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, 2003
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)
(434) 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
$14,089,633.
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 1,
2004 was approximately $42,526,000. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant.)
The number of outstanding shares of Common Stock as of March 1, 2004
was 2,000,659.
TABLE OF CONTENTS
PART I
Page
ITEM 1. DESCRIPTION OF BUSINESS............................................. 3
ITEM 2. DESCRIPTION OF PROPERTY.............................................12
ITEM 3. LEGAL PROCEEDINGS...................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS....................................13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................14
ITEM 7. FINANCIAL STATEMENTS................................................36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................36
ITEM 8A. CONTROLS AND PROCEDURES.............................................36
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT..............................36
ITEM 10. EXECUTIVE COMPENSATION..............................................36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................37
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K..............................37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................37
2
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 began business in February 1981 as a
federal savings association, converted to a Virginia chartered Federal Reserve
member bank in 1997, and is headquartered in Charlottesville, Virginia. The
consolidated financial statements of Guaranty include the accounts of Guaranty
and its wholly-owned subsidiaries, Guaranty Capital Trust I and the Bank, and
the Bank's wholly-owned subsidiaries, GMSC, Inc. and Guaranty Investment Corp.
Guaranty Capital Trust I issued trust preferred securities in 1998, which have
been fully redeemed as of December 31, 2003. GMSC, Inc. was organized in 1987
for the purpose of issuing debt securities which are principally secured by
mortgage-backed securities. The debt securities have been fully paid as of
December 31, 2003.
Guaranty's principal asset is the outstanding stock of the Bank.
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, and
selling loans. Of Guaranty's $157.8 million of gross loans outstanding at
December 31, 2003, 24.1% represented construction and land loans, 46.3%
represented commercial business and commercial real estate loans, and 16.1%
represented residential first mortgages. Guaranty also lends funds to retail
banking customers by means of home equity and installment loans. 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.
On December 18, 2003, Guaranty and Union Bankshares Corporation
announced the signing of a definitive merger agreement, which was unanimously
approved by each board of directors, pursuant to which Union will acquire
Guaranty. The merger is dependent on certain regulatory approvals, as well as
approval by Guaranty shareholders, and is expected to close in the second
quarter of 2004.
Guaranty's main office is located at 1658 State Farm Boulevard,
Charlottesville, Virginia 22911 and the telephone number is (434) 970-1100.
Market Area
Guaranty is headquartered in Charlottesville, Virginia. Charlottesville
and its surrounding area had a collective population of approximately 120,000 in
2001 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 seven full service retail branches, which serve the City of
Charlottesville and the counties of Albemarle, Fluvanna and Nelson. According to
the June 30, 2003 market share report as summarized by the Federal Deposit
Insurance Corporation (the "FDIC"), Guaranty holds 7.68% of the deposits in the
Charlottesville, Virginia market.
3
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.
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.
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, 2003, commitments to extend credit totaled $60.1 million.
4
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, 2003, construction, land and land development
loans outstanding were $38.0 million, or 24.1%, of gross loans. Approximately
95% 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 75% to 80% 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, 2003, commercial loans, excluding commercial real estate loans as
discussed below, totaled $67.0 million, or 42.5% 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, 2003, commercial real estate loans aggregated $6.0
million or 3.8% of Guaranty's gross loans.
5
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 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 valuation of residential
collateral is provided by independent fee appraisers who have been approved by
the Bank's Board of Directors. Loan applications are underwritten either
manually or automatically. Automated underwriting may be used on those loans
with limited risk, based on assigned guidelines set forth by FHLMC.
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.
Most fixed rate mortgage loans are originated with the intent to sell.
The Bank also occasionally originates non-conforming fixed rate loans to hold in
the portfolio. At December 31, 2003, $15.4 million, or 9.8%, 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. 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 One, Three, Five or Seven Year United States Treasury
bills. 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. At
December 31, 2003, $10.0 million, or 6.3%, of the Bank's loan portfolio
consisted of adjustable rate mortgages.
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
6
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 requires 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, 2003, Guaranty had consumer loans of $21.2
million or 13.5% of gross loans. Such loans are generally made to customers with
whom Guaranty has a pre-existing relationship. Guaranty currently originates all
of its consumer loans in its geographic market area. 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. 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, 2003, Guaranty had 91 full-time and 4 part-time
employees. None of Guaranty's employees are represented by any collective
bargaining unit.
7
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 is 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, 2003, the Bank
declared $773,803 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. Guaranty and the Bank
were released from the Written Agreement in October of 2002. 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 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.
8
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 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. The Bank's deposit insurance assessment
decreased from .030% to .017% and then to .015% of deposits in calendar years
2001, 2002 and 2003, respectively. 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 1997
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.
9
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 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, 2003, 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.
10
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 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.
11
Item 2. Description of Property.
As of March 1, 2004, Guaranty conducted its business from its main
office in Charlottesville, Virginia and seven branch offices. The following
table provides certain information with respect to these properties:
Location Date Facility Opened Lease Arrangements
-------- -------------------- ------------------
Main Office:
1658 State Farm Boulevard 1996 Owned by Guaranty
Charlottesville, Virginia
Branch Offices:
Downtown Mall 2002 Lease expires in 2012, subject to
400 East Main Street Guaranty's right to renew for two
Charlottesville, Virginia additional five-year terms
Barracks Road 1994 Lease expires in 2004
1924 Arlington Boulevard
Charlottesville, Virginia
Route 29 North & Rio Road 1985 Lease expires in 2012, subject to
1700 Seminole Trail Guaranty's right to renew for two
Charlottesville, Virginia additional five-year terms
Lake Monticello 1998 Owned by Guaranty
Route 53 & Turkey Sag Road
Lake Monticello, Virginia
Forest Lakes 2001 Owned by Guaranty
3290 Worth Crossing
Charlottesville, Virginia
Lovingston 2003 Owned by Guaranty
124 Main Street
Lovingston, Virginia
Guaranty believes that all of its properties are maintained in good
operating condition and are suitable and adequate for its operational needs.
Item 3. Legal Proceedings.
In the course of its operations, Guaranty is a party to various legal
proceedings. There are no material pending legal proceedings to which the
Company is a party or of which the property of the Company is subject.
12
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, 2003:
1st quarter $14.00 12.83 $0.075
2nd quarter 15.36 13.01 0.075
3rd quarter 16.20 14.18 0.075
4th quarter 26.24 15.90 0.075
Fiscal Year Ended December 31, 2002:
1st quarter 10.95 8.00 --
2nd quarter 13.75 10.20 --
3rd quarter 14.12 12.20 --
4th quarter 14.60 12.50 --
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 was 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. Guaranty and the Bank were
released from the Written Agreement in October 2002. The timing, amount and
payment of future dividends on Guaranty's Common Stock is at the discretion of
Guaranty's Board of Directors and will depend upon the earnings of Guaranty and
its subsidiaries, principally the Bank, the financial condition of Guaranty and
other factors, including general economic conditions and applicable governmental
regulations and policies.
Guaranty is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from the Bank.
As of March 1, 2004, Guaranty had approximately 330 shareholders of
record. This number of shareholders does not reflect the number of individuals
or institutional investors holding stock in nominee name through banks,
brokerage firms and others.
13
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
The following commentary discusses major components of the business of
Guaranty Financial Corporation (Guaranty) and presents an overview of its
consolidated financial position and results of operations at December 31, 2003
and 2002, and for the years ended December 31, 2003, 2002 and 2001. This
discussion should be reviewed in conjunction with the consolidated financial
statements, the summary of accounting policies 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 its operations through its subsidiary, Guaranty Bank. Guaranty
Bank is a community bank serving the markets of the City of Charlottesville and
the counties of Albemarle, Fluvanna and Nelson. Guaranty Bank (the "Bank")
operated seven branch locations throughout the year 2003.
Guaranty maintained solid earnings during calendar year 2003, which was
the third and final year of its strategic repositioning to become a high
performing banking company. Management continued to focus on initiatives that
were established in 2001 to improve earnings. Guaranty maintained a high level
of asset quality, ending the year with no non-performing assets and past-due
loans balances at the lowest level in five years. As a result of Guaranty's
focused effort on attracting low-cost deposits, the net interest margin widened
from 3.51% for calendar year 2001 to 4.75% for calendar year 2003.
From December 31, 2001 to December 31, 2003, Guaranty reduced its total
assets from $225.2 million to $199.0 million. This planned reduction in total
assets is indicative of Guaranty's emphasis changing from aggressive growth to
profitability management.
Net Income
Net income for the year ended December 31, 2003, was $1,946,000 ($.97
per diluted share), which represented a $183,000, or 10.4% increase over the net
income for the prior year. Factors that contributed to the increased net income
were the gain that was realized on the sale of the Harrisonburg branch and
increased mortgage banking income. These favorable variances were offset by
lower net interest income, an increased loan loss provision, resulting from
fraudulent activity on the part of one large commercial borrower, and decreased
investment commissions.
Net income for the year ended December 31, 2002, was $1,763,000 ($.89
per diluted share), which represented a $1,245,000, or 240% increase over the
net income for the prior year. Factors that significantly contributed to the
increased net income were higher net interest income, lower loan loss provision,
and decreased personnel and occupancy expenses, offset by lower mortgage banking
fees, investment commissions and an increased provision for income taxes.
Net income for the year ended December 31, 2001, was $518,000 or $.26
per diluted share, an $89,000 decrease from the net income reported for the
prior year. Decreased net income was due to a reduction in net interest income
caused by the impact of declining interest rates on a short-term asset sensitive
balance sheet. Increases in operating expenses primarily related to severance
expenses arising from management changes also negatively impacted net income for
2001. These changes more than offset increased mortgage banking income and a
reduction in the provision for possible loan losses.
14
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 $8.3 million for the year ended December 31,
2003, a 4.8% decrease from $8.7 million in net interest income for the year
ended December 31, 2002. The yield on loans fell 75 basis points from 6.99%
during 2002 to 6.24% during 2003. The yield on securities was substantially
impacted by the low rate environment, as Guaranty replaced higher risk long-term
corporate bonds yielding an average of 6.30% in 2002 with securities yielding an
average of 3.73% in 2003. The cost of interest bearing deposits fell 115 basis
points to 1.09% during 2003 from 2.24% during 2002, as Guaranty's continued
focus regarding deposits remained centered around low-cost deposit growth.
During 2003, Guaranty redeemed its Trust Preferred Securities, which had a 7%
coupon rate, saving over $260,000 in interest expense in 2003. Unamortized
expenses were recognized in full at the time of the redemption, resulting in a
negative impact to the yield of $185,000. Guaranty also redeemed GMSC's REMIC
bond during 2003, at which time $52,000 in unamortized premium was recognized,
also negatively impacting Guaranty's net interest income.
Net interest income was $8.7 million for the year ended December 31,
2002, a 10.3% increase from $7.9 million in net interest income for the year
ended December 31, 2001. The net interest margin was 4.58% for the year ended
December 31, 2002, a 107 basis point increase over net interest margin of the
prior year. Interest on deposits decreased year-over-year by 61.2%, falling from
$8.9 million to $3.5 million. This decrease was the result of a focused effort
to attract and retain low-cost deposits, coupled with lower market rates. The
average cost of deposits decreased 233 basis points, from 4.57% to 2.24% from
December 31, 2001 to December 31, 2002. The impact of lower interest rates
offered by the Bank to deposit customers was offset to a certain extent by lower
interest earned on interest earning assets. Interest income generated by loans
fell from $15.5 million to $11.6 million, a 24.6% decrease. The average yield on
loans fell by 118 basis points, to 6.99% for the year ended December 31, 2002,
from 8.17% for the prior year. Interest earned on investments decreased by
$984,000, predominantly due to lower balances in the investment portfolio.
Net interest income was $7.9 million for the year ended December 31,
2001, a 19.4% decrease from $9.8 million in net interest income for the prior
year. The net interest margin for the year ended December 31, 2001, was 3.51%, a
48 basis point decline from 3.99% in the prior year. The net interest margin was
compressed throughout 2001 as interest rates on earning assets fell faster than
the corresponding decrease in interest rates paid on deposits. During 2001, the
yield on the loan portfolio fell by 125 basis points while the cost of interest
bearing deposits declined by 62 basis points. This difference was due to the
impact of loans with interest rates tied to the prime rate repricing immediately
with each rate reduction. In contrast, certificates of deposit are generally
issued with maturities of twelve months and the interest rate paid usually does
not adjust until maturity. Net interest income was also negatively impacted by a
reduction in average loans outstanding to $189.1 million in 2001 from $213.4
million during the prior year.
