-----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, S6JJ/0lJDH7jE9BrC9bDqoWZ197yMPUDpJ1+9AfJAGqkeDi+Wa4K+0BpdbeIBQdo HWFjHzYGODfRLr6UWGm+Ww== 0000914317-03-002397.txt : 20030813 0000914317-03-002397.hdr.sgml : 20030813 20030813165547 ACCESSION NUMBER: 0000914317-03-002397 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 03842119 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-53547_easttexas.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 June 30, 2003 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 June 30, 2003, was 1,171,724. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB June 30, 2003 INDEX Page No. Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition, June 30, 2003 (Unaudited) and September 30, 2002 ............................................................. 4 Consolidated Statements of Income, (Unaudited) nine months ended June 30, 2003 and June 30, 2002 ................................................................ 5 Consolidated Statement of Changes in Stockholders' Equity, (Unaudited) nine months ended June 30, 2003 ................................................................ 6 Consolidated Statements of Cash Flows, (Unaudited) nine months ended June 30, 2003, and June 30, 2002 ............................................................... 7 Notes to (Unaudited) Consolidated Financial Statements, June 30, 2003 .......................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................................... 16 Item 3. Controls and Procedures ................................................................... 25 Part II - Other Information Item 1. Legal Proceedings ......................................................................... 26 Item 2. Changes In Securities ..................................................................... 26 Item 3. Defaults Upon Senior Securities ........................................................... 26 Item 4. Submission of Matters To a Vote of Security Holders ....................................... 26 Item 5. Other Information ......................................................................... 26 Item 6. Exhibits and Reports on Form 8-K .......................................................... 26 Certifications .......................................................................................... 27
2 of 29 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB June 30, 2003 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. 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. 3 of 29 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS June 30, 2003 September 30, 2002 ------------- ------------------ (Unaudited) Cash and due from banks $ 2,448,793 $ 2,561,615 Interest-bearing deposits with banks 6,310,032 2,883,189 Interest-earning time deposits with financial institutions 0 300,000 Federal funds sold 808,817 599,698 Investment securities available-for-sale 369,930 516,443 Investment securities held-to-maturity (estimated market value of $7,221,624 at June 30, 2003, and $10,134,910 at September 30, 2002) 6,696,415 9,723,716 Mortgage-backed securities available-for-sale 723,262 20,144,942 Mortgage-backed securities held-to-maturity (estimated market value of $69,201,561 at June 30, 2003 and $30,822,859 at September 30, 2002) 69,148,937 30,591,248 Loans receivable, net of allowance for credit losses of $878,471 at June 30, 2003 and $756,566 at September 30, 2002 115,960,749 137,182,965 Accrued interest receivable 1,158,883 1,324,440 Federal Home Loan Bank stock, at cost 4,677,600 4,588,500 Premises and equipment 2,774,778 2,868,435 Foreclosed assets, net 358,761 394,210 Goodwill, net 2,170,381 2,170,381 Mortgage servicing rights 435,928 255,269 Cash value of life insurance owned 3,725,306 0 Other assets 1,678,033 1,605,326 ------------- ------------- Total Assets $ 219,446,605 $ 217,710,377 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Noninterest deposits $ 3,418,959 $ 3,900,913 Interest-bearing deposits 109,382,457 103,567,616 ------------- ------------- Total deposits 112,801,416 107,468,529 FHLB advances 83,522,137 86,312,294 Advances from borrowers for taxes and insurance 564,697 1,033,717 Federal income taxes Current (113,604) 847,781 Deferred 543,301 493,953 Accrued expenses and other liabilities 2,000,374 2,271,637 ------------- ------------- Total liabilities 199,318,321 198,427,911 ------------- ------------- 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 1,171,724 and 1,162,320 outstanding, respectively 18,845 18,845 Additional paid-in-capital 12,525,303 12,525,303 Unearned employee stock ownership plan shares (170,716) (170,716) Retained earnings (substantially restricted) 16,824,995 16,035,441 Accumulated other comprehensive income (305,553) (259,125) Treasury stock, 712,768 and 722,172 shares, respectively, at cost (8,764,590) (8,867,282) ------------- ------------- Total stockholder's equity 20,128,284 19,282,466 ------------- ------------- Total liabilities and stockholders' equity $ 219,446,605 $ 217,710,377 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 4 of 29 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months Ended June 30, Ended June 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ INTEREST INCOME Loans receivable: First Mortgage $ 1,091,286 $ 1,605,417 $ 3,949,061 $ 4,763,261 Consumer and other loans 1,087,852 981,884 3,008,975 2,632,770 Securities available-for-sale: Investment securities 34,442 40,479 108,251 166,652 Mortgage-backed securities 19,309 183,626 87,922 556,294 Securities held-to-maturity: Investment securities 117,453 154,628 364,279 463,888 Mortgage-backed securities 483,484 427,240 1,333,789 1,450,617 Deposits with banks: 23,936 7,662 95,105 35,191 ------------ ------------ ------------ ------------ Total interest income 2,857,762 3,400,936 8,947,382 10,068,673 ------------ ------------ ------------ ------------ INTEREST EXPENSE Deposits 802,424 933,262 2,513,757 3,157,913 FHLB advances 591,639 681,464 1,854,182 2,013,897 ------------ ------------ ------------ ------------ Total interest expense 1,394,063 1,614,726 4,367,939 5,171,810 ------------ ------------ ------------ ------------ Net interest income before provision for loan losses 1,463,699 1,786,210 4,579,443 4,896,863 Provision for loan losses 