Trust Company*
5.1 Opinion of Williams, Mullen, Christian & Dobbins, P.C.*
5.2 Opinion of Richards, Layton & Finger*
8.1 Opinion of Williams, Mullen, Christian & Dobbins, P.C. as to tax
matters*
12.1 Calculation of Ratio of Earnings to Fixed Charges*
23.1 Consent of BDO Seidman, LLP*
23.2 Consent of Williams, Mullen, Christian & Dobbins, P.C. (included
in Exhibit 5.1 above)
23.3 Consent of Richards, Layton & Finger (included in Exhibit 5.2
above)
24.1 Powers of Attorney (included on signature page)
25.1 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of Wilmington Trust Company, as Trustee under the
Junior Subordinated Indenture
25.2 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of Wilmington Trust Company, as Property Trustee
under the Amended and Restated Declaration of Trust of Guaranty
Capital Trust I
25.3 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of Wilmington Trust Company, as Guarantee Trustee
under the Guarantee Agreement for the benefit of holders of Trust
Securities of Guaranty Capital Trust I
27.1 Financial Data Schedule (filed electronically only)
____________________
*File herewith.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Charlottesville, Commonwealth of Virginia, on April 2, 1998.
GUARANTY FINANCIAL CORPORATION
By: /s/ Thomas P. Baker
-------------------------------------
Thomas P. Baker
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thomas P. Baker President, Chief Executive Officer April 2, 1998
- ------------------------------------------- and Director
Thomas P. Baker (Principal Executive Officer)
/s/ Vincent B. McNelley Senior Vice President, April 2, 1998
- ------------------------------------------- Chief Financial Officer and
Vincent B. McNelley Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
* Chairman of the Board
- -------------------------------------------
Douglas E. Caton
<PAGE>
* Director
- -------------------------------------------
Henry J. Browne
* Director
- -------------------------------------------
Robert P. Englander
Director
- -------------------------------------------
Harry N. Lewis
* Director
- -------------------------------------------
John R. Metz
* Director
- -------------------------------------------
James R. Sipe, Jr.
* Director
- -------------------------------------------
Oscar W. Smith, Jr.
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Charlottesville, Commonwealth of Virginia, on April 2, 1998.
GUARANTY CAPITAL TRUST I
By: Guaranty Financial Corporation
as Depositor
By: /s/ Thomas P. Baker
----------------------------------
Thomas P. Baker
President, Chief Executive Officer
and Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
1.1 Form of Underwriting Agreement for offering of Convertible
Preferred Securities*
3.1 Articles of Incorporation of Guaranty Financial Corporation*
3.2 Bylaws of Guaranty Financial Corporation*
4.1 Certificate of Trust of Guaranty Capital Trust I*
4.2 Trust Agreement between Guaranty Financial Corporation and
Wilmington Trust Company*
4.3 Form of Amended and Restated Declaration of Trust for Guaranty
Capital Trust I
4.4 Form of Junior Subordinated Indenture between Guaranty Financial
Corporation and Wilmington Trust Company, as Trustee
4.5 Form of Convertible Preferred Security (included in Exhibit 4.3
above)
4.6 Form of Junior Subordinated Debt Security (included in Exhibit
4.4 above)
4.7 Form of Guarantee Agreement with respect to Trust Securities
issued by Guaranty Capital Trust I
4.8 Form of Escrow Agreement among McKinnon & Company, Inc., Guaranty
Capital Trust I, Guaranty Financial Corporation and Wilmington
Trust Company*
5.1 Opinion of Williams, Mullen, Christian & Dobbins, P.C.*
5.2 Opinion of Richards, Layton & Finger*
8.1 Opinion of Williams, Mullen, Christian & Dobbins, P.C. as to tax
matters*
12.1 Calculation of Ratio of Earnings to Fixed Charges*
23.1 Consent of BDO Seidman, LLP*
23.2 Consent of Williams, Mullen, Christian & Dobbins, P.C. (included
in Exhibit 5.1 above)
23.3 Consent of Richards, Layton & Finger (included in Exhibit 5.2
above)
24.1 Powers of Attorney (included on signature page)
25.1 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of Wilmington Trust Company, as Trustee under the
Junior Subordinated Indenture
25.2 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of Wilmington Trust Company, as Property Trustee
under the Amended and Restated Declaration of Trust of Guaranty
Capital Trust I
25.3 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of Wilmington Trust Company, as Guarantee Trustee
under the Guarantee Agreement for the benefit of holders of Trust
Securities of Guaranty Capital Trust I
27.1 Financial Data Schedule (filed electronically only)
_____________________
* Filed herewith.
Exhibit 1.1
UNDERWRITING AGREEMENT
for offering of
$___ Convertible Preferred Securities
GUARANTY CAPITAL TRUST I
(a Delaware Trust)
$___ Convertible Preferred Securities (the "Preferred Securities")
(Liquidation Amount of $25.00 per Preferred Security)
UNDERWRITING AGREEMENT
---------------
________ __, 1998
McKinnon & Company, Inc.
555 Main Street
First Virginia Building, 16th Floor
Norfolk, Virginia 23510
Dear Sirs:
Guaranty Capital Trust I (the "Trust"), a statutory business trust
organized under the Business Trust Act (the "Delaware Act") of the State of
Delaware (Chapter 38, Title 12, of the Delaware Code, 12 Del. C. ss.ss.3801 et
seq.), and Guaranty Financial Corporation, a Virginia corporation (the "Company"
and, together with the Trust, the "Offerors"), confirm their agreement (the
"Agreement") with McKinnon & Company, Inc. (the "Underwriter") with respect to
the sale by the Trust of $___ Convertible Preferred Securities (liquidation
amount of $25.00 per preferred security) of the Trust (the "Preferred
Securities") set forth in Schedule A. The Preferred Securities will be
guaranteed on a subordinated basis by the Company, to the extent set forth in
the Prospectus (as defined herein), with respect to distributions and payments
upon liquidation, redemption and otherwise (the "Preferred Securities
Guarantee") pursuant to the Guarantee Agreement, to be dated as of _______,
1998, and as may be amended, (the "Guarantee Agreement"), between the Company
and Wilmington Trust Company, as trustee (the "Guarantee Trustee"), and will be
entitled to the benefits of certain backup undertakings described in the
Prospectus (as defined herein) with respect to the Company's agreement pursuant
to the Indenture (as defined herein) to pay all expenses relating to
administration of the Trust (other than payment obligations with respect to the
Preferred Securities).
The Offerors have filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (Nos. _______ and
_______) and a related preliminary prospectus for the registration under the
Securities Act of 1933, as amended (the "1933 Act") of (i) the Preferred
Securities, (ii) the Preferred Securities Guarantee, (iii) the Junior
Subordinated Debt Securities to be issued and sold to the Trust by the Company
and (iv) such indeterminate number of shares of common stock, par value ___, of
the Company (the "Common Stock") as
<PAGE>
may be issuable upon conversion of the Preferred Securities, have filed such
amendments thereto, if any, and such amended preliminary prospectuses as may
have been required to the date hereof, and will file such additional amendments
thereto and such amended prospectuses as may hereafter be required. Such
registration statement (as amended) (including the information, if any, deemed
to be part thereof pursuant to Rule 430A(b) of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations")) and the prospectus
constituting a part thereof, as from time to time amended or supplemented
pursuant to the 1933 Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise, are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that, if any revised
prospectus shall be provided to the Underwriter by the Offerors for use in
connection with the offering of the Preferred Securities which differs from the
Prospectus on file at the Commission at the time the Registration Statement
became effective (whether or not such revised prospectus is required to be filed
by the Offerors pursuant to Rule 424(b) of the 1933 Act Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriter for such use. All references in this
Agreement to financial statements and schedules and other information that is
"contained," "included" or "stated" in the Registration Statement or the
Prospectus (and all other references of like import) shall be deemed to mean and
include all such financial statements and schedules and other information that
are or are deemed to be incorporated by reference in the Registration Statement
or the Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement or the Prospectus shall
be deemed to mean and include the filing of any document under the 1934 Act that
is incorporated or is deemed to be incorporated by reference in the Registration
Statement or the Prospectus, as the case may be.
The Offerors understand that the Underwriter proposes to make a public
offering of the Preferred Securities as soon as the Underwriter deems advisable
after this Agreement has been executed and delivered and the Declaration (as
defined herein), the Indenture (as defined herein) and the Preferred Securities
Guarantee have been qualified under the Trust Indenture Act of 1939, as amended
(the "1939 Act"). The entire proceeds to the Trust from the sale of the
Preferred Securities will be combined with the entire proceeds from the sale by
the Trust to the Company of its common securities (the "Common Securities"), as
guaranteed on a subordinated basis by the Company, to the extent set forth in
the Prospectus, with respect to distributions and payments upon liquidation and
redemption thereof (the "Common Securities Guarantee" and together with the
Preferred Securities Guarantee, the "Guarantees") pursuant to the Guarantee
Agreement between the Company and Guarantee Trustee, as Trustee, and will be
used by the Trust to purchase up to $________ aggregate principal amount of __%
Junior Subordinated Debt Securities due _______, 2028 (the "Junior Subordinated
Debt Securities") issued by the Company under the Indenture (as defined herein).
The Preferred Securities and the Common Securities will be issued pursuant to
the Declaration of Trust of the Trust, to be dated as of ______, 1998 (the
"Declaration"), among the Company, as Depositor, the individuals named as
Administrative Trustees therein, as trustees (the "Administrative Trustees"),
and Wilmington Trust Company, as property trustee (the "Property Trustee" and,
together with the Administrative Trustees, the "Trustees"), and the holders from
time to time of undivided beneficial interests in the assets of the Trust. The
Junior Subordinated Debt Securities will be issued pursuant to an indenture, to
be dated as of _______, 1998, between the Company and Wilmington Trust Company,
as trustee
-2-
<PAGE>
(the "Indenture Trustee") (together with any amendments or supplements thereto,
the "Indenture").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Offerors jointly and severally represent and warrant to the
Underwriter as of the date hereof and as of the Closing Time (as hereinafter
defined) as follows:
(i) At the time the Registration Statement became effective
and as of the date hereof, the Registration Statement complied in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations and
the 1939 Act and the rules and regulations of the Commission under the 1939 Act
(the "1939 Act Regulations"), and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, dated
the date hereof (unless the term "Prospectus" refers to a prospectus that has
been provided to the Underwriter by the Trust for use in connection with the
offering of the Preferred Securities and that differs from the Prospectus on
file at the Commission at the time the Registration Statement became effective,
in which case, at the time it is first provided to the Underwriter for such use)
and at the date of the Closing Time referred to in Section 2 hereof, does not
include an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however, the
Offerors make no representations or warranties as to (A) that part of the
Registration Statement which constitutes the Statements of Eligibility and
Qualification (Forms T-1) under the 1939 Act of the Indenture Trustee, the
Property Trustee or the Guarantee Trustee or (B) the information contained in or
omitted from the Registration Statement or the Prospectus or any amendment
thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Offerors by or on behalf of the
Underwriter specifically for use in the Registration Statement and the
Prospectus.
