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, 2000
Commission file number 0-25905
GUARANTY FINANCIAL CORPORATION
(Name of Small Business Issuer in its Charter)
Virginia 54-1786496
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
1658 State Farm Boulevard
Charlottesville, Virginia 22911
(Address of Principal Executive Offices) (Zip Code)
(804) 970-1100
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(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. [ ]
The issuer's gross income for its most recent fiscal year was
$23,797,240.
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 20,
2001 was approximately $11,728,721. (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 20, 2001
was 1,961,727.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2001 Annual Meeting of Shareholders - Part III
(to be filed)
2
TABLE OF CONTENTS
PART I
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Page
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ITEM 1. DESCRIPTION OF BUSINESS........................................ 4
ITEM 2. DESCRIPTION OF PROPERTY........................................ 13
ITEM 3. LEGAL PROCEEDINGS.............................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS......................................... 14
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION......................... 15
ITEM 7. FINANCIAL STATEMENTS........................................... 36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 37
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT.................................. 37
ITEM 10. EXECUTIVE COMPENSATION......................................... 37
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...................................... 37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 37
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K......................... 38
3
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 $204.0 million of gross loans outstanding at
December 31, 2000, 29.1% represented construction and land loans, 29.0%
represented commercial business loans, and 26.9% 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 120,000 in
2000 according to census figures. It 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 nine 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
depositors 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.
4
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.
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 utilizes 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 a Directors Loan
Committee to approve loans. The Management Loan Committee, which consists of the
President and three additional senior officers, meets weekly to review all loan
applications from borrowers having total credit exposure to the Bank in excess
of $750,000 in the aggregate or in excess of $250,000 on an unsecured basis. A
Directors Loan Committee, which currently consists of five directors (three
directors constitute a quorum, of whom any two may act), approves loans from
borrowers having total credit exposure to the Bank in excess of $1,500,000 in
the aggregate or in excess of $500,000 on an unsecured basis that have been
previously approved by the Management Loan Committee. Guaranty's Chief Credit
Officer 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 available for debt service.
Loan applications are submitted to the underwriting department for review. Loan
quality is analyzed based on the Bank's experience and credit underwriting
guidelines 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 that Guaranty originates are
not readily salable in the secondary market because they do not meet all of the
secondary marketing guidelines. Real estate collateral is appraised by
independent fee appraisers who have been pre-approved by the Board of Directors.
All conforming loans including HUD/FHA, VA and applicable VHDA loans are
underwritten by mortgage loan administration according to the Bank's loan
authority schedule.
5
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, 2000, commitments to extend credit totaled $49.7 million.
Construction Lending
Guaranty makes local construction loans, primarily residential, and
land acquisition and development loans. The construction loans are secured by
residential houses under construction and the underlying land for which the loan
was obtained. At December 31, 2000, construction, land and land development
loans outstanding were $59.4 million, or 29.1%, 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, typically prime plus one
percent. Because the interest rate 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 attributable to the fact that loan funds are advanced
upon the security of the land or home under construction, which value is
estimated 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 mitigate the risks associated with construction
lending, Guaranty generally limits loan amounts to 80.0% of appraised value, in
addition to analyzing the creditworthiness of its borrowers. Guaranty also
obtains a first lien on the property as security for its construction loans and
typically requires 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 obtains appropriate collateral and personal guarantees from
the borrower's principal owners 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 readily 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 is substantially dependent on the success
of the business itself. Furthermore, the collateral for commercial business
loans may depreciate over time and generally cannot be appraised with as much
precision as residential real estate. Guaranty has a loan review and monitoring
process to regularly assess the repayment ability of commercial borrowers. At
December 31, 2000, commercial loans totaled $59.1 million, or 29.0% 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, 2000, commercial real estate loans aggregated $3.4
million or 1.7% of Guaranty's gross loans.
In its underwriting of commercial real estate, Guaranty may lend, under
federal regulation, up to 85% of the secured property's appraised value,
although Guaranty's loan to original appraised value ratio
6
on such properties is 80% or less in many 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 typically requires personal guarantees or endorsements of the
borrowers' principal owners. Guaranty also carefully evaluates the location of
the security property.
One-to-Four-Family Residential Real Estate Lending
Residential lending activity may be generated by Guaranty's loan
originator solicitation, referrals by real estate professionals, and existing or
new bank customers. Loan applications are taken by a Bank loan originator. As
part of the application process, information is gathered concerning income,
employment and credit history of the applicant. Loan quality is analyzed based
on guidelines issued by the applicable investor, such as the Federal Home Loan
Mortgage Corporation (FHLMC), Veterans Administration (VA), the Department of
Housing and Urban Development (HUD). The non-conforming one-to-four family
adjustable rate mortgage (ARM) loans originated by Guaranty do not generally
meet secondary market investor guidelines. However, these loans are underwritten
using Guaranty's underwriting guidelines. The assessment of residential
collateral is provided by independent fee appraisers who have been approved by
the Bank's Board of Directors. Loans applications are reviewed and approved in
primarily two ways, by either the underwriting department, or in the case of
limited risk as defined by the automated underwriting system along with assigned
characteristics, it is possible for the origination team, consisting of the
originator and processor, to approve the transaction.
Security for the majority of Guaranty's residential lending is in the
form of owner occupied one-to-four family dwellings. Conventional mortgages are
originated up to allowable loan-to-value guidelines issued by the investor.
Maximum allowable loans insured by the Veterans Administration (VA) and the
Department of Housing and Urban Development (HUD) are originated according to
their applicable guidelines. Loans are also underwritten, funded, and serviced
by the Virginia Housing Development Authority specific to their defined
guidelines. The Loan Prospector automated underwriting system is capable of
rating conforming, VA, and FHA loans.
Typically, investor quality loans are originated with the intent to
sell. In order to meet community needs and retain a competitive edge, the bank
occasionally originates non-conforming fixed rate loans. These loans are
typically unconventional or jumbo in nature. No current investor relationship
exists for selling these products. At December 31, 2000, $20.4 million, or
10.0%, of Guaranty's loan portfolio consisted of fixed rate mortgage loans.
Guaranty also originates a non-conforming adjustable rate product with
a higher entry level rate and margin than that of the conforming adjustable rate
products. This non-conforming loan provides yet another outlet for loans not
meeting investor guidelines. As with the fixed rate non-conforming product, the
Bank has no current investor relationship for selling this ARM product. Interest
rates on adjustable rate products offered by the Bank are tied to the One Year
United States Treasury bill. Guaranty's ARM products contain interest rate caps
at adjustment periods and rate ceilings based on a cap over and above the
original interest rate. Guaranty originates the conforming one-year adjustable
rate mortgages below the index rate to compete with local competitors. At
December 31, 2000, $34.5 million, or 16.9%, of the Bank's loan portfolio
consisted of adjustable rate mortgages.
7
All residential mortgage loans originated by Guaranty contain a
"due-on-sale" clause providing that Guaranty may declare the unpaid principal
balance due and payable upon sale or transfer of the mortgaged premises, unless
certain investor provisions should apply. "Due-on-sale" definitions will vary
from investor to investor, so Guaranty's policy is to adhere to the mortgage
loan investor's guidelines, or in the case of our own loans, adhere to the
defined terms in the security instruments.
In connection with residential real estate loans, Guaranty requires
title insurance, hazard insurance and if required, flood insurance. Flood
determination letters with life of loan tracking are obtained on all federally
related transactions with improvements serving as security for the transaction.
Guaranty does require escrows for real estate 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, credit cards, and home equity lines of
credit and loans. At December 31, 2000, Guaranty had consumer loans of $27.0
million or 13.2% of gross loans. Such loans are generally made to customers with
which Guaranty has a pre-existing relationship. Guaranty originates all of its
consumer loans in its geographic market area and intends to continue this
practice. Most of the consumer loans are tied to the prime lending rate and
reprice monthly.
Consumer loans may entail greater risk than 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
borrower against an assignee of collateral securing the 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 monthly as the loans are
originated. Consumer loan delinquencies often increase over time as the loans
age.
The underwriting standards employed by Guaranty for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes an analysis
of the value of the security in relation to the proposed loan amount.
Employees
At December 31, 2000, Guaranty had 99 full-time and eight part-time
employees. None of Guaranty's employees are represented by any collective
bargaining unit.
8
Supervision and Regulation
General. 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 bank or merge
or consolidate with another bank holding company without the prior approval of
the Federal Reserve Board. The BHCA also generally limits the activities of a
bank holding company to that of banking, managing or controlling banks, or any
other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
As a state-chartered commercial bank, the Bank is subject to
regulation, supervision and examination by the Virginia State Corporation
Commission's Bureau of Financial Institutions. It also subject to regulation,
supervision and examination by the Federal Reserve Board. State and federal law
also governs the activities in which the Bank engages, the investments that it
makes 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 Guaranty's subsidiaries, and therefore the earnings of
Guaranty, are affected by general economic conditions, management policies,
changes in state and federal legislation and actions of various regulatory
authorities, including those referred to above. The following description
summarizes the significant state and federal and state laws to which Guaranty
and the Bank are subject. To the extent that statutory or regulatory provisions
or proposals are described, the description is qualified in its entirety by
reference to the particular statutory or regulatory provisions or proposals.
