SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to __________________
Commission File Number 0-25076
GILMER FINANCIAL SERVICES, INC.
(Exact Name of Small Business Issuer in its Charter)
Delaware 75-2561513
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
218 West Cass Street
Gilmer, Texas 75644
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number, including area code: (903) 843-5525
Securities Registered under Section 12(b) of the Exchange Act:
None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 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 requirements for the 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 had $3.0 million in gross revenues for the fiscal year ended
June 30, 1997.
As of June 30, 1997, there were issued and outstanding 191,258 shares of
the Issuer's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Issuer, computed by reference to the last known sale
price of such stock as of June 30, 1997, was $2.6 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Issuer that such person is an affiliate of the
Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1997. Part III of Form 10-KSB - Portions of the
Proxy Statement for the 1997 Annual Meeting of Shareholders.
<PAGE>
PART I
Item 1. Description of Business
General
Gilmer Financial Services, Inc. ("Gilmer Financial" or the "Company")
is a Delaware corporation which was organized in September 1994 by Gilmer
Savings Bank FSB ("Gilmer Savings" or the "Bank") for the purpose of becoming a
savings and loan holding company. Gilmer Savings is a federally chartered saving
bank headquartered in Gilmer, Texas. Originally chartered in 1920, the Bank
converted to a federal savings bank in 1990. Its deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
In February 1995, the Bank converted to the stock form of organization
through the sale and issuance of 195,755 shares of its common stock to the
Company. The principal asset of the Company is the outstanding stock of the
Bank, its wholly owned subsidiary. The Company presently has no separate
operation and its business consists of the business of the Bank. All references
to the Company, unless otherwise indicated, at or before February 9, 1995 refer
to the Bank.
Gilmer Financial is principally engaged in the business of attracting
deposits from the general public and uses such deposits to originate one- to
four-family residential loans secured by property located in its market area. To
a lesser extent, Gilmer Financial also makes commercial, construction and
consumer loans. In addition, the Company seeks to address its liquidity needs
and to enhance investment yields through Federal Home Loan Bank ("FHLB")
advances and by holding mortgage-backed securities, investment securities,
interest-bearing deposits and other short-term liquid assets.
At June 30, 1997, the Company had assets of approximately $42.2
million, deposits of approximately $29.1 million and shareholders' equity of
approximately $3.8 million.
The executive office of the Company is located at 218 W. Cass Street,
Gilmer, Texas 75644, telephone (903) 843-5525.
Market Area
The Company primarily serves Upshur County, which is located in the
eastern part of Texas, through its office located in Gilmer, Texas. Gilmer is
the county seat of Upshur County and is located approximately 100 miles east of
Dallas and approximately 40 miles north of Tyler. To a much lesser extent, the
Company serves the communities of Gregg, Smith, Wood, Marion, Camp and Titus
counties in Texas.
2
<PAGE>
During the 1980s, the economy in Texas, including the Company's primary
market area, was severely depressed, adversely affecting the Company's
operations. During this period, there were two severe, back-to-back recessions
in the State of Texas. As a result, in the mid-1980s, employment in the
Company's market area declined significantly, primarily in oil and gas related
service areas. Beginning in the late 1980s, the area began to recoup some of the
lost jobs and slowly to improve economically.
Based upon the 1990 Report of the U.S. Department of Commerce, Bureau
of the Census, the population of Upshur County was approximately 35,000. The
primary industries in Upshur County include lumber, cattle and agriculture.
Major employers in this area include Upshur Rural Electric, Rob Roy Industries,
ETEX Telephone Co-op, Inc., the Gilmer School District, Dean Lumber Company,
Gilmer Potteries, Lone Star Steel, Texas Utilities and Texas Eastman. The
unemployment rate in Upshur County is estimated to be approximately 7.6%, which
is below the average unemployment rate for the State of Texas generally.
Lending Activities
General. Historically, the Company originated fixed-rate mortgage
loans. Since the mid- 1980s, however, the Company has emphasized, subject to
market conditions, the origination and holding of adjustable rate mortgage
("ARM") loans and the origination and sale of fixed-rate loans with terms to
maturity of up to 30 years. Management's strategy has been to attempt to
increase the percentage of assets in its portfolio with more frequent repricing
or shorter maturities. In response to customer demand, however, the Company
continues to originate fixed-rate mortgages with terms not greater than 30
years, which it typically sells in the secondary market while retaining the
servicing rights on such loans.
The Company's primary focus in lending activities is on the origination
of loans secured by first mortgages on owner-occupied, one- to four-family
residences. In addition, in order to serve the financial needs of the families
and the communities in the Company's primary market area, Gilmer Financial also
originates commercial real estate, commercial business, construction and
consumer loans. See "- Originations, Purchases and Sales of Loans." At June 30,
1997, the Company's net loan portfolio totaled $23.5 million.
All loans secured by real estate (except as noted below) over $10,000
must be reviewed by a loan committee comprised of three designated directors of
the Company. The committee has the authority to approve adjustable-rate mortgage
loans secured by real estate to any one borrower for amounts up to $200,000 and
commercial real estate loans for amounts up to $250,000. Adjustable-rate loans
in excess of $200,000 require approval of a majority of the Board of Directors
and commercial real estate loans in excess of $250,000 require unanimous
approval of the Board of Directors. In addition, the President has the authority
to approve all home improvement loans for less than $20,000, having a loan to
value ratio of 80% or less. All
3
<PAGE>
unsecured consumer loans in excess of $10,000 must be approved by the Board of
Directors. The Board also ratifies all loans originated by the Company.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank can have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At June
30, 1997, the maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was approximately $559,000. At June 30,
1997, the Bank had no loans with an aggregate outstanding balance in excess of
this amount. The Bank did, however, have one loan on a church located in Upshur
County that exceeded the loan to one borrower limit for $620,000, of which a
participation interest was sold to reduce the loan below the loan to one
borrower limit.
4
<PAGE>
Loan Portfolio Composition. The following information presents the
composition of the Company's loan portfolios in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- ------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family...................... $12,360 48.83% $10,695 49.85% $10,319 54.74% $10,739 62.33%
Multi-family............................. 282 1.12 122 .57 140 .74 157 0.91
Commercial............................... 2,683 10.60 2,934 13.68 2,354 12.49 1,946 11.29
Construction............................. 1,306 5.16 526 2.45 823 4.37 604 3.51
-------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans.............. 16,631 65.71 14,277 66.55 13,636 72.34 13,446 78.04
Other Loans:
Consumer Loans:
Savings account......................... 423 1.67 424 1.98 441 2.34 521 3.02
Home improvement........................ 1,010 3.99 945 4.40 734 3.89 581 3.37
Automobile.............................. 4,499 17.77 3,777 17.61 2,329 12.36 1,972 11.45
Other................................... 888 3.51 538 2.50 612 3.25 328 1.90
--------- ------- ------- ------- ------- ------ ------- ------
Total consumer loans................. 6,820 26.94 5,684 26.49 4,116 21.84 3,402 19.74
Commercial business loans................ 1,860 7.35 1,492 6.96 1,097 5.82 382 2.22
-------- ------ ------- ------- ------- ------ ------- ------
Total other loans.................... 8,680 34.29 7,176 33.45 5,213 27.66 3,784 21.96
-------- ------ ------- ------ ------- ------ ------- ------
Total loans.......................... 25,311 100.00% 21,453 100.00% 18,849 100.00% 17,230 100.00%
====== ====== ====== ======
Less:
Loans in process......................... 999 362 331 598
Deferred fees and discounts.............. 596 439 296 215
Allowance for losses..................... 309 215 204 215
--------- ------- ------- -------
Total loans receivable, net.............. $23,407 $20,437 $18,018 $16,202
======= ======= ======= =======
</TABLE>
<PAGE>
At June 30,
---------------------
1993
---------------------
Amount Percent
------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family...................... $12,037 70.99%
Multi-family............................. 173 1.02
Commercial............................... 1,999 11.79
Construction............................. 134 0.79
------- ------
Total real estate loans.............. 14,343 84.59
Other Loans:
Consumer Loans:
Savings account......................... 723 4.27
Home improvement........................ 507 2.99
Automobile.............................. 833 4.91
Other................................... 410 2.42
------- ------
Total consumer loans................. 2,473 14.59
Commercial business loans................ 139 0.82
------- ------
Total other loans.................... 2,612 15.41
------- ------
Total loans.......................... 16,955 100.00%
======
Less:
Loans in process......................... 98
Deferred fees and discounts.............. 112
Allowance for losses..................... 215
-------
Total loans receivable, net.............. $16,530
=======
5
<PAGE>
The following table shows the composition of the Company's loan
portfolios by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------ ---------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family..................... $1,982 7.83% $ 1,964 9.16% $ 1,967 10.43% $ 2,231 12.95%
Commercial.............................. 597 2.36 --- --- --- --- --- ---
Construction............................ 1,306 5.16 526 2.45 823 4.37 604 3.51
------ ------- -------- ------- -------- ----- ------- -------
Total real estate loans.............. 3,885 15.35 2,490 11.61 2,790 14.80 2,835 16.46
Consumer................................. 6,299 24.89 5,132 23.92 3,827 20.30 3,189 18.50
Commercial business...................... 1,860 7.35 1,096 5.11 248 1.32 36 0.21
------- ------- -------- ------- -------- ------- ------- -------
Total fixed-rate loans............... 12,044 47.59 8,718 40.64 6,865 36.42 6,060 35.17
Adjustable-Rate Loans:
Real estate:
One- to four-family..................... 10,378 41.00 8,731 40.69 8,352 44.32 8,508 49.38
Multi-family............................ 282 1.12 122 .57 140 .74 157 0.91
Commercial.............................. 2,086 8.24 2,934 13.68 2,354 12.49 1,946 11.29
------- ------- -------- ------- -------- ------ ------- -------
Total real estate loans.............. 12,746 50.36 11,787 54.94 10,846 57.55 10,611 61.58
Consumer................................. 521 2.05 552 2.57 289 1.53 213 1.24
Commercial business...................... --- --- 396 1.85 849 4.50 346 2.01
--------- -------- -------- ------ -------- ------ ------- -------
Total adjustable-rate loans.......... 13,267 52.41 12,735 59.36 11,984 63.58 11,170 64.83
------ ------- ------- ------ ------- ------ ------- -------
Total loans.......................... 25,311 100.00% 21,453 100.00% 18,849 100.00% 17,230 100.00%
====== ====== ====== ======
Less:
Loans in process......................... 999 362 331 598
Deferred fees and discounts.............. 596 439 296 215
Allowance for loan losses................ 309 215 204 215
--------- -------- -------- -------
Total loans receivable, net........... $23,407 $20,437 $18,018 $16,202
======= ======= ======= =======
</TABLE>
<PAGE>
At June 30,
-------------------------
1993
-------------------------
Amount Percent
------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family..................... $ 2,609 15.39%
Commercial.............................. --- ---
Construction............................ 134 0.79
------- -------
Total real estate loans.............. 2,743 16.18
Consumer................................. 2,283 13.46
Commercial business...................... 100 0.59
------- -------
Total fixed-rate loans............... 5,126 30.23
Adjustable-Rate Loans:
Real estate:
One- to four-family..................... 9,428 55.61
Multi-family............................ 173 1.02
Commercial.............................. 1,999 11.79
------- -------
Total real estate loans.............. 11,600 68.42
Consumer................................. 190 1.12
Commercial business...................... 39 0.23
------- -------
Total adjustable-rate loans.......... 11,829 69.77
------ ------
Total loans.......................... 16,955 100.00%
======
Less:
Loans in process......................... 98
Deferred fees and discounts.............. 112
Allowance for loan losses................ 215
-------
Total loans receivable, net........... $16,530
=======
6
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------------------
Multi-family and
One- to Four-Family Commercial Construction Consumer
----------------------- ----------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1)................ 35 9.28% $ --- ---% $1,306 8.82% $1,899 9.74%
1999................... 26 8.35 8 9.57 --- --- 720 10.53
2000................... 74 8.84 52 9.59 --- --- 1,068 10.14
2001 and 2002.......... 806 8.96 855 7.74 --- --- 2,260 9.88
2003 to 2007........... 2,647 8.50 457 8.59 --- --- 662 8.52
2008 to 2022........... 6,839 8.00 1,593 8.49 --- --- 211 8.60
2023 and following..... 1,933 7.95 --- --- --- --- --- ---
------- ------ ------ ------ ------ ------ ------ ------
Total................ $12,360 $2,965 $1,306 $6,820
======= ====== ====== ======
</TABLE>
Commercial
Business Total
----------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due During
Years Ending
June 30,
1998(1)................ $ 806 10.00% $4,046 9.49%
1999................... 112 9.82 866 10.36
2000................... 210 9.74 1,404 9.99
2001 and 2002.......... 372 10.57 4,293 9.34
2003 to 2007........... 336 10.08 4,102 8.64
2008 to 2022........... 24 7.00 8,667 8.10
2023 and following..... --- --- 1,933 7.95
------ ------- ------- ------
Total................ $1,860 $25,311
====== =======
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
7
<PAGE>
As of June 30, 1997, the total amount of loans due after June 30, 1998
which had predetermined interest rates was $8.0 million, while the total amount
of loans due after such date which had floating or adjustable interest rates was
$13.3 million.
All of the Company's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations, if
applicable.
The Company requires evidence of marketable title and lien position
and/or appropriate title insurance or title opinions and surveys of such
properties. The Company also requires fire and extended coverage casualty
insurance in amounts at least equal to the lesser of the principal amount of the
loan and the value of improvements on the property, depending on the type of
loan. As required by federal regulations, the Company also requires flood
insurance to protect the property securing its interest if such property is
located in a designated flood area.
One- to Four-Family Residential Real Estate Lending
The cornerstone of the Company's lending program has long been the
origination of long-term permanent loans secured by mortgages on owner-occupied,
one- to four-family residences. At June 30, 1997, $12.4 million, or 48.8%, of
the Company's loan portfolio consisted of permanent loans on one- to four-family
residences. Substantially all of the residential loans originated by Gilmer
Financial are secured by properties located in the Company's market area.
Historically, Gilmer Financial originated for retention in its
portfolio, fixed-rate loans secured by one- to four-family residential real
estate. In the mid-1980s, in order to reduce its exposure to changes in interest
rates, Gilmer Financial began to emphasize the origination of ARMs, subject to
market conditions and consumer preference. The Company originates ARM loans for
its portfolio. As a result of continued consumer demand for long-term fixed-rate
loans, however, particularly during recent periods of relatively low interest
rates, Gilmer Financial has continued to originate fixed-rate loans for sale in
the secondary market with servicing retained, in amounts and at rates which are
monitored for compliance with the Company's asset/liability management policy.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -Asset/Liability Management" in the Annual Report to Stockholders
attached hereto as Exhibit 13.
In the loan approval process, Gilmer Financial assesses the borrower's
ability to repay the loan, the adequacy of the proposed security, the employment
stability of the borrower and the creditworthiness of the borrower. Initially,
Gilmer Financial's loan underwriters analyze the loan application and the
property involved. As part of the loan application process, qualified outside
appraisers inspect and appraise the security property. All appraisals are
subsequently reviewed by the President or the loan committee, as applicable.
The Company's loans are underwritten and documented pursuant to the
guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC"). Most of the
Company's fixed-rate
8
<PAGE>
residential loans have contractual terms to maturity of ten to 30 years. The
Company's decision to hold or sell these loans is based on its asset/liability
management policies and goals and the market conditions for mortgages at any
period in time. Currently, the Company originates and sells substantially all of
its fixed-rate loans to the FHLMC. The Company also retains the servicing of all
the loans it originates. See "- Originations, Purchases and Sales of Loans." The
interest rate on loans sold is determined at the time of closing, thereby
reducing the Company's exposure to fluctuations in the rate during the
application process.
The Company has offered ARM loans at rates and on terms determined in
accordance with market and competitive factors. The ARM program currently
offered by the Company meets the standards and requirements of the secondary
market for residential loans. The Company's current one- to four-family
residential ARMs are fully amortizing loans with contractual maturities of up to
30 years.
Gilmer Financial presently offers ARM products which adjust annually
subject to an annual limitation of 1.0% or 2.0% and an overall life of loan
limitation ranging from 6.0% to 6.5%. These ARM products utilize the one-year
treasury index plus a margin of 2.75% to 3.0%. ARM products held in the
Company's portfolio do not permit negative amortization of principal and carry
no prepayment restrictions. At June 30, 1997, the Company had $10.4 million of
one- to four-family ARM loans, or 41.0% of total loans.
It is Gilmer Financial's present policy generally not to lend more than
95% of the lesser of the appraised value or purchase price of the property.
Gilmer Financial generally requires private mortgage insurance in specified
amounts on residential loans with a loan-to-value ratio at origination exceeding
80%.
Adjustable-rate loans decrease the risk associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrowers may rise to the extent permitted by the terms
of the loan, thereby increasing the potential for default. At the same time, the
market value of the underlying property may be adversely affected by higher
interest rates.