(ii) The documents, if any, incorporated or deemed to be
incorporated by reference in the Registration Statement or Prospectus, at the
time they were or hereafter are filed with the Commission complied and will
comply in all material respects with the requirements of the 1934 Act and the
rules and regulations of the Commission under the 1934 Act (the "1934 Act
Regulations").
(iii) To the best knowledge of the Offerors, BDO Seidman, LLP,
the accountants who certified the financial statements and supporting schedules
included in or incorporated by reference into the Registration Statement, are
independent public accountants as required by the 1933 Act and the 1933 Act
Regulations.
(iv) The Trust has been duly created and is validly existing
and in good standing as a business trust under the Delaware Act with the power
and authority to own property and to conduct its business as described in the
Registration Statement and Prospectus and to enter into and perform its
obligations under this Agreement, the Preferred Securities, the Common
Securities and the Declaration; the Trust is not a party to or otherwise bound
by any agreement
-3-
<PAGE>
other than those described in the Prospectus; the Trust is and will be
classified for United States federal income tax purposes as a grantor trust and
not as an association taxable as a corporation; and the Trust is and will be
treated as a consolidated subsidiary of the Company pursuant to generally
accepted accounting principles.
(v) The Common Securities have been duly authorized by the
Trust pursuant to the Declaration and, when issued and delivered by the Trust to
the Company against payment therefor as described in the Registration Statement
and Prospectus, will be validly issued and, subject to the terms of the
Declaration, fully paid and non-assessable undivided beneficial interests in the
assets of the Trust and will conform to all statements relating thereto
contained in the Prospectus; the issuance of the Common Securities is not
subject to preemptive or other similar rights.
(vi) This Agreement has been duly authorized, executed and
delivered by each of the Offerors.
(vii) The Declaration has been duly authorized by the Company,
as Depositor, and will have been duly executed and delivered by the Company and
the Trustees, and assuming due authorization, execution and delivery of the
Declaration by the Property Trustee, the Declaration is and will be a valid and
binding obligation of the Company, the Trust and the Administrative Trustees,
enforceable against the Company and the Administrative Trustees in accordance
with its terms, subject, as to enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or
other similar laws affecting the rights of creditors now or hereafter in effect,
and to equitable principles that may limit the right to specific enforcement of
remedies, and further subject to 12 U.S.C. 1818(b)(6)(D) (or any successor
statute) and any bank regulatory powers now or hereafter in effect and to the
application of principles of public policy (collectively, the "Permitted
Exceptions") and will conform to all statements relating thereto in the
Prospectus; and the Declaration has been duly qualified under the 1939 Act.
(viii) The Guarantee Agreement has been duly authorized by the
Company and, when validly executed and delivered by the Company, assuming due
authorization, execution and delivery of the Guarantee Agreement by the
Guarantee Trustee, will constitute a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms except to
the extent that enforcement thereof may be limited by the Permitted Exceptions,
and each of the Guarantees and the Guarantee Agreement will conform to all
statements relating thereto contained in the Prospectus; and the trust pursuant
to the Guarantee Agreement will have been duly qualified under the 1939 Act.
(ix) The Preferred Securities have been duly authorized by the
Trust pursuant to the Declaration and, when issued and delivered pursuant to
this Agreement and payment of the consideration therefor set forth in Schedule B
hereto, will be validly issued and, subject to the terms of the Declaration,
fully paid and non-assessable undivided beneficial interests in the Trust, will
be entitled to the benefits of the Declaration and will conform to all
statements relating thereto contained in the Prospectus; the issuance of the
Preferred Securities is not subject to
-4-
<PAGE>
preemptive or other similar rights; and, subject to the terms of the
Declaration, holders of Preferred Securities will be entitled to the same
limitation of personal liability under Delaware law as extended to stockholders
of private corporations for profit.
(x) Each of the Administrative Trustees of the Trust is an
employee of the Company and has been duly authorized by the Company to execute
and deliver the Declaration; the Declaration has been duly executed and
delivered by the Administrative Trustees and is a valid and binding obligation
of each Administrative Trustee, enforceable against such Administrative Trustee
in accordance with its terms except to the extent that enforcement thereof may
be limited by the Permitted Exceptions.
(xi) None of the Offerors is, and upon the issuance and sale
of the Preferred Securities as herein contemplated and the application of the
net proceeds therefrom as described in the Prospectus none will be, an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended (the "1940 Act").
(xii) No authorization, approval, consent or order of any court
or governmental authority or agency is necessary in connection with the issuance
and sale of the Common Securities or the offering of the Preferred Securities,
the Junior Subordinated Debt Securities or the Guarantees hereunder, except such
as may be required under the 1933 Act or the 1933 Act Regulations or state
securities laws and the qualification of the Declaration, the Guarantee
Agreement and the Indenture under the 1939 Act.
(b) The Company represents and warrants to the Underwriter as of the
date hereof and as of the Closing Time (as hereinafter defined) as follows:
(i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings or business affairs of the Trust or
of the Company and its subsidiaries, considered as one enterprise, whether or
not arising in the ordinary course of business.
(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the Commonwealth of
Virginia, with corporate power to own, lease and operate its properties and to
conduct its business as described in the Prospectus, to enter into and perform
its obligations under this Agreement, the Declaration, as Depositor, the
Indenture and each of the Guarantees and to purchase, own, and hold the Common
Securities issued by the Trust; the Company is duly registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended; and the Company
is duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which the character or location of its
properties or the nature or the conduct of its business requires such
qualification, except for any failures to be so qualified or in good standing
which, taken as a whole, are not material to the Company and its subsidiaries,
considered as one enterprise.
-5-
<PAGE>
(iii) Guaranty Bank (the "Principal Subsidiary Bank") is a
banking association operating under the laws of Virginia and authorized
thereunder to transact business; all of the issued and outstanding capital stock
of the Principal Subsidiary Bank has been duly authorized and validly issued, is
fully paid and non-assessable; and the capital stock of the Principal Subsidiary
Bank owned by the Company, directly or through subsidiaries, is owned free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
(iv) The Indenture has been duly authorized by the Company
and, when validly executed and delivered by the Company, will constitute a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms except to the extent that enforcement thereof may be
limited by the Permitted Exceptions; the Indenture will conform to all
statements relating thereto contained in the Prospectus; and the Indenture has
been duly qualified under the 1939 Act.
(v) The Junior Subordinated Debt Securities have been duly
authorized by the Company and have been duly executed by the Company and, when
authenticated in the manner provided for in the Indenture and delivered against
payment therefor as described in the Prospectus, will constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms except to the extent that enforcement thereof may be
limited by the Permitted Exceptions, will be in the form contemplated by, and
subject to the Permitted Exceptions entitled to the benefits of, the Indenture
and will conform to all statements relating thereto in the Prospectus.
(vi) The Company's obligations under the Guarantees are
subordinate and junior in right of payment to all Senior Debt of the Company
(which, as defined in the Indenture, includes all outstanding subordinated debt
of the Company).
(vii) The Junior Subordinated Debt Securities are subordinated
and junior in right of payment to all Senior Debt of the Company.
(viii) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein and compliance by
the Company with its obligations hereunder will not conflict with or constitute
a breach of, or default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or the
Principal Subsidiary Bank pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or the Principal
Subsidiary Bank is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or the Principal Subsidiary
Bank is subject (except for conflicts, breaches and defaults which would not,
individually or in the aggregate, be materially adverse to the Company and its
subsidiaries taken as a whole or materially adverse to the transactions
contemplated by this Agreement), nor will such action result in any material
violation of the provisions of the articles of incorporation or by-laws of the
Company, or any applicable law, administrative regulation or administrative or
court decree.
-6-
<PAGE>
(ix) The shares of Common Stock issuable upon conversion of
the Preferred Securities have been duly authorized and reserved for issuance
upon such conversion and, when issued upon such conversion in accordance with
the provisions of the Preferred Securities, will have been validly issued and
will be fully paid and non-assessable and free of preemptive rights.
(x) There are not now outstanding and at the Closing Time
there will be no preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon the Company for the purchase or
acquisition of any shares of its capital stock other than as set forth in the
Prospectus.
(c) Each certificate signed by any officer of the Company and
delivered to the Underwriter shall be deemed to be a representation and warranty
by the Company to the Underwriter as to the matters covered thereby.
(d) The Trust represents and warrants to the Underwriter as of the
date hereof and as of the Closing Time (as hereinafter defined) as follows:
(i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings or business affairs of the Trust,
whether or not arising in the ordinary course of business, and (B) there have
been no transactions entered into by the Trust, other than in the ordinary
course of business, which are material with respect to the Trust.
(ii) Except as disclosed in the Prospectus, there is no
action, suit or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending or, to the best
knowledge of the Trust, threatened, against or affecting the Trust that is
required to be disclosed in the Prospectus, other than actions, suits or
proceedings which are not reasonably expected, individually or in the aggregate,
to have a material adverse effect on the condition, financial or otherwise, or
on the earnings or business affairs of the Trust, whether or not arising in the
ordinary course of business; and there are no transactions, contracts or
documents of the Trust that are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act Regulations that have
not been so filed.
(iii) The Trust possesses adequate certificates, authorities or
permits issued by the appropriate state, federal or foreign regulatory agencies
or bodies to conduct the business now operated by it, and the Trust has not
received any notice of proceedings relating to the revocation or modification of
any such certificate, authority or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding would materially and
adversely affect the condition, financial or otherwise, or the earnings or
business affairs of the Trust.
(iv) The execution, delivery and performance of this
Agreement, the Declaration, the Guarantee Agreement and the Guarantees, the
issuance and sale of the Preferred Securities and the Common Securities, and the
consummation of the transactions contemplated herein and therein and compliance
by the Trust with its obligations hereunder and thereunder have
-7-
<PAGE>
been duly authorized by all necessary action (corporate or otherwise) on the
part of the Trust and do not and will not result in any violation of the
Declaration or Certificate of Trust and do not and will not conflict with, or
result in a breach of any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Trust under (A) any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument to which the Trust is a party or by which it may be bound or to which
any of its properties may be subject or (B) any existing applicable law, rule,
regulation, judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, or any regulatory body or
administrative agency or other governmental body having jurisdiction over the
Trust, or any of its properties (except for conflicts, breaches, violations or
defaults which would not, individually or in the aggregate, be materially
adverse to the Trust, or materially adverse to the transactions contemplated by
this Agreement).
