-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q3U2NuEjh6jFsKYjAn1ICxwR0E+QmPz5Lu/wme1NgsIOfhRpqVKwSgU8xk+JwWa7 +JMSMtpHd9u/u/vEhopS4w== 0000914317-99-000304.txt : 19990517 0000914317-99-000304.hdr.sgml : 19990517 ACCESSION NUMBER: 0000914317-99-000304 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAST TEXAS FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000929646 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 752559089 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24848 FILM NUMBER: 99621988 BUSINESS ADDRESS: STREET 1: 1200 S BECKHAM AVE CITY: TYLER STATE: TX ZIP: 75701 BUSINESS PHONE: 9035931767 MAIL ADDRESS: STREET 1: 1200 SOUTH BECKHAM AVE CITY: TYLER STATE: TX ZIP: 75701 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended March 31, 1999 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 0-24848 East Texas Financial Services, Inc. (Exact name of registrant as specified in its charter) Delaware 75-2559089 (State or other jurisdiction of (I.R.S. employer incorporation or organization identification number) 1200 South Beckham, Tyler, Texas 75701 (Address of principal executive offices) (Zip code) (903) 593-1767 (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ x ] Yes [ ] No The number of shares of the registrant's common stock ($.01 par value) outstanding as of March 31, 1999, was 1,392,853. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB MARCH 31, 1999 INDEX Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition, March 31, 1999 (Unaudited) and September 30, 1998........................................ Consolidated Statements of Income, (Unaudited) three months and six months ended March 31, 1999, and March 31, 1998.................................. Consolidated Statement of Changes in Stockholders' Equity, (Unaudited) six months ended March 31, 1999........................................... Consolidated Statements of Cash Flows, (Unaudited) six months ended March 31, 1999, and March 31, 1998........................................ Notes to (Unaudited) Consolidated Financial Statements, March 31, 1999.... Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. Part II - Other Information Item 1. Legal Proceedings................................................... Item 2. Changes In Securities............................................... Item 3. Defaults Upon Senior Securities..................................... Item 4. Submission of Matters To a Vote of Security Holders................. Item 5. Other Information................................................... Item 6. Exhibits and Reports on Form 8-K.................................... Signature Page.................................................................. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB MARCH 31, 1999 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements East Texas Financial Services, Inc. (the "Company") was formed in September of 1994 for the purpose of acquiring all of the common stock of First Federal Savings and Loan Association of Tyler (the "Association"), concurrent with its conversion from the mutual to stock form of ownership. The Company completed its initial public stock offering of 1,215,190 shares of $.01 par value common stock on January 10, 1995. The Company utilized approximately one half of the net stock sale proceeds to acquire all of the common stock issued by the Association. For additional discussion of the Company's formation and intended operations, see the Form S-1 Registration Statement (No. 33-83758) filed with the Securities and Exchange Commission and the Company's annual report on Form 10-KSB for the fiscal year ended September 30, 1998, also filed with the Commission. The financial statements presented in this Form 10-QSB reflect the consolidated financial condition and results of operations of the Company and its wholly owned subsidiary, First Federal Savings and Loan Association of Tyler.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS March 31, 1999 September 30, 1998 -------------- ------------------ (Unaudited) Cash and due from banks ........................................ $ 960,755 $ 592,363 Interest-bearing deposits with banks ........................... 3,330,176 1,104,695 Interest-earning time deposits with financial institutions ..... 2,559,617 1,959,617 Federal funds sold ............................................. 0 129,187 Investment securities available-for-sale ....................... 3,036,307 0 Mortgage-backed securities available-for-sale .................. 22,145,577 12,810,165 Investment securities held-to-maturity (estimated market value of $27,045,150 at March 31, 1999, and $30,115,954 at September 30, 1998) ........................ 27,015,739 29,766,844 Mortgage-backed securities held-to-maturity (estimated market value of $7,782,809 at March 31, 1999 and $11,088,555 at September 30, 1998) .................... 7,743,937 10,940,500 Loans receivable, net of allowance for credit losses of $231,933 at March 31, 1999 and $233,180 at September 30, 1998 ...... 61,760,054 61,119,047 Accrued interest receivable .................................... 965,070 978,378 Federal Home Loan Bank stock, at cost .......................... 1,386,600 789,100 Premises and equipment ......................................... 2,700,269 2,273,067 Foreclosed real estate, net of allowance of $-0- ............... 0 34,500 Mortgage servicing rights ...................................... 264,362 216,879 Other assets ................................................... 474,308 1,303,120 ------------- ------------- Total Assets .............................................. $ 134,342,771 $ 124,017,462 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Demand deposits ........................................... $ 1,455,359 $ 1,528,374 Savings and NOW deposits .................................. 11,764,053 10,504,973 Time deposits ............................................. 73,857,107 74,610,310 ------------- ------------- Total deposits ...................................... 87,076,519 86,643,657 FHLB advances ............................................. 26,907,438 14,945,852 Advances from borrowers for taxes and insurance ........... 323,634 844,188 Federal income taxes Current ............................................. (53,725) -0- Deferred ............................................ 34,408 31,618 Accrued expenses and other liabilities .................... 306,994 1,168,453 ------------- ------------- Total liabilities ................................... 114,595,268 103,633,768 ------------- -------------
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued) March 31, 1999 September 30, 1998 -------------- ------------------ (Unaudited) Stockholders' equity: Preferred stock, $0.01 par value, 500,000 shares authorized, none outstanding Common stock, $0.01 par value, 5,500,000 shares authorized, 1,884,492 shares issued and 1,392,853 outstanding ...... 18,845 18,845 Additional paid-in-capital ................................ 12,319,624 12,319,624 Deferred compensation - RRP shares ........................ (164,874) (213,366) Unearned employee stock ownership plan shares ............. (543,564) (543,564) Unrealized gain/(loss) available-for-sale securities (net) (110,129) (64,974) Retained earnings (substantially restricted) .............. 13,751,695 13,661,392 Treasury stock, 491,639 shares at cost .................... (5,524,094) (4,794,263) ------------- ------------- Total stockholder's equity .......................... 19,747,503 20,383,694 ------------- ------------- Total liabilities and stockholders' equity .......... $ 134,342,771 $ 124,017,462 ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Six Months Ended March 31, Ended March 31, (Unaudited) (Unaudited) 1999 1998 1999 1998 ----------- ---------- ---------- ---------- INTEREST INCOME Loans receivable: First Mortgage ............................ $ 1,105,784 $1,152,062 $2,227,971 $2,286,895 Consumer and other loans .................. 83,109 40,783 159,118 70,088 Securities available for sale: Investment securities ..................... 37,655 15,104 52,190 30,313 Mortgage-backed securities ................ 312,272 104,684 576,592 169,074 Securities held to maturity: Investment securities ..................... 417,734 406,515 885,040 800,424 Mortgage-backed securities ................ 138,310 281,066 317,010 595,768 Deposits with banks ......................... 50,913 54,923 83,996 131,885 ----------- ---------- ---------- ---------- Total interest income ................... 2,145,777 2,055,137 4,301,917 4,084,447 ----------- ---------- ---------- ---------- INTEREST EXPENSE Deposits .................................... 1,045,721 1,105,465 2,129,252 2,229,135 FHLB advances ............................... 305,619 121,675 556,837 183,848 ----------- ---------- ---------- ---------- Total interest expense .................. 1,351,340 1,227,140 2,686,089 2,412,983 ----------- ---------- ---------- ---------- Net interest income before provision for loan losses ............ 794,437 827,998 1,615,828 1,671,464 Provision for loan losses ................... 0 0 0 0 ----------- ---------- ---------- ---------- Net interest income after provision for loan losses ............. 794,437 827,998 1,615,828 1,671,464 ----------- ---------- ---------- ---------- NONINTEREST INCOME Gain(loss) on sale of interest-earning assets 28,589 42,008 105,065 63,445 Loan origination and commitment fees ........ 23,450 18,807 47,058 41,770 Loan servicing fees ......................... 18,950 26,621 29,733 48,924 Gain on foreclosed real estate .............. (2,068) 560 302 560 Other ....................................... 5,787 10,926 60,249 21,638 ----------- ---------- ---------- ---------- Total noninterest income ................ 74,708 98,922 242,407 176,337 ----------- ---------- ---------- ----------