The Company's residential mortgage loans customarily include a
due-on-sale clause giving the Company the right to declare the loan immediately
due and payable in the event that, among other things, the borrower sells or
otherwise disposes of the property subject to the mortgage and the loan is not
repaid. The Company may enforce the due-on-sale clause in its mortgage contracts
for the purpose of increasing its loan portfolio yield. Despite the Company's
emphasis on ARM loans, consumer preference for fixed-rate mortgages, in light of
the current interest rate environment, and sale of such loans have resulted in a
decrease in the Company's loan portfolio of adjustable-rate one-to four-family
residential loans.
9
<PAGE>
Multi-Family and Commercial Real Estate Lending
Gilmer Financial also originates loans secured by multi-family and
commercial real estate. At June 30, 1997, $282,000, or 1.1%, of the Company's
loan portfolio consisted of multi-family loans and $2.7 million, or 10.6%, of
the Company's loan portfolio consisted of commercial real estate loans.
Multi-family and commercial real estate loans originated by the Company
generally have terms to maturity and amortization schedules of up to 15 years.
Rates on such loans are generally adjusted annually to specified spreads over an
index. Multi-family and commercial real estate loans (other than loans to
facilitate the sale of foreclosed property) are written in amounts of up to 75%
of the lesser of the appraised value of the property or the sales price.
The Company's commercial real estate portfolio consists of loans on a
variety of non-residential properties including churches, chicken houses,
convenience stores and land for agricultural use. Appraisals on properties
securing commercial real estate loans are performed by a qualified appraiser at
the time the loan is made. In addition, the Company's underwriting procedures
generally require verification of the borrower's credit history, income and
financial statements, banking relationships, references and income projections
for the property. Personal guarantees are obtained for most of the Company's
commercial real estate loans.
At June 30, 1997, the Company had two multi-family real estate loans,
with an outstanding balance of $282,000 at June 30, 1997. Both loans have
performed in accordance with [their] terms.
At June 30, 1997, the Company's largest commercial real estate loan,
secured by a church located in Upshur County, Texas, totaled $620,000, of which
a participation interest was sold to reduce the loan below the loan to one
borrower limit. At that date, the Company had 36 commercial real estate loans
totaling $2.7 million.
Multi-family and commercial real estate lending affords the Company an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger and involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by commercial real estate and multi-family properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced, the borrower's
ability to repay the loan might be impaired. The Company has attempted to
minimize these risks by lending primarily to the ultimate user of the property
or on existing income-producing properties. In addition, Gilmer Financial has
generally limited itself to a real estate market and/or borrowers with which it
has knowledge and experience.
10
<PAGE>
Construction Lending
On occasion, the Company originates loans for the construction of
commercial buildings as well as new homes and improvements on existing homes.
These loans are generally six-month to one year fixed-rate loans with
interest-only payments generally required on a monthly basis. At June 30, 1997,
approximately $1.3 million or 5.2%, of the Company's loan portfolio consisted of
construction loans.
The Company's construction loans have been originated with fixed-rates
of interest. Construction loans are generally made in amounts of up to a maximum
loan-to-value ratio of 75%. Higher loan-to-value ratios are determined by the
availability of coverage of private mortgage insurance as evidenced by a
commitment to ensure the permanent loan. Prior to making a commitment to fund a
construction loan, the Company requires an appraisal of the property. All of the
Company's current construction loans are secured by property located in its
market area.
The Company's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses based on
in-house inspections. The Company periodically reviews the progress of the
underlying construction project.
Construction lending generally affords the Company an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive higher origination and other loan fees. In addition, such loans
are generally made for relatively short terms and generally have permanent loans
in place at the time the construction loan is originated. Nevertheless, the
nature of these loans is such that they are more difficult to evaluate and
monitor. The Company's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. Because defaults in repayment may not occur during the construction
period it may be difficult to identify problem loans at an early stage. To
minimize these risks, the Company inspects each project periodically and an
inspection is done prior to advancing construction draws to assure that the
percent of project completion equals or exceeds the outstanding percent of the
total construction loan.
Consumer Lending
Gilmer Financial offers a variety of consumer loans for various
purposes with terms up to five years. In addition, home improvement loans are
offered with terms of up to fifteen years. The majority of the Company's
consumer lending is for automobiles, home improvements and other personal
purposes. The Company also makes loans for consumer purposes secured by deposit
accounts.
The Company currently originates substantially all of its consumer
loans in its market area. At June 30, 1997, the Company's consumer loans totaled
$6.8 million, or 26.9% of the Company's loan portfolio.
11
<PAGE>
Consumer loan terms vary according to the type of collateral, term of
the loan and creditworthiness of the borrower. Unsecured loans are offered to
borrowers for a variety of purposes and personal needs. These are generally
fully amortizing with loan terms of five years or less. At June 30, 1997,
$128,000 of the Company's consumer loans were unsecured.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet payments on the proposed loan along
with his existing obligations.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured. Consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
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. Although the level of delinquencies in the Company's
consumer loan portfolio has generally been low (at June 30, 1997, 14 consumer
loans totaling $65,000 were 90 days or more delinquent), there can be no
assurance that delinquencies will not increase in the future.
Commercial Business Lending
On occasion, the Company may originate commercial business loans for
the purpose of supporting accounts receivable and inventory along with equipment
during a peak in a particular business cycle. These loans are generally
originated for terms to maturity of five years or less. At June 30, 1997, the
Company had $8.7 million in commercial business loans representing 34.3% of the
Company's total loan portfolio.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property the value of which tends to
be more easily ascertainable, commercial business loans typically are made on
the basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself (which, in turn, is likely to be dependent upon the general
economic environment). The Company's commercial business loans are sometimes,
but not always, secured by business assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
Originations, Purchases and Sales of Loans
The Company originates real estate loans through marketing efforts, the
Company's customer base and walk-in customers. The Company originates both
adjustable-rate and fixed-rate loans. Its ability to originate loans is
dependent upon the relative demand for fixed-rate or ARM loans in the
12
<PAGE>
origination market, which is affected by the term structure of interest rates
(short-term compared to long-term) as well as the current and expected future
level of interest rates.
The Company has a portfolio of fixed-rate and adjustable-rate
mortgage-backed securities which it purchases and holds for investment. At June
30, 1997, mortgage-backed securities totaled $15.1 million, of which, $10.2
million were held for investment. See "Investment Activities - Mortgage-Backed
Securities."
In the past, when Gilmer Financial sold loans, it retained 5% of the
loan on its books and the responsibility for collecting and remitting loan
payments, inspecting the properties, making certain insurance and tax payments
on behalf of borrowers and servicing the loans, and receives a fee for
performing this service. Presently when GFS sells loans, it does not retain any
principal of the loan, but retains the servicing of that loan. Sales of loans
generate income (or loss) at the time of sale, produce future servicing income
and provide funds for additional lending and other purposes.
The contractual right to service mortgage loans that have been sold has
an economic value that is not recognized in the Company's financial statements.
The value results from the future income stream of the servicing fees, the
availability of and earnings from the cash balances associated with escrow funds
collected monthly for real estate taxes and insurance, the availability of the
cash from monthly principal and interest payments from the collection date to
the remittance date, and the ability of the servicer to cross-sell other
products and services. The actual value of a servicing portfolio is dependent
upon such factors as the age, maturity, and prepayment rate of the loans in the
portfolio, the average dollar balance of the loans, the location of the
collateral property, the average amount of escrow funds held, the interest rates
and delinquency experience on the loans, the types of loans and other factors.
At June 30, 1997, the Company had $10.2 million in loans serviced for others.
The marketability of loans depends on the purchasers' investment
limitations, general market and competitive conditions, mortgage loan demand,
and other factors. Gilmer Financial's sales of loans or participations are
"without recourse" (i.e., without remedy against the seller by the purchaser if
the borrower defaulted on payment under the loan) against Gilmer Financial in
the event of default. Gilmer Financial does have contingent liability on loans
sold under warranty of conforming origination to FHLMC guidelines.
13
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family.................. $2,586 $ 2,160 $ 1,179
- commercial......................... 623 713 362
Non-real estate - commercial business.............. --- --- ---
-------- --------- ---------
Total adjustable-rate....................... 3,209 2,873 1,541
------ ------- -------
Fixed rate:
Real estate - one- to four-family.................. 1,879 3,378 1,824
- commercial......................... 785 35 194
- construction....................... 2,638 974 542
Non-real estate - consumer......................... 6,503 4,905 4,980
- commercial business........... 3,133 1,041 680
------- ------- --------
Total fixed-rate............................ 14,938 10,333 8,220
------ ------- --------
Total loans originated...................... 18,147 13,206 9,761
------ ------- --------
Purchases:
Mortgage-backed securities (excluding
REMICs and CMOs).................................. --- 299 1,744
REMICs and CMOs.................................... --- 5,176 ---
-------- ------- ---------
Total purchased............................. --- 5,475 1,744
-------- ------- -------
Sales and Repayments:
Sales:
Real estate - one- to four-family.................. 1,091 3,194 1,545
------ ------- -------
Total loans sold............................ 1,091 3,194 1,545
Mortgage-backed securities......................... --- 841 1,761
------- -------- -------
Total sales................................. 1,091 4,035 3,306
Principal repayments:
Mortgage-backed securities........................ 1,107 1,086 1,380
Loans............................................. 13,846 7,775 6,386
------ -------- -------
Total reductions............................ 16,044 12,895 11,072
Increase (decrease) in other items, net.............. 867 (49) (13)
------- --------- --------
Net increase (decrease)..................... $2,970 $ 5,737 $ 420
====== ======== =======
</TABLE>
14
<PAGE>
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a first mortgage loan, the Company attempts to cause the delinquency
to be cured by contacting the borrower when the loan is 16 days delinquent. A
late notice is sent on the 16th day after the due date of the loan. A second
late notice is sent after the loan is 30 days delinquent in addition to verbal
contact with the borrower. If the delinquency is not cured by the 45th day, the
Company will arrange a face to face interview with the borrower to discuss
arrangements for curing the default. If there is no acceptable response from the
borrower, a 30-day notice of foreclosure is sent. If the delinquency is not
cured within the 30 days, foreclosure proceedings are initiated.
In the event the loan payment is past due for ninety days or more, the
Company performs an in-depth review of the loan's status, the condition of the
property and circumstances of the borrower. Based upon the results of the
review, the Company may negotiate and accept a repayment program with the
borrower or, when deemed necessary, initiate foreclosure proceedings. If
foreclosed on, real property is sold at a public sale and the Company may bid on
the property to protect its interest. A decision as to whether and when to
initiate foreclosure proceedings is made by the President or the Board of
Directors and is based on such factors as the amount of the outstanding loan in
relation to the original indebtedness, the extent of delinquency and the
borrower's ability and willingness to cooperate in curing the delinquencies.
The following table sets forth the Company's loan delinquencies by type
and by amount at June 30, 1997.
<TABLE>
<CAPTION>
Total Loans
Loans Delinquent For: Delinquent
-------------------------------------- -------------------
60-89 Days 90 Days and Over 60 Days or More
----------------- ----------------- -------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family...... 17 $ 456 12 $ 389 29 $ 845
Commercial............... --- --- 1 129 1 129
Consumer................... 22 177 16 77 38 254
---- ----- ---- ------ -- -------
Total................. 39 $ 633 29 $ 595 68 $1,228
==== ===== ==== ===== == ======
</TABLE>
Non-Performing Assets. Real estate acquired in settlement of loans is
classified as real estate owned until it is sold. When property is acquired, it
is initially recorded at the lower of estimated fair value or cost. If,
subsequent to foreclosure, the fair value of the real estate acquired through
foreclosure is determined to have declined based upon periodic evaluations by
15
<PAGE>
management, valuation allowances are established through a charge to income.
Costs relating to the development or improvement of real estate owned are
capitalized to the extent of fair market value.
The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans are placed on non-accrual status
at the earlier of principal or interest being 90 days past due and/or when the
collection of principal and/or interest becomes doubtful. For all years
presented, the Company had no troubled debt restructurings (which involved
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates). Foreclosed assets include
assets acquired in settlement of loans.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 385 $ 236 $ 295 $ 128 $ 167
Multi-family -- -- -- -- --
Commercial real estate 129 63 40 49 51
Construction or development 4 -- -- -- --
Consumer 77 94 23 -- 12
Commercial business -- -- -- 3 --
------- ------- ------- ------- -------
Total 595 393 358 180 230
------- ------- ------- ------- -------
Foreclosed assets:
One- to four-family 99 -- 9 -- 20
Commercial real estate -- -- -- 80 125
------- ------- ------- ------- -------
Total 99 -- 9 80 145
------- ------- ------- ------- -------
Total non-performing assets $ 694 $ 393 $ 367 $ 260 $ 375
======= ======= ======= ======= =======
Total assets $42,170 $39,088 $32,759 $32,572 $30,965
======= ======= ======= ======= =======
Total as a percentage of total assets 1.65% 1.01% 1.08% 0.80% 1.21%
</TABLE>
For the year ended June 30, 1997 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $10,000. The amounts that were included in interest
income on such loans were approximately $6,000 for the year ended June 30, 1997.
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
16
<PAGE>
are characterized by the distinct possibility that the savings association will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified Loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified Loss, or charge off such amount. Assets which do not currently expose
the institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses may also be designated "special
mention" by management. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS.
On the basis of management's review of its assets, at June 30, 1997, on
a net basis, the Company had classified $778,000 as Substandard, $11,458 as
Doubtful and 6 loans totaling $21,570 as Loss. At June 30, 1997, the Bank had no
loans designated as special mention.
Other Loans of Concern. Not categorized as non-performing assets are
$174,000 of certain potential problem loans which are classified as substandard
that management believes are adequately secured and for which no material loss
is expected, but as to which certain circumstances may cause the borrowers to be
unable to comply with the present loan repayment terms at some future date. Such
potential problem loans consist primarily of single family home loans.
Management has considered the Company's non-performing and "of concern" assets
in establishing its allowance for loan losses.
Allowance for Loan Losses. The allowance for estimated loan losses is
established through a provision for losses on loans based on management's
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of all
loans of which full collectibility may not be reasonably assured, considers the
estimated net realizable value of the underlying collateral, economic
conditions, historical loan loss experience, Office of Thrift Supervision
Midwest Region factors, and other factors that warrant recognition in providing
for an adequate allowance for loan losses.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
As a result of the Office of Thrift Supervision exam conducted in April
1997, management recalculated the allowance for loan losses, using historical
loan loss experience for mortgage loans and commercial real estate, and OTS
Midwest region factors for consumer and commercial business, which resulted in
additional reserve requirement of $95,000. Management had been using historical
17
<PAGE>
loan loss factors to calculate the allowance. Due to the growth in the consumer
and commercial business loan portfolio the Office of Thrift Supervision did not
believe that [the Bank's] low historical loss would substantiate the allowance
needed for the growing loan portfolio. Therefore, management recalculated the
allowance for loan loss using the OTS Midwest Region factors for consumer and
commercial business loans and historical loss factors for real estate loans
along with the OTS requirement of 15% of total classified to establish the
needed reserves.
Management believes that although unforeseen market conditions could
result in adjustments to the allowance for loan losses, the additional reserves
will help keep earnings more stable when losses are incurred.
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......................... $215 $204 $ 215 $ 215 $ 221
Charge-offs:
One- to four-family................................... --- 2 15 --- 50
Commercial real estate................................ --- --- --- --- ---
Commercial business................................... 6
Consumer.............................................. 42 24 3 --- ---
------ ----- ------ ------- --------
Total............................................... 48 26 18 --- 50
------ ----- ------ ------- -------
Recoveries.............................................. --- --- --- --- ---
------- ------ ------- ------- --------
Net charge-offs........................................ 48 (26) (18) --- (50)
Additions charged to operations......................... 142 37 7 --- 44
------ ----- ------- ------- -------
Balance at end of period................................ $ 309 $215 $ 204 $ 215 $ 215
===== ==== ====== ====== =======
Ratio of net charge-offs during the period to
average loans outstanding during the period............ .21% .11% .10% ---% 0.30%
=== ==== ====== ====== =======
Ratio of net charge-offs during the period to
average non-performing assets.......................... 10.62% 7.42% 5.72% ---% 9.29%
===== ==== ==== ====== =======
</TABLE>
18
<PAGE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ---------------------------------- -----------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss By to Total Loan Loss By to Total Loan Loss By to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family. $ --- $12,360 48.83% $ --- $10,695 49.85% $ --- $10,319 54.7%
Multi-family........ --- 282 1.12 --- 122 .57 --- 140 .7
Commercial real
estate............. 15 2,683 10.60 18 2,934 13.68 23 2,354 12.5
Construction or
development........ --- 1,306 5.16 --- 526 2.45 --- 823 4.4
Consumer............ --- 6,820 26.94 1 5,684 26.49 --- 4,116 21.9
Commercial business. --- 1,860 7.35 --- 1,492 6.96 --- 1,097 5.8
Unallocated......... 294 --- --- 196 --- --- 181 --- ---
----- ------- ------ ----- ------- ------ ------- ------- -----
Total.......... $ 309 $25,311 100.00% $ 215 $21,453 100.00% $ 204 $18,849 100.0%
===== ======= ====== ===== ======= ====== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------
1994 1993
---------------------------------- ---------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss By to Total Loan Loss By to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family. $ --- $10,739 62.3% $ --- $12,037 71.0%
Multi-family........ --- 157 0.9 --- 173 1.0
Commercial real
estate............. 25 1,946 11.3 25 1,999 11.8
Construction or --- 604 3.5 --- 134 0.8
development........
