10QSB 1 form10q38497_5-11.txt 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, 2001 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, 2001, was 1,162,320. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB March 31, 2001 -------------------------------------------------------------------------------- INDEX
Page No. Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition, March 31, 2001 (Unaudited) and September 30, 2000..................................... 4 Consolidated Statements of Income, (Unaudited) three months and six months ended March 31, 2001 and March 31, 2000......................... 5 Consolidated Statement of Changes in Stockholders' Equity, (Unaudited) six months ended March 31, 2001........................... 6 Consolidated Statements of Cash Flows, (Unaudited) six months ended March 31, 2001, and March 31, 2000.................................... 7 Notes to (Unaudited) Consolidated Financial Statements, March 31, 2001................................................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 14 Part II - Other Information Item 1. Legal Proceedings.................................................. 22 Item 2. Changes In Securities.............................................. 22 Item 3. Defaults Upon Senior Securities.................................... 22 Item 4. Submission of Matters To a Vote of Security Holders................ 22 Item 5. Other Information.................................................. 22 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 March 31, 2001 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 of Tyler. 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 was recorded as goodwill. The statements of income for the three and six month periods ended March 31, 2000 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. Certain items from prior periods have been reclassified for comparability purposes. Page 3 of 23 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS March 31, 2001 September 30, 2000 -------------- ------------------ (Unaudited) Cash and due from banks $ 1,678,812 $ 1,661,435 Interest-bearing deposits with banks 1,653,826 543,288 Interest-earning time deposits with financial institutions 991,000 1,089,000 Federal funds sold 1,643,049 364,822 Investment securities available-for-sale 6,695,189 7,916,597 Mortgage-backed securities available-for-sale 39,041,889 44,012,663 Investment securities held-to-maturity (estimated market value of $15,313,032 at March 31, 2001, and $25,428,105 at September 30, 2000) 15,223,514 25,970,113 Mortgage-backed securities held-to-maturity (estimated market value of $19,289,200 at March 31, 2001 and $4,349,164 at September 30, 2000) 19,088,205 4,279,132 Loans receivable, net of allowance for credit losses of $807,942 at March 31, 2001 and $1,057,374 at September 30, 2000 105,416,458 102,064,137 Accrued interest receivable 1,429,238 1,548,840 Federal Home Loan Bank stock, at cost 4,238,400 4,115,000 Premises and equipment 2,681,816 2,744,278 Foreclosed assets, net 138,562 86,465 Goodwill, net 2,231,019 2,313,491 Deferred tax asset 0 255,233 Mortgage servicing rights 219,395 258,682 Other assets 1,458,344 986,482 --------------- ---------------- Total Assets $ 203,828,716 $ 200,209,658 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Noninterest deposits $ 2,965,307 $ 2,644,220 Interest-bearing deposits 109,717,401 98,975,563 --------------- ---------------- Total deposits 112,682,708 101,619,783 FHLB advances 71,605,509 78,959,065 Advances from borrowers for taxes and insurance 588,486 1,478,438 Federal income taxes Current (31,275) 0 Deferred 390,599 0 Accrued expenses and other liabilities 1,345,727 1,943,399 --------------- ---------------- Total liabilities 186,581,754 184,000,685 --------------- ---------------- 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) 13,956,129 13,732,109 Accumulated other comprehensive income 40,918 (773,051) Treasury stock, 722,172 shares at cost (8,867,282) (8,867,282) --------------- ---------------- Total stockholder's equity 17,246,962 16,208,973 --------------- ---------------- Total liabilities and stockholders' equity $ 203,828,716 $ 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 Six Months Ended March 31, Ended March 31, (Unaudited) (Unaudited) 2001 2000 2001 2000 ------------- ------------- ------------- -------------- INTEREST INCOME Loans receivable: First Mortgage $ 1,645,319 $ 1,171,733 $ 3,301,654 $ 2,315,129 Consumer and other loans 498,543 164,101 937,061 333,491 Securities available for sale: Investment securities 165,417 43,304 363,769 282,847 Mortgage-backed securities 663,612 639,370 1,478,132 1,217,326 Securities held to maturity: Investment securities 347,660 556,421 742,450 936,541 Mortgage-backed securities 290,076 92,896 373,996 180,898 Deposits with banks 26,691 11,194 59,950 34,815 ------------- ------------- ------------- -------------- Total interest income 3,637,318 2,679,019 7,257,012 5,301,047 ------------- ------------- ------------- -------------- INTEREST EXPENSE Deposits 1,506,257 1,016,244 2,947,657 2,037,824 