-----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, L37BChziYzimZc3sxwATfR5s0MvBipoMwaWt/cWdMLa1hvLq6g+nCwx1S14L4DBg FIU/ho7uugIw6lhINIC8VQ== 0000914317-98-000473.txt : 19980806 0000914317-98-000473.hdr.sgml : 19980806 ACCESSION NUMBER: 0000914317-98-000473 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980805 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: SEC FILE NUMBER: 000-24848 FILM NUMBER: 98677635 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, 1998 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, 1998, was 1,539,461. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 1998 INDEX Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition, June 30, 1998 (Unaudited) and September 30, 1997 Consolidated Statements of Income, (Unaudited) three months and nine months ended June 30, 1998, and June 30, 1997 Consolidated Statement of Changes in Stockholders' Equity, (Unaudited) nine months ended June 30, 1998 Consolidated Statements of Cash Flows, (Unaudited) nine months ended June 30, 1998, and June 30, 1997 Notes to (Unaudited) Consolidated Financial Statements, June 30, 1998 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, 1998 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, 1997, 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, 1998 September 30, 1997 ------------- ------------------ (Unaudited) ASSETS Cash and due from banks ........................................ $ 853,232 $ 508,729 Interest-bearing deposits with banks ........................... 2,161,915 6,422,404 Interest earning time deposits with financial institutions ..... 1,565,617 1,565,573 Federal funds sold ............................................. 0 753,847 Mortgage-backed securities available-for-sale .................. 10,176,556 4,356,271 Investment securities held-to-maturity (estimated market value of $29,127,057 at June 30, 1998, and $23,128,073 at September 30, 1997) .................................... 29,046,630 23,058,359 Mortgage-backed securities held-to-maturity (estimated market value of $12,752,806 at June 30, 1998, and $18,611,834 at September 30, 1997) ........................ 12,547,113 18,151,765 Loans receivable, net of allowance for credit losses of $233,670 at June 30, 1998, and $272,851 at September 30, 1997 ..................................... 61,727,067 57,110,029 Accrued interest receivable .................................... 936,782 885,383 Federal Home Loan Bank stock, at cost .......................... 777,400 1,005,700 Premises and equipment ......................................... 1,050,712 1,123,311 Foreclosed real estate, net of allowances of $-0- .............. 204,700 0 Mortgage servicing rights ...................................... 197,418 149,094 Other assets ................................................... 1,348,687 858,147 ------------- ------------- Total Assets .......................................... $ 122,593,829 $ 115,948,612 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Demand deposits ........................................... $ 1,965,549 $ 1,882,109 Savings and NOW deposits .................................. 10,862,579 9,771,266 Other time deposits ....................................... 74,845,657 76,897,274 ------------- ------------- Total deposits ........................................ 87,673,785 88,550,649 FHLB advances ............................................. 12,322,028 4,195,000 Advances from borrowers for taxes and insurance ........... 615,633 881,685 Federal income taxes Current ............................................... 89,741 0 Deferred .............................................. 33,612 127,909 Accrued expenses and other liabilities .................... 674,055 1,314,001 ------------- ------------- Total Liabilities ..................................... 101,408,854 95,069,244 ------------- -------------
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (continued) June 30, 1998 September 30, 1997 ------------- ------------------ (Unaudited) 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 1,539,461 outstanding ......... 12,564 12,564 Additional paid-in capital ................................ 12,203,160 12,196,879 Deferred compensation - RRP shares ........................ (242,461) (329,748) Unearned employee stock ownership plan shares ............. (650,614) (650,614) Unrealized gain/(loss) available-for-sale securities (net) (9,805) 15,512 Retained earnings (substantially restricted) .............. 13,603,148 13,365,792 Treasury stock, 345,031 shares at cost .................... (3,731,017) (3,731,017) ------------- ------------- Stock stockholders' equity ............................ 21,184,975 20,879,368 ------------- ------------- Total liabilities and stockholders' equity ............ $ 122,593,829 $ 115,948,612 ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Nine Months Ended June 30, Ended June 30, (Unaudited) (Unaudited) 1998 1997 1998 1997 ----------- ----------- ----------- ----------- INTEREST INCOME Loans receivable: First Mortgage .................................... $ 1,137,446 $ 1,050,080 $ 3,424,340 $ 3,023,247 Consumer and other loans .......................... 60,995 20,378 131,083 61,306 Securities available for sale: Investment securities ............................. 11,546 14,626 41,859 42,328 Mortgage-backed securities ........................ 145,433 9,530 314,507 9,530 Securities held to maturity: Investment securities ............................. 422,663 428,745 1,223,087 1,367,214 Mortgage-backed securities ........................ 243,422 354,023 839,190 1,164,609 Deposits with banks ................................. 58,664 76,489 190,550 220,477 ----------- ----------- ----------- ----------- Total interest income ........................... 