Consumer............ --- 3,402 19.7 --- 2,473 14.6
Commercial business. --- 382 2.2 --- 139 0.8
Unallocated......... 190 --- --- 190 --- ---
-------- ------- ----- ------- ------- -----
Total.......... $ 215 $17,230 100.0% $ 215 $16,955 100.0%
======== ======= ===== ======= ======= =====
</TABLE>
19
<PAGE>
Investment Activities
General. Gilmer Financial must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Company has
maintained liquid assets at levels above the minimum requirements imposed by OTS
regulations and at levels believed adequate to meet the requirements of normal
operations, including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
For June 30, 1997, the Company's liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowing) was 6.34%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Regulation - Liquidity" in
the Annual Report to Stockholders attached hereto as Exhibit 13.
The Company has the authority to invest in various types of liquid
assets, including United States Treasury obligations, securities of various
federal and state agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, the Bank may also invest its
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a savings institution
is otherwise authorized to make directly.
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives.
Included in the Company's investment portfolio are mortgage-backed
securities consisting primarily of securities issued under government-sponsored
agency programs, including those of the Federal National Mortgage Association
("FNMA"), the FHLMC and the Government National Mortgage Association ("GNMA").
The Company also invests in Collateralized Mortgage Obligations ("CMOs"), one
type of which is a real estate mortgage investment conduit (REMIC").
See "- Mortgage-Backed Securities."
Investment Securities. At June 30, 1997, Gilmer Financial's
interest-bearing deposits with banks totaled $1,365,000 or 3.2%, of total
assets, and its investment securities totaled $316,000 or .75% of total assets.
As of such date, the Bank also had a $495,100 investment in FHLB stock,
satisfying its requirement for membership in the FHLB of Dallas based on its
advances outstanding. It is the Company's general policy to purchase securities
which are U.S. Government securities or federal or state agency obligations or
other issues that are rated investment grade or have credit enhancements.
20
<PAGE>
The following table sets forth the composition of the Company's
investment and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
1997 1996 1995
-------------------- ----------------------- ----------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Treasury Note................................. $300 36.99% $ 301 37.86% $ --- ---%
FHLB Series........................................ --- --- --- --- 100 17.92
Corporate obligations.............................. 16 1.97 27 3.40 46 8.24
Municipal bonds.................................... --- --- --- --- 100 17.92
----- ----- ------- ------- -------- -------
Subtotal........................................ 316 38.96 328 41.26 246 44.09
FHLB stock........................................... 495 61.04 467 58.74 312 55.91
---- ----- ------- ------- -------- -------
Total investment securities and FHLB stock...... $811 100.00% $ 795 100.00% $ 558 100.00%
==== ====== ======= ====== ======== =======
Average remaining life or term to repricing
of investment securities, excluding FHLB stock...... .75 years 3.2 years 1.8 years
Other interest-earning assets:
Interest-bearing deposits with banks............... $1,365 100.00 $ 634 100.00% $ 360 100.00%
------ ------ ------- ------ -------- ======
Total........................................... $1,365 100.00 $ 634 100.00% $ 360 100.00%
====== ====== ======= ====== ======== ======
Mortgage-backed securities:
GNMA............................................... $3,470(1) 22.88% $ 3,963 24.40% $ 4,544 35.26
FNMA............................................... 2,283(2) 15.05 2,485 15.30 2,647 20.54
FHLMC.............................................. 1,410 9.30 1,684 10.37 2,659 20.63
Private issue CMOs/REMICs.......................... 7,771(3) 51.23 7,791 47.97 2,650 20.57
------- ------ ------ ------ -------- -------
14,934 98.46 15,923 98.04 12,500 97.00
Unamortized premium (discounts), net................. 235 1.54 318 1.96 386 3.00
------- ------ ------ ------ -------- -------
Total mortgage-backed securities................ $15,169 100.00% $16,241 100.00% $12,886 100.00%
======= ====== ======= ====== ======== =======
</TABLE>
(1) $78,249 (market value of $79,616) of these mortgage-backed securities were
held for sale. (2) $805,297 (market value of $780,451) of these mortgage-backed
securities were held for sale. (3) $4,0169,145 (market value of $3,981,010) of
these mortgage-backed securities were held for sale.
The composition and maturities of the investment securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
------ ----- ----- -------- ---------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Note.......................... $300 $ --- $ --- $ --- $ 300 $301
Corporate obligations....................... --- --- --- 16 16 16
---- ------ ------ ----- ---- ----
Total investment securities................. $300 $ --- $ --- $ 16 $316 $317
==== ====== ====== ===== ==== ====
Weighted average yield...................... 6.13% ---% ---% 6.22% 6.13% 6.13%
==== ====== ====== ===== ==== ====
</TABLE>
21
<PAGE>
Mortgage-Backed Securities. The Company purchases mortgage-backed
securities to supplement residential loan production. The type of securities
purchased is based upon the Company's asset/liability management strategy and
balance sheet objectives. For instance, most of the mortgage-backed investments
purchased by the Company over the last several years have had adjustable rates
of interest or short or intermediate effective terms to maturity. The book value
of all mortgage-backed securities at June 30, 1997 was $15.1 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report to Stockholders
attached hereto as Exhibit 13.
The Company's mortgage-backed securities held for investment are
included in its financial statements at amortized cost. The Company's
mortgage-backed securities available for sale are included in its financial
statements at market value. See Note 3 of the Notes to the Financial Statements
in the Annual Report to Stockholders attached hereto as Exhibit 13 for
information regarding the amortized cost and approximate market value of the
Company's mortgage-backed securities as of June 30, 1997.
As of June 30, 1997, all of the Company's mortgage-backed securities
were backed by federal agencies or by credit enhancements. Accordingly,
management believes that the Company's mortgage-backed securities are generally
resistant to credit problems.
The Company's holdings of mortgage-backed securities have increased in
recent years as a result of customer preference for fixed-rate mortgages which
are not originated for the portfolio by the Company. The Company has emphasized
mortgage-backed and related securities with high credit quality, high cash flow,
low interest-rate risk, high liquidity and acceptable prepayment risk. Since
federal agency mortgage-backed securities generally carry a yield approximately
50 to 100 basis points below that of the corresponding type of residential loan
(due to the implied federal agency guarantee fee and the retention of a
servicing spread by the loan servicer), in the event that the proportion of the
Company's assets consisting of mortgage-backed investments continues to
increase, the Company's asset yields would be adversely affected.
The Company's mortgage-backed and related securities portfolio consists
primarily of securities issued under government-sponsored agency programs,
including those of FNMA, FHLMC and GNMA. The FNMA, FHLMC and GNMA certificates
are modified pass-through mortgage-backed securities that represent undivided
interests in underlying pools of fixed-rate, or certain types of
adjustable-rate, predominantly single-family and, to a lesser extent,
multi-family residential mortgages issued by these government-sponsored
entities. FNMA and FHLMC generally provide the certificate holder a guarantee of
timely payments of interest, whether or not collected. GNMA's guarantee to the
holder is timely payments of principal and interest, backed by the full faith
and credit of the U.S. Government.
Mortgage-backed securities generally yield less than the loans that
underlie such securities, because of the cost of payment guarantees or credit
enhancements that reduce credit risk to holders. Mortgage-backed securities are
also more liquid than individual mortgage loans and may be used to collateralize
obligations of the Company. In general, mortgage-backed securities issued or
22
<PAGE>
guaranteed by FNMA, FHLMC and certain AAA- or AA-rated mortgage-backed
pass-through securities are weighted at no more than 20% for risk-based capital
purposes, and mortgage-backed securities issued or guaranteed by GNMA are
weighted at 0% for risk-based capital purposes, compared to an assigned risk
weighting of 50% to 100% for whole residential mortgage loans. These types of
securities thus allow the Company to optimize regulatory capital to a greater
extent than non-securitized whole loans.
The Company also invests in Collateralized Mortgage Obligations
("CMOs"). A CMO is a special type of pass-through debt in which the stream of
principal and interest payments on the underlying mortgages or mortgage-backed
securities is used to create classes with different maturities and, in some
cases, amortization schedules, as well as a residual interest, with each such
class possessing different risk characteristics. Management believes these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity and repayment options available through such
investments.
One type of CMO is a real estate mortgage investment conduit ("REMIC").
At June 30, 1997, the Company had an investment in one REMIC totaling $2.7
million, with a scheduled final distribution date of October 2003. The REMIC is
a multi-class pass-through certificate evidencing beneficial ownership interests
in a trust fund which consists primarily of a pool of conventional, fixed-rate,
fully amortizing, one- to four-family residential mortgage loans sold by GE
Capital Mortgage Services, Inc. The REMIC has several forms of credit
enhancement designed to enhance the likelihood of regular receipt of the
scheduled amounts due and to provide limited protection against losses. The
REMIC was rated "AAA" by Standard & Poor's Corporation and "AAA" by Moody's
Investors Services, Inc.
The Company's investment in the REMIC is in a class of "accretion
directed certificates" which had a weighted average life of 7.9 years at
issuance, based on a 325% prepayment assumption. The investment was purchased
with the proceeds from a fixed-rate FHLB advance which has a first maturity date
of January 1998, which then rolls into an amortizing advance with a final
maturity in October 2003.
The Company also held $5.0 million in REMIC's tied to the Eleventh
District Cost of Funds Index. The REMIC's are pass-through certificates
representing beneficial ownership interest in a trust fund which is backed by a
pool of first lien, single-family, fixed-rate residential mortgage loans
guaranteed by FNMA, as to timely payments of principal and interest.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. The adjustable rate and/or short maturity of the
Company's portfolio is designed to minimize that risk.
23
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at June 30, 1997.
<TABLE>
<CAPTION>
Due in
--------------------------------------------------------------------------------------
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year 3 Years Years Years Years Years Outstanding
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation..... $ --- $ --- $ --- $ --- $ --- $161 $1,249 $1,410
Federal National Mortgage Association...... --- --- --- 80 --- 816 1,387 2,283
Government National Mortgage Association... --- --- --- --- --- 757 2,713 3,470
CMOs/REMICs................................ --- --- --- --- 2,650 --- 5,121 7,771
------ ----- ----- ----- ------ ----- ----- -----
Total................................. $ --- $ --- $ --- $ 80 $2,650 $1,734 $10,470 $14,934
====== ===== ===== ===== ====== ====== ======= =======
</TABLE>
24
<PAGE>
Sources of Funds
General. Deposit accounts have traditionally been the principal source
of the Company's funds for use in lending and for other general business
purposes. In addition to deposits, the Company derives funds from loan
repayments and cash flows generated from operations. Scheduled loan payments are
a relatively stable source of funds, while deposit inflows and outflows and the
related cost of such funds have varied. Other potential sources of funds
available to the Company include borrowing from the FHLB of Dallas and other
borrowings.
Deposits. The Company attracts both short-term and long-term deposits
by offering a wide assortment of accounts and rates. The Company offers regular
passbook accounts, checking accounts, commercial accounts, NOW accounts, money
market investment accounts and fixed and variable interest rate certificates of
deposit with varying maturities and sindividual retirement accounts. Deposit
account terms vary, according to the minimum balance required, the time period
the funds must remain on deposit and the interest rate, among other factors.
Gilmer Financial has not actively sought deposits outside of its market area.
The Company, like many thrift institutions in the current interest rate
environment, has had to compete for depositors' funds with non-traditional
deposit vehicles, such as annuities, mutual funds, municipal bonds and other
obligations. As a result of the higher yields available on such instruments,
there has been some disintermediation (i.e., an outflow of funds from the
institution) and, accordingly, a reduction in the Company's deposits in recent
periods. During the year ended June 30, 1997, the Company used FHLB borrowings,
in addition to deposits, in order to fund loans. Should this disintermediation
continue, management believes that the Company's borrowing capacity with the
FHLB of Dallas at rates comparable to those associated with the outflow of funds
should preclude any significant negative impact on earnings.
In setting rates, Gilmer Financial regularly evaluates (i) its internal
cost of funds, (ii) the rates offered by competing institutions, (iii) its
investment and lending opportunities and (iv) its liquidity position. In order
to decrease the volatility of its deposits, Gilmer Financial imposes penalties
on early withdrawal from its certificates of deposit. To its knowledge, Gilmer
Financial does not have any brokered deposits and has no present intention to
accept or solicit such deposits.
25
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1997 1996 1995
--------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................. $25,477 $ 25,486 $ 24,924
Deposits.................................... 25,497 9,959 7,010
Withdrawals................................. 22,586 10,715 (7,079)
Interest credited........................... 718 747 631
------- ------- ---------
Ending balance.............................. $29,106 $25,477 $ 25,486
======= ======= =========
Net increase (decrease)..................... $3,629 $ (9) $ 562
======= ======== =========
Percent increase (decrease)................. 12.47% (.04)% 2.21%
======= ======== =========
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company for the periods
indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
Transactions and Savings Deposits:
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts................................ $1,007 3.46% $ 970 3.81% $1,087 4.27%
Money Market Accounts............................ 786 2.70 1,043 4.09 1,279 5.02
DDA Individual................................... 348 1.20 110 .44 --- ---
Commercial Checking.............................. 218 .75 171 .67 --- ---
NOW Accounts..................................... 238 .81 115 .45 --- ---
------- ----- ------- ------ ------ ------
Total Non-Certificates........................... 2,597 8.92% 2,409 9.46% $2,366 9.29
------- ----- ------- ------ ------ ------
Certificates:
- ------------
2.00 - 3.99%................................... 735 2.53 815 3.20% 1,580 6.20
4.00 - 5.99%................................... 15,779 54.21 17,480 68.61 15,361 60.27
6.00 - 7.99%................................... 9,903 34.02 4,689 18.40 6,100 23.93
8.00 - 10.00%.................................. 92 .32 84 .33 79 .31
-------- ------ ------- ------- ------- ------
Total Certificates............................... 26,509 91.08 23,068 90.54 23,120 90.71
-------- ------ ------- ------- ------- ------
Total Deposits................................... $29,106 100.00% $25,477 100.00% $25,486 100.00%
======== ====== ======= ======= ======= ======
</TABLE>
26
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 10.00% Total of Total
-------- -------- -------- -------- --------- --------
(Dollars in Thousands)
Certificate accounts
maturing in quarter ending:
- --------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30,1997.............. $130 $4,219 $2,502 $ 3 $6,854 25.86%
December 31, 1997.............. 143 2,934 2,898 5 5,980 22.56
March 31, 1998................. 7 2,673 942 --- 3,622 13.66
June 30, 1998.................. 147 3,007 1,508 --- 4,662 17.59
September 30, 1998............. --- 562 209 --- 771 2.91
December 31, 1998.............. --- 831 477 --- 1,308 4.93
March 31, 1999................. --- 377 320 --- 697 2.63
June 30, 1999.................. 29 509 309 --- 847 3.20
September 30, 1999............. 25 38 200 --- 263 .99
December 31, 1999.............. --- 18 225 --- 243 .92
March 31, 2000................. 100 100 140 --- 340 1.28
June 30, 2000.................. 29 159 --- --- 188 .70
Thereafter..................... 125 352 173 84 734 2.77
----- ----- ----- ----- ------ ----
Total....................... $735 $15,779 $9,903 $ 92 $26,509 100.00%
==== ======= ====== ==== ======= ======
Percent of total............ 2.77% 59.52% 37.36% .35%
==== ======= ====== ====
</TABLE>
The following table indicates the amount of the Company's certificates
of deposit and other deposits by time remaining until maturity as of June 30,
1997.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- --------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $5,736 $3,867 $6,267 $3,657 $19,527
Certificates of deposit of $100,000 or more...... 1,118 2,113 2,017 1,734 6,982
----- ----- ----- --------
Total certificates of deposit.................... $6,854 $5,980 $8,284 $5,391 $26,509
======= ====== ====== ====== =======
</TABLE>
27
<PAGE>
For additional information regarding the composition of the Company's
deposits, see Note 10 of the Notes to the Financial Statements in the Annual
Report to Stockholders filed as Exhibit 13 hereto.
Borrowing. Gilmer Financial's other available sources of funds include
advances from the FHLB of Dallas and other borrowings. As a member of the FHLB
of Dallas, the Bank is required to own capital stock in the FHLB of Dallas and
is authorized to apply for advances from the FHLB of Dallas. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Dallas may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
Gilmer Savings may obtain advances from the FHLB of Dallas upon the
security of its capital stock in the FHLB of Dallas and certain of its mortgage
loans and mortgage-backed securities. Such advances may be made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. At June 30, 1997, the Bank's outstanding borrowings with
the FHLB of Dallas was $8.6 million.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1997 1997 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances........................................... $9,400 $9,120 $5,854
Average Balance:
FHLB advances........................................... $8,996 $5,714 $4,965
Weighted average interest rate of FHLB
advances (at June 30, 1997, 1996 and
1995, respectively).................................... 5.78% 5.66% 6.26%
</TABLE>
Service Corporation Activities
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets for community purposes. In
addition, federal associations may invest up to 50% of their total capital in
conforming loans to their service corporations in which they own more than 10%
of the capital stock. In addition, federal associations are permitted to invest
an unlimited amount in operating subsidiaries engaged solely in activities which
a federal association may engage in directly. In September of 1996, Gilstar
Service Corporation, the service corporation subsidiary of Gilmer Savings, began
operations in non-deposit products. Offering general securities through Brokers
Transaction Services, Inc. of Dallas, Texas (member of the NASD and SIPC),
Gilstar has primarily marketed mutual funds to existing retail customers
interested in regular investments, IRAs and other qualified retirement plans.
