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, 2002
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. [X]
The issuer's gross income for its most recent fiscal year was
$15,306,120.
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 February
28, 2003 was approximately $21,166,000. (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 February 28,
2003 was 1,978,377.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2003 Annual Meeting of Shareholders - Part III
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................37
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT.............................37
ITEM 10. EXECUTIVE COMPENSATION.............................................37
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS...................................37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................38
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.............................38
ITEM 14. CONTROLS AND PROCEDURES............................................39
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 is a Virginia state chartered bank which
began business in February 1981 and is headquartered in Charlottesville,
Virginia.
Guaranty's principal asset is the outstanding stock of the Bank, a
wholly owned subsidiary. Guaranty presently has no separate operations and its
business primarily consists of the business of the Bank. Guaranty's Common Stock
is quoted on The Nasdaq National Market under the symbol "GSLC".
The Bank is a community bank that provides a broad range of commercial
and retail banking services. Guaranty's principal business activities are
attracting checking and savings deposits from local businesses and the general
public through its retail banking offices and originating, servicing, investing
in and selling loans. Of Guaranty's $165.4 million of gross loans outstanding at
December 31, 2002, 23.3% represented construction and land loans, 51.1%
represented commercial business and commercial real estate loans, and 12.2%
represented residential first mortgages. Guaranty also lends funds to retail
banking customers by means of home equity, installment loans, and multi-family
dwellings. In addition, Guaranty offers consumer loans and government-insured
and conventional small business loans. Guaranty invests in certain United States
government and agency obligations and other investments permitted by applicable
laws and regulations.
Guaranty's main office is located at 1658 State Farm Boulevard,
Charlottesville, Virginia 22911 and the telephone number is (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
2000 according to census figures. It is located in central Virginia 110 miles
southwest of Washington, D.C. and 70 miles west of Richmond, Virginia, and
includes the University of Virginia, the area's largest employer. Guaranty
operates six full service retail branches, which serve Charlottesville,
Albemarle County, and Fluvanna County, Virginia.
Competition
Guaranty faces strong competition for loans and deposits. Competition
for loans comes primarily from commercial banks and mortgage bankers who also
make loans in the Bank's market area. The Bank competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Guaranty faces substantial competition for deposits from commercial
banks, money market and mutual funds, credit unions and other investment
vehicles. The ability of Guaranty to attract and retain deposits depends on its
ability to provide an investment opportunity that satisfies the requirements of
depositors as to rate of return, liquidity, risk and other factors. Guaranty
competes for these deposits by offering a variety of deposit products at
competitive rates and convenient business hours.
3
Many of our competitors have substantially greater financial resources
than those available to Guaranty. Certain of these institutions have
significantly higher lending limits than Guaranty. In addition, there can be no
assurance that other financial institutions, with substantially greater
resources than Guaranty, will not establish operations in Guaranty's service
area.
Credit Policies
The principal risk associated with each of the categories of loans in
Guaranty's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased, depending on prevailing economic
conditions. In an effort to manage the risk, Guaranty's policy gives loan amount
approval limits to individual loan officers based on their position and level of
experience. The risk associated with real estate mortgage loans, commercial and
consumer loans varies, based on employment levels, consumer confidence,
fluctuations in the value of real estate and other conditions that affect the
ability of borrowers to repay indebtedness. The risk associated with real estate
construction loans varies, based on the supply and demand for the type of real
estate under construction.
Guaranty has written policies and procedures to help manage credit
risk. Guaranty utilizes a loan review process that includes formulation of
portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for ongoing identification and management of credit
deterioration, and regular portfolio reviews to establish loss exposure and to
ascertain compliance with Guaranty's policies.
Guaranty uses a Management Loan Committee and a Directors Loan
Committee to approve loans. The Management Loan Committee, which consists of the
President and three additional senior officers, meets weekly to review all loan
applications from borrowers having total credit exposure to the Bank in excess
of $750,000 in the aggregate or in excess of $250,000 on an unsecured basis. A
Directors Loan Committee, which currently consists of five directors (three
directors constitute a quorum, of whom any two may act), approves loans from
borrowers having total credit exposure to the Bank in excess of $1,500,000 in
the aggregate or in excess of $500,000 on an unsecured basis that have been
previously approved by the Management Loan Committee. Guaranty's Chief Credit
Officer is responsible for reporting to the Directors Loan Committee monthly on
the activities of the Management Loan Committee and on the status of various
delinquent and non-performing loans. The Directors Loan Committee also reviews
lending policies proposed by Management.
Residential loan originations come primarily from walk-in customers,
real estate brokers and builders. Commercial real estate loan originations are
obtained through broker referrals, direct solicitation of developers and
continued business from customers. All completed loan applications are reviewed
by Guaranty's salaried loan officers. As part of the application process,
information is obtained concerning the income, financial condition, employment
and credit history of the applicant. If commercial real estate is involved,
information is also obtained concerning cash flow available for debt service.
Loan applications are submitted to the underwriting department for review. Loan
quality is analyzed based on the Bank's experience and credit underwriting
guidelines as well as the guidelines issued by the Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and other
purchasers of loans, depending on the type of loan involved. The non-conforming
one-to-four-family adjustable-rate mortgage loans that Guaranty originates are
not readily salable in the secondary market because they do not meet all of the
secondary marketing guidelines. Real estate collateral is appraised by
independent fee appraisers who have been pre-approved by the Board of Directors.
All conforming loans including HUD/FHA, VA and applicable VHDA loans are
underwritten by mortgage loan administration according to the Bank's loan
authority schedule.
4
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, 2002, commitments to extend credit totaled $52.4 million.
Construction Lending
Guaranty makes local construction loans, primarily residential, and
land acquisition and development loans. The construction loans are secured by
residential houses under construction and the underlying land for which the loan
was obtained. At December 31, 2002, construction, land and land development
loans outstanding were $38.5 million, or 23.3%, 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, 2002, commercial loans totaled $76.6 million, or 46.3% 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, 2002, commercial real estate loans aggregated $7.9
million or 4.8% 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.
Typically, all fixed rate mortgage loans are originated with the intent
to sell. In order to meet community needs and retain a competitive edge, the
bank occasionally originates non-conforming fixed rate loans. At December 31,
2002, $8.9 million, or 5.4%, 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, 2002, $11.2 million, or 6.8%, of the Bank's loan portfolio
consisted of adjustable rate mortgages.
6
All residential mortgage loans originated by Guaranty contain a
"due-on-sale" clause providing that Guaranty may declare the unpaid principal
balance due and payable upon sale or transfer of the mortgaged premises, unless
certain investor provisions should apply. "Due-on-sale" definitions will vary
from investor to investor, so Guaranty's policy is to adhere to the mortgage
loan investor's guidelines, or in the case of our own loans, adhere to the
defined terms in the security instruments.
In connection with residential real estate loans, Guaranty requires
title insurance, hazard insurance and if required, flood insurance. Flood
determination letters with life of loan tracking are obtained on all federally
related transactions with improvements serving as security for the transaction.
Guaranty does require escrows for real estate taxes and insurance.
Consumer Lending
Guaranty offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit, automobile loans, deposit account
loans, installment and demand loans, credit cards, and home equity lines of
credit and loans. At December 31, 2002, Guaranty had consumer loans of $22.2
million or 13.4% of gross loans. Such loans are generally made to customers with
which 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, 2002, Guaranty had 87 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 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, 2002, the Bank
declared $420,875 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 Federal
Deposit Insurance Corporation (the "FDIC"). The deposits of the Bank are insured
by the FDIC up to the limits set forth under applicable law. The deposits of the
Bank are subject to the deposit insurance assessments of the Bank Insurance Fund
("BIF") of the FDIC.
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
was .10% of deposits per year in 2000 and was .03% of deposits per year in 2001
and 2002. These rate schedules are subject to future adjustments by the FDIC. In
addition, the FDIC has authority to impose special assessments from time to
time. However, because the legislation enacted in 1996 requires that both
Savings Association Insurance Fund insured and BIF-insured deposits pay a pro
rata portion of the interest due on the obligations issued by the Financing
Corporation, the FDIC is assessing BIF-insured deposits an additional 1.30 basis
points per $100 of deposits to cover those obligations.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is not aware of any existing
circumstances that could result in termination of any Bank's deposit insurance.
Capital. The Federal Reserve Board has issued risk-based and leverage
capital guidelines applicable to banking organizations that it supervises. Under
the risk-based capital requirements, Guaranty and the Bank are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) of 8%. At least half of the total capital must be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital," which, together with Tier 1 capital, composes "total capital").
In addition, each of the federal banking regulatory agencies has
established minimum leverage capital requirements for banking organizations.
Under these requirements, banking organizations must maintain a minimum ratio of
Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject
to federal bank regulatory evaluation of an organization's overall safety and
soundness.
The risk-based capital standards of the Federal Reserve Board
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a banking organization's capital adequacy.
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, 2002, 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.
Forward Looking Statements
Certain statements in this annual report are forward-looking and may be
identified by the use of words such as "believe", "expect", "anticipate",
"should", "planned", "estimated", and "potential". These statements are based on
Guaranty's current expectations. A variety of factors could cause Guaranty's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in such forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development, and
results of Guaranty's business include interest rate movements, competition from
both financial and non-financial institutions, the timing and occurrence (or
nonoccurence) of transactions and events that may be subject to circumstances
beyond Guaranty's control, and general economic conditions.
