SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
[ ] 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 as specified in its charter)
Delaware 75-2561513
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification or
organization) Number)
218 W. Cass Street, Gilmer, Texas 75644
(Address of principal executive offices)
(903) 843-5525
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Transitional Small Business Disclosure Format (check one) :
Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes of
common equity, as of the latest date:
As of February 12, 1999, there were 195,755 shares of the Registrant's
common stock $.01 par value issued and 192,236 shares outstanding.
<PAGE>
<TABLE>
<CAPTION>
GILMER FINANCIAL SERVICES, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, 1998 AND JUNE 30, 1998
(UNAUDITED)
<S> <C> <C>
DECEMBER 31, JUNE 30,
1998 1998
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ASSETS
Cash on hand and in banks $ 386,241 $ 221,885
Interest bearing deposits 2,837,510 1,428,078
Investment securities
Available for sale 887,652 740,537
Held to maturity -- 980
Mortgage-backed securities
Available for sale 11,606,394 6,173,964
Held to maturity -- 8,928,088
Loans receivable, net 24,475,889 24,210,781
Accrued interest receivable 419,757 409,466
Real estate and other assets
acquired in settlement of loans,net 138,420 104,561
Federal Home Loan Bank stock, at cost 541,000 525,400
Office properties and equipment, at cost 279,267 279,480
Federal income taxes (7,312) 76,015
Prepaid expenses and other assets 133,423 90,695
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Total assets $41,698,241 $43,189,930
============= =============
LIABILITIES
Deposits $28,334,855 $28,796,905
Accrued interest payable 87,607 29,031
Advances by borrowers for taxes and ins. 198,790 523,303
Accounts payable and accrued expenses 88,396 187,114
Advances from Federal Home Loan Bank 8,945,584 9,751,346
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Total liabilities 37,655,232 39,287,699
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 1,622,943 1,624,968
Retained earnings 2,605,239 2,458,370
Less: Shares acquired by Employee Stock Ownership Plan (93,960) (101,790)
Shares acquired by Recognition and Retention Plan (24,460) (30,273)
Treasury Stock (4,497 shares, at cost) (44,234) (56,527)
Accumulated other comprehensive income (24,477) 5,525
------------- -------------
Total stockholders' equity 4,043,009 3,902,231
------------- -------------
Total liabilities and stockholders' equity $41,698,241 $43,189,930
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<S> <C> <C>
1998 1997
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INTEREST INCOME
Loans $ 559,602 $ 536,519
Investment securities 11,045 4,737
Mortgage-backed securities 187,374 225,914
Other interest-earning assets 34,969 23,539
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Total interest income 792,990 790,709
INTEREST EXPENSE
Deposits 366,368 395,437
Interest on FHLB advances 128,355 123,468
------------- -------------
Total interest expense 494,723 518,905
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Net interest income 298,267 271,804
Provision for loan losses 73,500 161,500
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Net interest income after provision for
loan losses 224,767 110,304
NONINTEREST INCOME
Gain on sale of interest-bearing assets (700) 318
Loan origination & commitment fees 7,758 11,396
Loan servicing fees 19,548 19,040
Income (loss) from real estate operations (2,845) (1,089)
Mortgage servicing rights 5,775 2,791
Other income 27,040 22,530
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Total noninterest income 56,576 54,986
NONINTEREST EXPENSE
Compensation and benefits 126,432 137,135
Occupancy and equipment 9,514 7,901
Federal insurance premium 5,859 4,432
Other expense 113,663 94,552
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Total noninterest expense 255,468 244,020
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Income before taxes 25,875 (78,730)
INCOME TAX EXPENSE 14,978 (27,379)
------------- -------------
Net income $ 10,897 $ (51,351)
============= =============
EARNINGS PER SHARE
Basic $ .06 $ (.28)
============= =============
Diluted $ .06 $ (.27)
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<S> <C> <C>
1998 1997
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INTEREST INCOME
Loans $ 1,133,663 $ 1,084,941
Investment securities 20,599 10,016
Mortgage-backed securities 386,127 461,610
Other interest-earning assets 57,668 46,976
------------- -------------
Total interest income 1,598,057 1,603,543
INTEREST EXPENSE
Deposits 739,862 803,093
Interest on FHLB advances 276,107 235,674
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Total interest expense 1,015,969 1,038,767
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Net interest income 582,088 564,776
Provision for loan losses 80,500 172,000
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Net interest income after provision for