Payment of Dividends. Guaranty is a legal entity separate and distinct
from its banking and other subsidiaries. The majority of Guaranty's revenues
will result from dividends paid to Guaranty by the Bank. The Bank is subject to
laws and regulations that limit the amount of dividends that it can pay. In
addition, both Guaranty and the Bank are subject to various regulatory
restrictions relating to the payment of dividends, including requirements to
maintain capital at or above regulatory minimums. Banking regulators have
indicated that banking organizations should generally pay dividends only if the
organization's net income available to common shareholders over the past year
has been sufficient to fully fund the dividends, and 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 affect the ability of the
Bank to pay dividends. During the year ended December 31, 2000, the Bank
declared $666,283 in dividends payable to Guaranty.
In October 2000, Guaranty and the Bank entered into a written agreement
with the Federal Reserve Bank of Richmond (the "FRB-Richmond") and the Bureau of
Financial Institutions that provided for certain restrictions on the declaration
and payment of dividends by either Guaranty or the Bank. Additional information
on this agreement is set forth in "Item 5. Market for Common Equity and Related
Stockholder Matters" below.
Insurance of Accounts, Assessments and Regulation by the Federal
Deposit Insurance Corporation (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.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution
9
and other factors (including supervisory evaluations). Depository institutions
insured by the BIF that are "well capitalized" and that present few or no
supervisory concerns, are required to pay only the statutory minimum assessment
of $2,000 annually for deposit insurance, while all other banks are required to
pay premiums ranging from .03% to .27% of domestic deposits. Because of the
weaknesses that led to the written agreement with the Federal Reserve and the
Bureau of Financial Institutions, the Bank's deposit insurance assessment was
.10% of deposits per year in 2000 and is .03% of deposits per year in 2001.
These rate schedules are subject to future adjustments by the FDIC. In addition,
the FDIC has authority to impose special assessments from time to time. However,
because the legislation enacted in 1996 requires that both Savings Association
Insurance Fund insured and BIF-insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation, 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 not aware of any existing
circumstances that could result in termination of any Bank's deposit insurance.
Capital. The Federal Reserve Board has issued risk-based and leverage
capital guidelines applicable to banking organizations that it supervises. 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 must 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," which, together with Tier 1 capital, composes "total capital").
In addition, each of the federal banking regulatory agencies has
established minimum leverage capital requirements for banking organizations.
Under these requirements, banking organizations must maintain a minimum ratio of
Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject
to federal bank regulatory evaluation of an organization's overall safety and
soundness.
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 banking organization's capital adequacy.
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 that the
depository institution is insolvent or is in
10
danger of becoming insolvent. For example, under the requirements 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 the FDIC as a result of the insolvency of commonly
controlled insured depository institutions or for any assistance provided by the
FDIC to commonly controlled insured depository institutions in danger of
failure. The FDIC may decline to enforce the cross-guarantee provision if it
determines that a waiver is in the best interests of the deposit insurance
funds. The FDIC's claim for reimbursement under the cross guarantee provisions
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 nonaffiliated holders of subordinated debt of the commonly
controlled insured depository institutions.
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, 2000, Guaranty and the Bank were
classified as well capitalized.
State banking regulators also have broad enforcement powers over the
Bank, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator.
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 was
authorized to merge with a bank headquartered in another state, as long as
neither of the states had opted out of such interstate merger authority prior to
such date. After 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.
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the
"Act") was signed into law on November 12, 1999. The Act covers a broad range of
issues, including a repeal of most of the restrictions on affiliations among
depository institutions, securities firms and insurance companies. Most of the
Act's provisions require the federal bank regulatory agencies and other
regulatory bodies to adopt regulations to implement the Act, and for that reason
an assessment of the full impact on Guaranty of the Act must await completion of
that regulatory process.
The Act repeals sections 20 and 32 of the Glass-Stegall Act, thus
permitting unrestricted affiliations between banks and securities firms. The Act
also permits bank holding companies to elect to become financial holding
companies. A financial holding company may engage in or acquire companies that
engage in a broad range of financial services, including securities activities
such as underwriting, dealing, brokerage, investment and merchant banking, and
insurance underwriting, sales and brokerage activities. In order to become a
financial holding company, the bank holding company and all of its affiliated
depository institutions must be well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating.
The Act provides that the states continue to have the authority to
regulate insurance activities, but prohibits the states in most instances from
preventing or significantly interfering with the ability of a bank, directly or
through an affiliate, to engage insurance sales, solicitations or
cross-marketing activities. Although the states generally must regulate bank
insurance activities in a nondiscriminatory manner, the
11
states may continue to adopt and enforce rules that specifically regulate bank
insurance activities in certain areas identified in the Act. The Act directs the
federal bank regulatory agencies to adopt insurance consumer protection
regulations that apply to sales practices, solicitations, advertising and
disclosures.
The Act adopts a system of functional regulation under which the
Federal Reserve Board is confirmed as the umbrella regulator for financial
holding companies, but financial holding company affiliates are to be
principally regulated by functional regulators such as the FDIC for state
nonmember bank affiliates, the Securities and Exchange Commission for securities
affiliates and state insurance regulators for insurance affiliates. The Act
repeals the broad exemption of banks from the definitions of "broker" and
"dealer" for purposes of the Securities Exchange Act of 1934, as amended, but
identifies a set of specific activities, including traditional bank trust and
fiduciary activities, in which a bank may engage without being deemed a
"broker", and a set of activities in which a bank may engage without being
deemed a "dealer". The Act also makes conforming changes in the definitions of
"broker" and "dealer" for purposes of the Investment Company Act of 1940, as
amended, and the Investment Advisers Act of 1940, as amended.
The Act contains extensive customer privacy protection provisions.
Under these provisions, a financial institution must provide to its customers,
at the inception of the customer relationship and annually thereafter, the
institution's policies and procedures regarding the handling of customers'
nonpublic personal financial information. The Act provides that, except for
certain limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to opt out of such disclosure. An institution may not disclose
to a non-affiliated third party, other than to a consumer reporting agency,
customer account numbers or other similar account identifiers for marketing
purposes. The Act also provides that the states may adopt customer privacy
protections that are more strict than those contained in the Act. The Act also
makes a criminal offense, except in limited circumstances, obtaining or
attempting to obtain customer information of a financial nature by fraudulent or
deceptive means.
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.
12
Item 2. Description of Property.
As of March 1, 2001, Guaranty conducted its business from its main
office in Charlottesville, Virginia and eight branch offices. The following
table provides certain information with respect to these properties:
Location Date Facility 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 to
520 East Main Street Guaranty's right to renew for three
Charlottesville, Virginia additional five-year terms
Barracks Road 1994 Lease expires in 2004, subject to
1924 Arlington Boulevard Guaranty's right to renew for two
Charlottesville, Virginia additional five-year terms
West Main 1998 Lease expires in 2003, subject to
2211 West Main Street Guaranty's right to renew for two
Charlottesville, Virginia 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
Forest Lakes 2001 Owned by Guaranty
3290 Worth Crossing
Charlottesville, Virginia
13
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 has been listed on the Nasdaq National Market
under the symbol "GSLC" since June 1997. 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
Sales Price ($)
---------------
High Low Dividends ($)
---- --- -------------
Fiscal Year Ended December 31, 1999:
1st quarter 13.625 11.250 .06
2nd quarter 11.875 10.375 .06
3rd quarter 11.750 10.125 .06
4th quarter 10.750 8.000 .06
Fiscal Year Ended December 31, 2000:
1st quarter 10.750 7.813 .06
2nd quarter 8.625 7.500 .06
3rd quarter 8.063 6.750 --
4th quarter 7.125 4.375 --
In October 2000, both Guaranty and the Bank entered into a written
agreement with the FRB-Richmond and the Bureau of Financial Institutions. Among
the restrictions included in the written agreement is a requirement that any
dividends paid or declared by either Guaranty or the Bank be approved by both
the FRB-Richmond and the Bureau of Financial Institutions. Following the
initiation of the written agreement, Guaranty's Board of Directors decided to
suspend dividend payments on Guaranty's Common Stock. The timing, amount and
payment of future dividends on Guaranty's Common Stock is at the discretion of
Guaranty's Board of Directors subject to the written approval by both the
FRB-Richmond and the Bureau of Financial Institutions 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.
14
Guaranty is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from the Bank. As
previously stated, the Bank is currently prohibited from paying dividends to
Guaranty without the prior written consent of both the FRB-Richmond and the
Bureau of Financial Institutions.
As of March 1, 2001, Guaranty had approximately 1,200 shareholders of
record.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following commentary discusses major components of Guaranty's
business and presents an overview of its consolidated financial position and
results of operations at December 31, 2000 and 1999 and for the years ended
December 31, 2000, 1999 and 1998. 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.
Overview
Guaranty is headquartered in Charlottesville, Virginia and conducts
almost all of it operations through its subsidiary, Guaranty Bank. Guaranty Bank
is a community bank serving the Charlottesville, Harrisonburg and western
Richmond suburban markets. Guaranty Bank opened its ninth branch location in
early 2001. Guaranty is currently negotiating to sell its one branch in western
suburban Richmond.
In October 2000, Guaranty and its subsidiary, Guaranty Bank, entered
into a written agreement with the FRB-Richmond and the Bureau of Financial
Institutions with respect to various operating policies and procedures. As a
result of the agreement, the Bank revised its asset/liability management,
liquidity, risk management, loan administration and capital adequacy policies.
In addition, both Guaranty and the Bank are restricted from paying or declaring
dividends without prior regulatory approval. Guaranty has suspended dividends to
its common shareholders. Guaranty is also prohibited from incurring any debt at
the holding company level. Guaranty does not have sufficient resources to make
interest payments on its subordinated debentures held by Guaranty Capital Trust
I unless the regulators approve dividend payments by the Bank to Guaranty. Thus
far, state and federal regulators have approved dividend payments from the Bank
to Guaranty sufficient to make such interest payments. No other terms of the
agreement are expected to restrict Guaranty's operating plans for 2001.
