-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R7C4jJIptH9wsAi+GOkzSCAQN3fmjCjMqrs5OxFrjymY6CPPBfzomM497n/2mEpj A9KOOpQjk0vlDR+MgIsTjQ== 0000914317-02-000577.txt : 20020515 0000914317-02-000577.hdr.sgml : 20020515 20020515122716 ACCESSION NUMBER: 0000914317-02-000577 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAST TEXAS FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000929646 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 752559089 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24848 FILM NUMBER: 02649750 BUSINESS ADDRESS: STREET 1: 1200 S BECKHAM AVE CITY: TYLER STATE: TX ZIP: 75701 BUSINESS PHONE: 9035931767 MAIL ADDRESS: STREET 1: 1200 SOUTH BECKHAM AVE CITY: TYLER STATE: TX ZIP: 75701 10QSB 1 form10qsb-45033.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, 2002 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, 2002, was 1,162,320. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB March 31, 2002 - --------------------------------------------------------------------------------
INDEX Page No. Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition, March 31, 2002 (Unaudited) and September 30, 2001......................................................4 Consolidated Statements of Income, (Unaudited) three months and six months ended March 31, 2002 and March 31, 2001.......................................................5 Consolidated Statement of Changes in Stockholders' Equity, (Unaudited) six months ended March 31, 2002.........................................................6 Consolidated Statements of Cash Flows, (Unaudited) six months ended March 31, 2002, and March 31, 2001......................................................7 Notes to (Unaudited) Consolidated Financial Statements, March 31, 2002..................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................16 Part II - Other Information Item 1. Legal Proceedings.......................................................................25 Item 2. Changes In Securities...................................................................25 Item 3. Defaults Upon Senior Securities.........................................................25 Item 4. Submission of Matters To a Vote of Security Holders...............................25 Item 5. Other Information.......................................................................25 Item 6. Exhibits and Reports on Form 8-K........................................................25 Signature Page..................................................................................26
2 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB March 31, 2002 - -------------------------------------------------------------------------------- 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 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. 3 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS March 31, 2002 September 30, 2001 --------------- ------------------- (Unaudited) Cash and due from banks $ 1,972,145 $ 2,013,647 Interest-bearing deposits with banks 1,249,643 2,824,364 Interest-earning time deposits with financial institutions 300,000 600,000 Federal funds sold 426,595 86,242 Investment securities available-for-sale 527,508 6,843,583 Mortgage-backed securities available-for-sale 22,554,703 27,352,449 Investment securities held-to-maturity (estimated market value of $9,790,540 at March 31, 2002, and $8,075,494 at September 30, 2001) 9,744,850 7,765,537 Mortgage-backed securities held-to-maturity (estimated market value of $30,972,950 at March 31, 2002 and $36,585,979 at September 30, 2001) 30,691,165 35,879,076 Loans receivable, net of allowance for credit losses of $723,424 at March 31, 2002 and $769,225 at September 30, 2001 132,380,753 115,847,396 Accrued interest receivable 1,301,126 1,285,582 Federal Home Loan Bank stock, at cost 4,388,700 4,323,900 Premises and equipment 2,606,827 2,656,988 Foreclosed assets, net 361,085 259,498 Goodwill, net 2,170,381 2,170,381 Mortgage servicing rights 123,148 174,128 Other assets 867,086 1,698,338 ------------- ------------- Total Assets $ 211,665,715 $ 211,781,109 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Noninterest deposits $ 3,460,751 $ 3,319,015 Interest-bearing deposits 103,288,767 112,292,026 ------------- ------------- Total deposits 106,749,518 115,611,041 FHLB advances 83,120,947 74,468,248 Advances from borrowers for taxes and insurance 404,211 1,267,900 Federal income taxes Current 510,580 0 Deferred 517,175 670,706 Accrued expenses and other liabilities 1,840,759 1,849,333 ------------- ------------- Total liabilities 193,143,190 193,867,228 ------------- ------------- 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 12,473,302 12,473,302 Unearned employee stock ownership plan shares (255,597) (255,597) Retained earnings (substantially restricted) 15,106,032 14,199,357 Accumulated other comprehensive income 47,225 345,256 Treasury stock, 722,172 shares at cost (8,867,282) (8,867,282) ------------- ------------- Total stockholder's equity 18,522,525 17,913,881 ------------- ------------- Total liabilities and stockholders' equity $ 211,665,715 $ 211,781,109 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 4 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Six Months Ended March 31, Ended March 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- INTEREST INCOME Loans receivable: First Mortgage $ 1,597,670 $ 1,645,319 $ 3,157,844 $ 3,301,654 Consumer and other loans 867,946 498,543 1,650,886 937,061 Securities available-for-sale: Investment securities 42,346 165,417 126,173 363,769 Mortgage-backed securities 104,106 663,612 372,668 1,478,132 Securities held-to-maturity: Investment securities 154,181 347,660 309,260 742,450 Mortgage-backed securities 496,414 290,076 1,023,377 373,996 Deposits with banks: 10,718 26,691 27,529 59,950 ----------- ----------- ----------- ----------- Total interest income 3,273,381 3,637,318 6,667,737 7,257,012 ----------- ----------- ----------- ----------- INTEREST EXPENSE Deposits 1,010,237 1,506,257 2,224,652 2,947,657 FHLB advances 649,423 1,030,196 1,332,433 2,299,038 ----------- ----------- ----------- ----------- Total interest expense 1,659,660 2,536,453 3,557,085 5,246,695 ----------- ----------- ----------- ----------- Net interest income before provision for loan losses 1,613,721 1,100,865 3,110,652 2,010,317 Provision for loan losses 101,438 7,405 111,197 23,639 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 1,512,283 1,093,460 2,999,455 1,986,678 ----------- ----------- ----------- ----------- NONINTEREST INCOME Gain (loss) on sale of 43,639 188,829 452,173 199,298 interest-earning assets Loan origination and commitment fees 33,506 22,756 82,995 42,655 Loan servicing fees (23,197) 20,723 (59,318) 30,917 Other 81,560 92,757 198,028 181,640 ----------- ----------- ----------- ----------- Total noninterest income 135,508 325,065 673,878 454,510 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE Compensation and benefits 653,324 573,566 1,290,095 1,137,040 Occupancy and equipment 114,668 109,364 221,907 224,703 SAIF deposit insurance premium 5,279 5,052 10,473 10,376 Foreclosed assets, net 20,235 (28,640) 35,231 (25,654) Goodwill amortization 0 39,206 0 78,418 Other 274,267 252,507 531,374 470,228 ----------- ----------- ----------- ----------- Total noninterest expense 1,067,773 951,055 2,089,080 1,895,111 ----------- ----------- ----------- ----------- Income (loss) before provision for income 580,018 467,470 1,584,253 546,077 taxes Income tax expense (benefit) 210,277 176,271 561,346 205,826 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 369,741 $ 291,199 $ 1,022,907 $ 340,251 =========== =========== =========== =========== Earnings per common share $ 0.33 $ 0.26 $ 0.91 $ 0.31 Earnings per common share - assuming 0.32 0.26 0.90 0.31 dilution