(e) Each certificate signed by any Trustee of the Trust and
delivered to the Underwriter or counsel for the Underwriter shall be deemed to
be a representation and warranty by the Trust to the Underwriter as to the
matters covered thereby.
SECTION 2. SALE AND DELIVERY; CLOSING.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Trust
agrees to issue and sell the Preferred Securities through the Underwriter, as
agent for the Trust, to the public and the Underwriter agrees to use its best
efforts to sell the Preferred Securities as agent for the Trust, at the price
per Preferred Security set forth on Schedule B (the "Public Offering Price").
The Trust reserves the right to increase the aggregate liquidation amount by up
to $900,000. The Company agrees to pay the Underwriter a commission for
Preferred Securities sold through the Underwriter in the public offering as set
forth on Schedule B (the "Selling Commission"). The Underwriter may reject any
offer to purchase the Preferred Securities made through the Underwriter in whole
or in part, and any such rejection shall not be deemed a breach of the
Underwriter's agreement contained herein.
(b) It is understood that, after the Registration Statement becomes
effective, you propose to sell the Preferred Securities to the public as agent
for the Trust upon the terms and conditions set forth in the Prospectus. The
escrow procedures established by the Underwriter shall comply with Commission
Rule 15c2-4 promulgated under the Exchange Act ("Rule 15c2-4"). All subscribers
to whom the Underwriter directly sells Preferred Securities shall be instructed
to make their check for payment of the Preferred Securities payable to "Guaranty
Capital Trust I Escrow Account." The Underwriter shall transmit all funds that
it receives from subscribers to Wilmington Trust Company, the escrow agent (the
"Escrow Agent") by noon of the next business day following receipt thereof. Only
broker/dealers who are either (i) members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") that are registered with
the NASD and maintain net capital pursuant to Rule 15c3-1 promulgated under the
Exchange Act of not less than $25,000 or (ii) dealers with their principal
places of business located outside the United States, its territories and its
possessions and not registered as brokers or dealers under the Exchange Act, who
have agreed not to make any sales within the United States, its territories or
its possessions or to persons who are nationals thereof or
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residents therein shall be designated selected dealers by the Underwriter. The
Underwriter shall comply, and shall require all selected dealers to comply, with
Rule 15c2-4.
(c) The Underwriter shall direct the Escrow Agent to make payment
for the Preferred Securities sold hereunder by wire transfer or certified or
bank cashier's check drawn to the order of the Trust in next day funds. Such
payment is to be made at the offices of Guaranty Financial Corporation, at 10:00
a.m. local time, on or about _________, 1998, or at such other time, date and
place as you and the Trust shall agree upon, such time and date being herein
referred to as the "Closing Time." The certificates for the Preferred Securities
will be delivered in such denominations and in such registrations as the
Underwriter requests in writing not later than the third (3rd) full business day
prior to the Closing Time, and will be made available for inspection by the
Underwriter at least twenty-four (24) hours prior to the Closing Time. Such
certificates will be delivered to the Escrow Agent by 12:00 p.m. on the day
prior to the Closing Time, along with addressed labels to be used to mail the
certificates to the purchasers thereof. The Trust shall direct the Escrow Agent
to deliver (i) payment of the portion of the Selling Commission due to the
Underwriter by wire transfer or certified or bank cashier's check drawn to the
order of the Underwriter in next day funds, to the Underwriter at the Closing
Time and (ii) payment of the portion of the Selling Commission due to each
selected dealer by wire transfer or certified or bank cashier's check drawn to
the order of such selected dealer in next day funds, to each selected dealer at
the Closing Time.
SECTION 3. COVENANTS OF THE OFFERORS. Each of the Offerors jointly and
severally covenants with the Underwriter as follows:
(a) The Offerors will notify the Underwriter promptly, and confirm
the notice in writing, (i) of the effectiveness of the Registration Statement
and any amendment thereto (including any post-effective amendment), (ii) of the
receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose.
The Offerors will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof at
the earliest possible moment.
(b) The Offerors will give the Underwriter notice of their intention
to file or prepare (i) any amendment to the Registration Statement (including
any post-effective amendment), (ii) any amendment or supplement to the
Prospectus (including any revised prospectus which the Offerors propose for use
by the Underwriter in connection with the offering of the Preferred Securities
which differs from the prospectus on file at the Commission at the time the
Registration Statement became effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the 1933 Act Regulations), or
(iii) any document that would as a result thereof be incorporated by reference
in the Prospectus whether pursuant to the 1933 Act, the 1934 Act or otherwise,
will furnish the Underwriter with copies of any such amendment, supplement or
other document within a reasonable amount of time prior to such proposed filing
or use, as the case may be, and will not file any such amendment, supplement or
other document or use any such prospectus to which the Underwriter or counsel
for the Underwriter shall
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reasonably object. Subject to the foregoing, the Offerors will file the
Prospectus pursuant to Rule 424(b) and Rule 430A under the Act not later than
the Commission's close of business on the second business day following the
execution and delivery of this Agreement.
(c) The Offerors will deliver to the Underwriter as many signed
copies of the Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by reference therein
and documents incorporated or deemed to be incorporated by reference therein) as
the Underwriter may reasonably request and will also deliver to the Underwriter
a conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits).
(d) The Offerors will furnish to the Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the 1933
Act, such number of copies of the Prospectus (as amended or supplemented) as the
Underwriter may reasonably request for the purposes contemplated by the 1933 Act
or the respective applicable rules and regulations of the Commission thereunder.
(e) If at any time when the Prospectus is required by the 1933 Act
to be delivered in connection with sales of the Preferred Securities, any event
shall occur as a result of which the Prospectus as then amended or supplemented
will include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in light of the
circumstances under which they were made not misleading or if it shall be
necessary to amend or supplement the Prospectus in order to comply with the
requirements of the 1933 Act or the 1933 Act Regulations, the Offerors will,
subject to paragraph (b) above, promptly prepare and file with the Commission an
amendment or supplement which will correct such statement or omission or an
amendment which will effect such compliance, and the Offerors will furnish to
the Underwriter a reasonable number of copies of such amendment or supplement.
(f) The Offerors will endeavor, in cooperation with the Underwriter,
to qualify the Preferred Securities (and the Preferred Securities Guarantee),
the Junior Subordinated Debt Securities and the Common Stock for offering and
sale under the applicable securities laws of such states and the other
jurisdictions of the United States as the Underwriter may designate; provided,
however, that none of the Offerors shall be obligated to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified.
(g) The Company will make generally available to its security
holders and to the Underwriter as soon as practicable, but not later than 90
days after the close of the period covered thereby, an earnings statement (which
need not be audited) of the Company and its subsidiaries, covering an applicable
period beginning not later than the first day of the Company's fiscal quarter
next following the "Effective Date" (as defined in Rule 158(c) under the 1933
Act) of the Registration Statement, which will satisfy the provisions of Section
11(a) of the 1933 Act.
SECTION 4. PAYMENT OF EXPENSES. The Company will pay all expenses
incident to the performance of each Offerors' obligations under this Agreement,
and will pay: (i) the printing and filing of the Registration Statement as
originally filed and of each amendment
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thereto, (ii) the preparation, issuance and delivery of the certificates for the
Preferred Securities and the Common Stock, (iii) the fees and disbursements of
the Company's and the Trust's counsel and accountants and counsel to the
Underwriter, (iv) the qualification of the Preferred Securities, the Preferred
Securities Guarantee, the Junior Subordinated Debt Securities and the Common
Stock under securities laws in accordance with the provisions of Section 3(f)
hereof, including fees and expenses incurred in connection with the preparation
of any blue sky survey, (v) the printing and delivery to the Underwriter of
copies of the Registration Statement as originally filed and of each amendment
thereto, of each preliminary prospectus, and of the Prospectus and any
amendments or supplements thereto, (vi) the printing and delivery to the
Underwriter of copies of any blue sky survey, (vii) the fee of the NASD, if
applicable, (viii) the fees and expenses of the Indenture Trustee, including the
fees and disbursements of counsel for the Indenture Trustee in connection with
the Indenture and the Junior Subordinated Debt Securities, (ix) the fees and
expenses of the Property Trustee and the Guarantee Trustee, including the fees
and disbursements of counsel for the Property Trustee in connection with the
Declaration and the Certificate of Trust; (x) the cost and charges of any
transfer agent or registrar, and (xi) the cost of qualifying the Preferred
Securities with Depository Trust Company ("DTC").
If this Agreement is terminated by the Underwriter in accordance with
the provisions of Section 5 or Section 9 hereof, the Company shall reimburse the
Underwriter for all of its reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriter.
SECTION 5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of
the Underwriter hereunder are subject to the accuracy of the representations and
warranties of the Offerors herein contained or in certificates of officers of
the Company, to the performance by the Offerors of their obligations hereunder,
and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M. on the date hereof, or, with the consent of the Underwriter, not
later than 5:30 P.M. on the first business day following the date hereof, or at
such later time and date as may be approved by the Underwriter; and at the
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission. The Prospectus shall have been filed
with the Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the 1933 Regulations and in accordance with
Section 3(b) and prior to Closing Time the Offerors shall have provided evidence
satisfactory to the Underwriter of such timely filing.
(b) At Closing Time the Underwriter shall have received:
(1) The favorable opinion of Williams, Mullen, Christian & Dobbins,
P.C., counsel for the Company, dated as of the Closing Time, to the following
effect:
(i) The Company is a duly organized and validly existing
corporation in good standing under the laws of the Commonwealth of Virginia, has
the corporate power and authority
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to own its properties, conduct its business as described in the Prospectus and
perform its obligations under this Agreement, and is duly registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended; the
Principal Subsidiary Bank is a banking association operating under the laws of
Virginia and authorized thereunder to transact business.
(ii) Except for those jurisdictions specifically enumerated in
such opinion, neither the Company nor the Principal Subsidiary Bank is required
to be qualified or licensed to do business as a foreign corporation in any
jurisdiction.
(iii) All the outstanding shares of capital stock of the
Principal Subsidiary Bank have been duly and validly authorized and issued and
are fully paid and non-assessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of the Principal Subsidiary
Bank are owned, directly or indirectly, by the Company free and clear of any
perfected security interest and, to the best knowledge of such counsel, any
other security interests, claims, liens or encumbrances.
(iv) To the best knowledge of such counsel, there is no
pending threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or any of its
subsidiaries, of a character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectus, and there is no
franchise, contract, or other document of a character required to be described
in the Registration Statement or Prospectus, or to be filed as an exhibit, which
is not described or filed as required.
