-----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, IV0qn7In9mCqUeQ0Wl3Nw1Bpbux9LkEYDjUc2UqMvvEiRCyS+yTAlFtC9lwZpgH2 pgkCkUZtmLUhO7WBvUyeNg== 0000914317-97-000369.txt : 19970813 0000914317-97-000369.hdr.sgml : 19970813 ACCESSION NUMBER: 0000914317-97-000369 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD 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: 97656986 BUSINESS ADDRESS: STREET 1: 1200 S BECKHAM AVE CITY: TYLER STATE: TX ZIP: 75701 BUSINESS PHONE: 9035931767 MAIL ADDRESS: STREET 1: 1200 SOUTH BECKHAM AVE CITY: TYLER STATE: TX ZIP: 75701 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 1997 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, 1997, was 1,025,321. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 1997 INDEX Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition, June 30, 1997 (Unaudited) and September 30, 1996 Consolidated Statements of Income, (Unaudited) three months and nine months ended June 30, 1997, and June 30, 1996 Consolidated Statement of Changes in Stockholders' Equity, (Unaudited) nine months ended June 30, 1997 Consolidated Statements of Cash Flows, (Unaudited) nine months ended June 30, 1997, and June 30, 1996 Notes to (Unaudited) Consolidated Financial Statements, June 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information Item 1. Legal Proceedings Item 2. Changes In Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters To a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature Page EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 1997 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 acquired all of the common stock issued by the Association. For additional discussion of the Company's formation and intended operations, see the Form S-1 Registration Statement (No. 33-83758) filed with the Securities and Exchange Commission and the Company's annual report on Form 10-KSB for the fiscal year ended September 30, 1996, also filed with the Commission. The financial statements presented in this Form 10-QSB reflect the consolidated financial condition and results of operations of the Company and its wholly owned subsidiary, First Federal Savings and Loan Association of Tyler.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 1997 September 30, 1996 ------------- ------------------ (Unaudited) ASSETS Cash and due from banks ............................................ $ 524,238 $ 704,615 Interest-bearing deposits with banks ............................... 3,661,117 4,995,032 Interest earning time deposits with financial institutions.......... 1,565,573 1,663,573 Federal funds sold ................................................. 191 480,285 Mortgage-backed securities available-for-sale ...................... 2,039,439 0 Investment securities held-to-maturity (estimated market value of $27,077,180 at June 30, 1997, and $30,114,685 at September 30, 1996) ........................................ 27,074,037 30,138,744 Mortgage-backed securities held-to-maturity (estimated market value of $20,314,274 at June 30, 1997, and $25,383,579 at September 30, 1996) ........................... 19,914,227 24,948,793 Loans receivable, net of allowance for credit losses of $273,659 at June 30, 1997, and $289,120 at September 30, 1996 ......................................... 54,582,647 47,925,067 Accrued interest receivable ........................................ 924,798 930,657 Federal Home Loan Bank stock, at cost .............................. 990,700 948,500 Premises and equipment ............................................. 952,471 970,184 Foreclosed real estate, net of allowances of $-0- .................. 31,202 0 Deferred income taxes .............................................. 107,310 130,825 Mortgage servicing rights .......................................... 137,604 119,845 Other assets ....................................................... 191,295 416,816 ------------- ------------- Total Assets .............................................. $ 112,696,849 $ 114,372,936 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Demand deposits ............................................... $ 2,340,942 $ 2,889,861 Savings and NOW deposits ...................................... 10,336,441 11,099,604 Other time deposits ........................................... 76,623,581 77,671,666 ------------- ------------- Total deposits ............................................ 89,300,964 91,661,131 FHLB advances ................................................. 1,963,420 0 Advances from borrowers for taxes and insurance ............... 632,275 917,222 Federal income taxes Current ................................................. 2,462 5,044 Deferred ................................................ 0 0 Accrued expenses and other liabilities ........................ 326,582 858,926 ------------- ------------- Total Liabilities ......................................... 92,225,703 93,442,323 ------------- -------------
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued) June 30, 1997 September 30, 1996 ------------- ------------------ (Unaudited) Stockholders' equity: Preferred stock, $0.01 par value, 500,000 shares authorized, none outstanding Common stock, $.01 par value, 5,500,000 shares authorized, 1,256,387 shares issued ....................................... 12,564 12,564 Additional paid-in capital .................................... 12,112,516 12,112,516 Deferred compensation - RRP shares ............................ (358,843) (446,129) Unearned employee stock ownership plan shares ................. (763,206) (763,206) Net unrealized gain on securities available-for-sale .......... 3,623 0 Retained earnings (substantially restricted) .................. 13,212,621 12,811,881 Treasury stock, 231,066 and 177,102 shares at cost ............ (3,748,129) (2,797,013) ------------- ------------- Total stockholders' equity ................................ 20,471,146 20,930,613 ------------- ------------- Total liabilities and stockholders' equity ................ $ 112,696,849 $ 114,372,936 ============= ============= The accompanying notes are an integral part of the financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Nine Months Ended June 30, Ended June 30, (Unaudited) (Unaudited) 1997 1996 1997 1996 ----------- ----------- ----------- ----------- INTEREST INCOME Loans receivable: First mortgage loans ..................... $ 1,050,080 $ 905,480 $ 3,023,247 $ 2,631,571 Consumer and other loans ................. 20,378 19,588 61,306 57,698 Securities available for sale: Mortgage-backed securities ............... 9,530 0 9,530 0 Securities held to maturity: Investment securities .................... 519,860 603,635 1,630,019 1,835,456 Mortgage-backed securities ............... 354,023 470,306 1,164,609 1,555,358 ----------- ----------- ----------- ----------- Total interest income .................. 1,953,871 1,999,009 5,888,711 6,080,083 ----------- ----------- ----------- ----------- INTEREST EXPENSE Deposits ...................................... 1,105,921 1,117,339 3,310,523 3,391,531 FHLB advances ................................. 4,728 0 4,728 0 ----------- ----------- ----------- ----------- Total interest expense ................. 1,110,649 1,117,339 3,315,251 3,391,531 ----------- ----------- ----------- ----------- Net interest income before provision for loan losses ...................... 843,222 881,670 2,573,460 2,688,552 Provision for loan losses ..................... 0 0 5,000 0 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses ...................... 843,222 881,670 2,568,460 2,688,552 ----------- ----------- ----------- ----------- NONINTEREST INCOME Gain (loss) on sales of interest-earning assets 13,050 16,588 44,372 74,548 Loan origination and commitment fees .......... 18,809 22,474 46,102 60,016 Loan servicing fees ........................... 26,860 32,007 73,797 91,995 Other ......................................... 18,967 18,118 51,382 48,668 ----------- ----------- ----------- ----------- Total noninterest income ............... 77,686 89,187 215,653 275,227 ----------- ----------- ----------- -----------
