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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
For the Fiscal Year Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
218 West Cass Street
Gilmer, Texas 75644
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(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 $3.2 million in gross revenues for the fiscal year ended
June 30, 1998.
As of June 30, 1998, 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, 1998, was $3.4 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 - Annual Report to Stockholders for the Fiscal
Year Ended June 30, 1998. Part III of Form 10-KSB - Portions of the Proxy
Statement for the 1998 Annual Meeting of Shareholders.
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<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, 1998, the Company had assets of approximately $43.2
million, deposits of approximately $28.8 million and shareholders' equity of
approximately $3.9 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.
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<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 7.0%, 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,
1998, the Company's net loan portfolio totaled $24.3 million.
All loans secured by real estate (except as noted below) over $50,000
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 $250,000 and
commercial real estate loans for amounts up to $250,000. Adjustable-rate loans
in excess of $250,000 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 $50,000, having a loan to
value ratio of 80% or less. The Board also ratifies all loans originated by the
Company.
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<PAGE>
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, 1998, the maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was approximately $566,000. At June 30,
1998, 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 $603,000, 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,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family......... $12,308 47.55% $12,360 48.83% $10,695 49.85% $10,319 54.74% $10,739 62.33%
Multi-family................ 260 1.01 282 1.12 122 .57 140 .74 157 0.91
Commercial.................. 3,454 13.34 2,683 10.60 2,934 13.68 2,354 12.49 1,946 11.29
Construction................ 1,506 5.81 1,306 5.16 526 2.45 823 4.37 604 3.51
------- ------- ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans. 17,528 67.71 16,631 65.71 14,277 66.55 13,636 72.34 13,446 78.04
Other Loans:
Consumer Loans:
Savings account............ 338 1.31 423 1.67 424 1.98 441 2.34 521 3.02
Home improvement........... 950 3.67 1,010 3.99 945 4.40 734 3.89 581 3.37
Automobile................. 3,744 14.46 4,499 17.77 3,777 17.61 2,329 12.36 1,972 11.45
Other...................... 858 3.31 888 3.51 538 2.50 612 3.25 328 1.90
------- ------- ------- ------- ------- ------ ------- ------ ------- ------
Total consumer loans.... 5,890 22.75 6,820 26.94 5,684 26.49 4,116 21.84 3,402 19.74
Commercial business loans... 2,467 9.54 1,860 7.35 1,492 6.96 1,097 5.82 382 2.22
------- ------- ------- ------ ------- ------ ------- ------ ------- ------
Total other loans....... 8,357 32.29 8,680 34.29 7,176 33.45 5,213 27.66 3,784 21.96
------- ------- ------- ------ ------- ------ ------- ------ ------- ------
Total loans............. 25,885 100.00% 25,311 100.00% 21,453 100.00% 18,849 100.00% 17,230 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............ 777 999 362 331 598
Deferred fees and discounts. 556 596 439 296 215
Allowance for losses........ 341 309 215 204 215
------- ------- ------- ------- -------
Total loans receivable, net. $24,211 $23,407 $ 20,437 $18,018 $16,202
======= ======= ======== ======= =======
</TABLE>
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,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- --------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............ $2,345 9.06% $1,982 7.83% $ 1,964 9.16% $ 1,967 10.43% $ 2,231 12.95%
Multi-family................... 81 0.31 -- -- -- -- -- -- -- --
Commercial..................... 1,091 4.21 597 2.36 -- -- -- -- -- --
Construction................... 1,506 5.81 1,306 5.16 526 2.45 823 4.37 604 3.51a
-------- ------ ------ ----- ------- ------ ------- ----- ------- ------
Total real estate loans..... 5,023 19.39 3,885 15.35 2,490 11.61 2,790 14.80 2,835 16.46
Consumer........................ 5,461 21.10 6,299 24.89 5,132 23.92 3,827 20.30 3,189 18.50
Commercial business............. 2,467 9.54 1,860 7.35 1,096 5.11 248 1.32 36 0.21
-------- ------ ------ ------ ------- ------ ------- ----- ------- ------
Total fixed-rate loans...... 12,951 50.03 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............ 9,963 38.49 10,378 41.00 8,731 40.69 8,352 44.32 8,508 49.38
Multi-family................... 179 0.70 282 1.12 122 .57 140 .74 157 0.91
Commercial..................... 2,363 9.13 2,086 8.24 2,934 13.68 2,354 12.49 1,946 11.29
-------- ------ ------ ------ ------- ------ ------- ----- ------- ------
Total real estate loans..... 12,505 48.32 12,746 50.36 11,787 54.94 10,846 57.55 10,611 61.58
Consumer........................ 429 1.65 521 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..................... 12,934 49.97 13,267 52.41 12,735 59.36 11,984 63.58 11,170 64.83
------ ------ ------- ------ ------- ----- ------- ------
Total loans................. 25,885 100.00% 25,311 100.00% 21,453 100.00% 18,849 100.00% 17,230 100.00%
====== ====== ====== ====== ======
Less:
Loans in process................ 777 999 362 331 598
Deferred fees and discounts..... 556 596 439 296 215
Allowance for loan losses....... 341 309 215 204 215
-------- ------ ------- ------- -------
Total loans receivable, net.. $ 24,211 $23,407 $20,437 $18,018 $16,202
======== ======= ======= ======= =======
</TABLE>
6
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 1998. 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 Commercial
One- to Four-Family Commercial Construction Consumer Business Total
------------------- -------------- -------------- --------------- --------------- -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate 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> <C> <C> <C> <C>
1999(1)............... 1,484 9.16 292 9.28 1,506 9.15 1,148 9.88 1,511 10.10 5,941 9.54
2000.................. 54 9.19 77 8.31 -- -- 814 10.88 189 10.95 1,134 10.64
2001.................. 339 8.66 621 7.59 -- -- 1,442 10.59 279 11.29 2,681 9.72
2002 to 2003.......... 573 8.25 214 8.54 -- -- 1,574 9.70 488 10.22 2,849 9.41
2004 to 2008.......... 2,932 8.42 988 8.70 -- -- 625 8.80 -- -- 4,545 8.53
2009 to 2023.......... 4,783 8.41 1,522 7.15 -- -- 287 8.25 -- -- 6,592 8.11
2024 and following.... 2,143 7.88 -- -- -- -- -- -- -- -- 2,143 7.88
Total...............12,308 3,714 1,506 5,890 2,467 25,885
</TABLE>
- ----------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
7
<PAGE>
As of June 30, 1998, the total amount of loans due after June 30, 1999
which had predetermined interest rates was $8.7 million, while the total amount
of loans due after such date which had floating or adjustable interest rates was
$11.2 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, 1998, $12.3 million, or 47.6%, 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, 1998, the Company had $10.0 million of
one- to four-family ARM loans, or 38.6% 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, 1998, $260,000, or 1.0% of the Company's
loan portfolio consisted of multi-family loans and $3.5 million, or 13.3%, 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 generally 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, 1998, the Company had three multi-family real estate loans,
with an outstanding balance of $260,000 at June 30, 1998. All loans have
performed in accordance with their terms.
At June 30, 1998, the Company's largest commercial real estate loan,
secured by a church located in Upshur County, Texas, totaled $603,000, of which
a participation interest was sold to reduce the loan below the loan to one
borrower limit. At that date, the Company had 32 commercial real estate loans
totaling $3.3 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, 1998,
approximately $1.5 million or 5.8%, 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, 1998, the Company's consumer loans totaled
$5.9 million, or 22.8% 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, 1998,
$323,000 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, 1998, 15 consumer
loans totaling $122,000 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, 1998, the
Company had $2.5 million in commercial business loans representing 9.5% 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, 1998, mortgage-backed securities totaled $15.2 million, of which, $9.0
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, 1998, the Company had $10.7 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.
Year Ended June 30,
-------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family ......... $ 1,261 $ 2,586 $ 2,160
- commercial .................. 528 623 713
Non-real estate - commercial business ..... 17 -- --
-------- -------- --------
Total adjustable-rate .............. 1,806 3,209 2,873
-------- --------
Fixed rate:
Real estate - one- to four-family ......... 2,293 1,879 3,378
- commercial .................. 602 785 35
- construction ................ 1,563 2,638 974
- home equity ................. 537 -- --
Non-real estate - consumer ................ 5,135 6,503 4,905
--------
- commercial business ..... 3,903 3,133 1,041
-------- -------- --------
Total fixed-rate ................... 14,033 14,938 10,333
-------- -------- --------
Total loans originated ............. 15,839 18,147 13,206
-------- -------- --------
Purchases:
Mortgage-backed securities (excluding
REMICs and CMOs) ......................... 1,709 -- 299
REMICs and CMOs ........................... 925 -- 5,176
-------- -------- --------
Total purchased .................... 2,634 -- 5,475
-------- -------- --------
Sales and Repayments:
Sales:
Real estate - one- to four-family ......... 1,555 1,091 3,194
-------- -------- --------
Total loans sold ................... 1,555 1,091 3,194
Mortgage-backed securities ................ -- -- 841
-------- -------- --------
Total sales ........................ 1,555 1,091 4,035
Principal repayments:
Mortgage-backed securities ............... 2,602 1,107 1,086
Loans .................................... 13,410 13,846 7,775
-------- -------- --------
Total reductions ................... 17,567 16,044 12,895
Increase (decrease) in other items, net ..... (60) 867 (49)
-------- -------- --------
Net increase (decrease) ............ $ 846 $ 2,970 $ 5,737
======== ======== ========
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, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For: Total Loans
------------------------------------- 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...... 18 $428 9 $360 27 $788
Consumer................... 15 86 15 122 30 208
Commercial business........ -- -- 2 95 2 95
--- ----- --- ------ --- -------
Total................. 33 $514 26 $577 59 $1,091
=== ==== === ==== === ======
</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
management, valuation allowances are established through a charge to income.