15
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.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest earning assets:
Securities $ 7,114 $ 265 3.73% $ 17,226 $ 1,086 6.30% $ 28,303 $ 1,855 6.55%
Loans 158,992 9,916 6.24% 166,634 11,649 6.99% 189,135 15,451 8.17%
Interest bearing deposits
in other banks 8,159 101 1.25% 6,078 120 1.97% 7,381 336 4.55%
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets/
total interest income 174,265 10,282 5.90% 189,938 12,855 6.77% 224,819 17,642 7.85%
------------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks 8,715 8,551 8,134
Premises and equipment 6,467 8,185 9,245
Other assets 4,742 4,975 4,504
Less allowance for loan losses (2,193) (2,531) (2,523)
Total non-interest earning assets 17,731 19,180 19,360
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $191,996 $209,118 $244,179
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing deposits:
Demand accounts $ 30,347 54 0.18% $ 27,057 87 0.32% $23,344 243 1.04%
MMDA accounts 40,164 368 0.92% 24,864 381 1.53% 21,170 674 3.18%
Savings 12,833 27 0.21% 13,103 63 0.48% 11,643 195 1.67%
Certificates of deposit 58,309 1,094 1.88% 89,635 2,933 3.27% 139,438 7,821 5.61%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 141,653 1,543 1.09% 154,659 3,464 2.24% 195,595 8,933 4.57%
------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other
borrowings 760 10 1.32% 6,136 120 1.96% 4,608 237 5.14%
Trust preferred bonds 2,718 364 13.39% 6,013 481 8.00% 6,013 481 8.00%
Bonds payable (3) 189 84 44.44% 486 90 18.52% 739 105 14.21%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities/total interest
expense 145,320 2,001 1.38% 154,659 4,155 2.48% 206,955 9,756 4.71%
------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits 26,306 22,879 18,755
Other liabilities 1,123 1,397 2,259
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 172,749 191,570 227,969
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 19,247 17,548 16,210
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Stockholders' equity $191,996 $209,118 $244,179
------------------------------------------------------------------------------------------------------------------------------------
Interest spread (1) 4.52% 4.29% 3.13%
Net interest income/net interest
margin (2) $8,281 4.75% $ 8,700 4.58% $7,886 3.51%
------------------------------------------------------------------------------------------------------------------------------------
(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.
(3) The yield associated with bonds payable for the year ended December 31, 2003
includes $52,000 of premium associated with the time of redemption of the
bonds.
16
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, 2003 Year Ended December 31, 2002
compared to compared to
Year Ended December 31, 2002 Year Ended December 31, 2001
Change Due To: Change Due To:
------------------------------------------------------------------------------------------------------------------------------------
Increase Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ (444) $ (377) $ (821) $ (71) $ (698) $ (769)
Loans (1,256) (477) (1,733) (2,229) (1,573) (3,802)
Interest bearing deposits
in other banks (44) 26 (18) (190) (26) (216)
------------------------------------------------------------------------------------------------------------------------------------
Total interest income (1,744) (828) (2,572) (2,490) (2,297) (4,787)
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest bearing deposits:
Demand accounts (39) 6 (33) (168) 12 (156)
MMDA accounts (153) 140 (13) (350) 57 (293)
Savings (35) (1) (36) (139) 7 (132)
Certificates of deposit (1,251) (588) (1,839) (3,258) (1,630) (4,888)
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits (1,478) (443) (1,921) (3,915) (1,554) (5,469)
FHLB advances and other (39) (71) (110) (147) 30 (117)
Trust preferred bonds 324 (441) (117) -- -- --
Bonds payable 126 (132) (6) 32 (47) (15)
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense (1,067) (1,087) (2,154) (4,030) (1,571) (5,601)
------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ (677) $ 259 $ (418) $ 1,540 $ (726) $ 814
------------------------------------------------------------------------------------------------------------------------------------
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 has an Asset/Liability Committee ("ALCO"), which meets
regularly to discuss deposit pricing, changes in borrowed money, investment
activity, loan sale activity, 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. Guaranty's ALCO has assigned
an "effective maturity" to non-maturing demand accounts, ranging from two to
three years, depending on the nature of the account, and this effective maturity
reduces the risk of the liability sensitive position.
At December 31, 2003, Guaranty had $46.7 million more liabilities than
assets that re-price within one year and therefore was in a one-year
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 primarily the result of a large
concentration of non-maturing interest-bearing demand deposit accounts and fixed
rate certificates of deposit reaching maturity in one year or less.
17
Because gap analysis shows only the dollar volume of assets and
liabilities that will mature or re-price, Guaranty's ALCO uses simulation
modeling to measure the actual effects the re-pricing will have on net interest
margin and net income. The typical simulation model involves a 12-month
projection with a level rate scenario and rising and falling rate scenarios
deemed appropriate given the current rate environment. The acceptable level of
interest rate sensitivity is plus or minus 15% of net interest income from an
immediate 200 basis point increase or decrease in interest rates. The acceptable
change in net income is plus or minus 40% from a 200 basis point increase or
decrease in interest rates. ALCO 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.
ALCO also measures the economic value at risk. The purpose of this
measure is to determine the long-term effect interest rate changes will have on
the economic value of the balance sheet. This measurement is obtained using a
discounted cash flow technique, at current, level and rising and falling rate
scenarios. ALCO has established risk parameters for economic value of equity and
monitors periodic projections against such parameters.
The following table presents the amounts of Guaranty's interest
sensitive assets and liabilities that mature or reprice in the periods
indicated.
December 31, 2003
Maturing or Repricing In:
------------------------------------------------------------------------------------------------------------------------------------
3 Months 4-12 1-5 Over 5
(Dollars in thousands) or less Months Years Years
------------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive assets:
Loans $ 68,932 $ 17,349 $ 41,139 $ 30,360
Investments and mortgage-backed securities (1) 3 9 9,669 9,012
Deposits at other institutions 4,667 - - -
------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets 73,602 17,358 50,808 39,372
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets 73,602 90,960 141,768 181,140
------------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
NOW accounts 32,073 - - -
Money market deposit accounts 45,225 - - -
Savings accounts 13,404 - - -
Certificates of deposit 16,991 29,971 7,413 9
------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities 107,693 29,971 7,413 9
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive liabilities $ 107,693 $137,664 $145,077 $145,086
------------------------------------------------------------------------------------------------------------------------------------
Period gap $(34,091) $(12,613) $ 43,395 $ 39,363
Cumulative gap (34,091) (46,704) (3,309) 36,054
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 68.34% 66.07% 97.72% 124.85%
Ratio of cumulative gap to total assets (17.13%) (23.47%) (1.66%) 18.12%
------------------------------------------------------------------------------------------------------------------------------------
(1) Amounts include Federal Home Loan Bank stock.
Of Guaranty's commercial and construction loans with a maturity of more
than one year, approximately $2.2 million have fixed interest rates and $1.9
million have variable interest rates.
18
Investments
Total investment securities increased 267% to $19.9 million at December
31, 2003, from $5.4 million at December 31, 2002. During 2002, Guaranty took
advantage of the sustained low interest rate environment and liquidated $10.4
million of the corporate bonds in the available for sale classification, in an
effort to improve liquidity without incurring investment losses. Guaranty began
to re-build the investment portfolio in 2003 to meet future liquidity and
profitability objectives.
The following table shows the amortized cost and fair market value of
investment securities at the dates indicated.
December 31,
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Cost Market Cost Market Cost Market
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Held-to-maturity
Mortgage-backed securities $ 3,321 $ 3,349 $ 433 $ 471 $ 720 $ 768
U.S. Government Agency Obligations 8,138 8,122 403 403 250 250
------------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 11,459 11,471 836 874 970 1,018
------------------------------------------------------------------------------------------------------------------------------------
Available for sale
Mortgage-backed securities 5,882 5,868 - - - -
Corporate bonds - - 3,247 3,212 13,620 12,597
U.S. Government Agency Obligations 1,497 1,477 - - 8,000 7,970
Federal Reserve Bank & Other Stocks 557 557 422 422 422 422
------------------------------------------------------------------------------------------------------------------------------------
Total available for sale 7,936 7,902 3,669 3,634 22,042 20,989
------------------------------------------------------------------------------------------------------------------------------------
Other
Federal Home Loan Bank Stock 532 532 947 947 1,550 1,550
------------------------------------------------------------------------------------------------------------------------------------
Total $19,927 $19,905 $5,452 $5,455 $24,562 $23,557
------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Book % of Book % of Book % of
(Dollars in thousands) Value Total Value Total Value Total
------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
Mortgage-backed securities $ 9,189 46.19% $ 431 7.96% $ 720 3.06%
Corporate bonds - - 3,212 59.29 12,597 53.58
Treasury and agency notes 9,615 48.33 - - 8,220 34.97
FHLB stock 532 2.68 947 17.48 1,550 6.59
Other 557 2.80 827 15.27 422 1.80
------------------------------------------------------------------------------------------------------------------------------------
Total Investment securities $19,893 100.00% $5,417 100.00% $23,509 100.00%
------------------------------------------------------------------------------------------------------------------------------------
19
The following table indicates the maturity distribution and yields of investment
securities, held as of December 31, 2003.
Due in 1 year Due after 1 year Due after 5 years
or less through 5 years through 10 years Due after 10 years Total
------------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities held for investment:
U.S. Government securities $ - - $8,138 2.77% $ - - $ - - $8,138 2.77%
Mortgage-backed securities - - - - - - 3,321 4.86% 3,321 4.86
------------------------------------------------------------------------------------------------------------------------------------
Total $ - - $8,138 2.77% $ - - $ 3,321 4.86% $11,459 3.38%
Securities available for sale (1):
U.S. Government securities $ - - $1,477 3.50% $ - - $ - - $1,477 3.50%
Mortgage-backed securities - - - - - - 5,868 2.68% 5,868 2.68%
Total $ - - $1,477 3.50% $ - - $ 5,868 2.68% $7,345 3.50%
Total securities $ - - $9,615 2.88% $ - - $ 9,189 3.47% $18,804 3.17%
------------------------------------------------------------------------------------------------------------------------------------
(1) Excludes Federal Reserve stock of $352,250, Federal Home Loan Bank stock of
$532,000, Community Bankers Bank stock of $70,000 and BI Investments stock
of $135,000.
Loans
Net loans consist of total loans minus undisbursed loan funds, deferred
loan fees and the allowance for loan losses. Net loans were $156.0 million at
December 31, 2003, a 4.4% decline from December 31, 2002. During 2003, Guaranty
continued to reposition the loan portfolio with highly focused lending
strategies and an emphasis on credit quality. Net loans declined to $163.2
million at December 31, 2002, from $177.6 million at December 31, 2001, as
Guaranty controlled its growth to increase its regulatory capital ratios.
The following table sets forth the composition of Guaranty's loan
portfolio in dollars at the dates indicated.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage Loans:
Residential $25,461 $ 20,119 $ 39,864 $ 54,911 $ 62,796
Commercial 5,975 7,894 16,277 3,434 1,179
Construction and land loans 38,013 38,480 36,307 59,363 70,009
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 69,449 66,493 92,448 117,708 133,984
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 67,090 76,651 66,603 59,120 55,698
Consumer loans 21,241 22,238 20,973 27,190 16,960
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 157,780 165,382 180,024 204,018 206,642
------------------------------------------------------------------------------------------------------------------------------------
Adjustments:
Deferred fees (costs) (240) (110) (67) (27) 40
Allowance for losses 2,011 2,242 2,512 2,396 1,203
------------------------------------------------------------------------------------------------------------------------------------
Total net items 1,771 2,132 2,445 2,369 1,243
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $156,009 $163,250 $177,579 $201,649 $205,399
------------------------------------------------------------------------------------------------------------------------------------
20
The changes in Guaranty's loan portfolio over the past five years
represent the evolution from a savings association to a full service commercial
bank. Commercial business lending began in 1998 and now comprises over 42% of
total loans outstanding. During this same time period, residential mortgage
loans outstanding have decreased from $62.8 million to $25.5 million. Presently,
the majority of the residential mortgage loans originated are sold on a
servicing released basis.
The following tables show the composition of Guaranty's loan portfolio
by fixed and adjustable rate at the dates indicated.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate
Residential $15,417 $ 8,921 $ 27,200 $ 20,403 $ 18,277
Commercial - - - - 1,179
Construction and land loans - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 15,417 8,921 27,200 20,403 19,456
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 13,380 15,745 15,427 12,891 13,678
Consumer Loans 4,412 3,606 3,429 3,832 2,825
------------------------------------------------------------------------------------------------------------------------------------
Total fixed-rate loans 33,209 28,272 46,056 37,126 35,959
------------------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
Real Estate
Residential 10,045 11,198 12,664 34,508 44,519
Commercial 5,975 7,894 16,277 3,434 11,140
Construction and land loans 38,013 38,480 36,307 59,363 70,009
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 54,033 57,572 65,248 97,305 125,668
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 53,650 60,906 51,176 46,229 30,880
Consumer loans 16,888 18,632 17,544 23,358 14,135
------------------------------------------------------------------------------------------------------------------------------------
Total adjustable-rate loans 124,571 137,110 133,968 166,892 170,683
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 157,780 165,382 180,024 204,018 206,642
------------------------------------------------------------------------------------------------------------------------------------
Less:
Deferred fees (costs) (240) (110) (67) (27) 40
Allowances for losses 2,011 2,242 2,512 2,396 1,203
------------------------------------------------------------------------------------------------------------------------------------
Total net items 1,771 2,132 2,445 2,369 1,243
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $156,009 $163,250 $177,579 $201,649 $205,399
------------------------------------------------------------------------------------------------------------------------------------
The following table presents the remaining maturities of selected
categories of Guaranty's loan portfolio at December 31, 2003.
Commercial, Financial Real Estate
and Agricultural Construction
---------------------------------------------------------------------------
(Dollars in thousands)
Within 1 year $12,735 $23,848
---------------------------------------------------------------------------
Variable Rate:
1 to 5 years 16,800 5,450
After 5 years 32,822 2,235
---------------------------------------------------------------------------
Total 49,622 7,685
Fixed Rate:
1 to 5 years 5,920 -
After 5 years 4,738 -
---------------------------------------------------------------------------
Total 10,658 -
---------------------------------------------------------------------------
Total $73,015 $31,533
---------------------------------------------------------------------------
21
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
General
Asset quality is an important factor in the successful operation of a
financial institution. Banking regulations require insured institutions to
classify their own assets and to establish prudent general allowances for losses
for assets classified as "substandard" or "doubtful." For the portion of assets
classified as "loss," an institution is required to either establish specific
allowances of 100% of the amount classified or charge such amounts off its
books.
