SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-18265
GUARANTY FINANCIAL CORPORATION
(Name of Small Business Issuer in its Charter)
Virginia 54-1786496
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
1658 State Farm Boulevard 22911
Charlottesville, Virginia (Zip Code)
(Address of Principal Executive Offices)
(804) 970-1100
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None n/a
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $1.25 per share
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's gross income for its most recent fiscal year was
$13,060,000.
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The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing sales price of such stock as of March 26,
1999 was approximately $12,785,068. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant.)
The number of outstanding shares of Common Stock as of March 26, 1999
was 1,501,727.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999 Annual Meeting of Shareholders - Part III
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TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS.......................................... 4
ITEM 2. DESCRIPTION OF PROPERTY.......................................... 13
ITEM 3. LEGAL PROCEEDINGS................................................ 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................. 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................ 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.................. 15
ITEM 7. FINANCIAL STATEMENTS............................................. 38
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 38
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT........................... 38
ITEM 10. EXECUTIVE COMPENSATION........................................... 38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 38
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 39
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K............................39
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PART I
Item 1. Description of Business.
General
Guaranty Financial Corporation ("Guaranty") is a Virginia corporation
which was organized in 1995 for the purpose of becoming the holding company of
Guaranty Bank (the "Bank"). The Bank is a Virginia state chartered bank which
began business in February 1981 and is headquartered in Charlottesville,
Virginia.
The principal asset of Guaranty is the outstanding stock of the Bank, a
wholly owned subsidiary. Guaranty presently has no separate operations and its
business primarily consists of the business of the Bank. Effective April 29,
1998 Guaranty formed Guaranty Capital Trust I (the "Trust"), a wholly owned
subsidiary. The purpose of the Trust was to issue convertible preferred
securities. 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 $173.1
million of gross loans outstanding at December 31, 1998, 43.8% represented
commercial real estate, and 38.4% represented residential first mortgages.
Guaranty also lends funds to retail banking customers by means of home equity,
installment loans, 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 headquartered 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 seven
full service retail branches, which serve Charlottesville, Albemarle County,
Fluvanna 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
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requirements of investors as to rate of return, liquidity, risk and other
factors. Guaranty competes for these deposits by offering a variety of deposit
products at competitive rates and convenient business hours.
Guaranty operates in a highly competitive environment, competing for
deposits and loans with commercial banks and other financial institutions, many
of which possess substantially greater financial resources than those available
to Guaranty. Certain of these institutions have significantly higher lending
limits than Guaranty. In addition, there can be no assurance that other
financial institutions, with substantially greater resources than Guaranty, will
not establish operations in Guaranty's service area.
Credit Policies
The principal risk associated with each of the categories of loans in
Guaranty's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased, depending on prevailing economic
conditions. In an effort to manage the risk, Guaranty's policy gives loan amount
approval limits to individual loan officers based on their level of experience.
The risk associated with real estate mortgage loans and consumer loans varies,
based on employment levels, consumer confidence, fluctuations in the value of
real estate and other conditions that affect the ability of borrowers to repay
indebtedness. The risk associated with real estate construction loans varies,
based on the supply and demand for the type of real estate under construction.
Guaranty has written policies and procedures to help manage credit
risk. The loan portfolio is managed under a specifically defined credit process.
This process includes formulation of portfolio management strategy, guidelines
for underwriting standards and risk assessment, procedures for ongoing
identification and management of credit deterioration, and regular portfolio
reviews to establish loss exposure and to ascertain compliance with Guaranty's
policies.
Guaranty uses a Management Loan Committee and Directors Loan Committee
to approve loans. The Management Loan Committee, which consists of the President
and two additional loan underwriters, meets as necessary to review all loan
applications. A Directors Loan Committee, which currently consists of all
directors, approves loans in excess of $1,000,000 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
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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, 1998, commitments to extend credit totaled $61.9 million.
Commercial Real Estate Lending
During 1998 Guaranty has focused on increasing its percentage of
commercial real estate loans in relation to the total loan portfolio. 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, 1998, commercial real estate
loans aggregated $36.9 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. 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 secured 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.
One-to-Four-Family Residential Real Estate Lending
Guaranty's primary lending program in the past 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
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market. At December 31, 1998, $20.2 million, or 11.7%, 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, 1998, $46.1
million, or 26.7%, 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, 1998, construction and land loans outstanding were
$60.0 million, or 16.9%, of gross loans. The average life of a construction loan
is approximately nine months and they reprice daily to meet the market, normally
prime plus two percent. Because the interest charged on these loans floats with
the market, they help Guaranty in managing its interest rate risk. Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans often involve larger loan balances concentrated with
single borrowers or groups of related borrowers. Construction loans involve
additional risks attributable to the fact that loan funds are advanced upon the
security of the home under construction, which is of uncertain value prior to
the completion of construction. Thus, it is more difficult to evaluate
accurately the total loan funds required to complete a project and related
loan-to-value ratios. To minimize the risks associated with construction
lending, Guaranty limits loan amounts to 80.0% of appraised value, in addition
to its usual credit analysis of its borrowers. Guaranty also obtains a first
lien on the security property as security for its construction loans.
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, 1998, Guaranty had consumer loans of $9.6 million
or 5.5% of gross loans. During 1997 and 1998, Guaranty increased its level of
consumer loans by 43.6%. Such loans were generally made to customers with which
Guaranty had an pre-existing
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relationships. Guaranty originates all of its consumer loans in its market area
and intends to continue its consumer lending in this geographic area.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
lines of credit, or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loan such as Guaranty,
and a borrower may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral. Guaranty adds
general provisions to its loan loss allowance at the time the loans are
originated. Consumer loan delinquencies often increase over time as the loans
age.
The underwriting standards employed by Guaranty for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income for primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes an analysis
of the value of the security in relation to the proposed loan amount.
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. At December 31, 1998,
commercial loans made up 15.5% of the total loan portfolio.
Employees
At December 31, 1998, Guaranty had the equivalent of 91 full-time
employees, and currently has 9 part-time employees. None of Guaranty's employees
are represented by any collective bargaining unit.
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Supervision and Regulation
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework applicable to Guaranty and
the Bank. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport
to be complete and are qualified in their entirety by reference to applicable
laws and regulations.
As a bank holding company, Guaranty is subject to regulation under the
Bank Holding Company Act of 1956 (as amended, the "BHCA") and the examination
and reporting requirements of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may
not directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any additional bank or merge
or consolidate with another bank holding company without the prior approval of
the Federal Reserve Board. The BHCA also generally limits the activities of a
bank holding company to that of banking, managing or controlling banks, or any
other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
As a state-chartered bank, the Bank is subject to regulation,
supervision and examination by the Virginia State Corporation Commission's
Bureau of Financial Institutions (the "Virginia SCC"). The Bank is also subject
to regulation, supervision and examination by the Federal Reserve Board and the
Federal Deposit Insurance Corporation (the "FDIC"). State and federal law also
govern the activities in which the Bank may engage, the investments it may make
and the aggregate amount of loans that may be granted to one borrower. Various
consumer and compliance laws and regulations also affect the Bank's operations.
The earnings of the Bank, and therefore the earnings of Guaranty, are
affected by general economic conditions, management policies and the legislative
and governmental actions of various regulatory authorities, including those
referred to above. The following description summarizes some of the state and
federal laws to which Guaranty and the Bank are subject.
The Virginia SCC and the Federal Reserve Bank of Richmond conduct
regular examinations of the Bank, reviewing such matters as the adequacy of loan
loss reserves, quality of loans and investments, management practices,
compliance with laws, and other aspects of their operations. In addition to
these regular examinations, the Bank must furnish the Virginia SCC and the
Federal Reserve with periodic reports containing a full and accurate statement
of its affairs. Supervision, regulation and examination of banks by these
agencies are intended primarily for the protection of depositors rather than
shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of the Bank are insured by the FDIC up to the limits set forth under
applicable law. The deposits of the Bank are subject to the deposit insurance
assessments of the Bank Insurance Fund ("BIF") of the FDIC.
For the semi-annual period beginning January 1, 1998, the assessments
imposed on all FDIC deposits for deposit insurance have an effective rate
ranging from 0 to 27 basis points per $100 of insured deposits, depending on the
institution's capital position and other supervisory factors. However, because
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.
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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,
1998, Guaranty's Tier 1 capital and total capital ratios were 10.44% and 10.99%,
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 4% 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, 1998 was 10.81%.
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 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
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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, 1998, 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.
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Economic and Monetary Policies. 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.
The Year 2000 Issue
The Year 2000 ("Y2K") issue relates to whether computer systems will
properly recognize and process date sensitive information on and after January
1, 2000. Systems that do not properly recognize such information could generate
erroneous data or fail. The Bank is heavily dependent on computer systems in the
conduct of substantially all of its business activities.
The Corporation has both a Y2K Committee and a Y2K Plan that were
established and adopted in 1998. The Plan, as recommended by the Federal
Financial Institutions Examination Council, is based on five phases: Awareness,
Assessment, Renovation, Validation and Implementation. The Corporation continues
in the Validation phase, or testing phase, which is scheduled for completion by
April 1999. In the event that any of its mission critical computer systems fail
to meet the Y2K requirements, or if other systems that the Bank depends upon for
automated processing its ongoing transactions, such as electrical or data
transmission fail, the Bank is required by Federal regulators to develop and
test a comprehensive contingency plan. The contingency plan is currently being
developed and should be completed by September 1999.
Successful and timely completion of the Y2K project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the testing of results of the core
processing system maintained by a third party service bureau, and readiness of
all vendors, suppliers and customers. No assurance can be given that the Plan
will be successfully completed by the Year 2000, in which case the Corporation
could incur data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial statements
of the Corporation.
Forward Looking Statements
Certain statements in this annual report on Form 10-KSB are
forward-looking and may be identified by the use of words such as "believe",
"expect", "anticipate", "should", "planned", "estimated", and "potential". These
statements are based on the Corporation's current expectations. A variety of
factors could cause the Corporation's actual results and experience to differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, and results of the Corporation's business
include interest rate movements, competition from both financial and
non-financial institutions, the timing and occurrence (or nonoccurence) of
transactions and events that may be subject to circumstances beyond the
Corporation's control, and general economic conditions.
12
<PAGE>
Item 2. Description of Property.
Guaranty's current principal office opened in December 1996 and is
located at 1658 State Farm Boulevard, Charlottesville, Virginia.
Guaranty has operated an office on Seminole Trail in Charlottesville
since 1983. Guaranty purchased this office in June 1996 at a cost of $1.15
million.
Guaranty has operated a branch in downtown Charlottesville since 1981,
and has operated its current Main Street location since 1992. The current lease
expires in 2002, subject to Guaranty's right to renew for three additional
five-year periods under certain circumstances. Guaranty has operated a branch in
Charlottesville near the University of Virginia since 1985, including the
Arlington Boulevard branch that opened in 1994. The current lease for this
branch expires in 1999, subject to Guaranty's right to renew for three
additional five-year periods, and West Main Street branch which opened July
1998. The current lease for this branch expires in 2003, subject to Guaranty's
right to renew for two five year terms.
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 and Lake Monticello, Virginia in November 1998.
Item 3. Legal Proceedings.
In the course of its operations, Guaranty is a party to various legal
proceedings. Based upon information currently available, management believes
that such legal proceedings, in the aggregate, will not have a material adverse
effect on Guaranty's business, financial position, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of Guaranty.
13
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Guaranty's Common Stock has been listed on the Nasdaq National Market
under the symbol "GSLC" since June 1997. From June 1995 to June 1997, the Common
Stock had been listed on the Nasdaq SmallCap Market. The following table sets
forth, for the quarters indicated, the high and low sales prices for Guaranty's
Common Stock and per share dividends for the periods indicated.