257,965 64,490 657,861 175,688 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 1,205,734 1,721,720 3,921,582 4,721,175 ------------ ------------ ------------ ------------ NONINTEREST INCOME Gain (loss) on sale of interest-earning assets 239,335 55,147 596,869 507,320 Loan origination and commitment fees 31,187 31,174 74,674 114,169 Loan servicing fees (35,674) (15,696) (15,867) (75,014) Other 125,464 118,706 519,640 316,734 ------------ ------------ ------------ ------------ Total noninterest income 360,312 189,331 1,175,316 863,209 ------------ ------------ ------------ ------------ NONINTEREST EXPENSE Compensation and benefits 789,007 712,168 2,266,261 2,002,263 Occupancy and equipment 99,897 105,969 295,645 327,876 SAIF deposit insurance premium 5,143 4,726 14,839 15,199 Foreclosed assets, net 87,729 36,766 179,476 71,997 Other 236,917 264,975 851,461 796,349 ------------ ------------ ------------ ------------ Total noninterest expense 1,218,693 1,124,604 3,607,682 3,213,684 ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes 347,353 786,447 1,489,216 2,370,700 Income tax expense (benefit) 97,505 284,209 511,131 845,555 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 249,848 $ 502,238 $ 978,085 $ 1,525,145 ============ ============ ============ ============ Earnings per common share $ 0.22 $ 0.45 $ 0.86 $ 1.36 Earnings per common share - assuming dilution 0.21 0.44 0.83 1.34
The accompanying notes are an integral part of the consolidated financial statements. 5 of 29 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Common Additional Retained Balance at September 30, 2002 Stock Paid-in Capital Earnings Treasury Stock ---------------------------------------------------------------- $ 18,845 $ 12,525,303 $ 16,035,441 $ (8,867,282) Comprehensive income: Net Income $ 978,085 Net change in unrealized gain (loss) on securities available-for-sale net of deferred taxes Total comprehensive income Stock Options Exercised $ (14,106) $ 102,692 Cash dividends of $0.15 per share $ (174,425) ------------ ------------ ------------ ------------ Balance June 30, 2003 $ 18,845 $ 12,525,303 $ 16,824,995 $ (8,764,590) ============ ============ ============ ============ Net Unearned Employee Stock Other Accumulated Ownership Plan Comprehensive Balance at September 30, 2002 Shares Income Total -------------------------------------------------- $ (170,716) $ (259,125) $ 19,282,466 Comprehensive income: Net Income $ 978,085 Net change in unrealized gain (loss) on securities available-for-sale net of deferred taxes $ (46,428) $ (46,428) ------------ Total comprehensive income $ 931,657 Stock Options Exercised $ 88,586 Cash dividends of $0.15 per share $ (174,425) ------------ ------------ ------------ Balance June 30, 2003 $ (170,716) $ (305,553) $ 20,128,284 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 6 of 29 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended June 30, 2003 2002 ------------ ------------ Cash flows from operating activities: Net income $ 978,085 $ 1,525,145 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees (6,620) (3,767) Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans 409,449 3,523 Amortization of mortgage servicing rights 122,139 170,314 Depreciation 121,890 124,990 Deferred Income Taxes 73,265 0 Provision for loan losses 657,861 175,688 Stock dividends on FHLB stock (89,100) (97,916) Increase in cash value of life insurance (125,306) 0 Net (gain) loss on sale of: Loans held for sale (271,950) (77,291) Mortgage-backed securities available-for-sale (22,121) 0 Fixed assets (3,090) 8,287 Foreclosed assets 171,262 52,501 Interest earning assets 0 (325,503) Proceeds from loan sales 17,961,654 9,265,325 Originations of loans held for sale (17,689,704) (9,188,034) (Increase) decrease in Accrued interest receivable 165,557 (108,350) Other assets (72,707) 643,500 Increase (decrease) in: Accrued expenses and other liabilities (271,263) (178,990) Federal income tax payable (961,385) 769,417 ------------ ------------ Net cash provided (used) by operating activities 1,147,916 2,758,839 ------------ ------------
(Continued) 7 of 29 EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended June 30, 2003 2002 ------------- ------------- Cash flows from investing activities Net (increase) decrease in interest-earning time deposits 300,000 300,000 Net (increase) decrease in fed funds sold (209,119) 86,242 Activity in securities available-for-sale Proceeds from sales 0 6,308,899 Proceeds from maturities and calls 140,000 25,000 Activity in securities held-for-maturity Proceeds from maturities and calls 3,000,000 0 Purchases 0 (2,000,000) Activity in mortgage-backed securities available-for-sale Proceeds from sales 1,739,494 0 Principal payments 17,560,692 12,862,253 Purchases 0 (8,569,474) Activity in mortgage-backed securities held-to-maturities Principal payments 38,212,214 16,134,753 Purchases (77,072,266) (11,627,398) Activity in municipal bonds available-for-sale Principal payments 0 20,000 Purchases of FHLB stock 0 (97,100) Purchases of bank Owned Life Insurance (3,600,000) 0 Net (increase)decrease in loans 19,845,635 (24,780,787) Proceeds from sale of foreclosed assets 599,065 433,717 Acquisition costs related to foreclosed assets 0 (6,699) Proceeds from the sale of fixed assets 3,090 0 Capitalized acquisition costs related to foreclosed assets (22,463) 0 Expenditures for premises and equipment (15,310) (93,224) Origination of mortgage servicing rights (302,798) (104,525) ------------- ------------- Net cash provided (used) by investing activities 178,234 (11,108,343) ------------- ------------- Cash flows from financing activities: Net increase (decrease) in: Deposits 5,332,887 (8,937,768) Advances from borrowers (469,020) (496,034) Proceeds from advances from Federal Home Loan Bank 291,500,000 486,500,000 Payment of advances from Federal Home Loan Bank (294,290,157) (471,253,254) Exercise of Stock Options 88,586 0 Dividends paid to stockholders (174,425) (174,348) ------------- ------------- Net cash provided (used) by financing activities 1,987,871 5,638,596 ------------- ------------- Net increase (decrease) in cash and cash equivalents 3,314,021 (2,710,908) Cash and cash equivalents at beginning of the period 5,444,804 4,838,011 ------------- ------------- Cash and cash equivalents at end of the period $ 8,758,825 $ 2,127,103 ============= ============= Supplemental disclosure: Cash paid for: Interest on deposits $ 1,417,351 $ 1,933,869 Interest on FHLB advances and other borrowed funds 1,854,182 2,013,897 Income taxes 1,399,252 50,760 Transfers from loans to real estate and other assets acquired through foreclosures 1,598,039 604,321 Loans made to facilitate the sale of foreclosed assets 339,735 240,460 Transfer of foreclosed assets to fixed assets 12,925 0