2,080,169 1,953,871 6,164,616 5,888,711 ----------- ----------- ----------- ----------- INTEREST EXPENSE Deposits ............................................ 1,096,740 1,105,921 3,325,875 3,310,523 FHLB advances ....................................... 167,030 4,728 350,878 4,728 ----------- ----------- ----------- ----------- Total interest expense .......................... 1,263,770 1,110,649 3,676,753 3,315,251 ----------- ----------- ----------- ----------- Net interest income before provision for loan losses .................... 816,399 843,222 2,487,863 2,573,460 Provision for loan losses ........................... 0 0 0 5,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses ..................... 816,399 843,222 2,487,863 2,568,460 ----------- ----------- ----------- ----------- NONINTEREST INCOME Gain(loss) on sale of interest-earning assets ....... 37,230 13,050 100,675 44,372 Loan origination and commitment fees ................ 14,245 18,809 56,015 46,102 Loan servicing fees ................................. 19,874 26,860 68,798 73,797 Gain on foreclosed real estate ...................... (6,911) 0 (6,351) 0 Other ............................................... 13,692 18,967 35,330 51,382 ----------- ----------- ----------- ----------- Total noninterest income ........................ 78,130 77,686 254,467 215,653 ----------- ----------- ----------- -----------
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Nine Months Ended June 30, Ended June 30, (Unaudited) (Unaudited) 1998 1997 1998 1997 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE Compensation and benefits ........................... 463,006 425,534 1,415,800 1,271,288 Occupancy and equipment ............................. 47,084 40,769 140,843 112,829 SAIF deposit insurance premium ...................... 14,417 15,011 42,862 66,186 Loss on foreclosed real estate ...................... 0 (8) 0 5,683 Other ............................................... 173,060 136,337 470,015 438,547 ----------- ----------- ----------- ----------- Total noninterest expense ....................... 697,567 617,643 2,069,520 1,894,533 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes ........ 196,962 303,265 672,810 889,580 Income tax expense (benefit) ........................... 73,913 112,354 247,662 329,646 ----------- ----------- ----------- ----------- NET INCOME (LOSS) ...................................... $ 123,049 $ 190,911 $ 425,148 $ 559,934 =========== =========== =========== =========== Earnings per common share .............................. $ .09 $ .13 $ .29 $ .38 Earnings per common share - assuming dilution .......... .08 .13 .28 .37
The accompanying notes are an integral part of the consolidated financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED June 30, 1998 Common Net Unrealized Stock and Unearned Unallocated Gain on Avail. Total Paid in RRP ESOP For Sale Retained Treasury Stockholders' Capital Shares Shares Securities Earnings Stock Equity ------- ------ ------ ---------- -------- ----- ------ Balance October 1, 1997 $12,209,443 $ (329,748) $ (650,614) $ 15,512 $13,365,792 $(3,731,017) $20,879,368 Deferred compensation amortization - 87,287 - - - - 87,287 Payment of cash dividends - - - - (177,111) - (177,111) Accrued dividends - RRP stock - - - - (4,400) - (4,400) Net change in unrealized gain - - - (25,317) - - (25,317) on securities available for sale, net of deferred taxes of ($13,042) Transfer of par value of 6,281 - - - (6,281) - - shares created in stock split Net income for the nine months ended June 30, 1998 - - - - 425,148 - 425,148 Balance June 30, 1998 $12,215,724 $ (242,461) $ (650,614) $ (9,805) $13,603,148 $(3,731,017) $21,184,975 =========== ========== ========== ============ ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Nine Months Ended June 30, ---------------------------- 1998 1997 ----------- ----------- Cash flows from operating activites: Net income .............................................. $ 425,148 $ 559,934 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees ...... 3,660 (1,947) Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans . 100,344 77,941 Amortization of deferred compensation ............... 87,286 87,286 Compensation charge related to release of ESOP shares 94,014 70,977 Depreciation ........................................ 72,410 50,890 Deferred income taxes ............................... (81,255) 21,649 Stock dividends on FHLB stock ....................... (41,800) (42,200) Origination of mortgage servicing rights ........... (80,916) 0 Amortization of mortgage servicing rights ........... 32,592 18,819 Net (gain) loss on sale of: Securities held to maturity ....................... 0 (1,381) Foreclosed real estate ............................ 0 0 Fixed assets ...................................... 0 (9,562) Net loss on disposal of fixed assets .............. 3,889 0 Other assets ...................................... 0 0 Loans ............................................. (19,759) (42,991) Loans held for sale ............................... 0 0 Proceeds from loan sales ............................ 6,805,150 2,989,034 Originations of loans held for sale ................. 0 0 Proceeds from sale of fixed assets .................. 0 0 (Increase) decrease in: Accrued interest receivable ....................... (51,399) 5,859 Other assets ...................................... (490,540) 243,280 Accrued loan loss ................................. 0 5,000 Increase (decrease) in: Federal income tax payable ........................ 89,741 (2,582) Accrued expenses and other liabilities ............ (733,960) (603,321) Capitalized interest on time deposits ............... 0 0 ----------- ----------- Net cash provided (used) by operating activities ........... 6,214,605 3,426,685 ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements.
