SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________________________________
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 MARCH 31, 1999
[ ] 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 May 17, 1999, there were 195,755 shares of the Registrant's common
stock $.01 par value issued and 192,236 shares outstanding.
GILMER FINANCIAL SERVICES, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT MARCH 31, 1999 AND JUNE 30, 1998
(UNAUDITED)
MARCH 31, JUNE 30,
1999 1998
------------- ------------
ASSETS
Cash on hand and in banks $ 595,806 $ 221,885
Interest bearing deposits 765,009 1,428,078
Investment securities
Available for sale 794,790 740,537
Held to maturity --- 980
Mortgage-backed securities
Available for sale 10,677,068 6,173,964
Held to maturity --- 8,928,088
Loans receivable, net 24,590,569 24,210,781
Accrued interest receivable 425,898 409,466
Real estate and other assets
acquired in settlement of loans,net 123,217 104,561
Federal Home Loan Bank stock, at cost 548,300 525,400
Office properties and equipment, at cost 272,749 279,480
Federal income taxes (11,592) 76,015
Prepaid expenses and other assets 202,744 90,695
----------- -----------
Total assets $38,984,558 $43,189,930
=========== ===========
LIABILITIES
Deposits $28,152,341 $28,796,905
Accrued interest payable 45,926 29,031
Advances by borrowers for taxes and ins. 343,108 523,303
Accounts payable and accrued expenses 230,870 187,114
Advances from Federal Home Loan Bank 6,120,274 9,751,346
----------- -----------
Total liabilities 34,892,519 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 2,647,303 2,458,370
Less: Shares acquired by
Employee Stock Ownership Plan (90,045) (101,790)
Shares acquired by
Recognition and Retention Plan (21,553) (30,273)
Treasury Stock (3,519 shares, at cost) (44,234) (56,527)
Accumulated other comprehensive income (24,333) 5,525
----------- -----------
Total stockholders' equity 4,092,039 3,902,231
----------- -----------
Total liabilities and stockholders' equity $38,984,558 $43,189,930
=========== ===========
See accompanying notes to the consolidated financial statements.
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
----------- -----------
INTEREST INCOME
Loans $ 545,068 $ 537,253
Investment securities 10,294 5,306
Mortgage-backed securities 164,980 232,746
Other interest-earning assets 24,992 15,492
----------- -----------
Total interest income 745,334 790,797
INTEREST EXPENSE
Deposits 350,025 385,318
Interest on FHLB advances 105,472 129,475
----------- -----------
Total interest expense 455,497 514,793
Net interest income 289,937 276,004
Provision for loan losses 10,500 10,500
----------- -----------
Net interest income after provision for
loan losses 279,337 265,504
NONINTEREST INCOME
Gain on sale of interest-bearing assets 0 10,283
Loan origination & commitment fees 3,943 10,009
Loan servicing fees 21,319 16,935
Income (loss) from real estate operations (546) (88)
Mortgage servicing rights 1,883 2,483
Other income 33,844 26,813
----------- -----------
Total noninterest income 60,443 66,435
NONINTEREST EXPENSE
Compensation and benefits 155,345 158,375
Occupancy and equipment 9,882 12,493
Federal insurance premium 5,826 4,432
Other expense 107,961 225,996
----------- -----------
Total noninterest expense 279,014 401,296
----------- -----------
Income before taxes 60,766 (69,357)
INCOME TAX EXPENSE 18,702 (23,414)
----------- -----------
Net income(loss) $ 42,064 $ (45,943)
=========== ===========
EARNINGS PER SHARE
Basic $ .23 $ (.25)
=========== ===========
Diluted $ .23 $ (.24)
=========== ===========
See accompanying notes to consolidated financial statements.
