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, 1999
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
$18,372,136.
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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 13,
2000 was approximately $12,935,255. (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 13, 2000
was 1,961,727.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2000 Annual Meeting of Shareholders - Part III
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TABLE OF CONTENTS
PART I
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Page
ITEM 1. DESCRIPTION OF BUSINESS............................................. 4
ITEM 2. DESCRIPTION OF PROPERTY............................................. 12
ITEM 3. LEGAL PROCEEDINGS................................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.............................................. 13
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION............................... 14
ITEM 7. FINANCIAL STATEMENTS................................................ 34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 34
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT........................................ 34
ITEM 10. EXECUTIVE COMPENSATION.............................................. 34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................ 34
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 35
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.............................. 35
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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. Guaranty's Common Stock is
quoted on The Nasdaq National Market under the symbol "GSLC".
The Bank is a community bank that provides a broad range of commercial and
retail banking services. Guaranty's principal business activities are attracting
checking and savings deposits from local businesses and the general public
through its retail banking offices and originating, servicing, investing in and
selling loans. Of Guaranty's $211.0 million of gross loans outstanding at
December 31, 1999, 31.4% represented construction and land loans, 24.9%
represented commercial business loans, and 29.8% represented residential first
mortgages. Guaranty also lends funds to retail banking customers by means of
home equity, installment loans, and multi-family dwellings. In addition,
Guaranty offers 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, Virginia. Charlottesville and its
surrounding 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 eight
full service retail branches, which serve Charlottesville, Albemarle County,
Fluvanna County, Henrico County and Harrisonburg, Virginia.
Competition
Guaranty faces strong competition for loans and deposits. Competition for loans
comes primarily from commercial banks and mortgage bankers who also make loans
in the Bank's market area. The Bank competes for loans principally on the basis
of the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers.
Guaranty faces substantial competition for deposits from commercial banks, money
market and mutual funds, credit unions and other investment vehicles. The
ability of Guaranty to attract and retain deposits depends on its ability to
provide an investment opportunity that satisfies the requirements of investors
as to rate of return, liquidity, risk and other factors. Guaranty competes for
these deposits by offering a variety of deposit products at competitive rates
and convenient business hours.
Many of our competitors have 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.
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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 position and level of
experience. The risk associated with real estate mortgage loans, commercial 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.
Guaranty is implementing a loan review process that 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 senior officers, meets as necessary to review all loan
applications in excess of $250,000. A Directors Loan Committee, which currently
consists of five directors (any two of whom may act), 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. Real estate is
appraised by independent fee appraisers who have been pre-approved by the Board
of Directors. Loans are submitted to the underwriting department for review. All
conforming loans including HUD/FHA, VA and applicable VHDA loans are
underwritten and acted upon within loan administration requiring two signatures
of approval.
In the normal course of business, Guaranty makes various commitments and incurs
certain contingent liabilities which are disclosed but not reflected in its
annual financial statements, including commitments to extend credit. At December
31, 1999, commitments to extend credit totaled $66.1 million.
Construction Lending
Guaranty makes local construction loans, primarily residential, and land
development loans. The construction loans are secured by the property for which
the loan was obtained. At December 31, 1999, construction and land loans
outstanding were $66.2 million, or 31.4%, of gross loans. Approximately 90% of
these loans are concentrated in the Richmond and Charlottesville, Virginia
markets. The average life of a construction loan is approximately nine months
and they reprice monthly to meet the market, normally prime plus one and
one-half 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. Another risk involved in
construction lending is
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attributable to the fact that loan funds are advanced upon the security of the
home or land under construction, which is of estimated 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 property as
security for its construction loans and personal guarantees from the borrower's
principal owners.
Commercial Business Loans
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but have higher yields. To manage these risks,
Guaranty generally secures appropriate collateral and 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, 1999, commercial loans totaled $52.6
million, or 24.9% of the total loan portfolio.
Commercial Real Estate Lending
Commercial real estate loans are secured by various types of commercial real
estate in Guaranty's market area, including multi-family residential buildings,
commercial buildings and offices, small shopping centers and churches. At
December 31, 1999, commercial real estate loans aggregated $12.3 million or 5.8%
of Guaranty's gross loans.
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 makes loans secured by one-to-four-family residences, all of which are
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. Guaranty makes 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.
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Although, due to competitive market pressures, the Bank does originate
fixed-rate mortgage loans, it currently underwrites and documents the majority
of such loans to permit their sale in the secondary mortgage market. At December
31, 1999, $18.3 million, or 8.7%, 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, 1999, $44.5
million, or 21.1%, 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.
Consumer Lending
Guaranty offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit, automobile loans, deposit account
loans, installment and demand loans, letters of credit, and home equity loans.
At December 31, 1999, Guaranty had consumer loans of $17.2 million or 8.1% of
gross loans. Such loans are generally made to customers with which Guaranty had
a pre-existing relationship. Guaranty originates all of its consumer loans in
its market area and intends to continue its consumer lending in this geographic
area. Most of the consumer loans are tied to the prime lending rate and reprice
daily.
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. Guaranty
has very few unsecured consumer loans.
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 from primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of
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primary consideration, the underwriting process also includes an analysis of the
value of the security in relation to the proposed loan amount.
Employees
At December 31, 1999, Guaranty had the equivalent of 99 full-time employees, and
currently has five part-time employees. None of Guaranty's employees are
represented by any collective bargaining unit.
Supervision and Regulation
The discussion below is only a summary of the principal laws and regulations
that comprise the regulatory framework applicable to Guaranty and the Bank. The
descriptions of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, do not purport to be complete and are
qualified in their entirety by reference to applicable laws and regulations.
As a bank holding company, Guaranty is subject to regulation under the Bank
Holding Company Act of 1956 (as amended, the "BHCA") and the examination and
reporting requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). Under the BHCA, a bank holding company may not
directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any additional bank or merge
or consolidate with another bank holding company without the prior approval of
the Federal Reserve Board. The BHCA also generally limits the activities of a
bank holding company to that of banking, managing or controlling banks, or any
other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
The activities permissible to bank holding companies and their affiliates were
substantially expanded by the Gramm-Leach-Bliley Act, which the President signed
on November 12, 1999. Gramm-Leach-Bliley repeals the anti-affiliation provisions
of the Glass-Steagall Act to permit the common ownership of commercial banks,
investment banks and insurance companies. Under Gramm-Leach-Bliley, a bank
holding company can elect to be treated as a financial holding company. A
financial holding company may engage in any activity and acquire and retain any
company that the Federal Reserve determines to be financial in nature. A
financial holding company also may engage in any activity that is complementary
to a financial activity and does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
Federal Reserve must consult with the Secretary of the Treasury in determining
whether an activity is financial in nature or incidental to a financial
activity.
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,
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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.
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,
1999, Guaranty's Tier 1 capital and total capital ratios were 9.43% and 11.22%,
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
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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 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, 1999, 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.
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
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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.
Forward Looking Statements
Certain statements in this annual report 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.
11
<PAGE>
Item 2. Description of Property.
As of March 1, 2000, Guaranty conducted its business from its main office in
Charlottesville, Virginia and seven branch offices. The following table provides
certain information with respect to these properties:
Date Facility
Location Opened Lease Arrangements
- -------- ------ ------------------
Main Office:
1658 State Farm Boulevard 1996 Owned by Guaranty
Charlottesville, Virginia
Branch Offices:
Downtown Mall 1992 Lease expires in 2002, subject
520 East Main Street to Guaranty's right to renew
Charlottesville, Virginia for three additional five-year
terms
Barracks Road 1994 Lease expires in 2004, subject
1924 Arlington Boulevard to Guaranty's right to renew
Charlottesville, Virginia for two additional five-year
terms
West Main 1998 Lease expires in 2003, subject
2211 West Main Street to Guaranty's right to renew
Charlottesville, Virginia for two additional five-year
terms
Route 29 North & Rio Road 1996 Owned by Guaranty
1700 Seminole Trail
Charlottesville, Virginia
Harrisonburg 1997 Owned by Guaranty
1925 Reservoir Street
Harrisonburg, Virginia
Lake Monticello 1998 Owned by Guaranty
Route 53 & Turkey Sag Road
Lake Monticello, Virginia
Henrico County 1999 Owned by Guaranty
3498 Lauderdale Drive
Richmond, Virginia
12
<PAGE>
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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Guaranty's Common Stock is listed on the Nasdaq National Market under the symbol
"GSLC". 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, 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
Fiscal Year Ended December 31, 1999:
1st quarter 13.625 11.25 .06
2nd quarter 11.875 10.375 .06
3rd quarter 11.75 10.125 .06
4th quarter 10.75 8.00 .06
</TABLE>
Guaranty generally pays 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, 1999, the Bank had available for
distribution as dividends to Guaranty approximately $2.0 million.
As of March 13, 2000, Guaranty had approximately 1,194 shareholders of record.
13
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following commentary discusses major components of Guaranty's business and
presents an overview of its consolidated financial position and results of
operations at December 31, 1999 and 1998 and for the years ended December 31,
1999, 1998 and 1997. 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
o On November 17, 1999, Guaranty Financial Corporation, in an effort to
increase its regulatory capital base, completed a secondary offering of
460,000 shares of common stock with net proceeds after offering expenses of
$3,693,000.
o Guaranty opened its eighth retail branch during 1999, in Wellesley, a
planned community in Henrico County, Virginia. With the opening of this
branch, Guaranty is beginning to expand its market area into the western
Richmond, Virginia market area.
o As previously reported, during the third quarter Guaranty took steps to
restructure its balance sheet in order to reduce its interest rate risk. As
part of this restructuring, the Bank sold approximately $13 million in
long-term corporate bonds which resulted in a net after tax loss of
$857,000. The sale of these bonds reduced the Bank's exposure to increases
in interest rates. Also, as part of the restructuring, the Bank sold a
significant portion of its residential loan servicing portfolio resulting
in a net loss of approximately $31,000. The Bank sold the servicing to
reduce its overall servicing asset, which is very sensitive to changes in
the interest rate environment.