Guaranty's performance for 2000 reflected improvement in net earnings
with a reduction in total assets. This combination resulted in the strengthening
of both Guaranty's and the Bank's regulatory capital ratios. The reduction in
total assets is indicative of Guaranty's emphasis changing from growth to profit
management.
Net Income
Net income for the year ended December 31, 2000, was $607,000 or $.31
per diluted share. The increased earnings in 2000 were the result of increased
net interest income and deposit fees which exceeded increases in operating
expenses and additional provisions for possible loan losses. Additionally, net
income in 2000 was not impacted by the losses on the sale of investments which
negatively impacted the 1999 earnings.
Net income for the year ended December 31, 1999 was $4,400, a 99.5%
decrease when compared to 1998 earnings of $1,016,000 ($.68 per diluted share).
These decreased earnings were primarily a result
15
of the sale of approximately $13 million in long-term corporate bonds that
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 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.
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 $9.8 million for the year ended December 31,
2000, 26.5% greater than the $7.7 million reported for the year ended December
31, 1999. The improvement in net interest income reflects higher loan and
investment yields, higher average balances and an increasing gap between the
amount of earning assets and the amount of interest bearing liabilities. The net
interest margin increase continues to reflect the bank shifting its asset base
into both commercial and consumer loans and away from more conservatively priced
residential mortgage loans. The net interest margin for the year ended December
31, 2000, increased by 56 basis points to 3.99% as compared to the prior year
end. The increase was due to a .97% increase in the yield on earning assets
which exceeded the .54% increase in the cost of interest bearing liabilities.
Declines in the prime rate in early 2001 will cause the yield on interest
earning assets to fall faster than the cost of interest bearing liabilities. The
net result will be a lower net interest margin in 2001.
Net interest income was $7.7 million for the year ended December 31,
1999, 36.8% greater than the $5.7 million reported for 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 3.43% 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.
16
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.
17
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate balance expense rate
------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest earning assets:
Securities $25,065 $1,786 7.13% $32,278 $2,157 6.68% $18,388 $1,290 7.02%
Loans 213,353 20,103 9.42% 184,340 15,765 8.55% 122,751 11,231 9.15%
Interest bearing deposits
in other banks 6,668 469 7.03% 8,928 450 5.04% 10,500 539 5.13%
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets/total interest income 245,086 22,358 9.12% 225,546 18,372 8.15% 151,639 13,060 8.61%
------------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 6,599 5,484 2,450
Premises and equipment 9,454 8,399 6,519
Other assets 4,876 5,256 3,001
Less allowance for loan losses (1,798) (1,122) (1,104)
------------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 19,131 18,017 10,866
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $264,217 $243,563 $162,505
===================================================================================================================================-
Liabilities and stockholders' equity
Interest bearing liabilities:
Interest bearing deposits:
Demand/MMDA accounts $42,034 $1,328 3.16% $44,906 $1,571 3.50% $24,936 $862 3.46%
Savings 10,922 245 2.24% 10,968 253 2.31% 8,551 254 2.97%
Certificates of deposit 149,787 8,949 5.97% 126,015 6,541 5.19% 93,615 5,068 5.41%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 202,743 10,522 5.19% 181,889 8,365 4.60% 127,102 6,184 4.87%
------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other borrowings 28,791 1,950 6.77% 34,955 1969 5.63% 13,893 899 6.47%
Bonds payable 881 105 11.92% 1,468 305 20.78% 2,142 325 15.17%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities/total interest expense 232,415 12,577 5.41% 218,312 10,639 4.87% 143,137 7,408 5.18%
------------------------------------------------------------------------------------------------------------------------------------
Non interest bearing liabilities:
Demand deposits 14,409 10,232 5,338
Other liabilities 1,991 3,583 3,531
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 248,815 232,127 152,006
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 15,402 11,436 10,499
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $264,217 $243,563 $162,505
====================================================================================================================================
Interest spread (1) 3.71% 3.28% 3.43%
Net interest income/net interest
margin (2) $9,781 3.99% $7,733 3.43% $5,652 3.73%
====================================================================================================================================
(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.
18
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.
Year Ended December 31, 2000 Year Ended December 31, 1999
compared to compared to
Year Ended December 31, 1999 Year Ended December 31, 1998
Change Due To: Change Due To:
--------------------------------------------------------------------------------------------------------------
Increase Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)
--------------------------------------------------------------------------------------------------------------
Interest income:
Securities $145 ($516) ($371) ($63) $930 $867
Loans 1,604 2,734 4,338 (737) 5,271 4,534
Interest bearing deposits
in other banks 178 (159) 19 (9) (80) (89)
--------------------------------------------------------------------------------------------------------------
Total interests income 1,927 2,059 3,986 (809) 6,121 5,312
Interest expense:
Interest bearing deposits:
Demand/MMDA accounts (153) (90) (243) 10 699 709
Savings (8) - (8) (56) 55 (1)
Certificates of deposit 983 1,425 2,408 (206) 1,679 1473
Total interest bearing deposits 822 1,335 2,157 (252) 2,433 2,181
FHLB advances and other 398 (417) (19) (117) 1,187 1070
Bonds payable (130) (70) (200) 120 (140) (20)
--------------------------------------------------------------------------------------------------------------
Total interest expense 1,090 848 1,938 (249) 3,480 3,231
--------------------------------------------------------------------------------------------------------------
Net interest income $837 1,211 $2,048 ($560) 2,641 $2,081
==============================================================================================================
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, 2000, Guaranty had $41.1 million more liabilities than
assets that reprice within one year and therefore was in an liability-sensitive
position. A liability-sensitive position or a negative gap will tend to
positively impact net earnings in a period of falling interest rates and
negatively impact net earnings in a period of rising interest rates. This
liability-sensitive 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.
19
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, investment and
trading activity, along with any other significant transactions are managed by
the President 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.
December 31, 2000
Maturing or Repricing In:
----------------------------------------------------------------------------------------------------------
3 Months 4-12 1-5 Over
(Dollars in thousands) or less Months Years 5 Years
----------------------------------------------------------------------------------------------------------
Interest-sensitive assets:
Loans $ 94,248 $ 37,166 $ 42,633 $ 29,966
Investments and mortgage-backed securities(1) - 1,800 950 19,354
Deposits at other institutions 5,921 - - -
----------------------------------------------------------------------------------------------------------
Total interest-sensitive assets 100,169 38,966 43,583 49,320
==========================================================================================================
Cumulative interest-sensitive assets 100,169 139,135 182,718 232,038
==========================================================================================================
Interest-sensitive liabilities:
NOW accounts (2) - - - 23,228
Money market deposit accounts 18,894 - - -
Savings accounts 10,319 - - -
Certificates of deposit 39,280 97,689 9,982 -
Borrowed money 14,000 - - -
Convertible preferred securities - - - 6,013
Bonds payable 23 72 144 588
----------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities 82,516 97,761 10,126 29,829
==========================================================================================================
Cumulative interest-sensitive liabilities $ 82,516 $180,277 $190,403 $220,232
==========================================================================================================
Period gap $ 17,653 $(58,795) $ 33,457 $ 19,491
Cumulative gap $ 17,653 $(41,142) $ (7,685) $ 11,806
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 121.39% 77.18% 95.96% 105.36%
Ratio of cumulative gap to total assets 6.95% -16.20% -3.03% 4.65%
(1) Includes Federal Home Loan Bank stock.
(2) Guaranty 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 $4.7 million have fixed interest rates and $5.7
million have variable interest rates.
20
Investments
Total available for sale investment securities decreased 19.3% to $17.9
million at December 31, 2000, from $22.2 million at December 31, 1999. The
overall decrease was primarily a result of management's efforts to reduce market
rate risk in Guaranty's balance sheet.
The following table shows the amortized cost and fair market value of
investment securities at the dates indicated.
December 31,
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Cost Market Cost Market Cost Market
------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------
Held-to-maturity
Mortgage-backed securities $ 950 $ 970 $ 1,086 $ 1,103 $ 2,094 $ 2,187
Other 250 250 250 250 250 250
------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 1,200 1,220 1,336 1,353 2,344 2,437
------------------------------------------------------------------------------------------------------------------------
Available for sale
Corporate bonds 19,354 17,508 19,416 17,097 26,463 26,581
U.S. Government Obligations - - - - 301 328
Mortgage-backed securities - - 4,898 4,780 - -
------------------------------------------------------------------------------------------------------------------------
Total available for sale 19,354 17,508 24,314 21,877 26,764 26,909
------------------------------------------------------------------------------------------------------------------------
Trading
U.S. Government Obligations - - - - 1,000 1,001
------------------------------------------------------------------------------------------------------------------------
Total Trading - - - - 1,000 1,001
------------------------------------------------------------------------------------------------------------------------
Other
Federal Reserve Bank & Other Stocks 422 422 320 320 328 328
Federal Home Loan Bank Stock 1,550 1,550 1,500 1,500 1,300 1,300
------------------------------------------------------------------------------------------------------------------------
Total $ 22,526 $ 20,700 $ 27,470 $ 25,050 $ 31,736 $ 31,975
========================================================================================================================
21
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
December 31,
2000 1999 1998
----------------------------------------------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Investment securities:
FHLMC mortgage-backed securities $ 950 4.59% $ 1,086 4.34% $ 2,094 6.64%
FNMA mortgage-backed securities 0 - 4,781 19.10 - -
Corporate bonds 17,508 84.66 17,096 68.29 26,581 84.24
Treasury and agency notes 250 1.21 250 1.00 1,250 3.96
Other 422 2.04 320 1.28 328 1.04
----------------------------------------------------------------------------------------------------------
Subtotal 19,130 92.50 23,533 94.01 30,253 95.88
Other:
FHLB stock 1,550 7.50 1,500 5.99 1,300 4.12
----------------------------------------------------------------------------------------------------------
Total Investment securities $ 20,680 100.00% $ 25,033 100.00% $ 31,553 100.00%
==========================================================================================================
Loans
Net loans consist of total loans minus undisbursed loan funds, deferred
loan fees and the allowance for loan losses. Net loans declined by 1.9% to
$201.6 million at December 31, 2000, as Guaranty controlled its growth to
increase its regulatory capital ratios. 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 80.7%, and 75.7% for the years ended December 31, 2000 and 1999,
respectively.