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (continued) Three Months Nine Months Ended June 30, Ended June 30, (Unaudited) (Unaudited) 1997 1996 1997 1996 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE Compensation and benefits ..................... 425,534 405,463 1,271,288 1,193,286 Occupancy and equipment ....................... 40,769 40,133 112,829 115,051 SAIF deposit insurance premium ................ 15,011 55,139 66,186 167,522 (Gain) loss on foreclosed real estate ......... (8) (26) 5,683 4,826 Other ......................................... 136,337 135,526 438,547 431,882 ----------- ----------- ----------- ----------- Total noninterest expense .............. 617,643 636,235 1,894,533 1,912,567 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes .. 303,265 334,622 889,580 1,051,212 Income tax expense (benefit) ..................... 112,354 122,262 329,646 383,063 ----------- ----------- ----------- ----------- NET INCOME (LOSS) ................................ $ 190,911 $ 212,360 $ 559,934 $ 668,149 =========== =========== =========== =========== Earnings per common share $ 0.20 $ 0.20 $ 0.57 $ 0.60 The accompanying notes are an integral part of the financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED June 30, 1997 Common Unearned Unallocated Net Unrealized Stock and RRP ESOP Gain on Avail. Retained Paid in Capital Shares Shares For Sale Security Earnings --------------- ------ ------ ----------------- -------- Balance October 1, 1996 ....... $ 12,125,080 $ (446,129) $ (763,206) $ -- $ 12,811,881 Deferred compensation amortization ............. -- 87,286 -- -- -- Purchase of treasury stock at cost ............ -- -- -- -- -- Payment of cash dividends ..... -- -- -- -- (154,252) Accrued dividends - RRP stock . -- -- -- -- (4,942) Net change in unrealized gain on securities available for sale, net of deferred taxes of $1,866 . -- -- -- 3,623 -- Net income for the nine months ended June 30, 1997 ............ -- -- -- -- 559,934 Balance June 30, 1997 ......... $ 12,125,080 $ (358,843) $ (763,206) $ 3,623 $ 13,212,621 ============ ============ ============ ============ ============
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED June 30, 1997 (continued) Total Treasury Stockholders' Stock Equity ----- ------ Balance October 1, 1996 .............. $ (2,797,013) $ 20,930,613 Deferred compensation amortization .................... -- 87,286 Purchase of treasury stock at cost ................... (951,116) (951,116) Payment of cash dividends ............ -- (154,252) Accrued dividends - RRP stock ........ -- (4,942) Net change in unrealized gain on securities available for sale, net of deferred taxes of $1,866 ........ -- 3,623 Net income for the nine months ended June 30, 1997 ................... -- 559,934 Balance June 30, 1997 ................ $ (3,748,129) $ 20,471,146 ============ ============ The accompanying notes are an integral part of these financial statements
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For The Nine Months Ended June 30, 1997 1996 ----------- ----------- Cash flows from operating activities: Net income ................................................... $ 559,934 $ 668,149 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees ........... (1,947) (1,692) Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans... 77,941 155,372 Amortization of deferred compensation .................... 87,286 87,286 Compensation charge related to release of ESOP shares .... 70,977 64,064 Depreciation ............................................. 50,890 55,481 Deferred income taxes .................................... 21,649 47,973 Stock dividends on FHLB stock ............................ (42,200) (41,300) Amortization of mortgage servicing rights ................ 18,819 0 Net (gain) loss on sale or disposal of: Securities held to maturity ............................ (1,381) 0 Foreclosed real estate ................................. 0 0 Fixed assets ........................................... (9,562) 0 Other Assets ........................................... 0 0 Loans .................................................. (42,991) (14,811) Loans held for sale .................................... 0 0 Proceeds from loan sales ................................. 2,989,034 6,127,911 Originations of loans held for sale ...................... 0 0 (Increase) decrease in: Accrued interest receivable ............................ 5,859 (58,817) Other assets ........................................... 243,280 (21,147) Accrued loan loss reserve .............................. 5,000 0 Increase (decrease) in: Federal income tax payable ............................. (2,582) (53,573) Accrued expenses and other liabilities ................. (603,321) (116,735) Capitalized interest on time deposits .................... 0 (1,573) ----------- ----------- Net cash provided (used) by operating activities ............... 3,426,685 6,896,588 ----------- ----------- The accompanying notes are an integral part of the financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the Nine Months Ended June 30, 1997 1996 ------------ ------------ Cash flows from investing activities: Purchases of interest earning time deposits .......................... $ (98,000) $ (877,000) Net decrease (increase) in fed funds sold ............................ 480,094 294,857 Purchases of obligations - U.S. Govt. and agencies held-to-maturity ................................................. (6,495,391) (9,641,946) Proceeds from maturity of time deposits .............................. 196,000 98,000 Proceeds from sale of securities held-to-maturity ................... 0 0 Proceeds from maturity of securities held-to-maturity ................ 0 0 Proceeds from maturities of obligations - U.S. Govt. and agencies held-to-maturity ........................................ 8,500,000 9,500,000 Proceeds from sale of obligations - U.S. Govt. and agencies held-to-maturity ........................................ 1,000,938 0 Purchases of mortgage-backed securities available-for-sale............ (2,035,446) 0 Purchases of mortgage-backed securities held-to-maturity ............. (512,122) (913,080) Principal pmts on mortgage-backed securities available-for-sa1e....... 1,130 0 Principal payments on mortgage-backed securities held-to-maturity ................................................. 5,529,654 7,851,932 Net originations and principal collections on loans .................. (10,121,466) (10,688,421) Acquisition cost related to foreclosed real estate ................... (9,489) 0 Proceeds from sale of foreclosed real estate ......................... 437,094 83,320 Expenditures for premises and equipment .............................. (41,115) (22,418) Proceeds from sale of fixed assets ................................... 17,500 0 ------------ ------------ Net cash provided (used) by investing activities ....................... (3,150,619) (4,314,756) ------------ ------------ Cash flows from financing activities: Net increase (decrease) in: Non-interest bearing deposits, savings, and NOW accounts............ (1,312,081) 417,356 Time deposits ....................................................... (1,048,085) (434,203) Proceeds from FHLB advances ......................................... 2,481,420 0 Repayment of FHLB advances .......................................... (518,000) 0 Advances from borrowers for taxes and insurance ..................... (284,947) (335,525) Dividends paid to stockholders ......................................... (157,549) (112,212) Purchase of treasury stock ............................................. (951,116) (1,970,702) ------------ ------------ Net cash provided (used) by financing activities ....................... (1,790,358) (2,435,286) ------------ ------------ Net increase (decrease) in cash and cash equivalents ................... (1,514,292) 146,546 Cash and cash equivalents at beginning of the period ................... 5,699,647 6,239,836 ------------ ------------ Cash and cash equivalents at end of the period ......................... $ 4,185,355 $ 6,386,382 ============ ============