FHLB advances 1,030,196 835,214 2,299,038 1,563,556 Interest Expense to other banks 0 7,291 0 21,979 ------------- ------------- ------------- -------------- Total interest expense 2,536,453 1,858,749 5,246,695 3,623,359 ------------- ------------- ------------- -------------- Net interest income before provision for loan losses 1,100,865 820,270 2,010,317 1,677,688 Provision for loan losses 7,405 402 23,639 402 ------------- ------------- ------------- -------------- Net interest income after provision for loan losses 1,093,460 819,868 1,986,678 1,677,286 ------------- ------------- ------------- -------------- NONINTEREST INCOME Gain(loss) on sale of interest- earning assets 188,829 10,974 199,298 23,182 Loan origination and commitment fees 22,756 7,824 42,655 19,783 Loan servicing fees 20,723 16,415 30,917 31,332 Gain on foreclosed real estate 29,140 (445) 26,342 (855) Other 92,757 22,903 181,640 44,128 ------------- ------------- ------------- -------------- Total noninterest income 354,205 57,671 480,852 117,570 ------------- ------------- ------------- -------------- NONINTEREST EXPENSE Compensation and benefits 573,566 480,657 1,137,040 1,068,510 Occupancy and equipment 109,364 111,125 224,703 181,345 SAIF deposit insurance premium 5,052 4,723 10,376 17,702 Loss on foreclosed real estate 500 0 688 0 Goodwill 39,206 0 78,418 0 Other 252,507 192,994 470,228 290,032 ------------- ------------- ------------- -------------- Total noninterest expense 980,195 789,499 1,921,453 1,557,589 ------------- ------------- ------------- -------------- Income (loss) before provision for income taxes 467,470 88,040 546,077 237,267 Income tax expense (benefit) 176,271 35,237 205,826 90,705 ------------- ------------- ------------- -------------- NET INCOME (LOSS) $ 291,199 $ 52,803 $ 340,251 $ 146,562 ============= ============= ============= ============== Earnings per common share $ .26 $ .05 $ .31 $ .13 Earnings per common share - assuming dilution .26 .05 .31 .12
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) SIX MONTHS ENDED March 31, 2001
Unrealized Common Stock Unallocated Gain(Loss) Total and Additional ESOP on AFS Retained Treasury Comprehensive Shareholders' Paid in Capital Shares Securities Earnings Stock Income Equity --------------- ----------- ---------- ------------ ------------ ------------- ------------- Balance September 30, 2000 $ 12,463,217 $(346,020) $ (773,051) $ 13,732,109 $(8,867,282) $ $ 16,208,973 Comprehensive income: Net Income 340,251 340,251 Unrealized holding gains 813,969 813,969 ------- Comprehensive income $ 1,154,220 1,154,220 =========== Deferred compensation amortization Payment of cash dividends (116,231) (116,231) Balance March 31, 2001 $ 12,463,217 $(346,020) $ 40,918 $ 13,956,129 $(8,867,282) $ 17,246,962 ============ ========= ========== ============ =========== ============
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 Six Months Ended March 31, 2001 2000 ------------- ------------ Cash flows from operating activities: Net income $ 340,251 $ 146,562 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees (3,809) (2,113) Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans (15,250) 24,220 Amortization of deferred compensation 0 58,191 Amortization of goodwill 78,418 0 Compensation charge related to release of ESOP shares 9,364 33,075 Depreciation 95,415 74,292 Provision for loan losses 23,637 0 Deferred income taxes 215,426 25,298 Stock dividends on FHLB stock (123,400) (80,400) Amortization of mortgage servicing rights 58,466 31,284 Net (gain) loss on sale of: Loans 0 (2,188) Loans held for sale (8,235) 0 Fixed assets 0 228 Foreclosed real estate (18,008) 0 Other repossessed property (12,450) 0 Interest earning assets (171,884) 0 Proceeds from loan sales 1,704,418 1,775,893 Originations of loans held for sale (2,008,688) 0 (Increase) decrease in Accrued interest receivable 119,602 (7,478) Other assets (471,862) (305,171) Increase (decrease) in: Federal income tax payable (31,275) (4,356) Accrued expenses and other liabilities (597,672) (1,294,166) ------------ ----------- Net cash provided (used) by operating activities (817,536) 473,171 ------------ -----------
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 Six Months Ended March 31, 2001 2000 -------------- ------------ Cash flows from investing activities Net (increase) decrease in interest-earning time deposits 98,000 976,617 Net (increase) decrease in fed funds sold (1,278,227) 0 Purchases of securities available-for-sale 0 (485,930) Purchase of securities held-to-maturity (4,751,239) 0 Proceeds from sale of securities available-for-sale 1,495,125 0 Proceeds from maturities of securities available-for-sale 20,000 0 Proceeds from maturities of securities held-to-maturity 15,500,000 2,000,000 Proceeds from sale of mortgage-backed securities available-for-sale 3,961,253 0 Purchases of mortgage-backed securities available-for-sale 0 (5,208,739) Purchase of mortgage-backed securities held-to-maturity (15,447,927) Principal payments on mortgage-backed securities available-for-sale 2,141,344 1,385,298 Principal payments on