(v) The Registration Statement has become effective under the
1933 Act; to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or threatened; the Registration Statement,
the Prospectus and each amendment thereof or supplement thereto (other than the
financial statements and other financial and statistical information contained
therein or incorporated by reference therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the 1933 Act and the 1933 Act Regulations and the
Exchange Act and the rules and regulations of the Commission under the Exchange
Act (the "Exchange Act Regulations").
(vi) This Agreement has been duly authorized, executed and
delivered by the Company.
(vii) No authorization, approval, consent or order of any court
or governmental authority or agency is required in connection with the offering,
issuance or sale of the Preferred Securities through the Underwriter, the
Preferred Securities Guarantee or the Junior Subordinated Debt Securities,
except (a) such as may be required under the 1933 Act and the 1933 Act
Regulations and such as may be required under the blue sky or insurance laws of
any jurisdiction, and (b) the qualification of the Declaration, the Guarantee
Agreement and the Indenture under the 1939 Act.
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(viii) The Declaration has been duly authorized, executed and
delivered by the Company and the Administrative Trustees and has been duly
qualified under the 1939 Act.
(ix) The Guarantee Agreement has been duly authorized,
executed and delivered by the Company, and assuming it is duly authorized,
executed and delivered by the Guarantee Trustee, constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except to the extent that enforcement thereof may be limited by the
Permitted Exceptions; and the Guarantee Agreement has been duly qualified under
the 1939 Act.
(x) The Indenture has been duly executed and delivered by the
Company and, assuming due authorization, execution, and delivery thereof by the
Indenture Trustee, is a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except to the extent that
enforcement thereof may be limited by the Permitted Exceptions; the Indenture
has been duly qualified under the 1939 Act; and the Indenture conforms to the
description thereof in the Prospectus.
(xi) The Junior Subordinated Debt Securities have been duly
authorized and executed by the Company and, when authenticated by the Trustee in
the manner provided in the Indenture and delivered against payment therefor,
will constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except to the extent that
enforcement thereof may be limited by the Permitted Exceptions; and the Junior
Subordinated Debt Securities conform to the description thereof in the
Prospectus.
(xii) Neither the Company nor the Trust is and, upon the
issuance and sale of the Preferred Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus,
neither will be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the 1940 Act.
(xiii) The shares of Common Stock issuable upon conversion of
the Preferred Securities have been duly authorized and reserved for issuance
upon such conversion and, when issued upon such conversion in accordance with
the provisions of the Preferred Securities, will have been validly issued and
will be fully paid and non-assessable and free of preemptive rights.
In rendering such opinion, such counsel may rely (A) as to matters
involving certain matters of Delaware law upon the opinion of Richards, Layton &
Finger, special Delaware counsel to the Offerors, which shall be delivered in
accordance with Section 5(b)(2)hereto; and (B) as to matters of fact, to the
extent deemed proper, on the representations and warranties of the Offerors
contained herein or in the Declaration, the Indenture and the Guarantee
Agreement of even date herewith, between the Company and the Trust covering the
Common Securities, and on certificates of responsible officers of the Company
and its subsidiaries and public officials.
(2) The favorable opinion of Richards, Layton & Finger, Special
Delaware counsel to the Offerors, in form and substance satisfactory to the
Underwriter, to the effect that:
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(i) The Trust has been duly created and is validly existing
in good standing as a business trust under the Delaware Act; all filings
required under the laws of the State of Delaware with respect to the formation
and valid existence of the Trust as a business trust have been made; the Trust
has all necessary power and authority to own property and to conduct its
business as described in the Registration Statement and the Prospectus and to
enter into and perform its obligations under this Agreement, the Preferred
Securities and the Common Securities; the Trust is duly qualified and in good
standing as a foreign company in any other jurisdiction in which such
qualification is necessary, except to the extent that the failure to so qualify
or be in good standing would not have a material adverse effect on the Trust;
and the Trust is not a party to or otherwise bound by any agreement other than
those described in the Prospectus.
(ii) Assuming due authorization, execution and delivery by the
Company and the Trustees, the Declaration is a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as enforcement thereof may be limited by the Permitted Exceptions.
(iii) The Common Securities have been duly authorized by the
Declaration and are validly issued and (subject to the terms of the Declaration)
fully paid and non-assessable beneficial interests in the assets of the Trust,
and the issuance of the Common Securities is not subject to preemptive or other
similar rights.
(iv) The Preferred Securities have been duly authorized by the
Declaration and are validly issued and, subject to the terms of the Declaration,
when delivered to and paid for by the Underwriter pursuant to this Agreement,
will be validly issued, fully paid and non-assessable beneficial interests in
the assets of the Trust; the holders of the Preferred Securities will, subject
to the terms of the Declaration, be entitled to the same limitation of personal
liability under Delaware law as is extended to stockholders of private
corporations for profit; and the issuance of the Preferred Securities is not
subject to preemptive or other similar rights.
(v) The Common Securities, the Preferred Securities and the
Declaration conform in all material respects to all statements relating thereto
contained in the Prospectus.
(vi) All of the issued and outstanding Common Securities of
the Trust are directly owned by the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equitable right.
(vii) This Agreement has been duly authorized, executed and
delivered by the Trust.
(viii) The execution, delivery and performance of this
Agreement, the Declaration, the Preferred Securities and the Common Securities;
the consummation of the transactions contemplated herein and therein; and the
compliance by the Trust with its obligations hereunder and thereunder do not and
will not result in any violation of the Declaration or Certificate of Trust, and
do not and will not conflict with, or result in a breach of, any of the terms
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or provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Trust under (A) any contract, indenture, mortgage, loan agreement, note, lease
or any other agreement or instrument known to such counsel to which the Trust is
a party or by which it may be bound or to which any of its properties may be
subject (except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a material adverse effect on the condition,
financial or otherwise, or in the earnings or business affairs of the Trust),
(B) any existing applicable law, rule or regulation (other than the securities
or blue sky laws of the various states, as to which such counsel need express no
opinion) or (C) any judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, or any regulatory body or
administrative agency or other governmental body having jurisdiction over the
Trust or any of its properties.
(3) The favorable opinion, dated as of the Closing Time, of
Richards, Layton & Finger, counsel to Wilmington Trust Company, as Property
Trustee under the Declaration, Guarantee Trustee under the Guarantee Agreement,
and Indenture Trustee under the Indenture, in form and substance satisfactory to
the Underwriter, to the effect that:
(i) Wilmington Trust Company is a Delaware banking
corporation with trust powers, duly organized, validly existing and in good
standing under the laws of the State of Delaware with all necessary power and
authority to execute and deliver, and to carry out and perform its obligations
under, the terms of the Declaration.
(ii) The execution, delivery and performance by the Indenture
Trustee of the Indenture and the execution, delivery and performance by the
Property Trustee of the Declaration and the execution, delivery and performance
by the Guarantee Trustee of the Guarantee Agreement have been duly authorized by
all necessary corporate action on the part of the Indenture Trustee, the
Property Trustee and the Guarantee Trustee, respectively. The Indenture, the
Declaration and the Guarantee Agreement have been duly executed and delivered by
the Indenture Trustee, the Property Trustee and the Guarantee Trustee,
respectively, and constitute the legal, valid and binding obligations of the
Indenture Trustee, the Property Trustee and the Guarantee Trustee, respectively,
enforceable against the Indenture Trustee, the Property Trustee and the
Guarantee Trustee, respectively, in accordance with their terms, except as
enforcement thereof may be limited by the Permitted Exceptions.
(iii) The execution, delivery and performance of the Indenture,
the Declaration and the Guarantee Agreement by the Indenture Trustee, Property
Trustee and the Guarantee Trustee, respectively, does not conflict with or
constitute a breach of the Certificate of Incorporation or Bylaws of the
Indenture Trustee, Property Trustee and the Guarantee Trustee, respectively.
(iv) No consent, approval or authorization of, or registration
with or notice to, any Delaware or federal banking authority is required for the
execution, delivery or performance by the Indenture Trustee, the Property
Trustee and the Guarantee Trustee of the Indenture, the Declaration and the
Guarantee Agreement, respectively.
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(4) The favorable opinion of Williams, Mullen, Christian & Dobbins,
P.C., tax counsel to the Company and the Trust, as to certain Federal tax
matters set forth in the Prospectus under "United States Income Taxation."
(5) Williams, Mullen, Christian & Dobbins, P.C. shall also provide a
written statement that nothing has come to their attention that has caused them
to believe that the Registration Statement (except for financial statements and
schedules and other financial or statistical data included or incorporated by
reference, therein, as to which counsel need make no statement), at the time it
became effective or as of the date of their respective opinions, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus (except for financial statements and schedules and other
financial or statistical data included or incorporated by reference therein, as
to which counsel need make no statement), as at the date hereof or at Closing
Time, included an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(6) At the Closing Time, there shall not have been, since the date
hereof or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings or business affairs of the
Trust or the Company and its subsidiaries, considered as one enterprise, whether
or not arising in the ordinary course of business, and the Underwriter shall
have received a certificate of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the Company and a
certificate of the Trustee of the Trust, dated as of the Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1 hereof are true and correct with the
same force and effect as though expressly made at and as of the Closing Time,
(iii) the Trust and the Company have complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to the
Closing Time, and (iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been initiated or threatened by the Commission.
(7) At the Closing Time, BDO Seidman, LLP shall have furnished to
the Underwriter a letter or letters (which may refer to letters previously
delivered to the Underwriter), dated as of the Closing Time, in form and
substance satisfactory to the Underwriter, confirming that the response, if any,
to Item 10 of the Registration Statement is correct insofar as it relates to
them and stating in effect that:
(i) They are independent accountants within the meaning of
the 1933 Act and the Exchange Act and the 1933 Act Regulations and the Exchange
Act Regulations.
(ii) In their opinion, the consolidated financial statements
of the Company and its subsidiaries audited by them and included or incorporated
by reference in the Registration Statement and Prospectus comply as to form in
all material respects with the applicable
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accounting requirements of the 1933 Act and the 1933 Act Regulations with
respect to registration statements on Form S-1 and the Exchange Act and the
Exchange Act Regulations.