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (continued) Three Months Six Months Ended March 31, Ended March 31, (Unaudited) (Unaudited) 1999 1998 1999 1998 ----------- ---------- ---------- ---------- NONINTEREST EXPENSE Compensation and benefits ................... 518,609 460,684 1,028,684 952,794 Occupancy and equipment ..................... 68,687 45,513 114,891 93,759 SAIF deposit insurance premium .............. 13,480 14,299 26,464 28,446 Loss on foreclosed real estate .............. 0 0 2,069 0 Other ....................................... 171,384 157,288 314,321 296,954 ----------- ---------- ---------- ---------- Total noninterest expense ............... 772,160 677,784 1,486,429 1,371,953 ----------- ---------- ---------- ---------- Income (loss) before provision for income taxes 96,985 249,135 371,806 475,848 Income tax expense (benefit) ................... 39,606 91,340 138,656 173,749 ----------- ---------- ---------- ---------- NET INCOME (LOSS) .............................. $ 57,379 $ 157,795 $ 233,150 $ 302,099 =========== ========== ========== ========== Earnings per common share ...................... $ .04 $ .11 $ .17 $ .21 Earnings per common share - assuming dilution .. .04 .11 .17 .20
The accompanying notes are an integral part of the consolidated financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) SIX MONTHS ENDED March 31, 1999 Common Stock Unearned Unallocated Unrealized and Additional RRP ESOP Gain(loss) on Retained Treasury Paid in Capital Shares Shares AFS Securities Earnings Stock --------------- ------ ------ -------------- -------- ----- Balance September 30, 1998 $ 12,338,469 $ (213,366) $ (543,564) $ (64,974) $13,661,392 $(4,794,263) Comprehensive income: Net income 233,150 Unrealized holding gains (45,155) Comprehensive income Deferred compensation amortization 48,492 Purchase of treasury stock at cost (729,831) (729,831) Payment of cash dividends (140,375) Accrued dividends - RRP stock (2,472) (2,472) Balance March 31, 1999 $ 12,338,469 $ (164,874) $ (543,564) $ (110,129) $13,751,695 $(5,524,094) ============= ============ =========== ============ =========== ===========
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) Balance September 30, 1998 $ $20,383,694 Comprehensive income: Net income 233,150 233,150 Unrealized holding gains (45,155) (45,155) ------------- Comprehensive income $ 187,995 ============= Deferred compensation amortization 48,492 Purchase of treasury stock at cost (729,831) Payment of cash dividends (140,375) Accrued dividends - RRP stock (2,472) Balance March 31, 1999 $19,747,503 ===========
The accompanying notes are an integral part of the consolidated financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Six Months Ended March 31, 1999 1998 ------------ ------------ Cash flows from operating activities: Net income .............................................. $ 233,150 $ 302,099 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees ...... 10,715 2,071 Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans 78,783 64,514 Amortization of deferred compensation ............... 58,191 58,191 Compensation charge related to release of ESOP shares 55,921 60,547 Depreciation ........................................ 45,780 48,881 Deferred income taxes ............................... 60,838 14,299 Stock dividends on FHLB stock ....................... (31,582) (30,300) Origination of mortgage servicing rights ............ (86,422) (49,826) Amortization of mortgage servicing rights ........... 38,939 20,143 Net (gain) loss on sale of: Securities held to maturity .................... 0 0 Foreclosed real estate ......................... 2,069 0 Fixed assets ................................... 0 0 Net loss on disposal of fixed assets ........... 0 3,889 Other assets ................................... 0 0 Loans .......................................... (18,642) (13,619) Loans held for sale ............................ 0 0 Proceeds from loan sales ............................ 6,661,864 4,199,237 Originations of loans held for sale ................. 0 0 Proceeds from sale of fixed assets .................. 0 0 (Increase) decrease in: Accrued interest receivable .................... 13,308 (41,749) Other assets ................................... 828,812 120,627 Accrued loan loss .............................. 1,247 0 Increase (decrease) in: Federal income tax payable ..................... (53,725) (33,820) Accrued expenses and other liabilities ......... (861,459) (915,453) Capitalized interest on time deposits ............... 0 0 Net cash provided (used) by operating activities ............. 7,037,787 3,809,731 ----------- -----------
The accompanying notes are an integral part of the financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Six Months Ended March 31, 1999 1998 -------------- -------------- Cash flows from investing activities Purchases of interest earning time deposits ....................... $ (600,000) $ (99,617) Net decrease (increase) in fed funds sold ......................... 129,187 (1,379) Purchases of obligations - U.S. Govt. and agencies held to maturity ............................................... (4,997,656) (8,530,438) Proceeds from maturity of time deposits ........................... 0 197,573 Proceeds from sale of securities held to maturity ................. 0 0 Proceeds from maturities of obligations - U.S. Govt ............... and agencies held to maturity .................................. 7,725,000 6,500,000 Proceeds from sale of obligations of U.S. Govt .................... and agencies held to maturity .................................. 0 0 Purchases of FHLB stock ........................................... (597,500) 0 Purchases of investment securities available-for-sale ............. (3,073,051) 0 Purchases of mortgage-backed securities available-for-sale ........ (12,513,589) (5,559,986) Purchases of mortgage-backed securities held to maturity .......... 0 0 Principal payments on mortgage-backed securities available for sale 3,101,656 815,511 Principal payments on mortgage-backed securities held to maturity . 3,186,390 3,885,016 Net originations and principal collections on loans ............... (7,413,269) (8,438,910) Capitalized acquisition cost related to foreclosed real estate .... 0 0 Proceeds from sale of foreclosed real estate ...................... 32,432 0 Proceeds from sale of fixed assets ................................ 0 0 Expenditures for premises and equipment ........................... (427,202) (352) ------------- ------------ Net cash provided (used) by investing activities ....................... (15,447,602) (11,235,382) ------------- ------------ Cash flows from financing activities: Net increase (decrease) in: Non-interest bearing deposits, savings, NOW accounts .......... 1,186,065 (319,856) Time deposits ................................................. (753,203) (323,416) FHLB Advances ................................................. 145,510,909 45,273,500 Repayment of FHLB Advances .................................... (133,549,323) (38,442,612) Advances from borrowers for taxes and insurance ............... (520,554) (486,725) Dividends paid to stockholders .................................... (140,375) (104,538) Purchase of treasury stock ........................................ (729,831) 0 Proceeds from sale of common stock ................................ 0 0 ------------- ------------ Net cash provided (used) by financing activities ....................... 11,003,688 5,596,353 ------------- ------------ Net increase (decrease) in cash and cash equivalents ................... 2,593,873 (1,829,298) Cash and cash equivalents at beginning of the period ................... 1,697,058 6,931,133 ------------- ------------ Cash and cash equivalents at end of the period ......................... $ 4,290,931 $ 5,101,835 ============= ============