NET INCOME
Net income for the year ended December 31, 1999 was $4,400, a 99.5% decrease
when compared to calendar year 1998 earnings of $1,016,000 ($.68 per diluted
share). These decreased earnings were primarily a result from the sale of
approximately $13 million in long term corporate bonds which resulted in a net
after tax loss of $857,000. This action was taken to reduce market rate risk in
Guaranty's balance sheet and improve net interest margin in the future. Also,
during 1999, Guaranty increased its loan loss provision by approximately
$300,000.
Net income for the year ended December 31, 1998 was $1,016,000 ($.68 per share),
a 13.3% increase when compared to calendar year 1997 earnings of $898,000 ($.61
per share). These increased earnings were 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 the one-time expenses related
to the conversion to a state chartered bank.
14
<PAGE>
NET INTEREST INCOME
Net interest income is the major component of Guaranty's earnings and is equal
to the amount by which interest income exceeds interest expense. Earning assets
consist primarily of loans and securities, while deposits and borrowings
represent the major portion of interest bearing liabilities. Changes in the
volume and mix of assets and liabilities, as well as changes in the yields and
rates paid, determine changes in net interest income. The net interest margin is
calculated by dividing net interest income by average earning assets.
Net interest income was $7.7 million for the year ended December 31, 1999, 36.8%
greater than the $5.7 million reported during the year ended December 31, 1998.
This improvement in the net interest income was primarily due to an increase in
the volume of prime based residential construction lending including builder
lines of credit, commercial loan increases, and an increase in income from
securities held for sale, coupled with the decline in the average cost of
interest bearing liabilities. Average loans increased 40.4% for the year ended
December 31, 1999. The interest income from investments increased 53.0% during
the year ended December 31, 1999. Net interest margin decreased 30 basis points
to 3.28% at December 31, 1999 which was caused by a reduction in the average
yield on loans, and fee income associated with commercial and construction
lending. The average cost of interest bearing deposits declined from 4.87% in
1998 to 4.60% in 1999. The cost of average total interest bearing liabilities
during the year ended December 31, 1999 declined from 5.18% in 1998 to 4.87% in
1999. The average rate paid on savings accounts declined 66 basis points from
2.97% in 1998 to 2.31% in 1999. The average rate paid on certificates of
deposits declined 22 basis points from 5.41% in 1998 to 5.19% in 1999.
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 65 basis points from 8.50% in 1997 to 9.15% in 1998. The
average yield on interest bearing deposits declined from 5.05% in 1997 to 4.87%
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.
15
<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>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
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 $32,278 $2,157 6.68% $18,388 $1,290 7.02% $22,637 $1,590 7.02%
Loans 184,340 15,765 8.55% 122,751 11,231 9.15% 89,222 7,584 8.50%
Interest bearing deposits
in other banks 8,928 450 5.04% 10,500 539 5.13% 5,605 346 6.17%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets/total interest income 225,546 18,372 8.15% 151,639 13,060 8.61% 117,464 9,520 8.10%
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 5,484 2,450 1,898
Premises and equipment 8,399 6,519 5,508
Other assets 5,256 3,001 2,624
Less allowance for loan losses (1,122) (1,104) (890)
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 18,017 10,866 9,140
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $243,563 $162,505 $126,604
==================================================================================================================================
Liabilities and stockholders' equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts $44,906 $1,571 3.50% $24,936 $862 3.46% $11,110 $289 2.60%
Savings 10,968 253 2.31% 8,551 254 2.97% 5,654 190 3.36%
Certificates of deposit 126,015 6,541 5.19% 93,615 5,068 5.41% 80,779 4,443 5.50%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 181,889 8,365 4.60% 127,102 6,184 4.87% 97,543 4,922 5.05%
- ----------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other borrowings 34,955 1,969 5.63% 13,893 899 6.47% 14,070 804 5.71%
Bonds payable 1,468 305 20.78% 2,142 325 15.17% 2,583 312 12.08%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities/total interest expense 218,312 10,639 4.87% 143,137 7,408 5.18% 114,196 6,038 5.29%
- ----------------------------------------------------------------------------------------------------------------------------------
Non interest bearing liabilities:
Demand deposits 10,232 5,338 1,658
Other liabilities 3,583 3,531 903
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 232,127 152,006 116,757
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 11,436 10,499 9,847
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $243,563 $162,505 $126,604
==================================================================================================================================
Interest spread (1) 3.28% 3.43% 2.81%
Net interest income/net interest
margin (2) $7,733 3.43% $5,652 3.73% $3,482 2.96%
==================================================================================================================================
</TABLE>
(1) Interest spread is the average yield earned on earning assets, less the
average rate incurred on interest bearing liabilities
(2) Net interest margin is net interest income, expressed as a percentage of
average earning assets.
16
<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>
Year Ended December 31, 1999 Year Ended December 31, 1999
compared to compared to
Year Ended December 31, 1998 Year Ended December 31, 1998
Change Due To: Change Due To:
- --------------------------------------------------------------------------------------------------------------
Increase Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities ($63) $930 $867 $0 ($300) ($300)
Loans (737) 5,271 4,534 580 3,067 3,647
Interest bearing deposits
in other banks (9) (80) (89) (58) 251 193
- ------------------------------------------------------------------------------------------------------------
Total interests income (809) 6,121 5,312 522 3,018 3,540
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts 10 699 709 96 477 573
Savings (56) 55 (1) (22) 86 64
Certificates of deposit (206) 1,679 1,473 (73) 699 626
- ------------------------------------------------------------------------------------------------------------
Total interest bearing deposits (252) 2,433 2,181 1 1,262 1,263
FHLB advances and other (117) 1,187 1,070 107 (12) 95
Bonds payable 120 (140) (20) 66 (53) 13
- ------------------------------------------------------------------------------------------------------------
Total interest expense (249) 3,480 3,231 174 1,197 1,371
- ------------------------------------------------------------------------------------------------------------
Net interest income ($560) 2,641 $2,081 $348 $1,821 $2,169
============================================================================================================
</TABLE>
INTEREST SENSITIVITY
An important element of both earnings performance and liquidity is the
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
maturing or repricing within a specific time interval. The gap can be managed by
repricing assets or liabilities, by selling investments, 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, 1999, Guaranty had $32.9 million more liabilities than assets
that reprice within one year and therefore was in a liability-sensitive position
compared to the same period in the prior year where there were $17.0 million
more assets than liabilities that repriced within one year. A
liability-sensitive position or a negative gap can adversely affect earnings in
a period of rising interest rates. This negative position is the result of
investments in securities with a maturity of over five years coupled with fixed
rate borrowing and certificates of deposit reaching maturity in one year or less
and short term borrowings used to fund loans also maturing in one year or less.
Guaranty has an Asset/Liability Committee ("ALCO"), which 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,
17
<PAGE>
investment and trading activity, along with any other significant transactions
are managed by the CEO with input from other ALCO members.
The following table presents the amounts of Guaranty's interest sensitive assets
and liabilities that mature or reprice in the periods indicated.
<TABLE>
<CAPTION>
December 31, 1999
Maturing or Repricing In:
- ----------------------------------------------------------------------------------------------------------
3 Months 4-12 1-5 Over
(Dollars in thousands) or less Months Years 5 Years
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-sensitive assets:
Loans $85,191 $61,690 $34,457 $29,686
Investments and mortgage-backed securities(1) - 1,750 1,086 22,197
Deposits at other institutions 7,173 - - -
- ----------------------------------------------------------------------------------------------------------
Total interest-sensitive assets 92,364 63,440 35,543 51,883
==========================================================================================================
Cumulative interest-sensitive assets 92,364 155,804 191,347 243,230
==========================================================================================================
Interest-sensitive liabilities:
NOW accounts (2) - - - 30,206
Money market deposit accounts 27,888 - - -
Savings accounts 11,203 - - -
Certificates of deposit 30,502 82,281 17,525 -
Borrowed money 16,650 20,000 - -
Bonds payable 34 102 367 400
- ----------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities 86,277 102,383 17,892 30,606
==========================================================================================================
Cumulative interest-sensitive liabilities $ 86,277 $ 188,660 $ 206,552 $ 237,158
==========================================================================================================
Period gap $ 6,087 $ (38,943) $ 17,651 $ 21,277
Cumulative gap $ 6,087 $ (32,856) $ (15,205) $ 6,072
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 107.06% 82.58% 92.64% 102.56%
Ratio of cumulative gap to total assets 2.35% (12.67%) (5.86%) 2.34%
</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
Of Guaranty's commercial and construction loans with a maturity of more than one
year, approximately $3.9 million have fixed interest rates and $21.8 million
have variable interest rates.
INVESTMENTS
Total available for sale investment securities decreased 17.5% to $22.2 million
at December 31, 1999 from $26.9 million at December 31, 1998. The overall
decrease was primarily a result of management's efforts to reduce market rate
risk in Guaranty's balance sheet.