loan losses 501,588 392,776
NONINTEREST INCOME
Gain on sale of interest-bearing assets 0 318
Loan origination & commitment fees 28,533 27,311
Loan servicing fees 45,127 40,295
Income (loss) from real estate operations (3,349) 1,073
Mortgage servicing rights 12,246 4,548
Other income 172,397 43,242
------------- -------------
Total noninterest income 254,954 116,787
NONINTEREST EXPENSE
Compensation and benefits 292,584 289,354
Occupancy and equipment 23,265 20,466
Federal insurance premium 10,955 9,152
Other expense 208,724 180,390
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Total noninterest expense 535,528 499,362
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Income before taxes 221,014 10,201
INCOME TAX EXPENSE 74,145 3,468
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Net income $ 146,869 $ 6,733
============= =============
EARNINGS PER SHARE
Basic $ .81 $ .04
============= =============
Diluted $ .79 $ .04
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
<S> <C>
TOTAL
STOCKHOLDERS'
EQUITY
Balance at June 30, 1998 $ 3,902,231
Accrual of ESOP Plan Awards 7,830
Accrual of RRP Plan Awards 5,813
Treasury Shares Reissued for exercise of
stock options 10,268
Net Income 146,869
Other comprehensive income (30,002)
Comprehensive income 116,867
-------------
Balance at December 31, 1998 $ 4,043,009
=============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<S> <C> <C>
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 146,869 $ 6,733
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation 12,210 12,210
Gain on sale of real estate owned -- --
Provision of losses on loans and other
real estate 80,500 172,000
(Gain) Loss on sale of interest bearing assets -- (318)
Contribution to ESOP Plan 7,830 7,830
Contribution to RRP Plan 5,813 5,813
Change in assets and liabilities
(Increase) decrease in mortgage
servicing rights (5,775) (4,548)
(Increase) decrease in accrued
interest receivable (10,291) (62,627)
(Increase) decrease in prepaid
expenses and other assets (42,728) 50,193
(Decrease) increase in advances
for taxes and insurance (324,513) (232,182)
(Decrease) increase in accrued
interest payable 58,576 (498)
(Decrease) increase in federal
income taxes 83,327 9,921
(Decrease) increase in deferred
loan fees (504) (954)
(Decrease) increase in accounts
payable & accrued expenses (98,718) 47,252
------------- -------------
Net cash provided by operating
activities (87,404) 10,825
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities -- --
Purchase of investment securities (120,000) (735,000)
Capital expenditures (11,997) 10,073
Purchase of FHLB stock (15,600) (12,000)
Proceeds from sales of mortgage loans 985,515 656,394
Loans originates, net of payments (1,358,703) (1,045,616)
Sales proceeds from sale of real estate owned -- --
Purchase of securities available for sale (1,319,426) --
Sales proceeds from sale of mortgage-
backed certificates available for sale -- --
Principal paydown on mortgage-backed
certificates 4,758,947 591,388
------------- -------------
Net cash provided by (used in)
investing activities 2,918,736 (534,761)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in deposits (462,050) 225,431
Net (decrease)increase in advances from FHLB (805,762) 35,000
Reissuance of treasury shares 10,268 --
------------- -------------
Net cash provided by financing activities (1,257,544) 260,431
------------- -------------
Net increase (decrease) in cash
and cash equivalents 1,573,788 (263,505)
CASH AND CASH EQUIVALENTS AT BEGIN OF PERIOD 1,649,963 1,896,897
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,223,751 $ 1,633,392
============= =============
</TABLE>
See accompany notes to consolidated financial statements
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies and practices of Gilmer Financial
Services, Inc. conform to generally accepted accounting principles and to
prevailing practices within the savings and loan industry.
The unaudited interim financial statements were prepared in accordance with
instructions for Form 10-QSB and, therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations, and cash flows in conformity with generally accepted accounting
principles. However, all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation of the financial statements have been included. The results of
operations for the three and six month periods ended December 31, 1998 and 1997
are not necessarily indicative of the results which may be expected for an
entire fiscal year.
The OTS has adopted a regulation which requires that, for purposes of
calculating regulatory capital, unrealized gains or losses related to accounting
for certain investments in debt and equity securities under SFAS 115 are not
included in the Bank's regulatory capital. As a result of this rule at December
31, 1998, the Bank's core, tangible and risk-based capital was increased by
approximately $24,477 above the capital calculated in accordance with generally
accepted accounting principles.
