10QSB 1 0001.txt 10QSB FOR EAST TEXAS FINANCIAL SERVICES 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 December 31, 2000 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 December 31, 2000, was 1,162,320. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB December 31, 2000 INDEX
Page No. -------- Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition, December 31, 2000 (Unaudited) and September 30, 2000.................................................... 4 Consolidated Statements of Income, (Unaudited) three months ended December 31, 2000, and December 31, 1999.............................................. 5 Consolidated Statement of Changes in Stockholders' Equity, (Unaudited) three months ended December 31, 2000.................................................. 6 Consolidated Statements of Cash Flows, (Unaudited) three months ended December 31, 2000, and December 31, 1999.............................................. 7 Notes to (Unaudited) Consolidated Financial Statements, December 31, 2000............. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 14 Part II - Other Information Item 1. Legal Proceedings................................................................ 21 Item 2. Changes In Securities............................................................ 21 Item 3. Defaults Upon Senior Securities.................................................. 21 Item 4. Submission of Matters To a Vote of Security Holders.............................. 21 Item 5. Other Information................................................................ 21 Item 6. Exhibits and Reports on Form 8-K................................................. 22 Signature Page............................................................................................ 23
Page 2 of 23 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB December 31, 2000 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. On June 30, 2000, the Company acquired by merger 100% of the common stock of Gilmer Financial Services, Inc. ("Gilmer" or "the Gilmer transaction") and its wholly owned subsidiary, Gilmer Savings Bank, F.S.B. The acquisition was accounted for as a purchase transaction. Gilmer was merged into the Company's wholly owned subsidiary, First Federal Savings and Loan Association. The assets and liabilities of Gilmer were recorded at their fair market values. The difference in the purchase price and the fair market value of the assets and liabilities acquired is recorded as goodwill. The statement of income for the period ended December 31, 1999 do not reflect income for Gilmer. 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. Page 3 of 23 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS December 31, 2000 September 30, 2000 ------------------ ------------------ (Unaudited) Cash and due from banks $ 1,446,166 $ 1,661,435 Interest-bearing deposits with banks 759,602 543,288 Interest-earning time deposits with financial institutions 991,000 1,089,000 Federal funds sold 2,396,214 364,822 Investment securities available-for-sale 8,010,876 7,916,597 Mortgage-backed securities available-for-sale 43,122,089 44,012,663 Investment securities held-to-maturity (estimated market value of $24,867,235 at December 31, 2000, and $25,428,105 at September 30, 2000) 24,972,745 25,970,113 Mortgage-backed securities held-to-maturity (estimated market value of $3,977,682 at December 31, 2000 and $4,349,164 at September 30, 2000) 3,919,600 4,279,132 Loans receivable, net of allowance for credit losses of $1,003,158 at December 31, 2000 and $1,057,374 at September 30, 2000 103,474,091 102,064,137 Accrued interest receivable 1,623,653 1,548,840 Federal Home Loan Bank stock, at cost 4,180,600 4,115,000 Premises and equipment 2,712,432 2,744,278 Foreclosed assets, net 130,081 86,465 Goodwill, net 2,268,891 2,313,491 Deferred tax asset 136,607 255,233 Mortgage servicing rights 239,611 258,682 Other assets 1,362,536 986,482 ------------------ ------------------ Total Assets $ 201,746,794 $ 200,209,658 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Noninterest-bearing $ 2,975,995 $ 2,644,220 Interest-bearing 104,631,355 98,975,563 ------------------ ------------------ Total deposits 107,607,350 101,619,783 FHLB advances 74,140,165 78,959,065 Advances from borrowers for taxes and insurance 227,890 1,478,438 Federal income taxes Current 29,555 0 Deferred 0 0 Accrued expenses and other liabilities 3,311,652 1,943,399 ------------------ ------------------ Total liabilities 185,316,612 184,000,685 ------------------ ------------------ 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 1,162,320 outstanding 18,845 18,845 Additional paid-in-capital 12,444,372 12,444,372 Unearned employee stock ownership plan shares (346,020) (346,020) Retained earnings (substantially restricted) 13,723,045 13,732,109 Accumulated other comprehensive income (542,778) (773,051) Treasury stock, 722,172 shares at cost (8,867,282) (8,867,282) ------------------ ------------------ Total stockholder's equity 16,430,182 16,208,973 ------------------ ------------------ Total liabilities and stockholders' equity $ 201,746,794 $ 200,209,658 ================== ==================