(iii) On the basis of procedures (but not in accordance with
generally accepted auditing standards) consisting of:
(a) Reading the minutes of the meetings of the
shareholders, the board of directors, executive committee and audit committee of
the Company and the boards of directors and executive committees of its
subsidiaries as set forth in the minute books through a specified date not more
than five business days prior to the date of delivery of such letter;
(b) Performing the procedures specified by the
American Institute of Certified Public Accountants for a review of interim
financial information as described in SAS No. 71, Interim Financial Information,
on the unaudited condensed consolidated interim financial statements of the
Company and its consolidated subsidiaries included or incorporated by reference
in the Registration Statement and Prospectus and reading the unaudited interim
financial data, if any, for the period from the date of the latest balance sheet
included or incorporated by reference in the Registration Statement and
Prospectus to the date of the latest available interim financial data; and
(c) Making inquiries of certain officials of the
Company who have responsibility for financial and accounting matters regarding
the specific items for which representations are requested below; nothing has
come to their attention as a result of the foregoing procedures that caused them
to believe that:
(1) the unaudited condensed consolidated
interim financial statements, included or incorporated by reference in the
Registration Statement and Prospectus, do not comply as to form in all material
respects with the applicable accounting requirements of the Exchange Act and the
Exchange Act Regulations thereunder;
(2) any material modifications should be made
to the unaudited condensed consolidated interim financial statements, included
or incorporated by reference in the Registration Statement and Prospectus, for
them to be in conformity with generally accepted accounting principles;
(3)(i) at the date of the latest available interim
financial data and at the specified date not more than five business days prior
to the date of the delivery of such letter, there was any change in the capital
stock or the long-term debt (other than scheduled repayments of such debt) or
any decreases in shareholders' equity of the Company and the subsidiaries on a
consolidated basis as compared with the amounts shown in the latest balance
sheet included or incorporated by reference in the Registration Statement and
the Prospectus or (ii) for the period from the date of the latest available
financial data to a specified date not more than five business days prior to the
delivery of such letter, there was any change in the capital stock or the
long-term debt (other than scheduled repayments of such debt) or any decreases
in shareholders' equity of the Company and the subsidiaries on a consolidated
basis, except in all instances for changes or
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decreases which the Registration Statement and Prospectus disclose have occurred
or may occur, or BDO Seidman, LLP shall state any specific changes or decreases.
(iv) The letter shall also state that BDO Seidman, LLP has
carried out certain other specified procedures, not constituting an audit, with
respect to certain amounts, percentages and financial information which are
included or incorporated by reference in the Registration Statement and
Prospectus and which are specified by the Underwriter and agreed to by BDO
Seidman, LLP, and has found such amounts, percentages and financial information
to be in agreement with the relevant accounting, financial and other records of
the Company and its subsidiaries identified in such letter.
In addition, at or prior to the time this Agreement is executed, BDO
Seidman, LLP shall have furnished to the Underwriter a letter dated the date of
this Agreement, in form and substance satisfactory to the Underwriter, to the
effect set forth in this subsection (7).
(8) At the Closing Time, the NASD shall have confirmed in writing
that it has not raised any objection with respect to the fairness and
reasonableness of the underwriting terms and arrangements.
If any condition specified in this Section shall not have been
fulfilled in all material respects when and as required to be fulfilled, this
Agreement may be terminated by the Underwriter by notice to the Offerors, in
writing or by telephone or telegraph confirmed in writing, at any time at or
prior to the Closing Time, and such termination shall be without liability of
any party to any other party except as provided in Section 4 hereof, and except
that Sections 1, 7, and 8 shall survive any such termination and will remain in
full force and effect.
SECTION 6. [INTENTIONALLY OMITTED]
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Offerors jointly and severally agree to indemnify and hold
harmless the Underwriter and each of its partners, officers, directors, and
employees and each person, if any, who controls the Underwriter within the
meaning of the 1933 Act or the Exchange Act against any losses, claims, damages
or liabilities, and any action in respect thereof (including, but not limited
to, any loss, claim, damage, liability or action relating to purchases and sales
of the Preferred Securities), joint or several, which arises out of, or is based
upon, (i) any untrue statement or alleged untrue statement of a material fact
contained in (A) the Registration Statement, or any amendment or supplement
thereto, including information deemed to be part of the Registration Statement
pursuant to Rule 430A(b) of the 1933 Act Regulations, if applicable, (B) the
Prospectus and any amendment or supplement thereto, or (C) any application or
other document, any amendment or supplement thereto, executed by the Offerors or
based upon information furnished by or on behalf of the Offerors filed in any
jurisdiction in order to qualify the Preferred Securities and the Common Stock
under the securities or blue sky laws thereof (each, an "Application") or (ii)
the omission or alleged omission to state in the Registration Statement, or any
amendment or supplement thereto, or the Prospectus or any amendment or
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<PAGE>
supplement thereto, or any Application, a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
reimburse the Underwriter and each such controlling person for any legal and
other expenses incurred, as incurred, in investigating or defending or preparing
to defend against or appearing as a third party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that neither
of the Offerors shall be liable to the Underwriter in any such case to the
extent that any such loss, claim, damage or liability arises out of, or is based
upon, any untrue statement or alleged untrue statement made in the Prospectus,
including any amendment or supplement thereto, in reliance upon or in conformity
with information furnished in writing to the Offerors by or on behalf of the
Underwriter specifically for inclusion and actually included therein; and
provided further that, as to any Prospectus that has been amended or
supplemented as provided herein, this indemnity agreement shall not inure to the
benefit of the Underwriter, on account of any loss, claim, damage, liability or
action arising out of the sale of Preferred Securities to any person by the
Underwriter if (A) the Underwriter failed to send or give a copy of the final
Prospectus as so amended or supplemented to that person at or prior to the
confirmation of the sale of such Preferred Securities to such person in any case
where such delivery is required by the 1933 Act, and (B) the untrue statement or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact in any preliminary Prospectus was corrected in an
amendment or supplement thereto (but only if the sale to such person occurred
after the Offerors provided the Underwriter and the Underwriter received copies
of such amendment or supplement for distribution). This indemnity agreement will
be in addition to any liability which the Offerors may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company,
the Trust, the Trustees and each of the Company's directors, each of its
officers and each person, if any, who controls the Company or the Trust within
the meaning of the 1933 Act or the Exchange Act, to the same extent as the
foregoing indemnity from the Offerors to the Underwriter, but only with
reference to written information relating to such underwriter furnished to the
Offerors by the Underwriter and specifically included in the Prospectus. This
indemnity shall be in addition to any liability which such Underwriter may
otherwise have. The Offerors acknowledge that the statements set forth under the
heading "Underwriting" in the Prospectus constitute the only information
furnished in writing by the Underwriter for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 7, notify such indemnifying party or
parties of the commencement thereof; but the omission so to notify the
indemnifying party or parties will not relieve it or them from any liability
which it or they may have to any indemnified party otherwise than under
subsection (a) or (b) of this Section 7 or to the extent that the indemnifying
party was not adversely affected by such omission. In case any such action is
brought against an indemnified party and it notifies an indemnifying party or
parties of the commencement thereof, the indemnifying party or parties against
which a claim is to be made will be entitled to participate therein and, to the
extent that it or they may wish, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, that if
the defendants in any such action include both the indemnified party and the
indemnifying party
-19-
<PAGE>
and the indemnified party shall have reasonably concluded that there may be one
or more legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the indemnifying party,
the indemnifying party shall not have the right to direct the defense of such
action on behalf of such indemnified party or parties and such indemnified party
or parties shall have the right to select separate counsel to defend such action
on behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the immediately preceding sentence (it being understood, however,
that in connection with such action the indemnifying party shall not be liable
for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
designated by the lead Underwriter in the case of paragraph (a) of this Section
7, representing the indemnified parties under such paragraph (a) who are parties
to such action or actions), or (ii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, which consent will not be
unreasonably withheld, unless such indemnified party waived its rights under
this Section 7 in writing in which case the indemnified party may effect such a
settlement without such consent.
(d) The Company agrees to indemnify the Trust against all losses,
claims, damages or liabilities due from the Trust under Section 7(a) hereof.
(e) If the indemnification provided for in the preceding paragraphs
of this Section 7 is unavailable or insufficient to hold harmless an indemnified
party under paragraph (a) or (b) above in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then the
Offerors or the Underwriter shall contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) to which the Offerors and
the Underwriter may be subject in such proportion so that the Underwriter is
responsible for that portion represented by the percentage that the total
discounts and/or commissions received by the Underwriter bears to the sum of
such discounts and/or commissions and the purchase price of the Preferred
Securities specified in Schedule B hereto and the Offerors are responsible for
the balance; provided, however, that (y) in no case shall the Underwriter be
responsible for any amount in excess of the total discounts and/or commissions
received by it with respect to the Preferred Securities sold under this
Agreement and (z) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section 7, each person who controls the Underwriter within the meaning
of the 1933 Act shall have the same rights to contribution as the Underwriter,
and each person who controls either of the Offerors within the
-20-
<PAGE>
meaning of either the 1933 Act or the Exchange Act, each officer or trustee of
the Offerors who shall have signed the Registration Statement and each director
or trustee of the Offerors shall have the same rights to contribution as the
Offerors, subject in each case to clause (y) of this paragraph (e). Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this
paragraph (e), notify such party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any other
obligation it or they may have hereunder or otherwise than under this paragraph
(e).
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers or Trustees of the Offerors
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the Underwriter or
controlling person, or by or on behalf of the Offerors, and shall survive
delivery of the Preferred Securities to the purchasers thereof.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Underwriter may terminate this Agreement, by notice to the
Offerors, at any time at or prior to the Closing Time (i) if there has been,
since the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement, any material adverse change
in the condition, financial or otherwise, or in the earnings or business affairs
of the Trust or the Company and its subsidiaries, considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis or any change or development involving a prospective
change in national or international political, financial or economic conditions,
in each case the effect of which is such as to make it, in the judgment of the
Underwriter, impracticable to market the Preferred Securities or to enforce
contracts for the sale of the Preferred Securities, or (iii) if trading in any
securities of the Company or the Trust has been suspended or materially limited
by the Commission or the applicable exchange, or if trading generally on the New
York Stock Exchange, the American Stock Exchange or on the NASDAQ National
Market, has been suspended, limited or restricted or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securities have
been required, by said exchanges or such system or by order of the Commission,
the NASD or any governmental authority, or (iv) if a banking moratorium has been
declared by Federal, New York, Virginia or Delaware authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and except that Sections 1, 7, and 8 shall survive
any such termination and will remain in full force and effect.
SECTION 10. [INTENTIONALLY OMITTED]
-21-
<PAGE>
SECTION 11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to McKinnon & Company, 555 Main Street, First
Virginia Building, 16th Floor, Norfolk, Virginia 23510, Attention: William J.
McKinnon. Notices to the Trust and the Company shall be directed to them at
Guaranty Financial Corporation, 1658 State Farm Boulevard, Charlottesville,
Virginia 22911, Attention:
Thomas P. Baker.