Assets that do not currently expose Guaranty to sufficient risk to
warrant classification in one of the aforementioned categories but possess
potential weaknesses are required to be designated "special mention" by
management. On the basis of management's review of its assets, at December 31,
2003, Guaranty had classified $3.7 million of its loans as substandard. No loans
were classified as doubtful or loss at December 31, 2003. Most of Guaranty's
assets that have been classified are not included in the table of non-performing
assets set forth below because many loans are classified as substandard based on
certain criteria or previous credit problems but are currently performing and
management believes that they are fully collectible and secured.
Unless well secured and in the process of collection, Guaranty places
loans on a non-accrual 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 ceases, 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. Guaranty had no
loans that were considered in the non-accrual status as of December 31, 2003.
The following table reflects the composition of non-performing assets
at the dates indicated.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans $ - $2,363 $ 187 $ 238 $1,310
Restructured loans - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Total non-performing loans - 2,363 187 238 1,310
------------------------------------------------------------------------------------------------------------------------------------
Foreclosed assets - 397 764 1,301 843
------------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ - $2,760 $ 951 $1,539 $2,153
------------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 or more days and
accruing interest $ 92 $ 156 $ 103 $1,587 $ 93
Non-performing loans to total loans, at
period end - 1.43% 0.10% 0.12% 0.62%
Non-performing assets to period end
total loans and foreclosed assets - 1.67% 0.53% 0.76% 1.02%
22
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
Guaranty provides valuation allowances for anticipated losses on loans
when its management determines that full repayment by the borrower is unlikely
and 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, risk rating and type
of loan. A loss experience percentage is established for each risk rating and
loan type and is reviewed quarterly. Each quarter the loss percentage is applied
to the portfolio, by risk rating and loan type, to determine the minimum amount
of reserves required. Percentages are applied to the various categories of
loans, from 0.12% - 1% of satisfactory loans, and from 2% - 10% of loans for
less than satisfactory loans. Mortgage loans that are HUD or VA guaranteed are
excluded from the allowance for loan loss calculation. 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.
During 2003, Guaranty charged-off $1.03 million as the consequence of
substantial fraudulent activity by one commercial borrower and increased the
provision for loan loss due to concern regarding the ability to collect a second
large commercial credit that was currently in the workout stage. The combination
of these two factors resulted in an increased provision to the allowance for
loan losses in the amount of $949,000 during the second quarter of 2003. A
recovery of a portion of the previously charged-off loan was recorded in the
third quarter of 2003.
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of period $2,242 $2,512 $2,396 $1,203 $1,002
Provision charged to operations 841 100 333 1,505 486
Charge-offs:
Real estate - - 66 229 122
Consumer 19 14 15 72 -
Commercial 1,288 359 145 34 165
Recoveries:
Real estate - - 1 20 -
Consumer 7 3 - 2 2
Commercial 228 - 8 1 -
------------------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 1,072 370 217 312 285
------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $2,011 $2,242 $2,512 $2,396 $1,203
------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to period
end total loans 1.27% 1.36% 1.40% 1.17% 0.57%
Allowance for loan losses to nonaccrual
loans - 94.9% 1,343.32% 1,006.72% 91.83%
Net charge-offs to average loans 1.70% 0.22% 0.12% 0.15% 0.15%
23
Provision for loan losses
For the years ended December 31, 2003, 2002 and 2001, the provision for
loan losses was approximately $841,000, $100,000 and $333,000, respectively. The
provision for loan losses increased for the year ended December 31, 2003 due to
fraudulent activity on the part of one large commercial borrower and concern
regarding the ability to collect a second large commercial credit that was
currently in the workout stage. The provision for loan losses decreased for the
year ended December 31, 2002, as Guaranty's loan portfolio decreased and its
allowance for possible losses as a percentage of loans outstanding was
determined by management to be adequate to cover future potential losses based
on the assessed level of risk in the portfolio.
Guaranty monitors its loan loss allowance quarterly and makes
provisions as necessary. Management believes that the level of Guaranty's loan
loss allowance is adequate for its loan portfolio size and mix.
A comparison of the allocation of the allowance for loan losses in
dollars by loan category to the percentage of the loan portfolio represented by
each category is provided in the following table. Because all of these factors
are subject to change, the allocation is not necessarily predictive of future
loan losses in the indicated categories.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
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 $ 32 16.1% $ 27 12.2% $ 50 22.1%
Construction and land 512 24.1 48 23.3 611 20.2
Commercial 951 46.3 1,434 51.1 1,165 46.0
Consumer and other loans 106 13.5 10 13.4 105 11.7
Unallocated 410 - 23 - 581 -
------------------------------------------------------------------------------------------------------------------------------------
Total $2,011 100.0% $2,242 100.0% $2,512 100.0%
------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of
Loans to Loans to
Total Gross Total Gross
Allowance Loans Allowance Loans
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate $ 109 26.9% $ 78 29.8%
Construction and land 1,056 29.1 383 31.4
Commercial 861 30.7 575 30.7
Consumer and other loans 137 13.3 167 8.1
Unallocated 233 - - -
------------------------------------------------------------------------------------------------------------------------------------
Total $2,396 100.0% $1,203 100.0%
------------------------------------------------------------------------------------------------------------------------------------
24
Non-Interest Income
Guaranty's non-interest income consists primarily of mortgage banking
income, loan and deposit fees and servicing income, gains and losses on sale of
investment securities, and investment sales commissions. In the first quarter of
2002, Guaranty invested in bank-owned life insurance ("BOLI"). The BOLI will
increase in value over the life of the policies, and this increase will have a
positive impact on non-interest income.
The following table presents information on the sources and amounts of
non-interest income.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage banking income $1,419 $ 999 $1,093
Loan and deposit fees and servicing income 917 907 831
Net gain on sale of branches 939 - -
Increase in cash surrender value of life insurance 217 183 -
Investment sales commissions 10 104 254
Net gain (loss) on sale of securities 12 20 3
Other 293 273 325
------------------------------------------------------------------------------------------------------------------------------------
Total $3,807 $ 2,486 $2,506
------------------------------------------------------------------------------------------------------------------------------------
Non-interest income increased for the year ended December 31, 2003 by
$1.3 million, primarily as the result of the sale of the Harrisonburg branch and
the increase in mortgage banking income. In January 2003, Guaranty closed on the
sale of it Harrisonburg branch, as part of its focus on profitability
management. The Bank also thrived in the refinancing boom of 2003, increasing
mortgage banking income from $1.0 million for calendar year 2002 to $1.4 million
for calendar year 2003, a 42% increase. The mortgage banking department closed
over $70 million loans during 2003, of which $54 million were sold on the
secondary market; fees realized on the sale of loans averaged 220 basis points
throughout the year. Guaranty does not anticipate that earnings realized in 2003
in the mortgage banking area will be indicative of future results. Loan and
deposit fees increased by $10,000 from 2002 to 2003, due to increased commercial
and real estate loan fees, and a continued increased in the volume of checking
accounts. Investment sales commissions were minimal during 2003, as the
re-configuration of the investments sales function, realigned with a new
broker/dealer, was still in progress during 2003.
Non-interest income decreased for the year ended December 31, 2002, by
$20,000 from the same period in the prior year. Mortgage banking income
decreased approximately $94,000, as the result of a combination of two factors.
First, residential mortgage loan originations decreased from $70.7 million for
the year ended December 31, 2001, to $45.7 million for the year ended December
31, 2002, which was partially due to the closing of the mortgage loan production
office in Harrisonburg. The second factor affecting mortgage banking income was
the increase in fees realized upon the sale of the loans, which averaged 218
basis points compared to 155 basis points in the prior year. Loan and deposit
fees and servicing income increased $76,000 from December 31, 2001 to December
31, 2002, due to a continued increased volume of checking accounts. In the first
quarter of 2002, the Board of Directors approved the purchase of $3 million of
bank-owned life insurance ("BOLI"). The increase in the cash surrender value of
the BOLI amounted to $183,000 for the year ended December 31, 2002. Investment
sales commissions decreased by $150,000 for the year ended December 31, 2002,
compared to the prior year, due to the departure of key personnel.
As part of its revised mortgage banking business model, Guaranty sold
its residential mortgage loan servicing for others portfolio in 2001 for
approximately $900,000. The transfer of the loan servicing, which was completed
in October 2001, resulted in a gain of approximately $9,000. With the present
25
practice of selling most residential mortgage loans on a servicing released
basis, Guaranty will not accumulate mortgage loan servicing rights 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 creating volatility in net earnings. 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 exit the
mortgage loan servicing business.
Non-Interest Expenses
Non-interest expenses decreased $98,000 from $8.5 million for the year
ended December 31, 2002 to $8.4 million for the year ended December 31, 2003.
Occupancy expenses decreased $75,000, due to the net effect of closing two
branches early in the year and opening only one, more efficient use of third
party vendors who provide grounds maintenance services, and lower depreciation
expense. This favorable variances was offset by professional fees, for increased
legal fees relating to commercial loan workouts, including substantial fees
associated with the fraudulent activity of one commercial borrower. .
Non-interest expenses decreased by 8.3% to $8.5 million for the year
ended December 31, 2002, compared to $9.3 million for the prior year. Personnel
expenses decreased by $250,000, due partially to the strategic re-alignment of
several departments, which lowered overall headcount, coupled with the lack of
severance costs and recruiting expenses that were incurred in the prior year as
the result of turnover in management. Occupancy costs decreased by $244,000, as
certain assets became fully depreciated ($171,000 decrease in depreciation
expense), and rental expense decreased by approximately $40,000.
Non-interest expenses increased by 4.7% to $9.3 million for the year
ended December 31, 2001. The majority of the increase was related to severance
and recruiting expenses resulting from management changes in 2001. For the first
seven months of 2001, Guaranty operated nine retail-banking branches due to the
opening of the Forest Lakes branch in northern Albemarle County. The
retail-banking branch in suburban Richmond was sold in July 2001. Guaranty
incurred approximately $152,000 in expenses, consisting primarily of personnel
and occupancy expenses prior to its sale.
The following table summarizes the main components of non-interest
expense.
Year Ended December 31,
----------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Personnel $4,545 $4,561 $4,811
Occupancy 1,093 1,168 1,412
Data Processing 1,124 1,158 1,153
Marketing 161 159 211
Professional fees 338 294 385
Other 1,148 1,168 1,301
----------------------------------------------------------------------------------------------------------------------------
Total $8,409 $8,508 $9,273
----------------------------------------------------------------------------------------------------------------------------
Income Taxes
Income tax expense for the years ended December 31, 2003, 2002 and
2001, was $892,000, $814,000 and $267,000, respectively. The increases are a
direct result of earnings levels for the respective year-ends. The effective
income tax rate was 31.4% and 31.6% for the years ended December 31, 2003 and
2002, respectively, as the increase in cash surrender value of BOLI is a
non-taxable item and therefore reduces Guaranty's overall effective tax rate.
The effective tax rate was 34.0% for the year ended December 31, 2001.
26
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, repurchase agreements entered into with commercial banks and Federal
Home Loan Bank ("FHLB") of Atlanta advances. Contractual loan payments are a
relatively stable source of funds, while deposit inflows and outflows and the
related cost of such funds have varied widely. Borrowings may be used to
compensate for reductions in deposits or deposit-inflows at less than projected
levels and have been used on a longer-term basis to support expanded lending
activities.
Guaranty attracts both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. Guaranty
offers statement savings accounts, various checking accounts, various money
market accounts, fixed-rate certificates with varying maturities, individual
retirement accounts and 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, 2003, deposits totaled $175.2 million, a $3.9 million,
or 2.3% increase over the same date in the prior year. In its continuing effort
to reduce reliance on high cost sources of funds, Guaranty continues to direct
efforts towards attracting lower cost transaction accounts. Low cost transaction
and savings accounts comprise 69.0% of total deposits as of December 31, 2003,
compared to $58.7% as of December 31, 2002 and 41.1% as of December 31, 2001.
At December 31, 2002, deposits were $171.3 million, a 14.6% decline
from $200.6 million at December 31, 2001.
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, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Demand deposit accounts $ 62,170 $ 53,498 $ 47,570
Statement savings account 13,404 12,812 12,992
Money market accounts 45,226 34,445 22,394
30-to-180-day certificates 5,172 3,326 1,427
Seven to eleven month certificates 441 856 6,404
One-to-five year fixed-rate certificates 42,229 62,857 105,608
Eighteen-month prime rate certificates 6,542 3,465 4,237
------------------------------------------------------------------------------------------------------------------------------------
Total $175,184 $171,259 $200,632
------------------------------------------------------------------------------------------------------------------------------------
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, 2003 2002 2001
Average Average Average
Average Rate Average Rate Average Rate
(Dollars in thousands) Balance Paid Balance Paid Balance Paid
------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits $ 26,306 0.00% $ 22,879 0.00% $ 18,755 0.00%
Interest bearing demand deposits 70,511 0.60 51,921 0.90% 44,514 2.06%
Savings deposits 12,833 0.21 13,103 0.53% 11,643 1.67%
Time deposits 58,309 1.88 89,635 3.27% 139,438 5.61%
------------------------------------------------------------------------------------------------------------------------------------
Total deposits $167,959 0.92% $177,538 1.95% $214,350 4.17%
------------------------------------------------------------------------------------------------------------------------------------
27
The variety of deposit accounts offered by Guaranty has allowed it to
be competitive in obtaining funds and has allowed it to respond with flexibility
to, although not to eliminate, the threat of disintermediation (the flow of
funds away from depository institutions such as banking institutions into direct
investment vehicles such as government and corporate securities). The ability of
Guaranty to attract and maintain deposits, has been, and will continue to be,
significantly affected by market conditions.