The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 23 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31, (Unaudited) 2000 1999 ------------- ------------- INTEREST INCOME Loans receivable: First Mortgage $ 1,656,335 $ 1,143,396 Consumer and other loans 438,518 169,390 Securities available for sale: Investment securities 198,352 37,159 Mortgage-backed securities 814,520 577,956 Securities held to maturity: Investment securities 394,790 582,503 Mortgage-backed securities 83,920 88,002 Deposits with banks 33,259 23,621 ------------- ------------- Total interest income 3,619,694 2,622,027 ------------- ------------- INTEREST EXPENSE Deposits 1,441,400 1,021,580 FHLB advances 1,268,842 728,342 Interest expense other bank borrowings 0 14,688 ------------- ------------- Total interest expense 2,710,242 1,764,610 ------------- ------------- Net interest income before provision for loan losses 909,452 857,417 Provision for loan losses 16,234 0 ------------- ------------- Net interest income after provision for loan losses 893,218 857,417 ------------- ------------- NONINTEREST INCOME Gain(loss) on sale of interest-earning assets 10,469 12,208 Loan origination and commitment fees 19,899 11,959 Loan servicing fees 10,194 14,917 Gain on foreclosed real estate (2,798) (410) Other 88,883 21,225 ------------- ------------- Total noninterest income 126,647 59,899 ------------- ------------- NONINTEREST EXPENSE Compensation and benefits 563,474 587,853 Occupancy and equipment 115,339 70,220 SAIF deposit insurance premium 5,324 12,979 Loss on foreclosed real estate 188 0 Goodwill 39,212 0 Other 217,721 97,038 ------------- ------------- Total noninterest expense 941,258 768,090 ------------- ------------- Income (loss) before provision for income taxes 78,607 149,226 Income tax expense (benefit) 29,555 55,468 ------------- ------------- NET INCOME (LOSS) $ 49,052 $ 93,758 ============= ============= Earnings per common share and earnings per common share - assuming dilution $ .04 $ .08
The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 23 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED December 31, 2000 Common Stock Unallocated Unrealized and Additional ESOP Gain (loss) on Retained Paid in Capital Shares AFS Securities Earnings ----------------- ------------ -------------- -------------- Balance September 30, 2000 $ 12,463,217 $(346,020) $ (773,051) $13,732,109 Comprehensive income: Net Income 49,052 Unrealized holding gains 230,273 Comprehensive income Deferred compensation amortization Payment of cash dividends (58,116) Balance December 31, 2000 $ 12,463,217 $(346,020) $ (542,778) $13,723,045 ================= ============ ============= ============== Total Treasury Comprehensive Stockholders' Stocks Income Equity -------------- ----------------- --------------- Balance September 30, 2000 $(8,867,282) $ - $ 16,208,973 Comprehensive income: Net Income 49,052 Unrealized holding gains 230,273 ----------------- Comprehensive income $ 279,325 279,325 ================= Deferred compensation amortization - Payment of cash dividends (58,116) Balance December 31, 2000 $(8,867,282) $ 16,430,182 ============== ===============
The accompanying notes are an integral part of the consolidated financial statements. Page 6 of 23 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Three Months Ended December 31, 2000 1999 --------------------------------- Cash flows from operating activities: Net income $ 49,052 $ 93,758 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees (1,486) (1,003) Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans 277 13,017 Amortization of deferred compensation 0 29,095 Amortization of goodwill 39,212 0 Compensation charge related to release of ESOP shares 4,975 21,892 Depreciation 47,707 41,069 Provision for loan losses 16,234 0 Deferred income taxes 0 12,275 Stock dividends on FHLB stock (67,500) (37,100) Amortization of mortgage servicing rights 27,913 13,870 Net (gain) loss on sale of: Loans 0 (548) Loans held for sale (326) 0 Fixed assets 0 0 Foreclosed real estate 188 0 Other repossessed property (2,300) 0 Proceeds from loan sales 716,826 990,992 Originations of loans held for sale (716,500) 0 (Increase) decrease in Accrued interest receivable (74,813) (156) Other assets (370,666) (402,533) Increase (decrease) in: Federal income tax payable 29,555 43,193 Accrued expenses and other liabilities (1,368,253) (1,298,207) ------------ ----------- Net cash provided (used) by operating activities (1,066,601) (480,386) ------------ -----------
The accompanying notes are an integral part of the financial statements. Page 7 of 23 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Three Months End December 31,