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Six Months Ended March 31, 1999 1998 -------------- -------------- Supplemental disclosure: Cash paid for: Interest on deposits .......................................... $ 2,129,252 $ 1,114,472 Income taxes .................................................. $ 145,257 $ 0 Transfers from loans to real estate acquired through foreclosures .................................. $ 0 $ 207,229 Loans charged off to loan loss reserves ........................... $ 0 $ 36,744 Recoveries credited to loan loss reserves ......................... $ 0 $ 0
The accompanying notes are an integral part of the consolidated financial statements EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 - BASIS OF PRESENTATION The financial statements presented in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments which are, in the opinion of management, necessary for fair presentation. These financial statements have not been audited by an independent accountant. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures are adequate to make the information not misleading. However, these financial statements should be read in conjunction with the financial statement and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended September 30, 1998. The financial data and results of operations for interim periods presented may not necessarily reflect the results to be anticipated for the complete year. NOTE 2 - EARNINGS PER SHARE Earnings per common share for the three months and six months ended March 31, 1999 and 1998, has been computed based on net income divided by the weighted average number of common shares outstanding during the period. For the three months ended March 31, 1999 and 1998, the weighted average number of shares outstanding totaled 1,335,051 and 1,441,868, shares respectively. For the six months ended March 31, 1999 and 1998, the weighted average number of shares outstanding totaled 1,362,176 and 1,441,868 shares respectively. Earnings per common share - assuming dilution, for the three months and six months ended March 31, 1999 and 1998, has been computed based on net income divided by the weighted average number of common shares outstanding. In addition, it includes the effects of all dilutive potential common shares that were outstanding during the period. For the three months ended March 31, 1999 and 1998, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,348,110 and 1,496,037, shares respectively. For the six months ended March 31, 1999 and 1998, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,374,721 and 1,493,398, shares respectively. For both earnings per share and earnings per common share - assuming dilution and as prescribed by the American Institute of Certified Public Accountants Statement of Position 93-6 ("SOP 93-6") Employer's Accounting for Employees Stock Ownership Plans, the weighted average number of shares outstanding does not include unallocated Employee Stock Ownership Plan ("ESOP") shares. See Part II, Item 6 - Exhibits for a detailed presentation of the earnings per share calculation for the three month and six month periods ended March 31, 1999 and 1998. NOTE 3 - SECURITIES The carrying values and estimated market values of investment securities available-for-sale as of March 31, 1999, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value ---------- ------- -------- ----------- ---------- Fixed Rate .... $3,000,000 $73,545 $ 2,620 $ (34,618) $3,036,307 Adjustable Rate 0 0 0 0 0 ---------- ------- -------- ----------- ---------- $3,000,000 $73,545 $ 2,620 $ (34,618) $3,036,307 ---------- ------- -------- ----------- ----------
The weighted average yield on the investment security available-for-sale portfolio was 5.91% for the quarter ended March 31, 1999. The amortized cost and estimated market values of investment securities held-to-maturity as of March 31, 1999, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ------- ------- ----------- Debt securities: U. S. Treasury ........... $ 2,501,494 $ 4,248 $ 2,338 $ 2,503,404 U. S. government agency .. 24,514,245 82,108 54,607 24,541,746 ----------- ------- ------- ----------- Total debt securities $27,015,739 $86,356 $56,945 $27,045,150 ----------- ------- ------- -----------
The amortized cost and estimated market values of investment securities held-to-maturity as of March 31, 1999, by contractual maturity are shown below:
Estimated Amortized Market Cost Value ----------- ----------- Due in one year or less ...................... $ 6,519,862 $ 6,550,651 Due after one year through two years ......... 3,994,352 4,048,820 Due after two years through three years ...... 1,000,000 992,841 Due after three years through five years ..... 15,501,525 15,452,838 ----------- ----------- Total debt securities ................ $27,015,739 $27,045,150 ----------- -----------
As of March 31, 1999, each of the securities due after three and through five years had call options exercisable at the discretion of the issuer. Such call dates varied between April 1999 and June 2001. As of March 31, 1999, the weighted average yield on the Company's investment security held-to-maturity portfolio was approximately 5.99% while the Company's overall investment portfolio, including securities held-to-maturity, investment securities available-for-sale, overnight deposits and interest earning time deposits with other financial institutions was approximately 5.86%. The carrying values and estimated market values of mortgage-backed and related securities available-for-sale as of March 31, 1999, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value ----------- -------- --------- ------------ ----------- Fixed Rate .... $ 1,478,332 $ 0 $ 11,748 $ (16,363) $ 1,450,221 Adjustable Rate 20,576,089 236,949 1,800 (115,882) 20,695,356 ----------- -------- --------- ------------ ----------- $22,054,421 $236,949 $ 13,548 $ (132,245) $22,145,577 ----------- -------- --------- ------------ -----------
The carrying values and estimated market values of mortgage-backed and related securities held-to-maturity as of March 31, 1999, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value ----------- -------- --------- ------------ ----------- Fixed Rate .... $ 886,719 $ 0 $ 632 $ 886,087 $ 887,938 Adjustable Rate 6,804,501 61,648 8,299 6,857,850 6,894,871 ---------- ------- ---------- ---------- ---------- $7,691,220 $61,648 $ 8,931 $7,743,937 $7,782,809 ---------- ------- ---------- ---------- ----------
The overall yield on the Company's mortgage-backed securities portfolios as of March 31, 1999, was approximately 6.07%. NOTE 4 - CURRENT ACCOUNTING ISSUES SFAS No. 130 In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS ) No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in general purpose financial statements. Comprehensive income includes net income and several other items that current accounting standards require to be recognized outside of net income. SFAS No. 130 requires companies to display comprehensive income in its financial statements, to classify items of comprehensive income by their nature in their financial statements and to display accumulated balances of comprehensive income in stockholders' equity separately from retained earnings and addition paid-in capital. The Statement is effective for fiscal years beginning after December 31, 1997. The Company adopted the Statement as required. SFAS No. 131 In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure About Segments of and Enterprise and Related Information. The Statement requires entities to report certain information about their operating segments in a complete set of financial statements. It requires them to report certain enterprise-wide information about their products and services, activities in different geographic regions and their reliance on major customers, and to disclose certain segment information in their interim financial statements. The Statement is effective for fiscal years beginning after December 15, 1997. The Company has determined that it has no reporting obligations under this statement. The Company adopted the Statement as required. SFAS No. 132 In February of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 revises current disclosures for employers' disclosures for pensions and other postretirement benefit plans. It standardizes the disclosure requirements for these plans to the extent possible, and it requires additional information about changes in the benefit obligations and the fair value of plan assets that are expected to enhance financial analysis. It does not change measurement or recognition standards for these plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company anticipates changing the disclosure requirements of its defined benefit pension plan as a