The following table sets forth the deposit flows of Guaranty during the
periods indicated.
Year Ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Opening balance $171,259 $200,632 $217,044
Net deposits 2,383 (32,838) (25,345)
Interest credited 1,542 3,465 8,933
------------------------------------------------------------------------------------------------------------------------------------
Ending balance $175,184 $171,259 $200,632
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) $3,925 $ (29,373) $ (16,412)
Percent increase (decrease) 2.29% (14.64%) (7.56%)
------------------------------------------------------------------------------------------------------------------------------------
The following table indicates the amount of Guaranty's certificates of
deposit by time remaining until maturity as of December 31, 2003.
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 $ 11,753 $ 7,758 $ 17,558 $ 5,537 $42,606
Certificates of deposit of $100,000 or more 5,239 894 3,760 1,885 11,778
------------------------------------------------------------------------------------------------------------------------------------
Total of certificates of deposits $ 16,992 $ 8,652 $ 21,318 $ 7,422 $54,384
------------------------------------------------------------------------------------------------------------------------------------
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 the size of
the advances and repayment provisions. The advances are collateralized by
Guaranty's investment in FHLB 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, 2003, Guaranty had
$3 million in outstanding borrowings from the FHLB compared to zero and $1
million outstanding at the end of the prior two years, respectively.
Guaranty has also used securities sold under agreements to repurchase,
with mortgage-backed securities or other securities pledged as collateral. The
proceeds have been used for general corporate purposes. Guaranty did not use
securities sold under agreements to repurchase during the calendar years 2003 or
2002.
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.
28
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, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Maximum Balance:
FHLB advances $5,000 $15,000 $18,000
Securities sold under
agreements to repurchase - - -
------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------------------------------------------------------------
FHLB advances $760 1.32% $6,136 1.96% $4,608 5.14%
Securities sold under
agreements to repurchase - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the balances of Guaranty's short-term
borrowings at the dates indicated.
December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
FHLB advances $3,000 - $1,000
Weighted average interest rate of
short-term FHLB advances 1.24% - 2.13%
------------------------------------------------------------------------------------------------------------------------------------
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, loan
sales and prepayments and maturities of outstanding loans and investments. While
scheduled payments from the amortization of loans and securities are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition.
Excess funds are invested in overnight deposits to fund cash requirements
experienced in the normal course of business. Guaranty has been able to generate
sufficient cash through its deposits as well as borrowings.
At December 31, 2003, cash and cash equivalents were approximately
$11.8 million, which was a decrease of $3.6 million over the prior year.
Operating activities provided approximately $786,000, predominantly generated by
the sale of loans. Investing activities absorbed approximately $15.2 million in
cash, primarily with the purchase of agency and mortgage-backed securities. Cash
generated by financing activities partially offset the cash absorbed by
investing activities by approximately $10.9 million, which represents the
increase in deposits that occurred due to a continued effort to increase
low-cost deposits, offset by the cash paid to redeem the Trust Preferred
Securities.
29
At December 31, 2002 cash and cash equivalents were approximately $15.4
million, which was an increase of $3.0 million over the prior year. Operating
activities provided approximately $13.7 million, predominantly generated by the
sale of loans. Investing activities provided approximately $19.8 million in
cash, primarily through the sale of corporate bonds, in an effort to reduce the
market risk of long-term bonds previously held. Cash absorbed through financing
activities offset the cash generated by operating and investing activities by
approximately $30.6 million, which represents the decrease in deposits that
occurred, largely due to decreased certificate of deposit rates.
Cash and cash equivalents were approximately $12.4 million at December
31, 2001. Financing activities reduced cash and cash equivalents by
approximately $22.3 million in 2001 due to decreases in deposits and repayment
of advances from the FHLB. Approximately $5.8 million was absorbed by operating
activities, which was primarily a result of the origination of $70.7 million in
residential mortgage loans held for sale that were offset by proceeds from the
sale of residential mortgage loans totaling $63.5 million. In addition,
investing activities provided approximately $24.9 million that was primarily a
result of a net decrease in loans of $27.7 million that was slightly offset by
the net purchase of $2.3 million in investments available for sale.
Guaranty uses its sources of funds primarily to meet operating needs,
to pay deposit withdrawals and fund loan commitments. At December 31, 2003,
total approved loan commitments were $7.6 million. In addition, at December 31,
2003, commitments under unused lines of credit were $52.5 million. Certificates
of deposit scheduled to mature or re-price in one year or less at December 31,
2003 totaled $46.9 million.
Management intends to fund anticipated loan closings and operating
needs during 2004 through cash on hand, 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.
The following summarizes Guaranty's contractual cash obligations and
commercial commitments, including maturing certificates of deposit, as of
December 31, 2003 and the effect such obligations may have on liquidity and cash
flows in future periods.
Contractual Obligations
------------------------------------------------------------------------------------------------------------------------------------
Less Than 2-3 4-5 Over 5
One Year Years Years Years Total
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Certificate of deposit maturities (1) $ 46,962 $ 5,739 $ 1,674 $ 9 $ 54,384
Undisbursed credit lines 52,550 - - - 52,550
Commitments to extend credit 7,593 - - - 7,593
Standby letters of credit 3,899 - - - 3,899
------------------------------------------------------------------------------------------------------------------------------------
Total obligations $111,004 $ 5,739 $ 1,674 $ 9 $118,426
------------------------------------------------------------------------------------------------------------------------------------
(1) Guaranty expects to retain maturing deposits or replace maturing amounts
with comparable deposits based on current market interest rates.
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.
30
Guaranty and the Bank are subject to regulatory capital requirements of
the Federal Reserve. At December 31, 2003, Guaranty and the Bank exceeded all
such regulatory capital requirements as shown in the following table.
December 31, 2003
----------------------------------------------------------------------------------------------------------------------------
Guaranty Financial Guaranty
Corporation Bank
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 2,491 $ 2,000
Capital surplus 9,238 3,729
Retained earnings 8,484 14,201
----------------------------------------------------------------------------------------------------------------------------
Total Tier 1 Capital 20,213 19,930
----------------------------------------------------------------------------------------------------------------------------
Tier 2 Capital:
Allowance for loan losses (1) 1,993 1,993
----------------------------------------------------------------------------------------------------------------------------
Total Tier 2 Capital 1,993 1,993
----------------------------------------------------------------------------------------------------------------------------
Total Risk Based Capital $ 22,206 $ 21,923
----------------------------------------------------------------------------------------------------------------------------
Risk Weighted Assets $159,470 $159,470
Capital Ratios:
Tier 1 Risk-based 12.68% 13.75%
Total Risk-based 13.93% 12.50%
Tier 1 Capital to average adjusted total assets 10.27% 10.12%
----------------------------------------------------------------------------------------------------------------------------
(1) Limited to 1.25% of risk weighted assets.
31
Impact of Inflation, 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.
Recent Accounting Pronouncements
In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. This statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets". Thus, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets required as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor - and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement 144 requires for other long-lived assets that are held
and used. The adoption of SFAS 147 did not have an effect on the financial
statements.
SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments
and Hedging Activities", issued in April 2003, amends Statement No. 133 for
decisions made by the Derivatives Implementation Group, in particular the
meaning of an initial net investment, the meaning of underlying and the
characteristics of a derivative that contains financing components. Presently,
the Bank has no derivative financial instruments and, consequently, the adoption
of the Statement had no effect on its financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity", was issued in May 2003. Under
this Statement, certain freestanding financial instruments that embody
obligations for the issuer and that are now classified in equity, must be
classified as liabilities (or as assets in some circumstances). Generally, SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003. However, the effective date of the Statement's provisions related
to the classification and measurement of certain mandatory redeemable
non-controlling interests has been deferred indefinitely by the FASB, pending
further Board action. Presently, the Bank has no financial instruments that come
under the scope of the Statement and, therefore, believes that adoption of the
new Statement will have no impact on its financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities", to provide guidance on the identification of entities
controlled through means other than voting rights. FIN No. 46 specifies how a
business enterprise should evaluate its interests in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be consolidated by its primary
32
beneficiary if the entity does not effectively disperse risks among the parties
involved. The adoption of FIN No. 46 is not expected to have a significant
effect on the Bank's financial statements.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We do not expect the adoption of
SFAS 148 to have an effect on our financial statements.
In December 2003, the FASB issued Statement of Position 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This
SOP, among other things, no longer allows financial institutions to record an
allowance for loan losses, related to credit quality, when they purchase loans,
including through a purchase business acquisition. The SOP is effective, on a
prospective basis, for loans acquired in fiscal years beginning after December
31, 2004. We do not expect the adoption of SOP 03-3 to have an effect on our
financial statements.
Subsidiary Activities
Guaranty has two subsidiaries, the Bank and Guaranty Capital Trust I
(the "Trust"). The Trust was formed on April 29, 1999 and was the holder of the
trust preferred securities, which were sold for $6,900,000 in 1999 and redeemed
in full in 2003. See Notes to the Consolidated Financial Statements for
information regarding the terms and redemption 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 (loss) of
$73,000, $560 and $53,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
In 1987, Guaranty formed GMSC and entered into a REMIC in order to
create liquidity. Guaranty utilized the REMIC to pool $19.9 million of fixed
rate mortgages into mortgage backed securities, which were used as collateral
for bonds sold to private investors. The bonds bore a coupon of 8% and were sold
at a discount and costs of issuance of approximately $3.3 million. The bonds'
discount and issuance costs are amortized against income as mortgages underlying
the bonds repay. During 2003, Guaranty prepaid the bonds, eliminating the
liability associated with the REMIC. For the years ended December 31, 2003, 2002
and 2001, amortization expense was $66,000, $44,000 and $36,000, respectively.
The amortization of the REMIC expenses is treated as interest expense.
33
Critical Accounting Policies, Estimates and Judgments
Guaranty's financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, as well as the disclosure of contingent liabilities. Management
continually evaluates its estimates and judgments, including those related to
the allowance for loan losses and income taxes. Management bases its estimates
and judgments on historical experience and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. Management believes that,
of its significant accounting policies, the most critical accounting policies we
apply are those related to the valuation of the loan portfolio.
A variety of factors impact carrying value of the loan portfolio,
including the calculation of the allowance for loan losses, valuation of
amortization of loan fees, and deferred origination costs. The allowance for
loan losses is the most difficult and subjective judgment. The allowance is
established and maintained at a level that management believes is adequate to
cover losses resulting from the inability of borrowers to make required payments
on loans. Estimates for loan losses determined by analyzing risks associated
with specific loans and the loan portfolio, current trends in delinquencies and
charge-offs, the views of regulators, changes in the size and composition of
loan portfolio and peer comparisons. The analysis also requires consideration of
the economic climate and directions, changes in the interest rate environment,
which may impact a borrower's ability to pay, legislation impacting the banking
industry and economic conditions specific to our service area. Because the
calculation of the allowance for loan losses relies on estimates and judgments
relating to inherently uncertain events, results may differ from our estimates.
Caution About Forward Looking Statements
We make forward looking statements in this annual report that are
subject to risks and uncertainties. These forward looking statements include
statements regarding our profitability, liquidity, allowance for loan losses,
interest rate sensitivity, market risk, growth strategy, and financial and other
goals. The words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends," or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant
uncertainties because they are based upon or are affected by factors including:
o changes in general economic and business conditions in our market area;
o changes in interest rates and interest rate policies;
o risks inherent in making loans such as repayment risks and fluctuating
collateral values;
o competition with other banks and financial institutions, and companies
outside of the banking industry, including those companies that have
substantially greater access to capital and other resources;
o the ability to successfully manage our growth or implement our growth
strategies if we are unable to identify attractive markets, locations
or opportunities to expand in the future;
o maintaining capital levels adequate to support our growth;
o maintaining cost controls and asset qualities as we open or acquire new
branches and/or merger with another entity;
o reliance on our management team, including our ability to attract and
retain key personnel;
o the successfulmanagement of interest rate risk;
o problems with technology utilized by us, and
o changes in banking and other laws and regulations applicable to us.
34
Because of these uncertainties, our actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, our past results of operations do not necessarily
indicate our future results.
Item 7. Financial Statements.
The following financial statements are filed as a part of this report
following Item 14 below:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001
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.
Item 8A. Controls and Procedures.
Guaranty maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed by it in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods required by
the Securities and Exchange Commission, including, without limitation, those
controls and procedures designed to ensure that such information is accumulated
and communicated to Guaranty's management to allow timely decisions regarding
required disclosures.
An evaluation of the effectiveness of the design and operation of
Guaranty's disclosure controls and procedures, as of the end of the period
covered by this report, was carried out under the supervision and with the
participation of Guaranty's management, including the chief executive officer
and chief financial officer. Based on and as of the date of such evaluation,
these officers concluded that Guaranty's disclosure controls and procedures were
effective.
Guaranty also maintains a system of internal accounting controls that
is designed to provide assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorization and
properly recorded. This system is continually reviewed and is augmented by
written policies and procedures, the careful selection and training of qualified
personnel and an internal audit program to monitor its effectiveness. There were
no changes in Guaranty's internal control over financial reporting identified in
connection with the evaluation of it that occurred during Guaranty's last fiscal
quarter that materially affected, or are reasonably likely to materially affect,
internal control over financial reporting.
35
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors
Henry J. Browne, 71, has been a director since 1981. Mr. Browne is an
architect in private practice with a studio in Boca Grande, Florida.