2000 1999 ---------------- --------------- Cash flows from investing activities Net (increase) decrease in interest-earning time deposits 98,000 682,617 Net (increase) decrease in fed funds sold (2,031,392) 0 Purchases of securities available-for-sale 0 (485,930) Purchase of securities held-to-maturity 0 0 Proceeds from maturities of securities held-to-maturity 1,000,000 2,000,000 Purchases of mortgage-backed securities available-for-sale 0 (5,208,739) Principal payments on mortgage-backed securities available for sale 1,119,535 760,792 Principal payments on mortgage-backed securities held to maturity 356,143 533,085 Purchases of FHLB stock 0 (439,900) Proceeds from redemption of FHLB stock 1,900 0 Net increase in loans (1,487,295) (2,259,551) Proceeds from sale of foreclosed real estate 42,254 0 Acquisition costs related to foreclosed real estate 0 0 Proceeds from sales of fixed assets 0 0 Expenditures for premises and equipment (15,861) (35,339) Origination of mortgage servicing rights (8,843) (11,661) ---------------- -------------- Net cash provided (used) by investing activities (925,559) (4,464,626) ---------------- -------------- Cash flows from financing activities: Net increase (decrease) in: Deposits 5,987,567 (1,203,836) Advances from borrowers (1,250,548) (713,155) Proceeds from note payable to bank 0 1,500,000 Principal payments on note payable to bank 0 0 Proceeds from advances from Federal Home Loan Bank 237,558,000 131,125,206 Payment of advances from Federal Home Loan Bank (242,376,900) (121,710,399) Purchase of treasury stock at cost 0 (1,882,425) Exercise of stock options 0 0 Dividends paid to stockholders (58,116) (64,103) ---------------- -------------- Net cash provided (used) by financing activities (139,997) 7,051,228 ---------------- -------------- Net increase (decrease) in cash and cash equivalents 1,045 2,106,276 Cash and cash equivalents at beginning of the period 2,204,723 1,994,564 ---------------- -------------- Cash and cash equivalents at end of the period $ 2,205,768 $ 4,100,840 ================ ============== Supplemental disclosure: Cash paid for: Interest on deposits $ 776,207 $ 612,398 Interest on FHLB advances and other borrowed funds 1,268,841 743,030 Income taxes 0 0 Transfers from loans to real estate and other assets acquired through foreclosures 58,433 2,966 Loans made to facilitate the sale of foreclosed assets 54,600 0
The accompanying notes are an integral part of the consolidated financial statements Page 8 of 23 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 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, 2000. 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 ended December 31, 2000 and 1999, 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 December 31, 2000 and 1999, the weighted average number of shares outstanding totaled 1,162,320. Earnings per common share - assuming dilution, for the three months ended December 31, 2000 and 1999, 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 December 31, 2000 and 1999, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,110,497 and 1,226,999, 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 period ended December 31, 2000 and 1999. Page 9 of 23 NOTE 3 - SECURITIES The carrying values and estimated market values of investment securities available-for-sale as of December 31, 2000, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value -------------- --------------- -------------- --------------- --------------- Corporate debt $ 7,500,000 $ 49,640 $ 122,200 $ (2,730) $ 7,424,710 Municipal bonds 585,000 0 6,500 7,666 586,166 -------------- --------------- -------------- --------------- --------------- $ 8,085,000 $ 49,640 $ 128,700 $ 4,936 $ 8,010,876 -------------- --------------- -------------- --------------- ---------------
The weighted average yield on the investment security available-for-sale portfolio was 6.41% for the quarter ended December 31, 2000. The amortized cost and estimated market values of investment securities held-to-maturity as of December 31, 2000, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- -------------- --------------- -------------- Debt securities: U. S. government agency 24,972,745 39,187 144,697 24,867,235 -------------- -------------- --------------- -------------- Total debt securities 24,972,745 39,187 144,697 24,867,235 -------------- -------------- --------------- --------------
The amortized cost and estimated market values of investment securities held-to-maturity as of December 31, 2000, by contractual maturity are shown below: Estimated Amortized Market Cost Value -------------- --------------- Due in one year or less $ 0 $ 0 Due after one year through two years 4,000,000 3,988,760 Due after two years through three years 18,973,331 18,913,635 Due after three years through six years 1,999,414 1,964,840 -------------- --------------- Total debt securities $ 24,972,745 $ 24,867,235 -------------- --------------- As of December 31, 2000, all of the securities had call options exercisable at the discretion of the issuer. Page 10 of 23 As of December 31, 2000, the weighted average yield on the Company's investment security held-to-maturity portfolio was approximately 6.08% 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 6.14%. The carrying values and estimated market values of mortgage-backed and related securities available-for-sale as of December 31, 2000, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value -------------- --------------- -------------- -------------- --------------- Fixed Rate $ 6,152,310 $ 6,038 $ 90,445 $ 42,863 $ 6,110,766 Adjustable Rate 37,876,753 227,089 222,329 (870,190) 37,011,323 -------------- --------------- -------------- -------------- --------------- 44,029,063 233,127 312,774 (827,327) 43,122,089 -------------- --------------- -------------- -------------- ---------------
The carrying values and estimated market values of mortgage-backed and related securities held-to-maturity as of December 31, 2000, by type of security are as follows:
Estimated Principal Unamortized Unearned Carrying Market Balance Premiums Discounts Value Value -------------- --------------- -------------- -------------- --------------- Adjustable Rate 3,894,001 28,169 2,570 3,919,600 3,977,682 -------------- --------------- -------------- -------------- --------------- $ 3,894,001 $ 28,169 $ 2,570 $ 3,919,600 $ 3,977,682 -------------- --------------- -------------- -------------- ---------------
The overall yield on the Company's mortgage-backed securities portfolios as of December 31, 2000, was approximately 7.51%. NOTE 4 - CURRENT ACCOUNTING ISSUES 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 182,278 or 10% of the total number of common shares issued pursuant to the conversion. The option exercise price Page 11 of 23 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 generally 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: Balance, September 30, 1998 148,843 Granted -0- Exercised at $9.42 per share (1,567) Forfeited and expired -0- --------- Balance, September 30, 1999 147,276 Granted 4,500 Exercised at $9.42 per share -0- Forfeited and expired -0- --------- Balance, September 30, 2000 151,776 ========= Options exercisable at December 31, 2000 under stock option plan 147,276 ========= Shares available for future grants 22,662 ========= During the three months ended December 31, 2000, no options were exercised, issued, or forfeited. Page 12 of 23 NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK The outstanding advances from the FHLB consisted of the following at December 31, 2000: Maturity Balance Rate ------------------------ ---------------------- ------- 01/02/2001 $ 22,000,000 6.63% 01/05/2001 $ 1,000,000 6.64% 01/08/2001 $ 35,700,000 6.62% 01/08/2001 $ 3,190,000 6.62% 02/15/2001 $ 20,000 5.94% 02/15/2002 $ 25,000 5.98% 02/15/2003 $ 100,000 6.00% 09/01/2003 $ 1,420,300 6.25% 02/15/2004 $ 100,000 6.01% 12/31/2004 $ 243,481 6.09% 01/03/2005 $ 88,721 6.03% 02/15/2005 $ 100,000 6.04% 02/15/2006 $ 150,000 6.05% 01/01/2013 $ 434,834 6.09% 01/01/2013 $ 413,267 6.13% 02/01/2013 $ 409,884 5.91% 03/03/2014 $ 843,535 5.45% 04/01/2014 $ 814,596 5.97% 05/01/2014 $ 1,108,957 5.66% 06/01/2014 $ 845,444 5.90% 07/01/2014 $ 782,597 6.38% 08/01/2014 $ 568,410 6.37% 09/01/2014 $ 717,908 6.59% 10/01/2014 $ 629,949 6.86% 11/03/2014 $ 1,554,516 6.77% 12/01/2014 $ 531,154 6.57% 01/01/2015 $ 347,612 6.73% 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. Page 13 of 23 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB December 31, 2000 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, commercial real estate, one- to four-family construction, multi-family, commercial and consumer loans. These funds have also been used to purchase mortgage-backed securities, U. S. government and agency obligations and other permissible investments. 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. On June 30, 2000, the Company completed the acquisition of Gilmer and its wholly owned subsidiary, Gilmer Savings Bank, F.S.B. The Company acquired 100% of the outstanding stock of Gilmer, the transaction was accounted for as a purchase transaction. The assets and liabilities of Gilmer were recorded at their fair market values as of June 30, 2000. The difference in the net fair value of Gilmer's assets and liabilities and the purchase price of approximately $5.4 million was recorded as goodwill. The statement of financial condition, the statement of changes in stockholder's equity and the statement of cash flows reflect the acquisition of Gilmer. The statement of income for the three months ended December 31, 1999 reflects only activity for the Company prior to the acquisition of Gilmer. FINANCIAL CONDITION Total assets were $201.8 million at December 31, 2000, a $1.6 million increase from the $200.2 million reported at September 30, 2000, the Company's most recent fiscal year end. The increase in total assets was the result of a $2.0 million increase in federal funds sold, a $1.4 million increase in loans receivable, a $216,000 increase in interest-earning deposits with banks and a $94,000 increase in investment securities available-for-sale. The increases were partially offset by a $997,000 decrease in investment securities held to maturity, an $891,000 decline in mortgage-backed securities available-for-sale, and a $360,000 decline in mortgage-backed securities held to maturity. At December 31, 2000, loans-receivable totaled $103.5 million, and increase of $1.4 million compared to $102.1 million at September 30, 2000. The increase in loans-receivable was primarily the result of the Company's Page 14 of 23 continued efforts to expand its origination of consumer, commercial, and commercial real estate loans. The increase in the origination of such loans helped to offset a decline, due to rising interest rates, in the volume of one- to four-family loans originated. For the quarter ended December 31, 2000, the Company originated a total of approximately $5.0 million in consumer, commercial, and commercial real-estate loans. Approximately $800,000 of the loans originated were renewals of existing loans. The result was an increase in the balance of such loans outstanding to $24.4 million at December 31, 2000, compared to $22.4 million at September 30, 2000. The origination of consumer, commercial, and commercial