Costs relating to
15
<PAGE>
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,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C> <C>
One- to four-family ............... $ 360 $ 385 $ 236 $ 295 $ 128
Multi-family ...................... -- -- -- -- --
Commercial real estate ............ -- 129 63 40 49
Construction or development ....... -- 4 -- -- --
Consumer .......................... 122 77 94 23 --
Commercial business ............... 95 -- -- -- 3
------- ------- ------- ------- -------
Total .......................... 577 595 393 358 180
------- ------- ------- ------- -------
Foreclosed assets:
One- to four-family ............... 102 99 -- 9 --
Consumer .......................... 2 -- -- -- 80
------- ------- ------- ------- -------
Total .......................... 104 99 -- 9 80
------- ------- ------- ------- -------
Total non-performing assets ......... $ 681 $ 694 $ 393 $ 367 $ 260
======= ======= ======= ======= =======
Total assets ........................ $43,190 $42,170 $39,088 $32,759 $32,572
======= ======= ======= ======= =======
Total as a percentage of total assets 1.58% 1.65% 1.01% 1.08% 0.80%
======= ======= ======= ======= =======
</TABLE>
For the year ended June 30, 1998 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $14,000. The amounts that were included in interest
income on such loans were approximately $8,000 for the year ended June 30, 1998.
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
are characterized by the distinct possibility that the savings association will
sustain some loss if
16
<PAGE>
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, 1998, on
a net basis, the Company had classified $931,000 as Substandard, $3,000 as
Doubtful and one loan totaling $5,000 as Loss. At June 30, 1998, the Bank had
four loans totaling $130,000 designated as special mention.
Other Loans of Concern. Not categorized as non-performing assets are
$231,000 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.
Year Ended June 30,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ... $ 309 $ 215 $ 204 $ 215 $ 215
Charge-offs:
One- to four-family ............ -- -- 2 15 --
Commercial real estate ......... -- -- -- -- --
Commercial business ............ 150 6
Consumer ....................... 81 42 24 3 --
----- ----- ----- ----- -----
Total ........................ 231 48 26 18 --
----- ----- ----- ----- -----
Recoveries ....................... -- -- -- -- --
----- ----- ----- ----- -----
Net charge-offs .................. 231 48 (26) (18) --
Additions charged to operations .. 263 142 37 7 --
----- ----- ----- ----- -----
Balance at end of period ......... $ 341 $ 309 $ 215 $ 204 $ 215
===== ===== ===== ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period ... .95% .21% .11% .10% --%
===== ===== ===== ===== =====
Ratio of net charge-offs during
the period to average
non-performing assets ........... 36.60% 10.62% 7.42% 5.72% --%
===== ===== ===== ===== =====
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,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
Percent Percent Percent
of Loans in of Loans in of Loans in
Loan Each Loan Each Loan 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. $ -- $12,308 47.55% $ -- $12,360 48.83% $ -- $10,695 49.85%
Multi-family........ -- 260 1.01 -- 282 1.12 -- 122 .57
Commercial real
estate............. 10 3,454 13.34 15 2,683 10.60 18 2,934 13.68
Construction or
development........ -- 1,506 5.81 -- 1,306 5.16 -- 526 2.45
Consumer............ 10 5,890 22.75 -- 6,820 26.94 1 5,684 26.49
Commercial business. -- 2,467 9.54 -- 1,860 7.35 -- 1,492 6.96
Unallocated......... 321 -- -- 294 -- -- 196 -- --
---- ------- ------ ----- ------- ------ ----- ------- ------
Total.......... $341 $25,885 100.00% $ 309 $25,311 100.00% $ 215 $21,453 100.00%
==== ======= ====== ===== ======= ====== ===== ======= ======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1995 1994
--------------------------------- --------------------------------
Percent Percent
of Loans in of Loans in
Loan Each Loan 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. $ -- $10,319 54.7% $ -- $10,739 62.3%
Multi-family........ -- 140 .7 -- 157 0.9
Commercial real
estate............. 23 2,354 12.5 25 1,946 11.3
Construction or
development........ -- 823 4.4 -- 604 3.5
Consumer............ -- 4,116 21.9 -- 3,402 19.7
Commercial business. -- 1,097 5.8 -- 382 2.2
Unallocated......... 181 -- -- 190 -- --
------ ------- ----- ----- ------- -----
Total.......... $ 204 $18,849 100.0% $ 215 $17,230 100.0%
====== ======= ===== ===== ======= =====
</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, 1998, the Company's liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowing) was 8.0%. 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, 1998, Gilmer Financial's
interest-bearing deposits with banks totaled $1.4 million or 3.2% of total
assets, and its investment securities totaled $741,000 or 1.7% of total assets.
As of such date, the Bank also had a $525,000 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,
-----------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Investment securities:
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Note........................ $ -- --% $300 36.99% $ 301 37.86%
FHLB Series............................... -- -- -- -- -- --
Corporate obligations..................... -- -- 16 1.97 27 3.40
Municipal bonds........................... 735 58.33 -- -- -- --
------ ----- ----- ------ ------ ------
Subtotal............................... 735 58.33 316 38.96 328 41.26
FHLB stock.................................. 525 41.67 495 61.04 467 58.74
------ ----- ----- ------ ------ ------
Total investment securities and
FHLB stock........................... $1,260 100.00% $811 100.00% $ 795 100.00%
====== ====== ===== ====== ====== ======
Average remaining life or term to
repricing of investment securities,
excluding FHLB stock...................... 2.58 years .75 years 3.2 years
Other interest-earning assets:
Interest-bearing deposits with banks...... $1,379 100.00 $1,365 100.00 $ 634 100.00%
------ ------ ------ ------ ------ ------
Total.................................. $1,379 100.00% $1,365 100.00 $ 634 100.00%
====== ====== ====== ====== ====== ======
Mortgage-backed securities:
GNMA...................................... $2,845(1) 18.78 $3,470 22.88% $3,963 24.40%
FNMA...................................... 2,125(2) 14.03 2,283 15.05 2,485 15.30
FHLMC..................................... 2,756(3) 18.19 1,410 9.30 1,684 10.37
Private issue CMOs/REMICs................. 7,192(4) 47.48 7,771 51.23 7,791 47.97
------ ------ ------ ------ ------ ------
14,918 98.48 14,934 98.46 15,923 98.04
Unamortized premium (discounts), net........ 231 1.52 235 1.54 318 1.96
------ ------- ------ ------ ------ ------
Total mortgage-backed securities....... $15,149 100.00% $15,169 100.00% $16,241 100.00%
====== ====== ======= ====== ======= ======
</TABLE>
- --------------
(1) $57,387 (market value of $58,590) of these mortgage-backed securities were
held for sale.
(2) $815,365 (market value of $802,365) of these mortgage-backed securities
were held for sale.
(3) $1,661,503 (market value of $1,676,585) of these mortgage-backed securities
were held for sale.
(4) $3,636,814 (market value of $3,636,424) of these mortgage-backed securities
were held for sale.
21
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
At June 30, 1998
------------------------------------------------------------------------------------
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>
Municipal Bonds......................... $120 $265 $350 $ -- $ 735 $741
Total investment securities............. $120 $265 $350 $ -- $ 735 $741
Weighted average yield.................. 5.0 5.12 5.33 -- 5.20 5.20
</TABLE>
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, 1998 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, 1998.
As of June 30, 1998, 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
22
<PAGE>
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
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, 1998, the Company had an investment in one REMIC totaling $2.6
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 had a first maturity date
of January 1998, and then rolled into an amortizing advance with a final
maturity in October 2003.
23
<PAGE>
The Company also held $4.5 million in REMICs 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.
24
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at June 30, 1998.
<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..... $ -- $ -- $ -- $ -- $ -- $ 822 $ 1,934 $ 2,756
Federal National
Mortgage Association..... -- -- 77 -- -- 1,050 998 2,125
Government National
Mortgage Association..... -- -- -- -- -- 691 2,154 2,845
CMOs/REMICs .............. -- -- -- 110 2,557 4,525 -- 7,192
---------- ---------- ------- ------- ------- ------- ------- -------
Total ............... $ -- $ -- $ 77 $ 110 $ 2,557 $ 7,088 $ 5,086 $14,918
========== ========== ======= ======= ======= ======= ======= =======
</TABLE>
25
<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, 1998, 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.
26
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated.