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the Nine Months Ended June 30, 1998 1997 ------------ ------------ Cash flows from investing activites: Purchases of interest earning time deposits ....................... $ (295,617) $ (98,000) Net decrease (increase) in fed funds sold ......................... 753,847 480,094 Purchases of obligations - U.S. Govt. and agencies held-to-maturity ................................................ (15,031,688) (6,495,391) Proceeds from maturity of time deposits ........................... 295,573 196,000 Proceeds from sale of securities held-to-maturity ................. 0 0 Proceeds from maturity of securities held-to-maturity ............. 0 0 Proceeds from maturity of obligations - U.S. Govt. and agencies held-to-maturity ....................................... 9,000,000 8,500,000 Proceeds from sale of obligations of U.S. Govt. agencies held-to-maturity ................................................ 0 1,000,938 Proceeds from redemption of FHLB stock ............................ 270,100 0 Purchases of mortgage-backed securities available for sale ........ (7,598,697) (2,035,446) Purchases of mortgage-backed securities held-to-maturity .......... 0 (512,122) Principal payments on mortgage-backed securities available for sale 1,686,740 1,130 Principal payments on mortgage-backed securities held-to-maturity . 5,601,036 5,529,654 Net originations and principal collections on loans ............... (11,615,043) (10,121,466) Capitalized acquisition cost related to foreclosed real estate .... (2,737) (9,489) Proceeds from sale of foreclosed real estate ...................... 2,594 437,094 Proceeds from sale of fixed assets ................................ 0 17,500 Expenditures for premises and equipment ........................... (3,700) (41,115) ------------ ------------ Net cash provided (used) by investing activities ..................... (16,937,592) (3,150,619) ------------ ------------ Cash flows from financing activities: Net increase(decrease) in: Non-interest bearing deposits, savings, NOW accounts ............ 1,174,753 (1,312,081) Time deposits ................................................... (2,051,617) (1,048,085) FHLB Advances ................................................... 77,701,500 2,481,420 Repayment of FHLB Advances ...................................... (69,574,472) (518,000) Advances from borrowers for taxes and insurance ................. (266,052) (284,947) Dividends paid to stockholders .................................... (177,111) (157,549) Purchase of treasury stock ........................................ 0 (951,116) Proceeds from sale of common stock ................................ 0 0 ------------ ------------ Net cash provided (used) by financing activities ..................... 6,807,001 (1,790,358) ------------ ------------ Net increase (decrease) in cash and cash equivalents ................. (3,915,986) (1,514,292) Cash and cash equivalents at beginning of the period ................. 6,931,133 5,699,647 ------------ ------------ Cash and cash equivalents at end of the period ....................... $ 3,015,147 $ 4,185,355 ============ ============
EAST TEXAS FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (continued) For the Nine Months Ended June 30, 1998 1997 ------------ ------------ Supplemental disclosure: Cash paid for: Interest on deposits .............................................. $ 1,652,209 $ 1,666,746 Income taxes ...................................................... $ 4,589 $ 310,692 Transfers from loans to real estate Acquired through foreclosures ..................................... $ 244,229 $ 467,991 Loans charged off to loan loss reserves .............................. $ 39,181 $ 71,345 Recoveries credited to loan loss reserves ............................ $ 0 $ 51,159
The accompanying notes are an integral part of the consolidated financial statements. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 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, 1997. 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 share for the three months ended June 30, 1998 and 1997, 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, 1998 and 1997, the weighted average number of shares outstanding totaled 1,441,868 and 1,448,973 respectively. For the nine months ended June 30, 1998 and 1997, the weighted average number of shares outstanding totaled 1,441,868 and 1,482,256 shares respectively. Earnings per common share - assuming dilution, for the three months and nine months ended June 30, 1998 and 1997, 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, 1998 and 1997, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,499,546 and 1,479,110 shares respectively. For the nine months ended June 30, 1998 and 1997, the weighted average number of shares outstanding for earnings per share - assuming dilution totaled 1,495,531 and 1,507,631 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, 1998 and 1997.) NOTE 3 - SECURITIES The amortized cost and estimated market values of investment securities held-to-maturity as of June 30, 1998, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Debt securities: U. S. Treasury .................. $ 2,506,210 $ 13,460 $ 0 $ 2,519,670 U. S. government agency ......... 26,540,420 73,834 6,867 26,607,167 ----------- ----------- ----------- ----------- Total debt securities ...... $29,046,630 $ 87,294 $ 6,867 $29,127,057 ----------- ----------- ----------- -----------
The amortized cost and estimated market values of investment securities held-to-maturity as of June 30, 1998, by contractual maturity are shown below:
Estimated Amortized Market Cost Value ----------- ----------- Due in one year or less ...................... $ 7,505,509 $ 7,516,432 Due after one year through two years ......... 7,544,310 7,587,417 Due after two years through three years ...... 2,990,995 3,013,878 Due after three years through five years ..... 11,005,816 11,009,330 ----------- ----------- Total debt securities ................ $29,046,630 $29,127,057 ----------- -----------