22
The following table sets forth the composition of Guaranty's loan
portfolio in dollars at the dates indicated.
Loan Portfolio
December 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage Loans:
Residential $ 54,911 $ 54,912 $ 61,945 $ 66,035 $ 67,016
Commercial 3,434 3,838 3,926 16,641 8,486
Construction and land loans 59,363 70,009 52,530 18,263 5,220
-----------------------------------------------------------------------------------------------------
Total real estate 117,708 128,759 118,401 100,939 80,722
Commercial business loans 59,120 53,505 25,635 - -
Consumer loans 27,158 24,422 19,141 6,705 4,175
-----------------------------------------------------------------------------------------------------
Total loans receivable 203,986 206,686 163,177 107,644 84,897
-----------------------------------------------------------------------------------------------------
Adjustments:
Undistributed loans in process - - - 6,752 2,467
Deferred fees (costs) (27) 40 113 282 290
Allowance for losses 2,397 1,303 1,002 935 870
-----------------------------------------------------------------------------------------------------
Total net items 2,370 1,343 1,115 7,969 3,627
-----------------------------------------------------------------------------------------------------
Total loans receivable, net $201,616 $205,343 $162,062 $ 99,675 $ 81,270
=====================================================================================================
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, 2000, commercial business loans, construction loans and
residential mortgage loans, respectively represented 29.3%, 28.9%, and 13.2% of
gross loans.
23
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
December 31,
-----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate
Residential $ 20,403 $ 18,277 $ 20,206 $ 26,514 $ 26,061
Commercial - 1,155 3,623 - -
Construction and land loans - - - 37 138
-----------------------------------------------------------------------------------------------------------
Total real estate 20,403 19,432 23,829 26,551 26,199
-----------------------------------------------------------------------------------------------------------
Commercial business loans 12,891 21,681 4,178 - -
Consumer loans 3,832 2,825 242 3,099 1,396
-----------------------------------------------------------------------------------------------------------
Total fixed-rate loans 37,126 43,938 28,249 29,650 27,595
-----------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
Real Estate
Residential 34,508 44,519 46,163 39,521 40,955
Commercial 3,434 11,140 9,670 16,641 8,486
Construction and land loans 59,138 66,181 60,088 18,226 5,082
-----------------------------------------------------------------------------------------------------------
Total real estate 97,080 121,840 115,921 74,388 54,523
Commercial business loans 47,053 30,880 19,514 - -
Consumer loans 23,123 14,366 9,388 3,606 2,779
-----------------------------------------------------------------------------------------------------------
Total adjustable-rate loans 167,256 167,086 144,823 77,994 57,302
-----------------------------------------------------------------------------------------------------------
Total loans receivable 204,382 211,024 173,072 107,644 84,897
-----------------------------------------------------------------------------------------------------------
Less:
Undisbursed loans in process 395 4,382 9,588 6,752 2,467
Deferred loan fees (27) 40 113 282 290
Allowances for losses 2,397 1,203 1,002 935 870
-----------------------------------------------------------------------------------------------------------
Total net items 2,765 5,625 10,703 7,969 3,627
-----------------------------------------------------------------------------------------------------------
Total loans receivable, net $201,617 $205,399 $162,369 $ 99,675 $ 81,270
===========================================================================================================
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.
24
Assets which do not currently expose Guaranty to sufficient risk to
warrant classification in one of the aforementioned categories but posses
potential weaknesses are required to be designated "special mention" by
management. On the basis of management's review of its assets, at December 31,
2000, Guaranty had classified $7.1 million of its assets as substandard, and
$3,000 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.
December 31,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Nonaccrual loans 238 $1,310 $1,686 $1,436 $1,670
Restructured loans - - - - 11
------------------------------------------------------------------------------------------------
Total non-performing loans 238 1,310 1,686 1,436 1,681
------------------------------------------------------------------------------------------------
Foreclosed assets 1,301 843 488 65 51
------------------------------------------------------------------------------------------------
Total non-performing assets $1,539 $2,153 $2,174 $1,501 $1,732
================================================================================================
Loans past due 90 or more days and
accruing interest $1,587 $ 93 $ 106 $ 189 $ -
Non-performing loans to total loans, at
period end 0.12% 0.62% 0.97% 1.42% 1.98%
Non-performing assets to period end
total loans and foreclosed assets 0.76% 1.02% 1.25% 1.49% 2.04%
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
25
percentage is established for each loan type and is reviewed quarterly.
Quarterly the loss percentage is applied to the portfolio, by product type, to
determine the minimum amount of reserves required. Although management believes
that it uses the best information available to make such determinations, future
adjustments to reserves may be necessary, and net income could be significantly
affected, if circumstances differ substantially from assumptions used in making
the initial determinations.
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------
Balance at beginning of period $1,203 $1,002 $935 $870 $747
Provision charged to operations 1,505 486 184 122 57
Charge-offs:
Real estate 229 122 120 57 39
Consumer 72 - - - -
Commercial 34 165 - - -
Recoveries:
Real estate 20 - 3 - 19
Consumer 2 2 - -
Commercial 1 - - - 4
------------------------------------------------------------------------------------------------------------
Net Charge-offs 312 285 117 57 16
------------------------------------------------------------------------------------------------------------
Balance, end of period $2,396 $1,203 $1,002 $935 $788
============================================================================================================
Allowance for loan losses to period
end total loans 1.19% 0.57% 0.58% 0.93% 0.93%
Allowance for loan losses to
nonaccrual loans 1006.72% 91.83% 59.43% 67.20% 54.05%
Net charge-offs to average loans 0.15% 0.15% 0.10% 0.06% 0.02%
Provision for loan losses
For the years ended December 31, 2000, 1999 and 1998, the provision for
loan losses was $1.5 million, $486,000, and $184,200, respectively. The
provision for loan losses has increased during these time periods 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. The increase in the provision for loan losses in 2000 was to
increase Guaranty's allowance for possible loan losses to an amount consistent
with its peer institutions. The increase was not attributable to any specific
asset quality problems.
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.
26
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.
December 31, 2000 1999 1998
----------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------
Residential real estate $ 109 26.9% $ 78 29.8% $ 101 38.4%
Commercial real estate - 1.7 109 5.8 144 7.7
Construction and land 1,056 29.1 383 31.4 384 34.7
Commercial business 861 29.0 466 24.9 258 13.7
Consumer and other loans 137 13.3 167 8.1 115 5.6
Unallocated 233 - - - - -
----------------------------------------------------------------------------------------------
Total $ 2,396 100.0% $ 1,203 100.0% $ 1,002 100.0%
==============================================================================================
December 31,
---------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------------------------
Ratio of Ratio of
Loans to Loans to
Total Gross Total Gross
Allowance Loans Allowance Loans
---------------------------------------------------------------------------------------------
(Dollars in thousands)
---------------------------------------------------------------------------------------------
Residential real estate $ 477 61.4% $ 327 75.2%
Commercial real estate 212 15.5 194 8.7
Construction and land 52 17.0 70 10.0
Commercial business - - - -
Consumer and other loans 43 6.2 40 6.1
Unallocated 151 - 157 -
---------------------------------------------------------------------------------------------
Total $ 935 100.0% $ 788 100.0%
=============================================================================================
27
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.
Year Ended December 31,
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Non Interest Income
--------------------------------------------------------------------------------
(Dollars in thousands)
Servicing income (loss)
Gross servicing income $ 197 $ 560 $ 452
Amortization expense (138) (563) (169)
------------------------------------
Net servicing income (loss) 59 (3) 283
Gain (loss)on sale of loans and securities 137 (870) 1,063
Service charges on checking 718 578 424
Late charges and other consumer fees 238 105 69
Annuity and investment sales 195 140 61
Other 93 175 66
--------------------------------------------------------------------------------
Total $ 1,440 $ 125 $ 1,966
--------------------------------------------------------------------------------
Non-interest income increased by $1.3 million to $1.4 million for the
year ended December 31, 2000. The increase in non-interest income for the
current year was due to the elimination of the losses on securities sales. 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.
28
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 their fair value. At December 31, 2000 and 1999 MSRs
totaled $1.0 million and $568,000, respectively. Impairment on these rights was
$55,000 and $1,000 for the years ended December 31, 2000 and 1999, respectively.
See "Financial Statements - Summary of Accounting Policies." At December 31,
2000 and 1999, loans serviced for others totaled $92.0 million and $241.9
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, 2000 and 1999, Guaranty sold $39.9 million
and $80.0 million, respectively, of loans and securitized loans.
Prior to 2000, Guaranty has traded treasury securities in an effort to
take advantage of short term movements in market interest rates. Guaranty did
not buy or sell any trading account securities in 2000. Sales of trading account
securities totaled $ 30.8 million during the year ended December 31, 1999.