real estate loans is primarily conducted through the Company's full service banking location in Gilmer, Texas and the S. Broadway office in Tyler, Texas. The predominant method for originating these loans is through direct contacts with existing or potential new customers. However, the Company has increased its origination of indirect automobile loans through a network of dealers in the Tyler and Gilmer markets. Prior to purchasing a loan contract from a dealer, the Company underwrites each indirect loan in the same manner as its direct loans. In addition, each dealer maintains a reserve account with the Company. For the quarter ended December 31, 2000, the Company originated approximately $875,000 in automobile loans through its indirect program. Federal funds sold totaled $2.4 million at December 31, 2000, an increase of $2.0 million from the $365,000 at September 30, 2000. The additional balances, which are held in a "sweep" account arrangement with the Company's major correspondent bank, were funds held at the correspondent bank in anticipation of funding year end tax payments of the Company's mortgage loan portfolio. The Company issues checks to various taxing entities on the last day of the calendar year, when most property tax accounts are due. The balance in federal funds sold decreased by approximately $2.0 million as the checks were presented to the correspondent bank for payment. Investment securities available-for-sale increased by $94,000 to a total of $8.0 million at December 31, 2000. The increase was solely the result of increases in the mark-to-market value of the securities in the portfolio from September 30, 2000 to December 31, 2000. This portfolio consists of corporate debt securities and municipal bonds. All of the corporate debt securities have a fixed rate and term and are non-callable. The Company's investment policy only allows for the purchase of investment-grade securities. All corporate debt securities have a final maturity of eight years or less. The municipal bonds, which comprise only $585,000 of the portfolio, are primarily bonds issued by Upshur County, where the Company's Gilmer office is located. Investment securities held-to-maturity was reported as $25.0 million at December 31, 2000, a decline of $997,000 from the $26.0 million reported at September 30, 2000. The decrease was the result of bonds that matured or were called by the issuer during the quarter. This portfolio consists entirely of debt issued by governmental agencies such as Federal National Mortgage Corporation, Federal Home Loan Mortgage Corporation, or the Federal Home Loan Bank System. All of the bonds in the portfolio are currently callable at the discretion of the issuer. The Company expects, with anticipated declining interest rates, much of the portfolio to be called by the issuer over the next several months. The additional cash flow will provide a challenge for the Company to reinvest in a declining interest rate environment. Mortgage-backed securities available-for-sale totaled $43.1 million at December 31, 2000, a decrease of $891,000 from the $44.0 million at September 30, 2000. The decrease was the result of principal repayments on the bonds in the portfolio during the quarter. Mortgage-backed securities held-to-maturity portfolio totaled $3.9 million at December 31, 2000, a decrease of $360,000 from the $4.3 million reported at September 30, 2000. The decrease was primarily due to principal payments received on the portfolio during the period. Total deposits were $107.6 million at December 31, 2000, an $6.0 million increase from the $101.6 million reported at September 30, 2000. The increase was primarily the result of additional increases in certificates of deposit as the Company elected to pay higher interest rates on such deposits during the quarter. Page 15 of 23 The Company reported $74.1 million in borrowed funds at December 31, 2000, a decrease of $4.8 million from the $79.0 million reported at September 30, 2000. The decrease was primarily due to the Company's decision to repay short-term advances from excess cash flow. The advances are primarily used to fund investments in mortgage-backed securities, which are purchased by the Company when the Company is unable to originate mortgage loans and place such loans into the portfolio. In addition, the Company utilizes such advances to fund commercial real estate loans. The Company is able to structure the advances to mirror the terms of the loans. Also, the Company utilizes short-term advances to provide needed liquidity. Stockholder's equity totaled $16.4 million at December 31, 2000, an increase of $221,000 from the $16.2 million reported at September 30, 2000. The increase was primarily attributable to a net increase in unrealized losses on available-for-sale securities, of approximately $230,000, during the quarter. Stockholder's equity also increased due to the $49,000 of net income reported for the quarter. Both of these increases were offset by the payment of $58,000 in cash dividends during the quarter. At December 31, 2000, the Company reported a book value per share of $14.14 based on 1,162,320 net outstanding shares. 