As of June 30, 1998, $12.0 million of the securities were callable at various dates between November 1998 and June 2001. As of June 30, 1998, the weighted average yield on the Company's investment security held-to-maturity portfolio was approximately 6.03% 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 6.00%. The carrying values and estimated market values of mortgage-backed and related securities available-for-sale as of June 30, 1998, 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 9,930,051 261,361 0 (14,856) 10,176,556 ------------ ------------ ------------ ------------ ------------ $ 9,930,051 $ 261,361 $ 0 $ (14,856) 10,176,556 ------------ ------------ ------------ ------------ ------------
The carrying values and estimated market values of mortgage-backed and related securities held-to-maturity as of June 30, 1998, by type of security are as follows:
Estimated Principal Unamortized Unearned Carrying Market Balance Premiums Discounts Value Value ----------- ----------- ----------- ----------- ----------- Fixed Rate .... $ 2,261,358 $ 0 $ 3,241 $ 2,258,117 $ 2,256,892 Adjustable Rate 10,221,606 79,275 11,885 10,288,996 10,495,914 ----------- ----------- ----------- ----------- ----------- $12,482,964 $ 79,275 $ 15,126 $12,547,113 $12,752,806 ----------- ----------- ----------- ----------- -----------
The overall yield on the Company's mortgage-backed securities portfolio as of June 30, 1998, was approximately 6.86%. NOTE 4 - CURRENT ACCOUNTING ISSUES SFAS No. 130 In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS ) No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in general purpose financial statements. Comprehensive income includes net income and several other items that current accounting standards require to be recognized outside of net income. SFAS No. 130 requires companies to display comprehensive income in its financial statements, to classify items of comprehensive income by their nature in their financial statements and to display accumulated balances of comprehensive income in stockholders' equity separately from retained earnings and addition paid-in capital. The Statement is effective for fiscal years beginning after December 31, 1997. The Company adopted the Statement as required. SFAS No. 131 In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure About Segments of and Enterprise and Related Information. The Statement requires entities to report certain information about their operating segments in a complete set of financial statements. It requires them to report certain enterprise-wide information about their products and services, activities in different geographic regions and their reliance on major customers, and to disclose certain segment information in their interim financial statements. The Statement is effective for fiscal years beginning after December 15, 1997. The Company has not determined the effects, if any, that the disclosure requirements will have on its financial statements. The Company adopted the Statement as required. SFAS No. 132 In February of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 revises current disclosures for employers' disclosures for pensions and other postretirement benefit plans. It standardizes the disclosure requirements for these plans to the extent possible, and it requires additional information about changes in the benefit obligations and the fair value of plan assets that are expected to enhance financial analysis. It does not change measurement or recognition standards for these plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The Company anticipates changing the disclosure requirements of its defined benefit pension plan as a result of the statement. The Company has no other postretirement benefit plans. NOTE 5 - STOCK OPTION AND INCENTIVE PLAN The 1995 Stock Option and Incentive Plan (the "Stock Option Plan") provides for awards in the form of stock options, stock appreciation rights, limited stock appreciation rights, and restricted stock. Options to purchase shares of common stock of the Company may be granted to selected directors, officers and key employees. The number of shares of common stock reserved for issuance under the stock option plan was equal to 121,519 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 vest at a rate of 20% per year beginning at the date of the grant. The Company plans to use treasury stock for the exercise of options. The following is a summary of changes in options outstanding: Options outstanding: Balance, September 30, 1995 103,411 Granted 0 Exercised (2,090) Forfeited and expired 0 -------- Balance, September 30, 1996 101,321 Balance, September 30, 1996 101,321 Granted 0 Exercised (1,045) Forfeited and expired 0 -------- Balance, September 30, 1997 100,276 ======== All outstanding options were granted at an exercise price of $14.125 per share. On March 25, 1998, the Company completed a 3 for 2 stock split in the form of a 50% stock dividend. As a result of the split, the number of outstanding options, option price, options exercisable at year end, and shares available for the future grants were adjusted as follows: Options outstanding at September 30, 1997 ....................... 150,411 ======= Option price .................................................... $ 9.42 ======= Options exercisable at year end under stock option plan ......... 57,350 ======= Shares available for future grants .............................. 