28
<PAGE>
Competition
Savings institutions generally face strong competition both in
originating real estate loans and in attracting deposits. Competition in
originating loans comes primarily from other savings institutions, commercial
banks and mortgage bankers who also make loans secured by real estate located in
the Company's market area. The Company 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.
The Company faces substantial competition in attracting deposits from
other savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Company to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk, convenient locations and other factors. The Company
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and a customer-oriented staff. The
Company estimates its market share of the savings deposits in its market area to
be approximately 12%.
Employees
At June 30, 1997, the Company had a total of 12 full-time employees.
None of the Company's employees are represented by any collective bargaining
group. Management considers its employee relations to be good.
Executive Officers
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company. Except
as otherwise indicated, the persons named have served as officers of the Company
since it became the holding company of the Bank. There are no arrangements or
understandings between the persons named and any other person pursuant to which
such officers were selected.
Gary P. Cooper. Mr. Cooper, age 44, is currently serving as President
of the Company and the Bank, positions he has held since September 1994 and
1985, respectively. Prior to joining the Bank as Manager in 1985, Mr. Cooper
served as a Vice President - Loan Officer at Interfirst Bank of Irving. Mr.
Cooper began his career in 1975 at Citizens First National Bank of Tyler and
subsequently moved to East Texas Savings & Loan of Tyler where he was promoted
to Manager of the South Tyler branch prior to joining Interfirst Bank of Irving.
Sheri L. Parish. Ms. Parish, age 29, is Vice President, Chief Financial
Officer and Secretary of the Bank and Vice President/Treasurer/Secretary of the
Company. She has been with the Bank since October 1993 and is the principal
accounting and financial officer for both the Bank and the Company. Prior to
joining the Bank, she was employed by certified public accounting firms starting
in September 1991.
29
<PAGE>
Monty J. Small. Mr. Small, age 54 has served as Senior Vice President
of the Bank since February 1996, and has served as Senior Vice President of the
Company since October 1996. Mr. Small is in charge of the Bank's mortgage
lending department, investment portfolio and interest rate risk, retail business
development, and non-depository products. Prior to joining the Bank, he was
employed by independent securities brokerage firms starting in January 1986.
REGULATION
General
Gilmer Savings is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Gilmer Savings is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Dallas and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the savings and loan holding company of the Bank, the Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Company
and other holding companies is to protect subsidiary savings associations. The
Bank is a member of the Savings Association Insurance Fund ("SAIF"),which
together with the Bank Insurance Fund (the "BIF") are the two deposit insurance
funds administered by the FDIC and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS examination of the Bank was as of March 1997. When
these examinations are conducted by the OTS and the FDIC, the examiners may
require the Bank to provide for higher general or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. The
Bank's OTS assessment for the fiscal year ended June 30, 1997 was $13,991.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
30
<PAGE>
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1997, the Bank's lending limit under this restriction was $559,000. The
Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation, asset
quality and earnings standards, and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC
Gilmer Savings is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices, or is in an unsafe
or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
31
<PAGE>
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1997, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the same time the FDIC
revised the BIF premium schedule; it noted that absent legislative action (as
discussed below), the SAIF would not attain its designated reserve ratio until
the year 2002. As a result, SAIF members will generally be subject to higher
deposit insurance premiums than BIF members until, all things being equal, the
SAIF attains the required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$164,429 was paid in September 30, 1996. This special assessment significantly
increased noninterest expense and adversely affected the Bank's results of
operations for the year ended June 30, 1997. As a result of the special
assessment, the Bank's deposit insurance premiums was reduced to .01625% based
upon its current risk classification and the new assessment schedule for SAIF
insured institutions. These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are
32
<PAGE>
anticipated to be about a 6.5 basis points assessment on SAIF deposits and 1.5
basis points on BIF deposits until BIF insured institutions participate fully in
the assessment.
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At June 30, 1997, the Bank did
not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 1997, the Bank did not have any active
subsidiaries.
At June 30, 1997, the Bank had tangible capital of $3.8 million, or
8.85% of adjusted total assets, which is approximately $3.1 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1997, the Bank
had no intangibles which were subject to these tests.
At June 30, 1997, the Bank had core capital equal to $3.8 million, or
8.85% of adjusted total assets, which is $2.5 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital
33
<PAGE>
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The OTS is also authorized to require a Savings
association to maintain an additional amount of total capital to account for
concentration of credit risk. At June 30, 1997, the Bank had no capital
instruments that qualify as supplementary capital and $260,000 of general loss
reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at June 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations require also that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which Savings associations may appeal on interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On June 30, 1997, the Bank had total capital of $4.0 million and
risk-weighted assets of $20.7 million or total capital of 19.4% of risk-weighted
assets. This amount was $2.4 million above the 8% requirement in effect on that
date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
34
<PAGE>
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Gilmer Savings may have a substantial adverse effect on the Bank's operations
and profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for
35
<PAGE>
the most recent four quarter period. However, an association deemed to be in
need of more than normal supervision by the OTS may have its dividend authority
restricted by the OTS. The Bank may pay dividends in accordance with this
general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Gilmer Savings, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what Gilmer Savings
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report to Stockholders filed as Exhibit 13 hereto. This liquid
asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, Gilmer Savings was in compliance with both
requirements, with an overall liquid asset ratio of 6.34% and a short-term
liquid assets ratio of 6.34%.
36
<PAGE>
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS. The Bank was examined by OTS for safety and soundness as of March 1997 and
received a rating of satisfactory.
Qualified Thrift Lender Test
All savings associations, including Gilmer Savings, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the Savings association may maintain 60% of its assets
in those assets specified in Section 7701(a)(19) of the Internal Revenue Code.
Under either test, such assets primarily consist of residential housing related
loans and investments. At June 30, 1997, the Bank met the test and has always
met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet
37
<PAGE>
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in April 1997 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a case
by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Federal Reserve System
The Federal Reserve Board requires depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts if the balances in those transaction accounts exceed $2 million
(primarily checking, NOW and Super NOW checking accounts). At June 30, 1997,
Gilmer Financial was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
38
<PAGE>
Federal Home Loan Bank System
The Bank is a member of the FHLB of Dallas, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas. At June 30, 1997, Gilmer Savings had $495,100 in FHLB stock,
which exceeded the requirement amount. In past years, Gilmer Savings has
received substantial dividends on its FHLB stock. Over the past five fiscal
years, such dividends have averaged 5.48% and were 5.90% for fiscal year 1997.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Gilmer Savings' FHLB stock may result in a corresponding
reduction in the Bank's capital.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS will has enforcement authority over the Company
and its non-savings association subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If Gilmer Financial fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to,
39
<PAGE>
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company. See "- Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to
40
<PAGE>
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four-year period.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At June
30, 1997, the 6% and 12% limitations did not restrict the percentage bad debt
deduction available to the Bank. It is not expected that these limitations would
be a limiting factor in the foreseeable future.
In August 1997, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1997, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
41
<PAGE>
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1997 the Bank's excess on tax purposes totaled
approximately $400,000.
The Company files consolidated federal income tax returns with the Bank
on a fiscal year basis. Savings associations, such as the Bank, that file
federal income tax returns as part of a consolidated group are required by
applicable Treasury regulations to reduce their taxable income for purposes of
computing the percentage bad debt deduction for losses attributable to
activities of the non-savings association members of the consolidated group that
are functionally related to the activities of the savings association member.
The Bank has not been audited by the IRS for the last 10 years and has
federal income tax returns which are open and subject to audit for the years
1991 through 1993. With respect to years examined by the IRS, either all
deficiencies have been satisfied or sufficient reserves have been established to
satisfy asserted deficiencies. In the opinion of management, any examination of
still open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.
Texas Taxation. The State of Texas does not have a corporate income
tax, but it does have a corporate franchise tax. Prior to January 1, 1992
savings and loan associations had been exempt from the corporate franchise tax.
The tax for the year 1993 is the higher of 0.25% of taxable capital
(usually the amount of paid in capital plus members' equity) or 4.5% of "net
taxable earned surplus." "Net taxable earned surplus" is net income for federal
income tax purposes increased by the compensation of directors and executive
officers and decreased by interest on obligations guaranteed by the U.S.
government. Net taxable earned surplus cannot be reduced by net operating loss
carryforwards from years prior to 1991, and operating loss carryovers are
limited to five years.
Delaware Taxation. As a Delaware holding company, the company is
exempted from Delaware corporate income tax.
Item 2. Description of Property
The Company currently owns the its office as well as the entire block
of land surrounding its office. At June 30, 1997, the office and surrounding
land had a net book value of $129,000. At June 30, 1997, the Company's premises
and equipment had an aggregate net book value of approximately $245,000. The
Company is currently considering an expansion program.
The Company's accounting and record-keeping activities are maintained
on an on-line basis with an independent service bureau.
42
<PAGE>
Item 3. Legal Proceedings
From time to time, the Company or the Bank is involved as plaintiff or
defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on the Company or the
Bank's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
43
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 36 of the attached 1997 Annual Report to Stockholder is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 5 to 17 of the attached 1997 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
Pages 18 through 35 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors
Information concerning directors and executive officers of the Company
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers
of the Company and the Bank who are not also directors contained in Part I of
this Form 10-KSB is incorporated herein by reference.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Company common stock and other
equity securities of the Company by the tenth of the month following a change.
44
<PAGE>
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1997, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
45
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
- -------------- -------- ---------------
<S> <C> <C>
2 Plan of Acquisition, Reorganization, Arrangement, None
Liquidation or Succession
4.1 Articles of Incorporation and *
amendments thereto
4.2 Bylaws *
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
Employment Agreement with Gary P. Cooper *
Employee Stock Ownership Plan *
Stock Option and Incentive Plan *
Management Recognition Plan *
11 Statement re computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter re change in certifying accountant None
18 Letter re change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matter submitted None
to vote
23 Consent of Accountants None
24 Power of Attorney Not Required
27 Financial Data Schedule Not Required
28 Information from reports furnished to State Insurance None
regulatory authorities
99 Additional Exhibits None
</TABLE>
- ---------------------
* Filed on September 22, 1994, as exhibits to the Company's Form S-1
registration statement (File number 33-84334). All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-B.
** Filed on September 28, 1995, as an exhibit to the Company's Annual Report
on Form 10-KSB. Such previously filed document is hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Company during the
three months ended June 30, 1997.
46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GILMER FINANCIAL SERVICES, INC.
Date: September 29, 1997 By: /S/GARY P. COOPER
---------------------------------- ------------------
Gary P. Cooper
(Duly Authorized Representative)
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.
/S/M. VANCE GORMAN /S/GARY P. COOPER
- ------------------- -----------------
M. Vance Gorman, Chairman of the Gary P. Cooper, President and Director
Board
Date: September 29, 1997 Date: September 29, 1997
------------------ ------------------
/S/ROYCE HUDGINS /S/PAUL D. WILLIAMS
- ---------------- -------------------
Royce Hudgins, Director Paul D. Williams, Director
Date: September 29, 1997 Date: September 29, 1997
------------------ ------------------
/S/TEDD AUSTIN /S/F.L. GARRISON
- -------------- ----------------
Tedd Austin, Director F.L. Garrison, Director
Date: September 29, 1997 Date: September 29, 1997
------------------ ------------------
/S/STEVE W. SANSOM /S/SHERI PARISH
- ------------------ ---------------
Steve W. Sansom, Director Sheri Parish, Treasurer/Secretary
(Principal Financial and Accounting
Officer)
Date: September 29, 1997 Date: September 29, 1997
------------------ ------------------
47
1997 ANNUAL REPORT
GILMER FINANCIAL SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
President's Message........................................................ 2
Selected Consolidated Financial Information................................ 3
Management's Discussion and Analysis of Financial
Condition and Results of Operation....................................... 5
Consolidated Financial Statements ........................................ 18
Stockholder Information .................................................. 36
Corporate Information..................................................... 37
1
<PAGE>
TO OUR SHAREHOLDERS:
We are pleased to present the third annual report of Gilmer Financial
Services, Inc., the savings and loan holding company for Gilmer Savings Bank,
FSB. On behalf of the Board of Directors, the officers and staff, we appreciate
your support as a shareholder.
Gilmer Savings Bank has served the mortgage and consumer credit needs
of East Texas for over seventy-seven years. It is our mission to continue as a
strong, customer-driven, community-involved financial institution providing
diversified services for both depositors and borrowers, with a focus on present
and future needs. In keeping with our mission of diversified services, the Bank
is proud to announce that its new checking account services are increasingly
becoming a success. The Board would also like to announce that the Company is
now offering non-depository products through Brokers Transaction Services, to
once again emphasize our goal of becoming a one-stop institution.
Net earnings for the year ending June 30, 1997 were $23,000. This
represents a decrease of 91% from last year. The primary reason for this
decrease was an increase in non-interest expense due to the one-time SAIF
assessment of $164,000. The decrease in net income was also due to the Bank's
decision to build up its reserves for loan losses due to the growth in the
consumer and commercial portfolio by adding an additional $95,000 to the
reserves. The Company believes that the additional reserves will help protect
future earnings from loss on loans.
Stockholders' equity decreased to $3.8 million at June 30, 1997, or
9.02% of total assets at year end 1997. The decrease was primarily due to shares
repurchased and retired as treasury stock of $56,000, along with an increase in
unrealized loss of $49,000. The earnings per share for year end 1997 was $.12.
Total assets of the Company increased to $42.2 million at June 30, 1997,
compared to $39.1 million at year ended June 30, 1996. The book value of Gilmer
Financial Services, Inc.'s common stock based on actual shares outstanding at
June 30, 1997 was $19.88 per share.
We remain focused on our primary goal of providing a positive return on
your investment in Gilmer Financial Services, Inc. The Company is committed to
future growth and performance and will demonstrate this commitment within our
community. We have a history of stability and quality of service to our
community, due to our dedicated personnel. I would like to extend my
appreciation to the directors, officers, and staff for making our Bank a
success.
Gary Cooper
President and Chief Executive Officer
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars In Thousands)
Selected Financial Condition Data:
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Total assets......................................... $42,171 $39,088 $32,759 $32,494 $30,934
Loans receivable, net................................ 23,407 20,437 18,018 16,202 16,530
Mortgage-backed securities........................... 15,060 16,205 12,886 14,283 12,029
Investment securities................................ 316 328 247 260 ---
Deposits............................................. 29,106 25,477 25,486 24,924 24,889
Total borrowings..................................... 8,550 8,930 2,824 4,799 3,514
Stockholders' equity - substantially restricted...... 3,803 3,929 3,665 1,954 1,704
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars In Thousands)
Selected Operations Data:
- ------------------------
<S> <C> <C> <C> <C> <C>
Total interest income................................ $3,047 $2,708 $2,353 $2,062 $2,134
Total interest expense............................... 1,928 1,626 1,422 1,125 1,127
------- ------ ------ ------ ------
Net interest income............................... 1,119 1,082 931 937 1,007
Provision for loan losses............................ 129 38 7 --- 44
------- ------- ------- -------- ------
Net interest income after provision for loan losses.. 990 1,044 924 937 963
Fees and service charges............................. 125 110 74 92 84
Gain on sales of loans, mortgage-backed
securities and investment securities................ --- 12 9 1 19
Other non-interest income............................ 81 50 17 17 4
------ ------- ------- ------ ------
Total non-interest income............................ 206 172 100 110 107
Total non-interest expense........................... 1,145 817 704 645 675
----- ------- ------ ------ ------
Income before taxes.................................. 51 399 320 402 395
Income tax provision................................. 28 139 110 134 167
------- ------- ------ ------ ------
Net income........................................ $ 23 $ 260 $ 210 $ 268 $ 228
====== ======= ====== ====== ======
Earnings per share................................ $ .12 $ 1.31 $ .29 N/A N/A
====== ======= ======= === ===
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At and for the Year Ended June 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Selected Financial Ratios and Other Data:
- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net
income to average total assets)................... 0.06% 0.69% 0.62% 0.85% 0.75%
Return on stockholders' equity (ratio of
net income to average equity)..................... .60 6.86 8.21 14.65 14.34
Interest rate spread information:
Average during period............................. 2.23 2.03 2.35 2.66 3.38
End of period..................................... 2.77 2.81 2.49 2.90 3.72
Net interest margin(1)............................. 2.78 2.93 2.81 2.96 3.58
Ratio of operating expense to
average total assets.............................. 2.76 2.16 2.09 2.03 2.23
Ratio of average interest-earning assets
to average interest-bearing liabilities........... 111.46 120.52 110.58 108.41 105.07
Quality Ratios:
Non-performing assets to total assets
at end of period................................... 1.64 1.01 1.08 0.80 1.21
Allowance for loan losses to non-
performing loans................................... 44.55 54.71 56.98 82.69 64.95
Allowance for loan losses to loans
receivable, net.................................... 1.32 1.05 1.13 1.33 1.30
Capital Ratios:
Stockholders' equity to total assets at
end of period...................................... 9.02 10.05 11.19 6.01 5.51
Average stockholders' equity to average
assets............................................... 9.35 10.03 7.58 5.77 5.25
Other Data:
Number of full-service offices...................... 1 1 1 1 1
(1) Net interest income divided by average interest earning assets.