The accompanying notes are an integral part of the financial statements. 8 of 29 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003 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, 2002. 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 the nine months ended June 30, 2003 and 2002, 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 June 30, 2003 and 2002, the weighted average number of shares outstanding totaled 1,140,272 and 1,123,979 shares, respectively. For the nine months ended June 30, 2003 and 2002, the weighted average number of shares outstanding totaled 1,138,157 and 1,123,979 shares respectively. Earnings per common share - assuming dilution, for the three months and nine months ended June 30, 2003 and 2002, 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 June 30, 2003 and 2002, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,184,919 and 1,149,597 shares, respectively. For the nine months ended June 30, 2003 and 2002, the weighted average number of share outstanding for earnings per share - dilution totaled 1,175,429 and 1,140,243 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 nine-month periods ended June 30, 2003 and 2002. 9 of 29 NOTE 3 - SECURITIES The carrying values and estimated market values of investment securities available-for-sale as of June 30, 2003, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value ------------- -------------- ------------- -------------- -------------- Municipal bonds $ 350,000 -0- $ 1,532 $ 21,462 $ 369,930 ------------- -------------- ------------- -------------- -------------- $ 350,000 $ -0- $ 1,532 $ 21,462 $ 369,930 ------------- -------------- ------------- -------------- --------------
The amortized cost and estimated market values of investment securities held-to-maturity as of June 30, 2003, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ------------- -------------- ------------- Debt securities: U. S. government agency $ 492,569 $ 26,981 $ -0- $ 519,550 Corporate Debt 6,203,846 498,228 -0- 6,702,074 ------------- ------------- -------------- ------------- Total debt securities $ 6,696,415 $ 525,209 $ -0- 7,221,624 ------------- ------------- -------------- -------------
The amortized cost and estimated market values of investment securities held-to-maturity as of June 30, 2003, by contractual maturity are shown below: Estimated Amortized Market Cost Value ------------- -------------- Due in one year through two years $ 2,529,988 $ 2,679,550 Due in two years through three years 2,628,099 2,830,674 Due in three years through six years 1,538,328 1,711,400 Due after six years -0- -0- ------------- -------------- Total debt securities $ 6,696,415 $ 7,221,624 ------------- -------------- 10 of 29 The carrying values and estimated market values of mortgage-backed and related securities available-for-sale as of June 30, 2003, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value ------------- -------------- ------------- ------------- -------------- Fixed Rate $ 381,152 $ -0- $ 810 $ 12,083 $ 392,425 Adjustable Rate 330,596 163 -0- 78 330,837 ------------- -------------- ------------- ------------- -------------- $ 711,748 $ 163 $ 810 $ 12,161 $ 723,262 ------------- -------------- ------------- ------------- --------------
The carrying values and estimated market values of mortgage-backed and related securities held-to-maturity as of June 30, 2003, by type of security are as follows:
Estimated Principal Unamortized Unearned Carrying Market Balance Premiums Discounts Value Value ------------- -------------- ------------- -------------- -------------- Fixed Rate $ 14,941,546 $ 67,607 $ 2,555 $ 15,006,598 $ 15,135,226 Adjustable Rate 52,677,189 1,465,557 407 54,142,339 54,066,335 ------------- -------------- ------------- -------------- -------------- $ 67,618,735 $ 1,533,164 $ 2,962 $ 69,148,937 $ 69,201,561 ------------- -------------- ------------- -------------- --------------
11 of 29 NOTE 4 - 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, 2001 151,776 Granted -0- Exercised -0- Forfeited and expired -0- ------- Balance, September 30, 2002 151,776 Granted -0- Exercised 9,404 Forfeited and expired -0- ------- Balance, June 30, 2003 142,372 ======= Options exercisable at June 30, 2003 under stock option plan 140,873 ======= Shares available for future grants 22,662 ======= 12 of 29 NOTE 5 - ADVANCES FROM FEDERAL HOME LOAN BANK The outstanding advances from the FHLB consisted of the following at June 30, 2003: Maturity Balance Rate - ----------------------- -------------------- -------------- 07/07/03 $ 22,000,000 1.27% 07/14/03 $ 1,500,000 1.18% 09/01/03 $ 139,412 6.25% 12/01/03 $ 1,000,000 3.12% 12/05/03 $ 2,000,000 1.66% 12/05/03 $ 5,000,000 3.57% 02/12/04 $ 5,000,000 2.09% 02/15/04 $ 100,000 6.01% 03/10/04 $ 2,000,000 1.21% 05/18/04 $ 5,000,000 1.95% 09/10/04 $ 2,000,000 1.40% 11/30/04 $ 1,000,000 3.93% 12/31/04 $ 221,745 6.09% 01/03/05 $ 37,010 6.03% 02/15/05 $ 100,000 6.04% 03/10/05 $ 2,000,000 1.58% 06/06/05 $ 3,000,000 2.83% 09/12/05 $ 2,000,000 1.95% 02/15/06 $ 150,000 6.05% 03/10/06 $ 2,000,000 2.20% 04/11/11 $ 5,000,000 3.73% 04/11/11 $ 5,000,000 3.91% 04/11/11 $ 5,000,000 4.25% 06/07/11 $ 5,000,000 4.38% 01/01/13 $ 369,011 6.09% 01/01/13 $ 350,846 6.13% 02/01/13 $ 347,826 5.91% 03/03/14 $ 590,333 5.45% 04/01/14 $ 573,747 5.97% 05/01/14 $ 779,833 5.66% 06/01/14 $ 596,703 5.90% 07/01/14 $ 555,576 6.38% 08/01/14 $ 404,012 6.37% 09/01/14 $ 511,959 6.59% 10/01/14 $ 450,898 6.86% 11/03/14 $ 1,113,659 6.77% 12/01/14 $ 380,132 6.57% 01/01/15 $ 249,436 6.73% -------------------- $ 83,522,137 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 of 29 NOTE 6 - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The following table sets forth an analysis of the Company's allowance for loan losses.