The accompanying notes are an integral part of the consolidated financial statements. 5 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED March 31, 2002 Common Stock and Unrealized Total Additional Paid in Unallocated Gain(loss) on Retained Treasury Comprehensive Stockholders' Capital ESOP Shares AFS Securities Earnings Stock Income Equity ------------------ ------------ -------------- ------------ ------------- ------------- ------------ Balance September 30, 2001 $ 12,492,147 $ (255,597) $ 345,256 $ 14,199,357 $ (8,867,282) $ $ 17,913,881 Comprehensive income: Net Income 1,022,907 1,022,907 Unrealized holding losses (298,031) (298,031) ------------ Comprehensive income $ 724,876 724,876 ============ Deferred compensation amortization Payment of cash dividends (116,232) (116,232) Balance March 31, 2002 $ 12,492,147 $ (255,597) $ 47,225 $ 15,106,032 $ (8,867,282) $ 18,522,525 ============ ========== ========= ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 6 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Six Months Ended March 31, 2002 2001 ------------ ------------ Cash flows from operating activities: Net income $ 1,022,907 $ 340,251 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees (1,808) (3,809) Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans (7,839) (15,250) Amortization of goodwill 0 78,418 Compensation charge related to release of ESOP shares 0 9,364 Depreciation 79,427 95,415 Provision for loan losses 111,197 23,637 Deferred income taxes 0 215,426 Stock dividends on FHLB stock (64,800) (123,400) Amortization of mortgage servicing rights 121,324 58,466 Net (gain) loss on sale of: Loans held for sale (56,327) (8,235) Fixed assets 8,287 0 Foreclosed assets 19,943 (30,458) Interest earning assets (325,503) (171,884) Proceeds from loan sales 6,589,095 1,704,418 Originations of loans held for sale (6,532,768) (2,008,688) (Increase) decrease in Accrued interest receivable (15,544) 119,602 Other assets 831,252 (471,862) Increase (decrease) in: Federal income tax payable 510,580 (31,275) Accrued expenses and other liabilities (8,851) (597,672) ----------- ----------- Net cash provided (used) by operating activities 2,280,572 (817,536) ----------- -----------
The accompanying notes are an integral part of the financial statements. 7 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Six Months Ended March 31, 2002 2001 ------------- ------------- Cash flows from investing activities Net (increase) decrease in interest-earning time deposits $ 300,000 $ 98,000 Net (increase) decrease in fed funds sold (340,353) (1,278,227) Purchase of securities held-to-maturity (2,000,000) (4,751,239) Proceeds from sale of securities available-for-sale 6,308,899 1,495,125 Proceeds from maturities of securities available-for-sale 25,000 20,000 Proceeds from maturities of securities held-to-maturity 0 15,500,000 Proceeds from sale of mortgage-backed securities 0 3,961,253 available-for-sale Purchases of mortgage-backed securities available-for-sale (6,522,879) 0 Purchase of mortgage-backed securities held-to-maturity (7,627,398) (15,447,927) Principal payments on mortgage-backed securities 11,177,578 2,141,344 available-for-sale Principal payments on mortgage-backed securities held-to- 12,842,999 631,573 maturity Proceeds from redemption of FHLB stock 0 1,900 Net increase in loans (16,946,517) (3,167,669) Proceeds from sale of foreclosed assets 182,240 82,772 Proceeds from recovery of charged off loans 0 9,644 Acquisition costs related to foreclosed assets (2,974) (2,151) Expenditures for premises and equipment (37,553) (32,953) Origination of mortgage servicing rights (70,344) (19,179) ------------- ------------- Net cash provided (used) by investing activities (2,711,302) (757,734) Cash flows from financing activities: Net increase (decrease) in: Deposits (8,861,523) 11,062,925 Advances from borrowers (860,437) (889,952) Proceeds from advances from Federal Home Loan Bank 354,000,000 530,120,000 Payment of advances from Federal Home Loan Bank (345,347,301) (537,473,556) Dividends paid to stockholders (116,232) (116,232) ------------- ------------- Net cash provided (used) by financing activities (1,185,493) 2,703,185 ------------- ------------- Net increase (decrease) in cash and cash equivalents (1,616,223) 1,127,915 Cash and cash equivalents at beginning of the period 4,838,011 2,204,723 ------------- ------------- Cash and cash equivalents at end of the period $ 3,221,788 $ 3,332,638 ============= ============= Supplemental disclosure: Cash paid for: Interest on deposits $ 1,499,090 $ 1,571,080 Interest on FHLB advances and other borrowed funds 1,332,433 2,286,009 Income taxes 25,380 0 Transfers from loans to real estate and other assets acquired through foreclosures 415,923 269,147 Loans made to facilitate the sale of foreclosed assets 128,187 119,435
The accompanying notes are an integral part of the financial statements. 8 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 - -------------------------------------------------------------------------------- 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, 2001. 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, 2002 and 2001, has been computed based on net income divided by the weighted average number of common shares outstanding during the period. For the three months and six months ended March 31, 2002 and 2001, the weighted average number of shares outstanding totaled 1,123,979 and 1,110,416 shares respectively. Earnings per common share - assuming dilution, for the three months and six months ended March 31, 2002 and 2001, 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, 2002 and 2001, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,150,703 and 1,110,416, shares respectively. For the six months ended March 31, 2002 and 2001, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,137,079 and 1,110,421 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, 2002 and 2001. 9 NOTE 3 - SECURITIES The carrying values and estimated market values of investment securities available-for-sale as of March 31, 2002, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value -------------- --------------- -------------- --------------- --------------- Municipal bonds $ 510,000 $ 0 $ 3,388 $ 20,896 $ 527,508 -------------- --------------- -------------- --------------- --------------- $ 510,000 $ 0 $ 3,388 $ 20,896 $ 527,508 -------------- --------------- -------------- --------------- ---------------