Market Price and Dividends
<TABLE>
<CAPTION>
Sales Price ($)
-------------------------
High Low Dividends ($)
----------- --------- ----------------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1997:
1st quarter 11.00 8.25 -
2nd quarter 11.00 9.25 .06
3rd quarter 12.75 10.00 .03
4th quarter 15.25 10.75 .03
Fiscal Year Ended December 31, 1998:
1st quarter 16.75 13.25 .03
2nd quarter 17.00 15.50 .06
3rd quarter 17.00 12.375 .06
4th quarter 15.00 10.75 .06
</TABLE>
During the third quarter of 1997, Guaranty decided to begin paying
dividends on a quarterly basis. However, the final determination of the timing,
amount and payment of dividends on Guaranty's Common Stock is at the discretion
of Guaranty's Board of Directors and will depend upon the earnings of Guaranty
and its subsidiaries, principally the Bank, the financial condition of Guaranty
and other factors, including general economic conditions and applicable
governmental regulations and policies.
Guaranty is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from the Bank. The
Bank is subject to certain legal restrictions on the amount of dividends it is
permitted to pay to Guaranty. At December 31, 1998, the Bank had available for
distribution as dividends to Guaranty approximately $2.7 million.
As of March 26, 1999, Guaranty has approximately 1,191 shareholders of
record.
14
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
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 years ended December 31, 1998 and 1997, the six months
ended December 31, 1996 and the fiscal year ended June 30, 1996. This discussion
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes and other statistical information presented elsewhere in this
annual report.
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 April 28, 1998, Guaranty Financial Corporation, in an effort to increase
its regulatory capital base, formed the subsidiary Guaranty Capital Trust I,
which issued $6.9 million of 7% cumulative, convertible preferred securities
that mature on May 28, 2028.
* Guaranty opened its sixth and seventh retail branches during 1998, the first
on West Main Street near the University of Virginia in Charlottesville, Virginia
and second at Lake Monticello, a planned community in Fluvanna County, Virginia.
NET INCOME
Net income for the year ended December 31, 1998 was $1,016,000, ($.68 per
diluted share), a 13.3% increase when compared to calendar year 1997 earnings of
$898,000 ($.61 per diluted share). These increased earnings where primarily a
result of increased net interest margin, growth and expansion of the existing
branch network and the addition and expansion of the commercial and construction
loan departments. These increased revenues were partially offset by additional
costs relating to the expansion of the branch network and lending departments.
In addition, 1997 earnings were affected by the one-time expenses related to the
conversion to a state chartered commercial bank.
Management continues to implement strategies to restructure the balance sheet in
accordance with the current strategic plan which focuses on growth and expansion
of the existing branch network and product offerings by maximizing the
opportunities and benefits resulting from the impact recent bank consolidations
are having on the local market. Guaranty Bank is the only community bank with
corporate headquarters located in the Charlottesville market that has an
existing branch network and established lending programs in place to capitalize
on these unique growth opportunities. However, there can be no assurance that
management will be successful in implementing these plans, or if successful,
that these plans will result in improved operating performance.
15
<PAGE>
Net income for the year ended 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 related
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.
For the six months ended December 31, 1996, the Corporation had a net loss of
$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 charge of
$237,000 when it restructured its investment portfolio and a one time special
assessment of $347,000 to recapitalize the Savings Association Insurance Fund
("SAIF"). In order for Guaranty to convert to a commercial bank, securities
classified as available for sale had to be reclassified as trading securities.
This resulted in a mark to market loss of $237,000 which was charged against net
income and adjusted the basis of the securities. Without these losses, Guaranty
would have reported an after tax net income of $376,000 for the six months ended
December 31, 1996.
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 and
represents Guaranty's net interest margin.
Net interest income was $5.7 million for the year ended December 31, 1998, 62.9%
greater than the $3.5 million reported during the year ended December 31, 1997.
This improvement in the net interest income was primarily due to the volume
increases in the loan portfolios and interest bearing deposits with other banks
and the decline in the average cost of interest bearing liabilities. Average
loans increased 37.6% for the year ended December 31, 1998. The average balance
of the interest bearing deposits with other banks was $10.5 million during the
year ended December 31, 1998 an increase of 87.3%, from an average balance of
$5.6 million during the year ended December 31, 1997. The average yield on
average loans increased 60 basis points from 8.50% in 1997 to 9.15% in 1998. The
yield on interest bearing deposits declined from 6.17% in 1997 to 5.13% in 1998.
The cost of average total interest bearing liabilities during the year ended
December 31, 1998 declined from 5.29% in 1997 to 5.18% in 1998. The average rate
paid on savings accounts declined 39 basis points from 3.36% in 1997 to 2.97% in
1998. The average rate paid on certificates of deposits declined 9 basis points
from 5.50% in 1997 to 5.41% in 1998.
16
<PAGE>
Net interest income was $3.5 million for the year ended December 31, 1997, 33.9%
greater than the $2.60 million reported during calendar year 1996. This
improvement in net interest income was primarily due to volume increases in the
securities and loan portfolios and to a decline in the average cost of interest
bearing liabilities. Average loans increased 9.6% for the year ended December
31, 1997. The average balance of the securities portfolio was $22.6 million in
calendar 1997, up $7.74 million, or 51.9% over calendar 1996. Although market
interest rates were in a declining trend during the year ended December 31,
1997, the yield on average loans increased 20 basis points from 8.30% in 1996 to
8.50% in 1997. The average yield on securities declined from 7.4% in 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, from 5.12% to 5.05%,
and the average rate paid on certificates of deposit declined 10 basis points
from 5.60% to 5.50%. 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. This tread
reversed in late 1997 as a result of the expanded branch network and additional
loan demand.
Net interest income was $1.3 million for the six month period ended December 31,
1996, 15.5% greater than the $1.2 million reported for the same period in 1995.
This improvement in net interest income was primarily due to volume increases in
the securities portfolio and to higher average yields on the loan portfolio. The
average balance of the securities portfolio was $17.6 million for the six month
period ended December 31, 1996, up 124.7% over the same period in 1995. The
average balance of the loan portfolio was $83.8 million for the six month period
ended December 31, 1996, up 7.6% over the same period in 1995. The yield on
average loans increased 4 basis points from 8.2% during the six month period
ended December 31, 1995 to 8.24% for the same period in 1996, while the yield on
securities declined 182 basis points to 7.15% for the six month period ended
December 31, 1996 from 8.97% 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.
17
<PAGE>
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.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate balance expense rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Securities $18,388 $1,290 7.02% $22,637 $1,590 7.02% $17,640 $631 7.15%
Loans 122,751 11,231 9.15% 89,222 7,584 8.50% 83,816 3,455 8.24%
Interest bearing deposits
in other banks 10,500 539 5.13% 5,605 346 6.17% 5,257 190 7.23%
------ --- ---- ----- --- ---- ----- --- ----
Total interest-earning
assets/total interest income 151,639 13,060 8.61% 117,464 9,520 8.10% 106,713 4,276 8.01%
------- ------ ---- ------- ----- ---- ------- ----- ----
Noninterest earning assets:
Cash and due from banks 2,450 1,898 1,082
Premises and Equipment 6,519 5,508 4,038
Other assets 3,001 2,624 2,680
Less Allowance for loan losses (1,104) (890) (826)
------ ---- ----
Total noninterest earning assets 10,866 9,140 6,974
------ ----- -----
Total Assets $162,505 $126,604 $113,687
======== ======== ========
Liabilities and stockholders equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts $24,936 $862 3.46% $11,110 $289 2.60% $8,765 $121 2.76%
Savings 8,551 254 2.97% 5,654 190 3.36% 4,870 83 3.41%
Certificates of deposit 93,615 5,068 5.41% 80,779 4,443 5.50% 63,346 1,756 5.54%
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest bearing deposits 127,102 6,184 4.87% 97,543 4,922 5.05% 76,981 1,960 5.09%
------- ----- ---- ------ ----- ---- ------ ----- ----
FHLB advances and other borrowings 13,893 899 6.47% 14,070 804 5.71% 25,871 745 5.76%
Bonds payable 2,142 325 15.17% 2,583 312 12.08% 3,060 235 15.36%
----- --- ----- ----- --- ----- ----- --- -----
Total interest bearing
liabilities/total interest
expense 143,137 7,408 5.18% 114,196 6,038 5.29% 105,912 2,940 5.55%
------- ----- ---- ------- ----- ---- ------- ----- ----
Non interest bearing liabilities:
Demand deposits 5,338 1,658 1,324
Other liabilities 3,531 903 809
----- --- ---
Total liabilities 152,006 116,757 108,045
Stockholders equity 10,499 9,847 5,642
------ ----- -----
Total liabilities and
stockholders equity $162,505 $126,604 $113,687
======== ======== ========
Interest spread (1) 3.44% 2.82% 2.46%
Net interest income/net interest
margin (2) $5,652 3.73% $3,482 2.96% $1,336 2.50%
====== ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended
Year Ended June 30,
- ------------------------------------------------------------------------
---------------------------------
(Dollars in thousands) 1996
- -----------------------------------------------------------------------
Interest Average
Average income/ yield/
balance expense rate
------- ------- ----
<S> <C> <C> <C>
Assets
Interest earning assets:
Securities $10,523 $820 7.79%
Loans 79,885 6,442 8.06%
Interest bearing deposits
in other banks 5,163 355 6.88%
----- --- ----
Total interest-earning
assets/total interest income 95,571 7,617 7.97%
------ ----- ----
Noninterest earning assets:
Cash and due from banks 2,011
Premises and Equipment 1,427
Other assets 2,377
Less Allowance for loan losses (756)
----
Total noninterest earning assets 5,059
-----
Total Assets $100,630
========
Liabilities and stockholders equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts $8,927 $245 2.74%
Savings 4,541 152 3.35%
Certificates of deposit 48,460 2,735 5.64%
------ ----- ----
Total interest bearing deposits 61,928 3,132 5.06%
------ ----- ----
FHLB advances and other borrowings 25,773 1,553 6.03%
Bonds payable 3,520 507 14.40%
----- --- -----
Total interest bearing
liabilities/total interest
expense 91,221 5,192 5.69%
------ ----- ----
Non interest bearing liabilities:
Demand deposits 1,066
Other liabilities 2,062
-----
Total liabilities 94,349
Stockholders equity 6,281
-----
Total liabilities and
stockholders equity $100,630
========
Interest spread (1) 2.28%
Net interest income/net interest
margin (2) $2,425 2.54%
====== ====
</TABLE>
(1) Interest spread is the average yield earned on earning assets, less the
average rate incurred on noninterest bearing liabilities.
(2) Net interest margin is net interest income, expressed as a percentage
of average earning assets.
18
<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.