Nine Months Three Months Three Months Ended Ended Ended June 30, 2003 June 30, 2003 March 31, 2002 ------------- ------------- ------------- (Dollars in (Dollars in (Dollars in Thousands) Thousands) Thousands) Balance at beginning of period $ 757 $ 823 $ 775 Charge-offs: One- to four-family 0 0 0 Consumer and other loans (707) (296) (263) ------------- ------------- ------------- Total charge-offs (707) (296) (263) ------------- ------------- ------------- Recoveries: One- to four-family 0 0 0 Consumer and other loans 170 93 35 ------------- ------------- ------------- Total recoveries 170 93 35 ------------- ------------- ------------- Net (charge-offs)/recoveries (537) (203) (228) Additions charged to income 658 258 276 ------------- ------------- ------------- Balance at end of period $ 878 $ 878 $ 823 ============= ============= ============= Ratio of net charge-offs/recoveries during the period to average loans outstanding during the period (0.42)% (0.17)% (0.18)% ============= ============= ============= Ratio of net charge-offs/recoveries during the period to average non-performing assets (28.20)% (9.38)% (8.85)% ============= ============= =============
The distribution of the Company's allowance for losses on loans at the dates indicated is summarized as follows:
June 30, 2003 September 30, 2002 ------------------------------------------ -------------------------------------- Percent Percent Gross Of Loans Gross Of Loans Loan In Each Loan In Each Amount of Amounts Category Amount of Amounts Category Loan Loss by To Total Loan Loss by To Total Allowance Category Loans Allowance Category Loans ----------- ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands) (Dollars in Thousands) One- to four-family $ 141 $ 42,622 35.74% $ 108 $ 61,396 43.07% Other residential 3 2,871 2.41 0 2,679 1.88 Home equity and Improvement 5 15,037 12.61 2 10,845 7.61 Non-residential 0 19,634 16.46 0 17,185 12.05 Construction 0 4,803 4.03 9 8,592 6.03 Commercial and Consumer 139 34,288 28.75 272 41,845 29.36 Unallocated 590 0 0 366 0 0.00 ----------- ----------- ----------- ----------- ----------- ----------- Total $ 878 $ 119,255 100.00% $ 757 $ 142,542 100.00% =========== =========== =========== =========== =========== ===========
14 of 29 NOTE 7 - BANK OWNED LIFE INSURANCE During the nine months ended June 30, 2003, the Association elected to make an investment in Bank Owned Life Insurance ("BOLI"). The BOLI purchase was made with excess cash that was held by the Association that would have otherwise been invested in securities. The purpose of the BOLI investment is to increase earnings and thereby offset increased compensation and benefit expenses associated with the Association's defined benefit pension plan, medical insurance benefits, and other similar expenses. A total BOLI purchase of approximately $3.6 million in premiums was invested with two separate life insurance companies. The premiums are invested in the general assets of the life insurance companies. Crediting rates are set by the life insurance companies and are based on the overall performance of the assets under management by the insurance company. Earnings on the policies are tax deferred for the life of the insured under Internal Revenue Service guidelines. As part of the BOLI purchase, the Association identified 17 key employees that were given an opportunity to participate in the program. The $3.6 million in BOLI premiums were divided among the 17 participants and life insurance contracts were purchased on the 17 individual employees. All participants in the program were given an opportunity to decline to participate in the program. The Association is the owner and the beneficiary of the life insurance contracts. As part of the BOLI program, the Association expects to enter into separate death benefit agreements with the 17 employees. The death benefit agreements provide for a lump-sum payment to the participant's beneficiary in the event of the death of the participant while employed by the Association and, in certain instances, beyond the participant's employment with the Association. The Association worked in conjunction with the Meyer-Chatfield Company, a firm specializing in compensation and benefits consulting, to design and implement the BOLI program. Meyer-Chatfield assisted the Association in its due diligence efforts in analyzing prospective insurance carriers and in the Association's efforts to comply with all regulatory and legal aspects of the BOLI program. The Association also employed legal counsel with expertise in compensation and benefit planning and BOLI transactions to adopt board of director resolutions and draft the employee death benefit agreements. 15 of 29 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB June 30, 2003 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 holding company for 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. As previously disclosed in the Company's Form 10-KSB for the fiscal year ended September 30, 2002, the Company has been notified by the OTS that the Association has been deemed to be in "troubled condition" as a result of a lack of compliance with regulatory requirements involving oversight of its interest rate risk program. The Association was required to take a number of steps to comply with the OTS directive. The Association has implemented internal control measures to provide for more accurate and timely interest rate risk measurement and monitoring. In July 2003, the OTS conducted a Field Visit Examination to assess the Company's efforts to address the deficiencies noted in the September 30, 2002 exam. Based upon this Examination, management believes that the Association has taken, or is in the process of taking, all steps required to comply with the directive. However, the Company does not anticipate that the "troubled condition" designation will be reviewed for possible removal until the next full scope examination, scheduled for December 2003. FINANCIAL CONDITION Total assets were $219.4 million at June 30, 2003, a $1.7 million increase from the $217.7 million reported at September 30, 2002, the Company's most recent fiscal year end. The increase in total assets was the result of a $38.6 million increase in mortgage-backed securities held-to-maturity, a $3.7 million increase in cash value of life insurance owned, and a $3.4 million increase in interest bearing deposits with banks. [See Note 7 for a discussion of the cash value of life insurance owned.] The increases were partially offset by a $21.2 million decrease in loans receivable, a $19.4 million decrease in mortgage-backed securities available-for-sale, and a $3.0 million decrease in investment securities held-to-maturity. The changes in the composition of the balance sheet were primarily related to an increase in cash flow from the Company's mortgage loan portfolio and mortgage-backed securities portfolio. With continued lower interest rates, the Company continued to receive significant amounts of cash flow from these portfolios as customers refinanced existing mortgage loans. Also, the Company sold into the secondary market the majority of the loans it originated or refinanced. If cash flow from its mortgage-backed securities portfolio and the loan portfolio continues, the Company expects to continue to have significant amounts of cash to reinvest. The result would be a continuing increase in the 16 of 29 mortgage-backed securities held-to-maturity portfolio as the Company would re-invest the cash into this portfolio, possibly at yields less than the average in the current portfolio. At June 30, 2003, loans receivable totaled $116.0 million, a decrease of $21.2 million or 15.5% from the $137.2 million at September 30, 2002. The decrease in loans receivable was primarily the result of the Company's decision to sell the majority of its one- to four-family loans originated during the period into the secondary market. In addition, the Company elected to tighten the underwriting standards and loan-to-value limits on its indirect auto lending program which decreased the production of these type of loans. Interest bearing deposits with banks increased to $6.3 million at June 30, 2003, a $3.4 million increase from the $2.9 million reported at September 30, 2002. The increase was due to the additional cash flow from the Company's loans receivable and mortgage-backed securities portfolios as discussed above. The