result of the statement. The Company has no other postretirement benefit plans. SFAS No. 133 In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives in the statement of financial position at fair value. The Company currently does not invest in any derivative instruments or hedging activities as defined in this Statement. The Statement is effective for fiscal years beginning after June 15, 1999. The Company adopted the Statement as required. NOTE 5 - STOCK OPTION AND INCENTIVE PLAN The 1995 Stock Option and Incentive Plan (the "Stock Option Plan") provides for awards in the form of stock options, stock appreciation rights, limited stock appreciation rights, and restricted stock. Options to purchase shares of common stock of the Company may be granted to selected directors, officers and key employees. The number of shares of common stock reserved for issuance under the stock option plan was equal to 121,519 or 10% of the total number of common shares issued pursuant to the conversion. The option exercise price cannot be less than the fair market value of the underlying common stock as of the date of the option grant, and the maximum option term cannot exceed ten years. Awards vest at a rate of 20% per year beginning at the date of the grant. The Company plans to use treasury stock for the exercise of options. The following is a summary of changes in options outstanding:
Options outstanding Balance, September 30, 1995 103,411 Granted -0- Exercised at $14.125 per share (2,090) Forfeited and expired -0- Balance, September 30, 1996 101,321 Granted -0- Exercised at $14.125 per share (1,056) Forfeited and expired -0- Balance, September 30, 1997 100,276 =======
On March 25, 1998, the Company completed a 3 for 2 stock split in the form of a 50% dividend. As a result of the split, the number of outstanding options, option price, options exercisable at year end, and shares available for future grants were adjusted as follows:
Options outstanding Balance, September 30, 1997 150,411 Granted -0- Exercised at $9.42 per share (1,568) Forfeited and expired -0- Balance, September 30, 1998 148,843 ======= Options exercisable at December 31, 1998 under stock option plan 86,807 ======== Shares available for future grants 27,162
During the six months ended March 31, 1999, no options were exercised, issued, or forfeited. NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK The outstanding advances from the FHLB consisted of the following at March 31, 1999:
Maturity 1998 Rate -------- ---- ---- 04/06/1999 $ 682,909 4.90% 04/26/1999 $ 22,403,000 4.88% 12/31/2004 $ 256,847 6.09% 01/03/2005 $ 120,561 6.03% 01/01/2013 $ 475,310 6.09% 01/01/2013 $ 451,619 6.13% 02/01/2013 $ 448,192 5.91% 03/03/2014 $ 1,060,000 5.45% 04/01/2014 $ 1,009,000 5.97%
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB), advances are secured by all stock and deposit accounts in the FHLB, mortgage collateral, securities collateral, and other collateral. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB MARCH 31, 1999 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL The principle business of the Company is that of a community-oriented financial institution attracting deposits from the general public and using such deposits to originate one- to four-family residential loans and, to a lesser extent, commercial real estate, one- to four-family construction, multi-family and consumer loans. These funds have also been used to purchase mortgage-backed securities, U. S. government and agency obligations and other permissible securities. The Company also borrows funds from the Federal Home Loan Bank of Dallas ("FHLB") to fund loans and to purchase securities. The ability of the Company to attract deposits is influenced by a number of factors, including interest rates paid on competing investments, account maturities and levels of personal income and savings. The Company's cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans and other types of loans, which is in turn affected by the interest rates at which such loans are made, general economic conditions affecting loan demand, the availability of funds for lending activities, economic conditions and changes in real estate values. The Company's results of operations are dependent primarily on net interest income, which is the difference between the income earned on its loan and investment portfolios and the interest paid on deposits and borrowings. Results of operations are also affected by the Company's provision for loan losses and the net gain (loss) on sales of interest earning assets and loan fees. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. The Company has expanded its product lines to include commercial and consumer loans, debit and credit cards, an ATM machine and cards, safe deposit boxes, and a full range of business and personal checking and deposit accounts. With the introduction of new products and services, the Company opened an additional full-service office located in South Tyler. The start-up costs associated with the new product lines and the expansion will be significant and the Company does not anticipate the new branch office to be profitable immediately. However, management believes that the long-term future of the Company is dependent upon the success of this change. FINANCIAL CONDITION Total assets were $134.3 million at March 31, 1999, a $10.3 million increase from the $124.0 million reported at September 30, 1998, the Company's most recent fiscal year end. The increase in total assets was the result of a $9.3 million increase in mortgage-backed securities available-for-sale, a $3.0 million increase in investment securities available-for-sale and a $2.7 million increase in interest-earning deposits with banks. The increases were partially offset by a $2.8 million decline in investment securities held-to-maturity and a $3.2 million decline in mortgage-backed securities held to maturity. At March 31, 1999, loans receivable totaled $61.8 million, compared to $61.1 million at September 30, 1998. The increase in loans receivable was the result of a change in Company policy to place into portfolio 15 year fixed rate mortgage loans with interest rates below 7.00%. The Company had previously sold such loans into the secondary market. The loans consist primarily of 15 year fixed rate mortgages funded with a combination of long term amortizing and short term advances from the FHLB. The loan arbitrage is monitored on a monthly basis. The Company anticipates continuing the program as long as the interest rate spread remains favorable. The Company continued its policy of selling all one- to four-family loans with terms of greater than 15 years into the secondary market. The Company continued to offer home equity loans for up to 80% of the borrowers equity in the property, the maximum allowed by Texas law. Loan terms of up to 15 years are offered at interest rates, depending upon the size of the loan, ranging from 8.00% to 9.50%. As of March 31, 1999, the Company had approximately $2.7 million in home equity loans outstanding. The increase in the mortgage-backed securities available-for-sale portfolio was primarily the result of the Company's decision to continue its program of borrowing funds from the FHLB and investing the proceeds into mortgage-backed and similar securities in an effort to achieve a positive margin on the transaction. At March 31, 1999, the portfolio totaled $22.1 million, compared to $12.8 million at September 30, 1998. At March 31, 1999, the average yield on the securities in the program was approximately 5.71% while the cost of the FHLB advance was approximately 4.88%, resulting in a pre-tax interest rate spread of 83 basis points. Subject to favorable interest rates, the Company intends, over the next several quarters, to borrow an additional $20.0 million from the Federal Home Loan Bank ("FHLB") and invest the proceeds in adjustable rate mortgage-backed securities to be held in an available-for-sale accounting classification. The purpose of the program is to leverage a portion of the Company's excess capital and to achieve a rate of return on the difference in the rate earned on the securities and the cost of the advances. The success of the program will be dependent upon several factors, including the Company's ability to purchase adjustable rate securities that will maintain a positive margin above the FHLB advance rates. The Company intends to primarily borrow funds from the FHLB with terms of approximately thirty days and invest in mortgage-backed securities with interest rate adjustment frequencies that vary between one month and one year. The investment security available-for-sale portfolio consists of corporate debt securities. The corporate debt securities have a fixed rate and term. The Company invests only in investment grade corporate debt with varying maturities and