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (continued) For the Nine Months Ended June 30, 1997 1996 ------------ ------------ Supplemental disclosure: Cash paid for: Interest on deposits ................................................. $ 1,666,746 $ 1,794,387 Income taxes ......................................................... $ 310,692 $ 349,973 Transfers from loans to real estate acquired through foreclosures ........................................ $ 467,991 $ 0 Loan losses charged to valuation allowance ............................. $ 71,345 $ 0 Recoveries credited to loan loss reserves .............................. $ 51,159 $ 0 The accompanying notes are an integral part of the financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 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, 1996. 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 For purposes of calculating earnings per common share and as prescribed by the American Instituted of Certified Public Accountants Statement of Position 93-6 ("SOP 93-6") Employers' Accounting For Employees Stock Ownership Plans, the weighted average number of shares outstanding, excluding unallocated Employee Stock Ownership Plan ("ESOP") shares, was used. For the three months and nine months ended June 30, 1997, the weighted average number of shares outstanding for earnings per share calculation purposes were 965,982 and 988,171 shares, respectively. (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, 1997.) (See Part I, Item 4 - Notes for a discussion of proposed changes to earnings per share reporting.) NOTE 3 - SECURITIES The amortized cost and estimated market values of investment securities held-to-maturity as of June 30, 1997, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Debt securities: U. S. Treasury ........ $ 2,512,491 $ 0 $ 3,565 $ 2,508,926 U. S. government agency 24,561,546 58,971 52,263 24,568,254 ----------- ----------- ----------- ----------- Total debt ....... $27,074,037 $ 58,971 $ 55,828 $27,077,180 ----------- ----------- ----------- -----------
NOTE 3 - Continued The amortized cost and estimated market values of investment securities as of June 30, 1997, by contractual maturity are shown below:
Estimated Amortized Market Cost Value ----------- ----------- Due in one year or less ...................... $12,015,717 $12,043,471 Due after one year through two years ........................................ 7,512,042 7,511,609 Due after two years through three years 5,559,754 5,542,923 Due after three years through five years 1,986,524 1,979,177 ----------- ----------- Total debt securities ................ $27,074,037 $27,077,180 ----------- -----------
As of June 30, 1997, the weighted average yield on the Company's investment security portfolio was approximately 6.18% while the Company's overall investment portfolio, including securities held-to-maturity, overnight deposits and interest earning time deposits with other financial institutions was approximately 6.18%. The carrying values and estimated market values of mortgage-backed and related securities available-for-sale as of June 30, 1997, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying Balance Premiums Discounts Gain/(Loss) Value ---------- ---------- ---------- ---------- ---------- Fixed Rate .... $ 0 $ 0 $ 0 $ 0 $ 0 Adjustable Rate 1,962,290 71,660 0 5,489 2,039,439 ---------- ---------- ---------- ---------- ---------- $1,962,290 $ 71,660 $ 0 $ 5,489 $2,039,439 ---------- ---------- ---------- ---------- ----------
NOTE 3 - Continued The carrying values and estimated market values of mortgage-backed and related securities held-to-maturity as of June 30, 1997, by type of security are as follows:
Estimated Principal Unamortized Unearned Carrying Market Balance Premiums Discounts Value Value ----------- ----------- ----------- ----------- ----------- Fixed Rate ........ $ 4,611,008 $ 0 $ 16,511 $ 4,594,497 $ 4,539,937 Adjustable Rate ... 15,229,540 106,818 16,628 15,319,730 15,774,337 ----------- ----------- ----------- ----------- ----------- $19,840,548 $ 106,818 $ 33,139 $19,914,227 $20,314,274 ----------- ----------- ----------- ----------- -----------
The overall yield on the Company's mortgage-backed securities portfolio as of June 30, 1997, was approximately 7.19%. NOTE 4 - CURRENT ACCOUNTING ISSUES SFAS NO. 123 In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation which established a fair value based method of accounting for stock-based compensation plans. It encourages entities to adopt that method in place of the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. It permits entities to continue to use the intrinsic value method included in APB No. 25, but regardless of the method used to account for the compensation cost associated with stock option and similar plans, it requires employers to show significant expanded disclosures, including the pro forma amount of net income (and earnings per share) as if the fair value-based method were used to account for stock-based compensation. As of October 1, 1996, the effective date for the Statement, the Company elected to continue using the accounting and disclosure methods prescribed by APB No. 25 for its current plan and to continue using the accounting methods prescribed by APB No. 25 but disclose in the footnotes information on a fair value basis, as prescribed by SFAS No. 123, for any future stock-based compensation plans. SFAS NO. 125 Statement of Financial Accounting Standards (SFAS) No. 125, Accounting For Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings and for the extinguishment of financial liabilities. It is based on the consistent application of the financial-components approach. The Statement requires the recognition of financial assets and servicing assets that are controlled by an entity, the derecognition of financial assets and servicing assets where control is surrendered, and the derecognition of liabilities when they are extinguished. The Statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and shall be applied prospectively. The Company adopted the Statement as required. NOTE 4 - Continued SFAS NO. 128 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. The Statement simplifies the standards for computing EPS and makes them comparable with international EPS standards. SFAS No. 128 replaces the presentation of primary EPS previously prescribed in Accounting Principles Board Opinion (APB) No. 15, Earnings Per Share, with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS does not include dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The Statement is effective for financial statements issued for periods ending after December 15, 1997. NOTE 5 - FORWARD-LOOKING STATEMENTS When used in this Form 10-QSB or future filings by the Company with the Securities and Exchange