The amortized cost and estimated market values of investment securities held-to-maturity as of March 31, 2002, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- -------------- --------------- -------------- Debt securities: U. S. government agency $ 3,482,349 $ 74,762 $ 81,260 $ 3,475,851 Corporate Debt 6,262,501 83,805 31,617 6,314,689 -------------- -------------- --------------- -------------- Total debt securities $ 9,744,850 $ 158,567 $ 112,877 $ 9,790,540 -------------- -------------- --------------- --------------
The amortized cost and estimated market values of investment securities held-to-maturity as of March 31, 2002, by contractual maturity are shown below:
Estimated Amortized Market Cost Value -------------- --------------- Due in one year through two years $ 1,000,000 $ 1,035,000 Due in two years through three years 1,049,055 996,920 Due in three years through six years 5,787,745 5,747,930 Due after six years 2,000,000 1,918,740 ------------ ------------- Total debt securities $ 9,744,850 $ 9,790,540 ------------ -------------
10 The carrying values and estimated market values of mortgage-backed and related securities available-for-sale as of March 31, 2002, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value -------------- --------------- -------------- -------------- --------------- Fixed Rate $ 1,376,095 $ 0 $ 10,190 $ 40,030 $ 1,405,935 Adjustable Rate 21,026,317 116,483 4,659 10,627 21,148,768 -------------- --------------- -------------- -------------- --------------- $ 22,402,412 $ 116,483 $ 14,849 $ 50,657 $ 22,554,703 -------------- --------------- -------------- -------------- ---------------
The carrying values and estimated market values of mortgage-backed and related securities held-to-maturity as of March 31, 2002, by type of security are as follows:
Estimated Principal Unamortized Unearned Carrying Market Balance Premiums Discounts Value Value -------------- --------------- -------------- -------------- --------------- Fixed Rate $ 21,549,406 $ 34,133 $ 18,329 $ 21,565,210 $ 21,767,928 Adjustable Rate 9,129,202 13,279 16,526 9,125,955 9,205,022 -------------- --------------- -------------- -------------- --------------- $ 30,678,608 $ 47,412 $ 34,855 $ 30,691,165 $ 30,972,950 -------------- --------------- -------------- -------------- ---------------
NOTE 4 - CURRENT ACCOUNTING ISSUES In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and superseded APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. This Statement does not change many of the provisions of Opinion 16 and Statement 38 related to the application of the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company adopted this Statement as of October 1, 2001, the beginning of its current fiscal year. In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and superceded APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Intangible assets acquired in a business combination shall be recognized as an asset apart from goodwill (goodwill is measured as the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed) if the asset does not arise from contractual or legal rights. If an asset does not arise from contractual or other legal rights, it shall be recognized as an asset apart from goodwill only if it is separable, that is, capable of being separated or divided from the acquired enterprise and sold, transferred, licensed, rented, or exchanged (regardless of whether there is an intent to do so). 11 Goodwill will not be amortized but must be tested for impairment at least annually at the reporting unit level. Any impairment of the amount of goodwill reported must be expensed through the income statement in the period that the impairment is discovered. This Statement is required to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of this Statement (resulting from a transitional impairment test) are reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001, are subject immediately to the nonamortization and amortization provisions of this Statement. The Company adopted this statement as of October 1, 2001, the beginning of its fiscal year. During the quarter ended March 31, 2002, the Company completed its initial test for impairment of the goodwill recorded in the statement of financial position. The Company utilized the services of an independent consulting firm to test goodwill recorded in the statement of financial position for possible impairment. Based upon the analysis of the independent consulting firm and its own analysis, the Company has concluded that no impairment of the goodwill exists as of the most recent fiscal year-end, September 30, 2001. As a result, the Company will not make any adjustment to the amount of goodwill recorded in the statement of financial position. 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 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, 1999 147,276 Granted 4,500 Exercised at $9.42 per share -0- Forfeited and expired -0- ------- Balance, September 30, 2000 151,776 Granted -0- Exercised at $9.42 per share -0- Forfeited and expired -0- ------- Balance, September 30, 2001 151,776 ======= Options exercisable at March 31, 2002 under stock option plan 148,776 ======= Shares available for future grants 22,662 ======= During the six months ended March 31, 2002, no options were exercised, issued, or forfeited. 12 NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK The outstanding advances from the FHLB consisted of the following at March 31, 2002: Maturity Balance Rate ------------- -------------- ------ 04/03/02 $ 2,500,000 1.88% 04/04/02 $36,500,000 1.92% 12/05/02 $ 5,000,000 2.41% 12/05/03 $ 5,000,000 3.58% 02/15/03 $ 100,000 6.00% 03/10/03 $ 2,000,000 2.78% 03/10/03 $ 2,000,000 5.00% 09/01/03 $ 804,796 6.25% 12/31/04 $ 233,026 6.09% 02/15/04 $ 100,000 6.01% 01/03/05 $ 63,837 6.03% 02/15/05 $ 100,000 6.04% 02/15/06 $ 150,000 6.05% 04/11/11 $ 5,000,000 3.91% 04/11/11 $ 5,000,000 3.73% 04/11/11 $ 5,000,000 4.25% 06/07/11 $ 5,000,000 4.38% 01/01/13 $ 403,171 6.09% 01/01/13 $ 383,249 6.13% 02/01/13 $ 379,997 5.91% 03/03/14 $ 709,394 5.45% 04/01/14 $ 687,179 5.97% 05/01/14 $ 934,705 5.66% 06/01/14 $ 713,837 5.90% 07/01/14 $ 662,631 6.38% 08/01/14 $ 481,537 6.37% 09/01/14 $ 609,139 6.59% 10/01/14 $ 535,449 6.86% 11/03/14 $ 1,321,821 6.77% 12/01/14 $ 451,395 6.57% 01/01/15 $ 295,784 6.73% ----------- Total Advances $83,120,947 =========== 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. 13 NOTE 7 - PROFORMA EFFECTS OF SFAS NO. 142 SFAS No. 142 requires that all periods presented in the statements of income must be adjusted to exclude amortization expense (including any related tax effects) recognized in the periods presented related to goodwill. The following are condensed income statements showing restatement of income for the three and six months ended March 31,2001.