mortgage-backed securities held to maturity 631,573 703,015 Purchases of FHLB stock 0 (568,800) Proceeds from redemption of FHLB stock 1,900 0 Net increase in loans (3,167,669) (5,200,501) Proceeds from sale of foreclosed real estate 82,772 6,325 Proceeds from recovery of charged off loans 9,644 0 Acquisition costs related to foreclosed real estate (2,151) (4,221) Proceeds from sales of fixed assets 0 0 Expenditures for premises and equipment (32,953) (42,528) Origination of mortgage servicing rights (19,179) (20,426) -------------- ------------ Net cash provided (used) by investing activities (757,734) (6,459,890) -------------- ------------ Cash flows from financing activities: Net increase (decrease) in: Deposits 11,062,925 (4,444,715) Advances from borrowers (889,952) (475,551) Proceeds from note payable to bank 0 1,500,000 Principal payments on note payable to bank 0 (1,500,000) Proceeds from advances from Federal Home Loan Bank 530,120,000 268,146,206 Payment of advances from Federal Home Loan Bank (537,473,556) (255,427,019) Purchase of treasury stock at cost 0 (1,882,425) Exercise of stock options 0 0 Dividends paid to stockholders (116,232) (121,602) -------------- ------------ Net cash provided (used) by financing activities 2,703,185 5,794,894 -------------- ------------ Net increase (decrease) in cash and cash equivalents 1,127,915 (191,825) Cash and cash equivalents at beginning of the period 2,204,723 1,994,564 -------------- ------------ Cash and cash equivalents at end of the period $ 3,332,638 $ 1,802,739 ============== ============ Supplemental disclosure: Cash paid for: Interest on deposits $ 1,571,080 $ 696,247 Interest on FHLB advances and other borrowed funds 2,286,009 1,585,535 Income taxes 0 59,764 Transfers from loans to real estate and other assets acquired through foreclosures 269,147 2,966 Loans made to facilitate the sale of foreclosed assets 119,435 0
The accompanying notes are an integral part of the financial statements. Page 8 of 23 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 -------------------------------------------------------------------------------- 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 and six months ended March 31, 2001 and 2000, 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, 2001 and 2000, the weighted average number of shares outstanding totaled 1,110,416 and 1,096,007, shares respectively. For the six months ended March 31, 2001 and 2000, the weighted average number of shares outstanding totaled 1,110,416 and 1,152,678 shares respectively. Earnings per common share - assuming dilution, for the three months and six months ended March 31, 2001 and 2000, 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, 2001 and 2000, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,110,416 and 1,096,007, shares respectively. For the six months ended March 31, 2001 and 2000, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,110,421 and 1,175,462 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, 2001 and 2000. Page 9 of 23 NOTE 3 - SECURITIES The carrying values and estimated market values of investment securities available-for-sale as of March 31, 2001, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value -------------- --------------- -------------- --------------- --------------- Corporate debt $ 6,000,000 $ 44,323 $ 61,498 $ 147,205 $ 6,130,030 Municipal bonds 565,000 0 0 159 565,159 ------------- -------------- ------------- -------------- -------------- $ 6,565,000 $ 44,323 $ 61,498 $ 147,364 $ 6,695,189 ------------- -------------- ------------- -------------- --------------
The amortized cost and estimated market values of investment securities held-to-maturity as of March 31, 2001, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- -------------- --------------- -------------- Debt securities: U. S. government agency 10,475,262 79,293 5,035 10,549,520 Corporate Debt 4,748,252 23,717 8,457 4,763,512 ------------- ------------- -------------- ------------- Total debt securities $ 15,223,514 $ 103,010 $ 13,492 $ 15,313,032 ------------- ------------- -------------- -------------
The amortized cost and estimated market values of investment securities held-to-maturity as of March 31, 2001, by contractual maturity are shown below:
Estimated Amortized Market Cost Value -------------- --------------- Due in one year or less $ 1,000,000 $ 1,000,780 Due after one year through two years 1,000,000 1,002,970 Due after two years through three years 4,000,010 4,035,310 Due after three years through six years 9,223,504 9,273,972 ------------- -------------- Total debt securities $ 15,223,514 $ 15,313,032 ------------- --------------
Page 10 of 23 The carrying values and estimated market values of mortgage-backed and related securities available-for-sale as of March 31, 2001, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value -------------- --------------- -------------- -------------- --------------- Fixed Rate $ 5,510,535 $ 4.502 $ 31,234 $ 51,055 $ 5,534,858 Adjustable Rate 33,524,980 186,166 1,078 (203,037) 33,507,031 -------------- --------------- -------------- -------------- --------------- $ 39,035,515 $ 190,668 $ 32,312 $ (151,982) $ 39,041,889 -------------- --------------- -------------- -------------- ---------------