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1996
Year Ended December 31, 1998 Year Ended December 31, 1997 compared to
compared to compared to Six Months Ended
Year Ended December 31, 1997 Year Ended December 31, 1996 December 31, 1995
Change Due To: Change Due to: Change Due To:
- --------------------------------------------------------------------------------------------------------------
Increase Increase Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Securities $0 ($300) ($300) ($54) $544 $490 ($143) $422 $279
Loans 580 3,067 3,647 163 664 827 31 231 262
Interest bearing deposits
in other banks (58) 251 193 (49) 11 (38) (39) 69 30
- --------------------------------------------------------------------------------------------------------------
Total interests income 522 3,018 3,540 60 1219 1279 (151) 722 571
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts 96 477 573 (13) 63 50 (2) (4) (6)
Savings (22) 86 64 (1) 35 34 (0) 3 3
Certificates of deposit (73) 699 626 (59) 1218 1159 (132) 682 550
- --------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 1 1,262 1,263 (73) 1316 1243 (134) 681 547
FHLB advances and other 107 (12) 95 (10) (628) (638) (154) 43 (111)
Bonds payable 66 (53) 13 (78) (76) (154) 35 (75) (40)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Total interest expense 174 1,197 1,371 (161) 612 451 (253) 649 396
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Net interest income $348 $1,821 $2,169 $221 $607 $828 $102 $73 $175
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30, 1996
compared to
Year Ended June 30,1995
Change Due to
- -----------------------------------------------------------
Increase
(Dollars in thousands) Rate Volume (Decrease)
- -----------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Securities $226 $9 $235
Loans 545 (430) 115
Interest bearing deposits
in other banks 57 38 95
- -----------------------------------------------------------
Total interests income 828 (383) 445
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts (35) 9 (26)
Savings (41) 5 (36)
Certificates of deposit 768 (248) 520
- -----------------------------------------------------------
Total interest bearing
deposits 692 (234) 458
FHLB advances and other (135) 129 (6)
Bonds payable (28) (166) (194)
- -----------------------------------------------------------
- -----------------------------------------------------------
Total interest expense 529 (271) 258
- -----------------------------------------------------------
- -----------------------------------------------------------
Net interest income $299 ($112) $187
- -----------------------------------------------------------
</TABLE>
19
<PAGE>
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 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, 1998, Guaranty had $17.0 million more assets than liabilities
that reprice within one year or less and therefore was in an asset-sensitive
position. This is an improvement over the same period in the prior year where
there were $19.0 million more liabilities than assets that repriced within one
year. This improvement is due mainly to Guaranty increasing its prime rate
lending and increased principal focus on deposit marketing programs that
attracted low rate transaction accounts.
Guaranty has an Asset/Liability Committee ("ALCO"). The ALCO meets to discuss
deposit pricing, changes in borrowed money, investment and trading activity,
loan sale activities, liquidity levels and the overall interest sensitivity. The
actions of this committee are reported to the Board of Directors monthly. The
daily monitoring of interest rate risk, investment and trading activity, along
with any other significant transactions are managed by the CEO and CFO with
input from other ALCO members.
The following table presents the amounts of Guaranty's interest sensitive assets
and liabilities that mature or reprice in the periods indicated.
<TABLE>
<CAPTION>
December 31, 1998
Maturing or Repricing In:
- ----------------------------------------------- ----------------------------------------------------------------------
3 Months 4-12 1-5 Over 5
or less Months Years Years
- ----------------------------------------------- ----------------- ---------------- ----------------- -----------------
(Dollars in thousands)
- ----------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest-sensitive assets:
Loans $73,798 $52,707 $22,020 $24,547
Investments and mortgage-backed
securities (1) 1,550 1,000 26,909 2,094
Deposits at other institutions 7,326 - - -
- ----------------------------------------------- ----------------- ---------------- ----------------- -----------------
Total interest-sensitive assets 82,674 53,707 48,929 26,641
- ----------------------------------------------- ----------------- ---------------- ----------------- -----------------
Cumulative interest-sensitive assets 82,674 136,381 185,310 211,951
Interest-sensitive liabilities:
NOW accounts (2) - - - 23,433
Money market deposit accounts 22,319 - - -
Savings accounts (3) 2,465 1,381 1,184 4,833
Certificates of deposit 24,921 66,544 25,725 -
Borrowed money 1,008 - - -
Bonds payable 67 201 726 792
- ----------------------------------------------- ----------------- ---------------- ----------------- -----------------
Total interest-sensitive liabilities 50,780 68,126 27,635 29,058
- ----------------------------------------------- ----------------- ---------------- ----------------- -----------------
Cumulative interest-sensitive liabilities 50,780 118,906 146,541 175,599
Period gap 31,894 (14,419) 21,294 (2,417)
Cumulative gap 31,894 17,475 38,769 36,352
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 162.81% 114.70% 126.46% 120.70%
Ratio of cumulative gap to total assets 24.40% 13.36% 29.64% 27.81%
- ----------------------------------------------- ----------------- ---------------- ----------------- -----------------
</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
20
<PAGE>
INVESTMENTS
Total available for sale increased 122.1% to $26.91 million at December 31, 1998
from $11.52 million at December 31, 1997. The overall increase was primarily a
result of management's efforts to increase the interest margin by using money
received from the increase in deposits and proceeds from the trust preferred
securities, offset by the increase in loans.
The following table shows the amortized cost and fair market value of investment
securities and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1997 1997 1996
---- ---- ---- ----
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 $ 2,094 $ 2,094 $ 2,745 $ 2,759 $ 3,157 $ 3,349 $ 3,731 $ 3,879
Other 250 250 100 100 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 2,344 2,344 2,845 2,859 3,157 3,349 3,731 3,879
- -----------------------------------------------------------------------------------------------------------------------------------
Available for sale
Corporate bonds 26,463 26,581 11,415 11,474 - - - -
U.S. Government Obligations 301 328 50 50 - - - -
Mortgage-backed securities - - - - - - 9,993 9,564
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total available for sale 26,764 26,909 11,465 11,524 - - 9,993 9,564
- -----------------------------------------------------------------------------------------------------------------------------------
Trading
Mortgage-backed securities - - - - 16,937 16,736 - -
U.S. Government Obligations 1,000 1,001 1,031 1,032 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total Trading 1,000 1,001 1,031 1,032 16,937 16,736 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Other
Federal Reserve Bank, stock - - 72 72 - - - -
Federal Home Loan Bank Stock 1,300 1,300 860 860 1,360 1,360 1,360 1,360
Other - - 7 7 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Total $31,408 $31,554 $16,280 $16,354 $21,454 $21,445 $15,084 $14,803
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
Year Ended Six months ended Year Ended
December 31, December 31, June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
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 $ 2,094 6.64% $ 2,745 16.80% $ 6,819 32.08% $ 7,459 50.89%
GNMA mortgage-backed securities - - - - 11,967 56.32 5,836 39.81
Corporate bonds 26,581 84.24 11,474 70.23 - - - -
Treasury notes 1,250 3.96 1,082 6.62 1,104 5.19 - -
Other 328 1.04 100 0.61 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 30,253 95.88 15,401 94.26 19,890 93.59 13,295 90.70
Other :
FHLB stock 1,300 4.12 860 5.26 1,360 6.40 1,360 9.28
FRB Stock - - 72 0.44 - - - -
Other - - 7 0.04 3 0.01 3 0.02
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment securities $ 31,553 100.00% $ 16,340 100.00% $ 21,253 100.00% $ 14,658 100.00%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
LOANS
Net loans consist of total loans minus undisbursed loan funds, deferred loan
fees and the allowance for loan losses. Net loans were $162.4 million at
December 31, 1998, an increase of 62.90% over December 31, 1997. Net loans were
$99.67 million at December 31, 1997, an increase of 22.6% over net loans at
December 31, 1996. Net loans were $81.27 million at December 31, 1996, a
decrease of 3.3% over net loans of $84.1 million at June 30, 1996. Net loans
increased 11.8% at June 30, 1996 from a balance of $75.2 million at June 30,
1995.
The average balance of total loans as a percentage of average assets was 75.5%,
70.5%, and 73.7% for the years ended December 31, 1998 and 1997, and the six
month period ended December 31, 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 Category
Loan Portfolio by Category
<TABLE>
<CAPTION>
December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential $66,369 $ 66,035 $ 67,016 $ 66,136 $ 62,175
Commercial 36,985 16,641 8,486 7,670 4,508
Construction and land loans 60,088 18,263 5,220 8,813 8,887
- ------------------------------------------------------------------------------------------------------------------------
Total real estate 163,442 100,939 80,722 82,619 75,570
Consumer Loans (1) 9,630 6,705 4,175 5,386 4,580
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Total loans receivable 173,072 107,644 84,897 88,005 80,150
- ------------------------------------------------------------------------------------------------------------------------
Less:
Undistributed loans in process 9,588 6,752 2,467 2,824 3,858
Deferred fees and unearned discounts 113 282 290 314 323
Allowance for losses 1,002 935 870 786 747
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Total net items 10,703 7,969 3,627 3,924 4,928
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $162,369 $ 99,675 $ 81,270 $ 84,081 $ 75,222
- ------------------------------------------------------------------------------------------------------------------------
(1) Includes commercial business loans
</TABLE>
Loan Portfolio by Percent of Gross Loans
<TABLE>
<CAPTION>
December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential 38.35% 61.34% 78.93% 75.15% 77.58%
Commercial 21.37% 15.46% 10.00% 8.72% 5.62%
Construction and land loans 34.72% 16.97% 6.15% 10.01% 11.09%
- ------------------------------------------------------------------------------------------------------------------------
Total real estate 94.44% 93.77% 95.08% 93.88% 94.29%
Consumer Loans (1) 5.56% 6.23% 4.92% 6.12% 5.71%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Total loans receivable 100.00% 100.00% 100.00% 100.00% 100.00%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
The following tables show the composition of Guaranty's loan portfolio by fixed
and adjustable rate at the dates indicated.
Fixed Rate and Adjustable Rate Loans by Amount
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31, June 30,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate
Residential $20,206 $26,514 $26,061 $28,907 $ 23,577
Construction and land loans - 37 138 339 69
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate 20,206 26,551 26,199 29,246 23,646
- ----------------------------------------------------------------------------------------------------------------------------
Consumer Loans 242 3,099 1,396 597 736
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed-rate loans 20,448 29,650 27,595 29,843 24,382
- ----------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
Real Estate
Residential 46,163 39,521 40,955 37,229 38,598
Commercial 36,985 16,641 8,486 7,670 4,508
Construction and land loans 60,088 18,226 5,082 8,474 8,818
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate 143,236 74,388 54,523 53,373 51,924
Consumer Loans 9,388 3,606 2,779 4,789 3,844
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustable-rate loans 152,624 77,994 57,302 58,162 55,768
- ----------------------------------------------------------------------------------------------------------------------------
Total loans receivable 173,072 107,644 84,897 88,005 80,150
- ----------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed loans in process 9,588 6,752 2,467 2,824 3,858
Deferred fees and unearned discounts 113 282 290 314 323
Allowances for losses 1,002 935 870 786 747
- ----------------------------------------------------------------------------------------------------------------------------
Total net items 10,703 7,969 3,627 3,924 4,928
- ----------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $162,369 $99,675 $81,270 $84,081 $ 75,222
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed Rate and Adjustable Rate Loans by Percentage
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
December 31, June 30,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate
Residential 11.67% 24.63% 30.70% 32.84% 29.41%
Construction and land loans - 0.03 0.16 0.39 0.09
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate 11.67 24.66 30.86 33.23 29.50
- ----------------------------------------------------------------------------------------------------------------------------
Consumer Loans 0.14 2.88 1.64 0.68 0.92
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed-rate loans 11.81 27.54 32.50 33.91 30.42
- ----------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
Real Estate
Residential 26.67 36.72 48.24 42.30 48.16
Commercial 21.37 15.46 10.00 8.72 5.62
Construction and land loans 34.72 16.93 5.99 9.63 11.00
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate 82.76 69.11 64.23 60.65 64.78
Consumer Loans 5.43 3.35 3.27 5.44 4.80
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustable-rate loans 88.19 72.46 67.50 66.09 69.58
- ----------------------------------------------------------------------------------------------------------------------------
Total loans receivable 100.00% 100.00% 100.00% 100.00% 100.00%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
The following tables summarize the contractual repayment terms of gross loans as
of December 31, 1998, as well as the amount of fixed rate and variable rate
loans due after December 31, 1998. The tables have not been adjusted for
estimates of prepayments and do not reflect periodic repricing of adjustable
rate loans.