Three Months Six Months Ended Ended March 31, 2001 March 31, 2001 (Unaudited) (Unaudited) -------------- -------------- Reported net income $ 291,199 $ 340,251 Add back: goodwill amortization 39,206 78,418 ----------- ----------- Adjusted net income $ 330,405 $ 418,669 =========== =========== Earnings per common share and earnings per common share - assuming dilution Reported net income $ 0.26 $ 0.31 Goodwill amortization 0.04 0.07 ----------- ----------- Adjust Earnings per share $ 0.30 $ 0.38 =========== ===========
NOTE 8 - CHANGES IN ACCOUNTING ESTIMATE During the quarter ended March 31, 2002, the Company elected to make changes to the assumptions and actuarial method for its Defined Benefit Plan. The valuation interest rate was increased from 7.00% to 7.50%, the projected compensation increase rate was reduced to 5.00% from 6.00%, and the asset method for actuarial value of assets was changed to a 5-year smoothing method from an annual basis. All of the changes were made in order to more closely reflect the Company's future long-term expectations. The changes should have the effect of reducing fluctuations in the net periodic pension cost and minimum required funding of the plan. The changes were effective for the plan year beginning October 1, 2001. For the fiscal year beginning October 1, 2001, the Company's estimated net periodic pension cost under the previous actuarial assumptions and methods was approximately $291,000. Under the revised assumptions, the estimated net periodic pension cost is approximately $238,000. On an after-tax basis, the change in net income in the current fiscal year due to the change in accounting estimate is approximately $35,000. 14 NOTE 9 - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The following table sets forth an analysis of the Company's allowance for loan losses.
Six Months Ended Quarter Ended Quarter Ended March 31, 2002 March 31, 2002 December 31, 2001 ----------------- ---------------- ------------------ Dollars in Thousands Balance at beginning of period $ 769 $ 721 $ 769 Charge-offs: One-to-four family (3) (3) 0 Consumer and other loans (173) (112) (61) ----- ----- ----- Total charge-offs (176) (115) (61) ----- ----- ----- Recoveries: One-to-four family 0 0 0 Consumer and other loans 19 16 3 ----- ----- ----- Total recoveries 19 16 3 ----- ----- ----- Net (charge-offs)/recoveries (157) (99) (58) Additions charged to income 111 101 10 ----- ----- ----- Balance at end of period $ 723 $ 723 $ 721 ===== ===== ===== Ratio of net charge-offs/recoveries during the period to average loans outstanding during the period (0.12)% (0.08)% (0.04)% ===== ===== ===== Ratio of net charge-offs/recoveries during the period to average non-performing assets (12.94)% (9.09)% (3.85)% ===== ===== =====
The distribution of the Company's allowance for losses at the dates indicated is summarized as follows:
March 31, 2002 September 30, 2001 ------------------------------ ----------------------------- Percent Percent of of Loans Loans Category to Category t Amount of Loan Total Amount of Loan Total Loss Allowance Loans Loss Allowance Loans ------------------------------ ----------------------------- (Dollars in Thousands) (Dollars in Thousands) One-to-four family $ 113 0.12% $ 148 0.16% Consumer and other loans 248 0.66 325 1.21 Unallocated 362 N/A 296 N/A --------- ---------- ---------- ---------- Total $ 723 $ 769 ========= ==========
15 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB March 31, 2002 - -------------------------------------------------------------------------------- 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. FINANCIAL CONDITION Total assets were $211.7 million at March 31, 2002, a $115,000 decrease from the $211.8 million reported at September 30, 2001, the Company's most recent fiscal year end. The decrease in total assets was the result of a $6.3 million decrease in investment securities available-for-sale, a $5.2 million decrease in mortgage-backed securities held-to-maturity, a $4.8 million decline in mortgage-backed securities available-for-sale, a $1.6 million decrease in interest-earning deposits with banks, and an $831,000 decrease in other assets. The decreases were partially offset by a $16.5 million increase in loans receivable, a $1.9 million increase in investment securities held to maturity, and a $340,000 increase in federal funds sold. At March 31, 2002, loans-receivable totaled $132.4 million, an increase of $16.5 million or 14.3% over the $115.8 million at September 30, 2001. The increase in loans-receivable was primarily the result of the Company's continued efforts to increase the 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 Company originates these loans through direct contacts with existing or potential new customers and indirectly through a network of automobile 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. For the six months ended March 31, 2002, the Company originated approximately $ 14.0 million in one-to-four family residential loans, which included loans for the purchase, refinance, or, construction of one-to-four family homes. The Company originated approximately $32.8 million in consumer, (including home-equity), 16 commercial and commercial real estate loans during the six months ended March 31, 2002. Approximately $9.9 million of the consumer, commercial and commercial real estate loans was originated on an indirect basis. Investment securities available-for-sale decreased by $6.3 million from $6.8 million at September 30, 2001 to $528,000 at March 31, 2002. The decrease was the result of the Company's decision to sell approximately 50% of its corporate debt securities portfolio. The Company elected to sell the corporate bonds in order to provide liquidity to fund loans and reduce the Company's exposure to possible downgrades of ratings on corporate debt in the portfolio. This portfolio now consists of municipal bonds, primarily issued by Upshur County, where the Company's Gilmer office is located. Investment securities held-to-maturity was reported as $9.7 million at March 31, 2002, an increase of $1.9 million from the $7.8 million reported at September 30, 2001. The increase was the result of additional purchases of bonds during the six months ended March 31, 2002. This portfolio consists of approximately $3.5 million of debt issued by governmental agencies such as Federal National Mortgage Corporation, Federal Home Loan Mortgage Corporation, or the Federal Home Loan Bank System and approximately $6.2 million of corporate debt securities. All securities in the portfolio are fixed rate and term. Mortgage-backed securities available-for-sale totaled $22.6 million at March 31, 2002, a decrease of $4.8 million from the $27.4 million at September 30, 2001. The decrease was primarily the result of the principle repayments on the securities during the six months ended March 31, 2002. Mortgage-backed securities held-to-maturity portfolio totaled $30.7 million at March 31, 2002, an increase of $5.2 million from the $35.9 million reported at September 30, 2001. The increase was primarily due to the Company's decision to reinvest funds in this portfolio from cash flow from its mortgage-backed securities available-for-sale portfolio. The additional securities purchased were primarily adjustable rate. Total deposits were $106.7 million at March 31, 2002, a $8.9 million decrease from the $115.6 million reported at September 30, 2001. The decrease was primarily the result of declines in certificates of deposit balances as the Company elected not to pay higher interest rates on renewing certificates of deposits during the period. The Company reported $83.1 million in borrowed funds at March 31, 2002, an increase of $8.6 million from the $74.5 million reported at September 30, 2001. The increase was primarily due to the Company's decision to utilize advances from the FHLB to fund loans and investments. Stockholder's equity totaled $18.5 million at March 31, 2002, an increase of $609,000 from the $17.9 million reported at September 30, 2001. The increase was primarily attributable to a net increase in retained earnings of $906,000 which was partially offset by a decline in accumulated other comprehensive income of $298,000. The increase in retained earnings was due to the $1.0 million in net income less $116,000 in cash dividends paid during the six months ended March 31, 2002. 