The carrying values and estimated market values of mortgage-backed and related securities held-to-maturity as of March 31, 2001, by type of security are as follows:
Estimated Principal Unamortized Unearned Carrying Market Balance Premiums Discounts Value Value -------------- --------------- -------------- -------------- --------------- Fixed Rate $ 12,463,362 $ 0 $ 6,760 12,456,602 12,573,587 Adjustable Rate 6,633,769 23,992 26,158 6,631,603 6,715,613 -------------- --------------- -------------- -------------- --------------- $ 19,097,131 $ 23,992 $ 32,918 $ 19,088,205 $ 19,289,200 -------------- --------------- -------------- -------------- ---------------
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. SFAS NO. 140 In September 2000, SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued to amend and replace SFAS No. 125. SFAS No. 140 revises certain standards for accounting for securitizations and other transfers of financial assets and collateral, and also requires certain additional disclosures. The statement is effective for transactions occurring after March 31, 2001. 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. Page 11 of 23 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 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 uses 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 March 31, 2001 under stock option plan 147,276 ========= Shares available for future grants 22,662 ========= During the six months ended March 31, 2001, 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 March 31, 2001: Maturity Balance Rate 04/09/2001 $ 35,100,000 5.120% 04/09/2001 $ 3,200,000 5.120% 04/19/2001 $ 17,500,000 5.020% 02/15/2002 $ 25,000 5.980% 03/08/2002 $ 2,000,000 4.881% 02/15/2003 $ 100,000 6.000% 03/08/2003 $ 2,000,000 4.995% 09/01/2003 $ 1,301,006 6.250% 02/15/2004 $ 100,000 6.010% 12/31/2004 $ 241,453 6.090% 01/03/2005 $ 83,893 6.030% 02/15/2005 $ 100,000 6.040% 02/15/2006 $ 150,000 6.050% 01/01/2013 $ 428,692 6.090% 01/01/2013 $ 407,446 6.130% 02/01/2013 $ 404,081 5.910% 03/03/2014 $ 815,420 5.450% 04/01/2014 $ 787,920 5.970% 05/01/2014 $ 1,072,453 5.660% 06/01/2014 $ 817,889 5.900% 07/01/2014 $ 757,504 6.380% 08/01/2014 $ 550,239 6.370% 09/01/2014 $ 695,167 6.590% 10/01/2014 $ 610,201 6.860% 11/03/2014 $ 1,505,887 6.770% 12/01/2014 $ 514,479 6.570% 01/01/2015 $ 336,779 6.730% 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 March 31, 2001 -------------------------------------------------------------------------------- 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. The start-up costs associated with the new product lines and the expansion are 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. 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 and six months ended March 31, 2000 reflect only activity for the Company prior to the acquisition of Gilmer. FINANCIAL CONDITION Total assets were $203.8 million at March 31, 2001, a $3.6 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 $14.8 million increase in mortgage-backed securities held-to-maturity, a $3.4 million increase in loans receivable, $1.3 million increase in federal funds sold and a $1.1 million increase in interest-earning deposits with banks. The increases were partially offset by a $10.7 decline in investment securities held to maturity, a $5.0 million decline in mortgage-backed securities available-for-sale and a $1.2 million decrease in investment securities available-for-sale. Page 14 of 23 At March 31, 2001, loans-receivable totaled $105.4 million, and increase of $3.4 million compared to $102.1 million at September 30, 2000. The increase in loans-receivable was primarily the result of the Company's continued efforts to expand its origination of consumer, commercial, and commercial real estate loans. 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. As interest rates declined during the quarter ended March 31, 2001, the Company made the decision to begin selling all fixed rate and term mortgage loans into the secondary market. The Company has established a minimum mortgage rate of 7.00% in order to hold such loans in the portfolio. As mortgage rates fell below this level, the Company elected to sell loans into the secondary market. In addition and in an attempt to remain competitive in the market, the Company began offering its customers the option of having their loan serviced locally by the Association or to have the loan and the corresponding servicing sold to an investor. Loans originated where the servicing will be retained by the Company are sold to FNMA. Loans originated where the servicing and the loan is sold to a private investor are priced at a slightly lower interest rate, designed to compete with mortgage brokers in the Company's market. Investment securities available-for-sale decreased by $1.2 million from $7.9 million at September 30, 2000 to $6.7 million at March 31, 2001. The decrease was the result of the