18
<PAGE>
The following table shows the amortized cost and fair market value of investment
securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Cost Market Cost Market Cost Market
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity
Mortgage-backed securities $ 1,086 $ 1,103 $ 2,094 $ 2,187 $ 2,745 $ 2,759
Other 250 250 250 250 100 100
- ------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 1,336 1,353 2,344 2,437 2,845 2,859
- ------------------------------------------------------------------------------------------------------------------------
Available for sale
Corporate bonds 19,735 17,417 26,463 26,581 11,415 11,474
U.S. Government Obligations - - 301 328 129 129
Mortgage-backed securities 4,898 4,780 - - - -
- ------------------------------------------------------------------------------------------------------------------------
Total available for sale 24,633 22,197 26,764 26,909 11,544 11,603
- ------------------------------------------------------------------------------------------------------------------------
Trading
U.S. Government Obligations - - 1,000 1,001 1,031 1,032
- ------------------------------------------------------------------------------------------------------------------------
Total Trading - - 1,000 1,001 1,031 1,032
- ------------------------------------------------------------------------------------------------------------------------
Other
Federal Home Loan Bank Stock 1,500 1,500 1,300 1,300 860 860
- ------------------------------------------------------------------------------------------------------------------------
Total $ 27,469 $ 25,050 $ 31,408 $ 31,647 $ 16,280 $ 16,354
========================================================================================================================
</TABLE>
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
FHLMC mortgage-backed securities $ 1,086 4.34% $ 2,094 6.64% $ 2,745 16.80%
FNMA mortgage-backed securities 4,781 19.10 - - - -
Corporate bonds 17,096 68.29 26,581 84.24 11,474 70.23
Treasury notes 250 1.00 1,250 3.96 1,082 6.62
Other 320 1.28 328 1.04 177 1.09
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 23,533 94.01 30,253 95.88 15,478 94.74%
Other :
FHLB stock 1,500 5.99 1,300 4.12 860 5.26
- -------------------------------------------------------------------------------------------------------------------------------
Total Investment securities $ 25,033 100.00% $ 31,553 100.00% $ 16,338 100.00%
===============================================================================================================================
</TABLE>
19
<PAGE>
LOANS
Net loans consist of total loans minus undisbursed loan funds, deferred loan
fees and the allowance for loan losses. Net loans were $205.3 million at
December 31, 1999, an increase of 26.4% over December 31, 1998. Net loans were
$162.4 million at December 31, 1998, an increase of 62.9% over net loans at
December 31, 1997.
The average balance of total loans as a percentage of average assets was 75.7%,
and 75.5% for the years ended December 31, 1999 and 1998. respectively.
The following table sets forth the composition of Guaranty's loan portfolio in
dollars at the dates indicated.
Loan Portfolio
<TABLE>
<CAPTION>
December 31, June 30,
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage Loans:
Residential $ 62,796 $ 66,369 $ 66,035 $ 67,016 $ 66,136 $ 62,175
Commercial 12,295 13,293 16,641 8,486 7,670 4,508
Construction and land loans 66,181 60,088 18,263 5,220 8,813 8,887
- -----------------------------------------------------------------------------------------------------------------
Total real estate 141,272 139,750 100,939 80,722 82,619 75,570
Commercial business loans 52,561 23,692 - - - -
Consumer loans 17,191 9,630 6,705 4,175 5,386 4,580
- -----------------------------------------------------------------------------------------------------------------
Total loans receivable 211,024 173,072 107,644 84,897 88,005 80,150
- -----------------------------------------------------------------------------------------------------------------
Less:
Undistributed loans in process 4,382 9,588 6,752 2,467 2,824 3,858
Deferred fees 40 113 282 290 314 323
Allowance for losses 1,203 1,002 935 870 786 747
- -----------------------------------------------------------------------------------------------------------------
Total net items 5,625 10,703 7,969 3,627 3,924 4,928
- -----------------------------------------------------------------------------------------------------------------
Total loans receivable, net $ 205,399 $ 162,369 $ 99,675 $ 81,270 $ 84,081 $ 75,222
==================================================================================================================
</TABLE>
The growth of our loan portfolio and the change in its composition reflects our
growth strategy and the conversion of Guaranty Bank from a savings association
to a commercial bank. At June 30, 1996, we had no commercial business loans.
Construction loans accounted for only 10.0% of gross loans, while residential
mortgage loans represented 75.2% of gross loans. In contrast, at December 31,
1999, commercial business loans, construction loans and residential mortgage
loans, respectively represented 24.9%, 54.2%, and 29.8% of gross loans. The
dollar amount of Guaranty's residential mortgage loans has been relatively
constant since June 30, 1996. This does not reflect a decision to de-emphasis
mortgage lending. Rather, it reflects a decision in 1997 to sell all new
conforming fixed-rate mortgage loans in the secondary mortgage market.
20
<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,
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate
Residential $ 18,277 $ 20,206 $ 26,514 $ 26,061 $ 28,907 $ 23,577
Commercial 1,155 3,623 - -
Construction and land loans - - 37 138 339 69
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate 19,432 23,829 26,551 26,199 29,246 23,646
- --------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 21,681 4,178 - -
Consumer loans 2,825 242 3,099 1,396 597 736
- --------------------------------------------------------------------------------------------------------------------------------
Total fixed-rate loans 43,938 28,249 29,650 27,595 29,843 24,382
- --------------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
Real Estate
Residential 44,519 46,163 39,521 40,955 37,229 38,598
Commercial 11,140 9,670 16,641 8,486 7,670 4,508
Construction and land loans 66,181 60,088 18,226 5,082 8,474 8,818
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate 121,840 115,921 74,388 54,523 53,373 51,924
Commercial business loans 30,880 19,514 - -
Consumer loans 14,366 9,388 3,606 2,779 4,789 3,844
- --------------------------------------------------------------------------------------------------------------------------------
Total adjustable-rate loans 167,086 144,823 77,994 57,302 58,162 55,768
- --------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 211,024 173,072 107,644 84,897 88,005 80,150
- --------------------------------------------------------------------------------------------------------------------------------
Less:
Undisbursed loans in process 4,382 9,588 6,752 2,467 2,824 3,858
Deferred loan fees 40 113 282 290 314 323
Allowances for losses 1,203 1,002 935 870 786 747
- --------------------------------------------------------------------------------------------------------------------------------
Total net items 5,625 10,703 7,969 3,627 3,924 4,928
- --------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $ 205,399 $ 162,369 $ 99,675 $ 81,270 $ 84,081 $ 75,222
================================================================================================================================
</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. Banking 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 Guaranty to sufficient risk to warrant
classification in one of the aforementioned categories but possess potential
weaknesses are required to be designated "special mention" by management. On the
basis of management's review of its assets, at December 31, 1999, Guaranty had
classified $2.9 million of its assets as
21
<PAGE>
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.
The following table reflects the composition of nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,310 $ 1,686 $ 1,436 $ 1,670 $ 1,458 $ 1,556
Restructured loans - - - 11 11 12
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 1,310 1,686 1,436 1,681 1,469 1,568
- -----------------------------------------------------------------------------------------------------------------------------------
Foreclosed assets 843 488 65 51 41 122
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,153 $ 2,174 $ 1,501 $ 1,732 $ 1,510 $ 1,690
===================================================================================================================================
Loans past due 90 or more days and
accruing interest $ 93 $ 106 $ 189 $ - $ 19 $ 1
Non-performing loans to total loans, at
period end 0.62% 0.97% 1.42% 1.98% 1.67% 2.06%
Non-performing assets to period end
total loans and foreclosed assets 1.02% 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 15 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. In most cases, deficiencies are cured promptly.
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. Semi-annually 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.
22
<PAGE>
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 December 31, December 31, Year Ended
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $1,002 $935 $870 $788 $747 $754
Provision charged to operations 486 184 122 92 57 (10)
Charge-offs:
Real estate 122 120 57 10 39 -
Consumer - - - - - 1
Commercial 165 - - -
Recoveries:
Real estate - 3 - - 19 -
Consumer 2 - - -
Commercial - - - - 4 4
- ------------------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 285 117 57 10 16 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,203 $1,002 $935 $870 $788 $747
====================================================================================================================================
Allowance for loan losses to period
end total loans 0.57% 0.58% 0.93% 1.06% 0.93% 0.98%
Allowance for loan losses to nonaccrual
loans 91.83% 59.43% 67.20% 52.10% 54.05% 48.01%
Net charge-offs to average loans 0.15% 0.10% 0.06% 0.01% 0.02% 0.00%
</TABLE>
Provision for loan losses
For the year ended December 31, 1999, the provision for loan losses was
$486,000, compared to $184,200 for the year ended December 31, 1998. The
increase in the provision for loan losses during the year ended December 31,
1999 is due to Guaranty's continued movement towards commercial business, and
construction and land development lending which carries a higher risk of loss
than traditional mortgage lending.
Guaranty monitors its loan loss allowance monthly and makes provisions as
necessary. Management believes that the level of Guaranty's loan loss allowance
is adequate for its loan portfolio size and mix.
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.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended December, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
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 $ 78 29.77% $ 101 38.35% $ 477 61.35%
Commercial real estate 109 5.84 144 7.68 212 15.46
Construction and land 383 31.37 384 34.72 52 16.97
Commercial business 466 24.92 258 13.69 - -
Consumer and other loans 167 8.10 115 5.56 43 6.22
Unallocated - - - 151 -
- ----------------------------------------------------------------------------------------------------------
Total $ 1,203 100.00% $ 1,002 100.00% $ 935 100.00%
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
1996 1996 1995
- --------------------------------------------------------------------------------------------------------
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 $ 471 78.94% $ 327 75.15% $ 311 77.57%
Commercial real estate 179 10.00 194 8.72 220 5.63
Construction and land 38 6.15 70 10.01 86 11.09
Commercial business - - - - - -
Consumer and other loans 13 4.91 40 6.12 32 5.71
Unallocated 169 - 157 - 98 -
- --------------------------------------------------------------------------------------------------------
Total $ 870 100.00% $ 788 100.00% $ 747 100.00%
========================================================================================================
</TABLE>
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. The following table presents information on the sources and
amounts of non-interest income.
24
<PAGE>
Year Ended December 31,
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Non Interest Income
- ------------------------------------------------------------------------------
(Dollars in thousands)
Servicing income (loss)
Gross servicing income $ 560 $ 452 $ 526
Amortization expense (563) (169) (77)
Impairment adjustment 341 (342) -
- ------------------------------------------------------------------------------
Net servicing income (loss) 338 (59) 449
Gain (loss)on sale of loans and securities (1,211) 1,405 1,067
Service charges on checking 578 424 166
Late charges and other comsumer fees 105 69 82
Annuity and investment sales 140 61 12
Other 175 66 92
- ------------------------------------------------------------------------------
Total $ 125 $ 1,966 $ 1,868
- ------------------------------------------------------------------------------
For the year ended December 31, 1999, non-interest income was $125,000 compared
to $2.0 million for the year ended December 31, 1998. This decrease was a result
of gains on sales of securities in 1998 of $1.4 million while a pretax loss of
approximately $1.2 million occurred during 1999 due to the sale of approximately
$13 million of available for sale securities. This loss was partially offset by
a market value recovery recognized on the servicing asset of approximately
$341,000 as well as increases in income from service charges on checking
accounts and other related fees. For the year ended December 31, 1998,
non-interest income was $2.0 million compared to $1.9 million for the year ended
December 31, 1997. During 1998 there were increased fees with the addition of
the commercial loan department and service charges on commercial checking
accounts which carry higher fees and an increase in fees on other checking
accounts. These increases were offset by a market value impairment recognized on
the servicing asset for $342,000.