Guaranty experienced losses of $304,000 and $302,000, respectively on such sales
for the years ended December 31, 1999 and 1998.
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
Non-interest expenses increased by approximately $1.4 million to $8.8
million for the year ended December 31, 2000. The increase was in all categories
and reflected the continued growth of Guaranty. 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.
29
Year Ended December 31,
------------------------------------------------------------------------
Non Interest Expense 2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands)
Personnel $ 4,227 $ 3,998 $ 3,089
Occupancy 1,353 918 783
Data processing 926 762 585
Marketing and professional fees 740 471 513
Other 1,549 1,216 823
------------------------------------------------------------------------
Total $ 8,795 $ 7,365 $ 5,793
------------------------------------------------------------------------
Income Taxes
Income tax expense for the years ended December 31, 2000, 1999 and
1998, was $313,000, $2,300 and $624,000, respectively. The decreases and
increases are a direct result of earnings levels for the respective year ends.
The effective income tax rate for each year is substantially the same.
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, 2000, deposits were $216.7 million, an 8.6% increase
from $199.6 million at December 31, 1999. The deposit growth is a reflection of
management's emphasis on core deposit 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.
30
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, 2000 1999 1998
--------------------------------------------------------------------------------
(Dollars in thousands)
Statement savings accounts $ 10,311 $ 11,203 $ 9,863
Demand deposit accounts 40,571 30,206 23,433
Money market accounts 18,894 27,878 22,319
30-to-180-day certificates 4,613 3,250 825
Seven to eleven month certificates 37,027 - -
One-to five-year fixed-rate certificates 98,540 119,350 106,953
Eighteen-month prime rate certificates 6,771 7,708 9,412
--------------------------------------------------------------------------------
Total $216,727 $199,595 $172,805
================================================================================
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.
------------------------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
------------------------------------------------------------------------------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Noninterest bearing
demand deposits $14,409 0.00% $10,232 0.00% $ 5,338 0.00%
Interest bearing
demand deposits 42,034 3.16% 44,906 3.50% 24,936 3.46%
Savings deposits 10,922 2.24% 10,968 2.31% 8,551 2.97%
Time deposits 149,787 5.97% 126,015 5.19% 93,615 5.41%
------------------------------------------------------------------------------------------------
Total deposits $217,152 4.84% $192,121 4.35% $132,440 4.67%
================================================================================================
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.
31
The following table sets forth the deposit flows of Guaranty during the
periods indicated.
------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------
Opening balance $199,595 $172,805 $112,947
Net deposits 6,610 18,425 53,673
Interest credited 10,522 8,365 6,185
------------------------------------------------------------------
Ending balance $216,727 $199,595 $172,805
------------------------------------------------------------------
Net increase $ 17,132 $ 26,790 $ 59,858
Percent increase 8.58% 15.50% 53.00%
==================================================================
The following table indicates the amount of Guaranty's certificates of
deposit by time remaining until maturity as of December 31, 2000.
Maturity
--------------------------------------------------------------------------------------------------------
3 Months Over 3 to Over 6 to Over
or less 6 months 12 months 12 months Total
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------
Certificates of deposit less than $100,000 $ 35,246 $ 20,627 $ 57,390 $ 6,941 $ 120,204
Certificates of deposit of $100,000 or more 8,326 6,184 10,618 1,619 26,747
--------------------------------------------------------------------------------------------------------
Total certificates of deposit $ 43,572 $ 26,811 $ 68,008 $ 8,560 $ 146,951
========================================================================================================
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, 2000, Guaranty had $14.0 million outstanding to the FHLB compared
to $20 million and $21 million outstanding at the end of the prior two years.
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, 2000, Guaranty did not have any amount outstanding in securities
sold under agreement to repurchase, as compared to $16.6 million at the end of
the prior year.
Guaranty uses borrowings to supplement deposits when they are available
at a lower overall cost to Guaranty or they can be invested at a positive rate
of return.
32
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.
----------------------------------------------------------------------------------------
Year Ended December 31, 2000 1999 1998
----------------------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------------------
Maximum Balance:
FHLB Advances $31,000 $30,000 $26,000
Securities sold under
agreements to repurchase 16,684 16,650 6,856
----------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------------------------------
FHLB Advances $18,637 6.51% $26,226 4.88% $9,748 5.57%
Securities sold under
agreements to repurchase 4,137 6.59% 9,387 5.10% 2,336 5.00%
========================================================================================
The following table sets forth the balances of Guaranty's short-term
borrowings at the dates indicated.
--------------------------------------------------------------------------------
December 31, 2000 1999 1998
--------------------------------------------------------------------------------
(Dollars in thousands)
--------------------------------------------------------------------------------
FHLB advances $14,000 $20,000 $21,000
Securities sold under agreements
to repurchase - 16,650 1,008
--------------------------------------------------------------------------------
Total short-term borrowings 14,000 $36,650 $22,008
================================================================================
Weighted average interest rate of
short-term FHLB advances 6.35% 5.57% 5.57%
Weighted average interest rate of
securities sold under agreements to
repurchase - 6.14% 5.00%
================================================================================
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
33
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.
At December 31, 2000, cash and cash equivalents were approximately
$15.6 million. Financing activities reduced cash and cash equivalents by
approximately $6.1 million during 2000. This amount represents the combination
of the net decrease in advances from the FHLB of $6.0 million, a decrease of
$16.7 million in securities sold under agreements to repurchase and the growth
in deposits of $17.1 million. Approximately $353,000 in dividends to common
shareholders were paid during 2000. Daily operating activities of the company
provided $3.4 million in cash and cash equivalents. Investing activities
provided an additional $5.6 million in cash and cash equivalents which consisted
mainly of the sale of $4.8 million in securities and a net decrease in the loan
portfolio of $2.6 million. This additional cash flow was used to invest in
office properties and equipment (primarily for the new Forest Lakes branch) of
$1.3 million, and $453,000 in originated mortgage servicing rights.
Cash and cash equivalents were approximately $12.6 million at December
31, 1999. 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.
Guaranty uses its sources of funds primarily to meet operating needs,
to pay deposit withdrawals and fund loan commitments. At December 31, 2000 and
1999 total approved loan commitments were $6.2 million and $4.4 million
respectively. In addition, at December 31, 2000 and 1999 and 1998, commitments
under unused lines of credit were $49.7 million, $61.7 million and $52.3
million, respectively. Certificates of deposit scheduled to mature in one year
or less at December 31, 2000, 1999 and 1998 totaled $138.4 million, $112.8
million, $91.5 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 2001 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
34
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 the Bank are subject to regulatory capital requirements of
the Federal Reserve. At December 31, 2000, Guaranty exceeded all such regulatory
capital as shown in the following table.
December 31, 2000
Guaranty Financial Guaranty
Corporation Bank
-------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------
Tier 1 Capital:
Common stock $ 2,452 $ 2,000
Capital surplus 8,953 9,742
Cumulative preferred securities (2) 5,419 -
Retained earnings 4,851 10,217
-------------------------------------------------------------------------------
Disallowed intangible assets 102 102
-------------------------------------------------------------------------------
Total Tier 1 Capital 21,573 21,857
-------------------------------------------------------------------------------
Tier 2 Capital:
Allowance for loan losses (1) 2,396 2,396
Cumulative preferred securities 594 -
-------------------------------------------------------------------------------
Total Tier 2 Capital 2,990 2,396
-------------------------------------------------------------------------------
Total Risk Based Capital $ 24,563 $ 24,253
-------------------------------------------------------------------------------
Risk Weighted Assets $216,439 $218,065
Capital Ratios:
Tier 1 Risk-based 9.97% 10.02%
Total Risk-based 11.35% 11.12%
Tier 1 Capital to average adjusted total assets 8.50% 8.62%
===============================================================================
(1) Limited to 1.25% of risk weighted assets.
(2) Limited to 1/3 of core capital.
Impact of Inflation and Changing Prices and Seasonality
The financial statements in this document have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation.
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
35
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133, which was subsequently amended by SFAS 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", 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 if
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, as amended, was effective for all
quarters of fiscal years beginning after June 15, 2000, and required application
prospectively. The adoption of SFAS 133, as amended, did not have a material
impact on the consolidated financial statements.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of APB
No. 25 for (a) the definition of employee for purposes of applying APB 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequences of various modifications to the previously fixed
stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 2, 2000
but certain conclusions cover specific events that occur after either December
15, 1998 or January 12, 2000. The Corporation believes that adoption of FIN 44
will not have a material effect on the Corporation's financial statements but
may impact the accounting for grants or awards in future periods.
Subisdiary Activities
Guaranty 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 $42,500 and $2,400 for the years ended December 31, 2000 and
1999, respectively, 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, 2000, 1999 and 1998,
amortization expense was $21,000, $156,000 and $101,000 respectively. The
amortization of the REMIC expenses is treated as interest expense.
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, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2000, 1999 and 1998
36
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
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
2001 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
2000 fiscal year (the "2001 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 2001 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 2001
Proxy Statement is incorporated by reference.
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Transactions with Management"
in the 2001 Proxy Statement is hereby incorporated by reference.
37
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
(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, 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 Guaranty's definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders,
incorporated herein by reference.