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Gilmer Financial Services, Inc. ("Gilmer Financial" or the "Company") a
Delaware corporation was formed in July 1994 and became the holding company of
Gilmer Savings Bank FSB (the "Bank") on February 9, 1995. The Bank is a
federally chartered stock savings bank headquartered in Gilmer, Texas. The
principal asset of the Company is the outstanding stock of the Bank, its
wholly-owned subsidiary. The Company presently has no separate operations and
its business consists only of the business of the Bank. In this discussion and
analysis, references to the operations and financial condition of the Company
include the operations and financial condition of the Bank.
On February 9, 1995, the Bank completed its conversion from a mutual to
a stock savings institution. On that date, the Company issued and sold 195,755
shares of common stock at $10.00 per share to complete the conversion of the
Bank from mutual to stock form ("Conversion"). Net proceeds to the Company were
approximately $1.6 million after deducting expenses of approximately $320,000.
As a consumer-oriented financial institution, the Company offers a
range of banking services to residents of Upshur County, its primary market
area. The Company is principally engaged in the business of attracting deposits
from the general public and investing those deposits, along with funds generated
from operations and borrowings, into mortgage, commercial, and consumer loans.
The Company also invests in mortgage and government-backed securities and
certificates of deposit.
The Company's results of operations are primarily affected by its net
interest income, which is the difference between interest income earned on its
loans, investments and mortgage-backed securities and other investments and its
cost of funds, consisting of interest paid on deposits and borrowed funds,
including Federal Home Loan Bank ("FHLB") advances. Net income of the Company is
also affected by non-interest income, such as loan origination and commitment
fees, loan servicing fees and other income, and non-interest expense, including
compensation and benefits, insurance premiums, losses on foreclosed real estate
and provisions for losses on loans. The Company's net income also is affected
significantly by general economic conditions and competitive conditions,
particularly changes in market interest rates and actions of regulatory
authorities.
Business Strategy
The Company's current goal is to provide financial services to the
communities served by its office. In seeking to accomplish this mission,
management has adopted a business strategy designed to (i) maintain and
strengthen the Company's capital in excess of regulatory requirements, (ii)
maintain a high level of asset quality, (iii) manage the Company's exposure to
5
<PAGE>
fluctuations in market interest rates, and (iv) maintain or improve the
Company's interest rate spread. In pursuing this strategy, the Company has
focused on (i) the origination of one- to four-family adjustable-rate loans for
retention in its portfolio, (ii) the origination and sale of long-term,
fixed-rate residential loans in the secondary market on a servicing-retained
basis, (iii) diversifying its lending portfolio with consumer lending and
investments in mortgage-backed and investment securities, and (iv) reducing
interest rate risk by better matching asset and liability maturities.
The highlights of the principal elements of the Company's strategy are
as follows:
Capital Maintenance. To maintain net interest income, the
Company has adopted a policy of moderate growth with an
emphasis on one- to four-family residential real estate
lending. At June 30, 1997, the Company had stockholders'
equity of $3.9 million and the Bank exceeded each of its
regulatory capital requirements.
Commitment to Local Home Lending. Historically, the Bank has
emphasized the origination of mortgage loans secured by
single-family residential real estate located in the Company's
market area. Single-family residential mortgage loans
typically have less credit risk than commercial and
multi-family real estate loans. Residential mortgage loans
receivable have declined in recent periods as a result of
increased competition in the Company's mortgage lending area,
as well as borrowers' refinancing of adjustable-rate loans in
the Company's portfolio to fixed-rate loans for sale to the
secondary market. At June 30, 1997, however, single-family
residential loans still constituted $12.4 million, or 52.8% of
the Company's total net loan portfolio.
Management of Interest Rate Risk. Historically, deposit
accounts have typically been more sensitive to changes in
market rates than mortgage loans because of the shorter terms.
As a result, sharp increases in interest rates may adversely
affect an institution's earnings while decreases in interest
rates may benefit earnings. In order to reduce the risks
associated with fluctuations in interest rates, as indicated
above, the Company has sought to expand its portfolio of
adjustable rate mortgage loans and securities. At June 30,
1997 $12.7 million of the Company's portfolio of mortgage
loans and securities had adjustable rates of interest. In
addition, management has maintained a policy of selling
substantially all the fixed rate residential loans it
originates in the secondary market, primarily to the Federal
Home Loan Mortgage Corporation ("FHLMC"). See also "-Asset and
Liability Management" for policies and strategies used to
reduce interest rate risk.
Emphasis on Customer Service. As a community-oriented
institution, the Company has historically focused on enhancing
customer satisfaction with its products and services.
Management believes it can compete effectively against larger
institutions in its market area by continuing to offer
personalized service. To this end, the Company has increased
its consumer lending and offers a credit card program and a
checking account program in an effort to meet the changing
needs of its customers. Consumer loan originations increased
$0.8 million from
6
<PAGE>
$5.7 million at June 30, 1996 to $6.5 million at June 30,
1997. The Company's money market and checking accounts had an
outstanding balance of $1.6 million at June 30, 1997.
Financial Condition
June 30, 1997 Compared to June 30, 1996. Total assets increased $3.1
million or 7.98% to $42.2 million at June 30, 1997 from $39.1 million at June
30, 1996. The increase was primarily attributable to an increase in loans of
$3.0 million.
Loans receivable were $23.4 million at June 30, 1997, and $20.4 million
at June 30, 1996, an increase of $3.0 million, or 14.54%. This increase was
primarily attributable to a more favorable interest rate environment for home
financing. Loans originated, net of payments during the year ended June 30, 1997
were $4.3 million, of which $1.1 million was sold in the secondary market with
servicing retained.
Mortgage-backed securities available for sale decreased $.2 million
from $5.0 million at June 30, 1996 to $4.8 million at June 30, 1997.
Mortgage-backed securities held to maturity decreased $1.0 million from $11.2
million at June 30, 1996 to $10.2 million at June 30, 1997. The decrease was due
to principal repayments on mortgage-backed securities of $1.0 million.
Investment securities held to maturity decreased $12,000 from $328,000
at June 30, 1996 to $316,000 at June 30, 1997. The decrease was due to the
principal repayments on investment securities of $12,000.
Interest-bearing deposits increased $739,000 from $634,000 at June 30,
1996 to $1,373,000 at June 30, 1997 to fund growth in loans.
Deposits increased $3.6 million from $25.5 million at June 30, 1996 to
$29.1 million at June 30, 1997. Federal Home Loan Bank advances decreased $0.3
million from $8.9 million at June 30, 1996 to $8.6 million at June 30, 1997.
Total stockholders' equity decreased $126,000 to $3.80 million at June
30, 1997 from $3.93 million at June 30, 1996. This decrease was primarily a
result of net earnings of $23,000 and amortization of ESOP expense of $16,000,
offset by the purchase of treasury stock of $126,000 and the increase in
unrealized losses on securities available-for-sale of $49,000.
June 30, 1996 Compared to June 30, 1995. Total assets increased $6.3
million or 16.2% to $39.1 million at June 30, 1996 from $32.8 million at June
30, 1995. The increase was primarily attributable to an increase in loans of
$2.4 million and an increase in mortgage-backed securities of $3.3 million.
Loans receivable were $20.4 million at June 30, 1996, and $18.0 million
at June 30, 1995, an increase of $2.4 million, or 11.83%. This increase was
primarily attributable to a more favorable interest rate environment for home
financing. Loans originated, net of payments during
7
<PAGE>
the year ended June 30, 1996 were $5.4 million, of which $3.2 million was sold
in the secondary market with servicing retained.
Mortgage-backed securities available for sale increased $4.0 million
from $1.0 million at June 30, 1995 to $5.0 million at June 30, 1996. The
increase was due to the purchase of new securities at favorable interest rates
which were funded with lower rate FHLB advances. Mortgage-backed securities held
to maturity decreased $700,000 from $11.9 million at June 30, 1995 to $11.2
million at June 30, 1996. The decrease was due to principal repayments on
mortgage-backed securities of $1.1 million and sales of $625,000 in accordance
with accounting pronouncements in December 1995, offset by the purchase of $1.2
million in mortgage-backed securities held for maturity.
The Company's portfolio of investment securities available for sale at
June 30, 1995 totaled $100,000. During 1996, all of such securities matured
leaving a zero balance at June 30, 1996. Investment securities held to maturity
increased $182,000 from $146,000 at June 30, 1995 to $328,000 at June 30, 1996.
The increase was due to the $300,000 purchase of an investment security,
partially offset by sales of $100,000 under the FASB 115 window and principal
repayments on investment securities of $18,000.
Interest bearing deposits increased $275,000 from $359,000 at June 30,
1995 to $634,000 at June 30, 1996, to fund growth in checking accounts and
loans.
During 1996, the Company sold all of its foreclosed real estate owned
which totaled $8,500 at June 30, 1995.
Deposits remained relatively unchanged at $25.5 million at June 30,
1995 and at June 30, 1996. Federal Home Loan Bank advances increased $6.1
million from $2.8 million at June 30, 1995 to $8.9 million at June 30, 1996. The
proceeds were used primarily to purchase $5.0 million in mortgage-backed
securities and to fund additional loan commitments.
Total stockholders' equity increased $265,000 to $3.93 million at June
30, 1996 from $3.65 million at June 30, 1995. This increase was primarily a
result of net earnings of $260,000.
Results of Operations
The Company's results of operations depend primarily on the level of
its net interest income and non-interest income and its amount of non-interest
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them.
Comparison of Operating Results for Years Ended June 30, 1997 and 1996
General. Net earnings for the year ended June 30, 1997 totaled $23,000,
a decrease of $237,000, or 91.15%, from the year ended June 30, 1996. The
decrease was due to an increase in net interest income of $38,000 and an
increase in noninterest income of $34,000, and a decrease
8
<PAGE>
in income taxes of $110,000, partially offset by an increase in the provision
for loan losses of $92,000 and an increase in noninterest expense of $327,000.
Interest Income. Interest income totaled $3.0 million for the year
ended June 30, 1997, compared to $2.7 million for the year ended June 30, 1996,
an increase of $339,000 or 12.53%. This increase resulted from a 25 basis point
increase in the average rate earned on interest-earning assets, along with a
$3.7 million increase in total interest-earning assets. The increase in average
yields on loans and mortgage-backed securities resulted from upward interest
rate adjustments to the Company's adjustable rate mortgage loans and adjustable
rate mortgage-backed securities as market interest rates rose.
Interest Expense. Interest expense increased $302,000 for the year
ended June 30, 1997 compared to June 30, 1996, primarily due to a 57 basis point
increase in the average rate paid on deposits and the increase of $3.3 million
in average balance of FHLB advances and $2.2 million in the average balance of
deposits.
Provision for Loan Losses. The Company maintains an allowance for loan
losses based upon management's periodic evaluation of non-performing loans,
inherent risks in the loan portfolio, economic conditions and past experience.
The allowance for loan losses increased $94,000 from $215,000 for the year ended
June 30, 1996, to $309,000 for the year ended June 30, 1997. The increase was
primarily the result of $129,000 in additions to the allowance accounts offset
by net charge-offs of $35,000 due to growth in consumer and commercial business
loan portfolio. The allowance for loan losses was 1.3% of net loans receivable
at June 30, 1997 compared to 1.1% at June 30, 1996. At June 30, 1997, the ratio
of the allowance for loan losses to total non-performing loans was 44.6%
compared to a ratio of 54.7% at June 30, 1996.
Non-Interest Income. Non-interest income increased $34,000 from
$172,000 for the year ended June 30, 1996 to $206,000 for the year ended June
30, 1997. The increase resulted primarily from a increase of $8,000 in loan
origination and commitment fees, a $7,000 increase in loan servicing fees, as
well as a $27,000 increase in other income which includes fees related to new
checking account services offered by the Company.
Non-Interest Expense. Non-interest expense totaled $1,145,000 for the
year ended June 30, 1997, compared to $817,000 for the year ended June 30, 1996,
an increase of $328,000. Compensation and benefits increased $106,000 to
$536,000 the year ended June 30, 1997 from $430,000 for the year ended June 30,
1996, due to ordinary increases in staff, salaries, insurance, and other
benefits, as well as ESOP and RRP contributions. Other miscellaneous expenses
increased $59,000 from $302,000 for the year ended June 30, 1996 to $361,000 for
the year ended June 30, 1997. The primary reason for this increase was an
increase of $24,000 in service bureau expense, and a $10,000 increase in group
life and health insurance. Non-interest expense also included the one-time SAIF
special assessment of $164,000.
Income Taxes. The provision for income taxes decreased $110,000 from
$138,000 for the year ended June 30, 1996 to $28,000 for the year ended June 30,
1997 due to a decrease in pre-tax income of $340,000 for the year ended June 30,
1997.
9
<PAGE>
Comparison of Operating Results for Years Ended June 30, 1996 and 1995
General. Net earnings for the year ended June 30, 1996 totaled
$260,000, an increase of $50,000, or 19.23%, from the year ended June 30, 1995.
The increase was due to an increase in net interest income of $150,000 and
noninterest income of $72,000, partially offset by an increase in provisions for
loan losses of $31,000, an increase in noninterest expense of $113,000, and an
increase in income taxes of $28,000.
Interest Income. Interest income totaled $2.7 million for the year
ended June 30, 1996, compared to $2.4 million for the year ended June 30, 1995,
an increase of $355,000 or 13.10%. This increase resulted from a 25 basis point
increase in the average rate earned on interest-earning assets, along with a
$3.7 million increase in total interest-earning assets. The increase in average
yields on loans and mortgage-backed securities resulted from upward interest
rate adjustments to the Company's adjustable rate mortgage loans and adjustable
rate mortgage-backed securities as interest rates rose.
Interest Expense. Interest expense increased $204,000 for the year
ended June 30, 1996 compared to June 30, 1995, primarily due to a 57 basis point
increase in the average rate paid on deposits and the increased average balance
of FHLB advances.
Provision for Loan Losses. The allowance for loan losses increased
$11,000 from $204,000 for the year ended June 30, 1995, to $215,000 for the year
ended June 30, 1996. The increase was primarily the result of $37,000 in
additions to the allowance accounts offset by net charge-offs of $26,000. The
allowance for loan losses was 1.1% of net loans receivable at June 30, 1996
compared to 1.1% at June 30,1995. At June 30, 1996, the ratio of the allowance
for loan losses to total non-performing loans was 54.7% compared to a ratio of
57.0% at June 30, 1995.
Non-Interest Income. Non-interest income increased $72,000 from
$100,000 for the year ended June 30, 1995 to $172,000 for the year ended June
30, 1996. The increase resulted primarily from a increase of $15,000 in loan
origination and commitment fees, a $21,000 increase in loan servicing fees, as
well as a $37,000 increase in other income which includes fees related to new
checking account services offered by the Company.
Non-Interest Expense. Non-interest expense totaled $817,000 for the
year ended June 30, 1996, compared to $704,000 for the year ended June 30, 1995,
an increase of $113,000. Compensation and benefits increased $78,000 to $430,000
the year ended June 30, 1996 from $352,000 for the year ended June 30, 1995, due
to ordinary increases in staff, salaries, insurance, and other benefits, as well
as ESOP and RRP contributions. Other miscellaneous expenses increased $67,000
from $235,000 for the year ended June 30, 1995 to $302,000 for the year ended
June 30, 1996. The primary reason for this increase was an increase of $12,000
in service bureau expense, a $20,000 increase in legal fees, and a $7,000
increase in accounting fees, as well as an $18,000 increase in other fees
associated with becoming a public company.
Income Taxes. The provision for income taxes increased $28,000 from
$110,000 for the year ended June 30, 1995 to $138,000 for the year ended June
30, 1996, due to an increase in pre-tax income of $78,000 for the year ended
June 30, 1996.