Loans and securities sales were a result of the continued strategy of selling
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 1999 Guaranty sold the majority of its servicing portfolio, with the
transfer of the loans occurring in February 2000, for approximately $2.8 million
resulting in a loss of approximately $31,000, as part of its balance sheet
restructuring. Guaranty's mortgage loan servicing rights ("MSR's") accumulated
as a by-product of its mortgage lending business. Generally, the value of
servicing rights moves inversely with the value of interest bearing securities
as market interest rates change. Guaranty has found that the value of servicing
rights is extremely sensitive to changes in market interest rates, but tends to
fall faster as interest rates decline than interest rates rise. Increases and
decreases in the value of servicing rights are treated as income or expense.
Because Guaranty cannot control or predict changes in the value of servicing
rights or the rate of amortization as loans prepay, it decided to sell the
mortgage loan servicing business.
Historically, mortgage loan servicing was a significant business for Guaranty.
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
25
<PAGE>
their fair value. At December 31, 1999 and 1998 MSRs totaled $568,000 and
$1,978,000, respectively. Impairment on these rights was $1,000 and $342,000 for
the years ended December 31, 1999 and 1998, respectively. See "Financial
Statements - Summary of Accounting Policies." At December 31, 1999 and 1998,
loans serviced for others totaled $241.9 million and $173.1 million,
respectively. Approximately $189,000,000 of loans serviced for others at
December 31, 1999 were sold to a third party with transfer of the loans having
occurred in February 2000.
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 years ended December 31, 1999 and 1998 Guaranty sold $80.0 million
and $60.3 million, respectively, of loans and securitized loans. The sale of
fixed rate product creates liquidity.
Guaranty also traded 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 $ 30.8 million and $105.9 million, during the years ended December 31,
1999 and 1998 respectively. Guaranty experienced losses of $304,000 and
$302,000, respectively on such sales for the years ended December 31, 1999 and
1998, 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
$40,000 and $113,000 at December 31, 1999 and 1998, respectively.
NON-INTEREST EXPENSES
For the year ended December 31, 1999, non-interest expenses were $7.4 million,
compared to $5.8 million for the year ended December 31, 1998. The $1.6 million
increase was due to an increase in personnel, occupancy costs, and data
processing associated with the overall growth of the Bank including the opening
of an eighth branch during the year. For the year ended December 31, 1998,
non-interest expenses were $5.8 million compared to $3.8 million for the year
ended December 31, 1997. This increase was due primarily to increased costs
associated with the expanded branch network and the new commercial loan
department.
Year Ended December 31,
- ------------------------------------------------------------------------
Non Interest Expense 1999 1998 1997
- ------------------------------------------------------------------------
(Dollars in thousands)
Personnel $ 3,998 $ 3,089 $ 2,011
Occupancy 918 783 524
Data processing 762 585 422
Marketing and professional fees 471 513 426
Other 1,216 823 460
- ------------------------------------------------------------------------
Total $ 7,365 $ 5,793 $ 3,843
- ------------------------------------------------------------------------
INCOME TAXES
Income tax expense for the years ended December 31, 1999, 1998, and 1997, was
$2,300, $624,000, and $486,000 respectively. The decreases and increases are a
direct result of earnings levels for the respective year ends.
26
<PAGE>
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 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 has expanded to provide products and services for small businesses and
brokered deposits. Guaranty's principal use of deposits is to originate loans
and fund purchases of investment securities.
At December 31, 1999, deposits were $199.6 million, up 15.5% from $172.8 million
at December 31, 1998. The deposit growth is a reflection of branch office
growth, 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.
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by Guaranty at the dates indicated.
- --------------------------------------------------------------------------------
December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Statement savings accounts $ 11,203 $ 9,863 $ 6,434
Demand deposit accounts 30,206 23,433 12,037
Money market accounts 27,878 22,319 4,000
30-to-180-day certificates 3,250 825 1,326
Nine-month certificates - - 1,638
One-to five-year fixed-rate certificates 119,350 106,953 87,467
Eighteen-month prime rate certificates 7,708 9,412 45
- --------------------------------------------------------------------------------
Total $ 199,595 $ 172,805 $ 112,947
================================================================================
27
<PAGE>
The following table contains information pertaining to the average amount of and
the average rate paid on each of the following deposit categories for the
periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Noninterest bearing
demand deposits $ 10,232 0.00% $ 5,338 0.00% $ 1,658 0.00%
Interest bearing
demand deposits 44,906 3.50% 24,936 3.46% 11,110 2.59%
Savings deposits 10,968 2.31% 8,551 2.97% 5,654 3.36%
Time deposits 126,015 5.19% 93,615 5.41% 80,779 5.51%
- --------------------------------------------------------------------------------------------------------
Total deposits $ 192,121 4.35% $ 132,440 4.67% $ 99,201 4.97%
========================================================================================================
</TABLE>
The variety of deposit accounts offered by Guaranty has allowed it to be
competitive in obtaining funds and has allowed it to respond with flexibility
to, although not 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, has been, and will continue to be,
significantly affected by market conditions.
The following table sets forth the deposit flows of Guaranty during the periods
indicated.
- -------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------
Opening balance $ 172,805 $ 112,947 $ 81,401
Net deposits 18,425 53,673 26,624
Interest credited 8,365 6,185 4,922
- -------------------------------------------------------------------------------
Ending balance $ 199,595 $ 172,805 $ 112,947
- -------------------------------------------------------------------------------
Net increase $ 26,790 $ 59,858 $ 31,546
Percent increase 15.50% 53.00% 38.75%
===============================================================================
The following table indicates the amount of Guaranty's certificates of deposits
by time remaining until maturity as of December 31, 1999.
<TABLE>
<CAPTION>
Maturity
- ----------------------------------------------------------------------------------------------------------------
3 Months Over 3 to Over 6 to Over
or less 6 months 12 months 12 months Total
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 21,196 $ 17,612 $ 35,228 $ 15,676 $ 89,712
Certificates of deposit of $100,000 or more 9,306 5,074 24,367 1,849 40,596
- ----------------------------------------------------------------------------------------------------------------
Total certificates of deposits $ 30,502 $ 22,686 $ 59,595 $ 17,525 $ 130,308
================================================================================================================
</TABLE>
28
<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, 1999, $20 million were outstanding to the FHLB.
Guaranty's borrowings also include securities sold under agreements to
repurchase, with mortgage-backed securities or other securities pledged as
collateral. The proceeds are used by Guaranty for general corporate purposes. At
December 31, 1999, Guaranty had $16.6 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 December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Balance:
FHLB Advances $30,000 $26,000 $17,500
Securities sold under
agreements to repurchase 16,650 6,856 5,867
- ------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------
FHLB Advances $26,226 4.88% $9,748 5.57% $10,956 6.18%
Securities sold under
agreements to repurchase 9,387 5.10% 2,336 5.00% 2,007 6.29%
======================================================================================================
</TABLE>
At December 31, 1999, Guaranty had $20.0 million outstanding to the FHLB
compared to $21 million outstanding at December 31, 1998 and no advances were
outstanding at December 31, 1997.
29
<PAGE>
The following table sets forth the balances of Guaranty's short-term borrowings
at the dates indicated.
- -------------------------------------------------------------------------------
December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------
FHLB advances $20,000 $21,000 -
Securities sold under agreements
to repurchase 16,650 1,008 2,989
- -------------------------------------------------------------------------------
Total short-term borrowings $36,650 $22,008 $2,989
===============================================================================
Weighted average interest rate of
short-term FHLB advances 4.88% 5.57% 0.00%
Weighted average interest rate of
securities sold under agreements to
repurchase 6.14% 5.00% 6.29%
===============================================================================
See notes 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 $12.6 million and $10.5 million at
December 31, 1999 and 1998, respectively. Financing activities provided $42.9
million primarily as a result of net proceeds from the sale of common stock of
$3.7 million, a net increase in deposits of $26.8 million and an increase in
securities sold under agreements to repurchase of $15.6 million. Approximately
$4.1 million was provided by operating activities which was primarily a result
of an increase in non-cash items, such as a $1.2 million loss on sale of
available for sale securities, $486,000 in provision for loan loss and
depreciation and amortization of $633,000 along with the cash items such as
prepayments by borrowers for taxes and insurance of $366,000 and other
liabilities of $628,000. In addition, investing activities absorbed
approximately $44.9 million which was primarily a result of a net increase in
loans of approximately $43.8 million.
For the year ended December 31, 1998, cash and cash equivalents were
approximately $10.5 million. 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 for $6.9 million. Approximately $394,000 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 $79.7 million
which was primarily a result of a net increase in loans of approximately $62.8
million, net investment securities purchases of $14.9 million, and purchases of
office properties and equipment of approximately $1.5 million.
30
<PAGE>
Guaranty uses its sources of funds primarily to meet operating needs, to pay
deposit withdrawals and fund loan commitments. At December 31, 1999 and 1998
total approved loan commitments were $4.4 million and $9.6 million respectively.
In addition, at December 31, 1999 and 1998, commitments under unused lines of
credit were $61.7 million and $52.3 million, respectively. At December 31, 1997
the total approved loan commitments outstanding amounted to $14.3 million.
Certificates of deposits scheduled to mature in one year or less at December 31,
1999, 1998 and 1997 totaled $112.8 million, $91.5 million, $77.7 million,
respectively. Management believes that a significant portion of maturing
deposits will remain with Guaranty.