SECTION 12. PARTIES. This Agreement shall inure to the benefit of and
be binding upon the Underwriter and the Trust, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriter and the Trust and the Company and their respective successors and
the controlling persons and officers, directors and trustees referred to in
Sections 6 and 7 and their heirs and legal Underwriter, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
herein contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Underwriter and the
Trust and the Company and their respective successors, and said controlling
persons and officers, directors and trustees and their heirs and legal
Underwriter, and for the benefit of no other person, firm or corporation. No
purchaser of Preferred Securities from the Underwriter shall be deemed to be a
successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of Virginia
applicable to agreements made and to be performed in said Commonwealth. Except
as otherwise set forth herein, specified times of day refer to City of Richmond
time.
SECTION 14. COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall be
deemed to be an original, but all such respective counterparts shall together
constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Trust a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriter and the Trust and the Company in accordance with its
terms.
Very truly yours,
GUARANTY FINANCIAL CORPORATION
By:______________________________
Title:
-22-
<PAGE>
GUARANTY CAPITAL TRUST I
By:______________________________
Title: Trustee
By:______________________________
Title: Trustee
CONFIRMED AND ACCEPTED,
as of the date first above written:
McKINNON & COMPANY, INC.
By:_____________________________
William J. McKinnon, Jr.
President
-23-
<PAGE>
SCHEDULE A
Name of Underwriter Number of Preferred Securities
------------------- ------------------------------
-24-
<PAGE>
SCHEDULE B
Underwriting Agreement dated ________, 1998
Registration Statement No. _________
Underwriter: McKinnon & Company, Inc.
Address of Underwriter: 555 Main Street, First Virginia Building, 16th Floor,
Norfolk, Virginia 23510
Title, Purchase Price and Description of Securities:
Title: $________ Convertible Preferred Securities (Liquidation Amount
$25.00)
1. The initial public offering price per security for the
Preferred Securities, determined as provided in Section
2, shall be $25.00.
2. The compensation per Preferred Security to be paid by
the Company to the Underwriter shall be $_______, out of
which commissions payable to Selected Dealers shall be
paid.
-25-
Exhibit 3.1
ARTICLES OF AMENDMENT
OF THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
GUARANTY FINANCIAL CORPORATION
1. The name of the Corporation is Guaranty Financial Corporation.
2. Paragraph A of Article II of the Corporation's Articles of
Incorporation is hereby amended to read as follows:
The aggregate number of shares of stock which the Corporation
shall have authority to issue and the par value per share is as
follows:
Class Number of Shares Par Value
----- ---------------- ---------
Common Stock 4,000,000 $1.25
Preferred Stock 500,000 $1.00
3. The amendment set forth above shall become effective as of 12:01
a.m. o'clock Eastern Standard Time on January 15, 1996 (the "Effective Time").
At the Effective Time, each issued and unissued authorized share of common stock
of the Corporation existing immediately prior to the Effective Time shall be
automatically changed into two (2) shares of the Corporation's common stock with
a par value of $1.25 per share.
4. The foregoing amendment was adopted on November 30, 1995.
--
5. The amendment was adopted by the written consent of the sole
shareholder of the Corporation.
The undersigned president of the Corporation declares that the facts
herein stated are true as of November 30, 1995.
--
GUARANTY FINANCIAL CORPORATION
BY: /s/ Thomas P. Baker
--------------------------
Thomas P. Baker, President
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
January 15, 1996
The State Corporation Commission has found the accompanying articles submitted
on behalf of
GUARANTY FINANCIAL CORPORATION
to comply with the requirements of law, and confirms payment of all related
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF AMENDMENT
be issued and admitted to record with the articles of amendment in the Office of
the Clerk of the Commission, effective January 15, 1996 at 12:01 AM.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By /s/ T.V. Morrison, Jr.
Commissioner
AMENACPT
CIS20436
96-01-16-0003
<PAGE>
ARTICLES OF AMENDMENT
AND
ARTICLES OF RESTATEMENT
OF
GUARANTY FINANCIAL CORPORATION
Pursuant to Sections 13.1-710 and 13.1-711 of the Virginia Stock
Corporation Act, the articles of incorporation of Guaranty Financial
Corporation, a Virginia corporation, are hereby amended and restated by the sole
shareholder of said corporation.
1. Name of Corporation. The name of the corporation is Guaranty
Financial Corporation.
2. Text of Amendment. Attached as an appendix hereto and
incorporated herein by this reference is the text of the amended and restated
articles of incorporation.
3. Certificate. The undersigned hereby certifies the following:
(a) The amended and restated articles of incorporation contain
amendments which require shareholder approval.
(b) The amended and restarted articles of incorporation were
adopted by unanimous written consent of the sole shareholder of the corporation
on February 17, 1994, pursuant to the provisions of the Virginia Stock
Corporation Act.
Dated: March 4 , 1994
---
By: /s/ Thomas P. Baker
----------------------------
Thomas P. Baker, President
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
GUARANTY FINANCIAL CORPORATION
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 shares is as
follows:
Number of
Class Shares Par Value
----- --------- ---------
Common Stock 2,000,000 $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.
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
March 4, 1994
The State Corporation Commission has found the accompanying articles submitted
on behalf of
GUARANTY FINANCIAL CORPORATION
to comply with the requirements of law, and confirms payment of all related
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF AMENDMENT AND RESTATEMENT
be issued and admitted to record with the articles of amendment in the Office of
the Clerk of the Commission, effective March 9, 1994 at 8:19 AM.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By /s/ T.V. Morrison, Jr.
Commissioner
AMENACPT
CIS20436
94-03-07-0520
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.
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<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
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<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
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<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.
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Exhibit 4.1
CERTIFICATE OF TRUST OF
GUARANTY CAPITAL TRUST I
THIS Certificate of Guaranty Capital Trust I (the "Trust"), dated
November 21, 1997, is being duly executed and filed by Wilmington Trust Company,
a Delaware banking corporation, as trustee, to form a business trust under the
Delaware Business Trust Act (12 Del. C. ss. 3801 et seq.).
1. Name. The name of the business trust formed hereby is Guaranty
Capital Trust I.
2. Delaware Trustee. The name and business address of the trustee
of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attn:
Corporate Trust Administration.
3. Effective Date. This Certificate of Trust shall be effective
upon filing.
IN WITNESS WHEREOF, the undersigned, being the trustee of the Trust,
have executed this Certificate of Trust as of the date first above written.
WILMINGTON TRUST COMPANY,
as trustee
By: /s/ W. Chris Sponenberg
-----------------------------------
Name: W. Chris Sponenberg
Title: Senior Financial Services Officer
Exhibit 4.2
TRUST AGREEMENT
This TRUST AGREEMENT, dated as of October 29, 1997 (this "Trust
Agreement"), between (i) GUARANTY FINANCIAL CORPORATION, a Virginia corporation
(the "Depositor"), and (ii) WILMINGTON TRUST COMPANY, a Delaware banking
corporation (the "Trustee"). The Depositor and the Trustee hereby agree as
follows:
1. The trust created hereby (the "Trust") shall be known as
"GUARANTY CAPITAL TRUST I" in which name the Trustee, or the Depositor to the
extent provided herein, may engage in the transactions contemplated hereby, make
and execute contracts, and sue and be sued.
2. The Depositor hereby assigns, transfers, conveys and sets over to
the Trustee the sum of $10. The Trustee hereby acknowledges receipt of such
amount in trust from the Depositor, which amount shall constitute the initial
trust estate. The Trustee hereby declares that it will hold the trust estate in
trust for the Depositor. It is the intention of the parties hereto that the
Trust created hereby constitute a business trust under Chapter 38 of Title 12 of
the Delaware Code, 12 Del. C. ss. 3801, et seq. (the "Business Trust Act"), and
that this document constitute the governing instrument of the Trust. The Trustee
is hereby authorized and directed to execute and file a certificate of trust
with the Delaware Secretary of State in accordance with the provisions of the
Business Trust Act.
3. The Depositor and the Trustee will enter into an amended and
restated Trust Agreement, satisfactory to each such party and substantially in
the form included as an exhibit to the 1933 Act Registration Statement (as
defined below), to provide for the contemplated operation of the Trust created
hereby and the issuance of the Capital Securities (the "Securities") referred to
therein. Prior to the execution and delivery of such amended and restated Trust
Agreement, the Trustee shall not have any duty or obligation hereunder or with
respect to the trust estate, except as otherwise required by applicable law or
as may be necessary to obtain prior to such execution and delivery of any
licenses, consents or approvals required by applicable law or otherwise.
4. The Depositor and the Trustee hereby authorize and direct the
Depositor, as the Sponsor of the Trust, (i) to file with the Securities and
Exchange Commission (the "Commission") and execute, in each case on behalf of
the Trust, the Registration Statement on Form S-2 (the "1933 Act Registration
Statement"), including any pre-effective or post-effective amendments to the
1933 Act Registration Statement, relating to the registration under the
Securities Act of 1933, as amended, of
<PAGE>
the Securities and possible certain other securities, (ii) to file and execute
on behalf of the Trust such applications, reports, surety bonds, irrevocable
consents, appointments of attorney for service of process and other papers and
documents as shall be necessary or desirable to register the Securities under
the securities or blue sky laws of such jurisdictions as the Depositor, on
behalf of the Trust, may deem necessary or desirable and (iii) to execute on
behalf of the Trust that certain Underwriting Agreement relating to the
Securities, among the Trust, the Depositor and the Underwriter named therein,
substantially in the form included as an exhibit to the 1933 Act Registration
Statement. In connection with the filings referred to above, the Depositor
hereby constitutes and appoints Thomas P. Baker and Vincent B. McNelley, and
each of them, as its true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for the Depositor or in the
Depositor's name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to the 1933 Act
Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Commission and administrators
of state securities or blue sky laws, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as the Depositor might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their respective substitute or substitutes, shall do or cause to be
done by virtue hereof.
5. This Trust Agreement may be executed in one or more counterparts.
6. The number of Trustees initially shall be one (1) and thereafter
the number of Trustees shall be such number as shall be fixed from time to time
by a written instrument signed by the Depositor which may increase or decrease
the number of Trustees; provided, however, that to the extent required by the
Business Trust Act, one Trustee shall either be a natural person who is a
resident of the State of Delaware or, if not a natural person, an entity which
has its principal place of business in the State of Delaware and otherwise meets
the requirements of applicable Delaware law. Subject to the foregoing, the
Depositor is entitled to appoint or remove without cause any Trustee at any
time. The Trustees may resign upon thirty (30) days' prior notice to the
Depositor.
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<PAGE>
7. This Trust Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware (without regard to conflict
of laws of principles).