11
Item 2. Description of Property.
As of March 1, 2003, Guaranty conducted its business from its main
office in Charlottesville, Virginia and six 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, subject to
1924 Arlington Boulevard Guaranty's right to renew for two
Charlottesville, Virginia additional five-year terms
West Main 1998 Lease expires in 2003, subject to
2211 West Main Street Guaranty's right to renew for two
Charlottesville, Virginia additional five-year terms
Route 29 North & Rio Road 1996 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
Guaranty believes that all of its properties are maintained in good
operating condition and are suitable and adequate for its operational needs.
12
Item 3. Legal Proceedings.
In the course of its operations, Guaranty is a party to various legal
proceedings. Based upon information currently available, management believes
that such legal proceedings, in the aggregate, will not have a material adverse
effect on Guaranty's business, financial position, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of Guaranty.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Guaranty's Common Stock has been listed on the Nasdaq National Market
under the symbol "GSLC" since June 1997. The following table sets forth, for the
quarters indicated, the high and low sales prices for Guaranty's Common Stock
and per share dividends for the periods indicated.
Market Price and Dividends
Sales Price ($)
---------------
High Low Dividends ($)
---- --- -------------
Fiscal Year Ended December 31, 2001:
1st quarter 9.000 5.000 --
2nd quarter 8.250 7.500 --
3rd quarter 8.500 7.270 --
4th quarter 9.000 7.500 --
Fiscal Year Ended December 31, 2002:
1st quarter 10.950 8.000 --
2nd quarter 13.750 10.200 --
3rd quarter 14.120 12.200 --
4th quarter 14.600 12.500 --
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. The timing, amount and
payment of future dividends on Guaranty's Common Stock is at the discretion of
Guaranty's Board of Directors subject to the written approval by both the
FRB-Richmond and the Bureau of Financial Institutions and will depend upon the
earnings of Guaranty and its subsidiaries, principally the Bank, the financial
condition of Guaranty and other factors, including general economic conditions
and applicable governmental regulations and policies. Guaranty and the Bank were
released from the Written Agreement in October 2002.
13
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 February 28, 2003, Guaranty had approximately 987 shareholders of
record.
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, 2002 and 2001, and
for the years ended December 31, 2002, 2001 and 2000. 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 Charlottesville and Fluvanna markets. Guaranty Bank
(the "Bank") operated eight branch locations throughout the year 2002, one of
which was located in the Harrisonburg market. The Bank closed on the sale of the
Harrisonburg branch to FNB Southeast, on January 24, 2003.
Guaranty made tremendous progress during calendar year 2002, which was the
second 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 realized substantial growth in earnings and
maintained a high level of asset quality, even while experiencing a continued
decline in the Federal Reserve's discount rate, which underwent an additional 50
basis point reduction in the fourth quarter of 2002, to .75%. As a result of
Guaranty's focused effort on attracting low-cost deposits, the net interest
margin widened year-over-year from 3.51 to 4.58%.
In October 2000, Guaranty and the Bank, entered into a Written Agreement (the
"Agreement") with the Federal Reserve Bank of Richmond and the Bureau of
Financial Institutions with respect to various operating policies and
procedures. As a result of the Agreement, the Bank revised its asset/liability
management, liquidity, risk management, loan administration and capital adequacy
policies. Guaranty addressed all of the issues raised in the Agreement and
gained formal written relief from the Agreement in October 2002. As a result of
the Agreement, Guaranty suspended dividends to its common shareholders from the
third quarter of 2000 through the fourth quarter of 2002. Guaranty's Board of
Directors re-instated a dividend to shareholders on January 23, 2003, in the
amount of 7.5 cents per share for shareholders of record as of January 29, 2003,
payable February 10, 2003.
Guaranty's 2002 financial performance reflected a planned reduction in total
assets. This planned reduction in total assets is indicative of Guaranty's
emphasis changing from aggressive growth to profitability management. Combined
with increased earnings, the net result increased regulatory capital ratios for
both Guaranty and the Bank.
Net Income
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
14
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 $518,000 ($.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.
Net income for the year ended December 31, 2000, was $607,000 or $.31 per
diluted share. These earnings, an increase over 1999 earnings, were the result
of increased net interest income and deposit fees, which exceeded increases in
operating expenses and additional provisions for possible loan losses.
Additionally, net income in 2000 was not impacted by the losses on the sale of
investments, which negatively impacted the 1999 earnings.
Net 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 $8.7 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. If
there are additional prime rate decreases in 2003, the net interest margin will
be negatively impacted, as the yield on interest earning assets will generally
fall faster than the cost of interest bearing liabilities. Guaranty's net
interest margin will be positively impacted by stable or rising rates in 2003.
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
Net interest income was $9.8 million for the year ended December 31, 2000, 26.5%
greater than the $7.7 million reported for the year ended December 31, 1999. The
improvement in net interest income reflected higher loan and investment yields,
higher average balances and an increased gap between the amount of earning
assets and the amount of interest bearing liabilities. The net interest margin
increased due to Guaranty shifting its asset base into both commercial and
consumer loans and away from more conservatively priced residential mortgage
loans. The net interest margin for the year ended December 31, 2000, increased
by 56 basis points to 3.99% as compared to the prior year-end. The increase was
due to a 97 basis point increase in the yield on earning assets, which exceeded
the 54 basis point increase in the cost of interest bearing liabilities.
16
The following table sets forth average balances of total interest earning assets
and total interest bearing liabilities for the periods indicated, showing the
average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted average yields and costs.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
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 $ 17,226 $ 1,086 6.30% $ 28,303 $ 1,855 6.55% $ 25,065 $ 1,786 7.13%
Loans 166,634 11,649 6.99% 189,135 15,451 8.17% 213,353 20,103 9.42%
Interest bearing deposits
in other banks 6,078 120 1.97% 7,381 336 4.55% 6,668 469 7.03%
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets/
total interest income 189,938 12,855 6.77% 224,819 17,642 7.85% 245,086 22,358 9.12%
------------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks 8,551 8,134 6,599
Premises and equipment 8,185 9,245 9,454
Other assets 4,975 4,504 4,876
Less allowance for loan
losses (2,531) (2,523) (1,798)
------------------------------------------------------------------------------------------------------------------------------------
Total non-interest earning
assets 19,180 19,360 19,131
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $209,118 $244,179 $264,217
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing deposits:
Demand accounts $ 27,057 87 0.32% $ 23,344 243 1.04% $ 20,151 328 1.63%
MMDA accounts 24,864 381 1.53% 21,170 674 3.18% 21,883 1,000 4.57%
Savings 13,103 63 0.48% 11,643 195 1.67% 10,922 245 2.24%
Certificates of deposit 89,635 2,933 3.27% 139,438 7,821 5.61% 149,787 8,949 5.97%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 154,659 3,464 2.24% 195,595 8,933 4.57% 202,743 10,522 5.19%
------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other
borrowings 6,136 120 1.96% 4,608 237 5.14% 22,774 1,485 6.50%
Trust preferred bonds 6,013 481 8.00% 6,013 481 8.00% 6,017 465 7.71%
Bonds payable 486 90 18.52% 739 105 14.21% 881 105 11.92%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities/total interest
expense 154,659 4,155 2.48% 206,955 9,756 4.71% 232,415 12,577 5.41%
------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits 22,879 18,755 14,409
Other liabilities 1,397 2,259 1,991
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 191,570 227,969 248,815
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 17,548 16,210 15,402
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
Stockholders' equity $209,118 $244,179 $264,217
------------------------------------------------------------------------------------------------------------------------------------
Interest spread (1) 4.29% 3.13% 3.71%
Net interest income/net interest
margin (2) $8,700 4.58% $ 7,886 3.51% $9,781 3.99%
====================================================================================================================================
(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.
17
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, 2002 Year Ended December 31, 2001
compared to compared to
Year Ended December 31, 2001 Year Ended December 31, 2000
Change Due To: Change Due To:
------------------------------------------------------------------------------------------------------------------------------------
Increase Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ (71) $ (698) $ (769) $ (143) $ 212 $ 69
Loans (2,229) (1,573) (3,802) (2,674) (1,978) (4,652)
Interest bearing deposits
in other banks (190) (26) (216) (165) 32 (133)
------------------------------------------------------------------------------------------------------------------------------------
Total interest income (2,490) (2,297) (4,787) (2,982) (1,734) (4,716)
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest bearing deposits:
Demand accounts (168) 12 (156) (118) 33 (85)
MMDA accounts (350) 57 (293) (303) (23) (326)
Savings (139) 7 (132) (62) 12 (50)
Certificates of deposit (3,258) (1,630) (4,888) (548) (580) (1,128)
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits (3,915) (1,554) (5,469) (1,031) (558) (1,589)
FHLB advances and other (147) 30 (117) (298) (934) (1,232)
Bonds payable 32 (47) (15) 18 (18) -
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense (4,030) (1,571) (5,601) (1,311) (1,510) (2,821)
------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,540 $ (726) $ 814 $(1,669) $ (224) $(1,895)
====================================================================================================================================
Interest Sensitivity
An important element of both earnings performance and liquidity is the
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
maturing or repricing within a specific time interval. The gap can be managed by
repricing assets or liabilities, by selling investments, by replacing an asset
or liability prior to maturity, or by adjusting the interest rate during the
life of an asset or liability. Matching the amounts of assets and liabilities
repricing in the same time interval helps to hedge the risk and minimize the
impact on net income of changes in market interest rates. Guaranty evaluates
interest rate risk and then formulates guidelines regarding asset generation and
pricing, funding sources and pricing, and off-balance sheet commitments in order
to decrease sensitivity risk. These guidelines are based upon management's
outlook regarding future interest rate movements, the state of the regional and
national economy, and other financial and business risk factors.