Douglas E. Caton, 61, has been a director since 1981 and has been
Chairman of Guaranty's Board of Directors since 1989. Mr. Caton is Chief
Executive Officer of Management Services Corporation, a regional commercial real
estate management, construction and development company. A combat veteran of the
Vietnam War, Mr. Caton retired as a Major General in the United States Army
Reserve. He is a member of the Board of Governors of both St. Margaret's School
in Tappahannock, Virginia, and The Miller School of Albemarle, Virginia.
William E. Doyle, Jr., 51, has been a director since 2001. Mr. Doyle
has been Guaranty's President and Chief Executive Officer since May 2001. From
November 1997 to May 2001, he was Senior Vice President, Mortgage and Retail
Services, of The Middleburg Bank. Mr. Doyle is a member of the Board of
Directors of the United Way - Thomas Jefferson Area, Martha Jefferson Medical
Enterprises, VBA Management Services Corporation and VBA Benefits Corporation.
Jason I. Eckford, Jr., 74, has been a director since 1999. Mr. Eckford
is President of Eckford Financial Services, a financial consulting business in
Charlottesville, Virginia. He had a 36-year career in commercial and trust
banking in the Charlottesville area and currently serves on the boards of the
Martha Jefferson House, the Charlottesville and University Symphony Orchestra,
and the Coastal Lumber Company.
W. Bradford Eure, 47, was appointed a director in 2003. Mr. Eure is the
President and General Manager of Eure Communications, Inc., which owns and
operates WINA, WQMZ and WWWV. He serves as a board member of the National
Association of Broadcasters and is past president of the Virginia Association of
Broadcasters.
Harry N. Lewis, 76, has been a director since 1981, has served as
Chairman of the Board of Directors, and currently serves as Vice Chairman, a
position he has held since 1989. Mr. Lewis retired as President of Lewis
Insurance Agency, an insurance sales company, and as owner of O'Neill Mortgage
Corp, a mortgage company, both in Charlottesville, Virginia.
Patrick J. McCann, 47, was appointed a director in 2003. Mr. McCann is
a principal in Virginia CFO Services, LLC, a financial management consulting
firm. From January 1998 through January 2000, Mr. McCann was Senior Financial
Officer for NationsBank-Florida. He has been involved in the banking industry
for over 20 years, where he served in a variety of financial capacities,
including Chief Financial Officer, Director of Finance and Controller. His
background and experience qualify him as an audit committee financial expert,
according to the standards promulgated by Sarbanes-Oxley Act of 2002.
John R. Metz, 66, has been a director since 1981. Mr. Metz is a retired
pharmacist and also retired from the United States Air Force and Air National
Guard in 1995 with the rank of Brigadier General. He is a member and past
president of the Board of Directors of the Virginia Pharmacists
36
Association Research and Education Foundation and is a member of the Board of
Directors of the Northwestern Virginia Health Systems Agency.
James R. Sipe, Jr., 48, has been a director since 1996. Mr. Sipe is an
Associate Broker with Coldwell Banker Funkhouser Realtors and Coldwell Banker
Commercial Funkhouser Realtors, real estate sales companies in Harrisonburg,
Virginia. Mr. Sipe is a member of the Board of Directors of the James Madison
University Duke Club, a member of the Emmanuel Episcopal Church Construction and
Renovation Committee and currently serves as president of the Harrisonburg
Rockingham Association of Realtors.
Oscar W. Smith, Jr., 73, has been a director since 1981. Mr. Smith is
President of K-B Management Co., a real estate investment company, in
Charlottesville, Virginia.
Executive Officers Who Are Not Directors
Tara Y. Harrison, 35, has been Vice President and Chief Financial
Officer since January 2003. From December 2000 to January 2003, she was Director
of Internal Audit for Guaranty. Ms. Harrison was Director of Finance and
Controller for Comdial Corporation from February 1999 through December 2000 and,
prior to that, was with Deloitte & Touche LLP in their Richmond office, where
she most recently held the position of Senior Manager.
Richard L. Saunders, 50, has been Senior Vice President and Chief
Credit Officer since February 2000. From June 1998 to February 2000, he was Vice
President and a commercial banker of Guaranty and, from April 1996 to June 1998,
he was Vice President and a business banker with Jefferson National Bank and its
successor, Wachovia Bank. Mr. Saunders also acted as Guaranty's chief executive
officer from March 2001 to May 2001.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Guaranty's directors and executive officers, and any
persons who own more than 10% of the outstanding shares of Common Stock, to file
with the SEC reports of ownership and changes in ownership of Common Stock.
Directors and executive officers are required by SEC regulation to furnish
Guaranty with copies of all Section 16(a) forms that they file. Based solely on
review of the copies of such reports furnished to Guaranty or written
representation that no other reports were required, Guaranty believes that,
during fiscal year 2003, its executive officers and directors were in compliance
with the applicable regulations.
Audit Committee Financial Expert
The Board of Directors has determined that Patrick J. McCann qualifies
as an audit committee financial expert as defined by the regulations of the
Securities and Exchange Commission.
Code of Ethics
The Board of Directors has not approved a Code of Ethics for Guaranty's
senior officers who have financial responsibilities that covers all items
contemplated by the disclosure requirements of the Securities and Exchange
Commission. Guaranty expects that such a Code will be adopted if the merger with
Union Bankshares Corporation is not completed. The Bank, however, has a code of
ethics for all of its officers and employees that promotes the highest standards
of ethical conduct.
37
Item 10. Executive Compensation
Summary of Cash and Certain Other Compensation
The following table shows, for the fiscal years ended December 31,
2003, 2002 and 2001, the cash compensation paid by Guaranty, as well as certain
other compensation paid or accrued for those years, to the named Executive
Officers in all capacities in which they served.
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary ($) Bonus ($) Compensation ($) Options Compensation ($)(1)
------------------ ---- ---------- --------- ---------------- ------- -------------------
William E. Doyle, Jr. 2003 $218,244 $10,000 * 10,000 $7,000
President and Chief 2002 205,274 -- $60,243 (3) 15,000 5,500
Executive Officer (2) 2001 118,310 -- 47,201 (4) 5,100 --
Tara Y. Harrison 2003 97,854 5,869 * -- 2,936
Vice President and Chief
Financial Officer (5)
Richard L. Saunders 2003 136,794 8,961 * 2,500 3,681
Senior Vice President and 2002 118,750 3,563 * 10,000 3,563
Chief Credit Officer 2001 122,969 -- * 100 3,689
________________
* All benefits that might be considered of a personal nature did not exceed
the lesser of $50,000 or 10% of total annual salary and bonus.
(1) Amounts reflect Guaranty's matching contribution under its Section 401(k)
retirement plan.
(2) Mr. Doyle's employment with Guaranty commenced in May 2001.
(3) Amount includes $46,296 in benefits relating to initiation fees and dues
for a country club membership, including an allowance for the payment of
taxes resulting from the club membership benefit.
(4) Amount includes $33,758 in relocation expenses in connection with the
commencement of Mr. Doyle's employment.
(5) Ms. Harrison became an executive officer of Guaranty in January 2003.
38
Stock Option Grants
The following table sets forth for the year ended December 31, 2003,
the grants of stock options to the named Executive Officers. Guaranty did not
grant any stock options to Ms. Harrison in 2003.
Option Grants In Last Fiscal Year
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name Granted (#) (1) Year (%) (2) Price ($/Share) Expiration Date
---- --------------- ------------ --------------- ---------------
William E. Doyle, Jr. 10,000 57.14% $13.84 2/27/2013
Richard L. Saunders 2,500 14.29% $13.45 4/15/2013
__________________
(1) Stock options were granted at or above the fair market value of the shares
of Common Stock at the date of grant. Each grant is immediately
exercisable.
(2) Options to purchase 17,500 shares of Common Stock were granted to employees
during the year ended December 31, 2003.
Option Exercises and Holdings
The following table sets forth information as to stock option exercises
during 2003 and the amount and value of stock options held by the named
Executive Officers as of December 31, 2003.
Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised Options In-the-Money
at Fiscal Year End Options at Fiscal
(#) (1) Year End ($) (2)
--------------------- ---------------------
Shares Acquired on Exercisable / Exercisable/
Name Exercise Value Realized Unexercisable Unexercisable
---- -------- -------------- ------------- -------------
William E. Doyle, Jr. -- -- 30,100 / -- $472,710/ --
Tara Y. Harrison -- -- 50 / -- 873 / --
Richard L. Saunders 5,000 $14,400 12,500/ -- 207,000/ --
(1) Each of these options relates to shares of Common Stock.
(2) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between (i) the fair market
value of common stock underlying the options at December 31, 2003
($25.75) and (ii) the exercise price of the options. All options
disclosed in the table were in-the-money as of December 31, 2003.
39
Directors' Fees
Directors, excluding directors who are officers of Guaranty, receive
fees of $550 for each meeting of the Board of Directors attended and $300 for
each Audit, ALCO, Executive and Loan Committee meeting attended. Mr. Caton, who
is an ex officio member of all committees and devotes additional time to
Guaranty's affairs as Chairman of the Board of Directors, received a fee of
$32,500 in the fiscal year ended December 31, 2003, in lieu of any fees for
attending Board of Directors and committee meetings.
Beginning in 2002, Guaranty annually issues 150 shares of Common Stock
to each of its active non-employee directors (pro-rated in the first year as a
director). Such shares are not issued under any plan of Guaranty, and they are
in addition to the cash compensation that the directors receive.
Employment Agreements
Guaranty and William E. Doyle, Jr. are parties to an employment
agreement dated as of May 10, 2001. The agreement provides for Mr. Doyle's
service as President and Chief Executive Officer of both Guaranty and Guaranty
Bank and provides for a base salary of $195,300, beginning in 2001. In addition,
the agreement provides for, at the beginning of his employment, the grant of
options to purchase 5,000 shares of Common Stock and, in each of February 2002,
2003 and 2004, the grant of options to purchase 10,000 shares of Common Stock.
Each option, which Guaranty grants under the 1991 Incentive Plan, is immediately
exercisable, has an exercise price of the fair market value at the date of grant
and has a 10-year term. The options are intended to be treated as incentive
stock options.
Under the agreement, if Mr. Doyle's employment is terminated by
Guaranty for reasons other than cause or by Mr. Doyle for "good reason" (as
defined in the agreement), he will be entitled to receive severance pay equal to
one-twelfth of his annual base salary in effect at the time for 36 months or for
the remainder of the term of the agreement, whichever is less. If his employment
terminates for reasons other than cause or for good reason within one year of a
change in control of Guaranty, he will be entitled to severance payments
approximately equal to 299% of his annualized cash compensation for the period
that precedes the change in control as determined under the Internal Revenue
Code of 1986, as amended. If termination of employment due to a change in
control had occurred in the year ended December 31, 2003, Mr. Doyle would have
been entitled to severance payments amounting to approximately $695,000.
The agreement also contains a covenant not to compete that is in effect
while Mr. Doyle is an officer and employee of Guaranty and for a 12-month period
after the termination of employment. The agreement is for a period ending May
31, 2006.
Change of Control Agreements
Tara Y. Harrison and Richard L. Saunders are each parties with Guaranty
to change of control agreements, dated January 16, 2003 and January 2, 2002,
respectively. The agreements provide for severance payments approximately equal
to one times their annualized cash compensation for the period that precedes the
change in control as determined under the Internal Revenue Code of 1986, as
amended. If termination of employment due to a change in control had occurred in
the year ended December 31, 2003, Ms. Harrison would have been entitled to a
severance payment amounting to approximately $60,000 and Mr. Saunders would have
been entitled to a severance payment amounting to approximately $102,000.
40
Item 11. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Management
The following table sets forth information as of March 1, 2004,
regarding the number of shares of Common Stock beneficially owned by each
director, each individual named in the Summary Compensation Table below and all
current directors and executive officers as a group. Beneficial ownership
includes shares, if any, held in the name of the spouse, minor children or other
relatives of the individual living in such person's home, as well as shares, if
any, held in the name of another person under an arrangement whereby the
director or executive officer can vest title in himself at once or at some
future time. The address for each of the following individuals is 1658 State
Farm Boulevard, Charlottesville, Virginia 22911.
Common Stock
Name Beneficially Owned (1) Percentage of Class
---- ---------------------- -------------------
Henry J. Browne 38,587 1.93%
Douglas E. Caton 325,183 16.25%
William E. Doyle, Jr. 42,039 2.06%
Jason I. Eckford, Jr. 2,800 *
W. Bradford Eure 438 *
Tara Y. Harrison 436 *
Harry N. Lewis 5,988 *
Patrick J. McCann 444 *
John R. Metz 14,782 *
Richard L. Saunders 12,500 *
James R. Sipe, Jr. 3,200 *
Oscar W. Smith, Jr. 20,874 1.04%
All current executive officers and
directors as a group (12 Persons) 467,271 22.75%
-----------------
* Percentage of ownership is less than one percent of the outstanding shares of
Common Stock.
(1) Amounts disclosed include shares of Common Stock that certain individuals
have the right to acquire upon the exercise of stock options exercisable
within 60 days of March 1, 2004, as follows: Mr. Browne, 800; Mr. Doyle,
40,100; Mr. Saunders, 12,500; and all current executive officers as a
group, 53,400.
41
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of February 28, 2004,
regarding the number of shares of Common Stock beneficially owned by all persons
who own five percent or more of the outstanding shares of Common Stock.