Company's decision to sell securities acquired in the Gilmer merger and to reinvest in securities that better fit the Company's investment strategy. This portfolio consists of corporate debt securities and municipal bonds. All of the corporate debt securities have fixed rates and terms and are non-callable. The Company's investment policy allows for the purchase of investment-grade corporate bonds only. All corporate debt securities have a final maturity of four years or less. The municipal bonds, which comprise only $565,000 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 $15.2 million at March 31, 2001, a decline of $10.7 million 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 primarily of debt issued by governmental agencies such as Federal National Mortgage Corporation, Federal Home Loan Mortgage Corporation, or the Federal Home Loan Bank System. Most of the agency-issued 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 issuers over the next several months. The portfolio also includes corporate debt securities. Mortgage-backed securities available-for-sale totaled $39.0 million at March 31, 2001, a decrease of $5.0 million from the $44.0 million at September 30, 2000. The decrease was the result of the Company's decision to sell securities acquired in the Gilmer merger to reinvest in securities that better fit the Company's investment strategy. Mortgage-backed securities held-to-maturity portfolio totaled $19.1 million at March 31, 2001, an increase of $14.8 million from the $4.3 million reported at September 30, 2000. The increase was primarily due to the Company's decision to reinvest funds in this portfolio from its investment securities held-to-maturity and mortgage-backed securities available-for-sale portfolio. Total deposits were $112.7 million at March 31, 2001, a $11.1 million increase from the $101.6 million reported at September 30, 2000. The increase was primarily the result of additional certificates of deposit as the Company elected to pay more competitive interest rates on such deposits during the quarter. The Company reported $71.6 million in borrowed funds at March 31, 2001, a decrease of $7.4 million from the $79.0 million reported at September 30, 2000. The decrease was primarily due to the Company's decision to repay Page 15 of 23 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 advances to fund commercial real estate loans. The Company is able to structure the advances to match the terms of the loans. Also, the Company utilizes short-term advances to provide needed liquidity. Stockholder's equity totaled $17.2 million at March 31, 2001, an increase of $1.0 million from the $16.2 million reported at September 30, 2000. The increase was primarily attributable to a net decrease in unrealized losses on available-for-sale securities, of approximately $814,000, during the quarter. Stockholder's equity also increased due to the $291,000 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. 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, 2001 AND MARCH 31, 2000 General. Net income for the three months ended March 31, 2001 was $291,000 or $.26 per share, an increase of $238,000 from the $53,000, or $.05 per share, reported for the three months ended March 31, 2000. The increase in net income was attributable to a $297,000 increase in non-interest income and a $274,000 increase in net interest income after provision for loan losses, which were partially offset by a $191,000 increase in non-interest expense and a $141,000 increase in income tax expense. Net Interest Income. For the quarter ended March 31, 2001, net interest income before provision for loan losses totaled $1.1 million, and increase of $281,000 over the $820,000 reported for the quarter ended March 31, 2000. On an annualized basis, the $1.1 million in net interest income for the current quarter was approximately 2.28% of average interest-earning assets and 2.17% of average total assets. For the quarter ended March 31, 2000, the $820,000 in net interest income before provisions for loan losses was approximately 2.15% of average interest-earning assets and 2.06% of average total assets. Average interest-earning assets were approximately $192.9 million for the quarter ended March 31, 2001, compared to $152.7 million for the quarter ended March 31, 2000. Total interest income was $3.6 million for the quarter ended March 31, 2001, an increase of $958,000 over the $2.7 million reported for the quarter ended March 31, 2000. The increase was primarily due to an increase in interest earning assets, primarily as a result of the additional interest-earning assets acquired in the Gilmer merger. To a lesser extent, additional interest-earning assets acquired by the Company during the 12 months ended March 31, 2001 accounted for the increase in total interest income. On an annualized basis, the $3.6 million in total interest income was approximately 7.48% of average interest-earning assets. The $2.7 million in total interest income for the quarter ended March 31, 2000 was approximately 7.02% of average interest-earning assets. The increase in the average yield on interest-earning assets was a direct result of the additional consumer, commercial, and commercial real estate loans made by the Company over the past year and the additional interest earning assets acquired in the Gilmer merger. Interest income on loans-receivable was $2.1 million for the quarter ended March 31, 2001. On an annualized basis, the $2.1 million was approximately 8.21% or average loans-receivable balances outstanding for the quarter ended March 31, 2001, compared to approximately 7.68% for the quarter ended March 31, 2000. 