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 DECEMBER 31, 2000 AND DECEMBER 31, 1999 General. Net income for the three months ended December 31, 2000 was $49,000 or $.04 per share, a decrease of $45,000 from the $94,000, or $.08 per share, reported for the three months ended December 31, 1999. The decrease in net income was attributable to a $173,000 increase in non-interest expense which was partially offset by a $67,000 increase in non-interest income, a $36,000 increase in net interest income after provision for loan losses, and a $26,000 decline in income tax expense. Net Interest Income. For the quarter ended December 31, 2000, net interest income before provision for loan losses totaled $909,000, and increase of $52,000 over the $857,000 reported for the quarter ended December 31, 1999. On an annualized basis, the $909,000 in net interest income for the current quarter was approximately 1.91% of average interest-earning assets and 1.81% of average total assets. For the quarter ended December 31, 1999, the $857,000 in net interest income before provisions for loan losses was approximately 2.27% of average interest-earning assets and 2.19% of average total assets. Average interest-earning assets were approximately $190.1 million for the quarter ended December 31, 2000, compared to $150.8 million for the quarter ended December 31, 1999. Total interest income was $3.6 million for the quarter ended December 31, 2000, an increase of $998,000 over the $2.6 million reported for the quarter ended December 31, 1999. The increase was primarily due to the increase in interest earning assets, primarily as a result of the additional interest-earning assets acquired in the Gilmer merger, and, to a lesser extent, in additional interest-earning assets acquired by the Company during the 12 months ended December 31, 2000. Interest income on loans-receivable was $2.1 million for the quarter ended December 31, 2000. On an annualized basis, the $2.1 million was approximately 8.15% or average loans-receivable balances outstanding for the quarter ended December 31, 2000, compared to approximately 7.74% for the quarter ended December 31, 1999. The increase in average yield on the loan portfolio was primarily the result of the increase in consumer, commercial, and commercial real estate loan balances and the higher yields on such loans recorded over the past 12 months. Page 16 of 23 Interest income from mortgage-backed securities available-for-sale totaled $815,000 for the quarter ended December 31, 2000, compared to $578,000 for the quarter ended December 31, 1999. The increase in interest income from mortgage-backed securities available-for-sale was primarily due to an increase in the balances in the portfolio, from $32.9 million at September 30, 2000 to $43.1 million at December 31, 2000. The increase in the balance in the portfolio was primarily the result of additional securities acquired in the Gilmer merger. To a lesser extent the increase was due to securities purchased by the Company during the 12 months ended December 31, 2000. The average yield on the portfolio was approximately 6.39% for the quarter ended December 31, 2000, compared to approximately 6.60% for the quarter ended December 31, 1999. Interest income from the investment securities held-to-maturity portfolio was $395,000 for the quarter ended December 31, 2000, compared to $583,000 for the quarter ended December 31, 1999. The decline in the income from the portfolio was the result of a decline in the balance in the portfolio from $30.5 million at September 30, 2000 to $25.0 million at December 31, 2000, as the Company redirected cash flow into its lending operations. Interest income from investment securities available-for-sale increase to $198,000 for the quarter ended December 31, 2000 from $37,000 for the quarter ended December 31, 1999, a $161,000 increase. The increase was due primarily to an increase in the balance in the portfolio from $5.9 million at September 30, 1999 to $8.0 million at December 31, 2000. The increase in balances in the portfolio was due to the securities acquired in the Gilmer merger and to additional securities acquired by the Company. Interest income on mortgage-backed securities held-to-maturity totaled $84,000 for the quarter ended December 31, 2000, a decrease of $4,000 from the $88,000 reported for the quarter ended December 31, 1999. The decline in interest income was due to a decline in the balance in the portfolio as the Company directed cash flow from the portfolio into it lending operations or other investment portfolios. Interest paid to depositors totaled $1.4 million for the quarter ended December 31, 2000, and increase of $420,000 from the $1.0 million reported for the quarter ended December 31, 1999. The increase in interest expense on deposit accounts was primarily attributable to the increase in deposit balances acquired by the Company in the Gilmer merger. To a lesser extent, additional balances acquired by the Company during the year and increasing interest rates on certificate of deposit account renewals during the past year contributed to the increase in interest expense. Interest on FHLB advances was $1.3 million for the quarter ended December 31, 2000, compared to $728,000 for the quarter ended December 31, 1999. The increase in interest expense was a direct result of an increase in average FHLB advance balances outstanding from approximately $50.0 million for the