Commission, the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", "believe" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities, and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 1997 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL The principle business of the Company is that of a community-oriented financial institution attracting deposits from the general public and using such deposits to originate one- to four-family residential loans and, to a lesser extent, commercial real estate, one- to four-family construction, multi-family and consumer loans. These funds have also been used to purchase mortgage-backed securities, U. S. government and agency obligations and other permissible securities. The 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 $112.7 million at June 30, 1997, a $1.7 million or 1.5% decrease from the $114.4 million reported at the Company's fiscal year ended September 30, 1996. The decrease in total assets was primarily the result of an $8.1 million decline in mortgage-backed and investment securities held-to-maturity and a $2.0 million decrease in cash and cash equivalent accounts with financial institutions. The decreases were partially offset by a $6.7 million increase in loans receivable balances outstanding and a $2.0 million increase in mortgage-backed securities available-for-sale. Total liabilities declined by $1.2 million to $92.2 million at June 30, 1997, compared to $93.4 million at September 30, 1996. The decrease was primarily the result of a $2.4 million decline in total deposits to $89.3 million at June 30, 1997, from $91.7 million at September 30, 1996, which was partially offset by a $2.0 million increase in Federal Home Loan Bank advances. Stockholders' equity declined by $459,000 to $20.5 million at June 30, 1997, from $20.9 million at September 30, 1996. The decrease was due to a $951,000 increase in treasury stock as the Company re-purchased an additional 53,964 shares of stock during the year. The increase in treasury stock was partially offset by a $401,000 increase in retained earnings, which resulted from the $560,000 in net income for the nine months ended June 30, 1997, less $159,000 of cash dividends paid during the year. Cash, interest-earning deposits with banks and federal funds sold totaled $5.8 million at June 30, 1997, a decrease of $2.0 million from the $7.8 million reported at September 30, 1996. Balances in these accounts fluctuate as loan payments and deposits are received from customers as well as with purchases and maturities of securities, disbursement of loan proceeds, deposit withdrawals and payments of operating expenses. At June 30, 1997, the Company reported $2.0 million in mortgage-backed securities available-for-sale, compared to none at September 30, 1996. During the nine months ended June 30, 1997, the Company began a program of utilizing its borrowing privileges as a member of the Federal Home Loan Bank of Dallas. At June 30, 1997, the Company had outstanding $2.0 million in advances from the Federal Home Loan Bank of Dallas and had invested the advance proceeds in the $2.0 million of mortgage-backed securities available-for-sale. Subject to the level of interest rates, the Company intends, over the next several quarters, to systematically borrow up to approximately $20.0 million from the Federal Home Loan Bank of Dallas and invest the proceeds in adjustable rate mortgage-backed securities to be held in an "available-for-sale" account. The purpose of the program is to leverage a portion of the Company's excess capital and to achieve a rate of return on the difference in the rate earned on the securities and the cost of the advance. The success of the program will be dependent upon several factors, including the Company's ability to purchase adjustable rate securities that will maintain a positive "spread" above the Federal Home Loan Bank advance rates. The Company intends to borrow funds from the Federal Home Loan Bank of Dallas with a term of approximately thirty days and invest in mortgage-backed securities with interest rate adjustment frequencies that vary between six months and one year. As a result, the success of the program will be dependent upon the difference between very short term federal funds type interest rates and interest rates comparable to six month and one year U. S. Treasury rates. In general, the program will be more successful as the difference widens and less successful as the difference narrows. Also, the general level of interest rates, which in turn affect mortgage rates, will have an effect on the success of the program. A period of lower interest rates could have the effect of increasing prepayments of the principal balances on the securities which would in turn affect the yield on the adjustable rate securities purchased in the program. At June 30, 1997, the approximate yield on the portfolio was 6.63%, while the cost of the advance was 5.53%. Investment securities held-to-maturity totaled $27.1 million at June 30, 1997, compared to $30.1 million at September 30, 1996. Balances in the portfolio are determined by the Company's cash flow needs and will vary over time. During the nine months ended June 30, 1997, cash proceeds from maturing investment securities were redirected to fund loan originations and to fund deposit withdrawals. At June 30, 1997, the portfolio contained $12.0 million in securities with remaining terms until maturity of less than one year, $7.5 million with remaining maturities of one through two years, $5.6 million with remaining maturities of two through three years and $2.0 million with remaining maturities of three through four years. At June 30, 1997, the yield on the portfolio was approximately 6.18%. The Company's mortgage-backed securities held-to-maturity portfolio totaled $19.9 million at June 30, 1997, compared to $24.9 million at September 30, 1996. The decrease was primarily due to principal payments received on the portfolio during the year. The Company's decision to invest in mortgage-backed securities held-to-maturity, as it is with investment securities held-to-maturity, is primarily dependent upon and is counter to the Company's ability to originate portfolio loans. The weighted average yield on the portfolio was approximately 7.25% at June 30, 1997. Loans receivable totaled $54.6 million at June 30, 1997, an increase of $6.7 million over the $47.9 million reported at September 30, 1996. The demand for home loan financing in the Company's market area remained strong throughout the nine months ended June 30, 1997. For the period, the Company originated approximately $18.0 million in mortgage loans and estimates that it captures approximately 10% of the market in the Tyler area. In an effort to increase its lending volume, the Company opened an addtional loan production office in Lindale, Texas, a rapidly growing area located approximately ten miles north of Tyler. Lindale, a town of approximately 3,500 people, has experienced significant growth over the past several years. During 1995, the latest data available, Home Mortgage Disclosure Act filings showed that there were approximately 470 loans totaling $22.9 million originated in the census tracts encompassing the Lindale area. In addition, the Target Company recently made the decision to locate a major distribution hub in Lindale and anticipates employing approximately 800 to 1,000 persons when fully operational. Management believes that a loan production office located in the Lindale area will enable the Company to gain a larger percentage of the market in that area than it is currently capturing. In addition, the Company employed a full time loan officer in its existing full service branch office in