ratings. All corporate debt securities have maturities of less than or equal to five years. The yield on the investment security available-for-sale portfolio was 5.91% for the quarter ended March 31, 1999. At March 31, 1999, the investment securities held-to-maturity portfolio totaled $27.0 million, compared to $29.8 million at September 30, 1998. At March 31, 1999, the overall yield on the portfolio was approximately 5.99%, compared to 6.01% at September 30, 1998. At March 31, 1999, the portfolio contained $6.5 million in securities with remaining terms until maturity of less than one year, $4.0 million with remaining maturities of one through two years, $1.0 million with remaining maturities of two through three years and $15.5 million with remaining maturities of three through five years. Each of the investment securities with remaining maturities of three through five years is callable at the discretion of the issuer, and the call dates range from April 1999 to June 2001. The Company's mortgage-backed securities held-to-maturity portfolio totaled $7.7 million at March 31, 1999, compared to $10.9 million at September 30, 1998. The decrease in mortgage-backed securities held-to-maturity was primarily due to principal payments received on the portfolio during the period. Continued lower long-term interest rates could continue to influence borrower decisions to refinance the adjustable rate mortgage loans underlying the Company's mortgage-backed securities held-to-maturity portfolio. The result would be a continued decrease in the balances reported in this asset category. The weighted average yield on the portfolio was approximately 7.08% at March 31, 1999. Total deposits were $87.1 million at March 31, 1999, a $433,000 increase from the $86.6 million reported at September 30, 1998. The Company's cost of deposits was approximately 4.84% at March 31, 1999, and the overall cost of funds, including FHLB advances, was approximately 4.88%. The Company reported $26.9 million in borrowed funds at March 31, 1999, an increase of $12.0 million from the $14.9 million reported at September 30, 1998. Approximately $22.4 million of the borrowed funds were used to invest in mortgage-backed securities available-for-sale as part of the Company's wholesale funded arbitrage program. The advance had a remaining term of less than 30 days and had an interest rate of 4.88%. Approximately $2.8 million was used to fund the wholesale loan arbitrage of 15 year loans at an average rate of 5.50%, with the remaining $1.7 million in advances used to fund a portion of the Company's commercial real estate loan portfolio at a weighted average cost of approximately 6.05%. Stockholders' equity totaled $19.7 million at March 31, 1999, a decrease of $636,000 from the $20.4 million reported at September 30, 1998. The decrease was primarily attributable to the $730,000 increase in treasury stock, the payment of cash dividends in the amount of $140,000, and a $45,000 increase in net unrealized losses on securities available-for-sale. The decrease was partially offset by net income of $233,000 reported for the six months ended March 31, 1999, and a $49,000 decrease in deferred compensation. At March 31, 1999, the Company reported a book value per share of $14.18 based on 1,392,853 net outstanding shares. During the six months ended March 31, 1999, the Company repurchased 71,203 shares of treasury stock at an average price of $10.25 per share. The result was an increase in the number of shares held as treasury stock to 491,639 at an average cost of $11.236 per share. RESULTS OF OPERATIONS The Company's net income is dependent primarily upon net interest income, the difference or spread between the average yield earned on loans and investments and the average rate paid on deposits, as well as the relative amounts of such assets and liabilities. The Company, like other financial intermediaries, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis, than its interest earning assets. COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 General. Net income for the three months ended March 31, 1999 was $57,000 or $.04 per share, a decrease of $101,000 from the $158,000 or $.11 per share reported for the three months ended March 31, 1998. The decrease in net income was attributable to a $34,000 decline in net interest income after provision for loan losses, a $94,000 increase in total non-interest expense, and a $24,000 decrease in noninterest income. The decrease in net income was partially offset by a $52,000 decrease in income tax expense. Net Interest Income. For the quarter ended March 31, 1999, net interest income before provision for loan losses totaled $794,000, a decrease of $34,000 from the $828,000 reported for the quarter ended March 31, 1998. On an annualized basis, the $794,000 in net interest income for the current quarter was approximately 2.48% of average interest earning assets and 2.37% of average total assets. For the quarter ended March 31, 1998, the $828,000 in net interest income was approximately 2.84% of average interest earning assets and 2.75% of average total assets. Average interest earning assets were approximately $128.2 million for the quarter ended March 31, 1999, compared to $116.7 million for the quarter ended March 31, 1998. The decline in net interest income, despite the fact that average interest earning assets increased by approximately $11.5 million, was primarily the result of continued period of minimal differences in short term and long term interest rates. Cash flow from the Company's interest earning assets has increased over the past several quarters as mortgage borrowers have elected to refinance their mortgages. In addition, scheduled maturities and call options of the investment securities portfolios have also provided additional challenges for reinvesting cash flow in this current interest rate environment. The result has been, despite growth in interest-earning assets, a yield on the Company's average interest-earning assets that declined from 7.05% for the quarter ended March 31, 1998 to 6.68% for the quarter ended March 31, 1999 as the cash flow has been reinvested at lower interest rates. Interest rates on the Company's primary source of funds, certificates of deposit, have not decreased as rapidly as interest rates have fallen. Continued competition for deposits in the Company's market has compelled the Company to continue to pay higher interest rates in order to maintain current deposit levels. For the quarter ended March 31, 1999, the $1.0 million in interest expense on deposits was, on an annualized basis, approximately 4.78% of average interest costing deposits, compared to 4.82% for the same quarter in 1998. On an annualized basis, the $1.4 million in total interest expense, reported for the quarter ended March 31, 1999, was approximately 4.84% of average interest costing liabilities outstanding for the quarter. For the quarter ended March 31, 1998, the $1.2 million in total interest expense was approximately 4.97% of average interest costing liabilities. Total interest income was $2.2 million for the quarter ended March 31, 1999, an increase of $91,000 from the $2.1 million reported for the same quarter in 1998. Interest income on loans-receivable totaled $1.2 million or 7.74% of average loans receivable balances outstanding for the quarter ended March 31, 1999. For the three months ended March 31, 1998, interest income on loans-receivable was approximately 7.86% of average loans receivable balances. During the quarter ended March 31, 1999, the Company implemented a wholesale loan arbitrage program. The program, designed to leverage a portion of the Company's excess capital, allows the Company to portfolio 15 year loans with rates below 7.00% as well as continuing to place into portfolio mortgage loans with an original maturity of less than or equal to 15 years and with interest rates of greater than or equal to 7.00%. As a result, the Company has been able to increase its loans receivable portfolio and maintain interest income from loans receivable despite lower mortgage rates. The growth has been at marginal yields at less than the average in the portfolio and the result has been a decline in the average yield on the portfolio. However, the goal of the program is to increase overall net interest income. Interest income from mortgage-backed securities available-for sale totaled $312,000 for the three months ended March 31, 1999, compared to $105,000 for the three months ended March 31, 1998. The increase in interest income is a direct result of the increase in the average balance outstanding from $7.5 to $20.8 million. Interest income from this portfolio is part of the Company's plan to borrow funds from the FHLB and invest in mortgage-related securities in an effort to achieve a margin on the difference in the