Beginning July 1, 1998, the Company adopted the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No.130, "Reporting
Comprehensive Income" (FAS 130). This statement 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. As a result of adopting this FAS 130, the
Company reported (30,002) in other comprehensive income for the six month period
ended December 31, 1998.
NOTE 2-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 Company has available to award 7,830 shares of Company stock and on October
12, 1996, the Company awarded 4,303 shares, with the remainder being reserved
for future 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 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. The Company initially funded the RRP in
October 1995 by issuing 4303 shares of its previously authorized but unissued
common stock. In October 1996, the company repurchased 10,000 shares of its
outstanding common stock for $125,700, of these shares 4,303 shares were
contributed to the RRP to retire shares previously issued. During the year ended
June 30, 1997, the Company awarded an additional 1,200 shares and used Treasury
shares to fund the award. During the six month period ended December 31, 1998,
the Bank reissued treasury shares to fund 978 stock options exercised during the
quarter. The remaining 3,519 shares of stock repurchased are held in treasury
shares at cost. RRP Plan expense totalled $5,813 for the six month period ended
December 31, 1998.
<PAGE>
GILMER FINANCIAL SERVICES, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 3-EARNINGS PER SHARE
Effective with the quarter ended December 31, 1997, the Company adopted the
provisions of the Statement of Financial Accounting Standards No. 128, which
changes the method of computing and reporting earnings per share. Amounts
previously reported have been restated to conform to the new standard. Basic
earnings per share for the three and six month periods ended December 31, 1998
and 1997 have been computed by dividing net earnings by the weighted average
number of shares outstanding. Shares controlled by the ESOP are accounted for in
accordance with Statement of Position 93-6 under which unallocated shares are
not considered in the weighted average number of shares of common stock
outstanding. Diluted earnings per share have been computed, giving effect to
outstanding stock purchase options by application of the treasury stock method.
NOTE 4-RECLASSIFICATIONS
Certain items previously reported have been reclassified to conform with current
period reporting form. The most significant changes involve the adoption of the
Statement of Financial Accounting Standards No. 128, which changes the method of
computing and reporting earnings per share as described in Note 3 and the
adoption of Statement of Financial Accounting Standards No. 130, which requires
reporting and display of comprehensive income and its components.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Gilmer Financial Services, Inc. was formed in July of 1994 and is the
holding company and owner of 100% of the common stock of Gilmer Savings Bank FSB
(Bank), a federally chartered stock savings institution and its wholly owned
subsidiary, Gilstar Service Corporation (Gilstar), which offers non-depository
investment products. In this discussion and analysis, reference to the
operations and financial condition of the Company includes the operations and
financial condition of the Bank and Gilstar.
The Holding Company's business currently consists of the operations of the
Bank. As a consumer-oriented financial institution, the Company offers a range
of banking services to residents of 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 Bank's results of operations are primarily affected by its net
interest income, which is the difference between interest income earned on its
loans, investment 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 advances. Net income of the Bank 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 Bank'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.
Financial Condition
December 31, 1998 Compared to June 30, 1998. Total assets decreased $1.5
million from $43.2 million at June 30, 1998 to $41.7 million at December 31,
1998. The decrease was primarily attributable to $4.8 million in principal
repayments on mortgage backed securities, partially offset by an increase in
cash and cash equivalents of $1.6 million, a $265,000 increase in net loans
receivable, an increase in investment securities of $147,000, and the purchase
of $1.3 million in mortgage backed securities.
Cash and cash equivalents increased $1.6 million from $1.6 million at June
30, 1998 to $3.2 million at December 31, 1998. The increase was primarily
attributable to principal repayments on mortgage-backed securities.
Investment securities increased $147,000 from $742,000 at June 30, 1998 to
$887,000 at December 31, 1998. The increase was due to the purchase of $120,000
of municipal bonds and an increase in market value of available for sale
investment securities of $27,000.
Mortgage-backed securities decreased $3.5 million from $15.1 million at
June 30, 1998 to $11.6 million at December 31, 1998. The decrease was primarily
due to $4.8 million in principal repayments on mortgage-backed securities,
partially offset by purchases of $1.3 million in mortgage-backed securities. In
the quarter ended September 30, 1998, the Bank elected to move all of its
securities in the held to maturity category to the available for sale category,
in order to better manage its securities portfolio.