8. To the fullest extent permitted by applicable law, the Sponsor
shall indemnify and hold harmless the Trustee from and against any loss, damage
or claim incurred by the Trustee by reason of any act or omission performed or
omitted by the Trustee in good faith on behalf of the Trust and in a matter the
Trustee reasonably believed to be within the scope of authority conferred on the
Trustee by this Declaration, except that the Trustee shall not be entitled to be
indemnified in respect of any loss, damage or claim incurred by the Trustee by
reason of gross negligence or willful misconduct with respect to such acts or
omissions.
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement
to be duly executed as of the day and year first above written.
GUARANTY FINANCIAL CORPORATION
By: /s/ Thomas P. Baker
---------------------------
Thomas P. Baker
Title: President
WILMINGTON TRUST COMPANY,
as Trustee
By: /s/ Donald G. MacKelcan
---------------------------
Name: Donald G. MacKelcan
Title: Assistant Vice President
Exhibit 4.8
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is made and entered into as of
the __ day of ______, 1998, by and among McKINNON & COMPANY, INC., a Virginia
corporation (the "Underwriter"), GUARANTY CAPITAL TRUST I, a statutory business
trust organized under Delaware law (the "Trust") and GUARANTY FINANCIAL
CORPORATION, a Virginia corporation (the "Company" and, together with the Trust,
the "Offerors"), and WILMINGTON TRUST COMPANY, a Delaware banking corporation
(the "Escrow Agent").
R E C I T A L S :
A. The Offerors propose to sell up to $6.9 million of $____
Convertible Preferred Securities or liquidation amount of $25.00 per convertible
preferred security (the "Preferred Securities"), to the public at a price of
$25.00 per Preferred Security (the "Offering").
B. The Offerors have retained the Underwriter, as selling agent for
the Offerors on a best efforts basis, to sell the Preferred Securities in the
Offering, and the Underwriter has agreed to sell the Preferred Securities as the
Offerors' selling agent on a best efforts basis in the Offering, and the
Underwriter has agreed to serve in this capacity, the terms of which
relationship are set forth in an Underwriting Agreement between the Offerors and
the Underwriter, the form of which is attached hereto as Exhibit A (the
"Underwriting Agreement").
C. The Underwriter will enter into agreements with other
brokers/dealers (the "Selected Dealers" or individually, the "Selected Dealer")
to assist in the sale of the Preferred Securities.
D. The Offerors have agreed to pay the Underwriter a commission of
up to $_______.
E. The Escrow Agent is willing to hold the proceeds in escrow
pursuant to this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained in this Agreement, it is hereby agreed as
follows:
1. Establishment of the Escrow Account. On or prior to the
date of commencement of the Offering, the parties shall establish a
non-interest-bearing account with the Escrow Agent, which escrow account shall
be entitled "Guaranty Capital Trust I, Escrow Account" (the "Escrow Account").
The Underwriter shall make, and shall instruct purchasers and Selected Dealers
to make payment for the Preferred Securities by wire transfer of immediately
available funds as follows:
Fed. Funds to be wired to:
Wilmington Trust Company
Wilmington, Delaware
ABA No. 031100092
for credit to the account of Guaranty Capital Trust I-Escrow
Account No. _______
Attention: Terri Tavani, Corporate Trust Administration
Telephone No. (302) 651-8558
Fax No. (302) 651-8882
<PAGE>
The Offerors will make payment of the Underwriter's commission as
provided above.
2. Deposits into the Escrow Account. Funds received from the
Underwriter, purchasers and Selected Dealers shall be deposited in the Escrow
Account. All monies so deposited in the Escrow Account are hereinafter referred
to as the "Escrow Amount." The Escrow Account shall be a non-interest-bearing
account.
3. Escrow Period. The escrow period (the "Escrow Period")
shall begin on _______, 1998 and shall terminate at 5:00 p.m. on ________, 1998,
or such other time as shall be mutually agreed upon in writing by the parties.
During the Escrow Period, the Offerors acknowledge that they are not entitled to
any funds received into escrow and no amounts deposited by the Escrow Agent
shall become property of the Offerors or any other entity, or be subject to the
debts of the Offerors or any other entity.
4. Delivery of Escrow Account Proceeds. At the Closing Time
as defined in the Underwriting Agreement, the Underwriter and Offerors shall
provide the Escrow Agent with written directions for the distribution of the
Escrow Account, and the Escrow Agent agrees to distribute the Escrow Account
pursuant to such written directions. If no direction is received on or before
5:00 p.m., ________, 1998 (unless such time shall be extended by written
agreement of the Underwriter, Offerors and the Escrow Agent), the Escrow Agent
shall return the Escrow Amount to the parties that made payments to the Escrow
Account and this Agreement shall be of no further force or effect.
5. Closing Date. The "Closing Time" shall be that date
specified in the Underwriting Agreement.
6. Duties and Rights of the Escrow Agent. The foregoing
agreements and obligations of the Escrow Agent are subject to the following
provisions:
(a) The Escrow Agent's duties hereunder are limited
solely to the safekeeping of the Escrow Account in accordance with the terms of
this Agreement. It is agreed that the Escrow Agent shall have no other duties or
obligations hereunder except as expressly set forth herein, shall be responsible
only for the performance of such duties and obligations, shall not be required
to take any action otherwise than in accordance with the terms hereof, shall not
be required to perform any acts that may violate any applicable laws, and shall
not be liable or responsible in any manner for any loss or damage arising by
reason of any act or omission to act hereunder or in connection with any of the
transactions contemplated hereby, including, but not limited to, any loss or
damage that may occur by reason of forgery, false representation, the exercise
of its discretion in any particular manner or for any other reason, except any
loss or damage arising by reason of its gross negligence or willful misconduct.
(b) The Escrow Agent may rely upon, and shall be
protected in acting or refraining from acting upon, any written instructions
furnished to it hereunder and in good faith believed by it to be genuine or
presented by the proper party or parties, and the Escrow Agent may assume that
any person or entity purporting to give instructions in connection with
provisions hereof has been duly authorized to do so. The Escrow Agent may at any
time request written instructions from the Underwriter and the Offerors with
respect to the interpretation of this Agreement or of any action to be taken or
suffered or not taken hereunder.
-2-
<PAGE>
(c) In the event that the Escrow Agent shall be
uncertain about the interpretation of this Escrow Agreement or about its rights
or obligations hereunder or the propriety of any action contemplated hereunder,
or if the Escrow Agent shall receive instructions with respect to the Escrow
Account that are in its opinion in conflict with any other instructions with
respect to the Escrow Account that it has received or in conflict with any
provision of this Agreement, (i) the Escrow Agent promptly shall notify the
Underwriter and the Offerors (and any other involved parties, if necessary) of
such uncertainty or inconsistent instructions, (ii) the Escrow Agent shall be
entitled to refrain from taking any action other than to keep safely the Escrow
Account until it shall be directed otherwise in writing signed by the
Underwriter and the Offerors (and any other involved parties, if necessary) or
by a final order or judgment of a court of competent jurisdiction, and (iii) if
the Escrow Agent does not receive a notice signed by the Underwriter and the
Offerors (and any other involved parties, if necessary) resolving such
uncertainty or inconsistent instructions within a reasonable time, the Escrow
Agent shall have the right (but not the obligation) to file suit in interpleader
and obtain an order or judgment from a court of competent jurisdiction requiring
all persons involved to interplead and litigate in such court their several
claims and rights among themselves and, upon the conclusion thereof, to act in
accordance with the resolution of such litigation.
7. Indemnification and Fees of the Escrow Agent. The
Underwriter and the Offerors hereby jointly and severally agree to indemnify,
defend and save harmless the Escrow Agent from and against any and all losses,
expenses (including without limitation, reasonable fees, disbursements and other
expenses of counsel), assessments, liabilities, claims, damages, actions, suits
or other charges incurred by or assessed against the Escrow Agent for anything
done or omitted by it in the performance of its duties hereunder other than as a
result of its gross negligence or willful misconduct. In addition to the
foregoing, the Underwriter and the Offerors hereby agree that the Escrow Agent
shall deduct from the Escrow Account prior to distributing or delivering the
Escrow Account in accordance with Section 8 hereof reasonable compensation for
the services rendered by the Escrow Agent hereunder.
8. Resignation and Replacement of the Escrow Agent.
(a) The Escrow Agent may resign at any time and
thereupon be discharged of its duties and obligations as escrow agent hereunder
by giving five (5) days' prior written notice thereof to the Underwriter and
Offerors. Upon expiration of such five day period, the Escrow Agent shall take
no further action until the Underwriter and the Offerors have jointly appointed
a successor escrow agent. Upon receipt of written instructions signed by the
Underwriter and the Offerors, the Escrow Agent shall promptly turn over the
Escrow Account to the successor escrow agent. The Escrow Agent shall thereafter
have no further duties or obligations hereunder.
(b) The Escrow Agent may be removed and discharged
from its duties and obligations as escrow agent hereunder upon the mutual
agreement of the Underwriter and the Offerors by delivering a written notice
executed by the Underwriter and the Offerors of such removal to the Escrow Agent
specifying the date when such removal shall be effective (but such a removal
shall in no event be effective prior to the appointment of a successor escrow
agent). In the event of such removal, the Underwriter and the Offerors shall,
within thirty (30) days after such notice, jointly appoint a successor escrow
agent and, upon receipt of written instructions signed by the Underwriter and
the Offerors, the Escrow Agent shall promptly turn over the Escrow Account to
such successor escrow agent. The Escrow Agent shall thereafter have no further
duties or obligations hereunder.
-3-
<PAGE>
9. Notices. It is further agreed as follows:
(a) All notices given hereunder will be in writing,
served by registered or certified mail, return receipt requested, postage
prepaid, or by hand-delivery, to the parties at the following addresses:
To the Offerors:
Guaranty Capital Trust I
Guaranty Financial Corporation
1658 State Farm Boulevard
Charlottesville, Virginia 22911
Attention: ________________
To the Underwriter:
McKinnon & Company, Inc.
1609 First Virginia Building
555 Main Street
Norfolk, Virginia 23510
Attention: William J. McKinnon, Jr.
To the Escrow Agent:
Wilmington Trust Company
1100 North Market Street
Wilmington, Delaware 19890
Attention: Jack Beeson
10. Miscellaneous.
(a) This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parries hereto and their respective
successors and assigns.
(b) If any provision of this Agreement shall be held
invalid by any court of competent jurisdiction, such holding shall not
invalidate any other provision hereof.
(c) This Agreement shall be governed by the
applicable laws of the State of Delaware.
(d) This Agreement may not be modified except in
writing signed by the parties hereto.
(e) All demands, notices, approvals, consents,
requests and other communications hereunder shall be given in the manner
provided in this Agreement.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their respective names, all as of the date first above written.
McKINNON & COMPANY, INC.
By:
-----------------------------------
William J. McKinnon, Jr.