Common Stock
Name and Address Beneficially Owned Percentage of Class
---------------- ------------------ -------------------
Douglas E. Caton 325,183 16.25%
4 Deer Park
Earlysville, Virginia
J. Sheldon Clark (1) 193,737 9.68%
1633 Broadway, 30th Floor
New York, New York
Banc Fund V L.P. and (2) 159,848 7.99%
Banc Fund VI L.P.
208 S. LaSalle Street
Chicago, Illinois
-------------------------
(1) In a Schedule 13D/A filed with the Securities and Exchange Commission (the
"SEC") on January 24, 2003, John Sheldon Clark reported beneficial
ownership of, including sole voting and dispositive power with respect to,
193,737 shares of Common Stock as of that date.
(2) In a Schedule 13G/A filed with the SEC on February 12, 2004, Banc Fund V
L.P. reported beneficial ownership of, including sole voting and
dispositive power with respect to, 85,909 shares of Guaranty common stock
and Banc Fund VI L.P. reported similar beneficial ownership of 73,939
shares of Guaranty common stock, as of December 31, 2003. Banc Fund V L.P.
and Banc Fund VI L.P. are under common control and are affiliated with The
Bank Funds Company, L.L.C., according to the Schedule 13G/A. The total
amount with respect to which these entities have sole voting and
dispositive power was 159,848 shares of Guaranty common stock as of
December 31, 2003, according to the Schedule 13G/A.
42
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2003,
with respect to compensation plans under which shares of the Company's Common
Stock are authorized for issuance.
Number of Securities
Remaining Available
Number of Securities to Be Weighted Average for Future Issuance
Plan Category Issued upon Exercise of Exercise Price of Under Equity
------------- ----------------------- ----------------- ------------
Outstanding Options Outstanding Options Compensation Plans 1
------------------- ------------------- --------------------
Equity Compensation Plans
Approved by Shareholders
1991 Amended Incentive 66,750 $10.67 119,250
Stock Option Plan
Equity Compensation Plans Not
Approved by Shareholders 2 -- -- --
Total 66,750 $10.67 119,250
-------------------
1 Amounts exclude any securities to be issued upon exercise of outstanding
options.
2 The Company does not have any equity compensation plans that have not been
approved by shareholders.
Item 12. Certain Relationships and Related Transactions
Some of the directors and officers of Guaranty are at present, as in
the past, customers of Guaranty, and Guaranty has had, and expects to have in
the future, banking transactions in the ordinary course of its business with
directors, officers, principal shareholders and their associates, on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with others.
These transactions do not involve more than the normal risk of collectibility or
present other unfavorable features.
There are no legal proceedings to which any director, officer or
principal shareholder, or any affiliate thereof, is a party that would be
material and adverse to Guaranty.
Item 13. Exhibits and Reports on Form 8-K
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
(a) Exhibits
2 Agreement and Plan of Reorganization, dated December
18, 2003, by and between Union Bankshares Corporation
("Union") and Guaranty, and a related Plan of Merger,
filed as Appendix I to the Proxy Statement/Prospectus
included in (and referred to as Exhibit 2 of) Union's
Registration Statement on Form S-4, Registration No.
333-112416, filed with the Commission on March 5,
2004, incorporated herein by reference.
43
3.1 Amended and Restated Articles of Incorporation of
Guaranty (restated in electronic format), attached as
Exhibit 3.1 to Guaranty'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
Guaranty'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.
10.2 Employment Agreement, dated as of May 10, 2001, by
and between Guaranty and William E. Doyle, Jr.,
attached as Exhibit 10.1 to Guaranty's Quarterly
Report on Form 10-QSB for the period ended June 30,
2001, incorporated herein by reference.
10.3 Form of Change of Control Agreement for Executive
Officers.
21 Subsidiaries of Guaranty.
31.1 Rule 13a-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial
Officer.
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section
1350.
(b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K with the
Securities and Exchange Commission on October 23, 2003. The
Form 8-K reported Item 12 and attached as an exhibit and
incorporated by reference a press release that reported the
Company's financial results for the quarter ended September
30, 2003.
Item 14. Principal Accountant Fees and Services
Fees of Independent Public Accountants
Audit Fees
The aggregate fees billed by BDO Seidman, LLP for professional services
rendered for the audit of Guaranty's annual financial statements for the fiscal
years ended December 31, 2003 and 2002, and for the review of the financial
statements included in Guaranty's Quarterly Reports on Form 10-QSB, and services
that are normally provided in connection with statutory and regulatory filings
and engagements, for those fiscal years were $84,000 for 2003 and $74,000 for
2002.
Audit Related Fees
The aggregate fees billed by BDO Seidman, LLP for professional services
for assurance and related services that are reasonably related to the
performance of the audit or review of Guaranty's
44
financial statements and not reported under the heading "Audit Fees" above for
the fiscal year ended December 31, 2003 were $21,000, which included fees
related to filing of an S-4, review of the audit committee charter and internal
audit plan and audit and report of FHLB collateral verification. During 2002,
the Company incurred no audit related fees other than those noted in the
preceding paragraph.
Tax Fees
The aggregate fees billed by BDO Seidman, LLP for professional services
for tax compliance, tax advice and tax planning for the fiscal years ended
December 31, 2003 and December 31, 2002 were $9,000 and $12,000, respectively.
During 2003 and 2002, these services generally included preparing corporate tax
returns and estimating quarterly payments.
Pre-Approved Services
The Audit Committee pre-approves all audit, audit-related, tax and
other services to be performed by the independent auditors. All such services,
as described above, were pre-approved by the Audit Committee, which concluded
that the provision of such services by BDO Seidman, LLP was compatible with the
maintenance of that firm's independence in the conduct of its auditing
functions.
45
Guaranty Financial Corporation
and Subsidiaries
Consolidated Financial Statements
As of December 31, 2003 and 2002 and
For the Years Ended December 31, 2003, 2002 and 2001
GUARANTY FINANCIAL CORPORATION
Contents
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance Sheets 4
Statements of Operations 5
Statements of Comprehensive Income 6
Statements of Stockholders' Equity 7
Statements of Cash Flows 8 - 9
Summary of Accounting Policies 10 - 15
Notes to Consolidated Financial Statements 16 - 28
2
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, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2003. 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 auditing standards generally accepted
in the United States of America. 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, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
BDO Seidman, LLP
Richmond, Virginia
January 9, 2004
3
GUARANTY FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 2003 2002
--------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents (including interest bearing deposits
of approximately $5,398,000 and $6,979,000) $ 11,813,766 $ 15,391,874
Investment securities (Note 1)
Held-to-maturity 11,459,062 836,114
Available for sale 7,901,967 3,634,150
Investment in Federal Home Loan Bank stock, at cost 532,000 947,100
Loans receivable, net (Notes 2 and 9) 156,009,221 163,249,885
Accrued interest receivable 788,374 909,767
Real estate owned - 397,155
Office properties and equipment, net (Note 3) 6,371,287 7,442,935
Other assets (Note 8) 4,101,749 4,335,896
---------------------------------------------------------------------------------------------------------------------------------
$198,977,426 $197,144,876
---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $175,184,224 $171,259,105
Advances from Federal Home Loan Bank (Note 7) 3,000,000 -
Convertible preferred securities (Notes 11 and 12) - 6,012,500
Bonds payable (Notes 1 and 6) - 359,847
Accrued interest payable 9,504 57,801
Prepayments by borrowers for taxes and insurance 72,896 126,802
Other liabilities 519,901 721,368
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 178,786,525 172,524,923
---------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 10, 11, 13 and 15)
---------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Notes 12 and 13) 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, 1,992,909 and 1,970,677 shares issued
and outstanding 2,491,136 2,463,346
Additional paid-in capital 9,238,003 9,034,207
Accumulated other comprehensive loss (22,165) (23,007)
Retained earnings - substantially restricted 8,483,927 7,132,907
---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,190,901 18,607,453
---------------------------------------------------------------------------------------------------------------------------------
$198,977,426 $197,144,876
---------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Operations
Year Ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Interest income
Loans $9,915,739 $11,648,714 $15,451,066
Investment securities 366,218 1,206,296 2,190,541
------------------------------------------------------------------------------------------------------------------------------------
Total interest income 10,281,957 12,855,010 17,641,607
-----------------------------------------------------------------------------------------------------------------------------------=
Interest expense
Deposits 1,542,462 3,464,836 8,932,880
Borrowings 458,517 691,049 822,993
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,000,979 4,155,885 9,755,873
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,280,978 8,699,125 7,885,734
Provision for loan losses (Note 2) 840,991 99,998 333,467
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,439,987 8,599,127 7,552,267
------------------------------------------------------------------------------------------------------------------------------------
Other income
Mortgage banking income 1,419,062 999,168 1,093,393
Loan and deposit fees and servicing income 917,191 906,785 830,704
Net gain on sale of branches 939,231 - -
Increase in cash surrender value of life insurance 217,164 182,825 -
Investment sales commissions 10,215 104,298 254,433
Net gain on sale of securities 11,843 20,125 3,046
Other 292,970 272,875 324,679
------------------------------------------------------------------------------------------------------------------------------------
Total other income 3,807,676 2,486,076 2,506,255
------------------------------------------------------------------------------------------------------------------------------------
Other expenses
Personnel 4,544,878 4,560,540 4,810,577
Occupancy (Note 10) 1,093,235 1,167,544 1,411,567
Data processing (Note 10) 1,124,337 1,158,381 1,153,186
Other 1,646,948 1,621,038 1,897,717
------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 8,409,398 8,507,503 9,273,047
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,838,265 2,577,700 785,475
Provision for income taxes (Note 8) 891,956 814,258 267,100
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,946,309 $ 1,763,442 $ 518,375
------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ .98 $ .89 $ .26
------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share .97 $ .89 $ .26
------------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
5
GUARANTY FINANCIAL CORPORATION
Consolidated StatementS of comprehensive income
Year Ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Net income $1,946,309 $1,763,442 $518,375
Other comprehensive income
Unrealized gains on securities
arising during period 13,118 1,038,806 795,429
Reclassification adjustment for (gains)
losses included in net income (11,843) (20,125) (3,046)
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income,
before tax 1,275 1,018,681 792,383
Income tax expense related to
items of other comprehensive
income (433) (346,352) (269,410)
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income,
net of tax 842 672,329 522,973
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $1,947,151 $2,435,771 $1,041,348
------------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
6
GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholders'
Stock Capital Income (Loss) Earnings Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $2,452,159 $8,953,230 $(1,218,309) $4,851,090 $15,038,170
Other comprehensive income - - 522,973 - 522,973
Net income - - - 518,375 518,375
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 2,452,159 8,953,230 (695,336) 5,369,465 16,079,518
Other comprehensive income - - 672,329 - 672,329
Issuance of Common Stock (Note 13) 11,187 80,977 - - 92,164
------------------------------------------------------------------------------------------------------------------------------------
Net income - - - 1,763,442 1,763,442
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 2,463,346 9,034,207 (23,007) 7,132,907 18,607,453
Cash dividend - - - (595,289) (595,289)
Other comprehensive income - - 842 - 842
Issuance of Common Stock (Note 13) 27,790 203,796 - - 231,586
------------------------------------------------------------------------------------------------------------------------------------
Net income - - - 1,946,309 1,946,309
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $2,491,136 $9,238,003 $(22,165) $8,483,927 $20,190,901
------------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
7
GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003 2002 2001
Operating activities
Net income $ 1,946,309 $ 1,763,442 $ 518,375
Adjustments to reconcile net income to net cash
provided (absorbed) by operating activities:
Provision for loan losses 840,991 99,998 333,467
Provision for loss on sale of other real estate owned - 86,701-
Depreciation and amortization 455,317 585,810 1,122,468
Deferred loan fees (255,957) (109,386) (72,009)
Net amortization of premiums and accretion of
discounts 63,211 134,398 160,696
Gain on sale of loans (1,419,062) (999,168) (1,249,393)
Originations of loans held for sale (73,952,163) (45,748,750) (70,683,960)
Proceeds from sale of loans 73,882,883 57,437,524 63,478,428
Loss (gain) on sale of held to maturity and securities
available for sale (11,843) (20,125) (3,046)
Loss (gain) on disposal of office properties
and equipment (27,604) (7,481) (3,036)
Loss (gain) on sale of real estate owned (2,374) 22,416 -
Gain on sale of branch (986,305) - (79,289)
Changes in:
Accrued interest receivable 121,393 335,499 833,425
Other assets 434,679 167,924 87,544
Accrued interest payable (48,297) (79,690) (256,296)
Income taxes - (120,548) 156,510
Prepayments by borrowers for taxes and insurance (53,906) (37,860) (99,311)
Other liabilities (201,467) 176,255 (212)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 785,805 13,686,959 (5,755,639)
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Net decrease in loans 2,504,748 3,392,299 27,695,518
Repayments on held to maturity securities 297,687 286,302 229,620
Purchase of held to maturity securities (12,110,000) (812,434) (250,000)
Proceeds from retirement of held to maturity securities 1,400,000 650,000 250,000
Purchase of securities available for sale (7,493,337) - (26,000,000)
Proceeds from sales of securities available for sale 3,200,000 18,378,584 23,683,500
Sale of FHLB stock 415,000 602,900 -
Proceeds from sales of real estate owned 399,528 514,451 830,293
Improvements to real estate owned - (66,337) -
Purchase of bank owned life insurance - (3,000,000) -
Increase in bank owned life insurance (217,164) (213,694) -
Net decrease in cash from sale of branch:
Proceeds from sale of loans 5,446,001 - 4,358,781
Sale of deposits (9,983,988) - (7,143,692)
Proceeds from sale of office properties,
equipment and land 1,652,999 - 1,057,608
Origination of mortgage servicing rights - - (331,307)
Proceeds from sales of mortgage servicing rights, net - - 825,938
Purchase of office properties and equipment (808,826) (1,194,301) (374,986)
Proceeds from sales of office properties and equipment 57,298 1,289,408 109,883
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities (15,239,954) 19,827,178 24,941,156
------------------------------------------------------------------------------------------------------------------------------------
(continued)
8
GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003 2002 2001
Financing activities
Net increase (decrease) in deposits $14,677,672 $(29,372,598) $ (9,101,991)
Repayment of Federal Home Loan Bank advances (27,000,000) (49,000,000) (62,000,000)
Proceeds from Federal Home Loan Bank advances 30,000,000 48,000,000 49,000,000
Payments on bonds payable, including unapplied
payments (425,428) (279,122) (196,445)
Redemption of trust preferred securities (6,012,500) - -
Proceeds from issuance of common stock, net 231,586 92,164 -
Dividends paid (595,289) - -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing activities 10,876,041 (30,559,556) (22,298,436)
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (3,578,108) 2,954,581 (3,112,919)
Cash and cash equivalents, beginning of year 15,391,874 12,437,293 15,550,212
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $11,813,766 $ 15,391,874 $12,437,293
------------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
9
GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies
Nature of Business and Regulatory Environment
Guaranty Financial Corporation ("Guaranty") is a bank holding corporation whose
principal assets are its wholly-owned subsidiaries, Guaranty Bank ("the Bank")
and Guaranty Capital Trust I. Bank provides a full range of banking services to
individual and corporate customers.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for 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.