Year Ended June 30,
-------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Opening balance .................... $ 29,106 $ 25,477 $ 25,486
Deposits ........................... 31,105 25,497 9,959
Withdrawals ........................ 32,116 22,586 10,715
Interest credited .................. 702 718 747
-------- -------- --------
Ending balance ..................... $ 28,797 $ 29,106 $ 25,477
======== ======== ========
Net increase (decrease) ............ $ (309) $ 3,629 $ (9)
======== ======== ========
Percent increase (decrease) ........ 1.07% 12.47% (.04)%
======== ======== ========
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 1997 1996
------------------ ------------------- --------------------
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........... $ 874 3.04% $ 1,007 3.46% $ 970 3.81%
Money Market Accounts....... 1,307 4.54 786 2.70 1,043 4.09
DDA Individual.............. 381 1.32 348 1.20 110 .44
Commercial Checking......... 451 1.57 218 .75 171 .67
NOW Accounts................ 635 2.21 238 .81 115 .45
------- ----- ------- ----- ------ ------
Total Non-Certificates...... 3,648 12.68 2,597 8.92% 2,409 9.46%
------- ------ ------- ----- ------ -----
Certificates:
- -------------
2.00 - 3.99%.............. 25 0.08 735 2.53 815 3.20%
4.00 - 5.99%.............. 17,952 62.34 15,779 54.21 17,480 68.61
6.00 - 7.99%.............. 7,076 24.57 9,903 34.02 4,689 18.40
8.00 - 10.00%............. 96 0.33 92 .32 84 .33
------- ------ ------- ------ -------- -------
Total Certificates.......... 25,149 87.32 26,509 91.08 23,068 90.54
------- ------ ------- ------ ------- ------
Total Deposits.............. $28,797 100.00% $29,106 100.00% $25,477 100.00%
======= ====== ======= ====== ======= =======
</TABLE>
27
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of June 30, 1998.
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:
- --------------------
September 30, 1998 . $20 $ 4,935 $ 1,211 $ -- $ 6,166 24.52%
December 31, 1998 .. -- 4,272 1,021 -- 5,293 21.05
March 31, 1999 ..... -- 2,710 491 -- 3,201 12.73
June 30, 1999 ...... 5 3,910 395 -- 4,310 17.14
September 30, 1999 . -- 705 594 -- 1,299 5.17
December 31, 1999 .. -- 785 829 1 1,615 6.42
March 31, 2000 ..... -- 257 330 -- 587 2.33
June 30, 2000 ...... -- 191 151 -- 342 4.36
September 30, 2000 . -- 94 127 -- 221 .88
December 31, 2000 .. -- 21 67 -- 88 .35
March 31, 2001 ..... -- 28 116 -- 144 .57
Thereafter ......... -- 44 1,744 95 1,883 7.48
---- ------- ------- ------- ------- ------
Total ........... $25 $17,952 $ 7,076 $ 96 $25,149 100.00%
==== ======= ======= ======= ======= ======
Percent of total.. .10% 71.38% 28.14% .38%
==== ===== ===== =====
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,
1998.
Maturity
-----------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
Certificates of deposit
less than $100,000 .......... $ 4,851 $ 4,056 $ 5,482 $ 3,605 $17,994
Certificates of deposit
of $100,000 or more ......... 1,315 1,237 2,029 2,574 7,155
------- ------- ------- ------- -------
Total certificates
of deposit .................. $ 6,166 $ 5,293 $ 7,511 $ 6,179 $25,149
======= ======= ======= ======= =======
28
<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, 1998, the Bank's outstanding borrowings with
the FHLB of Dallas was $9.8 million.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
Year Ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Maximum Balance:
- ----------------
FHLB advances ......................... $9,751 $9,400 $9,120
Average Balance:
- ----------------
FHLB advances ......................... $8,711 $8,996 $5,714
Weighted average interest
rate of FHLB advances
(at June 30, 1998, 1997
and 1996, respectively) .............. 5.75% 5.78% 5.66%
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.
29
<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, 1998, the Company had a total of 13 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 45, 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 30, 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.
30
<PAGE>
Monty J. Small. Mr. Small, age 55 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, 1998 was $13,914.
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.
31
<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, 1998, the Bank's lending limit under this restriction was $566,000. 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.
32
<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.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits will continue until the bonds mature in the year 2017.
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, 1998, 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, 1998, the Bank did not have any active
subsidiaries.
At June 30, 1998, the Bank had tangible capital of $3.8 million, or
8.87% of adjusted total assets, which is approximately $3.2 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
33
<PAGE>
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, 1998, the Bank
had no intangibles which were subject to these tests.
At June 30, 1998, the Bank had core capital equal to $3.8 million, or
8.87% of adjusted total assets, which is $2.1 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 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, 1998, the Bank had no capital instruments that qualify as
supplementary capital and $321,000 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 in excess
of a 65% loan-to-value ratio and commercial and nonresidential construction
loans in excess of an 80% loan-to-value ratio and reciprocal holdings of
qualifying capital instruments. The Bank had $14,000 in land loans excluded from
capital and assets at June 30, 1998.
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
34
<PAGE>
assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise.
On June 30, 1998, the Bank had total capital of $4.1 million and
risk-weighted assets of $22.2 million or total capital of 18.3% of risk-weighted
assets. This amount was $2.3 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
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.
35
<PAGE>
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 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
36
<PAGE>
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 4%.
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, 1998, Gilmer Savings was in compliance with both
requirements, with an overall liquid asset ratio of 8.0% and a short-term liquid
assets ratio of 7.9%.
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, 1998, 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
37
<PAGE>
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 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.
38
<PAGE>
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, 1998,
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.
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, 1998, Gilmer Savings had $525,000 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 5.6% and were 5.9% for fiscal year 1998.
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
39
<PAGE>
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, 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
40
<PAGE>
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 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, 1998, 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
legislation did not 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
41
<PAGE>
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
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, 1998 the Bank's excess for tax purposes totaled
approximately $280,000.
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
1995 through 1998. 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.
42
<PAGE>
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, 1998, the office and surrounding
land had a net book value of $123,000. At June 30, 1998, the Company's premises
and equipment had an aggregate net book value of approximately $279,000. 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.
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 fiscal year ended June 30,
1998.
43
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 38 of the attached 1998 Annual Report to Stockholder is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 5 to 18 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
Pages 19 through 37 of the Company's 1998 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, 1998, 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:
Reference to
Regulation S-B Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
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 27
28 Information from reports furnished to State Insurance None
regulatory authorities
99 Additional Exhibits None
- ----------
* 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.
(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, 1998.
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 24, 1998 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 24, 1997 Date: September 24, 1997
--------------------- ------------------
/S/ ROYCE HUDGINS /S/ PAUL D. WILLIAMS
- -------------------------------- --------------------------------------
Royce Hudgins, Director Paul D. Williams, Director
Date: September 24, 1997 Date: September 24, 1997
-------------------- ------------------
/S/ TEDD AUSTIN /S/ DONALD G. BETHARD
- -------------------------------- ---------------------------------------
Tedd Austin, Director Donald G. Bethard, Director
Date: September 24, 1997 Date: September 24, 1997
--------------------- ------------------
/S/ STEVE W. SANSOM /S/ SHERI PARISH
- -------------------------------- ---------------------------------------
Steve W. Sansom, Director Sheri Parish, Treasurer/Secretary
(Principal Financial and Accounting
Officer)
Date: September 24, 1997 Date: September 24, 1997
--------------------- ------------------
47
- --------------------------------------------------------------------------------
1998 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............................ 17
Stockholder Information...................................... 38
Corporate Information........................................ 39
<PAGE>
TO OUR SHAREHOLDERS:
We are pleased to present the fourth 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-eight 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. The Board would like to once again emphasize that the Bank
offers non-depository products through Brokers Transaction Services. We hope
that you realize that by utilizing our depository and lending services, you as a
shareholder can increase the value of the institution.
Gilmer Savings Bank had a net loss of $8,000 for the year ending June
30, 1998. The Bank's earnings for the past two years have decreased primarily
due to two extraordinary events. In the fiscal year ended June 30, 1997, the
Bank recorded a one-time expense of $164,000 due to the recapitalization of the
Savings Association Insurance Fund reserves. In the fiscal year ended June 30,
1998 the Bank recorded loan losses of $175,000 and a $123,000 expense relating
to a dishonored cashier's check for $145,000, both of which related to the same
individual. Management continues to believe that the check will ultimately be
paid; however, due to the fact that the check is still in the litigation
process, no determination can be made for certain at this time. The Bank has
replenished its reserves for loan losses and added additional reserves to
protect against future losses on loans. Although the Bank's net earnings have
been significantly affected by these extraordinary items, the Bank's core
earnings are improving and we look forward to a profitable year in 1999.