quarter ended December 31, 1999 to $76.5 million for the quarter ended December 31, 2000. Increasing interest rates during the past year also contributed to the increase in interest expense. During the past 12 months, the Company increased its reliance on short term funding from the FHLB to fund loans and investments. Rising interest rates in 1999 and 2000 decreased cash flow from the Company's investment portfolios and reduced cash flow from prepayments in the loan portfolio. The result was that the Company needed additional FHLB borrowings to fund the loans and investments. As interest rates begin to decline in 2001 and cash flow increases, the Company will, depending upon loan demand, reduce its reliance on short- term borrowings from the FHLB. However, the Company's goal is to maintain total assets at around $200.0 million and fully utilize its existing capital. To the extent that excess cash flow not otherwise invested in the Company's loan portfolio can be invested in securities at interest rates higher than existing short term advance, the Company may continue to utilize borrowings from the FHLB to fund assets. Provision for Loan Losses. The Company made $16,000 in provision for loan losses for the quarter ended December 31, 2000, compared to none for the quarter ended December 31, 1999. The increase in provision for loan losses was the result of the Company's decision to establish additional reserves for losses in its checking with overdraft privilege program. In 2000, the Company instigated a program designed to attract additional checking accounts and to increase fee income from new and current checking accounts. The program allows approved checking account customers to overdraft their account up to $500. The Company agrees to not return the insufficient checks but charges the customer the usual insufficient check charge fee. The Company reviews overdraft checking account balances on a monthly basis to determine if, additional reserves for potential losses in the program or any of its other checking accounts, is warranted. Page 17 of 23 Noninterest Income. Noninterest income totaled $127,000 for the quarter ended December 31, 2000 compared to $60,000 for the quarter ended December 31, 1999, a $67,000 increase. The increase was the result of a $68,000 increase in other noninterest income. Additional fee income from the Company's free checking and checking with overdraft privilege programs introduced in 2000 accounted for most of the increase. In addition, additional fee income from the transaction accounts acquired in the Gilmer merger accounted for a portion of the increase in fee income for the current quarter. Noninterest Expense. Noninterest expense was $941,000 for the quarter ended December 31, 2000, an increase of $173,000 from the $768,000 for the quarter ended December 31, 1999. The increase was primarily attributable to a $121,000 increase in other operating expenses. The $121,000 increase in other operating expenses was attributable to a $71,000 increase in franchise tax expense paid by the Company's subsidiary, First Federal Savings and Loan Association of Tyler to the state of Texas. In the quarter ended December 31, 1999, the Association received approximately $63,000 in one-time refunds on previously filed franchise tax returns. The refunds were due to a change in the definition of certain items included as income under state of Texas franchise tax rules. In addition, the increase in other operating expenses was attributable to an additional $18,000 in data processing expenses, primarily due to the additional account processing associated with the Gilmer merger. Also, a $10,000 commission paid to the consultant that assisted the Company in designing and implementing the free checking and checking with overdraft privilege programs accounted for a portion of the increase in other operating expenses. Finally, a $6,000 increase in advertising expenses associated with initial marketing efforts in the Gilmer market and a $6,000 increase in postage expense, also as a result of additional account processing with the Gilmer merger, accounted for the remainder of the increase in other operating expenses. A $39,000 increase in amortization of the goodwill created in the Gilmer merger also accounted for a portion of the increase in noninterest expenses for the quarter ended December 31, 2000, compared to the quarter ended December 31, 1999. Occupancy and equipment expenses increased by $45,000 for the current quarter, primarily due to additional expenses in the Gilmer operation. The increases in noninterest expenses were partially offset by a $24,000 decrease in compensation and benefits expense to $563,000 for the quarter ended December 31, 2000, compared to $588,000 for the quarter ended December 31, 1999. The decrease was due to the elimination of year-end bonuses to employees that were paid to employees in the quarter ended December 31, 1999 and not paid in the quarter ended December 31, 2000. Provision for Income Taxes. The Company incurred federal income tax expense of $30,000 or 37.6% or pre-tax income for the quarter ended December 31, 2000, compared to $55,000 or 37.2% or pre-tax income for the quarter ended December 31, 1999. ASSET QUALITY At December 31, 2000, the Company's non-performing assets totaled $874,000 or 0.43% of total assets, compared to $1.0 million or 0.52% of total assets at September 30, 2000. At December 31, 2000, non-performing assets were comprised of non-accruing one- to four family loans, consumer and other loans delinquent more than 90 days and still accruing, foreclosed one- to four family, and foreclosed consumer and other loans. Non-performing loans at December 31, 2000 equaled $874,000 or 0.84% of loans receivable, compared to $1.0 million or 0.97% of loans receivable at September 30, 2000. Classified assets totaled $2.8 million or 1.41% of total assets at December 31, 2000, compared to $3.0 million or 1.49% of total assets at September 30, 2000. 