At December 31, 2002, Guaranty had $25.5 million more liabilities than assets
that reprice 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 fixed rate certificates
of deposit reaching maturity in one year or less. To decrease the gap between
interest-sensitive assets and liabilities, Guaranty is in the process of
shifting its deposit mix to include a higher percentage of demand accounts and a
lower percentage of certificates of deposit. Guaranty reduced its gap between
liabilities and assets that reprice within one year by $13.3 million, from $38.8
million at December 31, 2001.
Guaranty has an Asset/Liability Committee ("ALCO"), which meets regularly to
discuss deposit pricing, changes in borrowed money, investment and trading
activity, loan sale activity, liquidity levels and the
18
overall interest sensitivity. The actions of this committee are reported to the
Board of Directors monthly. The daily monitoring of interest rate risk,
investment and trading activity, along with any other significant transactions
are managed by the President with input from other ALCO members. The following
table presents the amounts of Guaranty's interest sensitive assets and
liabilities that mature or reprice in the periods indicated.
December 31, 2002
Maturing or Repricing In:
------------------------------------------------------------------------------------------------------------------------------------
3 Months 4-12 1-5 Over 5
(Dollars in thousands) or less Months Years Years
------------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive assets:
Loans $ 80,034 $ 23,350 $ 44,569 $ 17,429
Investments and mortgage-backed securities (1) 4 12 477 3,540
Deposits at other institutions 7,487 - - -
------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets 87,525 23,362 45,046 20,969
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets 87,525 110,887 155,933 176,902
------------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
NOW accounts 28,773 - - -
Money market deposit accounts 34,445 - - -
Savings accounts 12,812 - - -
Certificates of deposit 21,048 39,338 10,110 8
Convertible preferred securities - - - 6,013
Bonds payable 3 11 70 306
------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities 97,081 39,349 10,180 6,327
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive liabilities $ 97,081 $ 136,430 $ 146,610 $ 152,937
------------------------------------------------------------------------------------------------------------------------------------
Period gap $ (9,556) $ (15,987) $ 34,866 $ 14,642
Cumulative gap (9,556) (25,543) 9,323 23,965
Ratio of cumulative interest-sensitive
assets to interest-sensitive liabilities 90.16% 81.28% 106.36% 115.67%
Ratio of cumulative gap to total assets (4.85%) (12.96%) 4.73% 12.16%
------------------------------------------------------------------------------------------------------------------------------------
(1) Amounts include Federal Home Loan Bank stock.
Of Guaranty's commercial and construction loans with a maturity of more than one
year, approximately $2.9 million have fixed interest rates and $2.4 million have
variable interest rates.
19
Investments
Total investment securities decreased 77.0% to $5.4 million at December 31,
2002, from $23.5 million at December 31, 2001. 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. This
decreased the corporate bond portfolio from $13.6 million at December 31, 2001
to $3.2 million at December 31, 2002, in an effort to improve liquidity without
incurring investment losses. This strategy results in decreased interest income
in the short term, however, the flexibility gained allows Guaranty to build and
maintain an investment portfolio better structured 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,
2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Cost Market Cost Market Cost Market
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Held-to-maturity
Mortgage-backed securities $ 433 $ 471 $ 720 $ 768 $ 950 $ 970
Other 403 403 250 250 250 250
---------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity 836 874 970 1,018 1,200 1,220
---------------------------------------------------------------------------------------------------------------------------------
Available for sale
Corporate bonds 3,247 3,212 13,620 12,597 19,354 17,508
U.S. Government Agency Obligations - - 8,000 7,970 - -
Federal Reserve Bank & Other Stocks 422 422 422 422 422 422
---------------------------------------------------------------------------------------------------------------------------------
Total available for sale 3,669 3,634 22,042 20,989 19,776 17,930
---------------------------------------------------------------------------------------------------------------------------------
Other
Federal Home Loan Bank Stock 947 947 1,550 1,550 1,550 1,550
---------------------------------------------------------------------------------------------------------------------------------
Total $ 5,452 $ 5,455 $ 24,562 $ 23,557 $ 22,526 $ 20,700
=================================================================================================================================
The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Book % of Book % of Book % of
(Dollars in thousands) Value Total Value Total Value Total
------------------------------------------------------------------------------------------------------------------------------------
Investment securities:
FHLMC mortgage-backed securities $ 431 7.96 $ 720 3.06% $ 950 4.59%
Corporate bonds 3,212 59.29 12,597 53.58 17,508 84.66
Treasury and agency notes -- -- 8,220 34.97 250 1.21
FHLB stock 947 17.48 1,550 6.59 1,550 7.50
Other 827 15.27 422 1.80 422 2.04
------------------------------------------------------------------------------------------------------------------------------------
Total Investment securities $ 5,417 100.00% $ 23,509 100.00% $ 20,680 100.00%
====================================================================================================================================
20
The following table indicates the maturity distribution and yields of investment
securities, held as of December 31, 2002.
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 $ - - $ 403 3.07% $ - - $ - - $ 403 3.07%
Mortgage backed securities 16 8.52% 77 8.52% 142 8.52% 198 8.52% 433 8.52%
------------------------------------------------------------------------------------------------------------------------------------
Total 16 8.52% 480 3.94% 142 8.52% 198 8.52% 836 5.89%
------------------------------------------------------------------------------------------------------------------------------------
Securities held for sale (1):
Corporate securities - - - - 1,020 6.45% 2,192 7.67% 3,212 7.28%
------------------------------------------------------------------------------------------------------------------------------------
Total securities $ 16 8.52% $ 480 3.94% $1,162 6.70% $2,390 7.74% $4,048 7.00%
====================================================================================================================================
(1) Excludes Federal Reserve stock of $352,250, Federal Home Loan Bank stock of
$947,100 and Community Bankers Bank stock of $70,
Loans
Net loans consist of total loans minus undisbursed loan funds, deferred loan
fees and the allowance for loan losses. Net loans were $163.2 million at
December 31, 2002, an 8.1% decline from December 31, 2001. During 2002, the size
of Guaranty's loan portfolio decreased as a result of higher credit standards in
light of an uncertain economy. Net loans declined to $177.6 million at December
31, 2001, from $201.6 million at December 31, 2000, 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,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage Loans:
Residential $ 20,119 $ 39,864 $ 54,911 $ 62,796 $ 66,369
Commercial 7,894 16,277 3,434 1,179 2,504
Construction and land loans 38,480 36,307 59,363 70,009 50,286
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 66,493 92,448 117,708 133,984 119,159
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 76,651 66,603 59,120 55,698 34,388
Consumer loans 22,238 20,973 27,190 16,960 9,630
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 165,382 180,024 204,018 206,642 163,177
------------------------------------------------------------------------------------------------------------------------------------
Adjustments:
Deferred fees (costs) (110) (67) (27) 40 113
Allowance for losses 2,242 2,512 2,396 1,203 1,002
------------------------------------------------------------------------------------------------------------------------------------
Total net items 2,132 2,445 2,369 1,243 1,115
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $163,250 $177,579 $201,649 $205,399 $162,062
------------------------------------------------------------------------------------------------------------------------------------
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 51% of total
loans outstanding. During this same time period, residential mortgage loans
21
outstanding have decreased from $66.4 million to $20.1 million. Presently, the
majority of the residential mortgage loans originated are sold on a servicing
released basis. Construction and land development loans declined in 2001 as
Guaranty reduced its loan concentration in speculative real estate lending, and
increased in 2002 through implementation of a plan for targeted growth.
The following tables show the composition of Guaranty's loan portfolio by fixed
and adjustable rate at the dates indicated.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate
Residential $ 8,921 $ 27,200 $ 20,403 $ 18,277 $ 20,206
Commercial - - - 1,179 2,504
Construction and land loans - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 8,921 27,200 20,403 19,456 22,710
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 15,745 15,427 12,891 13,678 7,098
Consumer Loans 3,606 3,429 3,832 2,825 242
------------------------------------------------------------------------------------------------------------------------------------
Total fixed-rate loans 28,272 46,056 37,126 35,959 30,050
------------------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
Real Estate
Residential 11,198 12,664 34,508 44,519 46,163
Commercial 7,894 16,277 3,434 11,140 12,853
Construction and land loans 38,480 36,307 59,363 70,009 50,286
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 57,572 65,248 97,305 125,668 109,302
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 60,906 51,176 46,229 30,880 14,437
Consumer loans 18,632 17,544 23,358 14,135 9,388
------------------------------------------------------------------------------------------------------------------------------------
Total adjustable-rate loans 137,110 133,968 166,892 170,683 133,127
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 165,382 180,024 204,018 206,642 163,177
------------------------------------------------------------------------------------------------------------------------------------
Less:
Deferred fees (costs) (110) (67) (27) 40 113
Allowances for losses 2,242 2,512 2,396 1,203 1,002
------------------------------------------------------------------------------------------------------------------------------------
Total net items 2,132 2,445 2,369 1,243 1,115
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $163,250 $177,579 $201,649 $205,399 $162,062
====================================================================================================================================
The following table presents the remaining maturities of selected categories of
Guaranty's loan portfolio at December 31, 2002.