investment yield and the cost of the borrowings from the FHLB. The yield on the portfolio was approximately 5.71% at March 31, 1999. [See "Financial Condition"] Interest income from the investment securities held-to-maturity portfolio totaled $418,000 for the three months ended March 31, 1999, compared to $407,000 for the same quarter in 1998. The increase was primarily the result of an increase in the average balance outstanding in the portfolio from $25.6 million for the three months ended March 31, 1998 to $25.8 million for the three months ended March 31, 1999. Despite the fact that the average yield on the portfolio declined from 6.35% for the quarter ended March 31, 1998 to 6.00% for the quarter ended March 31, 1999. The decline in the yield on the portfolio was a result of maturing or called investment securities that were replaced at lower yields. Interest income from the mortgage-backed securities held-to-maturity portfolio totaled $138,000 for the three months ended March 31, 1999, compared to $281,000 for the same period in 1998. Continued prepayments on the adjustable rate securities in the portfolio caused the average balance in the portfolio to decline to $9.3 million for the quarter ended March 31, 1999 from $15.3 million for the quarter ended March 31, 1998. The Company redirected the cash flow from the portfolio into its lending operations and its investment securities held-to-maturity portfolio to replace matured or called investment securities. The result was a decline in interest income from the portfolio, as well as a decline in the average yield on the portfolio from 7.35% for the quarter ended March 31, 1998 to 7.15% for the quarter ended March 31, 1999. Interest paid to depositors totaled $1.0 million for the three months ended March 31, 1999, down $60,000 from the $1.1 million for the three months ended March 31, 1998. Average deposit balances declined $2.1 million from $89.5 million for the quarter ended March 31, 1998 to $87.4 million for the quarter ended March 31, 1999. Interest on FHLB advances was $306,000 for the three months ended March 31, 1999, compared to $122,000 for the same period in 1998. The increase was a direct result of the continued increase in total FHLB advances in the Company's wholesale investment security arbitrage and its program to match fund 15 year loans with advances. Total interest expense as a percentage of average interest costing liabilities was approximately 4.84% for the three months ended March 31, 1999, compared to 4.97% for the three months ended March 31, 1998. Provision For Loan Losses. The Company made no provision for loan losses for the quarter ended March 31, 1999 or for the quarter ended March 31, 1998. [See - "Asset Quality"] Noninterest Income. Noninterest income totaled $75,000 for the three months ended March 31, 1999, compared to $99,000 for the same period in 1998, a $24,000 decrease. The decrease was primarily the result of a decline in gains on sales of interest earning assets to $29,000 for the current quarter from the $42,000 reported for the same quarter in 1998. The decrease was attributable to fewer mortgage loans being sold into the secondary market as the Company implemented its program of placing all 15 year and shorter loans into portfolio. Additionally, loan servicing fees declined to $19,000 for the quarter ended March 31, 1999 from $27,000 for the quarter ended March 31, 1998. Despite the fact that the balance of loans serviced increased from March 31, 1998 to March 31, 1999, the Company was forced to write-off previously recorded origination mortgage servicing rights income due to increased refinancing activity. In comparison, loan origination fees increased to $23,000 for the three months ended March 31, 1999 from $19,000 for the three months ended March 31, 1998. The increase was attributable to an increase in lending activity for the current quarter compared to the same quarter in 1998. Noninterest Expenses. Noninterest expenses totaled $772,000 for the three months ended March 31, 1999, compared to $678,000 for the three months ended March 31, 1998. The increase in noninterest expense was partially the result of a $58,000 increase in compensation and benefits expense from $461,000 for the three months ended March 31, 1998 to $519,000 for the three months ended March 31, 1999. Also, there was a $23,000 increase in occupancy and equipment from $46,000 for the three months ended March 31, 1998 to $69,000 for the three months ended March 31, 1999. The increase in both compensation and benefits expense and occupancy and equipment expense was essentially the result of additional compensation for the staffing of a new full-service office opened for business during the current quarter. Also, additional expenses associated with the funding of the Company's defined benefit pension plan and additional expenses associated with the Company's Employee Stock Ownership Plan accounted for a portion of the increase in compensation and benefits expense. Provision For Income Taxes. The Company incurred federal income tax expense of $40,000 or 40.8% of pre-tax income for the three months ended March 31, 1999, compared to $91,000 or 36.7% of pre-tax income for the three months ended March 31, 1998. COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 General. For the six months ended March 31, 1999, the Company reported net income of $233,000 or $.17 per common share and $.17 per common share - assuming dilution, compared to $302,000 or $.21 per common share and $.20 per common share - assuming dilution for the six months ended March 31, 1998. The decrease in net income was attributable to a $56,000 decline in net interest income after provisions for loan losses and a $114,000 increase in noninterest operating expenses, which were partially offset by a $66,000 increase in noninterest income and a $35,000 decrease in income tax expense. Net Interest Income. For the six months ended March 31, 1999, net interest income after provisions for loan losses totaled $1.6 million, a decrease of $56,000 from the $1.7 million reported for the six months ended March 31, 1998. On an annualized basis, the $1.6 million in net interest income after provisions for loan losses for the current period was approximately 2.59% of average interest earning assets and 2.50% of average total assets. For the six months ended March 31, 1998, the $1.7 million in net interest income after provisions for loan losses was approximately 2.91% of average interest earning assets and 2.87% of average total assets. Average interest earning assets were approximately $124.6 million for the six months ended March 31, 1999, compared to $114.7 million for the six months ended March 31, 1998. Total interest income was $4.3 million or 6.91% of average interest earning assets for the six months ended March 31, 1999, compared to $4.1 million or 7.12% of average interest earning assets for the six months ended March 31, 1998. The increase in total interest income is attributable to the increase in average outstanding balance of interest earning assets. The decline in average yield on interest earning assets was a result of continued lower interest rates and a continued narrowing of the difference in short and long term interest rates. Cash flow from the Company's interest earning assets are being redeployed in lower yielding assets in the current interest rate and the result is a decline in the average yield on the Company's interest earning asset portfolio. Interest income on loans receivable totaled $2.4 million for the six months ended March 31, 1999, unchanged from the $2.4 million reported for the six months ended March 31, 1998. The continued level of interest income on loans receivable, despite a decline in the average yield on the portfolio, was a direct result of the increase in balances outstanding in the portfolio as the Company continued its policy of placing into portfolio the majority of the loans it originates. Average loans receivable balance increased to $61.4 million for the six months ended March 31, 1999 from $59.2 million for the six months ended March 31, 1998. For the six months ended March 31, 1999, the $2.4 million in interest income on loans receivable was approximately 7.77%, compared to 7.97% for the six months ended March 31, 1998. Interest income from mortgage-backed securities available-for sale totaled $577,000 for the six months ended March 31, 1999, compared to $169,000 for the six months ended March 31, 1998. Interest income from this portfolio is part of the Company's program, begun in June of 1997, to borrow funds from the FHLB and invest in mortgage-related securities in an effort to achieve a positive margin on the difference in the investment yield and the cost of the borrowings. At March 31, 1999, the Company had approximately $22.1 million invested in the program. [See "Financial Condition"] Interest income on investment securities held-to-maturity totaled $885,000 for the six months ended March 31, 1999, compared to $800,000 for the six months ended March 31, 1998. The increase in interest income on the portfolio was the result of a $4.3 million increase in the average balance outstanding, despite a decline in the overall yield on the portfolio as maturing securities were reinvested at lower yields. For the six months ended March 31, 1999, the $885,000 in interest income was approximately 6.23% of the average balance outstanding, compared to 6.65% for the $800,000 reported for the six months ended March 31, 1998. Interest income on mortgage-backed securities held-to-maturity was $317,000 for the six months ended March 31, 1999, compared to $596,000 for the six months ended March 31, 1998. The decline in interest income on the portfolio was primarily the result of a decline in the average balance outstanding in the portfolio from $15.2 million for the six months ended March 31, 1998 to $9.3 million for the six months ended March 31, 1999. The Company redirected cash flow from the portfolio into its lending operations, its investment securities available-for-sale portfolio, and its investment securities held-to-maturity portfolio. The adjustable rate feature of the underlying loans in the securities, the higher coupon rates on such loans, and lower rates of interest on fixed interest mortgage loans have caused borrowers on the underlying loans to seek out opportunities to refinance their mortgages. The result has been an increase in the cash flow from the portfolio, which resulted in the decline in the average balances in the portfolio. Interest expense was $2.7 million for the six months ended March 31, 1999, an increase of $273,000 from the $2.4 million reported for the six month period ended March 31, 1998. An increase in average interest costing liabilities, including advances from the FHLB, from $95.8 million for the six months ended March 31, 1998 to $107.8 million for the six months ended March 31, 1999 primarily accounted for the increase in interest expense. The $2.7 million in interest expense reported for the six month period ended March 31, 1999 was approximately 4.98% of average interest costing liabilities, compared to 5.04% for the same period in 1998. Noninterest Income. Noninterest income was $242,000 for the six months ended March 31, 1999, compared to $176,000 for the six months ended March 31, 1998. The increase in income was directly attributable to additional gains on sales of interest earning assets, additional loan origination fees, and other income. The increase in other income was a result of a one time collection of a deficiency judgment on a previously foreclosed real estate owned property of approximately $30,000. Gains on sales on interest earning assets totaled $105,000 for the six month period ended March 31, 1999, compared to $63,000 for the six months ended March 31, 1998. Loan origination and commitment fees were $47,000 for the six months ended March 31, 1999, compared to $42,000 for the six months ended March 31, 1998. The increases were directly attributable to additional lending activity of the Company during the current period and to the fact that during the first three months of the six month period ended March 31, 1999, the Company sold more loans into the secondary market than during the comparable period in 1998. Offsetting the increases in noninterest income was a $19,000 decline in loan servicing fees from $49,000 for the six months ended March 31, 1998 to $30,000 for the six months ended March 31, 1999. The decline in loan servicing fees is attributable to the Company's election to write-off previously recorded origination mortgage servicing rights income as loans serviced were refinanced with shorter maturities. Noninterest Expense. Noninterest expense was reported as $1.5 million for the six month period ended March 31, 1999, a $114,000 increase from the $1.4 million reported for the six months ended March 31, 1998. The increase in noninterest expense was primarily the result of a $76,000 increase in compensation and benefits expense from $953,000 for the six months ended March 31, 1998 to $1.0 million for the six months ended March 31, 1999. The increase in compensation and benefits expense was essentially the result of additional compensation for additional staff employed at the Company's new office location. Also, additional expenses associated with the funding of the Company's defined benefit pension plan and additional expenses associated with the Company's Employee Stock Ownership Plan accounted for a portion of the increase. Occupancy and equipment expense totaled $115,000 for the six months ended March 31, 1999, compared to $94,000 for the six months ended March 31, 1998. The increase was attributable to additional expenses associated with the opening of a new full-service office. Provision For Income Taxes. The Company incurred federal income tax expense of $139,000 or 37.3% of pre-tax income for the six months ended March 31, 1999, compared to $174,000 or 36.5% of pre-tax income for the six months ended March 31, 1998. ASSET QUALITY At March 31, 1999, the Company's non-performing assets totaled $329,000 or .25% of total assets, compared to $228,000 or .18% of total assets at September 30, 1998. At March 31, 1999, non-performing assets were comprised of sixteen (16) loans, the largest of which was $133,000, secured by a single family dwelling. Non-performing loans at March 31, 1999 equaled $329,000 or .53% of loans receivable, compared to $228,000 or .37% of loans receivable at September 30, 1998. Classified assets totaled $598,000 or .44% of total assets at March 31, 1999, compared to $570,000 or .46% of total assets at September 30, 1998. Classified assets and non-performing assets differ in that classified assets may include loans less than ninety (90) days delinquent. Also, assets guaranteed by government agencies such as the Veterans Administration and the Federal Housing Administration are not included in classified assets but are included in non-performing assets. All classified assets at March 31, 1999, were deemed to be "substandard". No assets were classified "doubtful" or "loss" as of such date. The Company's allowance for loan losses totaled $232,000 at March 31, 1999, a slight decrease from the $233,000 at September 30, 1998. The allowance for loan losses as a percentage of loans receivable equaled .38% at March 31, 1999 and September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are deposits from customers, advances from the FHLB, amortization and prepayment of loan principal (including mortgage-backed securities), maturities of securities, sales of loans and operations. Current Office of Thrift Supervision regulations require the Association to maintain, at a minimum, cash and eligible investments, in an amount of not less than 4.0% of net withdrawable savings accounts and borrowings payable on demand or in one year or less. Liquid assets include cash on hand, unpledged demand deposits, certain time deposits, and, U. S Government and agency obligations. The Association maintains a liquid asset ratio above the minimum required level of the Office of Thrift Supervision. At March 31, 1999, the Association's liquid asset ratio equaled 36.6%. The Association uses its liquidity and capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and loan commitments, maintain liquidity and pay operating expenses. At March 31, 1999, the Association had outstanding commitments to extend credit on $4.7 million of real estate loans. Management believes that present levels of liquid assets are sufficient to meet anticipated future loan commitments as well as deposit withdrawal demands. Total stockholders' equity equaled $19.7 million at March 31, 1999, a decrease of $636,000 from the $20.4 million reported at September 30, 1998. The decrease was the result of the $730,000 increase in treasury stock, a $45,000 increase in unrealized losses on available-for-sale securities, and the $140,000 cash dividend paid during the quarter. The decrease was offset by the $233,000 net income reported for the six month period ended March 31, 1999, and a $49,000 decrease in deferred compensation. As of March 31, 1999, the Company's reported book value per share, using total stockholders' equity of $19.7 million (net of the cost of unallocated ESOP and RRP shares) and 1,392,853 outstanding shares of common stock (the total issued shares including unallocated ESOP and RRP shares, less treasury shares), equaled $14.18 per share. Subsequent to the quarter ended March 31, 1999, the Company announced its intention to pay a cash dividend of $.05 per share on May 26, 1999, to stockholders of record at May 12, 1999. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Congress imposed a three part capital requirement for thrift institutions. At March 31, 1999, the Association's actual and required capital amounts under each of the three requirements were as follows: - - Tangible Capital (stockholders' equity) was $18.9 million or 14.0% of total assets, exceeding the minimum requirement of 1.5% by $16.9 million. - - Core Capital (Tangible capital plus certain intangible assets) was $18.9 million or 14.0% of total assets, exceeding the minimum requirement of 4.0% by $13.5 million. - - Risk-based Capital (Core capital plus general loan and valuation allowances less an adjustment for capitalized mortgage servicing rights) equaled $18.9 8.0% of risk weighted assets by $14.6 million. At March 31, 1999, the Association was considered a "well capitalized" institution under the prompt corrective action requirements of the Federal Deposit Insurance Corporation Improvement Act of 1991. YEAR 2000 ISSUE The Year 2000 or Century Date Change issue is a result of computer programs being written using two digits rather than four digits to define the applicable year. A computer system's inability to recognize the date "00" as the year 2000 of if the system recognized the date "00" as the year 1900, could result in a system failure or miscalculations causing disruptions of operations. The Company outsources its primary computer processing functions. The Company has established a management committee to identify all of its systems potentially affected by the year 2000 and to ensure that reprogramming of affected systems is completed. The committee is responsible for testing all company computer systems and ensuring that all third party computer system vendors complete Year 2000 remediation. The Company has undergone two examinations from its primary regulatory authority, the OTS. The Company received satisfactory ratings on both such exams. During the remainder of 1999, the Company will focus its Year 2000 efforts on customer awareness. The Company will be involved in training its employees to answer customer inquiries about Year 2000 issues and will continue to advise its customers about the Company's ongoing efforts. The Company believes that the risk that the major data processing service provider will not be Year 2000 compliant is low. The Company has also received correspondence from all other third party software providers that indicate that all of such software will be Year 2000 compliant. The Company has budgeted approximately $25,000 for its Year 2000 program. As of March 31, 1999, the Company has expensed or is aware of future expenditures totaling approximately $10,000. FORWARD-LOOKING STATEMENTS When used in this Form 10-QSB or future filings by the Company with the Securities and Exchange Commission, 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 "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", "believe" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending 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 publicly release the result of any revisions, which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB MARCH 31, 1999 PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no material legal proceedings to which the Company or the Association is a party or of which any of their property is subject. From time-to-time, the Association is a party to various legal proceedings incident to the conduct of its business. Item 2. Changes In Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submissions Of Matters To A Vote Of Security Holders None. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: Exhibit 11.0 - Computation of Earnings Per Share Exhibit 27.0 - Financial Data Schedule (b) Reports on Form 8-K During the quarter ended March 31, 1999, the Company filed a report on Form 8-K on January 29, 1999, to report the issuance of a press release dated January 29, 1999, announcing the Company's intention to pay, on February 24, 1999, a cash dividend of $.05 per share for the quarter ended December 31, 1998, to stockholders of record on February 10, 1999. During the quarter ended March 31, 1999, the Company filed a report on Form 8-K on January 29, 1999, to report the issuance of a press release dated January 29, 1999, announcing the Company's earnings for the quarter ended December 31, 1998. During the quarter ended March 31, 1999, the Company filed a report on Form 8-K on January 29, 1999, to report the issuance of a press release dated January 29, 1999, announcing the Company's 5% stock repurchase program. SIGNATURES Pursuant to the requirement of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. East Texas Financial Services, Inc. Date: May 11, 1999 /s/ Gerald W. Free ------------------ Vice Chairman, President and CEO (Principal Executive Officer) Date: May 11, 1999 /s/ Derrell W. Chapman ----------------------- Vice President/COO/CFO (Principal Financial and Accounting Officer) EX-11 2 COMPUTATIONS OF EARNINGS PER SHARE Three Months Ended March 31, 1999 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- December 31, 1998 1,464,056 81,536 1,382,520 January 31, 1999 1,464,056 81,536 1,382,520 February 28, 1999 1,392,853 81,536 1,311,317 March 31, 1999 1,392,853 81,536 1,311,317 Weighted average number of shares outstanding for the quarter ended March 31, 1999, for earnings per share calculation 1,335,051 Stock options outstanding at March 31, 1999: 148,843 --------- Exercise price of stock options: $9.42 per share --------------- Average stock price for three month period: ended March 31, 1999 $10.326 Three Months Ended March 31, ---------------------------- Basic Earnings Per Share 1999 1998 - ------------------------ ----------- ----------- Income available to common stockholders ...... $ 57,379 $ 157,795 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation .... 1,335,051 1,441,868 =========== =========== Basic Earnings Per Share ............ $ .04 $ .11 =========== =========== Diluted Earnings Per Share Income available to common stockholders ...... $ 57,379 $ 157,795 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation .... 1,335,051 1,441,868 Weighted average common shares issued under stock option plans ................. 148,843 150,411 Less weighted average shares assumed repurchased with proceeds ................ (135,784) (96,242) ----------- ----------- Weighted average number of common shares outstanding for diluted EPS calculation .. 1,348,110 1,496,037 =========== =========== Diluted Earnings Per Share .......... $ .04 $ .11 =========== =========== COMPUTATIONS OF EARNINGS PER SHARE Six Months Ended March 31, 1999 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- September 30, 1998 1,464,056 81,536 1,382,520 October 31, 1998 1,464,056 81,536 1,382,520 November 30, 1998 1,464,056 81,536 1,382,520 December 31, 1998 1,464,056 81,536 1,382,520 January 31, 1999 1,464,056 81,536 1,382,520 February 28, 1999 1,392,853 81,536 1,311,317 March 31, 1999 1,392,853 81,536 1,311,317 Weighted average number of shares outstanding for the quarter ended March 31, 1999, for earnings per share calculation 1,362,176 Stock options outstanding at March 31, 1999: 148,843 ------- Exercise price of stock options: $9.42 per share --------------- Average stock price for three month period: ended March 31, 1999 $10.287 Six Months Ended March 31, ---------------------------- Basic Earnings Per Share 1999 1998 - ------------------------ ----------- ----------- Income available to common stockholders ...... $ 233,150 $ 302,099 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation .... 1,362,176 1,441,868 =========== =========== Basic Earnings Per Share ............ $ .17 $ .21 =========== =========== Diluted Earnings Per Share Income available to common stockholders ...... $ 233,150 $ 302,099 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation .... 1,362,176 1,441,868 Weighted average common shares issued under stock option plans ................. 148,843 150,411 Less weighted average shares assumed repurchased with proceeds ................ (136,298) (98,881) ----------- ----------- Weighted average number of common shares outstanding for diluted EPS calculation .. 1,374,721 1,493,398 =========== =========== Diluted Earnings Per Share ................... $ .17 $ .20 =========== =========== EX-27 3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF EAST TEXAS FINANCIAL SERVICES, INC., AT MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS SEP-30-1999 MAR-31-1999 960,755 5,889,793 0 0 25,181,884 34,759,676 34,827,959 61,991,987 231,933 134,342,771 87,076,519 23,085,909 611,311 3,821,529 0 0 18,845 19,747,503 134,342,771 2,387,089 1,914,828 0 4,301,917 2,129,252 2,686,089 1,615,828 0 0 1,486,429 371,806 371,806 0 0 233,150 0.17 0.17 6.84 329,000 0 0 598,000 233,180 0 0 231,933 54,324 0 177,609
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