21 Subsidiaries of Guaranty.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 2000.
38
Guaranty Financial Corporation
and Subsidiaries
Consolidated Financial Statements
As of December 31, 2000 and 1999 and
For the Years Ended December 31, 2000, 1999 and 1998
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 - 38
2
[LETTERHEAD OF BDO SEIDMAN, LLP]
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, 2000 and 1999, 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, 2000. 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, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Richmond, Virginia
January 19, 2001
3
===================================================================================================
December 31, 2000 1999
---------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents (including interest
bearing deposits of approximately
$5,158,000 and $4,659,000) $ 15,550,212 $ 12,634,518
Investment securities (Note 1)
Held-to-maturity 1,199,609 1,335,625
Available for sale 17,930,719 22,196,717
Trading - -
Investment in Federal Home Loan Bank
stock, at cost (Note 8) 1,550,000 1,500,000
Loans receivable, net (Notes 2 and 10) 201,616,735 205,399,169
Accrued interest receivable 2,078,691 1,742,936
Real estate owned 1,301,277 842,981
Office properties and equipment, net (Note 3) 9,877,175 9,331,484
Mortgage servicing rights (Note 2) 1,020,982 567,697
Other assets (Note 9) 1,896,977 3,788,163
---------------------------------------------------------------------------------------------------
$254,022,377 $259,339,290
===================================================================================================
Guaranty Financial Corporation
and Subsidiaries
Consolidated Balance Sheets
===================================================================================================
December 31, 2000 1999
---------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $216,727,197 $199,594,671
Advances from Federal Home Loan Bank
(Note 8) 14,000,000 20,000,000
Securities sold under agreement to
repurchase (Notes 1 and 7) - 16,650,250
Bonds payable (Notes 1 and 6) 792,153 902,513
Accrued interest payable 393,787 257,879
Prepayments by borrowers for taxes and
insurance 263,973 493,725
Other liabilities 794,597 1,098,681
---------------------------------------------------------------------------------------------------
Total liabilities 232,971,707 238,997,719
---------------------------------------------------------------------------------------------------
Commitments and Contingencies
(Notes 11, 12, 14 and 16)
---------------------------------------------------------------------------------------------------
Convertible preferred securities (Notes 12 and 13) 6,012,500 6,075,000
--------------------------------------------------------------------------------------------------
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
shares issued and outstanding 2,452,159 2,452,159
Additional paid-in capital 8,953,230 8,943,119
Accumulated other comprehensive loss (1,218,309) (1,608,089)
Retained earnings - substantially restricted 4,851,090 4,479,382
---------------------------------------------------------------------------------------------------
Total stockholders' equity 15,038,170 14,266,571
---------------------------------------------------------------------------------------------------
$254,022,377 $259,339,290
===================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements.
4
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Operations
=======================================================================================================
Year Ended December 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------------
Interest income
Loans $20,102,511 $15,764,851 $11,230,838
Investment securities 2,254,749 2,607,285 1,829,428
-------------------------------------------------------------------------------------------------------
Total interest income 22,357,260 18,372,136 13,060,266
-------------------------------------------------------------------------------------------------------
Interest expense
Deposits 10,522,255 8,365,324 6,184,500
Borrowings 2,054,883 2,273,678 1,224,475
-------------------------------------------------------------------------------------------------------
Total interest expense 12,577,138 10,639,002 7,408,975
-------------------------------------------------------------------------------------------------------
Net interest income 9,780,122 7,733,134 5,651,291
Provision for loan losses (Note 2) 1,505,000 486,000 184,200
-------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,275,122 7,247,134 5,467,091
-------------------------------------------------------------------------------------------------------
Other income
Loan and deposit fees and servicing income 775,743 517,585 656,293
Net gain (loss) on sale of loans and
securities 136,704 (870,376) 1,062,670
Other 527,533 477,794 247,240
-------------------------------------------------------------------------------------------------------
Total other income 1,439,980 125,003 1,966,203
-------------------------------------------------------------------------------------------------------
Other expense
Personnel 4,226,707 3,998,107 3,089,212
Occupancy (Note 11) 1,352,678 918,099 783,473
Data processing (Note 11) 925,751 762,159 585,282
Other 2,289,747 1,687,039 1,334,848
-------------------------------------------------------------------------------------------------------
Total other expenses 8,794,883 7,365,404 5,792,815
-------------------------------------------------------------------------------------------------------
continued...
5
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Operations
(continued)
======================================================================================================
Year Ended December 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
Income before income taxes $920,219 $6,733 $1,640,479
Provision for income taxes (Note 9) 313,103 2,300 624,200
------------------------------------------------------------------------------------------------------
Net income $607,116 $4,433 $1,016,279
======================================================================================================
Basic and Diluted Earnings Per Share $ .31 $ - $ .68
======================================================================================================
See accompanying summary of accounting policies and notes to consolidated finanical statements.
6
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
======================================================================================================
Year Ended December 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
Net income $607,116 $ 4,433 $1,016,279
------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gains on securities
Unrealized holding gains (losses)
arising during period 514,370 (2,385,032) (19,865)
Less: reclassification adjustment for
gains (losses) included in net
income (76,206) 187,262 (82,211)
------------------------------------------------------------------------------------------------------
Other comprehensive income (loss),
before tax 590,576 (2,572,294) 62,346
Income tax (expense) benefit related
to items of other comprehensive
income (loss) (200,796) 874,580 (23,692)
------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
net of tax 389,780 (1,697,714) 38,654
------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $996,896 $(1,693,281) $1,054,933
======================================================================================================
See accompanying summary of accounting policies and notes to consolidated finanical statements.
7
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Stockholders' Equity
=======================================================================================================================
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholders'
Stock Capital Income (Loss) Earnings Equity
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $1,876,729 $5,724,954 $ 50,971 $4,207,500 $11,860,154
Cash dividend - - - (360,816) (360,816)
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)
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
Cash dividend - - - (235,408) (235,408)
Other comprehensive
income - - 389,780 - 389,780
Repurchase of trust preferred
securities (Note 12) - 10,111 - - 10,111
Net income - - - 607,116 607,116
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $2,452,159 $8,953,230 $(1,218,309) $4,851,090 $15,038,170
=======================================================================================================================
See accompanying summary of accounting policies and notes to consolidated finanical statements.
8
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
====================================================================================================================
Year Ended December 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 607,116 $ 4,433 $ 1,016,279
Adjustments to reconcile net income
to net cash provided (absorbed) by
operating activities
Provision for loan losses 1,505,000 486,000 184,200
Depreciation and amortization 721,954 632,665 487,073
Amortization of deferred loan fees (63,298) (43,797) (529,287)
Net amortization of premiums and
accretion of discounts (92,757) 111,133 194,913
Gain on sale of loans (338,318) (319,689) (1,328,575)
Originations of loan held for sale (40,142,264) (79,669,584) (58,985,227)
Proceeds from sale of loans 39,803,946 79,989,273 60,313,802
Loss (gain) on sale of held to maturity
and securities available for sale 76,206 1,212,750 (378,082)
Loss on disposal of office properties
and equipment 27,554 5,657 6,316
Loss on sale of trading account
securities - 303,968 301,869
Purchases of trading account securities - (30,061,752) (106,204,637)
Sales of trading account securities - 30,757,784 105,934,956
Changes in
Accrued interest receivable (335,755) (92,060) (806,664)
Other assets 1,865,189 (66,672) (1,014,818)
Accrued interest payable 135,908 133,053 66,422
Income taxes 36,108 (242,649) 61,549
Prepayments by borrowers for
taxes and insurance (229,752) 365,592 47,309
Other liabilities (186,381) 628,542 238,239
--------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating
activities 3,390,456 4,134,647 (394,363)
--------------------------------------------------------------------------------------------------------------------
continued...
9
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
====================================================================================================================
Year Ended December 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Investing activities
Net decrease (increase) in loans $ 2,559,072 $(43,826,795) $(62,772,937)
Repayments on held to maturity
securities 383,340 1,049,891 555,607
Purchase of held to maturity securities (250,000) - (150,000)
Purchase of securities available for sale - (53,120,948) (105,361,247)
Proceeds from sales of securities
available for sale 4,798,122 54,923,087 90,471,571
Sale of FHLB stock 500,000 1,100,000 -
Purchase of FHLB stock (550,000) (1,300,000) (439,900)
Purchase of other stock (102,500) - -
Origination of mortgage servicing rights (453,285) (806,650) (499,000)
Purchase of office properties and
equipment (1,295,199) (2,919,824) (1,543,593)
--------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing
activities 5,589,550 (44,901,239) (79,739,499)
--------------------------------------------------------------------------------------------------------------------
Financing activities
Net increase in deposits 17,132,526 26,789,387 59,858,272
Repayment of Federal Home Loan
Bank advances (62,000,000) (30,000,000) (39,000,000)
Proceeds from Federal Home Loan
Bank advances 56,000,000 29,000,000 60,000,000
Payments on bonds payable, including
unapplied payments (130,977) (1,036,063) (673,116)
Increase (decrease) in securities sold
under agreements to repurchase (16,650,250) 15,641,500 (1,980,250)
Proceeds from issuance of convertible
preferred securities - - 6,900,000
Repurchase of convertible preferred
securities (62,500) (825,000) -
Proceeds from issuance of common
stock, net - 3,692,568 -
Dividends paid (353,111) (388,014) (360,816)
--------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing
activities (6,064,312) 42,874,378 84,744,090
--------------------------------------------------------------------------------------------------------------------
continued...
10
Guaranty Financial Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(continued)
====================================================================================================================
Year Ended December 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents $ 2,915,694 $ 2,107,786 $ 4,610,228
Cash and cash equivalents, beginning
of year 12,634,518 10,526,732 5,916,504
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $15,550,212 $12,634,518 $10,526,732
====================================================================================================================
See accompanying summary of accounting policies and notes to consolidated finanical statements.