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
----------- -----------
INTEREST INCOME
Loans $ 1,678,731 $ 1,622,194
Investment securities 30,893 15,322
Mortgage-backed securities 551,107 694,356
Other interest-earning assets 82,660 62,468
----------- -----------
Total interest income 2,343,391 2,394,340
INTEREST EXPENSE
Deposits 1,089,887 1,188,411
Interest on FHLB advances 381,579 365,149
----------- -----------
Total interest expense 1,471,466 1,553,560
----------- -----------
Net interest income 871,925 840,780
Provision for loan losses 91,000 182,500
----------- -----------
Net interest income after provision for
loan losses 780,925 658,280
NONINTEREST INCOME
Gain on sale of interest-bearing assets 0 10,601
Loan origination & commitment fees 32,476 37,320
Loan servicing fees 66,446 57,230
Income (loss) from real estate operations (3,895) 985
Mortgage servicing rights 14,129 7,031
Other income 206,241 70,055
----------- -----------
Total noninterest income 315,397 183,222
NONINTEREST EXPENSE
Compensation and benefits 447,929 447,729
Occupancy and equipment 33,147 32,959
Federal insurance premium 16,781 13,584
Other expense 316,685 406,386
----------- -----------
Total noninterest expense 814,542 900,658
----------- -----------
Income before taxes 281,780 (59,156)
INCOME TAX EXPENSE 92,847 (19,946)
----------- -----------
Net income(loss) $ 188,933 $ (39,210)
=========== ===========
EARNINGS PER SHARE
Basic $ 1.04 $ (.21)
=========== ===========
Diluted $ 1.02 $ (.21)
=========== ===========
See accompanying notes to consolidated financial statements.
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
TOTAL
STOCKHOLDERS'
EQUITY
--------------
Balance at June 30, 1998 $ 3,902,231
Accrual of ESOP Plan Awards 11,745
Accrual of RRP Plan Awards 8,720
Treasury Shares Reissued for exercise of
stock options 10,268
Net Income 188,933
Other comprehensive income (29,858)
Comprehensive income 159,075
-----------
Balance at March 31, 1999 $ 4,092,039
===========
See accompanying notes to consolidated financial statements.
GILMER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
1999 1998
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 188,933 $ (39,210)
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation 18,315 18,315
Gain on sale of real estate owned -- --
Provision of losses on loans and other
real estate 91,000 182,500
(Gain) Loss on sale of interest bearing assets -- (10,601)
Contribution to ESOP Plan 11,745 11,745
Contribution to RRP Plan 8,720 8,720
Change in assets and liabilities
(Increase) decrease in mortgage
servicing rights (6,037) (7,031)
(Increase) decrease in accrued
interest receivable (16,432) (113,096)
(Increase) decrease in prepaid
expenses and other assets (112,049) 149,624
(Decrease) increase in advances
for taxes and insurance (180,195) (118,538)
(Decrease) increase in accrued
interest payable 16,895 2,372
(Decrease) increase in federal
income taxes 87,607 14,835
(Decrease) increase in deferred
loan fees (310) (831)
(Decrease) increase in accounts
payable & accrued expenses 43,756 57,240
---------- -----------
Net cash provided by operating
activities 151,948 156,044
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities -- --
Purchase of investment securities (120,000) (735,000)
Capital expenditures (11,584) (23,804)
Purchase of FHLB stock (22,900) (18,000)
Proceeds from sales of mortgage loans 1,264,324 1,015,144
Loans originates, net of payments (1,747,421) (1,559,870)
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 830,992 --
Principal paydown on mortgage-backed
certificates 4,950,287 1,754,661
---------- -----------
Net cash provided by (used in)
investing activities 3,824,272 433,131
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in deposits (644,564) 57,151
Net (decrease)increase in advances from FHLB (3,631,072) 35,000
Reissuance of treasury shares 10,268 --
---------- -----------
Net cash provided by financing activities (4,265,368) 92,151
---------- -----------
Net increase (decrease) in cash
and cash equivalents (289,148) 681,326
CASH AND CASH EQUIVALENTS AT BEGIN OF PERIOD 1,649,963 1,896,897
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,360,815 $ 2,578,223
========== ===========
See accompany notes to consolidated financial statements.