Stockholders' equity increased to $3.9 million at June 30, 1998, or
9.04% of total assets at fiscal year-end 1998. The increase was primarily due to
the change in unrealized gain/(loss) on available for sale securities of
$79,000, along with a decrease in the Employee Stock Ownership Plan of $16,000
and a decrease in the Recognition and Retention Plan of $12,000. The book value
of Gilmer Financial Services, Inc.'s common stock based on actual shares
outstanding at June 30, 1998 was $20.40 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
At June 30,
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars In Thousands)
Selected Financial
Condition Data:
- ------------------
Total assets ................. $43,190 $42,171 $39,088 $32,759 $32,494
Loans receivable, net ........ 24,211 23,407 20,437 18,018 16,202
Mortgage-backed securities ... 15,102 15,060 16,205 12,886 14,283
Investment securities ........ 742 316 328 247 260
Deposits ..................... 28,797 29,106 25,477 25,486 24,924
Total borrowings ............. 9,751 8,550 8,930 2,824 4,799
Stockholders' equity-
substantially restricted .... 3,902 3,803 3,929 3,665 1,954
Year Ended June 30,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars In Thousands)
Selected Operations Data:
- -------------------------
Total interest income ....... $ 3,230 $ 3,047 $ 2,708 $ 2,353 $ 2,062
Total interest expense ...... 2,026 1,928 1,626 1,422 1,125
------- ------- ------- ------- -------
Net interest income ...... 1,204 1,119 1,082 931 937
Provision for loan losses ... 263 129 38 7 --
------- ------- ------- ------- -------
Net interest income after
provision for loan losses .. 941 990 1,044 924 937
Fees and service charges .... 112 125 110 74 92
Gain on sales of loans,
mortgage-backed securities
and investment securities .. 16 -- 12 9 1
Other non-interest income ... 122 81 50 17 17
------- ------- ------- ------- -------
Total non-interest income ... 250 206 172 100 110
Total non-interest expense .. 1,199 1,145 817 704 645
------- ------- ------- ------- -------
Income before taxes ......... (8) 51 399 320 402
Income tax provision ........ -- 28 139 110 134
------- ------- ------- ------- -------
Net income ............... $ (8) $ 23 $ 260 $ 210 $ 268
======= ======= ======= ======= =======
Earnings per share ....... $ (.04) $ .13 $ 1.33 $ .29 N/A
======= ======= ======= ======= =======
3
<PAGE>
<TABLE>
<CAPTION>
At and for the Year Ended June 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net
income to average total assets)............... (0.02)% 0.06% 0.69% 0.62% 0.85%
Return on stockholders' equity (ratio of
net income to average equity)................. (0.20) .60 6.86 8.21 14.65
Interest rate spread information:
Average during period......................... 2.41 2.23 2.03 2.35 2.66
End of period................................. 2.41 2.77 2.81 2.49 2.90
Net interest margin(1)......................... 2.94 2.78 2.93 2.81 2.96
Ratio of operating expense to
average total assets.......................... 2.84 2.76 2.16 2.09 2.03
Ratio of average interest-earning assets
to average interest-bearing liabilities....... 113.91 111.46 120.52 110.58 108.41
Quality Ratios:
Non-performing assets to total assets
at end of period.............................. 1.58 1.65 1.01 1.08 0.80
Allowance for loan losses to non-
performing loans.............................. 59.10 51.93 54.71 56.98 119.44
Allowance for loan losses to loans
receivable, net............................... 1.41 1.32 1.05 1.13 1.33
Capital Ratios:
Stockholders' equity to total assets at
end of period................................. 9.03 9.02 10.05 11.19 6.01
Average stockholders' equity to average
assets........................................ 9.15 9.35 10.03 7.58 5.77
Other Data:
Number of full-service offices.................. 1 1 1 1 1
</TABLE>
- ---------------
(1) Net interest income divided by average interest-earning assets.
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.
Forward-Looking Statements
When used in this Annual Report, and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected
5
<PAGE>
to," "will continue," "is anticipated," "estimate," "project" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to risks and uncertainties, including but not limited to changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, all or some of which could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
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
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 of long-term, fixed-rate
residential loans and the sale of such 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 capital, the Company has
adopted a policy of moderate growth with an emphasis on one-
to four-family residential real estate lending. At June 30,
1998, 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.
6
<PAGE>
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 which have been sold in the secondary market. At June
30, 1998, however, single-family residential loans still
constituted $12.4 million, or 48.1% 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,
1998, $24.9 million, or 63.3%, of the Company's portfolio of
mortgage loans and securities had adjustable rates of
interest. In addition, management has maintained a policy of
selling in the secondary market substantially all fixed rate
residential loans it originates, 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 emphasized
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 were $5.7
million at June 30, 1998. The Company's money market and
checking accounts had an outstanding balance of $2.8 million
at June 30, 1998.
Financial Condition
June 30, 1998 Compared to June 30, 1997. Total assets increased $1.0
million or 2.42% to $43.2 million at June 30, 1998 from $42.2 million at June
30, 1997. The increase was primarily attributable to an increase in loans of
$800,000.
Loans receivable were $24.2 million at June 30, 1998, and $23.4 million
at June 30, 1997, an increase of $800,000, or 3.43%. 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, 1998, were $2.5
million, of which $1.6 million was sold in the secondary market with servicing
retained.
Mortgage-backed securities available for sale increased $1.4 million
from $4.8 million at June 30, 1997 to $6.2 million at June 30, 1998. The
increase was primarily due to a $1.6 million
7
<PAGE>
purchase of Federal Home Loan Mortgage Corporation securities. Mortgage-backed
securities held to maturity decreased $1.3 million from $10.2 million at June
30, 1997 to $8.9 million at June 30, 1998. The decrease was due to principal
repayments on mortgage-backed securities of $2.6 million.
Investment securities available for sale increased $740,000 due to the
purchase of Upshur County Municipal Bonds. Investment securities held to
maturity decreased $315,000 from $316,000 at June 30, 1997 to $1,000 at June 30,
1998. The decrease was due to the maturity of investment securities of $300,000.
Interest-bearing deposits increased $63,000 from $1,365,000 at June 30,
1997 to $1,428,000 at June 30, 1998, due to principal repayments on
mortgage-backed securities along with funds from Federal Home Loan Bank
advances.
Deposits decreased $300,000 from $29.1 million June 30, 1997 to $28.8
million at June 30, 1998. This decrease is primarily due to the decrease in
rates paid on deposits. Federal Home Loan Bank ("FHLB") advances increased $1.2
million from $8.6 million at June 30, 1997 to $9.8 million June 30, 1998. The
increase in FHLB advances was used to fund the purchase of $1.6 million in
mortgage-backed securities.
Total stockholders' equity increased $99,000 to $3.9 million at June
30, 1998 from 3.8 million June 30, 1997. This increase was primarily a result of
amortization of ESOP expense of $16,000 and the decrease in unrealized losses on
securities available-for-sale of $79,000.
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.
8
<PAGE>
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.
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, 1998 and 1997
General. Net losses for the year ended June 30, 1998 totaled $8,000, a
decrease of $31,000, or 133%, from the year ended June 30, 1997. The decrease
was primarily due to an increase in the provision for loan losses of $133,000
and an increase in noninterest expense of $54,000, partially offset by an
increase in net interest income of $84,000, an increase in noninterest income of
$45,000, and a decrease in income taxes of $31,000.
Interest Income. Interest income totaled $3.2 million for the year
ended June 30, 1998, compared to $3.0 million for the year ended June 30, 1997,
an increase of $183,000 or 5.99%. This increase resulted from a 31 basis point
increase in the average rate earned on interest-earning assets, along with a
$1.4 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. The increase in
average interest-earning assets was primarily due to a $1.7 million increase in
the average balance of loans receivable.
Interest Expense. Interest expense increased $98,000 for the year ended
June 30, 1998 compared to June 30, 1997, primarily due to a 13 basis point
increase in the average rate paid on deposits along with a $887,000 increase in
average balances of interest-bearing liabilities.
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 from $305,000 for the year ended June
30, 1997, to $341,000 for the year ended June 30, 1998. The increase was
primarily the result of $263,000 in additions to the allowance accounts offset
by net
9
<PAGE>
charge-offs of $232,000, of which $175,000 relates to losses recorded on the
same individual that the cashier's check was issued to. The allowance for loan
losses was 1.4% of net loans receivable at June 30, 1998 compared to 1.3% at
June 30, 1997. At June 30, 1998, the ratio of the allowance for loan losses to
total non-performing loans was 59.1% compared to a ratio of 51.9% at June 30,
1997.
Non-Interest Income. Non-interest income increased $45,000 from
$205,000 for the year ended June 30, 1997 to $250,000 for the year ended June
30, 1998. The increase resulted primarily from an increase of $42,000 in other
income, which includes $22,000 in commission income earned by Gilstar Service
Corporation. The Bank anticipates that the income derived from the service
corporation will continue to increase.
Non-Interest Expense. Non-Interest expense totaled $1,199,000 for the
year ended June 30, 1998, compared to $1,145,000 for the year ended June 30,
1997, an increase of $44,000. Compensation and benefits increased $45,000 to
$611,000 for the year ended June 30, 1998 from $563,000 for the year ended June
30, 1997, due to the addition of a new employee. Other miscellaneous expenses
increased $163,000 from $361,000 for the year ended June 30, 1997 to $524,000
for the year ended June 30, 1998. The primary reason for this increase was the
write-off of a $123,000 receivable related to a dishonored cashier's check,
along with an increase in service bureau expense of $7,000 due to an increase in
checking accounts, an increase in insurance of $9,000 due to a new directors and
officers liability policy, and an increase in legal fees of $10,000 related to
the dishonored cashier's check.
Income Taxes. The provision for income taxes decreased $28,000 from
$28,000 for the year ended June 30, 1997 to $0 for the year ended June 30, 1998,
due to a decrease in pre-tax income of $59,000 for the year ended June 30, 1998.
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 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.
10
<PAGE>
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 51.9%
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.