Whitehouse, a community of approximately 4,000 located seven miles south of Tyler. Management believes that the growth of new home construction south of Tyler warrants a full time loan officer in that area. Foreclosed real-estate owned totaled $31,000 at June 30, 1997, compared to none a September 30, 1996. The balance was comprised of one single-family residence located in San Antonio, Texas. The balance represents the Company's 95% interest in the property. The balance has been adjusted to "fair value" and is being marketed for sale by the servicer of the loan. Total deposits were down $2.4 million to $89.3 million at June 30, 1997, from $91.7 million at September 30, 1996. The decline was partially due to year end tax payments made by the Association on custodial escrow accounts held at the Association by FNMA. The remainder of the decrease in deposits was a result of deposit customers withdrawing funds to seek higher yielding investment alternatives. The Association's average funds cost was 4.96% at June 30, 1997, up seventeen basis points from the 4.79% reported at September 30, 1996. Advances from borrowers for taxes and insurance decreased $285,000 to $632,000 at June 30, 1997, compared to $917,000 at September 30, 1996. The decrease was a result of year end tax payments made on the Association's mortgage loan servicing portfolio less additional customer escrow deposits received during the year. The Company reported $2.0 million in borrowed money from the Federal Home Loan Bank of Dallas at June 30, 1997, compared to none at September 30, 1996. The entire $2.0 million balance had a maturity date of less than thirty days and had a cost of 5.53% at quarter end. Stockholders' equity totaled $20.5 million at June 30, 1997, down $459,000 from the $20.9 million reported at September 30, 1996. The decrease was primarily attributable to a $951,000 increase in treasury stock during the year. During the nine months ended June 30, 1997, the Company re-purchased 53,964 shares of stock at an average price of $17.63 per share. At June 30, 1997, the Company owned 231,066 shares of treasury stock at an average cost of approximately $16.22 per share. Partially offsetting the increase in treasury stock was a $401,000 increase in retained earnings to $13.2 million at June 30, 1997, from $12.8 million at September 30, 1996. The increase in retained earnings was the result of the $560,000 in net income reported for the nine months ended June 30, 1997, less the $159,000 in cash dividends paid during that same period. 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 JUNE 30, 1997 AND JUNE 30, 1996 General. Net income for the three months ended June 30, 1997, was $191,000 or $.20 per share, compared to $212,000 or $.20 per share for the three months ended June 30, 1996. The $21,000 decline in net income was attributable to a $38,000 decline in net interest income after provision for loan losses and a $12,000 decline in total noninterest income, which were partially offset by a $19,000 decrease in total noninterest expense and a $10,000 decrease in income tax expense. Net Interest Income. For the quarter ended June 30, 1997, net interest income before provision for loan losses totaled $843,000, down $38,000 from the $881,000 reported for the quarter ended June 30, 1996. On an annualized basis, the $843,000 in net interest income for the current year is approximately 3.09% of average interest earning assets and 3.01% of average total assets. For the quarter ended June 30, 1996, the $882,000 in net interest income was approximately 3.15% of average interest earning assets and approximately 3.06% of average total assets. Total interest income was $2.0 million for the quarter ended June 30, 1997, unchanged from the $2.0 million reported for the same quarter in 1996. For the three months ended June 30, 1997, total interest income was approximately 7.15% of average interest earning assets, compared to 7.13% for the same period in 1996. Interest income on loans receivable totaled $1.1 million for the three months ended June 30, 1997, an increase of $145,000 or 15.7% over the $925,000 reported for the quarter ended June 30, 1996. As a percentage of the $53.2 million in average loans receivable balances outstanding for the current quarter, interest income from loans receivable totaled approximately 8.05% on an annualized basis, compared to 8.20% for the prior year. During the current quarter, the Company continued its fifteen year term, fixed rate lending program at interest rates below the market but above comparable investment alternatives. As a result, the Company has been able to increase its loans receivable portfolio and increase the level of interest income from loans receivable, despite the decline in the overall yield of the portfolio. For the quarter ended June 30, 1997, the Company originated $4.8 million in loans. Approximately $1.1 million were sold into the secondary market, while the remainder were placed into the portfolio. Interest income from the investment securities held-to-maturity and overnight funds portfolio totaled $520,000 for the three months ended June 30, 1997, compared to $604,000 for the same quarter in 1996. The decrease resulted from a $4.5 million decline in the average balance outstanding in the portfolio to $34.7 million for the current quarter from $39.2 million from the same quarter in 1996. During the year, maturing securities were redirected to the Company's lending operations or were used to fund deposit withdrawals. In addition, the average yield on the portfolio declined to 6.08% for the quarter ended June 30, 1997, from 6.16% for the same quarter in 1996, as higher yielding maturing investment securities were reinvested at lower current rates or were redirected to fund loans. Interest income from the Company's mortgage-backed securities held-to-maturity portfolio totaled $354,000 for the three months ended June 30, 1997, compared to $470,000 for the three months ended June 30, 1996. Continued prepayments on the adjustable rate securities in the portfolio caused the balance in the portfolio to decline to $19.9 million at June 30,1997, from $26.8 million at June 30, 1996. The Company redirected the cash flows from the portfolio into its portfolio lending operations. Despite an increase in the average yield on the portfolio to 6.95% for the quarter ended June 30, 1997, from 6.79% for the quarter ended June 30, 1996, the significant decline in the average balance outstanding in the portfolio accounted for the decline in interest income on the portfolio. Interest income on mortgage-backed securities available-for-sale totaled $9,500 for the quarter ended June 30, 1997, as the Company purchased securities for this portfolio for the first time. The yield on the portfolio was approximately 6.63% at June 30, 1997. The Company intends to make additional purchases for this portfolio over the next several quarters and anticipates that the balance in the portfolio will reach approximately $20.0 million. Securities purchased for the portfolio will be predominately adjustable rate in nature and will have both annual and semi-annual interest rate adjustment frequencies on a stratified basis throughout the year. In addition, the Company anticipates purchasing securities for this portfolio that have various interest rate indices and various periodic and lifetime caps on the movement of the rates on the securities. All of these features are an effort to obtain some measure of price stability within the portfolio and to avoid dramatic changes in the overall yield on the portfolio. The Company anticipates, to the extent it is unable to do so through local retail deposit growth, funding the security