On December 18, 2003, Guaranty and Union Bankshares Corporation announced the
signing of a definitive merger agreement, which was unanimously approved by each
board of directors, pursuant to which Union will acquire Guaranty. The merger is
dependent on certain regulatory approvals, as well as approval by Guaranty
shareholders, and is expected to close in the second quarter of 2004.
Principles of Consolidation
The consolidated financial statements include the accounts of Guaranty, its
wholly-owned subsidiaries, Guaranty Capital Trust I and the 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, 2003 presentation.
Investment Securities
Investments in securities are classified as either held-to-maturity, available
for sale, or trading, according to management's intent and ability.
Investments in debt securities classified as held-to-maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts using the
level yield method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their market value below amortized cost. Investment in Federal Home
Loan Bank stock is stated at cost.
Investments in debt and equity securities classified as available-for-sale are
stated at market value with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax effect, until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security. No such declines have occurred.
If any, investments in debt and equity securities classified as trading would be
stated at market value. Unrealized holding gains and losses for trading
securities would be included in the statement of operations. Guaranty held no
securities that were classified as trading as of December 31, 2003 or 2002.
Gains and losses on the sale of securities are determined using the specific
identification method.
10
GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)
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.
Guaranty had approximately $1,451,000, $332,000 and $14,279,000 of loans held
for sale at December 31, 2003, 2002 and 2001, 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.
Guaranty defers loan origination and commitment fees, net of certain direct loan
origination costs, and the net deferred fees are amortized into interest income
over the lives of the related loans as yield adjustments. Any unamortized net
fees on loans fully repaid or sold are recognized as income in the year of
repayment or sale.
Sale of Loans and Participation in Loans
Guaranty generates funds by selling loans to the Federal Home Loan Mortgage
Corporation and other investors. In mid-2001, Guaranty changed its mortgage
banking business model to sell all residential mortgage loans originated on a
servicing released basis. As part of this revised business model, Guaranty sold
its residential mortgage loan servicing for others portfolio for $918,000 in
2001. Under prior servicing agreements, Guaranty continued to service the loans
and the participant is paid its share of principal and interest collections.
Historically, Guaranty allocated 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 sold or securitized the loans and retained the
mortgage servicing rights. Guaranty assessed its capitalized mortgage servicing
rights for impairment based on the fair value of those rights.
The cost of mortgage servicing rights was amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights was assessed based on the fair value of those rights. Fair
values were estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights were stratified
based on the predominant risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
Allowance for 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
Guaranty's regulators.
11
GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)
Loans are generally placed on nonaccrual status when the collection of principal
or interest is 90 days or more past due, or earlier if collection is uncertain
based upon an evaluation of the value of the underlying collateral and the
financial strength of the borrower. Loans may be reinstated to accrual status
when all payments are brought current and, in the opinion of management,
collection of the remaining balance can be reasonably expected. Loans greater
than 90 days past due may remain on accrual status if management determines it
has adequate collateral to cover the principal and interest.
A loan is considered to be impaired when it is probable that Guaranty 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, 2003 and 2002 Guaranty 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
Guaranty 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.
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.
12
GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)
Section 1616 of the Small Business Job Protection Act (the "Act") of 1996
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 Guaranty 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 Guaranty during the year is not less than Guaranty'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, Guaranty must recapture into taxable income
approximately $354,000 ratably over six years, which began December 31, 1998,
since Guaranty 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
1,985,897 and 2,007,399, for 2003 and 1,963,415 for the year ended 2002 and
1,961,727 for the year ended 2001.
Guaranty 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, Guaranty'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, 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
Net income
As reported $1,946,309 $1,763,442 $518,375
Pro forma 1,906,132 1,677,417 498,434
Net income per share (diluted)
As reported $ 0.97 $ 0.89 $ 0.26
Pro forma 0.95 0.85 0.25
The weighted average fair value of options granted during the year ended
December 31, 2003 and 2002 was $3.48 and $2.74, respectively.
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, 2003: a risk free interest rate range of
2.69% - 2.95%, depending on the date of grant, dividend yield of 2%, expected
weighted average term of 5.0 years, and a volatility of 30%.
Statements of Cash Flows
Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $1,812,000, $4,236,000 and
$10,012,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Cash paid for income taxes was approximately $822,000, $811,000 and $380,000 for
the years ended December 31, 2003, 2002 and 2001, respectively. Real estate
acquired in the settlement of loans was approximately $191,000 and $305,000 for
the years ended December 31, 2002 and 2001, respectively. No real estate was
acquired in the settlement of loans during the year ended December 31, 2003.
13
GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)
Accounting Pronouncements
In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. This statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets". Thus, the requirement in paragraph 5 of Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets required as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor - and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement 144 requires for other long-lived assets that are held
and used. The adoption of SFAS 147 did not have an effect on the financial
statements.
SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities", issued in April 2003, amends Statement No. 133 for
decisions made by the Derivatives Implementation Group, in particular the
meaning of an initial net investment, the meaning of underlying and the
characteristics of a derivative that contains financing components. Presently,
the Bank has no derivative financial instruments and, consequently, the adoption
of the Statement had no effect on its financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity", was issued in May 2003. Under this Statement,
certain freestanding financial instruments that embody obligations for the
issuer and that are now classified in equity, must be classified as liabilities
(or as assets in some circumstances). Generally, SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. However, the
effective date of the Statement's provisions related to the classification and
measurement of certain mandatory redeemable non-controlling interests has been
deferred indefinitely by the FASB, pending further Board action. As a result,
the convertible trust preferred securities at December 31, 2002 have been
reclassed into the liability section on the balance sheet.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities", to provide guidance on the identification of entities controlled
through means other than voting rights. FIN No. 46 specifies how a business
enterprise should evaluate its interests in a variable interest entity to
determine whether to consolidate that entity. A variable interest entity must be
consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved. The adoption of FIN No. 46 is not
expected to have a significant effect on the Bank's financial statements.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We do not expect the adoption of
SFAS 148 to have an effect on our financial statements.
14
GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)
In December 2003, the FASB issued Statement of Position 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. This SOP, among other
things, no longer allows financial institutions to record an allowance for loan
losses, related to credit quality, when they purchase loans, including through a
purchase business acquisition. The SOP is effective, on a prospective basis, for
loans acquired in fiscal years beginning after December 31, 2004. We do not
expect the adoption of SOP 03-3 to have an effect on our financial statements.
15
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Investment Securities
A summary of the carrying value and estimated market value of investment
securities is as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 3,320,829 $ 28,169 $ - $ 3,348,998
U.S. Government Agency Bonds 8,138,233 3,340 (19,689) 8,121,884
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 11,459,062 31,509 (19,689) 11,470,882
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
Mortgage-backed securities 5,881,589 2,938 (16,202) 5,868,325
U.S. Government Agency Bonds 1,496,712 - (20,320) 1,476,392
Other 557,250 - - 557,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 7,935,551 2,938 (36,522) 7,901,967
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $19,394,613 $ 34,447 $(56,211) $19,372,849
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 432,656 $38,152 $ - $ 470,808
U.S. Treasury Bonds 403,458 - - 403,458
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 836,114 38,152 - 874,266
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
Corporate bonds 3,246,760 - (34,860) 3,211,900
Other 422,250 - - 422,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 3,669,010 - (34,860) 3,634,150
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $4,505,124 $38,152 $(34,860) $4,508,416
------------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of available for sale and held to
maturity securities at December 31, 2003 by maturity is as follows:
Estimated
Amortized Market
Cost Value
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 3,320,829 $ 3,348,996
U.S. Government Agency Bonds 8,138,233 8,121,884
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 11,459,062 11,470,882
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
Mortgage-backed securities 5,881,589 5,868,325
U.S. Government Agency Bonds 1,496,712 1,476,392
Other 557,250 557,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 7,935,551 7,901,967
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $19,394,613 $19,372,849
------------------------------------------------------------------------------------------------------------------------------------
16
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Investment Securities (continued)
Gross gains and losses from the sale of securities during the years ended
December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
Gains Losses Gains Losses Gains Losses
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity $ - $ - $ - $ - $ - $ -
Available for Sale 11,843 - 20,125 - 3,046 -
------------------------------------------------------------------------------------------------------------------------------------
Totals $ 11,843 $ - $20,125 $ - $3,046 $ -
------------------------------------------------------------------------------------------------------------------------------------
No mortgage backed securities were pledged for bonds payable as of December 31,
2003. Mortgage backed securities of approximately $433,000 as of December 31,
2002, were pledged for bonds payable (Note 6).
2. Loans Receivable
Loans receivable are summarized as follows:
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans
Residential $25,461,644 $20,118,677
Commercial 5,974,792 7,893,953
Construction and land loans 38,012,937 38,479,836
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 69,449,373 66,492,466
Commercial business loans 67,090,002 76,651,355
Consumer loans 21,240,813 22,238,245
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 157,780,188 165,382,066
------------------------------------------------------------------------------------------------------------------------------------
Less
Deferred loan fees (costs), net (240,166) (109,911)
Allowance for loan losses 2,011,133 2,242,092
------------------------------------------------------------------------------------------------------------------------------------
1,770,967 2,132,181
------------------------------------------------------------------------------------------------------------------------------------
$156,009,221 $163,249,885
------------------------------------------------------------------------------------------------------------------------------------
The allowance for loan losses is summarized as follows: Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 2,396,512
Provision charged to expense 333,467
Net charge-offs (217,979)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 2,512,000
Provision charged to expense 99,998
Net charge-offs (369,906)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 2,242,092
Provision charged to expense 840,991
Net charge-offs (1,071,950)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 2,011,133
====================================================================================================================================
17
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Loans Receivable (continued)
Guaranty serviced loans for others aggregating approximately $172,000 and $12.4
million at December 31, 2003 and 2002, respectively. The servicing rights to
approximately $189,000,000 in loans were sold and transferred during 2001.
Gains on the sale of loans approximated $1.4 million, $1.0 million and $1.2
million during the years ended December 31, 2003, 2002 and 2001, respectively.
3. Office Properties and Equipment
Office properties and equipment are summarized as follows:
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Land $1,942,371 $2,817,101
Building and leasehold improvements 3,741,316 4,062,185
Furniture and fixtures 1,241,794 1,335,238
Equipment 2,837,055 2,546,040
-----------------------------------------------------------------------------------------------------------------------------------
9,762,536 10,760,564
Less accumulated depreciation
and amortization 3,391,249 3,317,629
------------------------------------------------------------------------------------------------------------------------------------
Net office properties and equipment $6,371,287 $7,442,935
------------------------------------------------------------------------------------------------------------------------------------
4. Deposits
Deposits are summarized as follows:
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Statement savings accounts $ 13,404,288 $ 12,811,611
Demand deposit accounts 62,170,098 53,498,243
Money market accounts 45,225,364 34,444,896
------------------------------------------------------------------------------------------------------------------------------------
120,799,750 100,754,750
------------------------------------------------------------------------------------------------------------------------------------
Time deposits 54,384,474 70,504,355
------------------------------------------------------------------------------------------------------------------------------------
$175,184,224 $171,259,105
------------------------------------------------------------------------------------------------------------------------------------
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $11,778,000 and $11,390,000 at December 31, 2003 and
2002, respectively.
At December 31, 2003, scheduled maturities of certificates are as follows
(rounded to the nearest thousand):
Year Ending December 31,
------------------------------------------------------------------------------------------------------------------------------------
2004 $46,962,000
2005 3,819,000
2006 2,569,000
2007 1,025,000
2008 and thereafter 9,000
------------------------------------------------------------------------------------------------------------------------------------
$54,384,000
------------------------------------------------------------------------------------------------------------------------------------
18
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Fair Value of Financial Instruments
The estimated fair values of Guaranty's financial instruments are as follows:
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and short-term investments $11,813,766 $11,814,000 $ 15,391,874 $ 15,392,000
Securities 19,361,029 19,372,849 4,470,264 4,508,000
Loans, net of allowance for loan losses 156,009,221 155,706,284 163,249,885 164,798,000
Financial liabilities
Deposits 175,184,224 175,285,979 171,259,105 171,729,000
Advances from Federal Home Loan Bank 3,000,000 3,000,000 - -
Bonds payable - - 359,847 N/A
Notional Fair Notional Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to
extend credit $60,142,000 $60,142,000 $52,356,000 $52,356,000
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.