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, 2002 AND MARCH 31, 2001 General. Net income for the three months ended March 31, 2002 was $370,000 or $.33 per share, an increase of $79,000 from the $291,000, or $.26 per share, reported for the three months ended March 31, 2001. The increase in net income was attributable to a $419,000 increase in net interest income after provision for loan losses, which was partially offset by a $190,000 decrease in 17 noninterest income, a $117,000 increase in non-interest expense, and a $34,000 increase in income tax expense. Net Interest Income. For the quarter ended March 31, 2002, net interest income before provision for loan losses totaled $1.6 million, an increase of $513,000 over the $1.1 million reported for the quarter ended March 31, 2001. On an annualized basis, the $1.6 million in net interest income for the current quarter was approximately 3.21% of average interest-earning assets and 3.07% of average total assets. For the quarter ended March 31, 2001, the $1.1 million in net interest income before provisions for loan losses was approximately 2.28% of average interest-earning assets and 2.17% of average total assets. Average interest-earning assets were approximately $200.8 million for the quarter ended March 31, 2002, compared to $192.9 million for the quarter ended March 31, 2001. Total interest income was $3.3 million for the quarter ended March 31, 2002, a decrease of $364,000 from the $3.6 million reported for the quarter ended March 31, 2001. The decrease was primarily due to a decline in interest on mortgage-backed securities available-for-sale of $560,000, a decline in combined interest on investment securities available-for-sale and investment securities held-to-maturity of approximately $317,000, and a decline in interest on mortgage loans of $48,000. The declines in interest income were partially offset by a $369,000 increase in interest income on consumer and other loans and a $206,000 increase in income on mortgage-backed securities held-to-maturity. Interest income on loans-receivable was $2.5 million for the quarter ended March 31, 2002, compared to 2.1 million for the quarter ended March 31, 2001. On an annualized basis, the $2.5 million was approximately 7.73% of average loans-receivable balances outstanding for the quarter ended March 31, 2002, compared to approximately 8.21% for the quarter ended March 31, 2001. The increase in interest income on the loan portfolio was primarily the result of an increase in consumer, commercial and commercial real estate loan balances. The overall decline in interest rates over the past 12 months and the number of mortgage loans refinanced by the Company contributed to the decline in overall yield on the loan portfolio. Interest income from mortgage-backed securities available-for-sale totaled $104,000 for the quarter ended March 31, 2002, compared to $664,000 for the quarter ended March 31, 2001. The decrease in income was due to a decline in the balance of the portfolio from $39.0 million at March 31, 2001 to $22.6 million at March 31, 2002. The decline in the balance in the portfolio resulted from the sale of securities, principle repayments, and the Company's decision to re-direct the cash flow into its loan portfolio. Interest income from the investment securities held-to-maturity portfolio was $154,000 for the quarter ended March 31, 2002, compared to $348,000 for the quarter ended March 31, 2001. The decrease in income from the portfolio was due to a decline in the balance in the portfolio from $15.2 million at March 31, 2001 to $9.7 million at March 31, 2002. At March 31, 2001, the portfolio was primarily comprised of debt issued by Government agencies such as FHLMC, FNMA and the Federal Home Loan Bank System and corporate debt securities. The agency securities had call options at the discretion of the issuer. As interest rates declined in 2001, the issuer elected to call the bonds. The Company elected to redirect cash flow from the called bonds into its mortgage-backed securities held-to-maturity portfolio, its investment securities 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 $496,000 for the quarter ended March 31, 2002, an increase of $206,000 from the $290,000 reported for the quarter ended March 31, 2001. The increase was due primarily to an increase in the balance in the portfolio from $19.1 million at March 31, 2001 to $30.7 million at March 31, 2002 as the Company invested excess cash flow into adjusted rate mortgage securities. Interest paid to depositors totaled $1.0 million for the quarter ended March 31, 2002, a decrease of $496,000 from the $1.5 million reported for the quarter ended March 31, 2001. On an annualized basis, the $1.0 million in interest expense on deposits was approximately 3.76% for the quarter ended March 31, 2002, compared to 5.47% for the quarter ended March 31, 2001. The decline in interest expense was primarily attributable to a decline in certificate of deposit account balances as the Company elected not to pay higher rates on renewing certificates of deposit. The Company relied more heavily on advances from the FHLB. 18 Interest on FHLB advances was $649,000 for the quarter ended March 31, 2002, compared to $1.0 million for the quarter ended March 31, 2001. The decrease in interest expense was a direct result of declining interest rates during 2001. At March 31, 2001, the Company had approximately $35.0 million in short-term advances, which re-priced approximately every 30 days. As short-term interest rates declined in 2001 and 2002, the Company benefited from an overall lower cost of borrowing as the rate of interest on the short-term advances declined substantially. The short-term advances had an interest rate of 1.92% at March 31, 2002, compared to 5.12% at March 31, 2001. Provision for Loan Losses. The Company made $101,000 in provision for loan losses for the quarter ended March 31, 2002, compared to $7,000 for the quarter ended March 31, 2001. The increase in provision for loan losses was the result of the Company's decision to establish additional allowances for loan losses, due to the increase in volume of consumer and commercial lending. See "Asset Quality" and Note 9. Noninterest Income. Noninterest income totaled $136,000 for the quarter ended March 31, 2002 compared to $325,000 for the quarter ended March 31, 2001, a $189,000 decrease. The decrease was primarily due to a decline in gains on the sale of interest-earning assets from $189,000 for the quarter ended March 31, 2001 to $44,000 for the quarter ended March 31, 2002. In 2001, the Company elected to sell a significant portion of the securities acquired in the Gilmer Savings Bank acquisition. They were predominately small balance securities and generally securities the Company would not normally hold in portfolio. For the quarter ended March 31, 2002, the $44,000 in gains on the sale of interest-earning assets was the result of gains on the sale of mortgage loans into the secondary market. Also, loan servicing fees were reported as a negative $23,000 for the quarter ended March 31, 2002, compared to $21,000 for the quarter ended March 31, 2001. The decrease in income was primarily due to the amortization of previously recognized mortgage servicing