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 nine month periods ended March 31, 1999 and 1998
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 March 31,
1999, the Bank's core, tangible and risk-based capital was increased by
approximately $24,333 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 ($29,858) in other comprehensive income for the nine month
period ended March 31, 1999.
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 quarter 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 $8,720 for the nine month period ended March 31,
1999.
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 nine month periods ended March 31, 1999 and
1998 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.
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
March 31, 1999 Compared to June 30, 1998. Total assets decreased $4.2
million from $43.2 million at June 30, 1998 to $39.0 million at March 31, 1999.
The decrease was primarily attributable to $5.0 million in principal repayments
on mortgage backed securities, partially offset by the purchase of $1.3 million
in mortgage-backed securities, a $380,000 increase in net loans receivable, and
an increase of $112,000 in prepaid and other expenses.
Cash and cash equivalents decreased $289,000 from $1.6 million at June 30,
1998 to $1.4 million at March 31, 1999. The decrease was primarily attributable
to principal repayments on federal home loan bank advances.
Investment securities increased $53,000 from $742,000 at June 30, 1998 to
$795,000 at March 31, 1999. 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, partially offset by the principal repayment of $120,000 on two
Upshur County bonds that matured during the quarter.
Mortgage-backed securities decreased $4.4 million from $15.1 million at
June 30, 1998 to $10.7 million at March 31, 1999. The decrease was primarily due
to $4.9 million in principal repayments on mortgage-backed securities and
$800,000 in sales of mortgage-backed securities during the quarter, 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 $24.6 million at
March 31, 1999 an increase of $380,000, or 1.54%. 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
$18,000 from $105,000 at June 30, 1998 to $123,000 at March 31, 1999. The
increase was primarily due to the foreclosure on real estate during the quarter
of $15,000, along with repossessed assets of $3,000.
Deposits decreased $645,000 from $28.8 million at June 30, 1998, to $28.2
million at March 31, 1999. The decrease was due primarily to a decrease in
average rates paid on deposits. Federal Home Loan Bank advances decreased $3.7
million from $9.8 million at June 30, 1998, to $6.1 million at March 31, 1999.
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 $180,000 from
$520,000 at June 30, 1998 to $340,000 at March 31, 1999. The decrease is due to
the majority of the property taxes being paid in the last quarter of calendar
1998.
Total stockholders' equity increased $190,000 to $4,092,000 at March 31,
1999 from $3,902,000 at June 30, 1998. This increase was a result of a $189,000
increase in net income, a decrease in the Employee Stock Ownership Plan of
$12,000, a decrease in the Recognition and Retention Plan of $8,700, and a
decrease in treasury shares of $12,000 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
March 31, 1999, with tangible and core capital of $4.0 million (10.21% of total
adjusted assets) and risk-based capital of $4.3 million (18.89% 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 March 31, 1999 and
1998
General. Net income for the quarter ended March 31, 1999 was $42,000, an
increase of $88,000 from the quarter ended March 31, 1998. The increase was
primarily due to a decrease in other expenses related to the write off of the
dishonored cashiers check in the quarter ended March 31, 1998.
Interest Income. Interest income totaled $745,000 for the quarter ended
March 31, 1999, compared to $791,000 for the quarter ended March 31, 1998, a
decrease of $46,000. Interest income on loans increased $8,000 due to an
increase in net loans receivable, interest income on investment securities
increased $5,000, and interest income on other interest earning assets increased
$9,000 due to the increase in the average cash balance, partially offset by a
$66,000 decrease in interest income from mortgage-backed securities due to a
decrease in principal balance on mortgage-backed securities.
Interest Expense. Interest expense decreased $59,000 primarily due to a
$35,000 decrease in interest expense on deposits due to a decrease in average
outstanding balances on deposits and a decrease in the average rates paid on
deposits, along with a $24,000 decrease in interest on Federal Home Loan Bank
advances due to a decrease in outstanding balances on Federal Home Loan Bank
advances.