Management intends to fund anticipated loan closings and operating needs during
2000 through cash on hand, 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 during
1999, Guaranty completed a secondary offering of common stock. The proceeds of
$3.7 million, less issuance costs of approximately $447,000 were added to the
Bank's additional paid in capital. During 1998, Guaranty's wholly-owned
subsidiary Guaranty Capital Trust I issued $6.9 million of 7.0% cumulative
convertible trust preferred securities. The proceeds, less issuance costs of
approximately $276,000 were added to the Bank's additional paid in capital.
Guaranty and Bank are subject to regulatory capital requirements of the Federal
Reserve. At December 31, 1999, Guaranty exceeded all such regulatory capital as
shown in the following table.
December 31, 1999
Guaranty Financial Guaranty
Corporation Bank
- --------------------------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------------------------
Tier 1 Capital:
Common stock $ 2,452 $ 2,000
Capital surplus 8,943 9,790
Cumulative preferred securities (2) 5,292 -
Retained earnings 4,479 9,780
- --------------------------------------------------------------------------------
Disallowed intangible assets 57 57
- --------------------------------------------------------------------------------
Total Tier 1 Capital 21,109 21,513
- --------------------------------------------------------------------------------
Tier 2 Capital:
Allowance for loan losses (1) 1,203 1,203
Cumulative preferred securities 2,797 -
- --------------------------------------------------------------------------------
Total Tier 2 Capital 4,000 1,203
- --------------------------------------------------------------------------------
Total Risk Based Capital $ 25,109 $ 22,716
- --------------------------------------------------------------------------------
Risk Weighted Assets $ 223,805 $ 223,805
Capital Ratios:
Tier 1 Risk-based 9.43% 9.61%
Total Risk-based 11.22% 10.15%
Tier 1 Capital to average adjusted total assets 9.29% 8.51%
================================================================================
(1) Limited to 1.25% of risk weighted assets.
(2) Limited to 1/3 of core capital.
31
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES AND SEASONALITY
The financial statements in this document have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation.
ACCOUNTING RULES
In 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, 2000 and
requires application prospectively.
SUBISDIARY ACTIVITIES
The Holding Company has two subsidiaries, 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 Notes to 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 income of $2,400 for the year ended December 31, 1999 and a net loss of
$15,800 for the year ended December 31, 1998.
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 amortized against income as mortgages underlying
the bonds repay. For the years ended December 31, 1999, 1998 and 1997
amortization expense was $156,000, $101,000 and $64,000, respectively. The
amortization of the REMIC expenses is treated as interest expense.
32
<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: 99 instead of
1999). 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 part of Guaranty's strategic plan, and in conjunction with the Year 2000
readiness plan, Guaranty upgraded its entire computer system, including hardware
and software. The changes not only made the institution better prepared for any
potential Year 2000 problems, but have also allowed Guaranty to offer more
sophisticated products, lower potential down time and increased customer
service. Total costs were approximately $325,000, with the expenses being
incurred in late 1998 and the first quarter of 1999. Included in non-interest
expense for the year ended December 31, 1999 is approximately $200,000
associated with the Year 2000 issue.
Currently Guaranty has experienced no negative effects as a result of the Year
2000 conversion. However, there can be no assurance that during the fiscal year
ending December 31, 2000 that no such disturbances will occur.
33
<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, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
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
2000 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
1999 fiscal year (the "2000 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 2000 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 2000
Proxy Statement is incorporated by reference.
34
<PAGE>
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Transactions with Management"
in the 2000 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, 1997, 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, 1997,
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.
10.2 Employment Agreement, dated February 26, 1999, by and
between the Registrant and Thomas P. Baker, attached
as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-88335,
filed with the Commission on October 1, 1999,
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, 1999.
35
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Financial Statements
Years Ended December 31, 1999, 1998 and 1997
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Contents
================================================================================
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance Sheets 4
Statements of Operations 5 - 6
Statements of Comprehensive Income (Loss) 7
Statements of Stockholders' Equity 8
Statements of Cash Flows 9 - 11
Summary of Accounting Policies 12 - 17
Notes to Consolidated Financial Statements 18 - 39
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 subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income (loss), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
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 subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
Richmond, Virginia
February 2, 2000
3
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents (including interest
bearing deposits of approximately
$4,659,000 and $1,561,000) $ 12,634,518 $ 10,526,732
Investment securities (Note 1)
Held-to-maturity 1,335,625 2,343,827
Available for sale 22,196,717 26,909,320
Trading - 1,000,000
Investment in Federal Home Loan Bank
stock, at cost (Note 8) 1,500,000 1,300,000
Loans receivable, net (Notes 2 and 10) 205,399,169 162,369,285
Accrued interest receivable 1,742,936 1,650,876
Real estate owned 842,981 488,273
Office properties and equipment, net (Note 3) 9,331,484 7,049,982
Mortgage servicing rights (Note 2) 567,697 1,978,000
Other assets (Note 9) 3,788,163 1,403,511
- -------------------------------------------------------------------------------------------------------------------
$259,339,290 $217,019,806
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
===================================================================================================================
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $199,594,671 $172,805,284
Advances from Federal Home Loan Bank
(Note 8) 20,000,000 21,000,000
Securities sold under agreement to
repurchase (Notes 1 and 7) 16,650,250 1,008,750
Bonds payable (Notes 1 and 6) 902,513 1,785,754
Accrued interest payable 257,879 124,826
Income taxes payable (Note 9) - 242,649
Prepayments by borrowers for taxes and
insurance 493,725 128,133
Other liabilities 1,098,681 470,139
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 238,997,719 197,565,535
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
(Notes 11, 12, 14 and 16)
- -------------------------------------------------------------------------------------------------------------------
Convertible preferred securities (Notes 12 and 13) 6,075,000 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, 1,961,727
and 1,501,727 shares issued and
outstanding 2,452,159 1,877,159
Additional paid-in capital 8,943,119 5,724,524
Accumulated other comprehensive income
(loss) (1,608,089) 89,625
Retained earnings - substantially restricted 4,479,382 4,862,963
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,266,571 12,554,271
- -------------------------------------------------------------------------------------------------------------------
$259,339,290 $217,019,806
===================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
4
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
====================================================================================================================
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $15,764,851 $11,230,838 $7,584,732
Mortgage-backed securities 124,865 207,406 1,045,831
Investment securities 2,482,420 1,622,022 889,245
- --------------------------------------------------------------------------------------------------------------------
Total interest income 18,372,136 13,060,266 9,519,808
- --------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 8,365,324 6,184,500 4,922,258
Borrowings 2,273,678 1,224,475 1,116,152
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 10,639,002 7,408,975 6,038,410
- --------------------------------------------------------------------------------------------------------------------
Net interest income 7,733,134 5,651,291 3,481,398
Provision for loan losses (Note 2) 486,000 184,200 122,320
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 7,247,134 5,467,091 3,359,078
- --------------------------------------------------------------------------------------------------------------------
Other income
Loan and deposit fees and servicing income 517,585 656,293 622,587
Net gain (loss) on sale of loans and
securities (870,376) 1,062,670 1,067,348
Other 477,794 247,240 177,837
- --------------------------------------------------------------------------------------------------------------------
Total other income 125,003 1,966,203 1,867,772
- --------------------------------------------------------------------------------------------------------------------
Other expense
Personnel 3,998,107 3,089,212 2,010,794
Occupancy (Note 11) 918,099 783,473 523,502
Data processing (Note 11) 762,159 585,282 422,851
Other 1,687,039 1,334,848 885,948
- --------------------------------------------------------------------------------------------------------------------
Total other expenses 7,365,404 5,792,815 3,843,095
- --------------------------------------------------------------------------------------------------------------------
continued...