10
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ -------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ---------- ------- ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................... $22,734 $2,015 8.86% $20,190 $1,713 8.48% $16,975 $1,437 8.47%
Mortgage-backed securities............ 15,635 935 5.98 14,935 901 6.03 14,149 811 5.73
Investment securities................. 320 22 6.88 259 15 5.79 310 10 3.23
Other interest earning assets(2)...... 1,568 75 4.78 1,504 79 5.25 1,754 95 5.42
-------- ------ ------ -------- ------- ---- -------- ------- ----
Total interest-earning assets........ $40,257 3,047 7.57 $36,888 2,708 7.34 $33,188 2,353 7.09
======= ----- ======= ------- ======= ------
Interest-Bearing Liabilities:
Savings deposits......................$ 953 31 3.25 $ 1,054 35 3.32 $ 1,217 36 2.96
Money market investment accounts...... 1,140 39 3.42 1,116 38 3.41 1,254 48 3.83
Certificate accounts.................. 25,030 1,338 5.35 22,724 1,223 5.38 22,577 1,030 4.56
Borrowings............................ 8,996 520 5.78 5,714 330 5.77 4,965 308 6.20
-------- ------ ---- -------- ------- ------- -------- -------- ----
Total interest-bearing liabilities... $36,119 $1,928 5.34 $30,608 1,626 5.31 $30,013 1,422 4.74
======= ====== ======= ------ ======= -------
Net interest income.................... $1,119 $1,082 $ 931
====== ====== =======
Net interest rate spread............... 2.23% 2.03% 2.35%
==== ==== ====
Net interest-earning assets............ $4,138 $6,280 $ 3,175
====== ====== =======
Net yield on average interest-earning
assets................................ 2.78% 2.93% 2.81%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities.. 1.11x 1.21x 1.11x
==== ==== ====
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Includes certificates of deposit, demand accounts and FHLB stock.
</TABLE>
11
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........................... $223 $ 79 $302 $274 $ 2 $276
Mortgage-backed securities................. 41 (7) 34 46 44 90
Investment securities...................... 4 3 7 (2) 7 5
Other interest-earning assets(1)........... 3 (7) (4) (13) (3) (16)
------ ----- ----- ------ ------ ------
Total interest-earning assets............ $271 $68 $339 $305 $ 50 $355
==== === ==== ==== ==== ====
Interest-bearing liabilities:
Savings deposits........................... $ (3) $ (1) $ (4) $ (4) $ 3 (1)
Money market accounts...................... 1 --- 1 (5) (5) (10)
Certificate accounts....................... 122 (7) 115 8 185 193
Borrowings................................. 189 1 190 44 (22) 22
----- ------ ---- ----- ------ -----
Total interest-bearing liabilities....... $309 $(7) $302 $ 43 $161 $204
==== === ==== ==== ==== ====
Net interest income (loss).................. $37 $151
=== ====
(1) Includes certificates of deposit, demand accounts and FHLB stock.
</TABLE>
12
<PAGE>
Interest Rate Spread. The following table presents the weighted average
yields earned on loans, investments and other interest-earning assets, and the
weighted average rates paid on savings deposits and the resultant interest rate
spreads at the dates indicated. Weighted average balances are based on month-end
balances.
<TABLE>
<CAPTION>
At June 30,
---------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable, net........................................ 8.95% 8.71% 8.51%
Mortgage-backed securities................................... 6.62 6.90 6.73
Investment securities........................................ 6.13 6.13 6.74
Other interest-earning assets(1)............................. 5.57 5.46 6.11
Combined weighted average yield on interest-earning
assets................................................... 8.05 8.04 7.72
Weighted average rate paid on:
Savings deposits............................................. 3.70 3.63 3.39
Money market investment accounts............................. 3.86 3.87 3.94
NOW accounts................................................. 2.95 3.01 ---
Certificate accounts......................................... 5.40 5.22 5.26
Borrowings................................................... 5.75 5.66 6.26
Combined weighted average rate paid on interest-
bearing liabilities...................................... 5.28 5.23 5.23
Spread........................................................ 2.77 2.81 2.49
(1) Includes certificates of deposit, interest-bearing demand accounts and FHLB
stock.
</TABLE>
Asset/Liability Management
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Company's interest rate risk. Management has an
asset/liability committee consisting of the President, the Chief Financial
Officer and two Directors of the Company which meets quarterly and reviews the
Company's interest rate risk position and makes recommendations for adjusting
such position. In addition, the Board reviews on a quarterly basis the Company's
asset/liability position, including simulations of the effect on the Company's
capital and income of various interest rate scenarios.
Key components of a successful asset/liability management strategy are
the monitoring and managing of interest rate sensitivity of both the
interest-earning asset and interest-bearing liability portfolios. One of the
Company's principal financial objectives is to achieve long-term profitability
while reducing its exposure to fluctuating interest rates and maintaining asset
quality. The Company has sought to reduce exposure of its earnings to changes in
market interest rates by managing the mismatch between asset and liability
maturities and interest rates. The principal element in achieving this objective
is to increase the interest-rate sensitivity of the Company's assets by
originating loans with interest rates subject to periodic rate adjustments based
on market conditions and the origination for sale in the secondary market of
fixed-rate loans. Accordingly, since the mid 1980s, the Company has emphasized
the origination of adjustable-rate mortgage ("ARM") loans for retention in its
portfolio. It has also been the Company's strategy to
13
<PAGE>
supplement mortgage loan originations with the origination of consumer loans.
The Company relies on retail deposits as its primary source of funds. Management
believes retail deposits, compared to brokered deposits, reduce the effects of
interest rate fluctuations because they generally represent a more stable source
of funds. In addition, the Company has supplemented its ARM lending portfolio
with adjustable-rate mortgage-backed securities. The Company also has a $2.7
million investment in a real estate mortgage investment conduit ("REMIC") which
consists primarily of a pool of conventional, fixed-rate, fully amortizing one-
to four-family residential mortgage loans. The REMIC is not insured or
guaranteed by any governmental agency, however, it has several forms of credit
enhancement designed to enhance the likelihood of regular receipt of the
scheduled amounts due and to provide limited protection against losses.
The success of the Company's strategies depend to a large measure on
the extent to which it experiences market competition for deposits and loans;
efforts by borrowers to prepay indebtedness prior to maturity; and preferences
by depositors for certain types or maturities of deposits. The Company endeavors
to create convenient, market-sensitive banking services to attract long-term
depositors that are less sensitive to changes in interest rates. By maintaining
a strong base of relationship-oriented customers, the Company believes its cost
of funds are more stable than if it were to focus on aggressive, rate-oriented
gathering outside its market area.
In 1994, the Office of Thrift Supervision ("OTS") issued a regulation
which uses a net market value methodology to measure the interest rate risk
exposure of thrift institutions ("NPV"). Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an assumed change in
interest rates is a decrease in the institution's NPV in an amount not exceeding
2% of the present value of its assets. Under this regulation, thrift
institutions with greater than "normal" interest rate exposure must take a
deduction from their total capital available to meet their risk-based capital
requirement. The amount of that deduction is one-half of the difference between
(a) the institution's actual calculated exposure to 200 basis point (100 basis
points equal 1.0%) interest rate increase or decrease (whichever results in the
greater pro forma decrease in NPV) and (b) its "normal" level of exposure which
is 2% of the present value of its assets. Based on the June 30, 1997 interest
rate risk exposure report, the Company was within the "normal" level of interest
rate risk as defined by the OTS.
14
<PAGE>
Presented below, as of June 30, 1997, is an analysis of the Company's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up and down
300 basis points and compared to Board policy limits. Assumptions used in
calculating the amounts in this table are OTS assumptions.
<TABLE>
<CAPTION>
At June 30, 1997 At June 30, 1996
Change in Board Limit ------------------ ------------------
Interest Rate % Change
------------- --------
$ Change % Change $ Change % Change
-------- -------- -------- --------
(Base Points) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
300bp 50.00 $43.5 13.52 $71.1 31.73%
200 25.00 29.1 9.04 47.8 21.36
100 10.00 14.7 4.57 24.5 10.95
0 --- --- --- --- ---
-100 (10.00) (15.2) (4.75) (25.5) (11.37)
-200 (25.00) (33.5) (10.45) (8.8) (3.95)
-300 (50.00) (48.5) (15.11) 4.9 2.19
</TABLE>
Management reviews the NPV measurements on a quarterly basis. In
addition to monitoring selected measures on NPV, management also monitors
effects on net interest income resulting from increases or decreases in rates.
This measure is used in conjunction with NPV measures to identify excessive
interest rate risk.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis used to calculate an
institution's NPV. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
Liquidity management is both a short- and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
managements assessment of (i) expected loan demand (ii) projected purchases of
investment and mortgage-backed securities (iii) expected deposits flows (iv)
yields available on interest-bearing deposits, and (v) the liquidity of its
asset/liability management strategy. Excess liquidity is generally invested in
interest-earning
15
<PAGE>
short-term deposits and other short-term municipal obligations. If the Company
requires funds beyond its ability to generate them internally, it has the
ability to borrow funds from the FHLB of Dallas under a blanket agreement which
assigns all investments in FHLB stock as well as qualifying first mortgage loans
equal to 170% of the outstanding balance as collateral to secure the amounts
borrowed. This borrowing arrangement is limited to a maximum of 50% of the
Company's total assets when secured by mortgage loans. At June 30, 1997, the
Company had approximately $8.6 million in borrowings outstanding from the FHLB
of Dallas, which represented 20.3% of total assets which were secured by
investment securities and not subject to the 50% limitation.
The Company's most liquid assets are cash and cash equivalents. The
levels of these assets are dependent on the Company's operating, financing and
investing activities. At June 30, 1997, 1996 and 1995, cash and cash equivalents
totaled $1,897,000, $981,000 and $780,000, respectively.
The Company is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions, is based upon a
percentage of deposits and short-term borrowings. The required ratio at June 30,
1997 was 5.0%. The Company's liquidity ratios have consistently been maintained
at levels in excess of regulatory requirements and at June 30, 1997, 1996 and
1995 were 7.22, 6.34% and 7.01%, respectively.
At June 30, 1997, the Company had outstanding commitments to originate
loans of approximately $60,600, all of which were at fixed rates and were
originated pursuant to commitments to sell in the secondary market. These loans
will be secured by properties in the Company's market area. The Company also had
$920,000 in undisbursed amounts for construction loans at that date. The Company
anticipates that it will have sufficient funds available to meet its current
commitments, principally through the use of current liquid assets.
Certificates of deposit scheduled to mature in one year or less at June
30, 1997 totaled approximately $21.1 million or 79.7% of the Company's total
certificates of deposit, reflecting consumer preference for short-term
investments as a result of the current low interest rate environment. Based on
the level of retention of such deposits in the recent past, management believes
that a significant portion of the deposits will remain with the Bank.
At June 30, 1997, the Bank exceeded all of its capital requirements on
a fully phased-in-basis. See also Note 17 to the Notes to Consolidated Financial
Statements.
Impact of New Accounting Standards
In December 1991, Financial Accounting Standards Board ("FASB") issued
SFAS No. 107, Disclosure About Fair Value of Financial Instruments ("SFAS 107").
Adoption of SFAS 107 was required for fiscal years ending after December 15,
1992 except for entities with less than $150 million in total assets. For those
entities, the effective date was for fiscal years ending after December 15,
1995. Adoption of SFAS 107 requires the Company to disclose additional
16
<PAGE>
information about the fair value of financial instruments, both on- and
off-balance sheet. SFAS 107 does not change the requirements for recognition,
measurement or classification of financial instruments in the Company's
financial statements. The Company implemented SFAS 107 in 1996, see Note 20 of
the Notes to Consolidated Financial Statements.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"),
an amendment to FASB Statement No. 65. SFAS No. 122 requires that a portion of
the cost of originating a mortgage loan be allocated to the mortgage servicing
rights based on its fair value relative to the loan as a whole. This statement
eliminates the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. Management believes that this standard
will have an impact on the Company's operating results and financial condition
in the future.
In October, 1995, the FASB issued FAS 123, "Accounting for Stock Based
Compensation," which encourages - but does not require - entities to use a "fair
value based method" to account for stock-based compensation plans. If a fair
value accounting method is not adopted, entities must disclose the pro-forma
effect on net income and on earnings per share as if such method had been
adopted. The fair value of a stock option is to be estimated using an
option-pricing model, such as Black-Scholes, that considers the following: (a)
the exercise price; (b) the expected life of the option; (c) the current trading
price of the stock; (d) the expected price volatility of the stock; (e) expected
dividends on the stock, and; (f) the risk-free interest rate. Once estimated
based on the above factors, the fair value of an option is not changed for
subsequent developments. The options issued by the Company in fiscal 1996 will
be subject to FAS 123. The required disclosures ar immaterial with respect to
Gilmer Financial Services, Inc. since only a limited number have been granted.
17
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
JUNE 30, 1997 AND 1996
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page(s)
Independent Auditors' Report .......................................... F-2
Financial Statements
Consolidated Statements of Financial Condition
(June 30, 1997 and 1996) ......................................... F-3
Consolidated Statements of Operations
(Years ended June 30, 1997, 1996 and 1995) ....................... F-4
Consolidated Statements of Stockholders' Equity
(Years ended June 30, 1997, 1996 and 1995) ....................... F-5
Consolidated Statements of Cash Flows
(Years ended June 30, 1997, 1996 and 1995) ....................... F-6
Notes to Consolidated Financial
Statements .................................................. F-7 to F-19
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gilmer Financial Services, Inc.
Gilmer, Texas
We have audited the accompanying consolidated statements of financial condition
of Gilmer Financial Services, Inc., and subsidiaries, as of June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended June
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gilmer Financial
Services, Inc., and subsidiaries, as of June 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ HENRY & PETERS, P. C.
HENRY & PETERS, P. C.