Company expects to reinvest any excess cash flow into various investment, mortgage-backed securities, and loan portfolios. Investment securities held-to-maturity were reported as $6.7 million at June 30, 2003, a decrease of $3.0 million from the $9.7 million reported at September 30, 2002. The decrease was the result of the maturity of securities during the nine months ended June 30, 2003. At June 30, 2003, this portfolio consisted of approximately $493,000 of debt issued by governmental agencies such as Federal National Mortgage Corporation, Federal Home Loan Mortgage Corporation, and 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 $723,000 at June 30, 2003, a decrease of $19.4 million from the $20.1 million at September 30, 2002. The decrease was primarily the result of principle repayments on the securities during the nine months ended June 30, 2003, due to the refinancing activity previously discussed. Mortgage-backed securities held-to-maturity portfolio totaled $69.1 million at June 30, 2003, an increase of $38.5 million from the $30.6 million reported at September 30, 2002. The increase was primarily due to additional securities added to the portfolio, during the nine months ended June 30, 2003 as the Company directed excess cash flow from loans and mortgage-backed securities available-for-sale into this portfolio. Total deposits were $112.8 million at June 30, 2003, a $5.3 million increase from the $107.5 million reported at September 30, 2002. The increase was primarily the result of increases in certificate of deposit balances as the Company paid competitive interest rates on renewing certificates of deposit during the period. The Company reported $83.5 million in borrowed funds at June 30, 2003, a decrease of $2.8 from the $86.3 million reported at September 30, 2002. The decrease was primarily due to the Company's decision to reduce its reliance on short term advances from the FHLB and to replace them with longer term certificates of deposits. Stockholder's equity totaled $20.1 million at June 30, 2003, an increase of $846,000 from the $19.3 million reported at September 30, 2002. The increase was primarily attributable to a net increase in retained earnings of $790,000. The increase in retained earnings was primarily due to the $978,000 in net income less $174,000 in cash dividends paid during the nine months ended June 30, 2003. 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. 17 of 29 COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002 General. Net income for the three months ended June 30, 2003 was $250,000 or $0.22 per share and $0.21 per share assuming - dilution, a decrease of $252,000 from the $502,000 or $.45 per share and $.44 per share - assuming dilution, reported for the three months ended June 30, 2002. The decrease in net income was attributable to a $516,000 decrease in net interest income after provision for loan losses. Approximately $193,000 of the decline in net interest income after provision for loan losses was attributable to additional provisions for loan losses and $323,000 was due to a decline in net interest income before provision for loan losses. The decrease in net income was also partially due to a $94,000 increase in noninterest expense. Noninterest income increased by $171,000 and income tax expense decreased by $187,000. Net Interest Income. For the quarter ended June 30, 2003, net interest income before provision for loan losses totaled $1.5 million, a decrease of $323,000 from the $1.8 million reported for the quarter ended June 30, 2002. On an annualized basis, the $1.5 million in net interest income for the current quarter was approximately 2.88% of average interest-earning assets and 2.68% of average total assets. For the quarter ended June 30, 2002, the $1.8 million in net interest income before provisions for loan losses was approximately 3.47% of average interest-earning assets and 3.32% of average total assets. Average interest-earning assets were approximately $203.4 million for the quarter ended June 30, 2003, compared to $205.8 million for the quarter ended June 30, 2002. Total interest income was $2.9 million for the quarter ended June 30, 2003, compared to $3.4 million for the quarter ended June 30, 2002. The decrease in total interest income was primarily due to a $514,000 decline in interest on first mortgage loans receivable. The decline in interest on first mortgage loans receivable was due to an overall decline in the balance in the portfolio as the Company elected to sell the majority of its mortgage loan production during the past year into the secondary market. Also, the yields on loans placed into the mortgage loan portfolio during the year were at lower levels which contributed to the overall decrease in interest income on mortgage loans. However, interest on consumer and other loans increased by $106,000 to $1.1 million for the three months ended June 30, 2003 from $982,000 for the three months ended June 30, 2002. The increase in interest income on consumer and other loans was due to an increase in balances in the consumer and other loan portfolio during the past year. In addition, interest rates on these types of loans are not as sensitive to overall movements in the general level of interest rates, which allowed the Company to continue to originate and place into the loan portfolio loans with higher yields than those available on mortgage loans. The decrease in total interest income was also due to a $108,000 decrease in interest income on the Company's mortgage-backed securities portfolio. The decline in income was primarily due to a decline in the overall yield of the portfolio. The Company replaced maturing or prepaid securities at yields that were lower than maturing or prepaying securities and loans. Interest income on loans receivable was $2.2 million for the quarter ended June 30, 2003, compared to $2.6 million for the quarter ended June 30, 2002. On an annualized basis, the $2.2 million was approximately 7.33% of average loans receivable balances outstanding for the quarter ended June 30, 2003, compared to approximately 7.60% for the quarter ended June 30, 2002. The decrease in total interest income on the loan portfolio was primarily the result of a decrease in one- to four-family real estate loan balances, as previously discussed. In addition, the overall decline in interest rates over the past 12 months and the refinance of mortgage loans held in portfolio to lower yields contributed to the decline in overall yield on the loan portfolio. Interest income from mortgage-backed securities available-for-sale totaled $19,000 for the quarter ended June 30, 2003, compared to $184,000 for the quarter ended June 30, 2002. The decrease in income was due to a decline in the balance of the portfolio from $22.9 million at June 30, 2002 to $723,000 at June 30, 2003, as the Company directed cash flow from this portfolio into other investments. Interest income on mortgage-backed securities held-to-maturity totaled $483,000 for the quarter ended June 30, 2003, an increase of $56,000 from the $427,000 reported for the quarter ended June 30, 2002. The increase was due primarily to an increase in the balance in the portfolio from $31.4 million at June 30, 2002 to $69.1 million at June 30, 2003 despite a decline of the overall yield of the portfolio. As previously discussed, the Company received excessive amounts of cash flow from its mortgage loans receivable and mortgage related securities portfolios during 18 of 29 the past year. The Company chose to reinvest the majority of this excess cash flow into mortgage-backed securities held-to-maturity. The new securities were at substantially lower, primarily adjustable, rates than those previously held in the portfolio. The result was an overall decline in the yield and an overall decrease in interest income on the portfolio. Interest paid to depositors totaled $802,000 for the quarter ended June 30, 2003, a decrease of $131,000 from the $933,000 reported for the quarter ended June 30, 2002. On an annualized basis, the $802,000 in interest expense on deposits was approximately 2.85% of interest bearing deposits for the quarter ended June 30, 2003, compared to 3.50% for the quarter ended June 30, 2002. Interest on FHLB advances was $592,000 for the quarter ended June 30, 2003, compared to $682,000 for the quarter ended June 30, 2002. The decrease in interest expense was the