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 $664,000 for the quarter ended March 31, 2001, compared to $639,000 for the quarter ended March 31, 2000. The average yield on the portfolio was approximately 6.46% for the quarter ended March 31, 2001, compared to approximately 6.93% for the quarter ended March 31, 2000. Interest income from the investment securities held-to-maturity portfolio was $348,000 for the quarter ended March 31, 2001, compared to $556,000 for the quarter ended March 31, 2000. The decrease in income from the portfolio was due to a decline in the balance in the portfolio from $28.5 million at March 31, 2000 to $15.2 million at March 31, 2001. The portfolio is primarily comprised of debt issued by Government agencies such as FHLMC, FNMA and the Federal Home Loan Bank System. The debt has call options at the discretion of the issuer. As interest rates decreased in February and March of 2001, a significant portion of the portfolio was called. The Company elected to redirect cash flow from the called bonds into its mortgage-backed securities held-to-maturity portfolio, its investment held-to-maturity portfolio, and its loans receivable portfolio. The result was a decline in the average balance on the portfolio and a decrease in income from the portfolio. Interest income on mortgage-backed securities held-to-maturity totaled $290,000 for the quarter ended March 31, 2001, an increase of $197,000 from the $93,000 reported for the quarter ended March 31, 2000. The increase was due primarily to an increase in the balance in the portfolio from $5.1 million at March 31, 2000 to $19.1 million at March 31, 2001. Interest paid to depositors totaled $1.5 million for the quarter ended March 31, 2001, and increase of $490,000 from the $1.0 million reported for the quarter ended March 31, 2000. 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. On an annualized basis, the $1.5 million in interest expense on deposits was approximately 5.47% for the quarter ended March 31, 2001, compared to 4.80% for the quarter ended March 31, 2000. Interest on FHLB advances was $1.0 million for the quarter ended March 31, 2001, compared to $835,000 for the quarter ended March 31, 2000. The increase in interest expense was a direct result of an increase in average FHLB advance balances outstanding from approximately $56.1 million for the quarter ended March 31, 2000 to $72.9 million for the quarter ended March 31, 2001. 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 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. Provision for Loan Losses. The Company made $7,000 in provision for loan losses for the quarter ended March 31, 2001, compared to $400 for the quarter ended March 31, 2000. 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. Noninterest Income. Noninterest income totaled $354,000 for the quarter ended March 31, 2001 compared to $58,000 for the quarter ended March 31, 2000, a $296,000 increase. The increase was primarily the result of a $178,000 increase in gains on sales of interest-earning assets. During the quarter ended March 31, 2001, the Company elected to sell a portion of its available-for-sale investment portfolio. The bonds that were sold were primarily bonds acquired in the Gilmer merger. Such bonds were primarily adjustable rate securities linked to the "11th District Cost of Funds" rate index. The Company does not normally purchase bonds linked to a "lagging" Page 17 of 23 index such as the "11th District COFI." The increase was also the result of a $70,000 increase in other noninterest income. Additional fee income from the Company's free checking and checking with overdraft privilege programs introduced in 2000 and additional fee income from the transaction accounts acquired in the Gilmer merger accounted for a portion of the increase in other noninterest income for the current quarter. Noninterest Expense. Noninterest expense was $980,000 for the quarter ended March 31, 2001, an increase of $191,000 from the $789,000 for the quarter ended March 31, 2000. Compensation and benefits expenses increased by $93,000 for the quarter ended March 31, 2001, compared to the quarter ended March 31, 2000, primarily as a result of the additional employees acquired in the Gilmer merger. Other operating expenses increased by $60,000, primarily due to a refund of prior Texas Franchise tax expense recorded in the quarter ended March 31, 2000. Also, a $39,000 increase in amortization of the goodwill created in the Gilmer merger accounted for a portion of