Tyler, Texas
September 10, 1997
F-2
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
ASSETS
<S> <C> <C>
Cash on hand and in banks $ 532,292 $ 346,721
Interest-bearing deposits 1,364,605 634,423
Investment securities:
Available-for-sale - -
Held-to-maturity 316,066 327,670
Mortgage-backed securities:
Available-for-sale 4,841,083 4,985,363
Held-to-maturity 10,218,465 11,219,452
Loans receivable, net 23,407,057 20,436,502
Accrued interest receivable 348,643 317,451
Real estate acquired in settlement of loans, net 98,690 -
Federal Home Loan Bank stock, at cost 495,100 467,200
Office properties and equipment, at cost 247,604 215,514
Federal income taxes 54,154 -
Prepaid expenses and other assets 246,870 137,904
------------- -------------
Total assets $42,170,629 $39,088,200
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $29,106,164 $25,476,872
Accrued interest payable 7,452 8,699
Advances by borrowers for taxes and insurance 487,714 540,807
Accounts payable and accrued expenses 215,897 77,959
Federal income taxes - 124,458
Advances from Federal Home Loan Bank 8,550,000 8,930,000
------------- -------------
Total liabilities 38,367,227 35,158,795
STOCKHOLDERS' EQUITY
Preferred stock; $.01 par value; 2,000,000 shares
authorized; none issued - -
Common stock; $.01 par value; 2,000,000 shares authorized;
195,755 and 200,058 shares issued 1,958 2,001
Additional paid-in capital 1,624,968 1,679,014
Retained earnings 2,466,014 2,442,626
Less: Shares acquired by Employee Stock Ownership Plan (117,450) (133,110)
Shares acquired by Recognition and Retention Plan (41,900) (36,934)
Treasury Stock (4,497 shares, at cost) (56,527) -
Net unrealized loss on decline in market
value of securities available-for-sale (73,661) (24,192)
------------- -------------
Total stockholders' equity 3,803,402 3,929,405
------------- -------------
Total liabilities and stockholders' equity $42,170,629 $39,088,200
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
INTEREST INCOME
<S> <C> <C> <C>
Loans $ 2,015,242 $ 1,713,261 $ 1,437,387
Investment securities 22,132 14,874 9,894
Mortgage-backed securities 934,873 900,603 811,382
Other interest-earning assets 74,857 79,079 94,489
------------ ----------- -----------
Total interest income 3,047,104 2,707,817 2,353,152
INTEREST EXPENSE
Deposits 1,407,372 1,295,953 1,113,817
Interest on FHLB advances 520,164 330,138 307,730
------------ ------------ ------------
Total interest expense 1,927,536 1,626,091 1,421,547
----------- ----------- -----------
Net interest income 1,119,568 1,081,726 931,605
Provision for loan losses 129,429 37,643 6,750
------------ ------------- -------------
Net interest income after provision for loan losses 990,139 1,044,083 924,855
NONINTEREST INCOME
Gain on sale of interest-bearing assets - 11,749 8,937
Loan origination and commitment fees 54,371 46,041 31,404
Loan servicing fees 70,762 63,847 42,996
Loss from real estate operation (64) (3,260) (41)
Other income 80,567 53,655 17,049
------------- ------------- ------------
Total noninterest income 205,636 172,032 100,345
NONINTEREST EXPENSE
Compensation and benefits 536,312 429,907 351,660
Occupancy and equipment 57,709 40,974 37,569
Federal insurance premiums 25,013 61,251 59,163
Loss (gain) on sale of foreclosed real estate - (17,037) 21,170
SAIF special assessment 164,429 - -
Other expense 360,965 302,235 234,976
------------ ------------ ------------
Total noninterest expense 1,144,428 817,330 704,538
----------- ------------ ------------
Income before taxes 51,347 398,785 320,662
INCOME TAX EXPENSE 27,959 138,444 110,576
------------ ------------ ------------
Net income $ 23,388 $ 260,341 $ 210,086
============ =========== ===========
Earnings per share (Note 1) $ .12 $ 1.31 $ .29
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unvested Unvested
Additional Shares Shares
Common Paid-in Retained Held by Held by Treasury
Stock Capital Earnings ESOP RRP Stock
----- ------- -------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1994 $ -- $ -- $ 1,972,199 $ -- $ -- $ --
Issuance of shares of
common stock, February, 1995 1,958 1,636,027 -- (156,600) -- --
Net income -- -- 210,086 -- -- --
Net unrealized gain on
securities available-for-sale -- -- -- -- -- --
Principal reductions in
ESOP note payable -- -- -- 7,830 -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 1995 1,958 1,636,027 2,182,285 (148,770) -- --
Net income -- -- 260,341 -- -- --
Net unrealized loss on
securities available-for-sale -- -- -- -- -- --
Shares acquired by RRP 43 42,987 -- -- (43,030) --
Accrual of RRP plan awards -- -- -- -- 6,096 --
Principal reductions in
ESOP note payable -- -- -- 15,660 -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 1996 2,001 1,679,014 2,442,626 (133,110) (36,934) --
Net income -- -- 23,388 -- -- --
Net unrealized loss on
securities available-for-sale -- -- -- -- -- --
Purchase of 10,000 Treasury shares -- -- -- -- -- (125,700)
Retirement of 4,303 shares used
for RRP Plan (43) (54,046) -- -- -- 54,089
Transfer of 1,200 Treasury shares
to RRP Plan -- -- -- -- (15,084) 15,084
Accrual of RRP Plan awards -- -- -- -- 10,118 --
Principal reductions in
ESOP note payable -- -- -- 15,660 -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 1997 $ 1,958 $ 1,624,968 $ 2,466,014 $ (117,450) $ (41,900) $ (56,527)
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
Unrealized
Loss on
Securities Total
Available- Stockholders'
for-Sale Equity
-------- ------
Balances, June 30, 1994 $ -- $ 1,972,199
Issuance of shares of
common stock, February, 1995 -- 1,481,385
Net income -- 210,086
Net unrealized gain on
securities available-for-sale (6,717) (6,717)
Principal reductions in
ESOP note payable -- 7,830
----------- -----------
Balances, June 30, 1995 (6,717) 3,664,783
Net income -- 260,341
Net unrealized loss on
securities available-for-sale (17,475) (17,475)
Shares acquired by RRP -- --
Accrual of RRP plan awards -- 6,096
Principal reductions in
ESOP note payable -- 15,660
----------- -----------
Balances, June 30, 1996 (24,192) 3,929,405
Net income -- 23,388
Net unrealized loss on
securities available-for-sale (49,469) (49,469)
Purchase of 10,000 Treasury shares -- (125,700)
Retirement of 4,303 shares used
for RRP Plan -- --
Transfer of 1,200 Treasury shares
to RRP Plan -- --
Accrual of RRP Plan awards -- 10,118
Principal reductions in
ESOP note payable -- 15,660
----------- -----------
Balances, June 30, 1997 $ (73,661) $ 3,803,402
=========== ===========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,388 $ 260,341 $ 210,086
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 24,420 24,420 24,420
Net loss (gain) on sale of real estate owned - (17,037) 21,170
Provision for losses on loans and other real estate 129,429 36,643 6,750
Gain on sale of interest-bearing assets - (11,749) (8,937)
Contribution to ESOP Plan 15,660 15,660 7,830
Accrual of RRP Awards 10,118 6,096 -
Change in assets and liabilities:
Increase in accrued interest receivable (31,192) (65,764) (42,687)
(Increase) decrease in prepaid expenses and other assets (108,966) (62,876) 6,458
(Decrease) increase in advances for taxes and insurance (53,093) (113,202) 48,064
(Decrease) increase in accrued interest payable (1,247) 1,348 (3,036)
(Decrease) increase in federal income taxes (178,612) 98,610 (11,199)
Increase (decrease) in deferred loan fees 11,783 (453) (2,060)
Increase (decrease) in accounts payable and
accrued expenses 137,938 (2,705) (67,302)
------------ ------------- ------------
Net cash provided by operating activities (20,374) 169,332 189,557
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities - 225,711 100,000
Purchase of investment securities - (300,687) (100,000)
Capital expenditures (56,510) (59,097) (10,957)
Purchase of FHLB stock (27,900) (155,600) (67,300)
Proceeds from sales of mortgage loans 1,090,992 3,194,000 1,545,370
Loans originated, net (4,301,449) (5,431,279) (3,374,828)
Proceeds from sale of real estate owned - 9,623 58,830
Purchase of mortgage-backed certificates - (1,188,989) -
Purchase of securities held-for-sale - (4,286,412) (1,744,211)
Proceeds from sale of mortgage-backed certificates - 841,907 1,760,838
Principal paydown on mortgage-backed certificates 1,107,402 1,086,186 1,414,046
----------- ----------- -----------
Net cash used in investing activities (2,187,465) (6,064,637) (418,212)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits 3,629,292 (9,617) 562,615
Net (decrease) increase in advances from FHLB (380,000) 6,106,486 (1,975,072)
Purchase of Treasury stock (125,700) - -
Proceeds from sale of common stock, net - - 1,481,385
----------- ----------- -------------
Net cash provided by financing activities 3,123,592 6,096,869 68,928
----------- ----------- -------------
Net increase (decrease) in cash and
cash equivalents 915,753 201,564 (159,727)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 981,144 779,580 939,307
----------- ----------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,896,897 $ 981,144 $ 779,580
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Gilmer Financial Services, Inc. (Company), and its wholly-owned subsidiary,
Gilmer Savings Bank, FSB (Bank), and its wholly-owned subsidiary, Gilstar
Service Corporation, (Gilstar). Gilstar was activated in September, 1996, to
market mutual funds to existing retail customers interested in regular
investments, IRA's and other qualified retirement plans. Gilstar had no
significant assets or liabilities at June 30, 1997, and its operations were
deminimus for the year then ended. All significant intercompany transactions
and balances are eliminated in consolidation. Financial information for
periods prior to February 9, 1995, represents that of the Bank as predecessor
entity (see Note 18 regarding conversion to stock company and formation of
holding company).
INVESTMENTS AND MORTGAGE-BACKED SECURITIES The Company accounts for and
classifies debt and equity securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", as follows:
HELD-TO-MATURITY Debt and equity securities that management has the
positive intent and ability to hold until maturity are classified as
held-to-maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the level interest yield method
over the estimated remaining term of the underlying security.
AVAILABLE-FOR-SALE Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available-for-sale. These assets are carried
at market value. Market value is determined using published quotes as of
the close of business. Unrealized gains and losses are excluded from
earnings and reported net of tax as a separate component of retained
earnings until realized.
TRADING SECURITIES Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at market value, with
unrealized gains and losses included in earnings.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are presented at cost, less accumulated
depreciation. Depreciation is generally computed using straight-line and
accelerated methods over the estimated useful life of the assets.
FEDERAL INCOME TAXES
The provision for Federal income taxes is calculated on pre-tax accounting
income after giving effect to the bad debt deduction allowed by the Internal
Revenue Code. Deferred Federal income taxes have been provided on items
treated differently for financial accounting and Federal income tax purposes
using the assets and liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109.
Under the asset and liability method, 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. Under SFAS 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
F-7
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate and other assets acquired in settlement of loans are recorded at
the balance of the loan or at estimated fair value less the estimated costs
to sell, whichever is less, at the date acquired. Adjustments are made to
reflect declines, if any, in net realizable values below the recorded amount.
Costs directly related to the development or improvement of real estate
acquired in settlement of loans are capitalized. Costs of holding real estate
acquired in settlement of loans, principally taxes, are expensed. Gain on
sale of real estate acquired in settlement of loans is currently recognized
to the extent allowed by generally accepted accounting principles.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses, and net deferred loan origination fees and discounts. The
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's periodic evaluation.
The allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back
to normal, in which case the loan is returned to accrual status. Currently,
the allowance for loan losses is formally reevaluated on a quarterly basis.
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income over the
contractual life of the loans, adjusted for estimated prepayments which have
been adjusted to the Company's historical prepayment experience. Commitment
fees and costs relating to commitments whose likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitment is subsequently exercised during the commitment period, the
remaining unamortized commitment fee at the time of exercise is recognized
over the life of the loan as an adjustment yield.
EARNINGS PER SHARE
Earnings per share have been computed since the beginning of the first
quarter, April 1, 1995, following the date of conversion to a stock company
(see Note 15). Earnings per share for the year ended June 30, 1995, have been
computed by dividing the net income of the Company since April 1, 1995, of
$57,530, by the weighted average of shares outstanding of 195,755.
CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
June 30,
1997 1996 1995
----------- ----------- -----------
Cash paid during the year for:
Interest $1,928,783 $1,624,743 $1,424,583
========== ========== ==========
Income taxes $ 160,081 $ 59,833 $ 117,200
=========== =========== ===========
F-8
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
CASH FLOWS - CONTINUED
During the years ended June 30, 1997, 1996, and 1995, the Company transferred
from loans to real estate acquired through foreclosure approximately
$162,000, $21,000, and $17,000, respectively.
SAIF SPECIAL ASSESSMENT
Gilmer Savings is a member of SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance
is backed by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums. Legislation to
recapitalize the SAIF was enacted in September of 1996. The legislation
provided for a one-time assessment to be imposed on all deposits assessed at
the SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
Held-to-maturity
June 30, 1997
---------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
American Housing $ 15,828 $ 553 $ - $ 16,381
FHLB Series 300,238 1,244 - 301,482
---------- ----------- -------------- ----------
$ 316,066 $ 1,797 $ - $ 317,863
========== =========== ============== ==========
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity
June 30, 1996
---------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
American Housing $ 27,022 $ - $ 270 $ 26,752
FHLB Series 300,648 189 - 300,837
---------- ------------ ------------- ----------
$ 327,670 $ 189 $ 270 $ 327,589
========== ============ ============= ==========
</TABLE>
The scheduled maturities of investment securities available-for-sale and
investment securities held-to-maturity at June 30, 1997, were as follows:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
securities securities
------------------------------ ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ 300,238 $ 301,482
Due from one to five years - - - -
Due from five to ten years - - - -
Due from ten to twenty years - - 15,828 16,381
------------ ------------ ----------- -----------
$ - $ - $ 316,066 $ 317,863
============ ============ ========== ==========
</TABLE>
F-9
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 3 - MORTGAGE-BACKED AND RELATED SECURITIES
The amortized cost and estimated market values of mortgage-backed and related
securities are summarized as follows:
<TABLE>
<CAPTION>
Available-for-sale
June 30, 1997
----------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 78,249 $ 1,367 $ - $ 79,616
FNMA certificates 4,874,442 - 112,975 4,761,467
----------- ------------ --------- ----------
$4,952,691 $ 1,367 $ 112,975 $4,841,083
=========== ============ ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity
June 30, 1997
-----------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 3,494,172 $ 8,191 $ 57,413 $ 3,444,950
FNMA certificates 2,572,469 782 91,468 2,481,783
FHLMC certificates 1,447,403 1,430 32,468 1,416,365
General Electric Capital Mortgage 2,704,421 - 26,763 2,677,658
------------ ---------- ---------- -----------
$10,218,465 $ 10,403 $ 208,112 $10,020,756
============ ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale
June 30, 1996
-----------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 87,196 $ - $ 258 $ 86,938
FNMA certificates 4,934,816 - 36,391 4,898,425
------------ ------------- ---------- ------------
$ 5,022,012 $ - $ 36,649 $ 4,985,363
============ ============= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity
June 30, 1996
-----------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 4,020,652 $ 1,090 $ 128,386 $ 3,893,356
FNMA certificates 2,752,589 8,097 158,516 2,602,170
FHLMC certificates 1,734,776 1,024 19,956 1,715,844
General Electric Capital Mortgage 2,711,435 - 55,048 2,656,387
------------ ----------- ---------- -----------
$ 11,219,452 $ 10,211 $ 361,906 $10,867,757
============ =========== ========== ===========
</TABLE>
F-10
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 3 - MORTGAGE-BACKED AND RELATED SECURITIES - CONTINUED
The scheduled maturities of mortgage-backed securities available-for-sale,
and mortgage-backed securities held-to-maturity at June 30, 1997, were as
follows:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
securities securities
------------------------------ -----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due from one to five years - - 79,973 78,940
Due from five to ten years - - 2,704,421 2,677,657
Due from ten to twenty years 190,103 184,545 807,790 790,002
Due in over twenty years 4,762,588 4,656,538 6,626,281 6,474,157
------------ ------------ ------------ ------------
$ 4,952,691 $ 4,841,083 $10,218,465 $10,020,756
============ ============ =========== ===========
</TABLE>
NOTE 4 - LOANS RECEIVABLE
Loans receivable at June 30, consisted of the following:
1997 1996
------------- --------------
MORTGAGE LOANS
Single-family residential $12,359,562 $10,694,740
Multi-family residential 282,381 121,834
Commercial 2,682,953 2,934,060
Construction 1,306,261 526,365
------------- -------------
16,631,157 14,276,999
NON-MORTGAGE LOANS
Secured by deposits 423,132 423,720
Home improvement 1,010,465 945,224
Commercial business 1,859,962 1,491,816
Other - consumer 5,386,474 4,315,208
------------- -------------
8,680,033 7,175,968
Total loans 25,311,190 21,452,967
Less:
Loans in process 999,248 362,454
Deferred fees and discounts 595,677 439,287
Allowance for losses 309,208 214,724
------------- -------------
Total loans receivable, net $23,407,057 $20,436,502
=========== ===========
Single-family residential loans include $674,034 and $904,221 at June 30,
1997, and 1996, respectively, of guaranteed participation certificates from
the Federal Home Loan Mortgage Corporation.
F-11
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 4 - LOANS RECEIVABLE - CONTINUED
An analysis of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $214,724 $203,959 $215,426
Provision for losses 129,429 37,643 6,750
Charge-offs (34,945) (26,878) (18,217)
-------- -------- --------
Balance, end of year $309,208 $214,724 $203,959
======== ======== ========
</TABLE>
Loans receivable from officers, directors, and employees aggregated $822,724
and $628,223, at June 30, 1997 and 1996, respectively.
Nonaccrual loans for which interest has been reduced totaled approximately
$595,000 and $352,000, at June 30, 1997 and 1996, respectively. Interest
income that would have been reported under the original terms of such loans
was approximately $10,000 and $15,000, for the years ended June 30, 1997 and
1996, respectively. The Company is not committed to lend additional funds to
debtors whose loans have been modified.
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of those
loans is summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Mortgage loans underlying FHLMC
pass-through securities $10,607,168 $10,259,988 $ 8,590,664
=========== =========== ============
</TABLE>
The Company at June 30, 1997, had mortgage loan commitments outstanding
substantially all of which had rates to be determined at closing.
Variable-rate $ -
Fixed-rate (8.125%) 60,600
----------
$ 60,600
NOTE 5 - REAL ESTATE OWNED
An analysis of the activity in the allowance for losses on real estate
acquired in settlement of loans follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ - $ - $ 101,940
Provision for losses - - -
Net charge-offs, sales - - (101,940)
------------- ------------- -------------
Balance, end of year $ - $ - $ -
============= ============= =============
</TABLE>
NOTE 6 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30, is summarized as follows:
1997 1996
--------- ---------
Investment securities $ 21,179 $ 7,236
Mortgage-backed securities 75,758 105,523
Loans receivable 287,706 204,692
--------- ---------
$ 384,643 $ 317,451
========= =========
F-12
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 7 - OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30, are summarized by major
classification as follows:
1997 1996
--------- --------
Land $ 80,842 $ 80,842
Buildings 185,958 185,958
Furniture, equipment, and autos 319,205 262,695
--------- --------
Total 586,005 529,495
Accumulated depreciation 338,401 313,981
--------- --------
Total net $ 247,604 $215,514
========= ========
Depreciation expense for the years ended June 30, 1997, 1996, and 1995 was
$24,420, $24,420, and $24,420, respectively.
NOTE 8 - FEDERAL INCOME TAX
The Company files a consolidated income tax return with the Bank. Federal
income tax (receivable) payable shown in the accompanying statements of
financial condition at June 30, consists of the following:
1997 1996
---------- --------
Current income tax $ (10,790) $138,332
Deferred income tax (43,364) (13,874)
---------- --------
$ (54,154) $124,458
Federal income tax expense shown in the accompanying statements of income
consisted of the following:
June 30,
--------------------------------------------
1997 1996 1995
--------- -------- --------
Current $ 31,806 $137,589 $109,876
Deferred (3,847) 855 700
--------- -------- --------
$ 27,959 $138,444 $110,576
========= ======== ========
Deferred tax expense results from timing differences principally relating to
the recognition of loan fees for tax and financial reporting purposes.
A reconciliation of tax computed at the statutory Federal corporate income
tax rate to the actual provision for income tax expense is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Computed "Expected" income tax $ 17,458 $135,587 $109,025
Adjustments:
Losses on foreclosed real estate - - 7,198
Bad debt deduction 25,069 761 (5,647)
Other, net (14,568) 2,096 -
--------- -------- --------
Total $ 27,959 $138,444 $110,576
========= ======== ========
</TABLE>
F-13
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 8 - FEDERAL INCOME TAX - CONTINUED
The Company is allowed a special bad debt deduction, limited after December
31, 1986, to 8% of otherwise taxable income and subject to certain
limitations based on aggregate loans and savings account balances at the end
of the year. If the amounts that qualify as deductions for Federal income tax
purposes are later used for purposes other than for bad debt losses, they
will be subject to Federal income tax at the then current corporate rate.