Commercial, Financial Real Estate
and Agricultural Construction
-----------------------------------------------------------------
(Dollars in thousands)
Within 1 year $24,553 $26,083
-----------------------------------------------------------------
Variable Rate:
1 to 5 years 10,262 3,604
After 5 years 39,078 1,237
-----------------------------------------------------------------
Total 49,340 4,841
Fixed Rate:
1 to 5 years 8,170 -
After 5 years 2,482 -
-----------------------------------------------------------------
Total 10,652 -
-----------------------------------------------------------------
Total $84,545 $30,924
=================================================================
22
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, 2002, Guaranty had
classified $8.4 million of its loans as substandard. No loans were classified as
doubtful or loss at December 31, 2002. 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.
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.
The following table reflects the composition of non-performing assets at the
dates indicated.
December 31,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans $2,363 $ 187 $ 238 $1,310 $1,686
Restructured loans - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 2,363 187 238 1,310 1,686
------------------------------------------------------------------------------------------------------------------------------------
Foreclosed assets 397 764 1,301 843 488
------------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $2,760 $ 951 $1,539 $2,153 $2,174
====================================================================================================================================
Loans past due 90 or more days and
accruing interest $ 156 $ 103 $1,587 $ 93 $ 106
Non-performing loans to total loans, at
period end 1.43% 0.10% 0.12% 0.62% 0.97%
Non-performing assets to period end
total loans and foreclosed assets 1.67% 0.53% 0.76% 1.02% 1.25%
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
23
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.
24
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% - 100% 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.
An analysis of the allowance for loan losses, including charge-off activity, is
presented below for the periods indicated.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of period $2,512 $2,396 $1,203 $1,002 $ 935
Provision charged to operations 100 333 1,505 486 184
Charge-offs:
Real estate - 66 229 122 120
Consumer 14 15 72 - -
Commercial 359 145 34 165 _
Recoveries:
Real estate - 1 20 - 3
Consumer 3 - 2 2 -
Commercial - 8 1 - -
------------------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 370 217 312 285 117
------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $2,242 $2,512 $2,396 $1,203 $1,002
====================================================================================================================================
Allowance for loan losses to period
end total loans 1.36% 1.40% 1.17% 0.57% 0.58%
Allowance for loan losses to nonaccrual
loans 94.9% 1,343.32% 1,006.72% 91.83% 59.43%
Net charge-offs to average loans 0.22% 0.12% 0.15% 0.15% 0.10%
Provision for loan losses
For the years ended December 31, 2002, 2001 and 2000, the provision for loan
losses was approximately $100,000, $333,000 and $1.5 million, respectively. The
provision for loan losses decreased for the years ended December 31, 2002 and
2001, as Guaranty's loan portfolio decreased and its allowance for possible
losses as a percentage of loans outstanding was above the peer group at each of
the years then ended.
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.
25
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,
------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
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 $ 27 12.2% $ 50 22.1% $ 109 26.9%
Construction and land 548 23.3 611 20.2 1,056 29.1
Commercial 1,434 51.1 1,165 46.0 861 30.7
Consumer and other loans 110 13.4 105 11.7 137 13.3
Unallocated 123 - 581 - 233 -
------------------------------------------------------------------------------------------------------------------------------------
Total $2,242 100.0% $2,512 100.0% $2,396 100.0%
====================================================================================================================================
December 31,
------------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of
Loans to Loans to
Total Gross Total Gross
Allowance Loans Allowance Loans
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate $ 78 29.8% $ 101 38.4%
Construction and land 383 31.4 384 34.7
Commercial 575 30.7 402 21.4
Consumer and other loans 167 8.1 115 5.5
Unallocated - - - -
------------------------------------------------------------------------------------------------------------------------------------
Total $1,203 100.0% $1,002 100.0%
====================================================================================================================================
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 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage banking income $ 999 $1,093 $ 213
Loan and deposit fees and servicing income 907 831 939
Increase in cash surrender value of life insurance 183 - -
Investment sales commissions 104 254 195
Net gain (loss) on sale of securities 20 3 (76)
Other 273 325 227
------------------------------------------------------------------------------------------------------------------------------------
Total $ 2,486 $2,506 $1,498
====================================================================================================================================
26
Non-interest income decreased for the year ended December 31, 2002, by $20,000.
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 current year, 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
transactions 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, which resulted in management's re-configuration of
the investment sales function, which was still in progress as of December 31,
2002.
Non-interest income increased by $1.0 million to $2.5 million for the year ended
December 31, 2001. The increase in non-interest income was due primarily to an
increase in income from Guaranty's mortgage banking unit resulting from an
increase in sales of residential mortgage loans to $63.5 million from $39.8
million in the prior year. In mid-2001, Guaranty revised its mortgage banking
business model and as a result sells all originated residential mortgage loans
on a servicing released basis. Residential mortgage loan originations for the
year ended December 31, 2001, increased to $70.7 million from $40.1 million in
the prior year. The increase was due to the employment of an additional mortgage
loan originator in 2001 and the impact of declining interest rates. Service
charges on deposit accounts increased by 9.3% to $785,000 for the year ended
December 31, 2001, due to increased volume of transaction accounts.
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
practice of selling all 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 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, due
to lower depreciation expense ($171,000 decrease) due to assets becoming fully
depreciated, and rental expense, which 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.
27
Non-interest expenses increased by approximately $1.4 million to $8.9 million
for the year ended December 31, 2000. The increase was in all categories and
reflected the continued growth of Guaranty.
28
The following table summarizes the main components of non-interest expense.
Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Personnel $4,561 $4,811 $4,227
Occupancy 1,168 1,412 1,353
Data Processing 1,158 1,153 984
Marketing 159 211 317
Professional fees 294 385 423
Other 1,168 1,301 1,549
------------------------------------------------------------------------------------------------------------------------------------
Total $8,508 $9,273 $8,853
====================================================================================================================================
Income Taxes
Income tax expense for the years ended December 31, 2002, 2001 and 2000, was
$814,000, $267,000 and $313,000, respectively. The decreases and increases are a
direct result of earnings levels for the respective year-ends. The effective
income tax rate was 31.6% for the year ended December 31, 2002, as the increase
in cash surrender value of BOLI is a non-taxable item and therefore reduces
Guaranty's effective tax rate. The effective tax rate was 34.0% for the years
ended December 31, 2001 and 2000.
Sources of Funds
Deposits
Deposits have traditionally been the principal source of Guaranty's funds for
use in lending and for other general business purposes. In addition to deposits,
Guaranty derives funds from loan repayments, cash flows generated from
operations, which includes interest credited to deposit accounts, repurchase
agreements entered into with commercial banks and 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, 2002, deposits were $171.3 million, a 14.6% decline from $200.6
million at December 31, 2001. In order to reduce the overall cost of funds and
reduce Guaranty's reliance on high cost time deposits and short-term borrowings
as a funding source, management continues to direct extensive efforts towards
attracting lower cost transaction accounts. Low-cost transaction accounts
comprise 58.7% of total deposits as of December 31, 2002, compared to 41.1% as
of December 31, 2001. Current rates offered by Guaranty on certificates of
deposit are substantially below those offered two years ago. The majority of
certificates of deposit are initially issued with a one-year maturity. As these
certificates of deposit continue to mature and reprice, Guaranty's interest
expense will decrease and its net interest income will increase. The average
cost of certificate of deposits for the year ended December 31, 2002 declined by
234 basis points to 3.27% from the same period a year ago.
At December 31, 2001, deposits were $200.6 million, a 7.6% decrease from $217.0
million at December 31, 2000. The decrease in deposits corresponds with the
decrease in the loan portfolio in 2001. During 2001, Guaranty increased its
non-interest bearing demand balances by 25.3% to $22.1 million and its
29
interest bearing demand balances by 11.1% to $25.5 million. The financial
markets were affected by eleven short-term interest rate reductions totaling 475
basis points in 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, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Demand deposit accounts $ 53,498 $ 47,570 $ 40,879
Statement savings account 12,812 12,992 10,319
Money market accounts 34,445 22,394 18,893
30-to-180-day certificates 3,326 1,427 4,613
Seven to eleven month certificates 856 6,404 37,027
One-to-five year fixed-rate certificates 62,857 105,608 98,540
Eighteen-month prime rate certificates 3,465 4,237 6,773
------------------------------------------------------------------------------------------------------------------------------------
Total $171,259 $200,632 $217,044
====================================================================================================================================
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, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Rate Average Rate Average Rate
(Dollars in thousands) Balance Paid Balance Paid Balance Paid
------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits $ 22,879 0.00% $ 18,755 0.00% $ 14,409 0.00%
Interest bearing demand deposits 51,921 0.90% 44,514 2.06% 42,034 3.16%
Savings deposits 13,103 0.53% 11,643 1.67% 10,922 2.24%
Time deposits 89,635 3.27% 139,438 5.61% 149,787 5.97%
------------------------------------------------------------------------------------------------------------------------------------
Total deposits $177,538 1.95% $214,350 4.17% $217,152 4.84%
====================================================================================================================================
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, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Opening balance $ 200,632 $217,044 $199,595
Net deposits (32,838) (25,345) 6,927
Interest credited 3,465 8,933 10,522
------------------------------------------------------------------------------------------------------------------------------------
Ending balance $171,259 $200,632 $217,044
====================================================================================================================================
Net increase (decrease) $ (29,373) $ (16,412) $ 17,449
Percent increase (decrease) (14.64%) (7.56%) 8.74%
====================================================================================================================================
30
The following table indicates the amount of Guaranty's certificates of deposit
by time remaining until maturity as of December 31, 2002.