11
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".
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.
Reclassifications
Certain reclassifications have been made in the prior year consolidated
financial statements and notes to conform to the December 31, 2000 presentation.
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
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.
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 $2,193,000, $630,000 and $1,080,000 of loans
held for sale at December 31, 2000, 1999 and 1998, 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
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, 2000 and
1999 an impairment of approximately $55,000 and $1,000 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
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, 2000 and 1999 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
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
1,961,727, 1,558,439 and 1,501,604 for the years ended December 31, 2000, 1999
and 1998, respectively.
16
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 $12,713,000, $10,772,000
and $7,343,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. Cash paid for income taxes was approximately $697,000, $360,000
and $656,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Real estate acquired in the settlement of loans was approximately $941,000,
$1,141,000 and $488,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
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, which was
subsequently amended by SFAS 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities", 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, as amended, was effective for all fiscal quarters of
fiscal years beginning after June 15, 2000 and required application
prospectively. The adoption of SFAS 133, as amended, did not have a material
impact on the Corporation's consolidated financial statements.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 2, 2000 but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The Corporation believes that adoption of FIN 44 will not have
a material effect on the Corporation's financial statements but may impact the
accounting for grants or awards in future periods.
17
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:
December 31, 2000
---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 949,609 $ 20,335 $ - $ 969,944
Other 250,000 - - 250,000
---------------------------------------------------------------------------------------------------------------------------
1,199,609 20,335 - 1,219,944
---------------------------------------------------------------------------------------------------------------------------
Available for Sale
Corporate bonds 19,354,392 - 1,845,923 17,508,469
Other 422,250 - - 422,250
---------------------------------------------------------------------------------------------------------------------------
19,776,642 - 1,845,923 17,930,719
---------------------------------------------------------------------------------------------------------------------------
$20,976,251 $ 20,335 $ 1,845,923 $19,150,663
===========================================================================================================================
18
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
1. Investment Securities (continued)
December 31, 1999
-------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------------
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
===============================================================================================================================
19
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, 2000 by maturity is as follows:
Estimated
Amortized Market
Cost Value
--------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 949,609 $ 969,944
Other 250,000 250,000
--------------------------------------------------------------------------------------------------------
1,199,609 1,219,944
--------------------------------------------------------------------------------------------------------
Available for Sale
Corporate bonds and other due after five years 19,776,642 17,930,719
--------------------------------------------------------------------------------------------------------
19,776,642 17,930,719
--------------------------------------------------------------------------------------------------------
$ 20,976,251 $ 19,150,663
========================================================================================================
Gross gains and losses from the sale of securities during the years ended
December 31, 2000, 1999 and 1998 were as follows (in 000's):
2000 1999 1998
Gains Losses Gains Losses Gains Losses
-------------------------------------------------------------------------------------------------------------------------------
Held to Maturity $ - $ - $ - $ - $ - $ 202
Available for Sale - 77 256 1,468 579 -
Trading - - 77 381 162 464
Mortgage backed securities of approximately $950,000 and $1,086,000 at December
31, 2000 and 1999, respectively, were pledged for bonds payable (Note 6). At
December 31, 2000 and 1999, investment securities with a market value of
approximately $16,650,000 were pledged as collateral under repurchase agreements
(Note 7).
20
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
2. Loans Receivable
Loans receivable are summarized as follows
December 31, 2000 1999
-------------------------------------------------------------------------------------------------------
Mortgage loans
Residential $ 54,910,973 $ 54,912,431
Commercial 3,434,287 3,838,316
Construction and land loans 59,363,432 70,008,650
-------------------------------------------------------------------------------------------------------
Total real estate 117,708,692 128,759,397
Commercial business loans 59,119,906 53,504,589
Consumer loans 27,157,528 24,378,061
-------------------------------------------------------------------------------------------------------
Total loans receivable 203,986,126 206,642,047
-------------------------------------------------------------------------------------------------------
Less
Deferred loan fees (costs), net (27,121) 39,640
Allowance for loan losses 2,396,512 1,203,238
-------------------------------------------------------------------------------------------------------
2,369,391 1,242,878
-------------------------------------------------------------------------------------------------------
$ 201,616,735 $ 205,399,169
=======================================================================================================
The allowance for loan losses is summarized as follows:
Amount
-------------------------------------------------------------------------------------------------------
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
Provision charged to expense 1,505,000
Net charge-offs (311,726)
-------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $2,396,512
=======================================================================================================
21
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
2. Loans Receivable (continued)
The Corporation serviced loans for others aggregating approximately $91,963,000
and $241,930,000 at December 31, 2000 and 1999, respectively. The servicing
rights to approximately $189,000,000 in loans were sold during 1999, however,
the transfer of the servicing portfolio did not occur until February 2000.
Mortgage servicing rights, net of valuation reserve, were approximately
$1,021,000 and $568,000 at December 31, 2000 and 1999, respectively. Mortgage
servicing rights of approximately $599,000 and $1,571,000 were capitalized
during the years ended December 31, 2000 and 1999, respectively.
Gross gains and gross losses on the sale of loans totaling approximately
$643,000 and $305,000, $911,000 and $592,000, $1,374,000 and $46,000 were
realized during the years ended December 31, 2000, 1999 and 1998, respectively.
3. Office Properties and Equipment
Office properties and equipment are summarized as follows:
December 31, 2000 1999
-------------------------------------------------------------------------------------------------
Land $ 3,494,851 $ 3,494,851
Building and leasehold improvements 4,459,307 4,389,136
Furniture and fixtures 1,253,539 1,223,340
Equipment 3,114,318 2,032,628
Automobiles 163,165 129,743
-------------------------------------------------------------------------------------------------
12,485,180 11,269,398
Less accumulated depreciation and amortization 2,608,005 1,938,214
-------------------------------------------------------------------------------------------------
Net office properties and equipment $ 9,877,175 $ 9,331,484
=================================================================================================
22
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
4. Deposits
Deposits are summarized as follows:
December 31, 2000 1999
-------------------------------------------------------------------------------------------
Statement savings accounts $ 10,310,764 $ 11,202,630
Demand deposit accounts 40,571,422 30,205,914
Money market accounts 18,893,556 27,877,742
-------------------------------------------------------------------------------------------
69,775,742 69,286,286
-------------------------------------------------------------------------------------------
Time deposits 146,951,455 130,308,385
-------------------------------------------------------------------------------------------
$ 216,727,197 $199,594,671
===========================================================================================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $26,746,000 and $40,596,000 at December 31, 2000 and
1999, respectively.
At December 31, 2000, scheduled maturities of time deposits are as follows:
Year Ending December 31,
----------------------------------------------------------------
2001 $136,969,152
2002 7,464,226
2003 1,552,047
2004 814,025
2005 and thereafter 152,005
----------------------------------------------------------------
$146,951,455
================================================================
23
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:
December 31, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and short-term investments $ 15,550,212 $ 15,550,000 $ 12,634,518 $ 12,635,000
Securities 19,130,328 19,151,000 23,532,342 23,549,000
Loans, net of allowance for loan losses 201,616,735 203,822,000 205,399,169 206,287,000
Financial liabilities
Deposits 216,727,197 216,733,000 199,594,671 199,951,000
Advances from Federal Home Loan Bank 14,000,000 14,000,000 20,000,000 20,000,000
Securities sold under agreement to repurchase - - 16,650,250 16,650,000
Bonds payable 792,153 N/A 902,513 N/A
Notional Fair Notional Fair
Amount Value Amount Value
-------------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to extend credit $49,674,000 $49,674,000 $66,134,000 $66,134,000
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
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, 2000 and 1999, 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
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:
December 31, 2000 1999
-----------------------------------------------------------------------------------------------
Serial Bonds
Class A-3, maturing January 20, 2019, at 8.0% $971,042 $1,152,698
Unapplied payments (34,949) (85,628)
-----------------------------------------------------------------------------------------------
936,093 1,067,070
Less unamortized discount (143,940) (164,557)
-----------------------------------------------------------------------------------------------
$792,153 $ 902,513
===============================================================================================
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
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:
Year Ended December 31, 2000 1999
----------------------------------------------------------------------------------------------------------
Maximum amount outstanding at any month end during
the year $16,684,364 $16,650,250
Average amount outstanding during the year $ 4,265,035 $ 9,387,194
Weighted average interest rate during the year 6.39% 5.10%
8. Advances From Federal Home Loan Bank
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
Year Ended December 31, 2000 1999
----------------------------------------------------------------------------------------------------------
Maximum amount outstanding during the year $31,000,000 $30,000,000
Average amount outstanding during the year $18,147,059 $26,225,806
Average interest rate during the year 6.68% 4.88%
9. Income Taxes
The provision for income taxes as presented in the consolidated statements of
operations are as follows:
Year ended December 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Current income tax $744,103 $2,300 $624,200
Deferred income tax expense (benefit) (431,000) - -
----------------------------------------------------------------------------------------------------------
$313,103 $2,300 $624,200
==========================================================================================================
Reconciliations of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
Year ended December 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Tax expense at statutory rate $312,874 $2,300 $557,800
Adjustments
Other 229 - 66,400
----------------------------------------------------------------------------------------------------------
$313,103 $2,300 $624,200
==========================================================================================================
27
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, 2000 1999
--------------------------------------------------------------------------------
Deferred tax asset
Bad debt reserves $ 755,000 $ 363,000
REO reserves 117,000 -
Deferred loan fees 14,000 22,000
Servicing rights 19,000 -
Available for sale securities 628,000 828,000
Other 37,000 70,000
--------------------------------------------------------------------------------
Total deferred tax asset 1,570,000 1,283,000
--------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 91,000 97,000
FHLB stock - 26,000
Fixed assets 309,000 221,000
--------------------------------------------------------------------------------
Total deferred tax liability 400,000 344,000
--------------------------------------------------------------------------------
Net deferred tax asset $1,170,000 $ 939,000
================================================================================
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, 2000 1999
--------------------------------------------------------------------------------
Balance at the beginning of year $1,469,000 $ 975,000
Additional loans 598,000 798,000
Loan reductions (902,000) (304,000)
--------------------------------------------------------------------------------
Balance at end of year $1,165,000 $1,469,000
================================================================================
28
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, 2000, are as follows:
Amount
-----------------------------------
Data
Year Ending December 31, Leases Processing
--------------------------------------------------------------------------------
2001 $106,000 $309,600
2002 88,400 309,600
2003 69,600 309,600
2004 43,000 51,600
2005 5,000 -
--------------------------------------------------------------------------------
$312,000 $980,400
================================================================================
Total rental expense amounted to approximately $108,000, $91,600 and $70,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. Total data
processing expense amounted to approximately $926,000, $762,000 and $585,000 for
the years ended December 31, 2000, 1999 and 1998, 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 Corporation's 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.