11
<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,
------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ---------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)..................... $24,235 $2,211 9.12% $22,734 $2,015 8.86% $20,190 $1,713 8.48%
Mortgage-backed securities.............. 14,654 913 6.23 15,635 935 5.98 14,935 901 6.03
Investment securities................... 520 15 2.88 320 22 6.88 259 15 5.79
Other interest earning assets(2)........ 1,604 91 5.67 1,568 75 4.78 1,504 79 5.25
-------- -------- ---- -------- ------ ----- -------- ------- ----
Total interest-earning assets.......... $41,013 3,230 7.88 $40,257 3,047 7.57 $36,888 2,708 7.34
======= ======= ----- ======= -------
Interest-Bearing Liabilities:
Savings deposits........................ $ 990 45 4.55 $ 953 31 3.25 $ 1,054 35 3.32
Money market investment accounts........ 1,443 42 2.91 1,140 39 3.42 1,116 38 3.41
Certificate accounts.................... 25,862 1,480 5.72 25,030 1,338 5.35 22,724 1,223 5.38
Borrowings.............................. 8,711 459 5.27 8,996 520 5.78 5,714 330 5.77
--------- -------- ---- --------- ------ ---- -------- ------- ------
Total interest-bearing liabilities..... $37,006 $2,026 5.47 $36,119 $1,928 5.34 $30,608 1,626 5.31
======= ====== ======= ====== ======= ------
Net interest income...................... $1,204 $1,119 $1,082
====== ====== ======
Net interest rate spread................. 2.41% 2.23% 2.03%
==== ==== ====
Net interest-earning assets.............. $4,007 $4,138 $6,280
====== ====== ======
Net yield on average interest-earning
assets................................. 2.94% 2.78% 2.93%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities............................ 1.14x 1.11x 1.21x
==== ==== ====
</TABLE>
- -----------------
(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.
12
<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, Year Ended June 30,
--------------------------------- --------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------- --------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------ Increase ----------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable........................... $135 $ 61 $196 $223 $ 79 $302
Mortgage-backed securities................. (60) 38 (22) 41 (7) 34
Investment securities...................... 10 (17) (7) 4 3 7
Other interest-earning assets(1)........... 2 14 16 3 (7) (4)
------ ----- ----- ----- ----- -----
Total interest-earning assets............ $ 87 $ 96 $183 $271 $68 $339
===== ==== ==== ==== === ====
Interest-bearing liabilities:
Savings deposits........................... $ 2 $ 12 $ 14 $ (3) $ (1) $ (4)
Money market accounts...................... 10 (7) 3 1 -- 1
Certificate accounts....................... 47 95 142 122 (7) 115
Borrowings................................. (15) (46) (61) 189 1 190
---- ---- ----- ----- ------ ----
Total interest-bearing liabilities....... $44 $54 $ 98 $309 $ (7) $302
=== === ===== ==== === ====
Net interest income ........................ $ 85 $37
===== ===
</TABLE>
- --------------
(1) Includes certificates of deposit, demand accounts and FHLB stock.
13
<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.
At June 30,
----------------------------
1998 1997 1996
---- ---- ----
Weighted average yield on:
Loans receivable, net ........................ 8.93% 8.95% 8.71%
Mortgage-backed securities ................... 6.60 6.62 6.90
Investment securities ........................ 5.20 6.13 6.13
Other interest-earning assets(1) ............. 5.55 5.57 5.46
Combined weighted average yield
on interest-earning assets ................ 7.89 8.05 8.04
Weighted average rate paid on:
Savings deposits ............................. 2.98 3.70 3.63
Money market investment accounts ............. 3.72 3.86 3.87
NOW accounts ................................. 2.98 2.95 3.01
Certificate accounts ......................... 5.62 5.40 5.22
Borrowings ................................... 5.75 5.75 5.66
Combined weighted average rate
paid on interest-bearing liabilities ...... 5.48 5.28 5.23
Spread ........................................ 2.41 2.77 2.81
- ---------------
(1) Includes certificates of deposit, interest-bearing demand accounts and FHLB
stock.
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 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
14
<PAGE>
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 $2.6 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, 1998 interest
rate risk exposure report, the Company was within the "normal" level of interest
rate risk as defined by the OTS.
15
<PAGE>
Presented below, as of June 30, 1998, 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.
At June 30, 1998
Change in Board Limit ----------------------
Interest Rate % Change $ Change % Change
------------- -------- -------- --------
(Base Points) (Dollars in Thousands)
300bp 50.00% $(233) (5.60)%
200 25.00 (115) (2.76)
100 10.00 (25) (0.60)
0 -- -- --
- -100 (10.00) 41 1.00
- -200 (25.00) 111 2.67
- -300 (50.00) 36 0.86
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 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
16
<PAGE>
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, 1998,
the Company had approximately $9.8 million in borrowings outstanding from the
FHLB of Dallas, which represented 22.6% 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, 1998, 1997 and 1996, cash and cash equivalents
totaled $1,650,000, $1,897,000, and $981,000, 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,
1998 was 4.0%. The Company's liquidity ratios have consistently been maintained
at levels in excess of regulatory requirements and at June 30, 1998, 1997 and
1996 were 8.0, 7.22 and 6.34%, respectively.
At June 30, 1998, the Company had outstanding commitments to originate
loans of approximately $124,000, all of which were at adjustable rates and were
originated to be held in the Bank's portfolio. These loans will be secured by
properties in the Company's market area. The Company also had $598,000 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, 1998 totaled approximately $19.0 million or 75.4% 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, 1998, the Bank exceeded all of its capital requirements on
a fully phased-in- basis. See also Note 16 to the Notes to Consolidated
Financial Statements.
Impact of Year 2000
In June, 1997, the Bank adopted a Year 2000 policy. The Year 2000
("Y2K") Problem is due to the practice of writing software using a 2-digit field
in the year designation of a date (e.g., 8/29/91). The twentieth century is
assumed to be the default in such designations, and will produce results that
are wrong by 100 years when the century date rolls to the twenty-first century.
The Bank understands the importance of compliance with regard to the Y2K Problem
and has implemented steps to assure compliance by calendar year-end 1998. As of
June 30, 1998, the Bank had assessed all critical areas, including major
borrowers that Y2K might have an affect on, and has contingency plans in place
for all mission-critical areas. The Bank is currently in the testing phase and
plans to be finished with our mission-critical areas by the end of calendar year
1998.
17
<PAGE>
Impact of New Accounting Standards
In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). This statement, which the Company will be required to
adopt, establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. The
new standard requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The company will adopt
FAS 130 beginning July 1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). This statement, which the
Company will be required to adopt, supersedes FAS 14, "Financial Reporting for
Segments of a Business Enterprise," but retains the requirement to report
information about major customers. The new standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. In the initial year of application, comparative
information for earlier years is to be restated. The company will adopt FAS 131
in the year beginning July 1, 1998.
18
<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, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended June
30,1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
HENRY & PETERS, P. C.
Tyler, Texas
September 18, 1998
19
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
ASSETS
Cash on hand and in banks ................................ $ 221,885 $ 532,292
Interest-bearing deposits ................................ 1,428,078 1,364,605
Investment securities:
Available-for-sale ..................................... 740,537 --
Held-to-maturity ....................................... 980 316,066
Mortgage-backed securities:
Available-for-sale ..................................... 6,173,964 4,841,083
Held-to-maturity ....................................... 8,928,088 10,218,465
Loans receivable, net .................................... 24,210,781 23,407,057
Accrued interest receivable .............................. 409,466 348,643
Real estate acquired in settlement of loans, net ......... 104,561 98,690
Federal Home Loan Bank stock, at cost .................... 525,400 495,100
Office properties and equipment, at cost ................. 279,480 247,604
Federal income taxes ..................................... 76,015 54,154
Prepaid expenses and other assets ........................ 90,695 246,870
----------- -----------
Total assets ......................................... $43,189,930 $42,170,629
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ................................................. $28,796,905 $29,106,164
Accrued interest payable ................................. 29,031 7,452
Advances by borrowers for taxes and insurance ............ 523,303 487,714
Accounts payable and accrued expenses .................... 187,114 215,897
Advances from Federal Home Loan Bank ..................... 9,751,346 8,550,000
----------- -----------
Total liabilities .................................... 39,287,699 38,367,227
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 shares issued ...................... 1,958 1,958
Additional paid-in capital ............................... 1,624,968 1,624,968
Retained earnings ........................................ 2,458,370 2,466,014
Less: Shares acquired by Employee Stock Ownership Plan ... (101,790) (117,450)
Shares acquired by Recognition and Retention Plan .. (30,273) (41,900)
Treasury Stock (4,497 shares, at cost) ............. (56,527) (56,527)
Net unrealized gain (loss) on decline in market
value of securities available-for-sale ................. 5,525 (73,661)
----------- -----------
Total stockholders' equity ........................... 3,902,231 3,803,402
----------- -----------
Total liabilities and stockholders' equity ......... $43,189,930 $42,170,629
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
1998 1997 1996
---------- ---------- ----------
INTEREST INCOME
Loans ................................... $2,210,789 $2,015,242 $1,713,261
Investment securities ................... 15,291 22,132 14,874
Mortgage-backed securities .............. 912,398 934,873 900,603
Other interest-earning assets ........... 91,142 74,857 79,079
---------- ---------- ----------
Total interest income ............... 3,229,620 3,047,104 2,707,817
INTEREST EXPENSE
Deposits ................................ 1,566,421 1,407,372 1,295,953
Interest on FHLB advances ............... 459,151 520,164 330,138
---------- ---------- ----------
Total interest expense .............. 2,025,572 1,927,536 1,626,091
---------- ---------- ----------
Net interest income ................. 1,204,048 1,119,568 1,081,726
Provision for loan losses ............... 263,000 129,429 37,643
---------- ---------- ----------
Net interest income after provision
for loan losses ..................... 941,048 990,139 1,044,083
NONINTEREST INCOME
Gain on sale of interest-bearing assets . 15,930 -- 11,749
Loan origination and commitment fees .... 35,202 54,371 46,041
Loan servicing fees ..................... 77,151 70,762 63,847
Loss from real estate operation ......... (992) (64) (3,260)
Other income ............................ 122,863 80,567 53,655
---------- ---------- ----------
Total noninterest income ............ 250,154 205,636 172,032
NONINTEREST EXPENSE
Compensation and benefits ............... 610,888 536,312 429,907
Occupancy and equipment ................. 45,257 57,709 40,974
Federal insurance premiums .............. 18,316 25,013 61,251
Loss (gain) on sale of foreclosed
real estate ........................... -- -- (17,037)
SAIF special assessment ................. -- 164,429 --
Other expense ........................... 524,385 360,965 302,235
---------- ---------- ----------
Total noninterest expense ........... 1,198,846 1,144,428 817,330
---------- ---------- ----------
(Loss) income before taxes .......... (7,644) 51,347 398,785
INCOME TAX EXPENSE ........................ -- 27,959 138,444
---------- ---------- ----------
Net (loss) income ................... $ (7,644) $ 23,388 $ 260,341
========== ========== ==========
EARNINGS PER COMMON SHARE
Basic ................................... $ (.04) $ .13 $ 1.33
========== ========== ==========
Diluted ................................. $ (.04) $ .13 $ 1.33
========== ========== ==========
See accompanying notes to consolidated financial statements.