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.
19
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Fair Value of Financial Instruments (continued)
The fair values of all other advances are estimated using discounted cash flow
analysis based on Guaranty'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, 2002, it was not deemed practicable to estimate the fair value.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases.
Forward Commitments to purchase mortgage-backed securities
Fair values are based on quoted market prices or dealer quotes.
6. 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 were secured by an indenture between GMSC, Inc. and the
Bank of New York, acting as trustee for the bondholders. The Bonds were redeemed
during 2003 and the balances are summarized as follows:
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Serial Bonds
Class A-3, maturing January 20, 2019,
at 8.0% $ - $455,428
Unapplied payments - (30,000)
------------------------------------------------------------------------------------------------------------------------------------
- 425,428
Less unamortized discount - (65,581)
------------------------------------------------------------------------------------------------------------------------------------
$ - $359,847
------------------------------------------------------------------------------------------------------------------------------------
Prior to redemption, the Bonds were 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 was less than their stated
maturities. Interest was paid as incurred on the Class A-3 Bonds. The indenture
also provided 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 was
included in cash on the balance sheet as of December 31, 2002. The account
established for payment of interest and debt maturities was netted with cash and
bonds payable on the balance sheet as of December 31, 2002.
20
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Advances From Federal Home Loan Bank
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
Year Ended December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Maximum amount outstanding during the year $5,000,000 $15,000,000
Average amount outstanding during the year 760,000 $ 6,136,000
Average interest rate during the year 1.32% 1.96%
8. Income Taxes
The provision for income taxes as presented in the consolidated statements of
operations are as follows:
Year Ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Current income tax $ 683,956 $927,972 $285,743
Deferred income tax expense (benefit) 208,000 (113,714) (18,643)
------------------------------------------------------------------------------------------------------------------------------------
$ 891,956 $814,258 $267,100
------------------------------------------------------------------------------------------------------------------------------------
Reconciliations of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
Year Ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Tax expense at statutory rate $965,010 $876,418 $267,062
Adjustments
Other 73,054 62,160 38
------------------------------------------------------------------------------------------------------------------------------------
$891,956 $814,258 $267,100
------------------------------------------------------------------------------------------------------------------------------------
The components of the net deferred income taxes, which is included in other
assets in the balance sheet, are as follows:
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset
Bad debt reserves $ 684,000 $ 742,000
REO reserves - 82,000
Deferred loan fees - 7,000
Available for sale securities 11,000 12,000
Other 5,000 23,000
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax asset 700,000 866,000
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 52,000 63,000
Fixed assets 459,000 405,000
Other - -
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liability 511,000 468,000
------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 189,000 $398,000
------------------------------------------------------------------------------------------------------------------------------------
21
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Related Party Transactions
In the normal course of business, Guaranty 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, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Balance at the beginning of year $2,069,000 $2,044,000
Additional loans 259,000 171,000
Loan reductions (1,847,000) (146,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 481,000 $2,069,000
------------------------------------------------------------------------------------------------------------------------------------
10. Commitments and Contingencies
Guaranty leases office space under operating leases expiring at various dates
through 2012. Future minimum rental payments required that have initial or
remaining noncancelable terms in excess of one year as of December 31, 2003, are
as follows:
Year Ending December 31,
------------------------------------------------------------------------------------------------------------------------------------
2004 $ 162,056
2005 141,783
2006 144,169
2007 146,630
------------------------------------------------------------------------------------------------------------------------------------
2008 and thereafter 731,206
$1,325,844
------------------------------------------------------------------------------------------------------------------------------------
Total rental expense amounted to approximately $197,000, $140,000 and $179,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
Guaranty 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.
11. Convertible Preferred Stock
On April 29, 1998, Guaranty formed Guaranty Capital Trust I (the "Trust"), a
wholly owned subsidiary. The Trust issued 276,000 shares of 7.0% convertible
preferred securities maturing May 5, 2028 for $6,900,000, with an option to call
on or after April 29, 2003. The Trust also issued 8,537 shares of convertible
common stock for $213,425. Guaranty purchased all shares of the common stock.
The proceeds from the sale of the preferred securities were utilized to purchase
from Guaranty 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.
22
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Convertible Preferred Stock (continued)
In January 2000, Guaranty 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. In December 1999, Guaranty 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. In May 2003, Guaranty redeemed 100% of the remaining preferred
securities at which time $185,000 of unamortized issuances expenses were
written-off.
12. Stockholders' Equity
The following table represents the Bank's regulatory capital levels.
Amount Percent Actual Actual Excess
December 31, 2003 Required Required Amount Percent Amount
------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 6,376,000 4.00% $20,213,000 12.68% $13,387,000
Total risk based capital 12,753,000 8.00% 22,206,000 13.93% 9,453,000
Amount Percent Actual Actual Excess
December 31, 2002 Required Required Amount Percent Amount
------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 6,628,000 4.00% $24,373,000 14.71% $17,745,000
Total risk based capital 13,255,000 8.00 26,447,000 15.96 13,192,000
The ratios which have been established for well-capitalized banks are 6% and 10%
for Tier 1 risk based capital and total risk based capital, respectively.
Guaranty 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 Guaranty 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 for the year ended December 31, 2002. No Trust Preferred Securities were
outstanding as of December 31, 2003 and therefore, were not included in capital
ratio calculations.
On October 26, 2000, Guaranty and the 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. The agreement restricted Guaranty from paying dividends or incurring
any debt at the holding company level without prior regulatory approval. In
addition, the Bank was also prohibited from paying intercompany dividends to
Guaranty without prior regulatory approval. Guaranty and the Bank gained formal
relief from the Written Agreement in October 2002. Guaranty paid dividends of
$595,289 during 2003.
23
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Stock Option Plan
Guaranty has a non-compensatory 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:
2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Weighted - Weighted - Weighted -
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
beginning of period 76,012 $10.01 57,912 $12.07 101,900 $14.16
Granted 17,500 13.47 47,500 8.59 16,512 8.74
Forfeited (5,762) 14.69 (21,500) 12.45 (60,500) 12.10
Exercised (21,000) 9.52 (7,900) 10.59 - -
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end
of period 66,750 10.67 76,012 10.01 57,912 12.07
------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end
of period 66,750 76,012 48,900
------------------------------------------------------------------------------------------------------------------------------------
14. Employee Benefit Plans
Effective February 16, 1989, Guaranty 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. Guaranty may make contributions to
the plan at its discretion. Guaranty's contributions are allocated to employee
accounts using a systematic formula based on participant compensation. Guaranty
contributed approximately $68,000, $67,000 and $60,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
15. Financial Instruments With Off-Balance-Sheet Risk
Guaranty 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 Guaranty has in particular classes of financial instruments.
Guaranty'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. Guaranty 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.
24
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Financial Instruments With Off-Balance-Sheet Risk (continued)
Unless noted otherwise, Guaranty does not require collateral or other security
to support financial instruments with credit risk.
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit $60,142,000 $52,356,000
Standby letters of credit written 3,899,000 5,054,000
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. Guaranty evaluates each
customer's creditworthiness on a case-by-case basis.
Standby letters of credit written are conditional commitments issued by Guaranty
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 Guaranty's loan activity was with customers located in
Charlottesville and Richmond, Virginia and surrounding counties.
16. Subsequent events
On December 18, 2003, Guaranty and Union Bankshares Corporation announced the
signing of a definitive merger agreement, which was unanimously approved by each
board of directors, pursuant to which Union will acquire Guaranty. The merger is
dependent on certain regulatory approvals, as well as approval by Guaranty
shareholders, and is expected to close in the second quarter of 2004.
25
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Selected quarterly financial data (Unaudited)
Condensed quarterly financial data is shown as follows:
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003
First Second Third Fourth
(Dollars in thousands except per share data) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------------------------------------------
Total interest income $2,641 $2,607 $2,498 $2,536
Total interest expense 598 479 416 508
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,043 2,128 2,082 2,028
Provision for (credit to) loan losses 30 979 (198) 30
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,013 1,149 2,280 1,998
Other income 1,609 796 910 493
Other expenses 2,167 2,206 2,278 1,758
------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,455 (261) 912 733
Income tax expense (benefit) 476 (107) 292 231
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 979 $ (154) $ 620 $ 502
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $0.50 ($0.08) $0.31 $0.25
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share 0.49 ( 0.08) 0.31 0.25
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
First Second Third Fourth
(Dollars in thousands except per share data) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------------------------------------------
Total interest income $3,472 $3,313 $3,151 $2,919
Total interest expense 1,388 1,121 901 745
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,084 2,192 2,250 2,174
Provision for loan losses 25 25 25 25
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,059 2,167 2,225 2,149
Other income 634 541 606 666
Other expenses 2,090 2,087 2,156 2,136
------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 603 621 675 679
Income tax expense 197 193 212 212
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 406 $ 428 $ 463 $ 467
------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share $ 0.21 $ 0.22 $ 0.23 $ 0.23
------------------------------------------------------------------------------------------------------------------------------------
26
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Condensed Financial Information of the Parent Company Only
Condensed Statements of Financial Condition
December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in subsidiaries, at equity $19,929,419 $24,324,165
Cash 283,647 83,784
Prepaid expenses and other assets - 448,437
------------------------------------------------------------------------------------------------------------------------------------
$20,213,066 $24,856,386
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other liabilities $ - $ -
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities - -
------------------------------------------------------------------------------------------------------------------------------------
Subordinated debt - 6,225,925
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 2,491,136 2,463,346
Additional paid-in capital 9,238,003 9,034,207
Retained earnings 8,483,927 7,132,908
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,213,066 18,630,461
------------------------------------------------------------------------------------------------------------------------------------
$20,213,066 $24,856,386
------------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Operations
Year Ended December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Income
Dividends received from bank $ 773,803 $ 420,875
------------------------------------------------------------------------------------------------------------------------------------
Total income 773,803 420,875
------------------------------------------------------------------------------------------------------------------------------------
Interest expense (164,187) (420,875)
Non-interest expenses (31,724) (8,531)
------------------------------------------------------------------------------------------------------------------------------------
Income before undistributed
net income of the Bank 577,892 (8,531)
Undistributed net income 1,368,417 1,771,973
------------------------------------------------------------------------------------------------------------------------------------
Net income $1,946,309 $1,763,442
------------------------------------------------------------------------------------------------------------------------------------
27
GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Condensed Financial Information of the Parent Company Only (continued)
Condensed Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $1,946,309 $1,763,442
Adjustments:
Undistributed earnings of the Bank (1,368,417) (1,771,973)
Decrease in prepaid and other assets 448,437 -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 1,026,329 (8,531)
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Dividends received from Bank 6,786,303 420,875
Investment in the bank (1,831,855) (420,875)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 4,954,448 -
------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of common stock 231,586 92,163
Redemption of trust preferred securities (6,012,500) -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing activities (5,780,914) 92,163
------------------------------------------------------------------------------------------------------------------------------------
Increase in cash 199,863 83,632
Cash, beginning of year 83,784 152
------------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 283,647 $ 83,784
28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: April 13, 2004 By: /s/ William E. Doyle, Jr.
----------------------------------------
William E. Doyle, Jr.
President and Chief Executive Officer
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/ William E. Doyle, Jr. President and Chief Executive Officer and April 13, 2004
-------------------------------------
William E. Doyle, Jr. Director
(Principal Executive Officer)
/s/ Tara Y. Harrison Chief Financial Officer April 13, 2004
-------------------------------------
Tara Y. Harrison (Principal Financial and
Accounting Officer)
/s/ Douglas E. Caton Chairman of the Board April 13, 2004
-------------------------------------
Douglas E. Caton
/s/ Harry N. Lewis Vice Chairman of the Board April 13, 2004
-------------------------------------
Harry N. Lewis
Director April , 2004
-------------------------------------
Henry J. Browne
Director April , 2004
-------------------------------------
Jason I. Eckford, Jr.
Director April , 2004
-------------------------------------
W. Bradford Eure
/s/ Patrick J. McCann. Director April 13, 2004
-------------------------------------
Patrick J. McCann
/s/ John R. Metz Director April 13, 2004
-------------------------------------
John R. Metz
Director April , 2004
-------------------------------------
James R. Sipe, Jr.
/s/ Oscar W. Smith, Jr. Director April 13, 2004
-------------------------------------
Oscar W. Smith, Jr.
EXHIBIT INDEX
Number Document
------ --------
2 Agreement and Plan of Reorganization, dated December 18, 2003,
by and between Union Bankshares Corporation ("Union") and
Guaranty, and a related Plan of Merger, filed as Appendix I to
the Proxy Statement/Prospectus included in (and referred to as
Exhibit 2 of) Union's Registration Statement on Form S-4,
Registration No. 333-112416, filed with the Commission on
March 5, 2004, incorporated herein by reference.
3.1 Amended and Restated Articles of Incorporation of Guaranty
(restated in electronic format), attached as Exhibit 3.1 to
Guaranty'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 Guaranty'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.
10.2 Employment Agreement, dated as of May 10, 2001, by and between
Guaranty and William E. Doyle, Jr., attached as Exhibit 10.1
to Guaranty's Quarterly Report on Form 10-QSB for the period
ended June 30, 2001, incorporated herein by reference.
10.3 Form of Change of Control Agreement for Executive Officers.
21 Subsidiaries of Guaranty.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.