result of declining interest rates during past year and a decline in the balances of advances outstanding. At June 30, 2002, the Company had approximately $89.7 million in advances compared to $83.5 million at June 30, 2003. For the three months ended June 30, 2003, the weighted average rate on FHLB advances was approximately 2.85%. Provision for Loan Losses. The Company made $258,000 in provision for loan losses for the quarter ended June 30, 2003, compared to $64,000 for the quarter ended June 30, 2002. The increase was directly related to the losses in the Company's indirect automobile lending program and consumer lending portfolio. [See "Asset Quality"] Noninterest Income. Non-interest income totaled $360,000 for the quarter ended June 30, 2003, compared to $189,000 for the quarter ended June 30, 2002. The increase was primarily due to a $184,000 increase in gains on sales of interest earning assets from $55,000 for the quarter ended June 30, 2002 to $239,000 for the quarter ended June 30, 2003. The Company elected to sell the majority of its one- to four-family loan production into the secondary market during 2002 and 2003. The result was an increase in gains on the sale of loans for the quarter ended June 30, 2003, compared to the same period in 2002. Noninterest Expense. Noninterest expense was $1.2 million for the quarter ended June 30, 2003, an increase of $94,000 from the $1.1 million for the quarter ended June 30, 2002. The increase in noninterest expense was primarily the result of a $77,000 increase in compensation and benefits expense, mainly associated with the Company's defined benefit pension plan and normal increases in employee compensation. The increase in defined benefit plan expense was due to the performance of plan assets in 2000 and 2001 and additional employees. Approximately two-thirds of the assets in the defined benefit plan trust are invested in various equity mutual funds. As the overall equity market declined in 2000 and 2001, the value of the assets in the plan decreased. The result was, on an actuarial basis, an increase in the pension plan expense to offset the decrease in the value of the plan assets. In addition, expenses on foreclosed assets increased by $51,000 from $37,000 for the three months ended June 30, 2002 to $ 87,000 for the three months ended June 30, 2003. Provision for Income Taxes. The Company recorded federal income tax expense of $98,000 or 28.0% or pre-tax income for the quarter ended June 30, 2003, compared to $284,000 or 36.1% or pre-tax income for the quarter ended June 30, 2002. The decrease in the percentage was due to the tax- deferred income earned on the Bank Owned Life Insurance investment and the tax treatment of the provision for loan losses incurred during the period ended June 30, 2003. 19 of 29 COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002 General. For the nine months ended June 30, 2003, the Company reported net income of $978,000 or $.86 per common share and $.83 per common share - assuming dilution, compared to $1.5 million or $1.36 per common share and $1.34 per common share - assuming dilution for the nine months ended June 30, 2002. The decrease in net income was due to a $800,000 decrease in net interest income after provisions for loan losses and a $394,000 increase in noninterest expense. These were partially offset by a $334,000 decrease in income tax expense and a $312,000 increase in noninterest income. Net Interest Income. For the nine months ended June 30, 2003, net interest income before provisions for loan losses totaled $4.6 million, a decrease of $317,000 from the $4.9 million reported for the nine months ended June 30, 2002. On an annualized basis, the $4.6 million in net interest income before provisions for loan losses for the current period was approximately 2.99% of average interest earning assets and 2.80% of average total assets. For the nine months ended June 30, 2002, the $4.9 million in net interest income before provisions for loan losses was, on an annualized basis, approximately 3.21% of average interest earning assets and 3.07% of average total assets. Average interest earning assets were approximately $204.5 million for the nine months ended June 30, 2003, compared to $203.1 million for the nine months ended June 30, 2002. Total interest income was $8.9 million or 5.83%, on an annualized basis, of average interest earning assets for the nine months ended June 30, 2003, compared to $10.1 million or 6.61% of average interest earning assets for the nine months ended June 30, 2002. The decrease was primarily due to a decline in interest on mortgage-backed securities available-for-sale of $468,000, and a decline in interest on mortgage loans of $814,000. The declines in interest income were partially offset by a $376,000 increase in interest income on consumer and other loans. Interest income on loans receivable totaled $7.0 million for the nine months ended June 30, 2003 a decrease of $438,000 from the $7.4 million reported for the nine months ended June 30, 2002. The decrease in interest income on loans receivable was due to a $814,000 decline in interest on first mortgage loans as the balance in the Company's one- to four-family portfolio declined. The balance in the one- to four-family portfolio declined as the Company elected to sell the majority of its new loans into the secondary market. Interest on consumer and other loans increased by $376,000 as the Company placed more of these loans into the loan portfolio Interest income from mortgage-backed securities available-for-sale totaled $88,000 for the nine months ended June 30, 2003, compared to $556,000 for the nine months ended June 30, 2002. The decrease in income was primarily attributable to a decrease in the balance in the portfolio. The Company elected to direct cash flow from this portfolio into its mortgage-backed securities held-to-maturity portfolio. Interest income on investment securities held-to-maturity totaled $108,000 for the nine months ended June 30, 2003, compared to $167,000 for the nine months ended June 30, 2002. The decrease was due primarily to a decline in the balance in the portfolio. Interest income on mortgage-backed securities held-to-maturity was $1.3 for the nine months ended June 30, 2003, compared to $1.5 million for the nine months ended June 30, 2002. The decrease in interest income on the portfolio was primarily the result of a decline in the overall yield of the portfolio as the Company redirected cash flow from its loan and other portfolios into this portfolio at lower yielding adjustable rate securities. Interest expense was $4.4 million for the nine months ended June 30, 2003, a decrease of $804,000 from the $5.2 million reported for the nine-month period ended June 30, 2002. The decrease was due to a decline in the overall cost of interest bearing deposits. Noninterest Income. Noninterest income was $1.2 million for the nine months ended June 30, 2003, compared to $863,000 for the nine months ended June 30, 2002. The increase was attributable to a $205,000 increase in other noninterest income. The increase in other noninterest income was primarily due to a $125,000 increase in Bank Owned Life Insurance income and increases in loan fee income. In addition, gains on the sale of interest earning assets increased by $90,000 from $507,000 for the nine 20 of 29 months ended June 30, 2002 to $597,000 for the nine months ended June 30, 2003. The increase was due to additional gains on the sale of mortgage loans into the secondary market. Noninterest Expense. Noninterest expense was reported as $3.6 million for the nine-month period ended June 30, 2003, a $394,000 increase from the $3.2 million reported for the nine months ended June 30, 2002. The increase was primarily attributable to a $264,000 increase in compensation and benefits expense due to additional pension plan expense, additional employees, and normal compensation increases. A $107,000 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 repossessed loans. Provision For Income Taxes. The Company incurred federal income tax expense of $511,000 or 34.3% of pre-tax income for the nine months ended June 30, 2003, compared to $846,000 or 35.7% of pre-tax income for the nine months ended June 30, 2002. ASSET QUALITY At June 30, 2003, the Company's non-performing assets (non-performing loans plus foreclosed assets) totaled $1.5 million or .70% of