Loans receivable were $24.2 million at June 30, 1998, and $24.5 million at
December 31, 1998 an increase of $265,000, or 1.08%. The increase is primarily
attributable to an increase in originations of consumer loans due to an increase
in home equity lending.
Real estate and other assets acquired in settlement of loans increased
$33,000 from $105,000 at June 30, 1998 to $138,000 at December 31, 1998. The
increase was primarily due to the foreclosure on real estate during the quarter
of $15,000, along with repossessed assets of $18,000.
<PAGE>
Deposits decreased $500,000 from $28.8 million at June 30, 1998, to $28.3
million at December 31, 1998. The decrease was due primarily to a decrease in
average rates paid on deposits. Federal Home Loan Bank advances decreased
$900,000 from $9.8 million at June 30, 1998, to $8.9 million at December 31,
1998. The decrease was due to the repayment of advances from funds received from
principal repayments on mortgage-backed securities.
Advances by borrowers for taxes and insurance decreased $324,000 from
$523,000 at June 30, 1998 to $199,000 at December 31, 1998. The decrease is due
to the majority of the property taxes being paid in the last quarter of calendar
1998.
Total stockholders' equity increased $141,000 to $4,043,000 at December
31, 1998 from $3,902,000 at June 30, 1998. This increase was a result of a
$147,000 increase in net income, a decrease in the Employee Stock Ownership Plan
of $7,830, a decrease in the Recognition and Retention Plan of $5,813, and a
decrease in treasury shares of $12,293 due to the reissuance of stock to fund
stock options exercised, offset by a $2,000 increase in additional paid in
capital due to the cost method of reissuing treasury shares and a $30,000
increase in accumulated other comprehensive income.
The Bank continued to exceed all of its regulatory capital requirements at
December 31, 1998, with tangible and core capital of $3.9 million (9.44% of
total adjusted assets) and risk-based capital of $3.9 million (16.82% of
risk-weighted assets).
Results of Operations
The Company's results of operations depend primarily on the level of its
net interest income and non-interest income and the 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 the Three Months Ended December 31, 1998 and
1997
General. Net income for the quarter ended December 31, 1998 was $11,000,
an increase of $62,000 from the quarter ended December 31, 1997. The increase
was primarily due to a decrease in the provision for loan losses of $88,000.
Interest Income. Interest income totaled $793,000 for the quarter ended
December 31, 1998, compared to $791,000 for the quarter ended December 31, 1997,
an increase of $2,000. Interest income on loans increased $23,000 due to an
increase in net loans receivable, partially offset by a $39,000 decrease in
interest income from mortgage-backed securities due to a decrease in principal
balance on mortgage-backed securities.
Interest Expense. Interest expense decreased $24,000 primarily due to a
decrease in interest expense on deposits due to a decrease in average
outstanding balances on deposits, along with a decrease in the average rates
paid on deposits.
Provision for Loan Losses. The Company maintains an allowance for loan
losses based upon management's periodic evaluation of non-performing loans,
inherent risks in the loan portfolio, economic conditions and past experience.
The provision for the three months ended December 31, 1998, decreased $88,000
from $161,500 for the three months ended December 31, 1997, to $73,500 for the
three month period ended December 31, 1998. The primary reason for the decrease
was the additional provisions of $151,000 that were recorded in the quarter
ended December 31, 1997 due to loan losses on the same individual. This decrease
was offset by specific reserves of $35,000 that were record to guard against
loss on slow pay and delinquent loans, along with $28,000 additional reserves
due to growth in the consumer and commercial loan portfolio.
Non-Interest Income. Non-interest income increased $2,000 from $55,000 for
the quarter ended December 31, 1997 to $57,000 for the quarter ended December
31, 1998. The increase resulted primarily from a $4,000 increase in other income
and a $3,000 increase in mortgage servicing rights, partially offset by a $4,000
decrease in loan origination and commitment fees and a $1,000 increase in loss
from real estate operations.