purchases for this portfolio through wholesale methods, primarily by borrowing through the advance window at the Federal Home Loan Bank of Dallas. Interest paid to depositors totaled $1.1 million for the quarter ended June 30, 1997, unchanged from the $1.1 million reported for the same quarter in 1996. Average deposit balances outstanding declined $2.5 million to $89.5 million for the quarter ended June 30, 1997, from $92.1 million for the quarter ended June 30, 1996. Interest on deposits as a percentage of average deposit balances was approximately 4.94% for the quarter ended June 30, 1997, compared to 4.85% for the same quarter in 1996. Provision for Loan Losses. The Company made no provision for loan losses for the quarter ended June 30, 1997, or for the quarter ended June 30, 1996. (See - "Asset Quality".) Non-Interest Income. Non-interest income totaled $78,000 for the quarter ended June 30, 1997, compared to $89,000 for the same quarter in 1996. The decrease in total interest income was due to a $4,000 decline in gains on sales of interest earning assets, a $4,000 decline in loan origination and commitment fees and a $5,000 decline in loan servicing fees. Over the last several quarters, the Company has placed more of its loans originated into portfolio than were sold. The result was that fewer gains on the sale of loans were reported under the accounting requirements of statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights - An Amendment of SFAS No. 65. Also, the market for fixed rate and term loans of the type the Company is originating and placing into portfolio has been less receptive to origination and commitment fees. Non-Interest Expense. Non-interest expense totaled $618,000 for the three months ended June 30, 1997, compared to $636,000 for the same period in 1996. The decrease was primarily due to a $40,000 decline in deposit insurance premiums as a result of the reduction in SAIF premiums after the special one-time contribution made by the Company in 1996 to help recapitalize the SAIF. The reduction in SAIF premiums was partially offset by a $20,000 increase in compensation and benefits expense. The increased compensation and benefits expense was directly related to additional expenses related to the Company's Employee Stock Ownership Plan as the value of the stock scheduled to be released to participants in the current fiscal year increased and was recognized as additional expense. In addition, the Company increased its accrual in anticipation of increased funding on its defined benefit pension plan for the fiscal year. Increases in employee salaries for the current year also contributed to the increase. Provision For Income Taxes. The Company incurred federal income tax expense of $112,000 or 37.0% of pre-tax income for the three months ended June 30, 1997, compared to $122,000 or 36.5% of pre-tax income for the same quarter in 1996. COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 General. For the nine months ended June 30, 1997, the Company reported net income of $560,000 or $.57 per share, compared to $668,000 or $.60 per share for the nine months ended June 30, 1996. The decrease in net income was primarily the result of $120,000 decrease in net interest income after provision for loan losses and a $60,000 decrease in total noninterest income. The decreases in net interest income and total noninterest expense were partially offset by a $53,000 decrease in income tax expense and an $18,000 decrease in total noninterest expense. Net Interest Income. For the nine months ended June 30, 1997, net interest income after provision for loan losses totaled $2.6 million, compared to $2.7 million for the nine months ended June 30, 1996. Net interest income, on an annualized basis, was approximately 3.12% of average interest earning assets and 3.02% of average total assets for the nine months ended June 30, 1997, comapred to 3.17% and 3.08% respectively for the nine months ended June 30, 1996. Total interest income, on an annualized basis, was approximately 7.16% of average interest earning assets for the nine months ended June 30, 1997, compared to 7.17% for the same period in 1996. Interest income on loans receivable increased $395,000 or 14.7% to $3.1 million for the nine months ended June 30, 1997, from $2.7 million for the nine months ended June 30, 1996. The increase was primarily attributable to a $7.2 million increase in avereage balances outstanding for the nine month period ended June 30, 1997, compared to the same period in 1996. Interest income on loans receivable, on an annualized basis, was approximately 8.02% of average loans receivable balances for the nine months ended June 30, 1997, compared to 8.14% for the same period in 1996. The decrease in the overall yield on the loans receivable portfolio was expected. The Company continued its emphasis on originating fifteen year term fixed interest rate loans at rates approximately .125% to .25% below competition but at levels higher than comparable investment alternatives. Interest income on the Company's investment securities held-to-maturity and overnight funds portfolios was $1.6 million for the nine months ended June 30, 1997, compared to $1.8 million for the same period in 1996. The decrease in income was the result of a $3.0 million decrease in average balances outstanding from $38.7 million for the nine months ended June 30, 1996, to $35.8 million for the same period in 1997. Also, the overall yield on the portfolio declined to approximately 6.08% for the current year from 6.32% for the prior year as maturing investment securities were reinvested at lower interest rates or were redirected to the Company's lending operations. Interest income on mortgage-backed securities held-to-maturity totaled $1.2 million for the nine months ended June 30, 1997, compared to $1.6 million for the nine months ended June 30, 1996. The decrease in earnings was primarily the result of a decline in the average balances outstanding in the portfolio as prepayments continued on the underlying adjustable rate loans in the securities. A period of lower long term interest rates could have the effect of continuing or increasing the prepayments on the portfolio. The result would be a continued decline in the income from the portfolio and possibly a decrease in total interest income as the cash flow is reinvested at lower interest rates. On an annualized basis, interest income on the portfolio was approximately 6.92% of average balances outstanding for the nine months enede June 30, 1997, compared to 6.86% for the prior year. Interest income on the mortgage-backed securities available-for-sale portfolio totaled $9,500 for the nine months ended June 30, 1997, compared to none for the same period in 1996. (See - Comparison of The Three Months Ended June 1997 and 1996.) Interest expense was $3.3 million for the nine months ended June 30, 1997, a decrease of $76,000 from the $3.4 million reported for the nine months ended June 30, 1996. A $1.6 million decline in average balances outstanding accounted for the decline in interest expense. For the nine months ended June 30, 1997, average deposit and borrowed funds balances were $90.9 million, compared to $92.5 million for the nine months ended June 30, 1996. As a percentage of average balances outstanding, interest expense was approximately 4.87% for the nine months ended June 30, 1997, compared to 4.89% for the same period in 1996. Non-Interest Income. Non-interest income was $216,000 for the nine months ended June 30, 1997, compared to $275,000 for the nine months ended June 30, 1996. The decrease in noninterest income, as was the case for the three months ended June 30, 1997, was directly attributable