total assets, compared to $1.6 million or .75% of total assets at September 30, 2002. At June 30, 2003, non-performing assets were comprised primarily of non-accruing one- to four-family, consumer and other loans delinquent 90 days or more. It also includes foreclosed one- to four-family and foreclosed consumer and other loans. Non-performing loans at June 30, 2003 equaled $1.2 million or 1.02% of loans receivable, compared to $1.2 million or .90% of loans receivable at September 30, 2002. The increase in non-performing loans was primarily related to the Company's one- to four-family portfolio. The Company attributes the increased number of non-performing one- to four-family loans to a general decline in the economy in its market area. At June 30, 2003, 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 $2.9 million or 1.3% of total assets at June 30, 2003, compared to $2.6 million or 1.2% of total assets at September 30, 2002. The increase in classified assets was also due to an increase in past due one- to four-family loans. Classified assets and non-performing assets differ in that classified assets may include loans less than 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 June 30, 2003, $2.8 million of classified assets were deemed to be substandard and $143,000 assets were classified as doubtful. The Company's allowance for loan and lease losses was $878,000 at June 30, 2003, which included $773,000 in general loan loss reserves, $88,000 in specific loan loss reserves, and $17,000 checking account loss reserves. The total allowance was $757,000 at September 30, 2002. The total allowance for loan losses as a percentage of loans receivable equaled .75% at June 30, 2003 and 0.55% at September 30, 2002. The Company uses a methodology for estimating the adequacy of its general allowance for loan losses that encompasses two separate components. The first 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 calculated allowance amount for this component. The second component is a combined inherent risk and historical loss component. This component recognizes the changes in the levels of loan balances and the historical loss levels of various classes of the loan portfolio. The loan portfolio is segregated into various classes of loans exhibiting similar risk characteristics. Each of the classes of loans is multiplied by a risk factor to determine the required allowance for the class of loans. The risk factor for each class of loans is determined by analyzing actual historical losses on the particular class of loans. 21 of 29 The historical loss analysis takes into account a period of time that is indicative of the current risks associated with the class of the loan portfolio being analyzed. The balance of loans in each class is reduced for any loans specifically reviewed by the Company and any classified assets, before applying the percentage amounts. The calculated allowance amount for each class is summed together to achieve the estimated allowance for the inherent risk and historical loss component. To determine a final estimate of the allowance for loan losses, the classified asset and inherent risk and historical loss component are summed together. The resulting calculated minimum allowance is compared to the actual balance in the allowance at the end of the period analyzed. A shortfall in the actual amount as compared to the calculated amount is charged against provision for loan losses in the period analyzed in order to bring the allowance up to the minimum calculated amount. Any excess in the actual allowance as compared to the calculated amount may remain in the allowance or may be reduced by applying the overage amount back against the provision for loan losses. At June 30, 2003, the classified asset component was calculated at $301,000 while the unidentified risk component was calculated at $486,000. At June 30, 2003, the Company had identified five separate components of the loan portfolio that it deemed necessary to analyze individually under the unidentified risk component. The five components were mortgage loans, indirect auto loans, sub-prime indirect auto loans, unsecured and miscellaneous collateral consumer loans, and all other non-mortgage loans. The classified asset component decreased by $18,000 during the nine months ended June 30, 2003 from approximately $319,000 at September 30, 2002 to $301,000 at June 30, 2003. The unidentified risk component increased from approximately $209,000 at September 30, 2002 to $486,000 at June 30, 2003. The increase in the inherent risk component was due to additional increases in the separate components. During the nine months ended June 30, 2003, the Company has experienced an increase in losses in the consumer lending program. The loss ratio for the sub-prime indirect portfolio was approximately 2.85% for the nine months ended June 30, 2003. The loss ratio for the remainder of the indirect portfolio was approximately 1.46% for the nine months ended June 30, 2003. The loss ratio for the remainder of the consumer loan portfolio was approximately 1.93% for the nine months ended June 30, 2003. These loss rates were applied to the remaining balances in the loan portfolio to calculate that portion of the minimum allowance for loan and lease losses. The result was a significant increase in the calculated allowance for loan loss at June 30, 2003. The Company did not separate its loan portfolio for allowance for loan loss analysis at September 30, 2002 in the same manner as June 30, 2003. Therefore, no comparison of these specific components can be made at June 30, 2003. The Company believes that segregating its loan portfolio into specific categories of loan for allowance analysis will provide a more accurate method for estimating the adequacy of the allowance. Also, the Company has significantly decreased the volume of its indirect auto loan program by substantially tightening credit and loan to value limits on such loans. In addition, the Company has placed additional restrictions on the types of unsecured and miscellaneous collateral loans that its individual loan officers can make. The Company 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 or 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 June 30, 2003, the Company had $88,000 in specific loan loss reserves established, compared to $71,000 at September 30, 2002. The Company believes that the overall quality of its loan portfolio remains good. However, the Company did record $658,000 in provision for loan losses during the nine months ended June 30, 2003, compared to $176,000 for the same period in 2002. [See "Note 6".] The Company anticipates that the general trend in the level of the allowance for loan loss will be to remain in a range that is close to the current balance in the allowance. By tightening loan-to-value and credit standards on its indirect auto loan program and its unsecured and miscellaneous collateral consumer loans, the Company believes that the balance in such loans will decline over time. The result should be a reduction in the calculated amount of 22 of 29 the allowance for loan loss reserves for these specific components. However, the Company can not predict the affect that outside factors such as economic conditions in the Company's market and other factors may have on a borrower's ability to repay their loans. In general, the estimated allowance for loan losses could increase under the classified asset component if the Company experiences an increase in its classified assets. The allowance could increase under the inherent risk and historical loss component if the Company experiences additional losses on its loan portfolio that are charged against the allowance for loan loss account. 