President
GUARANTY CAPITAL TRUST I
By:___________________________________
Trustee
GUARANTY FINANCIAL CORPORATION
By:___________________________________
Title:________________________________
WILMINGTON TRUST COMPANY
By:___________________________________
Title:________________________________
-5-
Exhibit 5.1
[WILLIAMS, MULLEN, CHRISTIAN & DOBBINS LETTERHEAD]
March 27, 1998
Guaranty Financial Corporation
1658 State Farm Blvd.
Charlottesville, VA 22911
Re: Guaranty Capital Trust I
Ladies and Gentlemen:
We have acted as counsel to Guaranty Financial Corporation (the
"Corporation") in connection with the registration by the Corporation of (i) an
aggregate of $6,900,000 of its junior subordinated debt securities (the "Debt
Securities"), (ii) the guarantee of the Preferred Securities of Guaranty Capital
Trust I (the "Guarantee"), a business trust created under the laws of the State
of Delaware, to be executed and delivered by the Corporation for the benefit of
the holders of the Preferred Securities, and (iii) such indeterminate number of
shares of common stock, par value $1.25, of the Corporation (the "Common Stock")
as may be issuable upon conversion of the Preferred Securities, each as set
forth in the Registration Statement on Form S-1, File No. ___-_________ (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"Commission") by the Corporation pursuant to the Securities Act of 1933, as
amended. This opinion letter is Exhibit 5.1 to the Registration Statement.
We have relied upon an officer's certificate as to corporate action
heretofore taken with respect to the Debt Securities, the Guarantee and the
Common Stock.
We have also assumed (i) the due incorporation and valid existence of
the Corporation, (ii) that the Corporation has the requisite corporate power and
authority to enter into and perform its obligations under the Declaration of
Trust (the "Declaration") among the Corporation, as Depositor, the individuals
named therein as Administrative Trustees and Wilmington Trust Company, as
Property Trustee, and the holders from time to time of undivided beneficial
interests in the assets of the Trust, the form of Indenture (the "Indenture")
between the Corporation and Wilmington Trust Company, as trustee, the Debt
Securities and the Guarantee and (iii) the due authorization, execution and
delivery of the Declaration, the Indenture, the Debt Securities and the
Guarantee by the Corporation.
Based on the foregoing, and subject to the qualifications herein
stated, we are of the opinion that when (i) the Registration Statement shall
have been declared effective by order of the Commission, (ii) the terms of the
class of Common Stock have been authorized by appropriate
<PAGE>
corporate action of the Corporation, and (iii) the Declaration, the Indenture
and the Guarantee have been duly authorized, executed and delivered by the
parties thereto:
1. The Debt Securities, when duly authenticated by the Trustee
pursuant to the terms of the Indenture, and delivered and paid for in accordance
with the terms of the Indenture and as contemplated by the Registration
Statement, will be validly issued and will constitute the legally binding
obligations of the Corporation, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity).
2. The Guarantee will constitute the legally binding obligation of
the Corporation, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally, and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity).
3. When certificates representing the Common Stock will have been
manually signed by an authorized officer of the transfer agent and registrar for
the Common Stock, registered by such transfer agent and registrar and delivered
to the holders of Preferred Securities upon conversion thereof in accordance
with the terms and conditions set forth in the Registration Statement, the
Declaration and the Indenture, the Common Stock will have been duly authorized,
validly issued, fully paid and nonassessable.
In rendering this opinion, we are not expressing an opinion as to the
laws of any jurisdiction other than the Commonwealth of Virginia and we express
no opinion as to the applicability of the laws of any other jurisdiction to the
subject matter hereof or to the effects of such laws thereon.
This opinion is rendered to you and for your benefit solely in
connection with the transactions described herein. This opinion may not be
relied on by you for any other purpose and may not be relied upon by, nor may
copies thereof be provided to, any other person, firm, corporation or entity for
any purposes whatsoever without our prior written consent. We hereby consent to
be named in the Registration Statement and in each of the Prospectuses as
attorneys who passed upon the legality of the Debt Securities, Guarantee and
Common Stock and to the filing of a copy of this opinion as Exhibit 5.1 to the
Registration Statement. Unless the prior written consent of our firm is
obtained, this opinion is not to be quoted or otherwise referred to in any
written report, proxy statement or other registration statement, nor is it to be
filed with or furnished to any other governmental agency or other person, except
as otherwise required by law.
<PAGE>
Very truly yours,
WILLIAMS, MULLEN, CHRISTIAN & DOBBINS
By________________________________________
A Shareholder
Exhibit 5.2
[LETTERHEAD OF RICHARDS, LAYTON & FINGER]
March ___, 1998
Guaranty Capital Trust I
c/o Guaranty Financial Corporation
1658 State Farm Blvd.
Charlottesville, Virginia 22911
Re: Guaranty Capital Trust I
Ladies and Gentlemen:
We have acted as special Delaware counsel for Guaranty Financial
Corporation, a Virginia corporation (the "Company") and Guaranty Capital Trust
I, a Delaware business trust (the "Trust"), in connection with the matters set
forth herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust (the "Certificate"),
dated November 21, 1997, as filed in the office of the Secretary of State of the
State of Delaware, (the "Secretary of State") on November 21, 1997;
(b) The Declaration of Trust of the Trust, dated as of October 29,
1997, among the Company and the trustees of the Trust named therein;
(c) The Registration Statement (the "Registration Statement") on
Form S-1, including a preliminary prospectus with respect to the Trust (the
"Prospectus"), relating to the Capital Securities of the Trust representing
preferred undivided beneficial interests in the Trust (each, a
<PAGE>
"Capital Security" and collectively, the "Capital Securities"), as filed by the
Company and the Trust with the Securities and Exchange Commission on March 27,
1998;
(d) A form of Amended and Restated Declaration of Trust for the
Trust, to be entered into among the Company, the trustees of the Trust, and the
holders, from time to time, of the undivided beneficial interests in the assets
of such Trust (including the exhibits) (the "Declaration"), attached as an
exhibit to the Registration Statement; and
(e) A Certificate of Good Standing for the Trust, dated March 27,
1998, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the Declaration.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed in paragraphs (a) through (e) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (e) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that is inconsistent with the opinions
stated herein. We have conducted no independent factual investigation of our own
but rather have relied solely upon the foregoing documents, the statements and
information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Declaration
constitutes the entire agreement among the parties thereto with respect to the
subject matter thereof, including with respect to the creation, operation and
termination of the Trust, and that the Declaration and the Certificate of Trust
are in full force and effect and have not been amended, (ii) except to the
extent provided in paragraph 1 below, the due creation or due organization or
due formation, as the case may be, and valid existence in good standing of each
party to the documents examined by us under the laws of the jurisdiction
governing its creation, organization or formation, (iii) the legal capacity of
natural persons who are parties to the documents examined by us, (iv) that each
of the parties to the documents examined by us has the power and authority to
execute and deliver, and to perform its obligations under, such documents, (v)
the due authorization, execution and delivery by all parties thereto of all
documents examined by us, (vi) the receipt by each Person
<PAGE>
to whom a Capital Security is to be issued by the Trust (collectively, the
"Capital Security Holders") of a Capital Security Certificate for such Capital
Security and the payment for the Capital Security, in accordance with the
Declarations and the Registration Statement, and (vii) that the Capital
Securities are issued and sold to the Capital Security Holders in accordance
with the Declaration and the Registration Statement. We have not participated in
the preparation of the Registration Statement and assume no responsibility for
its contents.
This opinion is limited to the laws of the State of Delaware (excluding
the securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of
law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act, 12 Del. C.
ss. 3801, et seq.
2. The Capital Securities of the Trust will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable undivided beneficial interests in the assets of the Trust.
3. The Capital Security Holders, as beneficial owners of the
Trust, will be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware. We note that the Capital Security
Holders may be obligated to make payments as set forth in the Declaration.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement. In addition, we
hereby consent to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving the foregoing consents, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. Except as stated above, without
our prior written consent, this opinion may not be furnished or quoted to, or
relied upon by, any other person for any purpose.
Very truly yours,
Exhibit 8.1
____________, 1998
McKinnon & Company, Inc.
555 Main Street
Norfolk, VA 23510
Gentlemen:
As special tax counsel to Guaranty Capital Trust I, a statutory
business trust formed under the laws of Delaware (the "Trust"), and Guaranty
Financial Corporation, a Virginia corporation, in connection with the issuance
by the Trust of $_________ of its ____% Convertible Preferred Securities (the
"Preferred Securities"), and assuming that the operative documents described in
the Prospectus for the Preferred Securities dated ____________, 1997 (the
"Prospectus"), will be performed in accordance with the terms described therein,
we hereby confirm to you our opinion as set forth in the Prospectus under the
heading "Certain United States Federal Income Tax Consequences," subject to the
limitations set forth therein.
Very truly yours,
WILLIAMS, MULLEN, CHRISTIAN
& DOBBINS
By:________________________________
CALCULATION OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended June 30,
Year Ended Six Months ---------------------------------------------------------------
12/31/97 Ended 12/31/96 1996 1995 1994 1993 1992
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss) 898 (6) 643 376 (480) 973 780
Effect Of Change In Accounting
Principal - - - - 196 - -
Income Taxes 487 (3) 344 101 (235) 483 356
Fixed Charges - Including Interest
On Deposits 1 6,038 2,940 5,192 4,663 5,073 5,094 6,359
-------------------------------------------------------------------------------------------
Total Earnings 7,423 2,931 6,179 5,140 4,554 6,550 7,495
===========================================================================================
Fixed Charges - Excluding Interest
On Deposits 2 1,116 980 2,059 2,223 3,134 2,806 2,504
===========================================================================================
Total Earnings - Excluding Interest
On Deposits 2,501 971 3,046 2,700 2,615 4,262 3,640
===========================================================================================
Ratio Of Earnings To Fixed Charges:
Excluding Interest On Deposits 3 2.24 0.99 1.48 1.21 0.83 1.52 1.45
===========================================================================================
Including Interest On Deposits 4 1.23 1.00 1.19 1.10 0.90 1.29 1.18
===========================================================================================
</TABLE>
1 Fixed charges including interest on deposits is equal to gross interest
expense.
2 Fixed charges excluding interest on deposits contains interest expense on
bonds payable, FHLB advances and other borrowings.
3 Computed by dividing total earnings by fixed charges excluding interest on
deposits.
4 Computed by dividing total earnings by fixed charges including interest on
deposits.
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Guaranty Financial Corporation
Charlottesville, VA
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated January 30, 1998, relating to the
consolidated financial statements of Guaranty Financial Corporation, which is
contained in that Prospectus.
We also consent to the reference to us under the caption "Accountants" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
Richmond, Virginia
April 2, 1998