Retained earnings for the years ended June 30, 1997 and 1996, included
$477,000 and $552,000, respectively, for which Federal income tax has not
been provided.
NOTE 9 - DEPOSITS
Deposits at June 30, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Passbook savings $ 1,007,247 3.46 $ 969,836 3.81
Money market accounts 785,970 2.70 1,156,647 4.54
Checking accounts 803,468 2.76 281,717 1.10
------------ ------- ----------- -------
2,596,685 8.92 2,408,200 9.45
Certificates of deposit:
2% to 3.99% 734,850 2.53 815,180 3.20
4% to 5.99% 15,779,222 54.21 17,479,957 68.61
6% to 7.99% 9,903,895 34.03 4,689,275 18.41
8% to 9.99% 91,512 .31 84,260 .33
------------ ------- ----------- -------
26,509,479 91.08 23,068,672 90.55
------------ ------- ----------- -------
$29,106,164 100.00 $25,476,872 100.00
============ ======= =========== =======
</TABLE>
Scheduled maturities of certificates of deposit at June 30, are as follows:
<TABLE>
<CAPTION>
1998 1999 2000 and thereafter
----------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
2% to 3.99% $ 427,153 $ 54,063 $ 253,634
4% to 5.99% 14,140,669 1,027,969 610,584
6% to 7.99% 8,445,392 1,145,342 313,161
8% to 9.99% 7,608 - 83,904
----------- ------------ ------------
$23,020,822 $ 2,227,374 $ 1,261,283
=========== ============ ============
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000, was approximately $5,249,000 and
$2,600,000, at June 30, 1997 and 1996, respectively.
NOTE 9 - DEPOSITS - CONTINUED
Interest expense on deposits is summarized as follows:
June 30,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
Money market $ 34,096 $ 35,936 $ 48,386
Passbook savings 31,220 34,746 35,908
Certificates of deposit 1,280,861 1,223,427 1,029,523
NOW accounts 5,151 1,844 -
---------- ---------- -----------
$1,351,328 $1,295,953 $1,113,817
========== ========== ==========
F-14
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank at June 30, consisted of the
following:
Interest
Due Dates Rate 1997 1996
------------------- -------- ---------- ----------
July 2, 1996 5.41% $ - $6,280,000
July 11, 1997 5.53% 5,900,000 -
January 25, 1998 6.25% 2,650,000 2,650,000
---------- ----------
$8,550,000 $8,930,000
The Bank has pledged its portfolio of first mortgage loans as well as
mortgage-backed securities with a book value of $7,957,594 and $7,914,453, at
June 30, 1997 and 1996, respectively, as collateral on advances from the
FHLB.
The maximum amount of FHLB advances outstanding at any month end during 1997
and 1996, were $9,400,000 and $9,120,000, respectively. The average amount of
FHLB advances outstanding during 1997 and 1996, were $8,995,833 and
$5,714,000, respectively.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company is a party to certain financial
instruments, with off-balance-sheet risk, to meet the financing needs of its
customers. The off-balance-sheet instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount reflected in the financial
statements. The contract or notional amounts of these instruments reflect the
extent of involvement and exposure to credit loss the Company has in these
particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer, provided
that the terms established in the contract are met. Commitments generally
have fixed expiration dates and may require payment of a fee. Since some
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company applies the same credit policies in making commitments as it does
for on-balance-sheet instruments. The Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary, upon extension of credit is based on management's credit
evaluation of the borrower. Collateral held varies but may include real
estate, accounts receivable, inventory, property, plant and equipment.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The economy of the Company's market area, East Texas, is directly tied to the
oil and gas industry. Oil prices have had an indirect effect on the Company's
business. Although the Company has a diversified loan portfolio, a
significant portion of its loans are secured by real estate. Repayment of
these loans is in part dependent upon the economic conditions in the market
area. Part of the risk associated with real estate loans has been mitigated
since much of this group represents loans secured by residential dwellings
that are primarily owner occupied. Losses on this type of loan have
historically been less than those on speculative properties. Many of the
remaining real estate loans are secured primarily with owner occupied
commercial real estate. The Company's loan policy requires appraisal prior to
funding any real estate loans and outlines the appraisal requirements on
those renewing.
F-15
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 13 - RETIREMENT PLAN
The Company has a defined contribution profit sharing plan that covers all
employees. The plan allows employees to contribute up to 15% of their gross
pay into a trust fund with a contribution to be matched up to 5% by the
Company. The trust funds are maintained by the Company. For the years ended
June 30, 1997, 1996, and 1995, the Company contributed $13,601, $11,228, and
$12,465, respectively, to the plan.
NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has established an Employee Stock Ownership Plan (ESOP) for
employees age 21 or older who have at least one year of credited service with
the Bank. The ESOP will be funded by the Bank's contributions made in cash
(which primarily will be invested in common stock) or common stock. Benefits
may be paid either in shares of common stock or in cash.
In February, 1995, the ESOP borrowed $156,600 from the Company and used the
proceeds to purchase 15,660 shares of Company common stock at $10 a share.
The note is due in semi-annual installments plus interest through 2005, and
had a balance of $117,450 and $133,110, at June 30, 1997 and 1996,
respectively. The note payable and related interest are eliminated in
consolidation.
ESOP plan expense included in compensation and benefits in the accompanying
statement of earnings totaled $15,660 and $15,660, for the years ended June
30, 1997 and 1996, respectively.
NOTE 15 - STOCK OPTION AND INCENTIVE PLAN
The October 12, 1995 stockholders' meeting, certain directors and officers
were granted options to purchase 10,071 shares of the Company's common stock
under its Stock Option and Incentive Plan. The option price of $10.50 per
share was the fair market value at the date of grant. The options are
excisable beginning one year from date of grant, and vest at a rate of 20%
per year. No additional options have been granted, nor have any options been
exercised or revoked.
NOTE 16 - RECOGNITION AND RETENTION PLAN
The Board of Directors of the Company adopted and obtained stockholder
approval at the October 12, 1995 stockholder's meeting, a Recognition and
Retention Plan (RRP) to enable the Company to provide officers and employees
with a proprietary interest in the Company as incentive to contribute to its
success. Officers and employees of the Company who are selected by members of
a committee appointed by the Board of Directors of the Company will be
eligible to receive benefits under the RRP.
The RRP will be managed initially by the non-employee directors of the
Company who will serve as trustees of the trust to be established pursuant to
the RRP. The trustees will have the responsibility to invest all funds
contributed by the RRP to the trust created for the RRP (Trust).
The Company has available to award 7,830 shares of Company stock and in the
year ended June 30, 1996 awarded 4,303 shares, with the remainder being
reserved for future award. During the year ended June 30, 1997, the Company
awarded an additional 1,200 shares and used Treasury shares to fund the
award. The shares granted are in the form of restricted stock to be earned
and payable over a five-year period at the rate of 20% per year, effective on
the date of stockholder ratification. Compensation expense in the amount of
the fair market value of the common stock at the date of the grant to the
officer or employee will be recognized pro rata over the five years during
which the shares are earned and payable. RRP Plan expense totaled $10,118 and
$6,096 for the years ended June 30, 1997 and 1996, respectively.
F-16
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 17 -REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - a possibly additional discretionary -
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of risk-based capital to risk-weighted assets and of core and
tangible capital to total assets. Management believes, as of June 30, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bank must maintain minimum risk-based, core and
tangible ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
institutions category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual: Adequacy Purposes: Action Provisions:
-------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Risk-based capital
(to risk-weighted assets) $3,974,253 19.2% $1,656,960 8.0% $2,071,200 10.0%
Core capital (to total assets) $3,714,253 8.8% $1,266,550 3.0% $2,533,100 6.0%
Tangible capital
(to total assets) $3,714,253 8.8% $633,275 1.5% $2,110,917 5.0%
As of June 30, 1996:
Risk-based capital
(to risk-weighted assets) $3,861,400 21.6% $1,400,000 8.0% $1,791,833 10.0%
Core capital (to total assets) $3,665,324 9.4% $1,170,000 4.0% $2,339,569 6.0%
Tangible capital
(to total assets) $3,665,324 9.4% $ 585,000 4.0% $1,949,640 5.0%
</TABLE>
F-17
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 18 - CONVERSION FROM A MUTUAL ASSOCIATION TO CAPITAL STOCK
On July 13, 1994, the Board of Directors of the Bank unanimously adopted a
Plan of Conversion (Plan) which was approved by the Office of Thrift
Supervision (OTS) and the members of the Bank. Pursuant to the Plan, on
February 9, 1995, the Bank converted from a federal mutual savings bank to a
federal stock savings bank, with the concurrent formation of a holding
company (Gilmer Financial Services, Inc.).
The conversion was accomplished through amendment of the Bank's federal
charter to authorize capital stock, at which time the Bank became a
wholly-owned subsidiary of the Company. The conversion was accounted for as a
pooling of interests.
As part of the conversion, the Company issued 195,755 shares of its common
stock including 15,660 shares to the Bank's Employee Stock Ownership Plan.
Additionally, shares have been reserved for the Bank's Stock Option and
Incentive Plan and its Recognition and Retention Plan (see Notes), and such
plans were approved by the stockholders at the October, 1995 annual meeting.
Conversion costs of $319,565 were deducted from the gross proceeds of
$1,957,550. The audited financial statements contained herein for the periods
prior to the conversion are those of the Bank as a predecessor entity.
NOTE 19 - PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information for Gilmer Financial Services, Inc. (parent
company only) follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
1997 1996
---------- -----------
<S> <C> <C>
Cash $ 12,833 $ 137,269
Interest-bearing deposits at Gilmer Savings Bank, FSB - -
Account receivable(payable),Gilmer Savings Bank, FSB (10,840) 17,894
Note receivable, Gilmer Savings Bank, FSB 117,450 133,110
Investment in Gilmer Savings Bank, FSB, at equity 3,801,409 3,774,242
---------- ----------
$3,920,852 $4,062,515
========== ==========
Stockholders' equity $3,920,852 $4,062,515
========== ==========
CONDENSED STATEMENT OF INCOME
Year ended Inception through
June 30, 1997 June 30, 1996
------------- -------------
Interest income $ 10,364 $ 11,652
Income tax benefit 19,558 -
Stock service and professional fees (83,170) (42,560)
------------- ------------
Income before equity in undistributed
earnings of subsidiary (53,248) (30,908)
Equity in undistributed earnings of subsidiary 76,636 297,345
------------- ------------
Net income $ 23,388 $ 266,437
============= ============
</TABLE>
NOTE 20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
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 INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
F-18
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996 AND 1995
CONTINUED
NOTE 20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
INVESTMENT AND MORTGAGE-BACKED SECURITIES
For securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS RECEIVABLE
For certain homogeneous categories of loans, such as residential mortgages,
fair value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loan characteristics. The fair
value of other types 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 credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
BORROWINGS
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
At June 30, 1997, the Bank had not issued any standby letters of credit.
Commitments to extend credit totaled $60,600 at June 30, 1997, and consisted
primarily of agreements to fund mortgage loans at the prevailing rates based
upon acceptable collateral. Fees charged for these commitments are not
significant to the operations or financial position of the Bank and primarily
represent a recovery of underwriting costs.
The estimated fair values of the Bank's financial instruments at June 30, are
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest-bearing deposits $ 1,896,897 $ 1,896,897 $ 981,144 $ 981,144
============ ============ ============= =============
Investment securities $ 316,066 $ 317,863 $ 327,670 $ 327,589
============ ============ ============= =============
Loans and mortgage-backed securities $ 38,887,421 $ 38,578,104 $ 36,892,690 $ 36,533,346
Less: Allowance for loan losses 309,208 - $ (214,724) $ -
------------ ------------ ------------- -------------
$ 38,578,213 $ 38,578,104 $ 36,677,966 $ 36,533,346
============ ============ ============= =============
Financial liabilities:
Deposits $ 29,107,202 $ 29,107,202 $ 25,476,872 $ 25,536,872
============ ============ ============= =============
Borrowings $ 8,550,000 $ 8,550,000 $ 8,930,000 $ 8,930,000
============ ============ ============= =============
Unrecognized financial instruments:
Commitments to extend credit $ 60,600 $ 60,600 $ 481,971 $ 481,971
============ ============ ============= =============
Standby letters of credit $ - - $ - $ -
============ ============ ============= =============
</TABLE>
F-19
<PAGE>
GILMER FINANCIAL SERVICES, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 4:00 p.m., p.m.,
Gilmer, Texas, time on October 28, 1997 at the office of Gilmer Savings, located
at 218 West Cass Street, Gilmer, Texas 75644.
STOCK LISTING
Gilmer Financial Services, Inc. common stock is traded on the
Over-the-Counter Market under the symbol "GILTX."
PRICE RANGE OF COMMON STOCK
Gilmer Financial Services, Inc. Common Stock is traded in the
Over-the-Counter Market and is only traded sporadically. Gilmer Financial
Services, Inc. Common Stock was issued at $10.00 per share in connection with
the conversion of Gilmer Savings Bank FSB from mutual to stock form on February
9, 1995. At September 15, 1997, there were 147 holders of Gilmer Financial
Services, Inc. Common Stock issued and outstanding. To the best of management's
knowledge, the last sale price of Gilmer Financial Services, Inc. Common Stock
was $13.375 as of June 30, 1997.
SHAREHOLDER AND GENERAL INQUIRIES: TRANSFER AGENT:
Gary P. Cooper American Securities Transfer,
President and Chief Executive Officer Incorporated
Gilmer Financial Services, Inc. 1825 Lawrence Street
218 West Cass Street Suite 444
Gilmer, Texas 75644 Denver, Colorado 80202
(903) 843-5525
ANNUAL AND OTHER REPORTS
A copy of Gilmer Financial Services, Inc's Annual Report on Form
10-KSB for the year ended June 30, 1997, as filed with the Securities and
Exchange Commission, may be obtained without charge by contacting Gary P.
Cooper, President and Chief Executive Officer, Gilmer Financial Services, Inc.,
218 West Cass Street, Gilmer, Texas (903) 843-5525.
36
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
218 West Cass Street Telephone: (903) 843-5525
Gilmer, Texas 75644 Fax: (903) 843-5331
DIRECTORS OF THE BOARD OF THE COMPANY AND THE BANK
M. Vance Gorman
Chairman of Gilmer Financial
Services, Inc. and
Chairman of the Board of Gilmer
Savings Bank, FSB
Gary P. Cooper
President and Chief Executive
Officer of Gilmer Financial
Services, Inc. and Gilmer Savings
Bank, FSB
Royce L. Hudgins
Owner of Retail Store
Paul D. Williams
Vice President, Gilmer Lumber
Company, Inc.
Tedd R. Austin
Part-owner, Dodd Motor Company
Steven W. Sansom
Part-owner, Funeral Homes
F.L. Garrison
Retired Visiting District Judge,
Upshur and Marion County
GILMER FINANCIAL SERVICES, INC. EXECUTIVE OFFICERS
Gary P. Cooper Sheri Parish
President and Chief Executive Officer Vice President/Treasurer/Secretary
Monty Small
Senior Vice President
INDEPENDENT AUDITORS SPECIAL COUNSEL
Henry & Peters, P.C. Silver, Freedman & Taff, L.L.P.
3310 S. Broadway 1100 New York Avenue, N.W.
Suite 100 Seventh Floor
Tyler, Texas 75701-7851 Washington, D.C. 20005
37
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ------ ------------ --------- -------------
Gilmer Financial Gilmer Savings Bank FSB 100% Federal
Services, Inc. and Loan Association
Gilmer Savings Gilstar Service Corporation 100% Texas
Bank FSB and Loan
Association
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1997
</LEGEND>
<CIK> 0000930540
<NAME> Gilmer Financial Services, Inc.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 532,292
<INT-BEARING-DEPOSITS> 1,364,605
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,841,083
<INVESTMENTS-CARRYING> 10,218,465
<INVESTMENTS-MARKET> 10,020,756
<LOANS> 25,311,190
<ALLOWANCE> 309,208
<TOTAL-ASSETS> 42,170,629
<DEPOSITS> 29,106,164
<SHORT-TERM> 5,900,000
<LIABILITIES-OTHER> 711,063
<LONG-TERM> 2,650,000
0
0
<COMMON> 1,958
<OTHER-SE> 3,801,444
<TOTAL-LIABILITIES-AND-EQUITY> 42,170,629
<INTEREST-LOAN> 2,015,242
<INTEREST-INVEST> 957,005
<INTEREST-OTHER> 74,857
<INTEREST-TOTAL> 3,047,104
<INTEREST-DEPOSIT> 1,407,372
<INTEREST-EXPENSE> 520,164
<INTEREST-INCOME-NET> 1,927,536
<LOAN-LOSSES> 129,429
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,144,428
<INCOME-PRETAX> 51,347
<INCOME-PRE-EXTRAORDINARY> 51,347
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,388
<EPS-PRIMARY> .12
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.75
<LOANS-NON> 595,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 214,724
<CHARGE-OFFS> 34,945
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 309,208
<ALLOWANCE-DOMESTIC> 309,208
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 294,160
</TABLE>