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. On Page 18 of 23 the basis of management's review of its assets, at December 31, 2000, the Company had classified $2.6 million assets as substandard, $154,000 as doubtful, and $127.000 as loss. The Company's allowance for loan losses totaled $1.0 million at December 31, 2000, a slight decrease from the $1.1 million at September 30, 2000. The allowance for loan losses as a percentage of loans receivable equaled 0.97% at December 31, 2000 and 1.04% at September 30, 2000. 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. 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 December 31, 2000, the Association had outstanding commitments to extend credit on $4.2 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 $16.4 million at December 31, 2000, an increase of $221.000 from the $16.2 million reported at September 30, 2000. The increase was the result of the $230,000 net gain on available-for-sale securities and net income of $49,000 reported for the three month period ended December 31, 2000. The decrease was offset by the $58,000 cash dividend paid during the quarter. As of December 31, 2000, the Company's reported book value per share, using total stockholders' equity of $16.4 million (net of the cost of unallocated ESOP and RRP shares) and 1,162,320 outstanding shares of common stock (the total issued shares including unallocated ESOP and RRP shares, less treasury shares), equaled $14.14 per share. Subsequent to the quarter ended December 31, 2000, the Company announced its intention to pay a cash dividend of $.05 per share on February 21, 2001, to stockholders of record at February 7, 2001. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Congress imposed a three part capital requirement for thrift institutions. At December 31, 2000, the Association's actual and required capital amounts under each of the three requirements were as follows: - Tangible Capital (stockholders' equity) was $13.8 million or 6.829% of total assets, exceeding the minimum requirement of 1.5% by $10.8 million. - Core Capital (Tangible capital plus certain intangible assets) was $13.8 million or 6.829% of total assets, exceeding the minimum requirement of 4.0% by $5.7 million. - Risk-based Capital (Core capital plus general loan and valuation allowances less an adjustment for capitalized mortgage servicing rights) equaled $14.8 million of 16.019% of risk weighted assets, exceeding the minimum requirement of 8.0% of risk weighted assets by $7.4 million. At December 31, 2000, the Association was considered a "well capitalized" institution under the prompt corrective action requirements of the Federal Deposit Insurance Corporation Improvement Act of 1991. Page 19 of 23 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. Page 20 of 23 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB DECEMBER 31, 2000 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 On January 24, 2001, the Company's Annual Stockholders' Meeting was held to elect directors and ratify the appointment of independent auditors for the current fiscal year. The following are the voting results of each of these matters submitted to stockholders. The election of Gerald W. Free For 698,178 as director for a three year term Withheld 131,277 ending January 2004 Abstain 0 Broker Non-Votes 0 The election of H. H. Richardson, Jr. For 698,344 and Jim M. Vaughn, M.D. Withheld 131,211 as directors for a three year term Abstain 0 ending January 2004 Broker Non-Votes 0 Ratification of the appointment of For 815,605 Bryant And Welborn, L.L.P. as Against 13,950 independent auditors for the Abstain 0 fiscal year ending September 30, 2001. The text of the matters referred to in this Item 4 is set forth in the Proxy Statement dated December 28, 2000, previously filed with the Securities and Exchange Commission. Item 5. Other Information. None Page 21 of 23 Item 6. Exhibits and Reports on Form 8-K Exhibit 27. 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 December 31, 2000, the Company filed a report on Form 8-K on October 24, 2000, to report the issuance of a press release dated October 24, 2000, announcing a cash dividend for the quarter ending September 31, 2000 and the annual stockholders' meeting. Page 22 of 23 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: February 14, 2001 /s/ Gerald W. Free -------------------------------------------- Vice Chairman, President and CEO (Principal Executive Officer) Date: February 14, 2001 /s/ Derrell W. Chapman -------------------------------------------- Vice President/COO/CFO (Principal Financial and Accounting Officer) Page 23 of 23