rights. As mortgage interest rates declined in 2001 and 2002, loan customers refinanced their mortgages. Any remaining balance in originated mortgage servicing rights associated with the loan must be expensed at the time the loan is refinanced or paid off. The expense is an offset to monthly serving fees in the loans. The result was an overall decline in net loan servicing fee income. Noninterest Expense. Noninterest expense was $1.1 for the quarter ended March 31, 2002, an increase of $117,000 from the $951,000 for the quarter ended March 31, 2001. The increase in noninterest expense was primarily the result of an $80,000 increase in compensation and benefits expense, mainly associated with the Company's defined benefit pension plan and normal increases in employee compensation. In addition, net expenses associated with the Company's foreclosed asset portfolio increased to $20,000 for the quarter ended March 31, 2002 from a negative $29,000 for the quarter ended March 31, 2001. The negative expense for the quarter ended March 31, 2001 was primarily due to gains on the sale of foreclosed real estate. Provision for Income Taxes. The Company incurred federal income tax expense of $210,000 or 36.3% or pre-tax income for the quarter ended March 31, 2002, compared to $176,000 or 37.7% or pre-tax income for the quarter ended March 31, 2001. COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001 General. For the six months ended March 31, 2002, the Company reported net income of $1.0 million or $.91 per common share and $.90 per common share - assuming dilution, compared to $340,000 or $.31 per common share and $.31 per common share - assuming dilution for the six months ended March 31, 2001. The increase in net income was due to a $1.0 million increase in net interest income after provisions for loan losses and a $219,000 increase in noninterest income. The increases were partially offset by a $356,000 increase in income tax expense and a $194,000 increase in noninterest expense. Net Interest Income. For the six months ended March 31, 2002, net interest income before provisions for loan losses totaled $3.1 million, an increase of $1.1 from the $2.0 million reported for the six months ended March 31, 2001. On an annualized basis, the $3.1 million in net interest income before provisions for loan losses for the current period was approximately 3.10% of average interest earning assets and 2.95% of average total assets. For the six months 19 ended March 31, 2001, the $2.0 million in net interest income before provisions for loan losses was, on an annualized basis, approximately 2.09% of average interest earning assets and 1.99% of average total assets. Average interest earning assets were approximately $201.1 million for the six months ended March 31, 2002, compared to $192.2 million for the six months ended March 31, 2001. Total interest income was $6.7 million or 6.63%, on an annualized basis, of average interest earning assets for the six months ended March 31, 2002, compared to $7.3 million or 7.49% of average interest earning assets for the six months ended March 31, 2001. The decrease was primarily due to a decline in interest on mortgage-backed securities available-for-sale of $1.1 million, a decline in combined interest on investment securities available-for-sale and investment securities held-to-maturity of approximately $671,000, and a decline in interest on mortgage loans of $144,000. The declines in interest income were partially offset by a $714,000 increase in interest income on consumer and other loans and a $649,000 increase in mortgage-backed securities held-to-maturity. Interest income on loans receivable totaled $4.8 million for the six months ended March 31, 2002 an increase of $570,000 from the $4.2 million reported for the six months ended March 31, 2001. Average loans receivable balances increased to $123.6 million for the six months ended March 31, 2002 from $103.7 million for the six months ended March 31, 2001. For the six months ended March 31, 2002, the $4.8 million in interest income on loans receivable was, on an annualized basis, approximately 7.78% of average loans receivable, compared to 8.17% for the six months ended March 31, 2001. The increase in interest income on loans receivable was primarily attributable to the increase in loan balances outstanding during the six months ended March 31, 2002, compared to the six months ended March 31, 2001. The increase in loans receivable was the result of the Company's continued focus on the origination of consumer and commercial real estate loans. Consumer loans outstanding, including home equity and improvement loans, increased from approximately $18.1 million at March 31, 2001 to approximately $44.1 million at March 31, 2002. Interest income from mortgage-backed securities available-for sale totaled $373,000 for the six months ended March 31, 2002, compared to $1.5 million for the six months ended March 31, 2001. The decrease in income was primarily attributable to a decrease in the balance in the portfolio from $39.0 million at March 31, 2001 to $22.4 million at March 31, 2002 as the Company sold securities in the portfolio and redirected cash flow from principle payments on the securities to its loan and other investment portfolios. Interest income on investment securities held-to-maturity totaled $309,000 for the six months ended March 31, 2002, compared to $742,000 for the six months ended March 31, 2001. The decrease was due primarily to a decline in the balance in the portfolio from $15.2 million at March 31, 2001 to $9.8 million at March 31, 2002. The decline in balances in the portfolio was due to the Company's decision to sell a portion of its corporate debt holdings in the current period. Interest income on mortgage-backed securities held-to-maturity was $1.0 million for the six months ended March 31, 2002, compared to $374,000 for the six months ended March 31, 2001. The increase in interest income on the portfolio was primarily the result of an increase in the balance outstanding in the portfolio from $19.0 million at March 31, 2001 to $30.7 million at March 31, 2002. The Company redirected excess cash flow into this portfolio, primarily to purchase adjustable rate securities. Interest expense was $3.6 million for the six months ended March 31, 2002, a decrease of $1.6 million from the $5.2 million reported for the six-month period ended March 31, 2001. The $3.6 million in interest expense reported for the six month period ended March 31, 2002 was approximately 3.77% of average interest costing liabilities, compared to 5.74% for the same period in 2001. Noninterest Income. Noninterest income was $674,000 for the six months ended March 31, 2002, compared to $455,000 for the six months ended March 31, 2001. The increase was attributable to a $253,000 increase in gains on sales of interest earning assets as the Company sold securities during the six months ended March 31, 2002. In addition, the Company reported $83,000 in loan origination and commitment fees, an increase of $40,000 over the $43,000 reported for the six months ended March 31, 2001. The additional fee income was due to the Company's decision to sell, into the secondary market, most of the one-to-four family loans originated during 2001 and 2002. The increases in noninterest income were partially offset by a $90,000 decline in loan servicing 20 fees. The decline in loan serving fees was the result of the amortization of previously recorded originated mortgage servicing rights. With lower interest rates many borrowers refinanced their mortgage loans during 2001 and 2002. For any such loan on which the Company had previously recognized originated mortgage income, the unamortized balance of the rights was charged against loan servicing income. Noninterest Expense. Noninterest expense was