21
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Unrealized
Unvested Unvested Loss on
Additional Shares Shares Securities Total
Common Paid-in Retained Held by Held by Treasury Available- Stockholders'
Stock Capital Earnings ESOP RRP Stock for-Sale Equity
------ ---------- ---------- --------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1995 ............ $1,958 $1,636,027 $2,182,285 $(148,770) $ -- $ -- $ (6,717) $3,664,783
Net income ....................... -- -- 260,341 -- -- -- -- 260,341
Net unrealized loss on
securities available-for-sale .. -- -- -- -- -- -- (17,475) (17,475)
Shares acquired by RRP ........... 43 42,987 -- -- (43,030) -- -- --
Accrual of RRP plan awards ....... -- -- -- -- 6,096 -- -- 6,096
Principal reductions in
ESOP note payable .............. -- -- -- 15,660 -- -- -- 15,660
------ ---------- ---------- --------- -------- --------- -------- ----------
Balances, June 30, 1996 ............ 2,001 1,679,014 2,442,626 (133,110) (36,934) -- (24,192) 3,929,405
Net income ....................... -- -- 23,388 -- -- -- -- 23,388
Net unrealized loss on
securities available-for-sale .. -- -- -- -- -- -- (49,469) (49,469)
Purchase of 10,000 Treasury shares -- -- -- -- -- (125,700) -- (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 -- -- 10,118
Principal reductions in
ESOP note payable .............. -- -- -- 15,660 -- -- -- 15,660
------ ---------- ---------- --------- -------- --------- -------- ----------
Balances, June 30, 1997 ............ 1,958 1,624,968 2,466,014 (117,450) (41,900) (56,527) (73,661) 3,803,402
Net loss ......................... -- -- (7,644) -- -- -- -- (7,644)
Net unrealized gain on
securities available-for-sale .. -- -- -- -- -- -- 79,186 79,186
Accrual of RRP Plan awards ....... -- -- -- -- 11,627 -- -- 11,627
Principal reductions in
ESOP note payable .............. -- -- -- 15,660 -- -- -- 15,660
------ ---------- ---------- --------- -------- --------- -------- ----------
Balances, June 30, 1998 ............ $1,958 $1,624,968 $2,458,370 $(101,790) $(30,273) $ (56,527) $ 5,525 $3,902,231
====== ========== ========== ========= ======== ========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................... $ (7,644) $ 23,388 $ 260,341
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ............................................. 24,420 24,420 24,420
Net gain on sale of real estate owned .................... -- -- (17,037)
Provision for losses on loans and other real estate ...... 263,000 129,429 36,643
Gain on sale of interest-bearing assets .................. (15,930) -- (11,749)
Contribution to ESOP Plan ................................ 15,660 15,660 15,660
Accrual of RRP Awards .................................... 11,627 10,118 6,096
Change in assets and liabilities:
Increase in accrued interest receivable ................ (60,823) (31,192) (65,764)
Decrease (increase) in prepaid expenses and other assets 156,175 (108,966) (62,876)
Increase (decrease) in advances for taxes and insurance 35,589 (53,093) (113,202)
Increase (decrease) in accrued interest payable ........ 21,579 (1,247) 1,348
(Decrease) increase in federal income taxes ............ (21,861) (178,612) 98,610
(Decrease) increase in deferred loan fees .............. (2,408) 11,783 (453)
(Decrease) increase in accounts payable and
accrued expenses ..................................... (28,783) 137,938 (2,705)
----------- ----------- -----------
Net cash provided by (used in) operating activities 390,601 (20,374) 169,332
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of investment securities .. 315,930 -- 225,711
Purchase of investment securities ............................ (735,000) -- (300,687)
Capital expenditures ......................................... (56,296) (56,510) (59,097)
Purchase of FHLB stock ....................................... (30,300) (27,900) (155,600)
Proceeds from sales of mortgage loans ........................ 1,554,954 1,090,992 3,194,000
Loans originated, net ........................................ (2,545,955) (4,301,449) (5,431,279)
Proceeds from sale of real estate owned ...................... -- -- 9,623
Purchase of mortgage-backed certificates ..................... (2,634,632) -- (5,475,401)
Proceeds from sale of mortgage-backed certificates ........... -- -- 841,907
Principal paydown on mortgage-backed certificates ............ 2,601,677 1,107,402 1,086,186
----------- ----------- -----------
Net cash used in investing activities .............. (1,529,622) (2,187,465) (6,064,637)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits .............................. (309,259) 3,629,292 (9,617)
Net increase (decrease) in advances from FHLB ................ 1,201,346 (380,000) 6,106,486
Purchase of Treasury stock ................................... -- (125,700) --
----------- ----------- -----------
Net cash provided by financing activities .......... 892,087 3,123,592 6,096,869
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents ................................. (246,934) 915,753 201,564
CASH AND CASH EQUIVALENTS
Beginning of year ............................................ 1,896,897 981,144 779,580
----------- ----------- -----------
End of year .................................................. $ 1,649,963 $ 1,896,897 $ 981,144
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
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, 1998 or 1997, and its operations
were deminimus for the years then ended. All significant intercompany
transactions and balances are eliminated in consolidation.
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.
24
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
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
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128). This statement supersedes APB
15, "Earnings Per Share" and simplifies the computation of earnings per share
(EPS) by replacing the "primary" EPS requirements of APB 15 with a "basic" EPS
computation based upon weighted-average shares outstanding. Shares issued to its
Employee Stock Ownership Plan (ESOP) are accounted for in accordance with AICPA
Statement of Position 93-6. The new standard requires a dual presentation of
basic and diluted EPS. Diluted EPS is similar to fully diluted EPS required
under APB 15 for entities with complex capital structures. The adoption of FAS
128 did not have a material impact on the Company. All previous periods have
been restated to reflect the adoption of FAS 128.
25
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
- -----------------------------------------------------------------
EARNINGS PER SHARE -- CONTINUED
Earnings per share on a basic and diluted basis as required by Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share" is
calculated as follows:
Years Ended June 30,
-------------------------------
1998 1997 1996
-------- -------- --------
Basic net earnings per share
Net income (loss) .......................... $ (7,644) $ 23,388 $260,341
Weighted-average shares outstanding ........ 183,693 180,702 195,755
-------- -------- --------
Per share .............................. $ (.04) $ .13 $ 1.33
======== ======== ========
Diluted net earnings per share
Net income ................................. $ (7,644) $ 23,388 $260,341
Weighted-average shares outstanding
plus assumed conversions ................. 187,708 182,424 195,755
-------- -------- --------
Per share .............................. $ (.04) $ .13 $ 1.33
======== ======== ========
Calculation of weighted average shares
outstanding plus assumed conversions
Weighted-average shares outstanding ...... 183,693 180,702 195,755
Effect of dilutive stock options ......... 4,015 1,722 --
-------- -------- --------
187,708 182,424 195,755
======== ======== ========
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations, since
the impact of stock-based compensation is immaterial.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). This statement, which the Company will be required to adopt, establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The new standard requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt FAS 130 beginning July
1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). This statement, which the Company
will be required to adopt, supersedes FAS 14, "Financial Reporting for Segments
of a Business Enterprise," but retains the requirement to report information
about major customers. The new standard requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. In the initial year of application, comparative information
for earlier years is to be restated. The Company will adopt FAS 131 in the year
beginning July 1998.