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 March 31, 1999, remained constant
compared to the three months ended March 31, 1998.
Non-Interest Income. Non-interest income decreased $5,000 from $66,000 for
the quarter ended March 31, 1998 to $61,000 for the quarter ended March 31,
1999. The decrease resulted primarily from a $10,000 decrease from gain on sale
of interest-bearing assets, partially offset by a $4,000 increase in loan
origination and commitment fees.
Non-Interest Expense. Non-interest expense decreased $122,000 from $401,000
for the quarter ended March 31, 1998, compared to $279,000 for the quarter ended
March 31, 1999. The decrease was primarily due to $118,000 decrease in other
expense due to the write off of the $123,000 cashier's check in the quarter
ended March 31, 1998, partially offset by a $5,000 increase in other
miscellaneous expenses.
Income Taxes. The provision for income taxes increased $42,000 from
($23,000) for the quarter ended March 31, 1998 to $19,000 for the quarter ended
March 31, 1999. The increase is due to an increase in net earnings before income
taxes of $130,000 for the quarter ended March 31, 1999.
Comparison of Operating Results for the Nine Months Ended March 31, 1999 and
1998
General. Net income(loss) for the nine months ended March 31, 1999 was
$189,000, an increase of $228,000 from the nine months ended March 31, 1998. 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 an increase
in net interest income of $30,000, and a decrease in the provision for loan
losses of $92,000.
Interest Income. Interest income decreased $51,000 from $2.4 million for
the nine months ended March 31, 1998 to $2.3 million for the nine months ended
March 31, 1999. Interest income on loans increased $56,000 due to an increase in
net loans receivable, interest income on investment securities increased
$16,000, and interest income on other interest-earning assets increased $21,000,
partially offset by a $144,000 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 $82,000 primarily due to a
$100,000 decrease in interest expense on deposits due to a decrease in average
outstanding balances on deposits, partially offset by a $16,000 increase in
interest paid on advances due to an increase in outstanding balances on advances
for the nine months ended March 31, 1999.
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 nine months ended March 31, 1999, decreased $92,000 from
$183,000 for the nine months ended March 31, 1998, to $91,000 for the nine month
period ended March 31, 1998. The primary reason for the decrease was the
additional provisions were recorded in the nine months ended March 31, 1998 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 additional reserves due to growth
in the consumer and commercial loan portfolio.
Non-Interest Income. Non-interest income increased $132,000 from $183,000
for the nine months ended March 31, 1998 to $315,000 for the nine months ended
March 31, 1999. The increase resulted primarily from a $136,000 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 $7,000 increase in mortgage servicing rights and an increase of $9,000
in loan servicing fees, partially offset by a $4,000 increase in loss from real
estate operations and a $10,000 decrease in gain on sale of interest-bearing
assets.
Non-Interest Expense. Non-interest expense decreased $86,000 from $901,000
for the nine months ended March 31, 1998, compared to $815,000 for the nine
months ended March 31, 1999. The decrease was primarily due to an $89,000
decrease in other expenses due to the write off of the dishonored cashiers check
in the March 31, 1998 quarter.
Income Taxes. The provision for income taxes increased $113,000 from
($20,000) for the nine months ended March 31, 1998 to $93,000 for the nine
months ended March 31, 1999. The increase is due to an increase in net earnings
before income taxes of $341,000 for the nine months ended March 31, 1999.
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 have taken the
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
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 $25,000 were
incurred and expensed by the Company through March 31, 1999.
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
Form 8K - Press Release.
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: May 17, 1999 By: /s/ Gary P. Cooper
--------------------------------------
Gary P. Cooper
Pres. and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ Sheri Parish
--------------------------------------
Sheri Parish
Vice President/Secretary/Treasurer
(Principal Fin. & Acct. Officer)