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 $ 18,386 $ 10,592 $ 22,260 $ 7,876 $59,114
Certificates of deposit of $100,000 or more 4,951 1,380 3,458 1,601 11,390
------------------------------------------------------------------------------------------------------------------------------------
Total of certificates of deposits $ 23,337 $ 11,972 $ 25,718 $ 9,477 $70,504
------------------------------------------------------------------------------------------------------------------------------------
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, 2002, Guaranty had
no outstanding borrowings from the FHLB compared to $1.0 million and $14.0
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 2002 or
2001.
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.
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, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Maximum Balance:
FHLB advances $15,000 $18,000 $31,000
Securities sold under
agreements to repurchase - - 16,684
------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------------------------------------------------------------
FHLB advances $6,136 1.96% $4,608 5.14% $18,147 6.68%
Securities sold under
agreements to repurchase - - - - 4,265 6.39%
------------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the balances of Guaranty's short-term borrowings
at the dates indicated.
December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
FHLB advances - $1,000 $14,000
Weighted average interest rate of
short-term FHLB advances - 2.13% 6.35%
------------------------------------------------------------------------------------------------------------------------------------
31
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, 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.
At December 31, 2000, cash and cash equivalents were approximately $15.6
million. Financing activities reduced cash and cash equivalents by approximately
$6.1 million during 2000. This amount represents the combination of the net
decrease in advances from the FHLB of $6.0 million, a decrease of $16.7 million
in securities sold under agreements to repurchase and the growth in deposits of
$17.1 million. Approximately $353,000 in dividends to common shareholders were
paid during 2000. Daily operating activities provided $3.4 million in cash and
cash equivalents. Investing activities provided an additional $5.6 million in
cash and cash equivalents that consisted mainly of the sale of $4.8 million in
securities and a net decrease in the loan portfolio of $2.6 million. This
additional cash flow was used to invest in office properties and equipment
(primarily for the new Forest Lakes branch) of $1.3 million, and $453,000 in
originated mortgage-servicing rights.
Guaranty uses its sources of funds primarily to meet operating needs, to pay
deposit withdrawals and fund loan commitments. At December 31, 2002, total
approved loan commitments were $2.5 million. In addition, at December 31, 2002,
commitments under unused lines of credit were $49.9 million. Certificates of
deposit scheduled to mature or re-price in one year or less at December 31, 2002
totaled $61.0 million.
Management intends to fund anticipated loan closings and operating needs during
2003 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.
32
The following summarizes Guaranty's contractual cash obligations and commercial
commitments, including maturing certificates of deposit, as of December 31, 2002
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) $ 61,027 $ 7,552 $ 1,917 $ 8 $ 70,504
Undisbursed credit lines 49,872 - - - 49,872
------------------------------------------------------------------------------------------------------------------------------------
Commitments to extend credit 2,484 - - - 2,484
Standby letters of credit 5,054 - - - 5,054
Total obligations $ 118,437 $ 7,552 $ 1,917 $ 8 $127,914
------------------------------------------------------------------------------------------------------------------------------------
(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.
Guaranty and the Bank are subject to regulatory capital requirements of the
Federal Reserve. At December 31, 2002, Guaranty and the Bank exceeded all such
regulatory capital requirements as shown in the following table.
December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
Guaranty Financial Guaranty
Corporation Bank
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Tier 1 Capital:
Common stock $ 2,463 $ 2,000
Capital surplus 9,034 9,742
Cumulative preferred securities (2) 6,013 -
Retained earnings 7,133 12,632
------------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 Capital 24,643 24,374
------------------------------------------------------------------------------------------------------------------------------------
Tier 2 Capital:
Allowance for loan losses (1) 2,076 2,073
Cumulative preferred securities - -
------------------------------------------------------------------------------------------------------------------------------------
Total Tier 2 Capital 2,076 2,073
------------------------------------------------------------------------------------------------------------------------------------
Total Risk Based Capital $ 26,719 $ 26,447
====================================================================================================================================
Risk Weighted Assets $165,911 $165,691
Capital Ratios:
Tier 1 Risk-based 14.87% 14.73%
Total Risk-based 16.12% 15.98%
Tier 1 Capital to average adjusted total assets 12.36% 12.24%
------------------------------------------------------------------------------------------------------------------------------------
(1) Limited to 1.25% of risk weighted assets.
(2) Limited to 1/3 of core capital.
33
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 July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which was effective July 1, 2001. SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests methods. The adoption of SFAS 141 has not
had an effect on Guaranty's financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which was
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires a transitional
goodwill impairment test six months from the date of adoption and further
requires an evaluation of the carrying value of goodwill for impairment annually
thereafter. The adoption of SFAS 142 has not had an effect on Guaranty's
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This statement also broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Guaranty believes the
adoption of SFAS 144 will not have a material effect on Guaranty's financial
statements.
On July 6, 2001, the SEC issued Staff Accounting Bulletin No. 102 ("SAB 102"),
"Selected Loan Loss Allowance Methodology and Documentation Issues". The
bulletin expresses the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses in accordance with generally accepted accounting principles. This
includes for each period reported the "books and records of the registrants
engaged in lending activities include documentation of: (a) systematic
methodology to be employed each period in determining the amount of loan losses
to be reported, and (b) rationale supporting each period's determination that
the amounts reported were adequate." Management believes that its documentation
and methodologies are compliant with SAB 102.
34
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", ("SFAS 146"). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition of Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of SFAS 146
will not have an effect on Guaranty's financial statements.
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 Guaranty's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 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
Statement 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. Guaranty
does not expect the adoption of SFAS 148 to have an effect on the financial
statements.
Subsidiary Activities
Guaranty has two subsidiaries, the Bank and Guaranty Capital Trust I (the
"Trust"). The Trust was formed on April 29, 1998 and is the holder of the trust
preferred securities, which were sold for $6,900,000. See Notes to the
Consolidated Financial Statements for information regarding the terms of the
securities. The Bank has two wholly owned subsidiaries, GMSC, Inc. ("GMSC") and
Guaranty Investments Corporation ("GICO"). GMSC is a financing subsidiary
through which Guaranty formed a Real Estate Mortgage Investment Conduit
("REMIC"). Guaranty sells non-deposit investment products through GICO. GICO had
a net income of $560, $53,000 and $42,000 for the years ended December 31, 2002,
2001 and 2000, 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. For the years ended December 31, 2002, 2001 and 2000,
amortization expense was $44,000, $36,000 and $21,000, respectively. The
amortization of the REMIC expenses is treated as interest expense.
35
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.
Forward Looking Statements
Guaranty cautions readers that certain statements in this annual report with
respect to Guaranty's future operations and business prospects are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are generally identified by phrases such as "Guaranty expects,"
"Guaranty believes" or words of similar import. Such forward-looking statements
involve known and unknown risks including, but not limited to, changes in
general economic and business conditions, interest rate fluctuations,
competition within and from outside the banking industry, new products and
services in the banking industry, risks inherent in making loans such as
repayment risks and fluctuating collateral values, changing trends in customer
profiles and changes in laws and regulations applicable to Guaranty. Although
Guaranty believes that its expectations with respect to the forward-looking
statements are based upon reliable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results, performance or achievements of Guaranty will not differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements.
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, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Summary of Accounting Policies Notes to
Consolidated Financial Statements
36
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last two fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Information set forth under the headings "Election of Directors,"
"Executive Officers Who Are Not Directors," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in Guaranty's definitive Proxy Statement for its
2003 Annual Meeting of Shareholders (the "2003 Proxy Statement") is hereby
incorporated by reference.
Item 10. Executive Compensation
Information set forth under the heading "Executive Compensation " in
the 2003 Proxy Statement is hereby incorporated by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information set forth under the headings "Security Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" in the 2003
Proxy Statement is incorporated by reference.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2002,
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
Issued upon Exercise of Exercise Price of Under Equity
Outstanding Options Outstanding Options Compensation Plans 1
------------------- ------------------- ---------------------
Plan Category
Equity Compensation Plans
Approved by Shareholders
1991 Amended Incentive 76,012 $10.01 109,988
Stock Option Plan
Equity Compensation Plans Not
Approved by Shareholders 2
-- -- --
Total 76,012 $10.01 109,988
---------
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.