reported as $2.1 million for the six-month period ended March 31, 2002, a $194,000 increase from the $1.9 million reported for the six months ended March 31, 2001. The increase was primarily attributable to a $153,000 increase in compensation and benefits expense due to additional employees and normal compensation increases. A $61,000 increase in net expenses on foreclosed and repossessed assets accounted for a portion of the increase in noninterest expense. The increase in net expenses on foreclosed and repossessed assets was primarily due to expenses associated with the disposition of repossessed automobiles from the Company's consumer loan portfolio and other consumer installment loans. A $78,000 decrease in amortization of goodwill offset a portion of the increase in noninterest expense. Under revised accounting guidelines for the year beginning October 1, 2001, the Company is no longer required to systematically amortize goodwill recorded on the statement of financial position. The Company now monitors, on at least an annual basis, the balance of goodwill in the financial statements for any possible impairment to the recorded amount. See Note 4 and Note 7. Provision For Income Taxes. The Company incurred federal income tax expense of $561,000 or 35.4% of pre-tax income for the six months ended March 31, 2002, compared to $206,000 or 37.7% of pre-tax income for the six months ended March 31, 2001. ASSET QUALITY At March 31, 2002, the Company's non-performing assets (non-performing loans plus foreclosed assets) totaled $1.1 million or .51% of total assets, compared to $1.6 million or .74% of total assets at September 30, 2001. At March 31, 2002, 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, 2002 equaled $713,000 or .54% of loans receivable, compared to $1.3 million or 1.14% of loans receivable at September 30, 2001. The Company defines non-performing loans as any loan past due for 90 days or more. All such loans are accounted for on a nonaccrual basis by reserving for 100% of the accrued interest or placing the loan in a nonaccrual status when the loan reaches 90 days delinquent. At March 31, 2002 the Company had no loans which were contractually past 90 days or more and for which it was still accruing interest. At March 31, 2002, the Company had no "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditor for Troubled Debt Restructurings", or any other loans for which the Company has information about possible credit problems of borrowers that would cause management to have serious doubts as to the ability of such borrowers to comply with the preset loan repayment terms. Classified assets totaled $2.2 million or 1.03% of total assets at March 31, 2002, compared to $2.7 million or 1.27% of total assets at September 30, 2001. 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, 2002, $2.0 million of classified assets were deemed to be substandard and $200,000 assets were classified as doubtful. The Company's allowance for loan losses totaled $723,000 at March 31, 2002, compared to $769,000 September 30, 2001. The allowance for loan losses as a percentage of loans receivable equaled .55% at March 31, 2002 and 0.66% at September 30, 2001. The Company uses a methodology for estimating the adequacy of its allowance for loan loss that encompasses three separate components. The first component is a historical loss analysis of loans segregated by different loan categories. A three-year rolling average of annual net gains and losses on each category of loans is calculated and then summed together to comprise the 21 first component. The second component is an estimate of losses on the Company's list of currently classified assets. A percentage, generally ranging from 5% to 50% of each classified asset, is applied to the balance of the asset. The percentage for each asset is combined to determine the second component. The third component is an unidentified risk component. The Company arbitrarily establishes a percentage of each category of net loans as an inherent or unidentified risk. The percentages range from .10% for one-to-four family to ...35% for consumer loans. The balance in each loan category is reduced for any loans specifically reviewed by the Company and any classified assets, before applying the percentage amounts. At March 31, 2002, the individual components were calculated to be $151,000 for the historical loss component, $308,000 for the classified asset component, and $201,000 for the unidentified risk component, a total of $661,000. At September 20, 2001, the individual components were calculated as $114,000 for the historical loss component, $331,000 for the classified asset component, and $156,000 for the unidentified risk component, a total of $601,000. The increase in the historical loss component was a direct result of increased losses on the Company's consumer installment lending program, including its indirect auto-lending program. The decrease in the classified asset component was the result of the $520,000 decline in classified assets. The increase in the inherent risk component was due to the overall increase in the loan portfolio, primarily consumer installment loans, from $115.8 million at September 30, 2001 to $132.4 million at March 31, 2002. The Company also establishes a specific loan loss allowance of 100% of the outstanding balance of loans that are severely past due and deemed unlikely to be collected in a timely manner. Generally, the Company establishes a specific reserve when a real estate secured loan is 180 days are more past due and when a consumer loan is 120 days or more past due. The Company may establish a specific reserve sooner than these general guidelines in the case of a bankruptcy. Also, the Company may choose not to establish a specific reserve for loans that would otherwise warrant doing so, if there is sufficient value supporting the loan balance. At March 31, 2002, the Company had $52,000 in specific loan loss reserves established, compared to $142,000 at September 30, 2001. The decrease in the specific reserve was due to a decrease in the balances of loans exceeding the past due limits. When combined, the general allowance for loan losses estimate of $661,000, and the $52,000 in specific loan loss allowances total $713,000, which is the Company's estimate of an adequate total loan loss allowance calculation at March 31, 2002. The Company reported an actual combined loan loss allowance of $723,000 in the statement of financial position at March 31, 2002. In general, the Company made no changes to its estimate of the adequacy of the allowance for loan losses as a result of any actual changes or expected trends in non-performing loans. The Company believes that the overall quality of its loan portfolio is good. The Company anticipates that the general trend in the level of the allowance for loan loss will be to increase the size of the allowance. The Company expects to continue its focus on increasing the size of its consumer, commercial, and commercial real estate loan portfolios. The result would be an expected increase in the estimated allowance for loan loss under the unidentified risk component. 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, 2002, the Association had outstanding commitments to extend credit on approximately $8.8 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. 