27,162 ======= During the nine months ended June 30, 1998, no options were exercised, issued, or forfeited. NOTE 6 - COMMON STOCK SPLIT On March 25, 1998, the Company completed a 3 for 2 stock split in the form of a 50% stock dividend. The effect of the split is presented retroactively within stockholder's equity by transferring the par value of the additional shares from retained earnings to additional paid in capital. All share per share data, including stock option plan information, has been retroactively restated to reflect the stock split. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 1998 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 $122.6 million at June 30, 1998, a $6.7 million increase from the $115.9 million reported at September 30, 1997, the Company's most recent fiscal year end. The increase in total assets was the result of a $5.8 million increase in mortgage-backed securities available-for-sale, a $4.6 million increase in loans receivable and a $6.0 million increase in investment securities held-to-maturity. The increases were partially offset by a $5.6 million decline in mortgage-backed securities held-to-maturity and a $5.0 million decrease in interest-bearing deposits with banks and federal funds sold. The increase in loans-receivable was a result of the Company's continued efforts to originate and place into portfolio one- to four-family loans. During the quarter ended June 30, 1998, the Company continued its policy of placing all fixed interest rate one- to four-family loans with original terms of less than or equal to 15 years and with interest rates of greater than or equal to 7.00% into portfolio. Continued lower mortgage rates have influenced borrowers to select fixed rate loans and, as result, the Company was able to increase its loans receivable portfolio. In addition, the Company has placed into portfolio approximately $2.5 million in home equity loans during the nine months ended June 30, 1998. Several times during the nine months ended June 30, 1998, interest rates on 15 year mortgage loans dropped below 7.00% and the Company elected to sell such loans into the secondary market. A continued period of declining mortgage rates could impede the Company's ability to continue to increase its loans receivable portfolio as few, if any, loans would be placed into portfolio under the Company's current policy. The result could be an overall decline in the Company's yield on earning assets as cash flows normally directed to loans are reinvested into lower yielding assets. In an effort to minimize some of the interest rate risk inherent in its 15 year fixed rate mortgage portfolio and in an effort to achieve higher yielding assets, the Company made the decision, during the quarter ended March 31, 1998, to begin offering home equity loans. Home equity lending was approved by Texas voters in an amendment to the Texas Constitution in November of 1997. Financial institutions were able to begin making loans on January 1, 1998. The Company currently offers home equity loans for up to 80% of the borrowers equity in the property, the maximum allowed by Texas law. Loan terms of up to 15 years are offered at interest rates, depending upon the size of the loan, ranging from 7.75% to 9.00%. As of June 30, 1998, the Company had approximately 61 home equity loans outstanding totaling $2.5 million. At June 30, 1998, loans receivable totaled $61.7 million, compared to $57.1 million at September 30, 1997. For the three months and nine months ended June 30, 1998, the Company originated a total of $8.5 million and $24.5 million in loans respectively. In an effort to increase its total loan production, to diversify into other types of lending, and to achieve greater yields on loans, the Company intends to open an additional full service branch location. The new location will be located in the rapidly growing area of South Tyler. The location will offer all of the lines of business the Company currently offers. In addition, the new office will offer a full line of commercial banking services, including commercial and consumer lending, commercial checking accounts, personal banking products such as credit and debit cards, investment brokerage services, automated teller machines, and extended banking hours. The Company anticipates opening the new location late in 1998. The increase in the mortgage-backed securities available-for-sale portfolio was primarily the result of the Company's decision to continue its program of borrowing funds from the FHLB and investing the proceeds into mortgage-backed and similar securities in an effort to achieve a positive margin on the transaction. At June 30, 1998, the portfolio totaled $10.2 million, compared to $4.4 million at September 30, 1997. Subject to favorable 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 ("FHLB") and invest the proceeds in adjustable rate mortgage-backed securities to be held in an available-for-sale accounting classification. 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 advances. 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 margin above the FHLB advance rates. The Company intends to primarily borrow funds from the FHLB with terms of approximately thirty days and invest in mortgage-backed securities with interest rate adjustment frequencies that vary between one month and one year. As a result, the success of the program will be dependent upon the difference between very short-term federal fund type interest rates and interest rates comparable to U.S. Treasury bill rates. In general, the program will be more successful as the difference in these types of interest rates 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 as borrowers on underlying loans of the securities elect to refinance their mortgages. A rapid period of prepayments could have the effect of decreasing the overall yield on the program. At June 30, 1998, the average yield on the securities in the program was approximately 6.07% while the cost of the FHLB advance was approximately 5.62%. At June 30, 1998, the investment securities held-to-maturity portfolio totaled $29.0 million, compared