Non-Interest Expense. Non-interest expense increased $11,000 from $244,000
for the quarter ended December 31, 1997, compared to $255,000 for the quarter
<PAGE>
ended December 31, 1998. Compensation and benefits decreased $11,000 to $127,000
for the quarter ended December 31, 1998 from $137,000 for the quarter ended
December 31, 1997, due to the Company's decision to decrease accrued bonuses to
offset some of the expense of additional reserves for loan losses. Occupancy and
equipment expense increased $2,000 due to the purchase of new equipment. Other
miscellaneous expenses increased $19,000 from $95,000 for the quarter ended
December 31, 1997 to $114,000 for the quarter ended December 31, 1998, the
increase was primarily due to increased printing and expenses associated with
year end annual reports and filings.
Income Taxes. The provision for income taxes increased $42,000 from
($27,000) for the quarter ended December 31, 1997 to $15,000 for the quarter
ended December 31, 1998. The increase is due to an increase in net earnings
before income taxes of $105,000 for the quarter ended December 31, 1998.
Comparison of Operating Results for the Six Months Ended December 31, 1998 and
1997
General. Net income for the six months ended December 31, 1998 was
$147,000, an increase of $140,000 from the six months ended December 31, 1997.
The increase was primarily due to the recovery of $123,000 relating to the
dishonored cashiers check on which a settlement of $145,000 was reached in
September 1998. The remaining $22,000 was booked to the general valuation
allowance account as recovery on loans. The increase was also due to a decrease
in the provision for loan losses of $92,000.
Interest Income. Interest income remained relatively constant, interest
income for the six months ended December 31, 1998 was $1.6 million, compared to
$1.6 million for the six months ended December 31, 1997. Interest income on
loans increased $49,000 due to an increase in net loans receivable, interest
income on investment securities increased $11,000, and interest income on other
interest-earning assets increased $11,000, partially offset by a $75,000
decrease in interest income from mortgage-backed securities due to a decrease in
the principal balance on mortgage-backed securities.
Interest Expense. Interest expense decreased $23,000 primarily due to a
$63,000 decrease in interest expense on deposits due to a decrease in average
outstanding balances on deposits, partially offset by a $40,000 increase in
interest paid on advances due to an increase in outstanding balances on advances
for the six months ended December 31, 1998.
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 provision for the six months ended December 31, 1998, decreased $92,000 from
$172,000 for the six months ended December 30, 1997, to $80,500 for the six
month period ended December 31, 1998. The primary reason for the decrease was
the additional provisions of $151,000 that were recorded in the six months ended
December 31, 1997 were due to loan losses on the same individual, this decrease
was offset by additional specific reserves of $35,000 that were recorded to
guard against loss on slow pay and delinquent loans, along with $24,000
additional reserves due to growth in the consumer and commercial loan portfolio.
Non-Interest Income. Non-interest income increased $138,000 from $117,000
for the six months ended December 31, 1997 to $255,000 for the six months ended
December 31, 1998. The increase resulted primarily from a $129,000 increase in
other income due to the settlement of the dishonored cashiers check. The Bank
received the face amount of the check, $145,000, of which, $123,000 that was
charged off in the March 31, 1998 quarter was booked directly to income and the
difference of $22,000 to recovery on loans. Noninterest income also increased
due to an $8,000 increase in mortgage servicing rights and an increase of $5,000
in loan servicing fees, partially offset by a $4,000 increase in loss from real
estate operations.
Non-Interest Expense. Non-interest expense increased $36,000 from $499,000
for the six months ended December 31, 1997, compared to $535,000 for the six
months ended December 31, 1998. Compensation and benefits increased $3,000 to
$293,000 for the six months ended December 31, 1998 from $289,000 for the six
months ended December 31, 1997. Occupancy and equipment expense increased $3,000
due to the purchase of new equipment. Other miscellaneous expenses increased
$28,000 from $180,000 for the six months ended December 31, 1997 to $208,000 for
the six months ended December 31, 1998, the increase was due to a $4,000
<PAGE>
increase in service bureau expense due to Year 2000 testing expense, a $4,000
increase in office supplies, a $4,000 increase in public relations, along with a
$10,000 increase in group life and health insurance due to the discontinuance of
our previous insurance plan and the addition of eligible employees.
Income Taxes. The provision for income taxes increased $71,000 from $3,000
for the six months ended December 31, 1997 to $74,000 for the six months ended
December 31, 1998. The increase is due to an increase in net earnings before
income taxes of $211,000 for the six months ended December 31, 1998.