37
Item 12. Certain Relationships and Related Transactions
Information set forth under the heading "Executive Compensation --
Transactions with Management" in the 2003 Proxy Statement is hereby incorporated
by reference.
Item 13. Exhibits and Reports on Form 8-K
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of
Guaranty (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.
21 Subsidiaries of Guaranty.
99.1 Statement of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350.
99.2 Statement of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350.
38
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2002.
ITEM 14. 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.
Within the 90 day period prior to the filing of this report, an
evaluation of the effectiveness of the design and operation of Guaranty's
disclosure controls and procedures 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 have
been no significant changes to this system of internal controls or in other
factors that could significantly affect those controls subsequent to the date of
Guaranty's evaluation.
38
[LETTERHEAD OF BDO SEIDMAN, LLP]
Independent Auditors' Report
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, 2002 and 2001, 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, 2002. 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, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Richmond, Virginia
January 17, 2003
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents (including interest bearing deposits
of approximately $6,979,000 and $2,739,000) $ 15,391,874 $ 12,437,293
Investment securities (Note 1)
Held-to-maturity 836,114 969,989
Available for sale 3,634,150 20,988,725
Investment in Federal Home Loan Bank stock, at cost 947,100 1,550,000
Loans receivable, net (Notes 2 and 9) 163,249,885 177,578,914
Accrued interest receivable 909,767 1,245,266
Real estate owned 397,155 763,873
Office properties and equipment, net (Note 3) 7,442,935 8,109,789
Other assets (Note 8) 4,335,896 1,522,512
------------------------------------------------------------------------------------------------------------------------------------
$197,144,876 $225,166,361
====================================================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 4) $171,259,105 $200,631,703
Advances from Federal Home Loan Bank (Note 7) - 1,000,000
Bonds payable (Notes 1 and 6) 359,847 595,374
Accrued interest payable 57,801 137,491
Prepayments by borrowers for taxes and insurance 126,802 164,662
Other liabilities 721,368 545,113
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 172,524,923 203,074,343
------------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 10, 11, 13 and 15)
------------------------------------------------------------------------------------------------------------------------------------
Convertible preferred securities (Notes 11 and 12) 6,012,500 6,012,500
------------------------------------------------------------------------------------------------------------------------------------
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, 1,970,677 and 1,961,727 shares issued
and outstanding 2,463,346 2,452,159
Additional paid-in capital 9,034,207 8,953,230
Accumulated other comprehensive loss (23,007) (695,336)
Retained earnings - substantially restricted 7,132,907 5,369,465
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 18,607,453 16,079,518
------------------------------------------------------------------------------------------------------------------------------------
$197,144,876 $225,166,361
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Interest income
Loans $11,648,714 $15,451,066 $20,102,511
Investment securities 1,206,296 2,190,541 2,254,749
------------------------------------------------------------------------------------------------------------------------------------
Total interest income 12,855,010 17,641,607 22,357,260
------------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 3,464,836 8,932,880 10,522,255
Borrowings 691,049 822,993 2,054,883
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 4,155,885 9,755,873 12,577,138
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,699,125 7,885,734 9,780,122
Provision for loan losses (Note 2) 99,998 333,467 1,505,000
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 8,599,127 7,552,267 8,275,122
------------------------------------------------------------------------------------------------------------------------------------
Other income
Mortgage banking income 999,168 1,093,393 212,910
Loan and deposit fees and servicing income 906,785 830,704 938,500
Increase in cash surrender value of life insurance 182,825 - -
Investment sales commissions 104,298 254,433 195,378
Net gain (loss) on sale of securities 20,125 3,046 (76,206)
Other 272,875 324,679 227,257
------------------------------------------------------------------------------------------------------------------------------------
Total other income 2,486,076 2,506,255 1,497,839
------------------------------------------------------------------------------------------------------------------------------------
Other expenses
Personnel 4,560,540 4,810,577 4,226,707
Occupancy (Note 10) 1,167,544 1,411,567 1,352,567
Data processing (Note 10) 1,158,381 1,153,186 983,610
Other 1,621,038 1,897,717 2,289,858
------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 8,507,503 9,273,047 8,852,742
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,577,700 785,475 920,219
Provision for income taxes (Note 8) 814,258 267,100 313,103
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,763,442 $ 518,375 $ 607,116
====================================================================================================================================
Basic and Diluted Earnings Per Share $ .89 $ .26 $ .31
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Net income $1,763,442 $518,375 $607,116
Other comprehensive income
Unrealized gains on securities
arising during period 1,038,806 795,429 514,370
Reclassification adjustment for (gains)
losses included in net income (20,125) (3,046) 76,206
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income,
before tax 1,018,681 792,383 590,576
Income tax expense related to
items of other comprehensive
income (346,352) (269,410) (200,796)
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income,
net of tax 672,329 522,973 389,780
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $2,435,771 $1,041,348 $996,896
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
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, 1999 $2,452,159 $8,943,119 $(1,608,089) $4,479,382 $14,266,571
Cash dividend - - - (235,408) (235,408)
Other comprehensive income - - 389,780 - 389,780
Repurchase of trust preferred
securities (note 12) - 10,111 - - 10,111
Net income - - - 607,116 607,116
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 2,452,159 8,953,230 (1,218,309) 4,851,090 15,038,170
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
====================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 1,763,442 $ 518,375 $ 607,116
Adjustments to reconcile net income to net cash
provided (absorbed) by operating activities:
Provision for loan losses 99,998 333,467 1,505,000
Provision for loss on sale of other real estate owned 86,701 - -
Depreciation and amortization 585,810 1,122,468 721,954
Deferred loan fees (109,386) (72,009) (63,298)
Net amortization of premiums and accretion of
discounts 134,398 160,696 (92,757)
Gain on sale of loans (999,168) (1,249,393) (338,318)
Originations of loans held for sale (45,748,750) (70,683,960) (40,142,264)
Proceeds from sale of loans 57,437,524 63,478,428 39,803,946
Loss (gain) on sale of held to maturity and securities
available for sale (20,125) (3,046) 76,206
Loss (gain) on disposal of office properties
and equipment (7,481) (3,036) 27,554
Loss on sale of real estate owned 22,416 - -
Gain on sale of branch - (79,289) -
Changes in:
Accrued interest receivable 335,499 833,425 (335,755)
Other assets 167,924 87,544 1,865,189
Accrued interest payable (79,690) (256,296) 135,908
Income taxes (120,548) 156,510 36,108
Prepayments by borrowers for taxes and insurance (37,860) (99,311) (229,752)
Other liabilities 176,255 (212) (186,381)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 13,686,959 (5,755,639) 3,390,456
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Net decrease in loans 3,392,299 27,695,518 2,559,072
Repayments on held to maturity securities 286,302 229,620 383,340
Purchase of held to maturity securities (812,434) (250,000) (250,000)
Proceeds from retirement of held to maturity securities 650,000 250,000 -
Purchase of securities available for sale - (26,000,000) -
Proceeds from sales of securities available for sale 18,378,584 23,683,500 4,798,122
Sale of FHLB stock 602,900 - 500,000
Purchase of FHLB stock - - (550,000)
Purchase of other stock - - (102,500)
Proceeds from sales of real estate owned 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 (213,694) - -
Net decrease in cash from sale of branch:
Proceeds from sale of loans - 4,358,781 -
Sale of deposits - (7,143,692) -
Proceeds from sale of office properties,
equipment and land - 1,057,608 -
Origination of mortgage servicing rights - (331,307) (453,285)
Proceeds from sales of mortgage servicing rights, net - 825,938 -
Purchase of office properties and equipment (1,194,301) (374,986) (1,295,199)
Proceeds from sales of office properties and equipment 1,289,408 109,883 -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 19,827,178 24,941,156 5,589,550
====================================================================================================================================
(Continued)
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Net increase (decrease) in deposits (29,372,598) (9,101,991) 17,132,526
Repayment of Federal Home Loan Bank advances (49,000,000) (62,000,000) (62,000,000)
Proceeds from Federal Home Loan Bank advances 48,000,000 49,000,000 56,000,000
Payments on bonds payable, including unapplied
payments (279,122) (196,445) (130,977)
Decrease in securities sold under agreements to
repurchase - - (16,650,250)
Repurchase of convertible preferred securities - - (62,500)
Proceeds from issuance of common stock, net 92,164 - -
Dividends paid - - (353,111)
---------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities (30,559,556) (22,298,436) (6,064,312)
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,954,581 (3,112,919) 2,915,694
Cash and cash equivalents, beginning of year 12,437,293 15,550,212 12,634,518
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $15,391,874 $12,437,293 $15,550,212
------------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
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 both banks and savings associations. The FDIC has
specific authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by financial
institutions that pose a serious threat to the Bank Insurance Fund.
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, 2002 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.
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, 2002 or 2001.
Gains and losses on the sale of securities are determined using the specific
identification method.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Guaranty had approximately $332,000, $14,279,000 and $2,193,000 of loans held
for sale at December 31, 2002, 2001 and 2000, 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.
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, 2002 and 2001 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.
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
1,963,415, 1,961,727 and 1,961,727 for the years ended December 31, 2002, 2001
and 2000, respectively.