26
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
- -----------------------------------------------------------------
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,
----------------------------------------
Cash paid during the year for: 1998 1997 1996
---------- ---------- ----------
Interest ...................... $2,003,993 $1,928,783 $1,624,743
========== ========== ==========
Income taxes .................. $ 34,940 $ 160,081 $ 59,833
========== ========== ==========
During the years ended June 30, 1998, 1997, and 1996, the Company transferred
from loans to real estate acquired through foreclosure approximately $46,000,
$162,000, and $21,000, 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:
Available-for-sale
-----------------------------------------------
June 30, 1998
-----------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Municipal bonds ............... $ 735,000 $5,537 $ -- $ 740,537
--------- ------ ------ ---------
$ 735,000 $5,537 $ -- $ 740,537
========= ====== ====== =========
Held-to-maturity
-----------------------------------------------
June 30, 1998
-----------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
American Housing .............. $ 980 $ -- $ 5 $ 975
--------- ------ ------ ---------
$ 980 $ -- $ 5 $ 975
========= ====== ====== =========
Held-to-maturity
-----------------------------------------------
June 30, 1997
-----------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
American Housing .............. $ 15,828 $ 553 $ -- $ 16,381
FHLB Series ................... 300,238 1,244 -- 301,482
--------- ------ ------ ---------
$ 316,066 $1,797 $ -- $ 317,863
========= ====== ====== =========
27
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 2 -- INVESTMENT SECURITIES -- CONTINUED
- --------------------------------------------
The scheduled maturities of investment securities available-for-sale and
investment securities held-to-maturity at June 30, 1998, were as follows:
Available-for-sale Held-to-maturity
securities securities
-------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less ............ $ 120,000 $ 120,356 $ 980 $ 975
Due from one to five years ......... 265,000 266,975 -- --
Due from five to ten years ......... 350,000 353,206 -- --
Due from ten to twenty years ....... -- -- -- --
--------- --------- ----- -----
$ 735,000 $ 740,537 $ 980 $ 975
========= ========= ===== =====
NOTE 3 -- MORTGAGE-BACKED AND RELATED SECURITIES
- ------------------------------------------------
The amortized cost and estimated market values of mortgage-backed and related
securities are summarized as follows:
Available-for-sale
----------------------------------------------
June 30, 1998
----------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
GNMA certificates ............... $ 58,965 $ -- $ 375 $ 58,590
FNMA certificates ............... 4,338,883 -- 11,698 4,327,185
FHLMC certificates .............. 1,773,481 14,708 -- 1,788,189
---------- ------- -------- ----------
$6,171,329 $14,708 $ 12,073 $6,173,964
========== ======= ======== ==========
Held-to-maturity
----------------------------------------------
June 30, 1998
----------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
GNMA certificates ............... $2,858,140 $ 6,676 $ 34,314 $2,830,502
FNMA certificates ............... 2,339,357 57 35,607 2,303,807
FHLMC certificates .............. 1,135,552 2,813 16,999 1,121,366
General Electric Capital Mortgage 2,595,039 18,987 -- 2,614,026
---------- ------- -------- ----------
$8,928,088 $28,533 $ 86,920 $8,869,701
========== ======= ======== ==========
Available-for-sale
----------------------------------------------
June 30, 1997
----------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
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
========== ======= ======== ==========
28
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 3 -- MORTGAGE-BACKED AND RELATED SECURITIES -- CONTINUED
- -------------------------------------------------------------
Held-to-maturity
----------------------------------------------
June 30, 1997
----------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
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
=========== ======= ======== ===========
The scheduled maturities of mortgage-backed securities available-for-sale, and
mortgage-backed securities held-to-maturity at June 30, 1998, were as follows:
Available-for-sale Held-to-maturity
securities securities
---------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Due in one year or less ........ $ -- $ -- $ -- $ --
Due from one to five years ..... 111,977 111,545 77,326 76,703
Due from five to ten years ..... -- -- 2,595,044 2,614,026
Due from ten to twenty years ... 225,493 223,586 2,608,915 2,566,428
Due in over twenty years ....... 5,833,859 5,838,833 3,646,803 3,612,544
---------- ---------- ---------- ----------
$6,171,329 $6,173,964 $8,928,088 $8,869,701
========== ========== ========== ==========
NOTE 4 -- LOANS RECEIVABLE
- --------------------------
Loans receivable at June 30, consisted of the following:
1998 1997
----------- -----------
MORTGAGE LOANS
Single-family residential .................. $12,308,383 $12,359,562
Multi-family residential ................... 260,358 282,381
Commercial ................................. 3,453,740 2,682,953
Construction ............................... 1,505,757 1,306,261
----------- -----------
17,528,238 16,631,157
NON-MORTGAGE LOANS
Secured by deposits ........................ 338,147 423,132
Home improvement ........................... 950,426 1,010,465
Commercial business ........................ 2,466,535 1,859,962
Other - consumer ........................... 4,602,023 5,386,474
----------- -----------
8,357,131 8,680,033
----------- -----------
Total loans ............................ 25,885,369 25,311,190
Less:
Loans in process ........................... 776,923 999,248
Deferred fees and discounts ................ 557,115 595,677
Allowance for losses ....................... 340,550 309,208
----------- -----------
Total loans receivable, net ............ $24,210,781 $23,407,057
=========== ===========
29
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 4 -- LOANS RECEIVABLE -- CONTINUED
- ---------------------------------------
Single-family residential loans include $10,704,351 and $10,607,167 at June 30,
1998, and 1997, respectively, of guaranteed participation certificates from the
Federal Home Loan Mortgage Corporation.
An analysis of the activity in the allowance for loan losses follows:
June 30,
----------------------------------------
1998 1997 1996
--------- --------- ---------
Balance, beginning of year ........ $ 309,208 $ 214,724 $ 203,959
Provision for losses ............ 263,000 129,429 37,643
Charge-offs ..................... (231,658) (34,945) (26,878)
--------- --------- ---------
Balance, end of year .............. $ 340,550 $ 309,208 $ 214,724
========= ========= =========
Loans receivable from officers, directors, and employees aggregated $798,100 and
$822,724, at June 30, 1998 and 1997, respectively.
Nonaccrual loans for which interest has been reduced totaled approximately
$577,000 and $595,000, at June 30, 1998 and 1997, respectively. Interest income
that would have been reported under the original terms of such loans was
approximately $14,000 and $10,000, for the years ended June 30, 1998 and 1997,
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:
June 30,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Mortgage loans underlying FHLMC
pass-through securities ............. $10,704,352 $10,607,168 $10,259,988
=========== =========== ===========
The Company at June 30, 1998, had mortgage loan commitments outstanding
substantially all of which had rates to be determined at closing.
Variable-rate ................................... $124,000
Fixed-rate (8.125%) ............................. --
--------
$124,000
========
NOTE 5 -- ACCRUED INTEREST RECEIVABLE
- -------------------------------------
Accrued interest receivable at June 30, is summarized as follows:
1998 1997
-------- --------
Investment securities ........................... $ 32,729 $ 21,179
Mortgage-backed securities ...................... 93,097 75,758
Loans receivable ................................ 283,640 287,706
-------- --------
$409,466 $384,643
======== ========
NOTE 6 -- OFFICE PROPERTIES AND EQUIPMENT
- -----------------------------------------
Office properties and equipment at June 30, are summarized by major
classification as follows:
1998 1997
-------- --------
Land ............................................ $ 80,842 $ 80,842
Buildings ....................................... 187,444 185,958
Furniture, equipment, and autos ................. 375,690 319,205
-------- --------
Total ....................................... 643,976 586,005
Accumulated depreciation ........................ 364,496 338,401
-------- --------
Total net ................................... $279,480 $247,604
======== ========
Depreciation expense for the years ended June 30, 1998, 1997, and 1996 was
$24,420, $24,420, and $24,420, respectively.
30
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 7 -- 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:
1998 1997
-------- --------
Current income tax .............................. $ 73,244 $(10,790)
Deferred income tax ............................. 2,771 (43,364)
-------- --------
$ 76,015 $(54,154)
======== ========
Federal income tax expense shown in the accompanying statements of income
consisted of the following:
June 30,
------------------------------
1998 1997 1996
------- ------- --------
Current .............................. $ 132 $31,806 $137,589
Deferred ............................. (132) (3,847) 855
------- ------- --------
$ -- $27,959 $138,444
======= ======= ========
Deferred tax expense results from timing differences principally relating to the
recognition of loan fees and timing of bad debts 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:
1998 1997 1996
------- ------- --------
Computed "Expected" income tax ....... $(2,599) $17,458 $135,587
Adjustments:
Other, net ....................... 2,599 10,501 2,857
------- ------- --------
Total .......................... $ -- $27,959 $138,444
======= ======= ========
The Company is allowed a special bad debt deduction, using the "experience"
method 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 year ended June 30, 1998,
includes approximately $280,000, for which Federal income tax has not been
provided.
NOTE 8 -- DEPOSITS
- ------------------
Deposits at June 30, are summarized as follows:
1998 1997
--------------------- ---------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
Passbook savings ............... $ 874,196 3.04 $ 1,007,247 3.46
Money market accounts .......... 1,307,237 4.54 785,970 2.70
Checking accounts .............. 1,466,361 5.09 803,468 2.76
----------- ------ ----------- ------
3,647,794 12.67 2,596,685 8.92
Certificates of deposit:
2% to 3.99% .................. 25,199 .08 734,850 2.53
4% to 5.99% .................. 17,951,528 62.34 15,779,222 54.21
6% to 7.99% .................. 7,076,285 24.57 9,903,895 34.03
8% to 9.99% .................. 96,099 .34 91,512 .31
----------- ------ ----------- ------
25,149,111 87.33 26,509,479 91.08
----------- ------ ----------- ------
$28,796,905 100.00 $29,106,164 100.00
=========== ====== =========== ======
31
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 8 -- DEPOSITS -- CONTINUED
- -------------------------------
Scheduled maturities of certificates of deposit at June 30, are as follows:
1999 2000 2001 and thereafter
----------- ---------- -------------------
2% to 3.99% .................... $ 25,199 $ -- $ --
4% to 5.99% .................... 15,827,245 1,939,280 186,003
6% to 7.99% .................... 3,117,846 1,904,382 2,054,057
8% to 9.99% .................... -- 1,099 95,000
----------- ---------- ----------
$18,970,290 $3,843,761 $2,335,060
=========== ========== ==========
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000, was approximately $7,155,000 and $5,249,000, at June
30, 1998 and 1997, respectively.