29
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
12. Convertible Preferred Stock (continued)
In January 2000, the Corporation repurchased 2,500 shares of the cumulative
preferred securities at a price of $17.50 per share which resulted in a net
gain, recognized in the statement of Stockholders' Equity, on the repurchase of
$10,111.
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.
Amount Percent Actual Actual Excess
December 31, 2000 Required Required Amount Percent Amount
--------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 8,723,000 4.00% $21,857,000 10.02% $13,134,000
Total risk based capital 17,445,000 8.00% 24,254,000 11.12 6,809,000
Amount Percent Actual Actual Excess
December 31, 1999 Required Required Amount Percent Amount
--------------------------------------------------------------------------------------------------------------------------
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
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.
On October 26, 2000, Guaranty Financial Corporation and Guaranty Bank entered
into a written agreement with the Federal Reserve Bank of Richmond and the
Bureau of Financial Institutions of the Commonwealth of Virginia with respect to
various operating policies and procedures. Various bank operating policies
including asset/liability management, liquidity, risk management, loan
administration and capital adequacy have been revised and reviewed and approved
by the bank regulators.
30
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
13. Stockholders' Equity (continued)
The agreement also restricts Guaranty Financial Corporation from paying future
dividends or incurring any debt at the holding company level without prior
regulatory approval. In addition, Guaranty Bank, is also prohibited from paying
intercompany dividends to Guaranty Financial Corporation without prior
regulatory approval. Except for the requirement of the pre-approval of dividend
payments by both the Company and its subsidiary bank, the Company does not
expect the agreement will restrict or change its operating plans.
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:
2000 1999 1998
------------------------------------------------------------------------------------------------------------------------
Weighted - Weighted - Weighted -
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------------------------------------------------------------------------------------------------------------------
Options outstanding at
beginning of year 130,000 $13.69 88,000 $15.48 71,200 $15.25
Granted - - 44,500 12.00 37,500 15.86
Forfeited (28,100) 12.00 (2,500) 12.00 (18,700) 16.03
Exercised - - - - (2,000) 12.00
------------------------------------------------------------------------------------------------------------------------
Options outstanding
at end of year 101,900 $14.16 130,000 $13.69 88,000 $15.48
========================================================================================================================
Options exercisable
at end of year 73,200 49,700 24,200
========================================================================================================================
No options were granted during the year ended December 31, 2000. The weighted
average fair value of options granted during the year ended December 31, 1999
and 1998 was $3.17 and $4.85, respectively.
31
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
14. Stock Option Plan (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:
Year Ended December 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported $607,116 $ 4,433 $1,016,279
Pro forma 607,116 (88,670) 896,242
Net income (loss)per share (basic and diluted)
As reported $ 0.31 $ .00 $ 0.61
Pro forma 0.31 (.06) 0.58
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 $65,000, $56,000 and
$14,900 for the years ended December 31, 2000, 1999 and 1998, 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
32
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.
December 31, 2000 1999
---------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $49,674,000 $66,134,000
Standby letters of credit written 3,776,000 4,719,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Substantially all of the Corporation's loan activity was with customers located
in Charlottesville and Richmond, Virginia and surrounding counties, with
approximately 24% of the loans collateralized by one to four family residential
properties.
33
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)
First Second Third Fourth
Year ended December 31, 2000 Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------------------------------------
Total interest income $ 5,327 $ 5,850 $ 5,702 $ 5,478
Total interest expense 3,019 3,317 3,164 3,077
-----------------------------------------------------------------------------------------------------------------------------
Net interest income 2,308 2,583 2,538 2,401
Provision for loan losses 130 1,075 150 150
-----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,178 1,458 2,388 2,251
Other income 214 501 400 325
Other expenses 2,022 2,083 2,134 2,556
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax
expense (benefit) 370 (124) 654 20
Income tax expense (benefit) 126 (42) 222 7
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 244 $ (82) $ 432 $ 13
=============================================================================================================================
Basic and diluted earnings (loss)
per share $ 0.12 $ (0.04) $ (0.22) $ 0.01
=============================================================================================================================
34
Guaranty Financial Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
17. Selected Quarterly Financial Data (Unaudited) (continued)
First Second Third Fourth
Year ended December 31, 1999 Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------------------
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
===============================================================================================================================
35
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
December 31, 2000 1999
------------------------------------------------------------------------------------------
Assets
Investment in subsidiaries, at equity $22,032,092 $21,695,484
Cash 1,876 129,640
Prepaid expenses and other assets 463,967 455,664
------------------------------------------------------------------------------------------
$22,497,935 $22,280,788
==========================================================================================
Liabilities and Stockholders' Equity
Other liabilities $ 15,531 $ 117,703
------------------------------------------------------------------------------------------
Total liabilities 15,531 117,703
------------------------------------------------------------------------------------------
Subordinated debt 6,225,925 6,288,425
------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 2,452,159 2,452,159
Additional paid-in capital 8,953,230 8,943,119
Retained earnings 4,851,090 4,479,382
------------------------------------------------------------------------------------------
Total stockholders' equity 16,256,479 15,874,660
------------------------------------------------------------------------------------------
$22,497,935 $22,280,788
==========================================================================================
36
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
Year Ended December 31, 2000 1999
----------------------------------------------------------------------------------------------
Income
Dividends received from Bank $666,291 $886,278
----------------------------------------------------------------------------------------------
Total income 666,291 886,278
----------------------------------------------------------------------------------------------
Interest expense (420,875) (497,940)
Noninterest expense (23,867) (23,473)
----------------------------------------------------------------------------------------------
Income before undistributed net income of the Bank 221,549 364,865
Undistributed net income 385,567 (360,432)
----------------------------------------------------------------------------------------------
Net income $607,116 $ 4,433
==============================================================================================
37
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
Year Ended December 31, 2000 1999
---------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 607,116 $ 4,433
Adjustments
Undistributed earnings of the Bank (385,567) 360,432
Gain on repurchase of subordinated debt 10,111 101,027
(Increase) decrease in prepaid and other assets (8,304) 71,453
(Decrease) increase in other liabilities 15,531 (132,369)
Other - 39,788
---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 238,887 444,764
---------------------------------------------------------------------------------------------------------------
Investing activities
Dividends received from Bank 666,291 886,278
Investment in the Bank (617,331) (3,692,568)
---------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities 48,960 (2,806,290)
---------------------------------------------------------------------------------------------------------------
Financing activities
Cash dividends paid on common stock (353,111) (388,014)
Repurchase of subordinated debt (62,500) (825,000)
Issuance of common stock - 3,692,568
---------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing activities (415,611) 2,479,554
---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (127,764) 118,028
Cash, beginning of year 129,640 11,612
---------------------------------------------------------------------------------------------------------------
Cash, end of year $ 1,876 $ 129,640
===============================================================================================================
38
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: March 30, 2001 By: /s/ Richard L. Saunders
-----------------------------------
Richard L. Saunders
Chief Executive Officer (interim)
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.
Signature Title Date
--------- ----- ----
/s/ Richard L. Saunders Chief Executive Officer (interim) March 30, 2001
------------------------------------- (Principal Executive Officer)
Richard L. Saunders
/s/ Thomas F. Crump Chief Financial Officer March 30, 2001
------------------------------------- (Principal Financial and
Thomas F. Crump Accounting Officer)
/s/ Douglas E. Caton Chairman of the Board March 30, 2001
-------------------------------------
Douglas E. Caton
/s/ Harry N. Lewis Vice Chairman of the Board March 30, 2001
-------------------------------------
Harry N. Lewis
Director March __, 2001
-------------------------------------
Henry J. Browne
Director March __, 2001
-------------------------------------
Jason I. Eckford, Jr.
/s/ Robert P. Englander Director March 30, 2001
-------------------------------------
Robert P. Englander
Signature Title Date
--------- ----- ----
/s/ John R. Metz Director March 30, 2001
-------------------------------------
John R. Metz
Director March __, 2001
-------------------------------------
James R. Sipe, Jr.
/s/ Oscar W. Smith, Jr. Director March 30, 2001
-------------------------------------
Oscar W. Smith, Jr.
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 definitive Proxy
Statement of Guaranty Financial Corporation for the 1998
Annual Meeting of Shareholders, incorporated herein by
reference.
21 Subsidiaries of Guaranty Financial Corporation.