to $23.1 million at September 30, 1997. At June 30, 1998, the overall yield on the portfolio was approximately 6.03%, compared to 6.06% at September 30, 1997. The increase in outstanding balances was a result of the Company's decision to transfer excess interest-earning bank balances and federal funds sold into longer term higher yielding investments. At June 30, 1998, the portfolio contained $7.5 million in securities with remaining terms until maturity of less than one year, $7.5 million with remaining maturities of one through two years, $3.0 million with remaining maturities of two through three years and $11.0 million with remaining maturities of three through five years. Of the $29.0 million outstanding, $12.0 million are callable at various dates between November 1998 and June 2001. The Company's mortgage-backed securities held-to-maturity portfolio totaled $12.5 million at June 30, 1998, compared to $18.2 million at September 30, 1997. The decrease in mortgage-backed securities held-to-maturity was primarily due to principal payments received on the portfolio during the period. Continued lower long-term interest rates could continue to influence borrower decisions to refinance the adjustable rate mortgage loans underlying the Company's mortgage-backed securities held-to-maturity portfolio. The result would be a continued decrease in the balances reported in this asset category. 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 the Company's ability to originate portfolio loans. A decision by the Company to discontinue placing mortgage loans into portfolio could have the effect of increasing the balances reported in this account as cash flow normally directed to mortgage lending would be redirected to mortgage-backed securities held-to-maturity. The weighted-average yield on the portfolio was approximately 7.50% at June 30, 1998. Total deposits were $87.7 million at June 30, 1998, a $877,000 decrease from the $88.6 million reported at September 30, 1997. The Company's average funds cost was approximately 4.93% at June 30, 1998, compared to the 4.91% reported at September 30, 1997. The Company reported $12.3 million in borrowed funds at June 30, 1998, an increase of $8.1 million from the $4.2 million reported at September 30, 1997. Approximately $10.2 million of the borrowed funds were used to invest in mortgage-backed securities available-for-sale as part of the Company's wholesale funded arbitrage program. The advance had a remaining term of less than 30 days and had an interest rate of 5.62%. The remaining $2.1 million in advances were used to fund a portion of the Company's commercial real estate loan portfolio and had a weighted average cost of approximately 6.05%. Stockholders' equity totaled $21.2 million at June 30, 1998, an increase of $306,000 from the $20.9 million reported at September 30, 1997. The increase was primarily attributable to the net income of $425,000 reported for the nine months ended June 30, 1998, offset by a $25,000 decline in net unrealized gains and losses on securities available-for-sale and $182,000 in cash dividends paid to stockholders. At June 30, 1998, the Company reported a book value per share of $13.76 based on 1,539,461 net outstanding shares. The Company did not repurchase any treasury stock during the nine months ended June 30, 1998. The Company held 345,031 shares of treasury stock at an average cost of $10.81 per share at June 30, 1998. 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, 1998 AND JUNE 30, 1997 General. Net income for the three months ended June 30, 1998 was $123,000 or $.09 per common share or $.08 per common share assuming dilution, a decrease of $68,000 from the $191,000 or $.13 per share reported for the three months ended June 30, 1997. The decrease in net income was attributable to a $27,000 decline in net interest income after provision for loan losses and a $80,000 increase in total non-interest expense, which were partially offset by a $38,000 decrease in income tax expense. The $80,000 increase in total non-interest expense included approximately $40,000 in legal and accounting expenses associated with due diligence performed on a potential bank acquisition during the quarter ended June 30, 1998. The costs incurred negatively affected earnings per share by $.02 per share for the quarter ended June 30, 1998. Net Interest Income. For the quarter ended June 30, 1998, net interest income before provision for loan losses totaled $816,000, a decrease of $27,000 from the $843,000 reported for the quarter ended June 30, 1997. On an annualized basis, the $816,000 in net interest income for the current quarter was approximately 2.78% of average interest earning assets and 2.68% of average total assets. For the quarter ended June 30, 1997, the $843,000 in net interest income was 3.09% of average interest earning assets and 3.01% of average total assets. Average interest earning assets were approximately $117.5 million for the quarter ended June 30, 1998, compared to $109.3 million for the quarter ended June 30, 1997. The decline in net interest income, despite the fact that average interest earning assets increased by approximately $8.2 million, was primarily the result of continued period of minimal differences in short term and long term interest rates. Cash flow from the Company's interest earning assets has increased over the past several quarters as mortgage borrowers have elected to refinance their mortgages. In addition, scheduled maturities of the investment securities portfolios have also provided additional challenges for reinvesting cash flow in this current interest rate environment. The result has been, despite growth in interest-earning assets, a yield on the Company's average interest-earning assets that declined from 7.15% for the quarter ended June 30, 1997 to 7.08% for the quarter ended June 30, 1998 as the cash