</TABLE>
5
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Operations
(continued)
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $6,733 $1,640,479 $1,383,755
Provision for income taxes (Note 9) 2,300 624,200 486,040
- --------------------------------------------------------------------------------------------------------------------
Net income $4,433 $1,016,279 $ 897,715
====================================================================================================================
Basic and Diluted Earnings Per Share $ - $ .68 $ .61
====================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
6
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
<TABLE>
<CAPTION>
====================================================================================================================
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 4,433 $1,016,279 $897,715
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gains on securities
Unrealized holding gains (losses)
arising during period (2,385,032) (19,865) 82,211
Less: reclassification adjustment for
gains (losses) included in net
income 187,262 (82,211) -
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss),
before tax (2,572,294) 62,346 82,211
Income tax (expense) benefit related
to items of other comprehensive
income (loss) 874,580 (23,692) (31,240)
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
net of tax (1,697,714) 38,654 50,971
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (1,693,281) $1,054,933 $948,686
- --------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
7
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
=======================================================================================================================
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholders'
Stock Capital Income (Loss) Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Cash dividend - - - (388,014) (388,014)
Accumulated other
comprehensive loss - - (1,697,714) - (1,697,714)
Repurchase of trust preferred
securities (Note 12) 101,027 101,027
Issuance of common stock
(Note 13) 575,000 3,117,568 - - 3,692,568
Net income - - - 4,433 4,433
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $2,452,159 $8,943,119 $(1,608,089) $4,479,382 $14,266,571
=======================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
8
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
====================================================================================================================
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 4,433 $ 1,016,279 $ 897,715
Adjustments to reconcile net income
to net cash provided (absorbed) by
operating activities
Provision for loan losses 486,000 184,200 122,320
Depreciation and amortization 632,665 487,073 354,005
Amortization of deferred loan fees (43,797) (529,287) (89,564)
Net amortization of premiums and
accretion of discounts 111,133 194,913 64,154
Gain on sale of loans (319,689) (1,328,575) (518,736)
Originations of loan held for sale (79,669,584) (58,985,227) (24,280,323)
Proceeds from sale of loans 79,989,273 60,313,802 24,799,059
Loss (gain) on sale of held to maturity
and securities available for sale 1,212,750 (378,082) (384,194)
Loss on disposal of office properties
and equipment 5,657 6,316 -
(Gain) loss on sale of trading
account securities 303,968 301,869 (5,520)
Purchases of trading account securities (30,061,752) (106,204,637) (73,838,893)
Sales of trading account securities 30,757,784 105,934,956 89,548,520
Changes in
Accrued interest receivable (92,060) (806,664) (173,001)
Other assets (66,672) (1,014,818) (115,936)
Accrued interest payable 133,053 66,422 (15,698)
Income taxes (242,649) 61,549 214,100
Prepayments by borrowers for
taxes and insurance 365,592 47,309 (25,077)
Other liabilities 628,542 238,239 (777,389)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating
activities 4,134,647 (394,363) 15,775,542
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
9
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
====================================================================================================================
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investing activities
Net increase in loans $(43,826,795) $(62,772,937) $(18,451,153)
Repayments on held to maturity
securities 1,049,891 555,607 309,815
Purchase of held to maturity securities - (150,000) -
Purchase of securities available for sale (53,120,948) (105,361,247) (58,088,310)
Proceeds from sales of securities
available for sale 54,923,087 90,471,571 46,920,567
Sale of FHLB stock 1,100,000 - 500,100
Purchase of FHLB stock (1,300,000) (439,900) -
Purchase of servicing rights (806,650) (499,000) -
Purchase of office properties and
equipment (2,919,824) (1,543,593) (1,407,630)
- --------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (44,901,239) (79,739,499) (30,216,611)
- --------------------------------------------------------------------------------------------------------------------
Financing activities
Net increase in deposits 26,789,387 59,858,272 31,545,941
Repayment of Federal Home Loan
Bank advances (30,000,000) (39,000,000) (21,000,000)
Proceeds from Federal Home Loan
Bank advances 29,000,000 60,000,000 3,500,000
Payments on bonds payable, including
unapplied payments (1,036,063) (673,116) (408,402)
Increase (decrease) in securities sold
under agreements to repurchase 15,641,500 (1,980,250) (3,692,000)
Proceeds from issuance of convertible
preferred securities - 6,900,000 -
Repurchase of convertible preferred
securities (825,000) - -
Proceeds from issuance of common
stock, net 3,692,568 - 4,470,978
Dividends paid (388,014) (360,816) (135,259)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 42,874,378 84,744,090 14,281,258
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
10
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
====================================================================================================================
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents $ 2,107,786 $ 4,610,228 $ (159,811)
Cash and cash equivalents, beginning
of year 10,526,732 5,916,504 6,076,315
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $12,634,518 $10,526,732 $5,916,504
====================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements.
</TABLE>
11
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
================================================================================
Nature of Business and Regulatory Environment
Guaranty Financial Corporation (the "Parent Corporation") is a bank holding
Corporation whose principal assets are its wholly-owned subsidiaries, Guaranty
Bank (the "Bank") and Guaranty Capital Trust I (the "Trust"). 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").
Principles of Consolidation
The consolidated financial statements include the 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.
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.
12
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Investment Securities (continued)
Investments in debt and equity securities classified as available-for-sale are
stated at market value with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax effect, until realized.
Investments in debt and equity securities classified as trading are stated at
market value. Unrealized holding gains and losses for trading securities are
included in the statement of operations.
Gains and losses on the sale of securities are determined using the specific
identification method.
Options
Premiums received for writing put and call options are recorded as a liability
and are taken into income if the option is closed prior to maturity or expires.
Upon exercise of the option, the premium is treated as an adjustment to the
basis of the underlying security.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
The Corporation had approximately $630,000, $1,080,000 and $9,200,000 of loans
held for sale at December 31, 1999, 1998 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.
13
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Sale of Loans and Participation in Loans
The Corporation is able to generate funds by selling loans and participations in
loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and to other
insured investors. Under participation servicing agreements, the Corporation
continues to service the loans and the participant is paid its share of
principal and interest collections.
The Corporation allocates 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. The Corporation assesses its capitalized mortgage servicing
rights for impairment based on the fair value of those rights.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value. At December 31, 1999 and
1998 an impairment of approximately $1,000 and $342,000 was recognized on those
rights, respectively.
Allowance for Possible Loan Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan
portfolio. Management's assessment of the adequacy of the allowance is based
upon type and volume of the loan portfolio, past loan loss experience, existing
and anticipated economic conditions, and other factors which deserve current
recognition in estimating future loan losses. Additions to the allowance are
charged to operations. Loans are charged-off partially or wholly at the time
management determines collectibility is not probable. Management's assessment of
the adequacy of the allowance is subject to evaluation and adjustment by the
Corporation's regulators.
Loans are generally placed on nonaccrual status when the collection of principal
or interest is 90 days or more past due, or earlier if collection is uncertain
based upon an evaluation of the value of the underlying collateral and the
financial strength of the borrower. Loans may be reinstated to accrual status
when all payments are brought current and, in the opinion of management,
collection of the remaining balance can be reasonably expected. Loans greater
than 90 days past due may remain on accrual status if management determines it
has adequate collateral to cover the principal and interest.
14
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Allowance for Possible Loan Losses (continued)
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.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
At December 31, 1999 and 1998 the Corporation had no loans that were considered
impaired.
Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of
fair value, less selling costs, or the balance of the loan on the property at
date of foreclosure. Costs relating to the development and improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated fair value, less selling costs.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability in the consolidated balance sheets. The dollar amount
of securities underlying the agreements remain in the asset accounts.
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated depreciation
and amortization. Provisions for depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the individual
assets or the terms of the related leases, if shorter, for leasehold
improvements. Expenditures for betterments and major renewals are capitalized
and ordinary maintenance and repairs are charged to expense as incurred.
15
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
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 $236,000 at
December 31, 1998.
Section 1616 of the Small Business Job Protection Act of 1996 (the "Act")
repealed the percentage of taxable income method of computing bad debt reserve,
and requires the recapture into taxable income of "excess reserves", on a
ratable basis over the next six years. Excess reserves are defined, in general,
as the excess of the balance of the tax bad debt reserve (using the percentage
of taxable income method) as of the close of the last tax year beginning before
January 1, 1996 over the balance of the reserve as of the close of the last tax
year beginning before January 1, 1988. The recapture of the reserves is deferred
if the Corporation meets the "residential loan requirement" exception, during
either or both of the first two years beginning after December 31, 1995. The
residential loan requirement is met, in general, if the principal amount of
residential loans made by the Corporation during the year is not less than the
Corporation's "base amount". The base amount is defined as the average of the
principal amounts of residential loans made during the six most recent tax years
beginning before January 1, 1996.
As a result of the Act, the Corporation must recapture into taxable income
approximately $354,000 ratably over six years, which began December 31, 1998,
since the Corporation met the residential loan requirement exemption for the
period ended December 31, 1997.
Basic and Diluted Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity. The basic
and diluted weighted average number of shares of common stock outstanding were
1,558,439, 1,501,604 and 1,466,843 for the years ended December 31, 1999, 1998
and 1997, respectively.
16
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Statements of Cash Flows
Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $10,772,000, $7,343,000
and $6,060,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Cash paid for income taxes was approximately $360,000, $656,000
and $350,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Real estate acquired in the settlement of loans was approximately $1,141,000,
$488,000 and $64,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Reclassifications
Certain reclassifications have been made in the prior year consolidated
financial statements and notes to conform to the December 31, 1999 presentation.
New Accounting Pronouncements
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, 2000 and
requires application prospectively.
17
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Investment Securities
A summary of the carrying value and estimated market value of investment
securities is as follows:
<TABLE>
<CAPTION>
December 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
Mortgage-backed securities $1,085,625 $17,048 $ - $1,102,673
Other 250,000 - - 250,000
- -------------------------------------------------------------------------------------------------------------------------------
1,335,625 17,048 - 1,352,673
- -------------------------------------------------------------------------------------------------------------------------------
Available for Sale
Mortgage-backed securities 4,897,805 - 117,365 4,780,440
Corporate bonds 19,415,565 - 2,319,038 17,096,527
Other 319,750 - - 319,750
- -------------------------------------------------------------------------------------------------------------------------------
24,633,120 - 2,436,403 22,196,717
- -------------------------------------------------------------------------------------------------------------------------------
$25,968,745 $17,048 $2,436,403 $23,549,390
===============================================================================================================================
</TABLE>
18
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
1. Investment Securities (continued)
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
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 Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
1. Investment Securities (continued)
The amortized cost and estimated market value of available for sale and held to
maturity securities at December 31, 1999 by maturity is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity
Mortgage-backed securities $ 1,085,625 $ 1,102,673
Other 250,000 250,000
- --------------------------------------------------------------------------------------------------
1,335,625 1,352,673
- --------------------------------------------------------------------------------------------------
Available for Sale
Mortgage-backed securities 4,897,805 4,780,440
Due after five years 19,735,315 17,416,277
- --------------------------------------------------------------------------------------------------
24,633,120 22,196,717
- --------------------------------------------------------------------------------------------------
$25,968,745 $23,549,390
- --------------------------------------------------------------------------------------------------
</TABLE>
Gross gains and losses from the sale of securities during the years ended
December 31, 1999, 1998 and 1997 were as follows (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
Gains Losses Gains Losses Gains Losses
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity $ - $ - $ - $202 $237 $ -
Available for Sale 256 1,468 579 - 147 -
Trading 77 381 162 464 134 128
</TABLE>
Mortgage backed securities of approximately $1,086,000 and $2,094,000 at
December 31, 1999 and 1998, respectively, were pledged for bonds payable (Note
6). At December 31, 1999 and 1998, investment securities with a market value of
approximately $16,650,000 and $1,008,000, respectively were pledged as
collateral under repurchase agreements (Note 7).