YEAR 2000 ISSUE
Effective June 19, 1997, the Bank adopted a Year 2000 ("Y2K") Policy. This
policy implements steps to assure any problems relating to software that has
been written to use a 2 digit field in the year designation of a date has been
corrected by year end 1998. 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 is meant to be the twenty first century.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors and with respect to data exchange and the potential impact of the Y2K
issue on their customers, suppliers, and borrowers. These statements also
require each federally regulated financial institution to survey its exposure,
measure its risk and prepare a plan to address the Y2K issue. Failure to address
appropriately the Y2K issue could result in supervisory action, including the
reduction of the institution's supervisory ratings, or the imposition of civil
money penalties.
The Company's operating, processing and accounting operations are computer
reliant and could be affected by the Y2K issues. Both the Bank and the Company
are reliant on third-party vendors for their data processing needs as well as
certain other significant functions and services. The Company is currently
working with its third party vendors in order to assess their Y2K readiness.
While no assurance can be given that such third party vendors will be Y2K
compliant, management believes that its mission critical vendors are taking
appropriate steps to address the issues on a timely basis.
The Company has formulated five phases from the regulatory guidelines to
attain Y2K compliance. In the Awareness phase the Company formally established a
Y2K plan headed by a senior manager, and a project team was assembled for
management of the Y2K project. The project team created a plan of action that
included strategies, milestone dates, and budget estimates for Y2K compliance.
In the Assessment phase the Company developed strategies to achieve the
objectives of the Y2K plan, and a Y2K business risk assessment was made to
quantify the extent of the Company's Y2K exposure. Systems were prioritized
based on business impact and available alternatives. The mission critical areas
supplied by vendors have been researched to determine Y2K readiness. The third
party systems that are not Y2K compliant are being monitored for compliance and
the Company has identified replacements that are Y2K compliant. The Bank has
identified all of our major customers, borrowers with balances in excess of
$250,000, and sent letters to them to assess our risk and the Bank has received
responses from all its major customers and the Bank's risk appears to be
minimal. In the Renovation phase the Company's systems revealed that Y2K
upgrades were available for some of its vendors and all of the hardware and
software systems that required an upgrade have been replaced and were tested
during the validation phase. In the Validation phase the Company tested the
ability of the hardware and software to accurately process date sensitive data.
The Company has completed testing each mission critical system. The Company has
not incurred any Y2K related errors in its testing to date. The Company's
validation phase was completed by December 31, 1998, for all mission critical
systems. The Company implemented the renovated systems as of December 31, 1998.
Although our service bureau has been tested for Year 2000 compliance, the
Office of Thrift Supervision requires that the Bank have a business resumption
<PAGE>
contingency plan to carry on the main bank activities in case its service bureau
is not up and running. The Bank has completed the business resumption plan and
submitted the plan to an outside firm to audit, and received a satisfactory
rating. The Bank has been audited by the Office of Thrift Supervision three
times, with the most recent exam concluding in January 1999, for Y2K compliance
and received a satisfactory rating on all exams. While the Company currently has
no reason to believe that the cost of addressing the Y2K issues will materially
affect the Bank's operations, no assurance can be made that the third party
vendors, on which the Company relies, will become Y2K compliant in a successful
and timely fashion. Nevertheless, the Company does not believe that the cost of
addressing the Y2K issues will be a material event or uncertainty that would
cause reported financial information not to be necessarily indicative of future
operating results or financial conditions. The total cost of the Y2K project for
the Company is estimated to be $44,000. Expenses of approximately $20,000 were
incurred and expensed by the Company through December 31, 1998.
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K
` Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GILMER FINANCIAL SERVICES, INC.
Date: February 12, 1999 By: /s/ Gary P. Cooper
----------------------------------
Gary P. Cooper
Pres. and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 1999 By: /s/ Sheri Parish
----------------------------------
Sheri Parish
Vice President/Secretary/Treasurer
(Principal Fin. & Acct. Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
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<FED-FUNDS-SOLD> 0
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<ALLOWANCE> 400,000
<TOTAL-ASSETS> 41,698,241
<DEPOSITS> 28,334,855
<SHORT-TERM> 6,416,000
<LIABILITIES-OTHER> 374,793
<LONG-TERM> 2,529,584
0
<COMMON> 1,958
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<OTHER-SE> 4,041,051
<TOTAL-LIABILITIES-AND-EQUITY> 41,698,241
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