flow has been reinvested at lower interest rates. Contrarily, interest rates on the Company's primary source of funds, certificates of deposits, have not decreased. Continued competition for deposits in the Company's market has compelled the Company to continue to pay higher interest rates in order to maintain current deposit levels. On an annualized basis, the $1.1 million in interest expense on deposits, reported for the quarter ended June 30, 1998, was approximately 5.00% of average deposits outstanding for the quarter. For the quarter ended June 30, 1997, the $1.1 million in interest expense on deposits was approximately 4.94% of average deposits outstanding for the quarter. In addition, growth of the Company's balance sheet has been done through advances from the Federal Home Loan Bank of Dallas and at marginal rates higher than the Company's average cost of funds. For the quarter ended June 30, 1998, the $167,000 in interest expense on FHLB advances was approximately 5.72%. Total interest income was $2.1 million for the quarter ended June 30, 1998, an increase of $126,000 from the $2.0 million reported for the same quarter in 1997. Interest income on loans-receivable totaled $1.2 million or 7.80% of average loans receivable balances outstanding for the quarter ended June 30, 1998. For the three months ended June 30, 1997, interest income on loans-receivable was approximately 8.05% of average loans receivable balances. During the quarter ended June 30, 1998, the Company continued its policy of placing into portfolio mortgage loans with an original maturity of less than or equal to 15 years and with interest rates of greater than or equal to 7.00%. As a result, the Company has been able to increase its loan receivable portfolio and increase interest income from loans-receivable. The growth has been at marginal yields at less than the average in the portfolio and the result has been a decline in the average yield on the portfolio. For the quarter ended June 30, 1998, the Company originated $8.5 million in loans. Approximately $2.6 million were sold into the secondary market while the remainder were place into portfolio. Interest income from mortgage-backed securities available-for sale totaled $145,000 for the three months ended June 30, 1998, compared to none for the three months ended June 30, 1997. Interest income from this portfolio is part of the Company's plan to borrow funds from the FHLB and invest in mortgage-related securities in an effort to achieve a margin on the difference in the investment yield and the cost of the borrowings from the FHLB. The yield on the portfolio was approximately 6.07% at June 30, 1998. [See "Financial Condition"] Interest income from the investment securities held-to-maturity portfolio totaled $423,000 for the three months ended June 30, 1998, compared to $520,000 for the same quarter in 1997. The average balance outstanding in the portfolio increased from $26.6 million for the quarter ended June 30, 1997 to $27.1 million for the quarter ended June 30, 1998. Despite the increase in the average balance outstanding, the average yield on the portfolio declined from 7.37% for the quarter ended June 30, 1997 to 6.13% for the quarter ended June 30, 1998. The decline in the yield on the portfolio was a result of maturing investment securities that were replaced at lower yields. Interest income from the mortgage-backed securities held-to-maturity portfolio totaled $243,000 for the three months ended June 30, 1998, compared to $354,000 for the same period in 1997. Continued prepayments on the adjustable rate securities in the portfolio caused the average balance in the portfolio to decline to $13.4 million for the quarter ended June 30, 1998 from $20.4 million for the quarter ended June 30, 1997. The Company redirected the cash flow from the portfolio into its lending operations. The result was a decline in interest income from the portfolio, despite the fact that the average yield on the portfolio increased from 6.95% for the quarter ended June 30, 1997 to 7.26% for the quarter ended June 30, 1998. Interest paid to depositors totaled $1.1 million for the three months ended June 30, 1998, unchanged from the $1.1 million for the three months ended June 30, 1997. Average deposit balances declined $1.8 million from $89.5 million for the quarter ended June 30, 1997 to $87.8 million for the quarter ended June 30, 1998. Total interest expense as a percentage of average interest costing liabilities was approximately 5.08% for the three months ended June 30, 1998, compared to 4.91% for the three months ended June 30, 1997. Provision For Loan Losses. The Company made no provision for loan losses for the quarter ended June 30, 1998 or for the quarter ended June 30, 1997. [See - "Asset Quality"] Non-Interest Income. Non-interest income totaled $78,000 for the three months ended June 30, 1998, which was unchanged from the same period in 1997. Gains on sales of interest earning assets equaled $37,000 for the current quarter, a $24,000 increase from the $13,000 reported for the same quarter in 1997. The increase was attributable to additional gains on the sale of mortgage loans into the secondary market during the quarter ended June 30, 1998, compared to the same quarter in 1997. Partially offsetting the increase in gains on sales of loans was a $5,000 decrease in loan origination fees to $14,000 for the three months ended June 30, 1998 from $19,000 for the three months ended June 30, 1997. The decrease was attributable to a decline in the number of single family loans made by the Company for which loan processing fee income is collected. During the nine months ended June 30, 1998, as compared to the same period in 1997, the Company has made fewer traditional one to four family loans as compared to the same period in 1997. In addition, a $7,000 decrease in loan servicing fees for the current