<TABLE>
<CAPTION>
Balance Principal Repayment Contractually Due
Outstanding in 12-Month Period Ending December 31,
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2002- 2004- 2006 and
1998 1999 2000 2001 2003 2005 Therafter
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential and
commercial real estate $ 98,120 $ 44,870 $ 5,167 $ 8,878 $ 7,846 $ 5,927 $ 25,432
Construction 29,976 23,729 1,788 1,780 1,729 950 -
Consumer and other
loans 44,976 25,270 8,381 6,618 2,202 744 1,761
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 173,072 $ 93,869 $ 15,336 $ 17,276 $ 11,777 $ 7,621 $ 27,193
- ---------------------------------------------------------------------------------------------------------------------------
</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.
ASSET QUALITY
Asset quality is an important factor in the successful operation of a financial
institution. The regulations require insured institutions to classify their own
assets and to establish prudent general allowances for losses for assets
classified as "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 posses
potential weaknesses are required to be designated "special mention" by
management. On the basis of management's review of its assets, at December 31,
1998, Guaranty had classified $2.2 million of it's assets as substandard, and
none as doubtful or loss. 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.
24
<PAGE>
The following table reflects the composition of nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,686 $ 1,436 $ 1,670 $ 1,458 $ 1,556
Restructured loans - - 11 11 12
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total non-performing loans 1,686 1,436 1,681 1,469 1,568
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Foreclosed assets 488 65 51 41 122
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,174 $ 1,501 $ 1,732 $ 1,510 $ 1,690
- ---------------------------------------------------------------------------------------------------------------------
Loans past due 90 or more days and
accruing interest $ 106 $ 189 $ - $ 19 $ 1
Non-performing loans to total loans, at
period end 0.97% 1.42% 1.98% 1.67% 2.06%
Non-performing assets to period end
total loans and foreclosed assets 1.25% 1.49% 2.04% 1.72% 2.21%
</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 not be
purchased by Guaranty. In most cases, deficiencies are cured promptly.
The following table sets forth information concerning delinquent mortgage and
other loans at December 31, 1998. The amounts presented represent the total
remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Residential Commercial Construction
Real Estate Real Estate and Land Consumer
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Number Amount Number Amount Number Amount Number Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
31-59 days 1 $ 567 20 $3,817 - $ - 3 $ 106
60-89 days 2 108 3 1,607 1 215 2 47
90 days and over 1 57 2 319 - - 1 3
- -------------------------------------------------------------------------------------------------------------------------------
Total delinquent loans 4 $ 732 25 $5,743 1 $ 215 6 $ 156
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
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, and 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 assumptions used in making the initial
determinations.
An analysis of the allowance for loan losses, including charge-off activity, is
presented below for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Year Ended December 31, December 31, June 30,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 935 $ 870 $ 788 $ 747 $ 754
Provision charged to operations 184 122 92 57 (10)
Charge-offs:
Real estate 120 57 10 39 -
Consumer - - - - 1
Recoveries:
Real estate 3 - - 19 -
Consumer - - - 4 4
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 117 57 10 16 (3)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,002 $ 935 $ 870 $ 788 $ 747
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to period
end total loans 0.58% 0.93% 1.06% 0.93% 0.98%
Allowance for loan losses to nonaccrual
loans 59.43% 67.20% 52.10% 54.05% 48.01%
Net charge-offs to average loans 0.10% 0.06% 0.01% 0.02% 0.00%
</TABLE>
26
<PAGE>
Provision for loan losses
For the year ended December 31, 1998, the provision for loan losses was
$184,200, compared to $122,000 at December 31, 1997 and $92,000 for the six
month period ended December 31, 1996. The provision for loan losses increased to
$57,000 for the year ended June 30, 1996 compared to a credit of $10,000 for the
same period ended 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.
A breakdown of the general 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.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, Year Ended June 30,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Gross Total Gross Total Gross
Allowance Loans Allowance Loans Allowance Loans
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate $ 384 38.35% $ 523 57.40% $ 471 73.74%
Commercial real estate 214 21.37 166 8.12 179 9.38
Construction 348 34.72 52 17.10 38 8.68
Consumer and other loans 56 5.56 43 17.38 13 8.20
Unallocated - - 115 - 8 -
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 1,002 100.00% $ 899 100.00% $ 709 100.00%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
- ---------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------
Ratio of Ratio of
Loans to Loans to
Total Gross Total Gross
Allowance Loans Allowance Loans
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential real estate $ 327 75.15% $ 311 77.58%
Commercial real estate 194 8.72 220 5.62
Construction 70 10.01 86 11.09
Consumer and other loans 40 6.12 32 5.71
Unallocated - - - -
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Total $ 631 100.00% $ 649 100.00%
- ---------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
NON-INTEREST INCOME
Guaranty's non-interest income consists primarily of loan fees and servicing
income, net gains on sale of loans and securities, and fees and service charges
on deposit accounts. For the year ended December 31, 1998, non-interest income
totaled $2.0 million. Loan fees and servicing income were $232,000, gains on
sales of loans and securities were $1,063,000, service charges on checking
accounts totaled $424,000, and other income was $247,000. Loans and securities
sales were a result of the continued strategy of selling all newly originated
fixed rate mortgage loans in the secondary market, restructuring of the balance
sheet to reduce interest rate risk relating to fixed rate mortgages, and to
provide liquidity to fund anticipated loan closings during the first half of
1999.
For the year ended December 31, 1997, loan fees and servicing income were
$456,000, gains on sales of loans and securities were $1,067,000, service
charges on checking accounts totaled $166,000, and other income was $178,000.
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 of 57.8%, 15.8% and 11.3%, respectively,
of total non-interest income.
In the years ended June 30, 1996 and 1995, loan fees and servicing income
accounted for 55.1% and 74.8%, respectively, of non-interest income. Gains on
the sale of loans and securities were 21.94% and .02% of non-interest income in
fiscal 1996 and 1995, respectively. Service charges on checking accounts were
$90,000 in fiscal 1996 and $78,000 in fiscal 1995. Non interest income in fiscal
year ended June 30, 1996 was $1.1 million, an increase of $235,000 or 27% over
non-interest income for the fiscal year ended June 30, 1995.
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 intangible assets that represent
the rights to service mortgage loans and in turn to receive the service fee
income associated with the mortgage loans. MSRs are 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 prepayments rates could result in increases in mortgage loan
servicing income in future periods. Impairment of MSRs 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 the 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 capitalized MSRs for a stratum exceed their fair value. At
December 31, 1998 MSRs totaled $1,978,000. Impairment on these rights was
$342,000 for the year ended December 31, 1998. See "Financial Statements -D
Summary of Accounting Policies." At December 31, 1998 and 1997 loans serviced
for others totaled $173.1 million and $123.8 million, respectively. Guaranty
serviced loans for others aggregating approximately $172.8 million at December
31, 1996 and, $168.4 million at June 30, 1996.
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 Governmental
National Mortgage Association ("GMNA") mortgage-backed securities.
During the year ended December 31, 1998 and 1997 Guaranty sold $60.3 million and
$24.4 million, respectively, of loans and securitized loans. Guaranty sold $11.8
million for the six month period ended December 31, 1996 and $7.3 million during
fiscal year ended 1996. The sale of fixed rate product creates liquidity and an
income stream from servicing fees on loans sold.
28
<PAGE>
Guaranty also trades treasury securities in an effort to take advantage of short
term movements in market interest rates. It is Guaranty's policy not to hold
trading securities with a cost in excess of $5 million at one time. Trading
securities are marked to market monthly. Sales of trading account securities
totaled $105.9 million, $89.5 million, $35.3 million, and $107.3 million during
the years ended December 31, 1998 and 1997 and the six month period ended
December 31, 1996 and the year ended June 30, 1996, respectively. Guaranty
experienced losses of $302,000, $255,000 and $64,000 on such sales for the year
ended December 31, 1998, the six month period ended December 31, 1996 and fiscal
year ended June 30, 1996, respectively, and a gain of $5,000 in the year ended
December 31, 1997.
Loan fees, net of loan underwriting and closing costs, are deferred and
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
$113,000, $283,000 and $290,000 at December 31, 1998, 1997 and 1996,
respectively.
NON-INTEREST EXPENSES
For the year ended December 31, 1998, non-interest expenses were $5.8 million,
compared to $3.9 million for the year ended December 31, 1997. The $1.9 million
increase was due primarily to increased costs associated with the expanded
branch network and the new commercial loan department. 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 the
overall growth of the Corporation. Non-interest expenses were $2.5 million for
the year ended June 30, 1996.
INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1997, and the
fiscal year ended June 30, 1996 was $624,000, $486,000, and $344,000,
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 $3,500 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, 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 related cost of such funds have a 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 and
brokered deposits. Guaranty's principal use of deposits is to originate loans
and fund investment securities.
At December 31, 1998, deposits were $172.8 million, up 53.0% from $112.9 million
at December 31, 1997. Deposits increased 9.0% to $81.4 million at December 31,
1996. The deposit growth is a reflection of aggressive pricing and increased
marketing. In order to reduce the overall cost of funds and reduce the
Corporation's reliance on high cost time deposits and short term borrowings as a
funding source, management continues to direct 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 Corporations reliance on time deposits and short term borrowings.
29
<PAGE>
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by Guaranty at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statement savings accounts $ 9,863 $ 6,434 $ 4,738 $ 4,654
Now accounts 23,433 12,037 6,929 6,440
Money market accounts 22,319 4,000 3,410 3,213
30-to-180-day certificates 40,587 1,326 250 227
Nine-month certificates - 1,638 - -
One-to five-year fixed-rate certificates 76,603 87,467 66,013 52,698
Eighteen-month prime rate certificates - 45 61 7,455
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Total $172,805 $112,947 $ 81,401 $ 74,687
- ----------------------------------------------------------------------------------------------------------
</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>
Six months ended Year Ended
Years Ended December 31, December 31, June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Average Rate Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid Balance Paid
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 5,338 0.00% $ 1,658 0.00% $ 1,324 0.00% $ 1,066 0.00%
Interest bearing
demand deposits 24,936 3.46% 11,110 2.59% 8,765 2.76% 8,927 2.73%
Savings deposits 8,551 2.97% 5,654 3.36% 4,870 3.41% 4,541 3.25%
Time deposits 93,615 5.41% 80,779 5.51% 63,346 5.54% 48,460 5.57%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $ 132,440 4.67% $ 99,201 4.97% $ 78,305 5.00% $ 62,994 4.91%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
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 to eliminate, the threat of disintermediation (the flow of
funds away from depository institutions such as banking 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.
The following table sets forth the deposit flows fo Guaranty during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended Six months Year Ended
December 31, Ended Dec 31, June 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Opening balance $ 112,947 $ 81,401 $ 74,687 $ 52,461
Net deposits (withdrawals) 53,673 26,624 4,754 19,093
Interest credited 6,185 4,922 1,960 3,133
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 172,805 $ 112,947 $ 81,401 $ 74,687
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) $ 59,858 $ 31,546 $ 6,714 $ 22,226
Percent increase (decrease) 53.00% 38.75% 8.99% 42.37%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table indicates the amount of Guaranty's certificates of deposits
by time remaining until maturity as of December 31, 1998.