the increase in noninterest expenses for the quarter. Provision for Income Taxes. The Company incurred federal income tax expense of $176,000 or 37.7% or pre-tax income for the quarter ended March 31, 2001, compared to $35,000 or 40.0% or pre-tax income for the quarter ended March 31, 2000. COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000 General. For the six months ended March 31, 2001, the Company reported net income of $340,000 or $.31 per common share and $.31 per common share - assuming dilution, compared to $147,000 or $.13 per common share and $.12 per common share - assuming dilution for the six months ended March 31, 2000. The increase in net income was due to a $363,000 increase in noninterest income and a $309,000 increase in net interest income after provisions for loan losses. The increases were partially offset by a $364,000 increase in noninterest expense and a $115,000 increase in income tax expense. Net Interest Income. For the six months ended March 31, 2001, net interest income before provisions for loan losses totaled $2.0 million, an increase of $333,000 from the $1.7 million reported for the six months ended March 31, 2000. On an annualized basis, the $2.0 million in net interest income before provisions for loan losses for the current period was approximately 2.09% of average interest earning assets and 1.99% of average total assets. For the six months ended March 31, 2000, the $1.7 million in net interest income before provisions for loan losses was, on an annualized basis, approximately 2.24% of average interest earning assets and 2.15% of average total assets. Average interest earning assets were approximately $192.2 million for the six months ended March 31, 2001, compared to $150.0 million for the six months ended March 31, 2000. Total interest income was $7.3 million or 7.49%, on an annualized basis, of average interest earning assets for the six months ended March 31, 2001, compared to $5.3 million or 7.07% of average interest earning assets for the six months ended March 31, 2000. The increase in total interest income was primarily attributable to the increase in average outstanding balances of interest earning assets and, to a lessor extent, an increase in commercial and consumer loans at higher yields. Interest income on loans receivable totaled $4.2 million for the six months ended March 31, 2001 an increase from the $2.6 million reported for the six months ended March 31, 2000. Average loans receivable balances increased to $103.7 million for the six months ended March 31, 2001 from $69.0 million for the six months ended March 31, 2000. For the six months ended March 31, 2001, the $4.2 million in interest income on loans receivable was, on an annualized basis, approximately 8.17%, compared to 7.68% for the six months ended March 31, 2000. Page 18 of 23 Interest income from mortgage-backed securities available-for sale totaled $1.5 million for the six months ended March 31, 2001, compared to $1.2 million for the six months ended March 31, 2000. The increase in income was primarily attributable to an increase in the balance in the portfolio from $32.9 million at September 30, 1999 to $39.0 million at March 31, 2001. Interest income on investment securities held-to-maturity totaled $742,000 for the six months ended March 31, 2001, compared to $937,000 for the six months ended March 31, 2000. The decrease in interest income on the portfolio was primarily the result of a derease in the average balance outstanding as bonds in the portfolio matured or were called at the option of the issuer. Interest income on mortgage-backed securities held-to-maturity was $374,000 for the six months ended March 31, 2001, compared to $181,000 for the six months ended March 31, 2000. The increase in interest income on the portfolio was primarily the result of an increase in the balance outstanding in the portfolio from $5.8 million at September 30, 1999 to $19.1 million at March 31, 2001. The Company redirected cash flow from its investment securities held-to-maturity portfolio into this portfolio. Interest expense was $5.2 million for the six months ended March 31, 2001, an increase of $1.6 million from the $3.6 million reported for the six-month period ended March 31, 2000. An increase in interest costing liabilities, including advances from the FHLB, from $132.6 million at September 30, 1999 to $184.3 million at March 31, 2001, accounted for the increase in interest expense. The $5.2 million in interest expense reported for the six month period ended March 31, 2001 was approximately 5.74% of average interest costing liabilities, compared to 5.38% for the same period in 2000. Noninterest Income. Noninterest income was $481,000 for the six months ended March 31, 2001, compared to $118,000 for the six months ended March 31, 2000. The increase was attributable to a $176,000 increase in gains on sales of interest earning assets. The additional gains were due to the Company's decision to sell a portion of its bond portfolio. In addition, other noninterest income increased by $138,000 due to increases in fee income