20
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
2. Loans Receivable
Loans receivable are summarized as follows
December 31, 1999 1998
- --------------------------------------------------------------------------------
Residential real estate $ 62,795,692 $ 66,369,052
Commercial real estate 12,295,263 13,293,237
Construction and land 66,180,482 60,088,168
Commercial business 52,561,209 23,692,273
Consumer 17,191,224 9,629,551
- --------------------------------------------------------------------------------
211,023,870 173,072,281
- --------------------------------------------------------------------------------
Less
Undisbursed loan funds 4,381,823 9,587,873
Deferred loan fees 39,640 112,809
Allowance for loan losses 1,203,238 1,002,314
- --------------------------------------------------------------------------------
5,624,701 10,702,996
- --------------------------------------------------------------------------------
$205,399,169 $162,369,285
================================================================================
The allowance for loan losses is summarized as follows:
Amount
- --------------------------------------------------------------------------------
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 charged to expense 184,200
Net charge-offs (116,863)
- --------------------------------------------------------------------------------
Balance at December 31, 1998 1,002,314
Provision charged to expense 486,000
Net charge-offs (285,076)
- --------------------------------------------------------------------------------
Balance at December 31, 1999 $1,203,238
================================================================================
21
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
2. Loans Receivable (continued)
The Corporation serviced loans for others aggregating approximately $241,930,000
and $173,147,000 at December 31, 1999 and 1998, respectively. Approximately
$189,000,000 of loans serviced at December 31, 1999 were sold to a third party
with transfer of the loans to occur in February 2000. Mortgage servicing rights
were approximately $568,000 and $1,978,000 at December 31, 1999 and 1998,
respectively. Mortgage servicing rights of approximately $1,571,000 and
$1,584,000 were capitalized during the years ended December 31, 1999 and 1998,
respectively.
Gross gains and gross losses on the sale of loans totaling approximately
$911,000, and $592,000, $1,374,000 and $46,000, and $520,000 and $1,000 were
realized during the years ended December 31, 1999, 1998 and 1997, respectively.
3. Office Properties and Equipment
Office properties and equipment are summarized as follows:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Land $3,494,851 $2,127,055
Building and leasehold improvements 4,389,136 3,691,488
Furniture and fixtures 1,223,340 1,052,840
Equipment 2,032,628 1,479,974
Automobiles 129,743 59,598
- --------------------------------------------------------------------------------
11,269,398 8,410,955
Less accumulated depreciation and amortization 1,938,214 1,360,973
- --------------------------------------------------------------------------------
Net office properties and equipment $9,331,484 $7,049,982
================================================================================
22
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
4. Deposits
Deposits are summarized as follows:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Statement savings accounts $ 11,202,630 $ 9,862,983
Demand deposit accounts 30,205,914 23,432,095
Money market accounts 27,877,742 22,319,439
- --------------------------------------------------------------------------------
69,286,286 55,614,517
- --------------------------------------------------------------------------------
Time deposits 130,308,385 117,190,767
- --------------------------------------------------------------------------------
$199,594,671 $172,805,284
- --------------------------------------------------------------------------------
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $40,596,000 and $29,640,000 at December 31, 1999 and
1998, respectively.
At December 31, 1999, scheduled maturities of certificates are as follows:
Year Ending December 31,
--------------------------------------------------------------------
2000 $112,783,419
2001 12,151,684
2002 3,292,624
2003 1,413,126
2004 and thereafter 667,532
--------------------------------------------------------------------
$130,308,385
--------------------------------------------------------------------
23
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
5. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 12,634,518 $ 12,635,000 $ 10,526,732 $ 10,527,000
Securities 23,532,342 23,549,000 30,253,147 30,346,000
Loans, net of allowance for loan losses 205,399,169 206,287,000 162,369,285 163,090,000
Financial liabilities
Deposits 199,594,671 199,951,000 172,805,284 173,825,000
Advances from Federal Home Loan Bank 20,000,000 20,000,000 21,000,000 21,000,000
Securities sold under agreement to repurchase 16,650,250 16,650,000 1,008,750 1,009,000
Bonds payable 902,513 N/A 1,785,754 N/A
</TABLE>
<TABLE>
<CAPTION>
Notional Fair Notional Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrecognized financial instruments
Commitments to extend credit $66,134,000 $66,134,000 $61,917,000 $61,917,000
Forward commitments to repurchase
mortgage-backed securities - - 10,000,000 10,000,000
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
- -------------------------------
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
- ----------
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
24
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
5. Fair Value of Financial Instruments (continued)
Loan receivables
- ----------------
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
- -------------------
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
- ------------------------------------
For advances that mature within one year of the balance sheet date, carrying
value is considered a reasonable estimate of fair value.
The fair values of all other advances are estimated using discounted cash flow
analysis based on the Corporation's current incremental borrowing rate for
similar types of advances.
Securities sold under agreement to repurchase
- ---------------------------------------------
Fixed-coupon reverse repurchase agreements are treated as short-term financings.
The carrying value is considered a reasonable estimate of fair value.
Bonds payable
- -------------
Due to the nature and terms (Note 6) of the bonds payable held by GMSC, Inc. at
December 31, 1999 and 1998, 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.
25
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
5. Fair Value of Financial Instruments (continued)
Forward Commitments to purchase mortgage-backed securities
- ----------------------------------------------------------
Fair values are based on quoted market prices or dealer quotes.
6. Bonds Payable
In October 1987, GMSC, Inc. issued serial bonds (the "Bonds") collateralized by
mortgage-backed securities which are treated as a real estate mortgage
investment conduit ("REMIC") under the Internal Revenue Code of 1986 for federal
tax purposes. The Bonds are secured by an indenture between GMSC, Inc. and the
Bank of New York, acting as trustee for the bondholders. The Bonds are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Serial Bonds
Class A-3, maturing January 20, 2019, at 8.0% $1,152,698 $2,169,815
Unapplied payments (85,628) (66,683)
- --------------------------------------------------------------------------------------------------------
1,067,070 2,103,132
Less unamortized discount (164,557) (317,378)
- --------------------------------------------------------------------------------------------------------
$ 902,513 $1,785,754
========================================================================================================
</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-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
balance sheet.
26
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
7. Securities Sold Under Agreements to Repurchase
The following is a summary of certain information regarding the Bank's
repurchase agreements:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at end of year $16,650,250 $1,009,000
Weighted average interest rate during the year 5.10% 5.00%
Average amount outstanding during the year $ 9,387,194 $2,336,294
Maximum amount outstanding at any month end during
the year $16,650,250 $6,856,060
</TABLE>
8. Advances From Federal Home Loan Bank
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum amount outstanding during the year $30,000,000 $26,000,000
- ---------------------------------------------------------------------------------------------------
Average amount outstanding during the year $26,225,806 $ 9,748,000
- ---------------------------------------------------------------------------------------------------
Average interest rate during the year 4.88% 5.57%
- ---------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
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:
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Current income tax $2,300 $624,200 $458,040
Deferred income tax - - 28,000
- --------------------------------------------------------------------------------
$2,300 $624,200 $486,040
================================================================================
Reconciliations of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Tax expense at statutory rate $2,300 $557,800 $470,477
Adjustments
Effect of state taxes - - 55,350
Other - 66,400 (39,787)
- --------------------------------------------------------------------------------
$2,300 $624,200 $486,040
================================================================================
28
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
9. Income Taxes (continued)
The components of the net deferred income taxes, which is included in other
assets in the balance sheet, are as follows:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Deferred tax asset
Bad debt reserves $ 363,000 $ 241,000
Deferred loan fees 22,000 30,000
Servicing rights - 116,000
Available for sale securities 828,000 -
Other 70,000 143,000
- --------------------------------------------------------------------------------
Total deferred tax asset 1,283,000 530,000
- --------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 97,000 133,000
FHLB stock 26,000 167,000
Fixed assets 221,000 84,000
Trading securities - 90,000
- --------------------------------------------------------------------------------
Total deferred tax liability 344,000 474,000
- --------------------------------------------------------------------------------
Net deferred tax asset $ 939,000 $ 56,000
- --------------------------------------------------------------------------------
10. Related Party Transactions
In the normal course of business, the Corporation makes loans to directors,
officers and other related parties. These loans are made on substantially the
same terms as those prevailing at the time for comparable transactions with the
other borrowers.
The following is a summary of loan transactions with directors, officers and
other related parties:
December 31, 1999 1998
- --------------------------------------------------------------------------------
Balance at the beginning of year $ 975,000 $293,000
Additional loans 798,000 856,000
Loan reductions (304,000) (174,000)
- --------------------------------------------------------------------------------
Balance at end of year $1,469,000 $975,000
================================================================================
29
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
11. Commitments and Contingencies
The Corporation leases office space under operating leases expiring at various
dates through 2002 and has a contract for data processing services whose initial
term expires in February 2004 and requires minimum payments of $25,800 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, 1999, are as follows:
Amount
------------------------------------
Data
Year Ending December 31, Leases Processing
- --------------------------------------------------------------------------------
2000 $ 91,300 $ 309,600
2001 87,500 309,600
2002 61,200 309,600
2003 28,900 309,600
2004 22,600 51,600
- --------------------------------------------------------------------------------
$291,500 $1,290,000
================================================================================
Total rental expense amounted to approximately $91,600, $70,000 and $47,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. Total data
processing expense amounted to approximately $762,000, $585,000, and $423,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
The Corporation is defendant in various lawsuits incidental to its business.
Management is of the opinion that its financial position will not be materially
affected by the ultimate resolution of any pending or threatened litigation.
12. Convertible Preferred Stock
On April 29, 1998, the Corporation formed Guaranty 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 at 7.0% and maturing May 5, 2028. All
intercompany interest and equity was eliminated in consolidation.
In December 1999 the Corporation repurchased 33,000 shares of the cumulative
preferred securities at an average price of $17.97 per share which resulted in a
net gain, recognized in the statement of stockholders' equity, on the repurchase
of $101,000.
30
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
13. Stockholders' Equity
On November 4, 1999, the Corporation completed a secondary offering of its
common stock through the sale of 460,000 shares at a price of $9.00 per share.
Proceeds to the Corporation from the offering (net of offering expenses of
approximately $447,000) were approximately $3,693,000.
The following table represents the Bank's regulatory capital levels.