<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> <C>
Certificates of deposit less than $100,000 $ 22,443 $ 23,237 $ 19,276 $ 22,595 $ 87,551
Certificates of deposit of $100,000 or more 2,478 2,403 21,627 3,131 29,639
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total certificates of deposits $ 24,921 $ 25,640 $ 40,903 $ 25,726 $117,190
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
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 the Notes to Consolidated Financial Statements for information
regarding the maturities and rate structure of Guaranty's FHLB advances. At
December 31, 1998, $21 million 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, 1998, Guaranty had $1.0 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 the can be invested at a positive rate of
return.
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.
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended
December 31, December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Balance:
FHLB Advances $26,000 $17,500 $22,500 $28,050
Securities sold under
agreements to repurchase 6,856 5,867 9,957 9,930
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted Weighted Weighted
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLB Advances $9,748 5.57% $10,956 6.18% $19,550 5.79% $22,829 6.21%
Securities sold under
agreements to repurchase 2,336 5.00% 2,007 6.33% 6,321 5.66% 3,112 5.65%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, Guaranty had $21.0 million outstanding to the FHLB
compared to no advances outstanding at December 31, 1997 and $17.5 million at
December 31, 1996.
32
<PAGE>
The following table sets forth the balances of Guaranty's short-term borrowings
at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances $21,000 $0 $7,500 $12,500
Securities sold under agreements
to repurchase 1,008 2,989 6,681 6,104
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Total short-term borrowings $22,008 $2,989 $14,181 $18,604
- -----------------------------------------------------------------------------------------------------------------
Weighted average interest rate of
short-term FHLB advances 5.57% 0.00% 6.35% 6.02%
Weighted average interest rate of
securities sold under agreements to
repurchase 5.00% 6.29% 6.50% 5.65%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes 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 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.
Cash and cash equivalents were approximately $10.5 million and $6.0 million at
December 31, 1998 and 1997, respectively. Financing activities provided $84.7
million primarily as a result of net advances from FHLB of $21.0 million, net
increase in deposits of approximately $59.9 million and proceeds from issuance
of convertible preferred securities of $6.9 million. Approximately $596,000 was
absorbed by operating activities which was primarily a result of an increase in
other assets which include approximately $1.5 million increase in originated
mortgage servicing rights, increase in accrued interest receivable of
approximately $807,000 and amortization of deferred loan fees of approximately
$529,000. In addition, investing activities absorbed approximately $79.5 million
which was primarily a result of a net increase in loans of approximately $62.7
million, net investment securities purchases of $15 million, and purchases of
office properties and equipment of approximately $1.5 million.
33
<PAGE>
For the six months ended December 31, 1996, cash and cash equivalents increased
$645,000 to $6.1 million as net cash provided by investing and financing
activities exceeded the cash used in operating activities. The $2.1 million of
cash provided by investing activities resulted mainly from a net decrease in
loans while the $6.7 million of cash provided by financing activities resulted
mainly from a net increase in deposits.
Guaranty uses its sources of funds primarily to meet operating needs, to pay
deposit withdrawals and fund loan commitments. At December 31, 1998 and 1997
total approved loan commitments were $9.6 million and $3.8 million respectively.
In addition, at December 31, 1998 and 1997, commitments under unused lines of
credit were $52.3 million and $14.3 million, respectively. At December 31, 1996
and June 30, 1996, the total approved loan commitments outstanding amounted to
$3.0 million and $3.9 million, respectively. At the same dates, commitments
under unused lines of credit amounted to $6.4 million and $5.4 million.
Certificates of deposits scheduled to mature in one year or less at December 31,
1998, 1997 and 1996 and June 30, 1996 totaled $91.5 million, $77.7 million,
$57.3 million and $51.2 million, respectively. Management believes that a
significant portion of maturing deposits well remain with Guaranty.
Management intends to fund anticipated loan closings and operating needs during
1999 through cash on hand, brokered deposits utilized, proceeds from the sale of
loans and securities, cash generated from operations and anticipated increases
in deposits. 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.
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. In an effort to increase the capital base
Guaranty's wholly-owned subsidiary Guaranty Capital Trust I issued $6.9 million
of 7.0% cumulative convertible trust preferred securities in April 1998. The
proceeds, less issuance costs of approximately $276,000 were added to the Bank's
additional paid in capital.
34
<PAGE>
The Corporation and Bank are subject to Federal Reserve regulations, including
the Bank Holding Company Act. At December 31, 1998, the Bank exceeded all such
regulatory capital requirements as shown in the following table.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital:
Common Stock $ 2,000 $ 2,000 $ 1,149 $ 1,149
Capital Surplus 400 400 1,978 1,978
Cumulative Preferred Securities (2) 4,161
Retained Earnings 10,084 9,358 3,530 3,579
Unrealized Loss on available for sale securities - - - -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Tier 1 Capital 16,645 11,758 6,657 6,706
- ---------------------------------------------------------------------------------------------------------------------------
Tier 2 Capital:
Allowance for loan losses (1) 1,002 935 706 631
Allowable long term debt - - - -
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Tier 2 Capital 1,002 935 706 631
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Risk Based Capital $ 17,647 $ 12,693 $ 7,363 $ 7,337
- ---------------------------------------------------------------------------------------------------------------------------
Risk Weighted Assets $181,147 $ 82,666 $ 56,500 $ 54,650
Capital Ratios:
Tier 1 Risk-based 9.19% 14.22% 11.78% 12.27%
Total Risk-based 9.74% 15.35% 13.03% 13.43%
Tier 1 Capital to average adjusted total assets 9.52% 9.53% 5.89% 6.59%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Limited to 1.25% of risk weighted assets.
(2) Limited to 1/3 of core capital
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.
35
<PAGE>
ACCOUNTING RULES
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. SFAS 130 is effective for financial
statements for periods beginning after December 15, 1997 and has been adopted by
the Corporation. The only component of accumulated other comprehensive income
was unrealized gain (loss) on available for sale securities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain requirements are met, a derivative may be specifically designated as a
hedge and an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999 and
requires application prospectively.
SUBISDIARY ACTIVITIES
The Holding Company has two subsidiaries Guaranty Bank ("the Bank") and Guaranty
Capital Trust I ("the Trust"). The Trust was formed on April 29, 1998 and is the
holder of the trust preferred securities which were sold for $6,900,000. See
Note 12 in the Consolidated Financial Statements for information regarding the
terms of the securities. 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"). Guaranty sells non-deposit investment products through GICO.
GICO had a net loss of $15,800 and $27,000 for the years ended December 31, 1998
and 1997, respectively 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% and were sold at
a discount and costs of issuance of approximately $3.3 million. The bonds
discount and issuance costs are amoritzed against income as mortgage underlying
the bonds repay. In the fiscal years ended June 30, 1996 and 1995, with rapidly
falling interest rates, Guaranty experienced significant repayment of mortgages,
resulting in an amortization expense of $160,000 and $124,000, respectively. For
the years ended December 31, 1998 and 1997 and the six month period ended
December 31, 1996, amortization expense was $101,000, $64,000 and $39,000,
respectively. The amortization of the REMIC expenses is treated as interest
expense.
36
<PAGE>
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.
Guaranty, in conjunction with its outside service bureau, has developed a plan
to address Year 2000 exposure surrounding Guaranty's computer and data
processing systems. Since early 1997, Guaranty has been updating its in-house
systems hardware to be Year 2000 compliant. The next step involves testing
system software, which is scheduled to begin in early 1999, and it is estimated
that the process will cost approximately $25,000 to complete. In conjunction
with this testing, Guaranty plans to test its other systems that are not related
to the service bureau. Management anticipates Guaranty will be Year 2000
compliant, thus satisfying all regulatory requirements.
37
<PAGE>
Item 7. Financial Statements.
The following financial statements are filed as a part of this report
following Item 13 below:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997 and June 30, 1996 and the six months ended
December 31, 1996
Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997 and June 30, 1996 and the six months
ended December 31, 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997 and June 30, 1996 and 1995 and the six months ended
December 31, 1996
Summary of Accounting Policies
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last two fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Information set forth under the headings "Election of Directors,"
"Executive Officers Who Are Not Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in Guaranty's definitive Proxy Statement for its
1999 Annual Meeting of Shareholders, which Proxy Statement will be filed with
the Securities and Exchange Commission within 120 days of the end of Guaranty's
1998 fiscal year (the "1999 Proxy Statement"), is hereby incorporated by
reference.
Item 10. Executive Compensation
Information set forth under the headings "Executive Compensation --
Summary of Cash and Certain Other Compensation," "-- Stock Option Grants," "--
Option Exercises and Holdings," "-- Directors' Fees," and "-- Employment
Agreements" in the 1999 Proxy Statement is hereby incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information set forth under the headings "Security Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" in the 1999
Proxy Statement is incorporated by reference.
38
<PAGE>
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Transactions with Management"
in the 1999 Proxy Statement is hereby incorporated by reference.
Item 13. Exhibits and Reports on Form 8-K
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of
Guaranty Financial Corporation (restated in
electronic format), attached as Exhibit 3.1 to the
Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1998, incorporated herein by
reference.
3.2 Bylaws of Guaranty Financial Corporation, attached as
Exhibit 3.1 to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1998,
incorporated herein by reference.
10.1 Guaranty Financial Corporation 1991 Incentive Plan
(as amended), attached as Exhibit A to the
Registrant's definitive Proxy Statement for the 1998
Annual Meeting of Shareholders, incorporated herein
by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
39
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Financial Statements
For the Years Ended December 31, 1998 and 1997,
the Six Months Ended December 31, 1996 and
the Year Ended June 30, 1996
<PAGE>
GUARANTY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance Sheets as of December 31, 1998 and 1997 4
Statements of Operations for the years ended December 31, 1998 and 1997, and
June 30, 1996, and the six months ended December 31, 1996 5 - 6
Statements of Comprehensive Income 7
Statements of Stockholders' Equity for the years ended December 31, 1998 and
1997, and June 30, 1996, and the six months ended December 31, 1996 8
Statements of Cash Flows for the years ended December 31, 1998 and 1997, and
June 30, 1996, and the six months ended December 31, 1996 9 - 11
Summary of Accounting Policies 12 - 18
Notes to Consolidated Financial Statements 19 - 44
</TABLE>
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income, and cash flows for the years ended December 31, 1998 and 1997, and the
six months ended December 31, 1996, and for the year 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, 1998 and 1997,
and the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997, the six months ended December 31, 1996, and the year
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 year ended June 30,
1996.