from the Company's consumer and commercial checking account products and commissions from the sale of credit insurance on the Company's consumer loans. Noninterest Expense. Noninterest expense was reported as $1.9 million for the six-month period ended March 31, 2001, a $364,000 increase from the $1.6 million reported for the six months ended March 31, 2000. The increase in noninterest expense was primarily the result of a $69,000 increase in compensation and benefits as a result of the Gilmer merger. In addition, amortization of goodwill from the Gilmer merger accounted for $78,000 of the increase. Also, other noninterest expense increased by $180,000 primarily due to the franchise tax refund previously received in the quarter ended March 31, 2000 and a $35,000 increase in data processing expenses due to the Gilmer merger. Provision For Income Taxes. The Company incurred federal income tax expense of $206,000 or 37.7% of pre-tax income for the six months ended March 31, 2001, compared to $91,000 or 38.2% of pre-tax income for the six months ended March 31, 2000. ASSET QUALITY At March 31, 2001, the Company's non-performing assets totaled $973,000 or .48% of total assets, compared to $1.0 million or .52% of total assets at September 30, 2000. At March 31, 2001, 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 March 31, 2001 equaled $973,000 or 0.92% of loans receivable, compared to $1.0 million or 0.97% of loans receivable at September 30, 2000. Classified assets totaled $3.0 million or 1.46% of total assets at March 31, 2001, compared to $3.0 million or 1.49% of total assets at September 30, 2000. Page 19 of 23 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. At March 31, 2001, $2.8 million of classified assets were deemed to be substandard, $122,000 assets were classified as doubtful and $24,000 were classified as loss. The Company's allowance for loan losses totaled $807,942 at March 31, 2001, compared to $1,057,374 September 30, 2000. The allowance for loan losses as a percentage of loans receivable equaled 0.77% at March 31, 2001 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 March 31, 2001, the Association had outstanding commitments to extend credit on approximately $4.4 million of 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 $17.2 million at March 31, 2001, an increase of $1.0 million from the $16.2 million reported at September 30, 2000. The increase was primarily the result of an $814,000 increase in accumulated other comprehensive income as market values on the Company's available-for-sale securities increased in a declining rate environment. In addition, retained earnings increased by $224,000, the $340,000 in net income less the cash dividends paid during the six months ended March 31, 2001. As of March 31, 2001, the Company's reported book value per share, using total stockholders' equity of $17.2 million (net of the cost of unearned ESOP shares) and 1,162,320 outstanding shares of common stock (the total issued shares including unearned ESOP shares, less treasury shares), equaled $14.84 per share. Subsequent to the quarter ended March 31, 2001, the Company announced its intention to pay a cash dividend of $.05 per share on May 23, 2001, to stockholders of record at May 9, 2001. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Congress imposed capital requirements for thrift institutions. At March 31, 2001, the Association's actual and required capital amounts under the requirements were as follows: - Tier 1 Capital was $14.1 million or 6.99% of total assets, exceeding the minimum requirement of 4.0% by $6.0 million. - Tier 1 Risk Based Capital was $14.1 million or 14.68% of total risk weighted assets, exceeding the minimum requirement of 4.0% by $10.2 million. - Total Risk-Based Capital equaled $14.9 million of 15.52% of risk weighted assets, exceeding the minimum requirement of 8.0% of total risk weighted assets by $7.2 million. At March 31, 2001, 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 20 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 21 of 23 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB MARCH 31, 2001 -------------------------------------------------------------------------------- \ 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 The following exhibits are filed herewith: Exhibit 11.0 - Computation of Earnings Per Share (b) Reports on Form 8-K During the quarter ended March 31, 2001, the Company filed a report on Form 8-K on February 2, 2001 to report the issuance of a press release dated February 2, 2001, announcing the Company's intention to pay, on February 21, 2001, a cash dividend of $.05 per share for the quarter ended December 31, 2000, to stockholders of record on February 7, 2001. 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: May 15, 2001 /s/ Gerald W. Free --------------------------------------------- Vice Chairman, President and CEO (Principal Executive Officer) Date: May 15, 2001 /s/ Derrell W. Chapman --------------------------------------------- Vice President/COO/CFO (Principal Financial and Accounting Officer) Page 23 of 23