to the Company's program designed to originate fifteen year fixed term and rate portfolio loans. Gains on sales of interest earning assets were down $30,000, loan origination and commitment fees were down $14,000 and loan servicing fees were down $18,000. Non-Interest Expense. Non-interest expense totaled $1.9 million for the nine months ended June 30, 1997, unchanged from the $1.9 million reported for the nine months ended June 30, 1996. Noninterest expense was approximately, on an annualized basis, 2.22% and 2.19% of average total assets for the nine months ended June 30, 1997, and June 30, 1996, respectively. Provision For Income Taxes. The Company reported federal income tax expenses of $330,000 or 37.1% and $383,000 or 36.4% of pre-tax income for the nine months ended June 30, 1997, and June 30, 1996, respectively. ASSET QUALITY At June 30, 1997, the Company's non-performing assets totaled $193,000 or .17% of total assets, compared to $450,000 or .39% of total assets at September 30, 1996. The decrease was primarily the result of the foreclosure and subsequent sale of four single family residences, all of which secured one loan. The loan was considered non-performing at September 30, 1996, and had a balance of approximately $197,000 at that time. All four of the properties were sold during the nine month period ended June 30, 1997, and a loss of approximately $19,000 was charged to the Company's general loss reserve. In addition, a loan with a balance of $54,000 and secured by one single family residence, was foreclosed and sold during the period. At June 30, 1997, non-performing assets was comprised of fifteen (15) loans, totaling approximately $162,000 and the largest of which was $48,000, secured by single family dwellings and $31,000 of foreclosed real estate which was comprised of one single family dwelling located in Tyler, Texas. The property was being marketed for sale. The $162,000 in non-performing loans at June 30, 1997, equaled .30% of loans receivable, compared to $450,000 or .94% of loans receivable at September 30, 1996. Classified assets totaled $715,000 or .63% of total assets at June 30, 1997, compared to $999,000 or .87% of total assets at September 30, 1996. Classified assets and non-performing assets differ in that classified assets may include loans less than ninety (90) days delinquent. Also, assets guaranteed by government agencies such as the Veterans Administration and the Federal Housing Administration are not included in classified assets but are included in non-performing assets. All classified assets at June 30, 1997, were deemed to be "substandard". No assets were classified "doubtful" or "loss" as of such date. The Company's allowance for loan losses totaled $274,0000 at June 30, 1997, compared to $289,000 at September 30, 1996. The decrease in the allowance was attributable to the approximate $19,000 charged against the reserve on the aforementioned foreclosed real estate less the $5,000 addition added to the reserve and charged against provision for loan losses. The allowance for loan losses as a percentage of loans receivable equaled .50% at June 30, 1997, compared to .60% at September 30, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are deposits from customers, amortization and prepayment of loan principal (including mortgage-backed securities), maturities of securities, sales of loans and operations. Current Office of Thrift Supervision regulations require the Association to maintain cash and eligible investments (liquid assets), in an amount equal to 5.0% of net withdrawable savings deposits and borrowings payable on demand or within five years or less during the preceding month. Liquid assets include cash, certain time deposits, U. S Government and agency securities having maturities of less than five years. The Association maintains a liquid asset ratio above the minimum required level of the Office of Thrift Supervision. At June 30, 1997, the Association's liquid asset ratio equaled 43.0%. 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 June 30, 1997, the Association had outstanding commitments to extend credit on $4.8 million of real estate loans. Management believes that present levels of liquid assets are sufficient to meet anticipated future loan commitments as well as deposit withdrawal demands. Total stockholders' equity equaled $20.5 million at June 30, 1997, a decrease of $459,000 from the $20.9 million reported at September 30, 1996. The decrease was primarily the result of a $951,000 increase in treasury stock to $3.7 million at June 30, 1997, from $2.8 million at September 30, 1996. The increase in treasury stock resulted from the Company's decision to repurchase 53,964 shares of stock at an average price of $17.63 per share. The decrease in stockholders' equity resulting from the treasury stock purchase was partially offset by a $401,000 increase in retained earnings. Retained earnings increased due to the $560,000 net income reported for the nine months ended June 30, 1997, less $159,000 in cash dividends paid during the year. As of June 30, 1997, the Company's reported book value per share, using total stockholders' equity of $20.5 million (net of the cost of unallocated ESOP and RRP shares) and 1,025,321 outstanding shares of common stock (the total issued shares including unallocated ESOP and RRP shares, less treasury shares), equaled $19.97 per share. Subsequent to the quarter ended June 30, 1997, the Company announced its intention to pay a cash dividend of $.05 per share on August 27, 1997, to stockholders of record at August 13, 1997. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Congress imposed a three part capital requirement for thrift institutions. At June 30, 1997, the Association's actual and required capital amounts under each of the three requirements were as follows: - - Tangible Capital (stockholders' equity) was $18.4 million or 16.3% of total assets, exceeding the minimum requirement of 1.5% by $16.7 million. - - Core Capital (Tangible capital plus certain intangible assets) was $18.4 million or 16.3% of total assets, exceeding the minimum requirement of 3.0% by $15.0 million. - - Risk-based Capital (Core capital plus general loan and valuation allowances less an adjustment for capitalized mortgage servicing rights) equaled $18.6 million of 41.0% of risk weighted assets, exceeding the minimum requirement of 8.0% of risk weighted assets by $15.0 million. At June 30, 1997, the Association was considered a "well capitalized" institution under the prompt corrective action requirements of the Federal Deposit Insurance Corporation Improvement Act of 1991. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 1997 PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no material legal proceedings to which the Company or the Association is a party or of which any of their property is subject. From time-to-time, the Association is a party to various legal proceedings incident to the conduct of its business. Item 2. Changes In Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submissions Of Matters To A Vote Of Security Holders None. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: Exhibit 11.0 - Computation of Earnings Per Share Exhibit 27.0 - Financial Data Schedule (b) Reports on Form 8-K During the quarter ended June 30, 1997, the Company filed a report on Form 8-K on April 23, 1997, to report the issuance of a press release dated April 17, 1997, reporting earnings for the quarter ended March 31, 1997, announcing a stock repurchase program, and announcing the declaration of a cash dividend for the quarter ended March 31, 1997. During the quarter ended June 30, 1997, the Company filed a report on Form 8-K on May 15, 1997, to report the issuance of a press release dated May 14, 1997, announcing the completion of the Company's stock repurchase program. SIGNATURES Pursuant to the requirement of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. East Texas Financial Services, Inc. Date: August 4, 1997 /s/ Gerald W. Free ------------------ Vice Chairman, President and CEO (Principal Executive Officer) Date: August 4, 1997 /s/ Derrell W. Chapman ----------------------- Vice President/COO/CFO (Principal Financial and Accounting Officer) EX-11.0 2 EXHIBIT 11.0