BDO Seidman, LLP
Richmond, Virginia
January 29, 1999
3
<PAGE>
<TABLE>
<CAPTION>
December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 10,526,732 $ 5,916,504
Investment securities (Note 1)
Held-to-maturity 2,343,827 2,845,560
Available for sale 26,909,320 11,523,908
Trading 1,000,000 1,032,188
Investment in Federal Home Loan Bank stock, at
cost (Note 8) 1,300,000 860,100
Other investments - 79,000
Loans receivable, net (Notes 2 and 10) 162,369,285 99,674,549
Accrued interest receivable 1,650,876 844,212
Real estate owned 488,273 64,985
Office properties and equipment, net (Note 3) 7,049,982 5,999,778
Mortgage servicing rights (Note 2) 1,978,000 904,383
Other assets (Note 9) 1,403,511 963,310
- ----------------------------------------------------------------------------------------------------
$217,019,806 $130,708,477
- ----------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities
Deposits (Note 4) $172,805,284 $112,947,012
Bonds payable (Notes 1 and 6) 1,785,754 2,360,083
Advances from Federal Home Loan Bank (Note 8) 21,000,000 -
Securities sold under agreement to repurchase (Notes 1 and 7) 1,008,750 2,989,000
Accrued interest payable 124,826 58,404
Income taxes payable (Note 9) 242,649 181,100
Prepayments by borrowers for taxes and insurance 128,133 80,824
Other liabilities 470,139 231,900
- --------------------------------------------------------------------------------------------------------------
Total liabilities 197,565,535 118,848,323
- --------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 11, 12, 14 and 16)
- --------------------------------------------------------------------------------------------------------------
Convertible preferred securities (Note 12) 6,900,000 -
- --------------------------------------------------------------------------------------------------------------
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, 1,501,727, and 1,501,383 shares issued and
outstanding 1,877,159 1,876,729
Additional paid-in capital 5,724,524 5,724,954
Accumulated other comprehensive income 89,625 50,971
Retained earnings - substantially restricted 4,862,963 4,207,500
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,554,271 11,860,154
- --------------------------------------------------------------------------------------------------------------
$217,019,806 $130,708,477
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
<PAGE>
- -------------------------------------------------------------------------------
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Six Months Ended
December 31, December 31, Year Ended
1998 1997 1996 June 30,1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Loans $11,230,838 $7,584,732 $3,454,559 $6,441,903
Mortgage-backed securities 207,406 1,045,831 564,079 652,639
Investment securities 1,622,022 889,245 254,833 498,686
Trading account assets - - 2,911 23,390
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 13,060,266 9,519,808 4,276,382 7,616,618
- ----------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 6,184,500 4,922,258 1,960,029 3,132,660
Borrowings (Notes 6, 7 and 8) 1,224,475 1,116,152 979,936 2,059,402
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 7,408,975 6,038,410 2,939,965 5,192,062
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 5,651,291 3,481,398 1,336,417 2,424,556
Provision for loan losses
(Note 2) 184,200 122,320 91,850 56,665
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,467,091 3,359,078 1,244,567 2,367,891
- ----------------------------------------------------------------------------------------------------------------------
Other income
Loan fees and servicing income 231,878 456,515 266,505 610,020
Net gain on sale of loans
and securities 1,062,670 1,067,348 72,547 242,866
Service charges on checking 424,415 166,072 52,058 90,156
Other 247,240 177,837 70,977 164,090
- ----------------------------------------------------------------------------------------------------------------------
Total other income 1,966,203 1,867,772 462,087 1,107,132
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
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
1998 1997 1996 June 30, 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other expenses
Personnel (Notes 14 and 15) $3,089,212 $2,010,794 $ 748,083 $1,013,674
Occupancy (Note 11) 783,473 523,502 131,593 302,139
Data processing (Note 11) 585,282 422,851 165,548 257,038
BIF/SAIF premium disparity
assessment - - 346,851 -
Deposit insurance premiums 23,182 87,298 100,908 190,263
Other 1,311,666 798,650 223,553 724,321
- -------------------------------------------------------------------------------------------------------------------------
Total other expenses 5,792,815 3,843,095 1,716,536 2,487,435
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 1,640,479 1,383,755 (9,882) 987,588
Provision for income taxes
(Note 9) 624,200 486,040 (3,500) 344,338
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $1,016,279 $ 897,715 $ (6,382) $ 643,250
- -------------------------------------------------------------------------------------------------------------------------
Basic and Diluted Earnings
(Loss) Per Share $ .68 $ .61 $ (.01) $ .70
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended Six Months Ended
December 31, December 31, Year Ended
1998 1997 1996 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $1,016,279 $897,715 $ (6,382) $643,250
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income
Unrealized gains on securities
Unrealized holding gains (losses)
arising during period 144,557 82,211 - (450,293)
Less: reclassification adjustment for
gains (losses) included in net income (82,211) - 450,293 -
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss),
before tax 62,346 82,211 450,293 (450,293)
Income tax (expense) benefit
related to items of other
comprehensive income (23,692) (31,240) (171,111) 171,111
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
net of tax 38,654 50,971 279,182 (279,182)
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income $1,054,933 $948,686 $272,800 $364,068
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholders'
Stock Capital Income Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $1,148,960 $1,981,745 $(279,182) $3,497,626 $6,349,149
Cash dividend - - - (46,200) (46,200)
Accumulated other comprehensive
income - - 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)
Accumulated other comprehensive
income - - 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
Cash dividend - - - (360,816) (360,816)
Accumulated other comprehensive
income - - 38,654 - 38,654
Stock options exercised (Note 14) 2,500 21,500 - - 24,000
Repurchase of common stock (2,070) (21,930) - - (24,000)
Net income - - - 1,016,279 1,016,279
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $1,877,159 $5,724,524 $ 89,625 $4,862,963 $12,554,271
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
8
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended Six Months Ended
December 31, December 31, Year Ended
1998 1997 1996 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 1,016,279 $ 897,715 $ (6,382) $ 643,250
Adjustments to reconcile net
income (loss) to net cash
provided (absorbed) by
operating activities
Provision for loan losses 184,200 122,320 91,850 56,665
Depreciation and amortization 487,073 354,005 76,160 95,511
Amortization of deferred loan fees (529,287) (89,564) (63,841) (136,086)
Net amortization of premiums
and accretion of discounts 194,913 64,154 84,606 199,060
Gain on sale of loans (1,328,575) (518,736) (216,537) (204,901)
Originations of loans held
for sale (58,985,227) (24,280,323) (11,773,561) (7,203,819)
Proceeds from sale of loans 60,313,802 24,799,059 11,822,300 7,160,241
(Gain) loss on sale of
mortgage-backed securities 201,715 (236,761) (111,039) -
Purchase of mortgage backed
securities (35,874,372) (24,754,127) (23,980,081) -
Proceeds from sale of
mortgage-backed securities 35,672,657 24,990,888 17,844,790 -
Gain on sale of securities
available for sale (579,797) (147,433) - (101,685)
(Gain) loss on disposal of office
properties and equipment 6,316 - - (1,341)
(Gain) loss on sale of trading
account securities 301,869 (5,520) 255,030 63,720
Purchases of trading account
securities (106,204,637) (73,838,893) (36,330,973) (107,346,227)
Sales of trading account
securities 105,934,956 89,548,520 35,305,544 107,282,507
</TABLE>
continued...
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
1998 1997 1996 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities (cont'd)
Changes in
Accrued interest receivable $ (806,664) $ (173,001) $ 40,631 $ (127,600)
Other assets (1,014,818) (115,936) (24,917) (442,298)
Accrued interest payable 66,422 (15,698) (38,308) 13,018
Income taxes 61,549 214,100 (3,000) -
Prepayments by borrowers
for taxes and insurance 47,309 (25,077) (39,829) (160,616)
Other liabilities 238,239 (777,389) (1,141,898) 689,882
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by operating activities (596,078) 16,012,303 (8,209,455) 479,281
- -----------------------------------------------------------------------------------------------------------------------------
Investing activities
Net (increase) decrease in
loans (62,772,937) (18,451,153) 2,880,494 (8,486,970)
Repayments on held to
maturity securities 555,607 309,815 776,007 998,457
Purchase of held to
maturity securities (150,000) - - -
Purchase of securities
available for sale (69,486,875) (33,334,183) - (28,399,062)
Proceeds from sales of
securities available for sale 54,798,914 21,929,679 - 18,507,960
Sale of FHLB stock - 500,100 - -
Purchase of FHLB stock (439,900) - - -
Purchase of servicing rights (499,000) - - -
Proceeds from sale of office
properties and equipment - - - 4,522
Purchases of office properties
and equipment (1,543,593) (1,407,630) (1,515,180) (3,186,982)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed)
by investing activities (79,537,784) (30,453,372) 2,141,321 (20,562,075)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
10
<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
1998 1997 1996 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financing activities
Net increase in deposits $59,858,272 $ 31,545,941 $ 6,713,625 $ 22,226,807
Repayment of Federal Home
Loan Bank advances (39,000,000) (21,000,000) (10,000,000) (31,510,000)
Proceeds from Federal Home
Loan Bank advances 60,000,000 3,500,000 10,000,000 23,960,000
Payments on bonds
payable, including
unapplied payments (673,116) (408,402) (531,459) (988,607)
Increase (decrease) in
securities sold under
agreements to repurchase (1,980,250) (3,692,000) 577,000 6,104,000
Proceeds from issuance of
convertible preferred
securities 6,900,000 - - -
Proceeds from issuance of
common stock - 4,470,978 - 15,300
Dividends paid (360,816) (135,259) (46,200) (45,958)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided
by financing activities 84,744,090 14,281,258 6,712,966 19,761,542
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 4,610,228 (159,811) 644,832 (321,252)
Cash and cash equivalents,
beginning of period 5,916,504 6,076,315 5,431,483 5,752,735
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $10,526,732 $ 5,916,504 $6,076,315 $ 5,431,483
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
11
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Nature of Business Guaranty Financial Corporation (the "Parent Company") is
and Regulatory 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, its
wholly-owned subsidiaries, Guaranty Capital Trust I and
Guaranty Bank, and the Bank's wholly-owned subsidiaries,
GMSC, Inc. and Guaranty Investment Corp. 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.
12
<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 Investments in securities are classified as either
held-to-maturity, trading, or available for sale,
according to management's intent and ability.
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.
13
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Loans Held for The Corporation had approximately $1,080,000 and
Sale $9,200,000 of loans held for sale at December 31, 1998
(continued) and 1997, respectively. The estimated market value of
these loans exceeded their carrying cost.
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.
The Corporation adopted Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights an Amendment of FASB
Statement No. 65" on July 1, 1995. 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.
14
<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. At December 31, 1998, an impairment of
approximately $342,000 was recognized on those rights.
Allowance for The allowance for loan losses is maintained at a level
Possible Loan considered by management to be adequate to absorb future
Losses 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.
15
<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 portion
(continued) 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 to agreements to repurchase (reverse repurchase
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 $295,000 at December 31, 1998.
16
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Income Taxes Section 1616 of the Small Business Job Protection Act of
(continued) 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 1,501,604 and 1,466,843 for the years ended
December 31, 1998 and 1997, respectively, and 920,681
for the six month period ended December 31, 1996, and
917,668 for the year ended June 30, 1996.
Statements of Cash Cash and cash equivalents include Federal funds sold
Flows with original maturities of three months or less.
Interest paid was approximately $7,343,000 and
$6,060,000 for the years ended December 31, 1998 and
1997, respectively, and $2,978,000 for the six month
period ended December 31, 1996, and $5,179,000 for the
year ended June 30, 1996. Cash paid for income taxes was
approximately $656,000 and $350,000 for the years ended
December 31, 1998 and 1997, respectively, and $277,000
for the six month period ended December 31, 1996, and
$180,000 for the year ended June 30, 1996. There was no
real estate acquired in settlement of loans for the six
month period ended December 31, 1996, and approximately
$488,000, $64,000 and $33,000 for the years ended
December 31, 1998 and 1997 and June 30, 1996.
17
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Reclassifications Certain reclassifications have been made in the prior
year consolidated financial statements and notes to
conform to the December 31, 1998 presentation.
New Accounting In June 1997, the Financial Accounting Standards Board
Pronouncements 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. At December 31, 1998, the only component of
accumulated other comprehensive income was unrealized
gains (loss) on available for sale securities.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments,
including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133
requires that an entity recognized all derivatives as
either assets or liabilities in the statement of
financial position and measure those instruments at fair
value. If certain requirements are met, a derivative may
be specifically designated as a hedge and an entity that
elects to apply hedge accounting is required to
establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining
the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing
risk. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999 and requires
application prospectively.