Statements of Cash Flows
Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $4,236,000, $10,012,000
and $12,713,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Cash paid for income taxes was approximately $811,000, $380,000
and $697,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Real estate acquired in the settlement of loans was approximately $191,000,
$305,000 and $941,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which was effective July 1, 2001. SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests methods. The adoption of SFAS 141 has not
had an effect on Guaranty's financial statements.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which was
effective January 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS 142 also requires a transitional
goodwill impairment test six months from the date of adoption and further
requires an evaluation of the carrying value of goodwill for impairment annually
thereafter. The adoption of SFAS 142 has not had an effect on Guaranty's
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This statement also broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Guaranty believes the
adoption of SFAS 144 will not have a material effect on Guaranty's financial
statements.
On July 6, 2001, the SEC issued Staff Accounting Bulletin No. 102 ("SAB 102"),
"Selected Loan Loss Allowance Methodology and Documentation Issues". The
bulletin expresses the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses in accordance with generally accepted accounting principles. This
includes for each period reported the "books and records of the
registrants engaged in lending activities include documentation of: (a)
systematic methodology to be employed each period in determining the amount of
loan losses to be reported, and (b) rationale supporting each period's
determination that the amounts reported were adequate." Management believes that
its documentation and methodologies are compliant with SAB 102.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", ("SFAS 146"). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition of Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. Guaranty does not expect
the adoption of SFAS 146 to have an effect on the financial statements.
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 Guaranty's
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 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
Statement 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. Management
does not expect the adoption of SFAS 148 to have an effect on the Guaranty's
financial statements.
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, 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
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 719,989 $48,288 $ - $ 768,277
U.S. Treasury Bonds 250,000 - - 250,000
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 969,989 48,288 - 1,018,277
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Government Agency Bonds 8,000,000 - (30,125) 7,969,875
Corporate bonds 13,620,016 - (1,023,416) 12,596,600
Other 422,250 - - 422,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 22,042,266 - (1,053,541) 20,988,725
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $23,012,255 $48,288 $(1,053,541) $22,007,002
------------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of available for sale and held to
maturity securities at December 31, 2002 by maturity is as follows:
Estimated
Amortized Market
Cost Value
-----------------------------------------------------------------------------------------
Held to Maturity
Mortgage-backed securities $ 432,656 $ 470,808
U.S. Treasury Bonds 403,458 403,458
-----------------------------------------------------------------------------------------
Total Held to Maturity 836,114 874,266
-----------------------------------------------------------------------------------------
Available for Sale
Corporate bonds and other due after five years 3,246,760 3,211,900
Other 422,250 422,250
-----------------------------------------------------------------------------------------
Total Available for Sale 3,669,010 3,634,150
-----------------------------------------------------------------------------------------
Total Investment Securities $4,505,124 $4,508,416
-----------------------------------------------------------------------------------------
1. Investment Securities (continued)
Gross gains and losses from the sale of securities during the years ended
December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
Gains Losses Gains Losses Gains Losses
-----------------------------------------------------------------------------------------------------------------------------------
Held to Maturity $ - $ - $ - $ - $ - $ -
Available for Sale 20,125 - 3,046 - - 76,206
-----------------------------------------------------------------------------------------------------------------------------------
Totals $ 20,125 $ - $ 3,046 $ - $ - $ 76,206
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage backed securities of approximately $433,000 and $720,000 December 31,
2002 and 2001, respectively, were pledged for bonds payable (Note 6).
2. Loans Receivable
Loans receivable are summarized as follows:
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans
Residential $ 20,118,677 $ 39,854,284
Commercial 7,893,953 16,276,612
Construction and land loans 38,479,836 36,307,260
------------------------------------------------------------------------------------------------------------------------------------
Total real estate 66,492,466 92,438,156
Commercial business loans 76,651,355 66,603,247
Consumer loans 22,238,245 20,982,986
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable 165,382,066 180,024,389
------------------------------------------------------------------------------------------------------------------------------------
Less
Deferred loan fees (costs), net (109,911) (66,525)
Allowance for loan losses 2,242,092 2,512,000
------------------------------------------------------------------------------------------------------------------------------------
2,132,181 2,445,475
------------------------------------------------------------------------------------------------------------------------------------
$163,249,885 $177,578,914
====================================================================================================================================
The allowance for loan losses is summarized as follows:
Amount
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $1,203,238
Provision charge to expense 1,505,000
Net charge-offs (311,726)
------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================
2. Loans Receivable (continued)
Guaranty serviced loans for others aggregating approximately $12.4 million and
$13.2 million at December 31, 2002 and 2001, respectively. The servicing rights
to approximately $189,000,000 in loans were sold and transferred during 2001.
Mortgage servicing rights of $0 and $331,307 were capitalized during the years
ended December 31, 2002 and 2001, respectively.
Gross gains and gross losses on the sale of loans and servicing totaling
approximately $999,000 and $0, $1,249,000 and $0, and $643,000 and $305,000 were
realized during the years ended December 31, 2002, 2001 and 2000, respectively.
3. Office Properties and Equipment
Office properties and equipment are summarized as follows:
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Land $2,817,101 $3,123,848
Building and leasehold improvements 4,062,185 4,419,899
Furniture and fixtures 1,335,238 1,293,824
Equipment 2,546,040 2,309,371
Automobiles - 32,949
------------------------------------------------------------------------------------------------------------------------------------
10,760,564 11,179,891
Less accumulated depreciation
and amortization 3,317,629 3,070,102
------------------------------------------------------------------------------------------------------------------------------------
Net office properties and equipment $7,442,935 $8,109,789
====================================================================================================================================
4. Deposits
Deposits are summarized as follows:
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Statement savings accounts $ 12,811,611 $ 12,991,825
Demand deposit accounts 53,498,243 47,569,392
Money market accounts 34,444,896 22,394,469
------------------------------------------------------------------------------------------------------------------------------------
100,754,750 82,955,686
------------------------------------------------------------------------------------------------------------------------------------
Time deposits 70,504,355 117,676,017
------------------------------------------------------------------------------------------------------------------------------------
$171,259,105 $200,631,703
====================================================================================================================================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $11,390,000 and $20,589,000 at December 31, 2002 and
2001, respectively.
At December 31, 2002, scheduled maturities of certificates are as follows
(rounded to the nearest thousand):
Year Ending December 31,
------------------------------------------------------------------------------------------------------------------------------------
2003 $61,027,000
2004 6,362,000
2005 1,190,000
2006 1,917,000
2007 and thereafter 8,000
------------------------------------------------------------------------------------------------------------------------------------
$70,504,000
------------------------------------------------------------------------------------------------------------------------------------
5. Fair Value of Financial Instruments
The estimated fair values of Guaranty's financial instruments are as follows:
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and short-term investments $ 15,391,874 $ 15,392,000 $ 12,437,293 $ 12,437,000
Securities 4,470,264 4,508,000 21,958,714 22,008,000
Loans, net of allowance for loan losses 163,249,885 164,798,000 177,578,914 174,715,000
Financial liabilities
Deposits 171,259,105 171,729,000 200,631,703 201,277,000
Advances from Federal Home Loan Bank - - 1,000,000 1,000,000
Bonds payable 359,847 N/A 595,374 N/A
Notional Fair Notional Fair
Amount Value Amount Value
------------------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to
extend credit $52,356,000 $52,356,000 $ 52,009,000 $ 52,009,000
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.
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 and 2001, 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 are secured by an indenture between GMSC, Inc. and the
Bank of New York, acting as trustee for the bondholders. The Bonds are
summarized as follows:
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Serial Bonds
Class A-3, maturing January 20, 2019,
at 8.0% $455,428 $739,648
Unapplied payments (30,000) (35,098)
------------------------------------------------------------------------------------------------------------------------------------
425,428 704,550
Less unamortized discount (65,581) (109,176)
------------------------------------------------------------------------------------------------------------------------------------
$359,847 $595,374
====================================================================================================================================
The Bonds are repaid in conjunction with the net cash flow from the
mortgage-backed securities together with the reinvestment income thereon. As a
result, the actual life of the Bonds is less than their stated maturities.
Interest is paid as incurred on the Class A-3 Bonds. The indenture also provides
for the establishment of two trust accounts to insure the timely payment of
interest, debt maturities, trustee and accounting fees and other expenses. The
account established for payment of trustee and accounting fees is included in
cash on the balance sheet. The account established for payment of interest and
debt maturities is netted with cash and bonds payable on the balance sheet.
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, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Maximum amount outstanding during the year $15,000,000 $18,000,000
Average amount outstanding during the year $ 6,136,000 $ 4,608,000
Average interest rate during the year 1.96% 5.14%
8. Income Taxes
The provision for income taxes as presented in the consolidated statements of
operations are as follows:
Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Current income tax $927,972 $285,743 $744,103
Deferred income tax expense (benefit) (113,714) (18,643) (431,000)
------------------------------------------------------------------------------------------------------------------------------------
$814,258 $267,100 $313,103
====================================================================================================================================
Reconciliations of the provision for income taxes computed at the federal
statutory income tax rate to the effective rate follows:
Year Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Tax expense at statutory rate $876,418 $267,062 $312,874
Adjustments
Other 62,160 38 229
------------------------------------------------------------------------------------------------------------------------------------
$814,258 $267,100 $313,103
====================================================================================================================================
The components of the net deferred income taxes, which is included in other
assets in the balance sheet, are as follows:
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset
Bad debt reserves $ 742,000 $ 814,000
REO reserves 82,000 68,000
Deferred loan fees 7,000 8,000
Available for sale securities 12,000 358,000
Other 23,000 -
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax asset 866,000 1,248,000
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liability
GMSC REMIC 63,000 81,000
Fixed assets 405,000 305,000
Other - 118,000
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liability 468,000 504,000
------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $398,000 $ 744,000
====================================================================================================================================
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, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Balance at the beginning of year $2,044,000 $1,165,000
Additional loans 171,000 1,978,000
Loan reductions (146,000) (1,099,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $2,069,000 $2,044,000
====================================================================================================================================
10. Commitments and Contingencies
Guaranty leases office space under operating leases expiring at various dates
through 2012 and has contracts for data processing services whose initial term
expires in February 2004 and requires minimum payments of $60,100 per month.