COMPUTATIONS OF EARNINGS PER SHARE Three Months Ended June 30, 1997 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- March 31, 1997 1,079,285 76,321 1,002,964 April 30, 1997 1,039,285 76,321 962,964 May 31, 1997 1,025,321 76,321 949,000 June 30, 1997 1,025,321 76,321 949,000
Weighted average number of shares outstanding for the quarter ended June 30, 1997, for earnings per share calculation (before effects of dilution) 965,982 Earnings Per Share Before Effects of Dilution: = $190,911 (net income)/965,982 = $ .20 per share Stock options outstanding at June 30, 1997: 101,321 Stock price for three month period: High: $18.375 Low: $17.75 Average: $17.625 Beginning: $17.75 Ending: $18.00 Exercise price of stock options: $14.125 per share The potential dilution from stock options is less than 20% of the number of common shares outstanding and the market price of the common stock exceeded the exercise price for all months of the period. Therefore, the treasury stock method was used for calculating the dilutive effects of the common stock equivalents (stock options). Primary Earnings Per Share Under the treasury stock method, for primary earnings per share, it is assumed that all of the outstanding options are exercised at their exercise price and the cash proceeds received by the Company are used to purchase treasury shares at the average market price of the common stock for the quarter. The difference in the number of shares that could be purchased under this assumption and the total number of stock options is added to the weighted average number of shares outstanding for the quarter to calculate "Earnings Per Common Share and Common Stock Equivalents". Additional shares to be added to common shares outstanding = 101,321 - [(101,321 * $14.125)/$17.625] = 101,321 - 81,201 = 20,120 shares Primary Earnings Per Share = $190,911 (net income) / 965,982 + 20,120 = $190,911 / 986,102 = $.19 per share Fully Diluted Earnings Per Share Under the treasury stock method, for fully diluted earnings per share, it is assumed that all of the outstanding options are exercised at their exercise price and the cash proceeds received by the Company are used to purchase treasury shares at the ending market price of the common stock for the quarter. The difference in the number of shares that could be purchased under this assumption and the total number of stock options is added to the weighted average number of shares outstanding for the quarter to calculate "Earnings Per Common Share Assuming Full Dilution". Additional shares to be added to common shares outstanding = 101,321 - [(101,321 * $14.125)/$18.00] = 101,321 - 79,509 = 21,812 shares Fully Diluted Earnings Per Share = $190,911 (net income) / 965,982 + 21,812 = $190,911 / 987,794 = $.19 per share The dilution in earnings per share from all potential dilution is less than 3% [$.20 per share assuming no dilution compared to $.19 per share assuming full dilution.] Therefore, the effects of dilution are considered not material and only a single earnings per share is presented in the income statement - "Earnings Per Common Share".
COMPUTATIONS OF EARNINGS PER SHARE Nine Months Ended June 30, 1997 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- September 30, 1996 1,079,285 76,321 1,002,964 October 31, 1996 1,079,285 76,321 1,002,964 November 30, 1996 1,079,285 76,321 1,002,964 December 31, 1996 1,079,285 76,321 1,002,964 January 31, 1997 1,079,285 76,321 1,002,964 February 28, 1997 1,079,285 76,321 1,002,964 March 31, 1997 1,079,285 76,321 1,002,964 April 30, 1997 1,039,285 76,321 962,964 May 31, 1997 1,025,321 76,321 949,000 June 30, 1997 1,025,321 76,321 949,000
Weighted average number of shares outstanding for the nine months ended June 30, 1997, for earnings per share calculation (before effects of dilution) 988,171 Earnings Per Share Before Effects of Dilution: = $559,934 (net income)/988,171 = $ .57 per share Stock options outstanding at June 30, 1997: 101,321 Stock price for nine month period: High: $19.00 Low: $14.75 Average: $16.962 Beginning: $15.50 Ending: $18.00 Exercise price of stock options: $14.125 per share The potential dilution from stock options is less than 20% of the number of common shares outstanding and the market price of the common stock exceeded the exercise price for all months of the period. Therefore, the treasury stock method was used for calculating the dilutive effects of the common stock equivalents (stock options). Primary Earnings Per Share Under the treasury stock method, for primary earnings per share, it is assumed that all of the outstanding options are exercised at their exercise price and the cash proceeds received by the Company are used to purchase treasury shares at the average market price of the common stock for the quarter. The difference in the number of shares that could be purchased under this assumption and the total number of stock options is added to the weighted average number of shares outstanding for the quarter to calculate "Earnings Per Common Share and Common Stock Equivalents". Additional shares to be added to common shares outstanding = 101,321 - [(101,321 * $14.125)/$16.962] = 101,321 - 84,374 = 16,947 shares Primary Earnings Per Share = $559,934 (net income) / 988,171 + 16,947 = $559,934 / 1,005,118 = $.56 per share Fully Diluted Earnings Per Share Under the treasury stock method, for fully diluted earnings per share, it is assumed that all of the outstanding options are exercised at their exercise price and the cash proceeds received by the Company are used to purchase treasury shares at the ending market price of the common stock for the quarter. The difference in the number of shares that could be purchased under this assumption and the total number of stock options is added to the weighted average number of shares outstanding for the quarter to calculate "Earnings Per Common Share Assuming Full Dilution". Additional shares to be added to common shares outstanding = 101,321 - [(101,321 * $14.125)/$18.00] = 101,321 - 79,509 = 21,812 shares Fully Diluted Earnings Per Share = $559,934 (net income) / 988,171 + 21,812 = $559,934 / 1,009,983 = $.55 per share The dilution in earnings per share from all potential dilution is less than 3% [$.57 per share assuming no dilution compared to $.55 per share assuming full dilution]. Therefore, the effects of dilution are considered not material and only a single earnings per share is presented in the income statement - "Earnings Per Common Share". EX-27 3
9 This schedule contains summary financial information extracted from the consolidated financial statements of East Texas Financial Services, Inc., at June 30, 1997, and is qualified in its entirety by reference to such financial statements. 9-MOS SEP-30-1997 JUN-30-1997 524,238 5,226,690 191 0 2,039,439 46,988,264 47,391,454 54,856,306 273,659 112,696,849 89,300,964 1,963,420 961,319 0 0 0 12,564 20,458,582 112,696,849 3,084,553 2,804,158 0 5,888,711 3,310,523 3,315,251 2,573,460 5,000 0 1,894,533 889,580 559,934 0 0 559,934 0.57 0.57 7.16 162,000 0 0 174,000 289,120 71,345 55,884 273,659 74,137 0 199,522
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