22 Total stockholders' equity equaled $18.5 million at March 31, 2002, an increase of $609,000 million from the $17.9 million reported at September 30, 2001. The increase was primarily the result of a $907,000 increase in retained earnings from the $1.0 million net income less the $116,000 in cash dividends paid during the six months ended March 31, 2002. A $298,000 decrease in unrealized gains on available-for sale securities partially offset the increase in retained earnings. As of March 31, 2002, the Company's reported book value per share, using total stockholders' equity of $18.5 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 $15.94 per share. Subsequent to the quarter ended March 31, 2002, the Company announced its intention to pay a cash dividend of $.05 per share on May 22, 2002, to stockholders of record at May 8, 2002. During the six months ended March 31, 2002, the Company paid cash dividends of $.10 per share, which equates to approximately 11.0% of the $.91 in earnings per share reported. The Company paid $.05 per share in cash dividends in the three months ended March 31, 2002, which is approximately 15.2% of the $.33 in reported earnings per share. The Company reported an equity to assets ratio of approximately 8.75% at March 31, 2002. Federally insured savings associations, such as First Federal, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain non-cumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage-servicing rights, must be deducted from total capital for calculating compliance with this requirement. At March 31, 2002, the Association had approximately $2.2 million of intangible assets and other required regulatory adjustments that were required to be deducted from total capital. At March 31, 2002, the Association had tangible capital of $15.7 million, or 7.48% of adjusted total assets, which is approximately $12.5 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require Tier 1 capital equal to at least 4.0% of adjusted total assets. Tier 1 capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card receivables. At March 31, 2002, the Association had Tier 1 capital equal to $15.7 million, or 7.48% of adjusted total assets, which is $7.3 million above the minimum requirement for capital adequacy purposes of 4.0% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8.0% of risk-weighted assets. Total risk-based capital consists of core capital, as defined above and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At March 31, 2002, the Association had no capital instruments that qualify as supplementary capital and $667,000 of general loss reserves, which was less than 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the purpose of calculating total risk-based capital. First Federal had no such exclusions from capital and assets at March 31, 2002. 23 In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk of 50% for prudently underwritten permanent one-to-four family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by a insurer approved by Fannie Mae or Freddie Mac. On March 31, 2002, First Federal had total risk based capital of $16.3 million (including $15.7 million in Tier 1 capital and $667,000 in loan loss reserves) and risk-weighted assets of $110.8 million, or total risk-based capital of 14.75% of risk-weighted assets. This amount was $7.5 million above the 8.0% requirement in effect on that date. At March 31, 2002, the Association was also considered a "well capitalized" institution under the prompt corrective action requirements of the Federal Deposit Insurance Corporation Improvement Act of 1991. 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. 24 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB MARCH 31, 2002 - -------------------------------------------------------------------------------- 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, 2002, the Company filed a report on Form 8-K on January 30, 2002 to report the issuance of a press release dated January 29, 2002, announcing the Company's intention to pay, on February 20, 2002, a cash dividend of $.05 per share for the quarter ended December 31, 2001, to stockholders of record on February 6, 2002. Also during the quarter ended March 31, 2002, the Company filed a report on Form 8-K on February 11, 2002, to report the issuance of a press release dated February 11, 2002, announcing the Company's earnings for the quarter ended December 31, 2001. 25 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, 2002 /s/ Gerald W. Free -------------------------------------------- Gerald W. Free Vice Chairman, President and CEO (Principal Executive Officer) Date: May 15, 2002 /s/ Derrell W. Chapman -------------------------------------------- Vice President/COO/CFO (Principal Financial and Accounting Officer) 26 EX-11 3 exhibit11.txt EXHIBIT 11.0 COMPUTATIONS OF EARNINGS PER SHARE Three Months Ended March 31, 2002 - --------------------------------------------------------------------------------
Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- December 31, 2001 1,162,320 38,341 1,123,979 January 31, 2002 1,162,320 38,341 1,123,979 February 28, 2002 1,162,320 38,341 1,123,979 March 31, 2002 1,162,320 38,341 1,123,979
Weighted average number of shares outstanding for the quarter ended March 31, 2002, for earnings per share calculation 1,123,979 Stock options outstanding at March 31, 2002: 151,776 ------- Weighted average exercise price of stock options: $9.39 per share --------------- Average stock price for three-month period: ended March 31, 2002 $11.40 ------
Three Months Ended ------------------ March 31, --------- Basic Earnings Per Share 2002 2001 ------------------------ ---- ---- Income available to common stockholders $ 369,741 $ 291,199 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation 1,123,979 1,110,416 =========== =========== Basic Earnings Per Share $ 0.33 $ 0.26 =========== =========== Diluted Earnings Per Share Income available to common stockholders $ 369,741 $ 291,199 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation 1,123,979 1,110,416 Weighted average common shares issued under stock option plans 151,776 151,776 Less weighted average shares assumed repurchased with proceeds (125,052) (151,776) -------- -------- Weighted average number of common shares outstanding for diluted EPS calculation 1,150,703 1,110,416 =========== =========== Diluted Earnings Per Share $ 0.32 $ 0.26 =========== ===========
COMPUTATIONS OF EARNINGS PER SHARE Six Months Ended March 31, 2002 - -------------------------------------------------------------------------------- Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- September 30, 2001 1,162,320 38,341 1,123,979 October 31, 2001 1,162,320 38,341 1,123,979 November 30, 2001 1,162,320 38,341 1,123,979 December 31, 2001 1,162,320 38,341 1,123,979 January 31, 2002 1,162,320 38,341 1,123,979 February 28, 2002 1,162,320 38,341 1,123,979 March 31, 2002 1,162,320 38,341 1,123,979 Weighted average number of shares outstanding for the six months ended March 31, 2002, for earnings per share calculation 1,123,979 --------- Stock options outstanding at March 31, 2002: 151,776 ------- Exercise price of stock options: $9.39 per share -------------------------------- --------------- Average stock price for six-month period: Ended March 31, 2002 $10.28 --- ---- ------
Six Months Ended ---------------- March 31, --------- Basic Earnings Per Share 2002 2001 - ------------------------ ---- ---- Income available to common stockholders $1,022,907 $340,251 ========== ======== Weighted average number of common shares outstanding for basic EPS calculation 1,123,979 1,110,416 ========= ========= Basic Earnings Per Share $0.91 $0.31 ===== ===== Diluted Earnings Per Share Income available to common stockholders $1,022,907 $340,251 ========== ======== Weighted average number of common shares outstanding for basic EPS calculation 1,123,979 1,110,416 Weighted average common shares issued under stock option plans 151,776 4,500 Less weighted average shares assumed repurchased with proceeds (138,676) (4,495) -------- ------ Weighted average number of common shares outstanding for diluted EPS calculation 1,137,079 1,110,421 ========= ========= Diluted Earnings Per Share $0.90 $0.31 ===== =====
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