18
<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:
December 31, 1998
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held to Maturity
Mortgage-backed
securities $ 2,093,827 $ 93,173 $ - $ 2,187,000
Other 250,000 - - 250,000
2,343,827 93,173 - 2,437,000
Available for sale
Corporate bonds 26,463,324 279,136 161,491 26,580,969
Other 301,438 26,913 - 328,351
26,764,762 306,049 161,491 26,909,320
$29,108,589 $399,222 $161,491 $29,346,320
</TABLE>
19
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. Investment A summary of the carrying value and estimated market
Securities value of investment securities is as follows:
(continued)
December 31, 1997
<TABLE>
<CAPTION>
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
$14,311,189 $80,163 $8,444 $14,382,908
</TABLE>
20
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. Investment The amortized cost and estimated market value of
Securities available for sale and held to maturity securities at
(continued) December 31, 1998 by maturity is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Held to Maturity
Mortgage-backed securities $ 2,093,827 $ 2,187,000
Other 250,000 250,000
2,343,827 2,437,000
Available for Sale
Due after five years 26,764,762 26,909,320
26,764,762 26,909,320
$29,108,589 $29,436,320
</TABLE>
21
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. Investment Proceeds from sales of securities available for sale was
Securities approximately $54,799,000 and $21,930,000 for the years
(continued) ended December 31, 1998 and 1997, respectively, 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 $579,800, $147,400 and
$101,700 were realized on those sales during the years
ended December 31, 1998 and 1997, respectively, and June
30, 1996, respectively.
Proceeds from the sale of trading securities was
approximately $105,935,000 and $89,549,000 for the years
ended December 31, 1998 and 1997, respectively, and
$35,306,000 for the six months ended December 31, 1996,
and $107,346,000 for the year ended June 30, 1996. Gross
gains of approximately $162,000 and $134,000 and gross
losses of approximately $464,000 and $128,000 were
realized on those sales for the year ended December 31,
1998 and 1997, respectively. 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 gross losses of approximately $272,700 was
realized on those sales during the year ended June 30,
1996.
Proceeds from the sale of mortgage backed securities was
approximately $35,673,000 and $24,991,000 for the years
ended December 31, 1998 and 1997, respectively, and
$17,845,000 for the six months ended December 31, 1996.
Gross gains of approximately $0 and $237,000 were
realized on those sales for the years ended December 31,
1998 and 1997, respectively, and $111,000, were realized
on those sales for the six months ended December 31,
1996. Gross losses on the sales of mortgage-backed
securities were $202,000 and $0 for the years ended
December 31, 1998 and 1997, $0 for the six months ended
December 31, 1996. The Corporation had no sales of
mortgage backed securities during the year ended June
30, 1996.
Mortgage backed securities of approximately $2,094,000
and $2,838,000 at December 31, 1998 and 1997,
respectively, were pledged for bonds payable (Note 6).
At December 31, 1998 and 1997 investment securities with
a market value of approximately $1,008,000 and
$3,141,000, respectively, were pledged as collateral
under repurchase agreements (Note 7).
22
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
2. Loans Receivable Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
Residential real estate $ 66,369,418 $ 66,035,224
Commercial real estate 36,985,202 16,641,057
Construction and land 60,088,110 18,263,062
Consumer 9,629,551 6,705,023
173,072,281 107,644,366
Less
Undisbursed loan funds 9,587,873 6,752,222
Deferred loan fees 112,809 282,618
Allowance for loan losses 1,002,314 934,977
10,702,996 7,969,817
$162,369,285 $ 99,674,549
</TABLE>
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
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
Provision charge to expense 184,200
Net charge-offs (116,863)
Balance at December 31, 1998 $1,002,314
</TABLE>
23
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
2. Loans Receivable The Corporation serviced loans for others aggregating
(continued) approximately $173,147,000 and $123,834,000 at December
31, 1998 and 1997, respectively. Mortgage servicing
rights were approximately $1,978,000 and $904,000 at
December 31, 1998 and 1997, respectively. Mortgage
servicing rights of approximately $1,584,000, $507,000
and $226,000 were capitalized during the years ended
December 31, 1998 and 1997 and six months ended December
31, 1996, respectively.
Gross gains and gross losses on the sale of loans
totalling approximately $1,374,000 and $46,000 and
$520,000 and $1,000 were realized during the years ended
December 31, 1998 and 1997, respectively, $283,000 and
$67,000 during the six months ended December 31, 1996,
and $205,000 and $0, for the year ended June 30, 1996.
At December 31, 1998 and 1997, 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, 1998 1997
<S> <C> <C>
Land $2,127,055 $1,910,922
Building and leasehold improvements 3,691,488 3,084,362
Furniture and fixtures 1,052,840 823,234
Equipment 1,479,974 1,147,688
Automobiles 59,598 55,362
8,410,955 7,021,568
Less accumulated depreciation
and amortization 1,360,973 1,021,790
Net office properties and equipment $7,049,982 $5,999,778
</TABLE>
24
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
4. Deposits Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Passbook, statement savings and
interest checking accounts
Non-interest bearing $ 8,408,737 4.9% $2,771,114 2.5%
1.00 to 2.00% 9,304,150 5.4 8,318,148 7.4
2.01 to 3.00% 15,582,682 9.0 953,976 .8
3.01 to 4.00% 5,638,171 3.3 6,433,351 5.7
4.01 to 5.00% - - 3,994,110 3.5
5.01 to 6.00% 16,681,267 9.7 - -
55,615,007 32.3 22,470,699 19.9
Certificates:
0 to 5.00% 42,020,778 24.3 65,962 .1
5.01 to 6.00% 69,883,330 40.4 75,747,649 67.1
6.01 to 7.00% 5,286,169 3.0 14,662,702 12.9
117,190,277 67.7 90,476,313 80.1
$172,805,284 100.0% $112,947,012 100.0%
</TABLE>
The aggregate amount of certificates of deposit with a
minimum denomination of $100,000 was approximately
$29,640,000 and $11,108,000 at December 31, 1998 and
1997, respectively.
At December 31, 1998, scheduled maturities of
certificates are as follows:
Year Ending December 31,
1999 $ 91,464,890
2000 14,334,216
2001 7,889,119
2002 2,744,041
2003 and thereafter 758,011
$117,190,277
25
<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, 1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term
investments $10,526,732 $10,527,000 $ 5,916,504 $ 5,917,000
Securities 30,253,147 30,346,000 15,566,382 15,587,000
Loans, net of allowance
for loan losses 162,369,285 163,090,000 99,674,549 100,595,000
Financial liabilities
Deposits 172,805,284 173,825,000 112,947,012 113,117,000
Advances from Federal
Home Loan Bank 21,000,000 21,000,000 - -
Securities sold under
agreement to
repurchase 1,008,750 1,009,000 2,989,000 2,989,000
Bonds payable 1,785,754 N/A 2,360,083 N/A
Notional Fair Notional Fair
Amount Value Amount Value
Unrecognized financial
instruments
Commitments to
extend credit $61,917,000 $61,917,000 $18,145,000 $18,145,000
Forward commitments
to purchase
mortgage-backed
securities 10,000,000 10,000,000 - -
</TABLE>
26
<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 that
(continued) 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.
27
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
5. Fair Value of Securities sold under agreement to repurchase
Financial
Instruments Fixed-coupon reverse repurchase agreements are treated
(continued) as short-term financings. The carrying value is
considered a reasonable estimate of fair value.
Bonds payable
Due to the nature and terms (Note 6) of the bonds
payable held by GMSC, Inc. at December 31, 1998 and
1997, 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.
28
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
6. Bonds Payable In October 1987, GMSC, Inc. issued serial bonds (the
"Bonds") collateralized by mortgage-backed securities
which are treated as a real estate mortgage investment
conduit ("REMIC") under the Internal Revenue Code of
1986 for federal tax purposes. The Bonds are secured by
an indenture between GMSC, Inc. and the Bank of New
York, acting as trustee for the bondholders. The Bonds
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
Serial Bonds
Class A-2, maturing January 20,
2012, at 8.0% $ - $ 285,701
Class A-3, maturing January 20,
2019, at 8.0% 2,169,815 2,649,648
Unapplied payments (66,683) (159,100)
2,103,132 2,776,249
Less unamortized discount (317,378) (416,166)
$1,785,754 $2,360,083
</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.
29
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
7. Securities Sold The following is a summary of certain information
Under Agreements regarding the Bank's repurchase agreements:
to Repurchase
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
<S> <C> <C>
Balance at end of period $1,009,000 $2,989,000
Weighted average interest rate
at end of period 5.00% 6.29%
Average amount outstanding
during the period $2,336,294 $2,006,792
Maximum amount outstanding
at any month end during the
period $6,856,060 $5,867,000
</TABLE>
8. Advances From Information related to borrowing activity from the
Federal Home Federal Home Loan Bank is as follows:
Loan Bank
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
<S> <C> <C>
Maximum amount
outstanding
during the
period $26,000,000 $17,500,000
Average amount
outstanding
during the period $ 9,748,000 $10,956,000
Average interest
rate during the
period 5.57% 6.23%
</TABLE>
30
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
9. Income Taxes The provision for income taxes as presented in the
consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1998 1997 1996 1996
<S> <C> <C> <C> <C>
Current income tax $624,200 $458,040 $(3,500) $344,338
Deferred income tax - 28,000 - -
$624,200 $486,040 $(3,500) $344,338
</TABLE>
Reconciliations of the provision for income taxes
computed at the federal statutory income tax rate to the
effective rate follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1998 1997 1996 1996
<S> <C> <C> <C> <C>
Tax expense at
statutory rate $557,800 $470,477 $(3,360) $335,780
Adjustments
Effect of state taxes - 55,350 (395) 39,504
Other 66,400 (39,787) 255 (30,946)
$624,200 $486,040 $(3,500) $344,338
</TABLE>
31
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
9. Income Taxes The components of deferred income taxes are as follows:
(continued)
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
Deferred tax asset
Bad debt reserves $241,000 $243,000
Deferred loan fees 30,000 43,000
Servicing rights 116,000 16,000
Other 143,000 60,000
Total deferred tax asset 530,000 362,000
Deferred tax liability
GMSC REMIC 133,000 185,000
FHLB stock 167,000 118,000
Fixed Assets 84,000 42,000
Trading securities 90,000 -
Other - 12,000
Total deferred tax liability 474,000 357,000
Net deferred tax asset $ 56,000 $ 5,000
</TABLE>
10. 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 following is a summary of loan transactions with
directors, officers and other related parties:
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
Balance at the beginning of year $293,000 $276,000
Additional loans 856,000 19,000
Loan reductions (174,000) (2,000)
Balance at end of year $975,000 $293,000
</TABLE>
32
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. 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, 1998, are as follows:
<TABLE>
<CAPTION>
Amount
----------------------------
Data
Year Ending December 31, Leases Processing
<S> <C> <C> <C>
1999 $ 82,366 $ 40,500
2000 63,156 -
2001 63,156 -
2002 56,436 -
Thereafter 21,498 -
$286,612 $ 40,500
</TABLE>
Total rental expense amounted to approximately $70,000
and $47,000 for the years ended December 31, 1998 and
1997, respectively, and $23,000 for the six months ended
December 31, 1996, and $168,000 for the year ended June
30, 1996. Total data processing expense amounted to
approximately $585,000 and $423,000 for the year ended
December 31, 1998 and 1997, respectively, and $170,000
for the six months ended December 31, 1996 and $257,000
for the year ended June 30, 1996.
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.
12. Convertible On April 29, 1998, the Corporation formed Guaranty
Preferred Stock Capital Trust I (the "Trust"), a wholly owned
subsidiary. The Trust issued 276,000 shares of 7.0%
cumulative preferred securities maturing May 5, 2028
with an option to call on or after April 29, 2003 (call
price of $18.50 per share) for $6,900,000. Conversion of
the preferred securities into the corporations stock may
occur at any time prior to maturity. The Trust also
issued 8,537 shares of convertible common stock for
$213,425. The Corporation purchased all shares of the
common stock. The proceeds from the sale of the
preferred securities were utilized to purchase from the
Corporation junior subordinated debt securities
(guaranteed by the Bank), of $7,113,425 bearing interest
of 7.0% and maturing May 5, 2028. All intercompany
interest and equity was eliminated in consolidation.