Future minimum rental and data processing payments required that have initial or
remaining noncancelable terms in excess of one year as of December 31, 2002, are
as follows:
Amount
------------------------------------------------------------------------------------------------------------------------------------
Data
Year Ending December 31, Leases Processing
------------------------------------------------------------------------------------------------------------------------------------
2003 $ 166,200 $721,200
2004 162,100 70,100
2005 141,800 -
2006 144,200 -
2007 and thereafter 1,698,000 -
------------------------------------------------------------------------------------------------------------------------------------
$2,312,300 $791,300
====================================================================================================================================
Total rental expense amounted to approximately $140,000, $179,000 and $108,000
for the years ended December 31, 2002, 2001 and 2000, respectively. Total data
processing expense amounted to approximately $1,049,000, $1,037,000 and $926,000
for the years ended December 31, 2002, 2001 and 2000, 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. Conversion of the preferred securities into
Guaranty's stock may occur at any time prior to maturity. 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.
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.
12. Stockholders' Equity
The following table represents the Bank's regulatory capital levels.
Amount Percent Actual Actual Excess
December 31, 2002 Required Required Amount Percent Amount
------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 6,628,000 4.00% $24,374,000 14.73% $17,746,000
Total risk based capital 13,255,000 8.00 26,447,000 15.98 13,192,000
Amount Percent Actual Actual Excess
December 31, 2001 Required Required Amount Percent Amount
------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based $ 7,279,000 4.00% $22,542,000 12.39% $15,263,000
Total risk based capital 14,560,000 8.00 24,818,000 13.64 10,258,000
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.
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.
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:
2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Weighted - Weighted - Weighted -
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
beginning of period 57,912 $12.07 101,900 $14.16 130,000 $13.69
Granted 47,500 8.59 16,512 8.74 - -
Forfeited (21,500) 12.45 (60,500) 12.10 (28,100) 12.00
Exercised (7,900) 10.59 - - - -
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end
of period 76,012 10.01 57,912 12.07 101,900 $14.16
------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end
of period 76,012 48,900 73,200
------------------------------------------------------------------------------------------------------------------------------------
The weighted average fair value of options granted during the year ended
December 31, 2002 and 2001 was $2.74 and $4.28, respectively.
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, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Net income
As reported $1,763,442 $518,375 $607,116
Pro forma 1,677,417 498,434 607,116
Net income per share (basic and diluted)
As reported $ 0.89 $ 0.26 $ 0.31
Pro forma 0.85 0.25 0.31
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, 2002: a risk free interest rate of 4.97%,
dividend yield of 2%, expected weighted average term of 7.0 years, and a
volatility of 30%.
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 $67,000, $60,000 and $65,000 for the years ended
December 31, 2002, 2001 and 2000, 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.
Unless noted otherwise, Guaranty does not require collateral or other security
to support financial instruments with credit risk.
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk
Commitments to extend credit $52,356,000 $52,009,000
Standby letters of credit written 5,054,000 3,282,000
15. Financial Instruments With Off-Balance-Sheet Risk (continued)
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. Selected quarterly financial data (Unaudited)
Condensed quarterly financial data is shown as follows:
------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
16. Selected quarterly financial data (Unaudited) (continued)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001
First Second Third Fourth
(Dollars in thousands except per share data) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------------------------------------------
Total interest income $5,105 $4,569 $4,204 $3,763
Total interest expense 2,929 2,753 2,328 1,746
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,176 1,816 1,876 2,017
Provision for loan losses 150 75 75 33
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,026 1,741 1,801 1,984
Other income 538 560 583 709
Other expenses 2,310 2,290 2,325 2,231
------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 254 11 59 462
Income tax expense 86 4 20 157
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 168 $ 7 $ 39 $ 305
====================================================================================================================================
Basic and diluted earnings per share $ 0.08 $ 0.00 $ 0.02 $ 0.16
====================================================================================================================================
17. Condensed Financial Information of the Parent Company Only
Condensed Statements of Financial Condition
December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Assets
Investment in subsidiaries, at equity $24,324,165 $22,552,191
Cash 83,784 152
Prepaid expenses and other assets 448,437 448,437
------------------------------------------------------------------------------------------------------------------------------------
$24,856,386 $23,000,780
====================================================================================================================================
Liabilities and Stockholders' Equity
Other liabilities $ - $ -
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities - -
------------------------------------------------------------------------------------------------------------------------------------
Subordinated debt 6,225,925 6,225,925
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 2,463,346 2,452,159
Additional paid-in capital 9,034,207 8,953,230
Retained earnings 7,132,908 5,369,466
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 18,630,461 16,774,855
------------------------------------------------------------------------------------------------------------------------------------
$24,856,386 $23,000,780
====================================================================================================================================
17. Condensed Financial Information of the Parent Company Only (continued)
Condensed Statements of Operations
Year Ended December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Income
Dividends received from bank $ 420,875 $420,875
------------------------------------------------------------------------------------------------------------------------------------
Total income 420,875 420,875
------------------------------------------------------------------------------------------------------------------------------------
Interest expense (420,875) (420,875)
Non-interest expenses (8,531) (1,724)
------------------------------------------------------------------------------------------------------------------------------------
Income before undistributed
net income of the Bank (8,531) (1,724)
Undistributed net income 1,771,973 520,099
------------------------------------------------------------------------------------------------------------------------------------
Net income $1,763,442 $518,375
====================================================================================================================================
Condensed Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $1,763,442 $ 518,375
Adjustments
Undistributed earnings of the Bank (1,771,973) (520,099)
Decrease in prepaid and other assets - 15,531
decrease in other liabilities - (15,531)
------------------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by operating activities (8,531) (1,724)
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Dividends received from Bank 420,875 420,875
Investment in the bank (420,875) (420,875)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities - -
------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Issuance of common stock 92,163 -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 92,163 -
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 83,632 (1,724)
Cash, beginning of year 152 1,876
------------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 83,784 $ 152
====================================================================================================================================
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: March 17, 2003 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 March 17, 2003
------------------------------------- Director
William E. Doyle, Jr. (Principal Executive Officer)
/s/ Tara Y. Harrison Chief Financial Officer March 17, 2003
------------------------------------- (Principal Financial and
Tara Y. Harrison Accounting Officer)
/s/ Douglas E. Caton Chairman of the Board March 17, 2003
-------------------------------------
Douglas E. Caton
/s/ Harry N. Lewis Vice Chairman of the Board March 17, 2003
-------------------------------------
Harry N. Lewis
Director March 17, 2003
-------------------------------------
Henry J. Browne
/s/ Jason I. Eckford, Jr. Director March 17, 2003
-------------------------------------
Jason I. Eckford, Jr.
/s/ John R. Metz Director March 17, 2003
-------------------------------------
John R. Metz
/s/ James R. Sipe, Jr. Director March 17, 2003
-------------------------------------
James R. Sipe, Jr.
/s/ Oscar W. Smith, Jr. Director March 17, 2003
-------------------------------------
Oscar W. Smith, Jr.
CERTIFICATION
I, William E. Doyle, Jr., certify that:
1. I have reviewed this annual report on Form 10-KSB of Guaranty Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003 /s/ William E. Doyle, Jr.
--------------------------------------
William E. Doyle, Jr.
President and Chief Executive Officer
CERTIFICATION
I, Tara Y. Harrison, certify that:
1. I have reviewed this annual report on Form 10-KSB of Guaranty Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003 /s/ Tara Y. Harrison
-----------------------------------
Tara Y. Harrison
Vice President and Chief Financial Officer
EXHIBIT INDEX
Number Document
------ --------
3.1 Amended and Restated Articles of Incorporation of
Guaranty Financial Corporation (restated in
electronic format), attached as Exhibit 3.1 to the
Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1997, incorporated herein by
reference.
3.2 Bylaws of Guaranty Financial Corporation, attached as
Exhibit 3.1 to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1997,
incorporated herein by reference.
10.1 Guaranty Financial Corporation 1991 Incentive Plan
(as amended), attached as Exhibit A to the definitive
Proxy Statement of Guaranty Financial Corporation for
the 1998 Annual Meeting of Shareholders, incorporated
herein by reference.
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 the Registrant's
Quarterly Report on Form 10-QSB for the period ended
June 30, 2001, incorporated herein by reference.
21 Subsidiaries of Guaranty Financial Corporation.
99.1 Statement of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
99.2 Statement of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350