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
December 31, 1999 Required Required Amount Percent Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 risk based $ 8,952,000 4.00% $21,513,000 9.61% $12,561,000
Total risk based capital 17,904,000 8.00 22,716,000 10.15 4,812,000
Amount Percent Actual Actual Excess
December 31, 1998 Required Required Amount Percent Amount
- --------------------------------------------------------------------------------------------------------------------------------
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
</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, to the extent allowed, in the calculation of regulatory
capital.
31
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
14. Stock Option Plan
The Corporation has a noncompensatory stock option 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>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Weighted - Weighted - Weighted -
average average average
exercise exercise exercise
Shares price Shares price Shares price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 88,000 $15.86 71,200 $15.25 4,000 $ 4.88
Granted 44,500 12.00 37,500 15.86 72,000 15.25
Forfeited (2,500) 12.00 (18,700) 16.03 (800) 12.00
Exercised - - (2,000) 12.00 (4,000) 4.88
- -------------------------------------------------------------------------------------------------------------------------------
Options outstanding
at end of year 130,000 $12.98 88,000 $15.86 71,200 $15.25
===============================================================================================================================
Options exercisable
at end of year 49,700 24,200 11,240
===============================================================================================================================
</TABLE>
The weighted average fair value of options granted during the year ended
December 31, 1999, 1998 and 1997 was $3.17, $4.85 and $1.14, respectively.
32
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
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 would have been decreased
to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $ 4,433 $1,016,279 $897,715
Pro forma (88,670) 896,242 844,363
Net income (loss) per share (basic and diluted)
As reported $ .00 $ .68 $ 0.61
Pro forma (.06) .60 0.58
</TABLE>
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, 1999: a risk free interest rate of 5.18%,
dividend yield of .50%, expected weighted average term of 8.00 years, and a
volatility of 20.00%.
15. Employee Benefit Plans
Effective February 16, 1989, the Corporation adopted a 401(k) profit-sharing
plan in which all employees are eligible to participate after one year of
service and are at least twenty-one years of age. Participants may elect to
contribute a percentage of their compensation to the plan. The Corporation may
make contributions to the plan at its discretion. Corporation contributions are
allocated to employee accounts using a systematic formula based on participant
compensation. The Corporation contributed approximately $56,000, $14,900 and
$10,300 for the years ended December 31, 1999, 1998 and 1997, respectively.
16. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, options written and
purchased, forward commitments to purchase mortgage-backed securities and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The contract or notional amounts of these instruments reflect
the extent of involvement the Corporation has in particular classes of financial
instruments
33
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
16. Financial Instruments With Off-Balance-Sheet Risk (continued)
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>
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $66,134,000 $61,917,000
Standby letters of credit written 4,719,000 1,454,000
Financial instruments whose contract amounts represent interest
rate risk
Forward commitment to purchase mortgage-backed securities - 10,000,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Substantially all of the Corporation's loan activity was with customers located
in Charlottesville and Richmond, Virginia and surrounding counties, with
approximately 30% of the loans collateralized by one to four family residential
properties.
34
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
17. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly consolidated financial data is shown as follows: (Dollars in
thousands except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended December 31, 1999 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $3,906 $4,679 $4,652 $5,135
Total interest expense 2,526 2,649 2,721 2,743
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,380 2,030 1,931 2,392
Provision for loan losses 60 105 216 105
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,320 1,925 1,715 2,287
Other income (loss) 794 158 (1,139) 312
Other expenses 1,701 1,701 1,917 2,047
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax
expense (benefit) 413 382 (1,341) 552
Income tax expense (benefit) 140 130 (456) 188
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 273 $ 252 $ (885) $ 364
===============================================================================================================================
Basic and diluted earnings (loss)
per share $ .18 $ .17 $ (.59) $ .21
===============================================================================================================================
</TABLE>
35
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
17. Selected Quarterly Financial Data (Unaudited) (continued)
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended December 31, 1998 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
===============================================================================================================================
Basic and diluted earnings per share $ .17 $ .12 $ .21 $ .18
===============================================================================================================================
</TABLE>
36
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
18. Condensed Financial Information of the Corporation (Parent Corporation
Only)
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investment in subsidiaries, at equity $21,695,484 $19,289,414
Cash 129,640 11,612
Prepaid expenses and other assets 455,664 527,117
- -----------------------------------------------------------------------------------------------
$22,280,788 $19,828,143
===============================================================================================
Liabilities and Stockholders' Equity
Other liabilities $ 117,703 $ 250,072
- -----------------------------------------------------------------------------------------------
Total liabilities 117,703 250,072
- -----------------------------------------------------------------------------------------------
Subordinated debt 6,288,425 7,113,425
- -----------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 2,452,159 1,877,159
Additional paid-in capital 8,943,119 5,724,524
Retained earnings 4,479,382 4,862,963
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 15,874,660 12,464,646
- -----------------------------------------------------------------------------------------------
$22,280,788 $19,828,143
===============================================================================================
</TABLE>
37
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
18. Condensed Financial Information of the Corporation (Parent Corporation
Only) (continued)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income
Dividends received from Bank $ 886,278 $ 361,306
- ---------------------------------------------------------------------------------------------------------
Total income 886,278 361,306
- ---------------------------------------------------------------------------------------------------------
Interest expense (497,940) (319,324)
Noninterest expense (23,473) (19,305)
- ---------------------------------------------------------------------------------------------------------
Income before undistributed net income of the Bank 364,865 22,677
Undistributed net income (360,432) 993,602
- ---------------------------------------------------------------------------------------------------------
Net income $ 4,433 $1,016,279
=========================================================================================================
</TABLE>
38
<PAGE>
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
18. Condensed Financial Information of the Corporation (Parent Corporation
Only) (continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 4,433 $ 1,016,279
Adjustments
Undistributed earnings of the Bank 360,432 (993,602)
Gain on repurchase of subordinated debt 101,027 -
(Increase) decrease in prepaid and other assets 71,453 (486,281)
(Decrease) increase in other liabilities (132,369) 250,072
Other 39,788 1,229
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 444,764 (212,303)
- -------------------------------------------------------------------------------------------------------------------------------
Investing activities
Dividends received from Bank 886,278 361,306
Investment in the Bank (3,692,568) -
Investment in Guaranty Capital Trust - (6,900,000)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (2,806,290) (6,538,694)
- -------------------------------------------------------------------------------------------------------------------------------
Financing activities
Cash dividends paid on common stock (388,014) (360,816)
Issuance of subordinate debt - 7,113,425
Repurchase of subordinated debt (825,000) -
Issuance of common stock 3,692,568 -
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,479,554 6,752,609
- -------------------------------------------------------------------------------------------------------------------------------
Increase in cash 118,028 1,612
Cash, beginning of year 11,612 10,000
- -------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 129,640 $ 11,612
===============================================================================================================================
</TABLE>
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: March 29, 2000 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 29, 2000
- ------------------------------------- Officer and Director
Thomas P. Baker (Principal Executive Officer)
/s/ L. Benjamin Johnson, III Vice President and Controller March 29, 2000
- ------------------------------------- (Principal Financial and
L. Benjamin Johnson, III Accounting Officer)
Chairman of the Board March __, 2000
- -------------------------------------
Douglas E. Caton
/s/ Harry N. Lewis Vice Chairman of the Board March 29, 2000
- -------------------------------------
Harry N. Lewis
/s/ Henry J. Browne Director March 29, 2000
- -------------------------------------
Henry J. Browne
/s/ Jason I. Eckford, Jr. Director March 29, 2000
- -------------------------------------
Jason I. Eckford, Jr.
/s/ Robert P. Englander Director March 29, 2000
- -------------------------------------
Robert P. Englander
/s/ John R. Metz Director March 29, 2000
- -------------------------------------
John R. Metz
<PAGE>
Signature Title Date
--------- ----- ----
/s/ James R. Sipe, Jr. Director March 29, 2000
- -------------------------------------
James R. Sipe, Jr.
/s/ Oscar W. Smith, Jr. Director March 29, 2000
- -------------------------------------
Oscar W. Smith, Jr.
/s/ John B. Syer Director March 29, 2000
- -------------------------------------
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, 1997, 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, 1997,
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.
10.2 Employment Agreement, dated February 26, 1999, by and
between the Registrant and Thomas P. Baker, attached as
Exhibit 10.2 to the Registrant's Registration Statement
on Form S-1, Registration No. 333-88335, filed with the
Commission on October 1, 1999, 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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR GUARANTY FINANCIAL CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL
STATEMENTS CONTAINED IN SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,634,518
<INT-BEARING-DEPOSITS> 4,659,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,897,805
<INVESTMENTS-CARRYING> 1,085,625
<INVESTMENTS-MARKET> 1,102,673
<LOANS> 205,399,169
<ALLOWANCE> 1,203,238
<TOTAL-ASSETS> 259,339,290
<DEPOSITS> 199,594,671
<SHORT-TERM> 36,650,250
<LIABILITIES-OTHER> 1,098,681
<LONG-TERM> 902,513
0
0
<COMMON> 2,452,159
<OTHER-SE> 11,814,412
<TOTAL-LIABILITIES-AND-EQUITY> 259,339,290
<INTEREST-LOAN> 15,764,851
<INTEREST-INVEST> 2,482,420
<INTEREST-OTHER> 124,865
<INTEREST-TOTAL> 18,372,136
<INTEREST-DEPOSIT> 8,365,324
<INTEREST-EXPENSE> 10,639,002
<INTEREST-INCOME-NET> 7,733,134
<LOAN-LOSSES> 486,000
<SECURITIES-GAINS> (870,376)
<EXPENSE-OTHER> 7,365,404
<INCOME-PRETAX> 6,733
<INCOME-PRE-EXTRAORDINARY> 4,433
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,433
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.15
<LOANS-NON> 1,310,000
<LOANS-PAST> 93,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,002,314
<CHARGE-OFFS> 287,076
<RECOVERIES> 2,000
<ALLOWANCE-CLOSE> 1,203,238
<ALLOWANCE-DOMESTIC> 1,203,238
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