33
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
13. Stockholders' On November 30, 1995, the Board of Directors declared a
Equity 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 relative to the Federal Reserve
requirements.
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
December 31, 1998 Required Required Amount Percent Amount
<S> <C> <C> <C> <C> <C>
Tier 1 risk based $ 7,246,000 4.00% $16,645,000 9.19% $9,399,000
Total risk based
capital 14,492,000 8.00 17,647,000 9.74 3,155,000
Amount Percent Actual Actual Excess
December 31, 1997 Required Required Amount Percent Amount
Tier 1 risk based $3,306,000 4.00% $11,758,000 14.22% $8,452,000
Total risk based
capital 6,613,000 8.00 12,693,000 15.53 6,080,000
</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.
Proceeds from the Trust Preferred Securities were
contributed to capital of the Bank and are included in
the calculation of regulatory capital.
34
<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 following table summarizes options outstanding:
<TABLE>
<CAPTION>
Year Ending December 31, 1998 1997
Weighted - Weighted -
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period 71,200 $15.25 4,000 $ 4.88
Granted 37,500 15.86 72,000 15.25
Forfeited (18,700) 16.03 (800) 12.00
Exercised (2,000) 12.00 (4,000) 4.88
Options outstanding at end
of period 88,000 $15.86 71,200 $15.25
Options exercisable at end
of period 24,200 11,240
</TABLE>
The weighted average fair value of options granted
during the year ended December 31, 1998 was $4.85.
35
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
14. Stock Option
Plan
(continued)
<TABLE>
<CAPTION>
Six Months
Ending Year Ending
December 31, 1996 June 30, 1996
Weighted - Weighted -
average average
exercise exercise
Shares price Shares price
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period 14,000 $4.75 17,600 $4.65
Granted - - - -
Forfeited - - - -
Exercised (10,000) 4.70 (3,600) 4.25
Options outstanding at end
of period 4,000 $4.88 14,000 $4.75
Options exercisable at end
of period 4,000 14,000
</TABLE>
The Corporation applies Accounting Principals Board
Opinion No. 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 years
ended December 31, 1998 and 1997 would have been
decreased to the pro forma amounts indicated in the
following table:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
<S> <C> <C>
Net income
As reported $1,016,279 $897,715
Pro forma 896,242 844,363
Net income per share (basic and diluted)
As reported $ .68 $ 0.61
Pro forma .60 0.58
</TABLE>
36
<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 year ended June 30, 1996,
(continued) 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, 1998: a risk free interest
rate of 5.56%, dividend yield of 1.00%, expected
weighted average term of 5.00 years, and a volatility of
25.00%.
The follow table summarizes information about stock
options outstanding at December 31, 1998:
<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>
$12.00 - 17.57 77,000 3.38 $14.91 24,200 $12.79
$19.00 - 21.26 11,000 4.03 19.47 - -
88,000 3.46 $15.86 24,200 $12.79
</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 $14,900 and
$10,300 for the year ended December 31, 1998 and 1997,
respectively, and $4,600 for the year ended June 30,
1996, and $5,500 for the six months ended December 31,
1996.
37
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
16. Financial The Corporation is a party to financial instruments with
Instruments With off-balance-sheet risk in the normal course of business
Off-Balance-Sheet to meet the financing needs of its customers and to
Risk 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, 1998 1997
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit $61,917,000 $18,145,000
Standby letters of credit written 1,454,000 944,000
Financial instruments whose contract
amount represent interest rate risk
Forward commitment to purchase
mortgage-backed securities 10,000,000 -
</TABLE>
38
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
16. Financial Commitments to extend credit are agreements to lend to a
Instruments With 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 65% of the
loans collateralized by one to four family residential
properties.
39
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
17. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly financial data is shown as follows: (Dollars in thousands
except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
- ----------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,508 $2,956 $3,506 $4,090
Total interest expense 1,540 1,753 2,065 2,051
- ----------------------------------------------------------------------------------------------------------
Net interest income 968 1,203 1,441 2,039
Provision for loan losses 42 44 49 49
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 926 1,159 1,392 1,990
Other income 613 375 730 248
Other expenses 1,173 1,245 1,607 1,768
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 366 289 515 470
Income taxes 153 105 201 165
- ----------------------------------------------------------------------------------------------------------
Net income $ 213 $ 184 $ 314 $ 305
- ----------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ .17 $ .12 $ .21 $ .18
Diluted $ .17 $ .12 $ .21 $ .18
- ----------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
17. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly financial data is shown as follows: (Dollars in thousands
except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,186 $2,374 $2,451 $2,508
Total interest expense 1,408 1,537 1,580 1,513
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 778 837 871 995
Provision for loan losses - 46 30 46
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 778 791 841 949
Other income 222 399 579 668
Other expenses 790 886 1,013 1,154
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 210 304 407 463
Income taxes 77 106 141 162
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 133 $ 198 $ 266 $ 301
- ------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share $ .10 $ .13 $ .18 $ .19
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
18. Condensed Condensed financial information is shown for the Parent
Financial Company only as follows:
Information of the
Corporation Condensed Statements of Financial Condition
(Parent Company
Only)
<TABLE>
<CAPTION>
December 31, 1998 1997
Assets
<S> <C> <C>
Investment in subsidiaries, at equity $19,289,414 $11,758,347
Cash 11,612 10,000
Prepaid expenses and other assets 527,117 40,836
$19,828,143 $11,809,183
Liabilities and Stockholders' Equity
Other liabilities $ 250,072 $ -
Total liabilities 250,072 -
Subordinated debt 7,113,425 -
Stockholders' Equity
Common stock 1,877,159 1,876,729
Additional paid-in capital 5,724,524 5,724,954
Retained earnings 4,862,963 4,207,500
Total stockholders' equity 12,464,646 11,809,183
$19,828,143 $11,809,183
</TABLE>
42
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
18. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
(continued)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31,
1998 1997 1996
<S> <C> <C> <C>
Income
Dividends received from Bank $ 361,306 $135,259 $46,200
Total income 361,306 135,259 46,200
Interest expense (319,324) - -
Noninterest expenses (19,305) (7,028) (52,582)
Income (loss) before undistributed
net income of the Bank 22,677 128,231 (6,382)
Undistributed net income 993,602 769,484 -
Net income (loss) $1,016,279 $897,715 $(6,382)
</TABLE>
43
<PAGE>
Guaranty Financial Corporation
and Subsidiary
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
18. Condensed
Financial
Information of the
Corporation
(Parent Company
Only)
(continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31,
1998 1997 1996
<S> <C> <C> <C>
Operating activities
Net income (loss) $1,016,279 $ 897,715 $ (6,382)
Adjustments
Undistributed earnings of
the Bank (993,602) (769,484) -
(Increase) decrease in prepaid
and other assets (486,281) 49,844 (21,701)
(Decrease) increase in other
liabilities 250,072 (182,086) 37,686
Other 1,229 4,011 (9,603)
Net cash absorbed by operating
activities (212,303) - -
Investing activities
Dividends received from Bank 361,306 135,259 46,200
Investment in the Bank - (4,470,978) -
Investment in Guaranty
Capital Trust (6,900,000) - -
Net cash provided (absorbed) by
investing activities (6,538,694) (4,335,719) 46,200
Financing activities
Cash dividends paid on
common stock (360,816) (135,259) (46,200)
Issuance of subordinate debt 7,113,425 - -
Issuance of common stock - 4,470,978 -
Net cash provided (absorbed)
by financing activities 6,752,609 4,335,719 (46,200)
Increase in cash 1,612 - -
Cash, beginning of period 10,000 10,000 10,000
Cash, end of period $ 11,612 $ 10,000 $ 10,000
</TABLE>
44
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: March 30, 1999 By: /s/ Thomas P. Baker
---------------------------------------------
Thomas P. Baker
President, Chief Executive Officer
and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thomas P. Baker President, Chief Executive March 30, 1999
- ------------------------------------- Officer and Director
Thomas P. Baker (Principal Executive Officer)
/s/ L. Benjamin Johnson, II Vice President and Controller (Principal March 29, 1999
- ------------------------------------- Financial and
L. Benjamin Johnson, III Accounting Officer)
/s/ Douglas E. Canton Chairman of the Board March 30, 1999
- -------------------------------------
Douglas E. Caton
/s/ Harry N. Lewis Vice Chairman of the Board March 30, 1999
- -------------------------------------
Harry N. Lewis
- ------------------------------------- Director March __, 1999
Henry J. Browne
- ------------------------------------- Director March __, 1999
Jason I. Eckford, Jr.
- ------------------------------------- Director March __, 1999
Robert P. Englander
/s/ John R. Metz
- ------------------------------------- Director March 30, 1999
John R. Metz
- ------------------------------------- Director March __, 1999
James R. Sipe, Jr.
/s/ Oscar W. Smith Jr.
- ------------------------------------- Director March 30, 1999
Oscar W. Smith, Jr.
/s/ John B. Syer
- ------------------------------------- Director March 30, 1999
John B. Syer
</TABLE>
<PAGE>
EXHIBIT INDEX
Number Document
3.1 Amended and Restated Articles of Incorporation of
Guaranty Financial Corporation (restated in
electronic format), attached as Exhibit 3.1 to the
Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1998, incorporated herein by
reference.
3.2 Bylaws of Guaranty Financial Corporation, attached
as Exhibit 3.1 to the Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1998,
incorporated herein by reference.
10.1 Guaranty Financial Corporation 1991 Incentive Plan
(as amended), attached as Exhibit A to the
Registrant's Definitive Proxy Statement for the 1998
Annual Meeting of Shareholders, incorporated herein
by reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
Exhibit 21
Subsidiaries of Guaranty Financial Corporation
Name of Subsidiary State of Organization
------------------ ---------------------
Guaranty Bank Virginia
- GMSC, Inc. Virginia
- Guaranty Investment Corp. Virginia
Guaranty Capital Trust I Delaware
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,526,732
<INT-BEARING-DEPOSITS> 6,211,701
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,000,000
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 2,093,827
<INVESTMENTS-MARKET> 2,187,000
<LOANS> 162,369,285
<ALLOWANCE> 1,002,000
<TOTAL-ASSETS> 217,019,806
<DEPOSITS> 172,805,284
<SHORT-TERM> 1,008,750
<LIABILITIES-OTHER> 554,581
<LONG-TERM> 0
0
6,900,000
<COMMON> 1,877,159
<OTHER-SE> 10,677,112
<TOTAL-LIABILITIES-AND-EQUITY> 12,554,271
<INTEREST-LOAN> 11,462,716
<INTEREST-INVEST> 1,829,428
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,060,266
<INTEREST-DEPOSIT> 6,184,500
<INTEREST-EXPENSE> 7,408,975
<INTEREST-INCOME-NET> 5,651,291
<LOAN-LOSSES> 184,200
<SECURITIES-GAINS> 1,062,670
<EXPENSE-OTHER> 5,792,815
<INCOME-PRETAX> 1,640,479
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 624,200
<CHANGES> 0
<NET-INCOME> 1,016,279
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.61
<LOANS-NON> 1,686,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 899,000
<CHARGE-OFFS> 120,000
<RECOVERIES> 3,000
<ALLOWANCE-CLOSE> 1,002,000
<ALLOWANCE-DOMESTIC> 1,002,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