Interest expense on deposits is summarized as follows:
June 30,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Money market ...................... $ 44,880 $ 34,096 $ 35,936
Passbook savings .................. 25,512 31,220 34,746
Certificates of deposit ........... 1,479,829 1,336,905 1,223,427
NOW accounts ...................... 16,200 5,151 1,844
---------- ---------- ----------
$1,566,421 $1,407,372 $1,295,953
========== ========== ==========
NOTE 9 -- 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 1998 1997
----------------- -------- ---------- ----------
July 1, 1997 ........................ 5.53% $ -- $5,900,000
January 25, 1998 .................... 6.25% -- 2,650,000
July 15, 1998 ....................... 5.52% 4,900,000 --
September 23,1998 ................... 5.59% 1,600,000 --
February 16, 1999 ................... 9.91% 120,000 --
February 15, 2000 ................... 5.88% 120,000 --
February 15, 2001 ................... 5.94% 20,000 --
February 15, 2002 ................... 5.98% 25,000 --
February 17, 2003 ................... 6.00% 100,000 --
August 25, 2003 ..................... 6.25% 2,516,346 --
February 15, 2004 ................... 6.01% 100,000 --
February 15, 2005 ................... 6.04% 100,000 --
February 15, 2006 ................... 6.05% 150,000 --
---------- ----------
$9,751,346 $8,550,000
========== ==========
The Bank has pledged its portfolio of first mortgage loans as well as
mortgage-backed securities with a book value of $9,354,241 and $7,957,594, at
June 30, 1998 and 1997, respectively, as collateral on advances from the FHLB.
The maximum amount of FHLB advances outstanding at any month end during 1998 and
1997, were $9,751,346 and $9,400,000, respectively. The average amount of FHLB
advances outstanding during 1998 and 1997, were $8,711,302 and $8,995,833,
respectively.
32
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 10 -- 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 11 -- SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- ----------------------------------------------------------
The economy of the Company's market area, East Texas, is directly related 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.
NOTE 12 -- 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, 1998,
1997, and 1996, the Company contributed $13,634, $13,601, and $11,228,
respectively, to the plan.
NOTE 13 -- 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 $101,790 and $117,450, at June 30, 1998 and 1997, 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, $15,660, and $15,660, for the years ended
June 30, 1998, 1997 and 1996, respectively.
33
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 14 -- STOCK OPTION AND INCENTIVE PLAN
- ------------------------------------------
The October 12, 1995 stockholders' meeting, certain directors and officers were
granted options to purchase 10,761 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 exercisable
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 15 -- 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 $11,627, $10,118 and $6,096 for the
years ended June 30, 1998, 1997, and 1996, respectively.
NOTE 16 -- 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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
34
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 16 -- REGULATORY MATTERS -- CONTINUED
- ------------------------------------------
As of June 30, 1998, 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, 1998:
- --------------------
Risk-based capital
(to risk-weighted assets) ...... $4,104,659 18.3% $1,776,000 8.0% $2,220,000 10.0%
Core capital (to total assets) ... $3,798,470 8.8% $1,295,475 3.0% $2,590,950 6.0%
Tangible capital
(to total assets) .............. $3,798,470 8.8% $ 647,738 1.5% $2,159,125 5.0%
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%
</TABLE>
NOTE 17 -- CONTINGENCIES
- ------------------------
The Bank is a plaintiff in a lawsuit filed in District Court in Upshur County
for the wrongful dishonor of a cashier's check in the amount of $145,000 issued
by another financial institution. Written discovery has been completed and
depositions have been taken. Management of the Bank is prosecuting the case
vigorously and anticipates full recovery of its claim. The $145,000 related to
the charge-off of this claim is included in other expense for the year ended
June 30, 1998.
NOTE 18 -- PARENT COMPANY ONLY FINANCIAL INFORMATION
- ----------------------------------------------------
Condensed financial information for Gilmer Financial Services, Inc. (parent
company only) follows:
CONDENSED BALANCE SHEET
1998 1997
---------- ----------
Cash ................................................. $ 18,280 $ 12,833
Account receivable(payable),Gilmer Savings Bank, FSB . (16,308) (10,840)
Note receivable, Gilmer Savings Bank, FSB ............ 101,790 117,450
Investment in Gilmer Savings Bank, FSB, at equity .... 3,900,260 3,801,409
---------- ----------
$4,004,022 $3,920,852
========== ==========
Stockholders' equity ................................. $4,004,022 $3,920,852
========== ==========
35
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 18 -- PARENT COMPANY ONLY FINANCIAL INFORMATION -- CONTINUED
- -----------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
Year ended Year ended
June 30, 1998 June 30, 1997
------------- -------------
Interest income ................................... $ 9,108 $ 10,364
Income tax benefit ................................ 7,101 19,558
Stock service and professional fees ............... (54,563) (83,170)
-------- --------
Income before equity in undistributed
earnings of subsidiary ........................ (38,354) (53,248)
Equity in undistributed earnings of subsidiary .... 30,713 76,636
-------- --------
Net (loss) income ........................... $ (7,641) $ 23,388
======== ========
NOTE 19 -- 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.
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, 1998, the Bank had not issued any standby letters-of-credit.
Commitments to extend credit totaled $124,000 at June 30, 1998, 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.
36
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
CONTINUED
NOTE 19 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
- -----------------------------------------------------------------------------
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS-OF-CREDIT -- CONTINUED
The estimated fair values of the Bank's financial instruments at June 30,
are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest-bearing deposits . $ 1,649,963 $ 1,649,963 $ 1,896,897 $ 1,896,897
=========== =========== =========== ===========
Investment securities .............. $ 741,517 $ 741,512 $ 316,066 $ 317,863
=========== =========== =========== ===========
Loans and mortgage-backed securities 39,653,383 39,594,996 $38,887,421 $38,578,104
Less: Allowance for loan losses .... 270,550 -- 309,208 --
----------- ----------- ----------- -----------
$39,382,833 $39,594,996 $38,578,213 $38,578,104
=========== =========== =========== ===========
Financial liabilities:
Deposits ........................... $28,796,905 $28,796,905 $29,107,202 $29,107,202
=========== =========== =========== ===========
Borrowings ......................... $ 9,751,346 $ 9,751,346 $ 8,550,000 $ 8,550,000
=========== =========== =========== ===========
Unrecognized financial instruments:
Commitments to extend credit ....... $ 124,000 $ 124,000 $ 60,600 $ 60,600
=========== =========== =========== ===========
Standby letters-of-credit .......... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
37
<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 22, 1998 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, 1998, there were 158 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 $17.25 as of June 30, 1998.
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, 1998, 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.
38
<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 Gary P. Cooper
Chairman of Gilmer Financial President and Chief Executive
Services, Inc. and Officer of Gilmer Financial
Chairman of the Board of Gilmer Services, Inc. and Gilmer Savings
Savings Bank, FSB Bank, FSB
Royce L. Hudgins Paul D. Williams
Owner of Retail Store Vice President, Gilmer Lumber
Company, Inc.
Tedd R. Austin Donald Bethard
Part-owner, Dodd Motor Company Part-owner, Med-Shop Pharmacies and
Med-Shop Total Care
Steven W. Sansom
Part-owner, Funeral Homes
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
39
Exhibit 21
<PAGE>
Subsidiaries of Registrant
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ------ ------------- ---------- -------------
<S> <C> <C> <C>
Gilmer Financial Services, Inc. Gilmer Savings Bank FSB 100% Federal
Gilmer Savings Bank FSB Gilmer Service Corp. 100% Texas
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the Annual
Report on Form 10-KSB for the fiscal year ending June 30, 1998
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 221,885
<INT-BEARING-DEPOSITS> 1,428,078
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,914,501
<INVESTMENTS-CARRYING> 8,929,068
<INVESTMENTS-MARKET> 8,870,676
<LOANS> 25,885,369
<ALLOWANCE> 340,550
<TOTAL-ASSETS> 43,189,930
<DEPOSITS> 29,320,208
<SHORT-TERM> 6,860,000
<LIABILITIES-OTHER> 216,145
<LONG-TERM> 2,891,346
1,958
0
<COMMON> 0
<OTHER-SE> 3,900,273
<TOTAL-LIABILITIES-AND-EQUITY> 43,189,930
<INTEREST-LOAN> 2,210,789
<INTEREST-INVEST> 927,689
<INTEREST-OTHER> 91,142
<INTEREST-TOTAL> 3,229,620
<INTEREST-DEPOSIT> 1,566,421
<INTEREST-EXPENSE> 459,151
<INTEREST-INCOME-NET> 1,204,048
<LOAN-LOSSES> 263,000
<SECURITIES-GAINS> 15,930
<EXPENSE-OTHER> 1,198,846
<INCOME-PRETAX> (7,644)
<INCOME-PRE-EXTRAORDINARY> (7,644)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,644)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
<YIELD-ACTUAL> 2.87
<LOANS-NON> 577,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 354,000
<ALLOWANCE-OPEN> 309,000
<CHARGE-OFFS> 231,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 341,000
<ALLOWANCE-DOMESTIC> 20,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 321,000
</TABLE>