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 Company 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 June 30, 2003, the Company had outstanding commitments to extend credit on approximately $13.8 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. Total stockholders' equity equaled $20.1 million at June 30, 2003, an increase of $846,000 from the $19.3 million reported at September 30, 2002. The increase was primarily the result of a $790,000 increase in retained earnings that resulted from the $978,000 net income less $174,000 in cash dividends paid during the nine months ended June 30, 2003. As of June 30, 2003, the Company's reported book value per share, using total stockholders' equity of $20.1 million (net of the cost of unearned ESOP shares) and 1,171,724 outstanding shares of common stock (the total issued shares including unearned ESOP shares, less treasury shares), equaled $17.18 per share. Subsequent to the quarter ended June 30, 2003, the Company announced its intention to pay a cash dividend of $.05 per share on August 27, 2003, to stockholders of record as of August 13, 2003. The Company paid $.15 per share in cash dividends in the nine months ended June 30, 2003, which is approximately 17.8% of the $.86 in reported earnings per share. The Company reported an equity to assets ratio of approximately 9.17% at June 30, 2003. 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 June 30, 2003, First Federal had approximately $2.3 million of intangible assets and other required regulatory adjustments that were required to be deducted from total capital. At June 30, 2003, First Federal had tangible capital of $17.6 million, or 8.08% of adjusted total assets, which is approximately $14.3 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 June 30, 2003, First Federal had Tier 1 capital equal to $17.6 million, or 8.08% of adjusted total assets, which is $8.9 million above the minimum requirement for capital adequacy purposes of 4.0% as in effect on that date. 23 of 29 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 June 30, 2003, First Federal had no capital instruments that qualify as supplementary capital and $787,000 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 June 30, 2003. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight generally, 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. For certain assets, such as sub-prime indirect automobile lending, the OTS can require a risk-weighting of greater than 100%. The OTS has assigned a risk weighting of 200% to the Company's sub-prime indirect automobile lending program. At June 30, 2003, the Company reported approximately $7.4 million in indirect automobile loans that met the OTS definition of sub-prime. On June 30, 2003, First Federal had total risk based capital of $18.4 million (including $17.6 million in Tier 1 capital and $787,000 in loan loss reserves) and risk-weighted assets of $118.7 million, or total risk-based capital of 15.5% of risk-weighted assets. This amount was $8.9 million above the 8.0% requirement in effect on that date. At June 30, 2003, First Federal 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 of 29 Item 3. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management within the 90-day period preceding the filing date of this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Changes in Internal Controls: In the nine months ended June 30, 2003, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 25 of 29 EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 2003 PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no material legal proceedings to which the Company or the Association is a party or of which any of their property is subject. From time-to-time, the Association is a party to various legal proceedings incident to the conduct of its business. Item 2. Changes In Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submissions Of Matters To A Vote Of Security Holders None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: Exhibit 11.0 - Computation of Earnings Per Share (b) Reports on Form 8-K None. 26 of 29 EX-31.1 3 ex31-1.txt Exhibit 31.1 CERTIFICATIONS I, Gerald W. Free, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of East Texas Financial Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 14, 2003 /s/ Gerald W. Free - ------------------ Gerald W. Free President and Chief Executive Officer 27 of 29 EX-31.2 4 ex31-2.txt Exhibit 31.2 I, Derrell W. Chapman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of East Texas Financial Services, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 14, 2003 /s/ Derrell W. Chapman - ---------------------- Derrell W. Chapman Executive Vice President, Chief Financial Officer and Chief Operating Officer 28 of 29 EX-32.1 5 ex32-1.txt Exhibit 32.1 CERTIFICATION (Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) Each of the undersigned hereby certifies in his capacity as an officer of East Texas Financial Services, Inc. (the "Registrant") that the Quarterly Report of the Registrant on Form 10-QSB for the quarter ended June 30, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the consolidated financial condition of the Registrant at the end of such period and the results of operations of the Registrant for such period. Date: August 14, 2003 /s/ Gerald W. Free ------------------ Gerald W. Free President and Chief Executive Officer Date: August 14, 2003 /s/ Derrell W. Chapman ---------------------- Derrell W. Chapman Executive Vice President, Chief Financial Officer and Chief Operating Officer 29 of 29 EX-11 6 ex11-0.txt EXHIBIT 11.0 COMPUTATIONS OF EARNINGS PER SHARE Three Months Ended June 30, 2003 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ------------ ----------- --------------- March 31, 2003 1,163,887 25,574 1,138,313 April 30, 2003 1,163,887 25,574 1,138,313 May 31, 2003 1,163,887 25,574 1,138,313 June 30, 2003 1,171,724 25,574 1,146,150 Weighted average number of shares outstanding for the quarter ended June 30, 2003, for earnings per share calculation 1,140,272 --------- Stock options outstanding at June 30, 2003: 142,372 ------- Exercise price of stock options: $9.39 per share --------------- Average stock price for three-month period: ended June 30, 2003 $13.68 ------ Three Months Ended June 30, -------------------------- Basic Earnings Per Share 2003 2002 - ------------------------ ----------- ----------- Income available to common stockholders $ 249,848 $ 502,238 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation 1,140,272 1,123,979 =========== =========== Basic Earnings Per Share $ .22 $ .45 =========== =========== Diluted Earnings Per Share Income available to common stockholders $ 249,848 $ 502,238 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation 1,140,272 1,123,979 Weighted average common shares issued under stock option plans 148,250 151,776 Less weighted average shares assumed repurchased with proceeds (101,819) (126,158) ----------- ----------- Weighted average number of common shares outstanding for diluted EPS calculation 1,186,703 1,149,597 =========== =========== Diluted Earnings Per Share $ .21 $ .44 =========== =========== COMPUTATIONS OF EARNINGS PER SHARE Nine Months Ended June 30, 2003 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ------------ ------------ --------------- September 30, 2002 1,162,320 25,574 1,136,746 October 31, 2002 1,162,320 25,574 1,136,746 November 30, 2002 1,162,320 25,574 1,136,746 December 31, 2002 1,162,320 25,574 1,136,746 January 31, 2003 1,162,320 25,574 1,136,746 February 28, 2003 1,162,320 25,574 1,136,746 March 31, 2003 1,163,887 25,574 1,138,313 April 30, 2003 1,163,887 25,574 1,138,313 May 31, 2003 1,163,887 25,574 1,138,313 June 30, 2003 1,171,724 25,574 1,146,150 Weighted average number of shares outstanding for the nine months ended June 30, 2003, for earnings per share calculation 1,138,157 --------- Stock options outstanding at June 30, 2003: 142,372 ------- Exercise price of stock options: $9.39 per share --------------- Average stock price for nine-month period: Ended June 30, 2003 $12.72 ------ Nine Months Ended June 30, -------------------------- Basic Earnings Per Share 2003 2002 - ------------------------ ----------- ----------- Income available to common stockholders $ 978,085 $ 1,525,145 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation 1,138,157 1,123,979 =========== =========== Basic Earnings Per Share $ 0.86 $ 1.36 =========== =========== Diluted Earnings Per Share Income available to common stockholders $ 978,085 $ 1,525,145 =========== =========== Weighted average number of common shares outstanding for basic EPS calculation 1,138,157 1,123,979 Weighted average common shares issued under stock option plans 150,366 151,776 Less weighted average shares assumed repurchased with proceeds (111,022) (135,512) ----------- ----------- Weighted average number of common shares outstanding for diluted EPS calculation 1,177,501 1,140,243 =========== =========== Diluted Earnings Per Share $ 0.83 $ 1.34 =========== =========== -----END PRIVACY-ENHANCED MESSAGE-----