quarter as compared to the same quarter in 1997 offset a portion of the increase in gains on sales of loans. The decrease was attributable to the amortization of previously recorded originated mortgage servicing rights, as loans were refinanced. Non-Interest Expenses. Non-interest expenses totaled $698,000 for the three months ended June 30, 1998, compared to $618,000 for the same period in 1997, an $80,000 increase. The increase in non-interest expense was partially the result of the $40,000 in due diligence expenses incurred during the quarter ended June 30, 1998, as well as a $37,000 increase in compensation and benefits expense. The increase in compensation and benefits expense was essentially the result of additional compensation for new employees added in 1997 in conjunction with the opening of a new loan production office by the Company. Also, additional expense associated with the funding of the Company's defined benefit pension plan and additional expenses associated with the Company's Employee Stock Ownership Plan accounted for a portion of the increase. Occupancy and equipment expense increased $6,000 from $41,000 for the three months ended June 30, 1997 to $47,000 for the three months ended June 30, 1998. The increase was also attributable to additional expenses associated with the opening of a new loan production office in 1997. Provision For Income Taxes. The Company incurred federal income tax expense of $74,000 or 37.5% of pre-tax income for the three months ended June 30, 1998, compared to $112,000 or 37.0% of pre-tax income for the three months ended June 30, 1997. COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 General. For the nine months ended June 30, 1998, the Company reported net income of $425,000 or $.29 per common share and $.28 per common share - assuming dilution, compared to $560,000 or $.38 per common share and $.37 per common share - assuming dilution for the nine months ended June 30, 1997. The decrease in net income was attributable to an $81,000 decline in net interest income after provisions for loan losses and a $175,000 increase in noninterest operating expenses, which were partially offset by a $39,000 increase in noninterest income and a $82,000 decrease in income tax expense. Included in the $175,000 increase in noninterest expenses is approximately $40,000 in due diligence expenses, which were incurred on a potential bank acquisition during the period. Net Interest Income. For the nine months ended June 30, 1998, net interest income after provisions for loan losses totaled $2.5 million, down slightly from the $2.6 million reported for the nine months ended June 30, 1997. On an annualized basis, the $2.5 million in net interest income after provisions for loan losses for the current period was approximately 2.88% of average interest earning assets and 2.78% of average total assets. For the nine months ended June 30, 1997, the $2.6 million in net interest income after provisions for loan losses was approximately 3.10% of average interest earning assets and 3.02% of average total assets. Average interest earning assets were approximately $115.2 million for the nine months ended June 30, 1998, compared to $110.5 million for the nine months ended June 30, 1997. Total interest income was $6.2 million or 7.13% of average interest earning assets for the nine months ended June 30, 1998, compared to $5.9 million or 7.11% of average interest earning assets for the nine months ended June 30, 1997. The decline in average yield on interest earning assets was a result of continued lower interest rates and a continued narrowing of the difference in short and long term interest rates. Cash flow from the Company's interest earning assets are being re-deployed in lower yielding assets in the current interest rate and the result is a decline in the average yield on the Company's interest earning asset portfolio. Interest income on loans receivable totaled $3.6 million for the nine months ended June 30, 1998, a $471,000 increase from the $3.1 million reported for the nine months ended June 30, 1997. The increase in interest income on loans receivable, despite a decline in the average yield on the portfolio, was a direct result of the increase in balances outstanding in the portfolio as the Company continued its policy of placing into portfolio the majority of the loans it originates. Average loans receivable balances increased to $59.4 million for the nine months ended June 30, 1998 from $51.3 million for the nine months ended June 30,1997. For the nine months ended June 30, 1998, the $3.6 million in interest income on loans receivable was approximately 7.98% on an annualized basis, compared to 8.02% on an annualized basis on the $3.1 million reported for the nine months ended June 30, 1997. Interest income from mortgage-backed securities available-for sale totaled $315,000 for the nine months ended June 30, 1998, compared to none for the nine months ended June 30, 1997. Interest income from this portfolio is part of the Company's program to borrow funds from the FHLB and invest in mortgage-related securities in an effort to achieve a margin on the difference in the investment yield and the cost of the borrowings. At June 30, 1998, the Company had approximately $10.2 million invested in the program. [See "Financial Condition"] Interest income on investment securities held-to-maturity totaled $1.2 million for the nine months ended June 30, 1998, compared to $1.6 million for the nine months ended June 30, 1997. The decrease in interest income on the portfolio was partially the result of a decline in the overall yield on the portfolio as maturing securities were re-invested at lower yields. For the nine months ended June 30, 1998, the $1.2 million in interest income was approximately 6.26% on an annualized basis of the average balance outstanding, compared to 7.60% on an annualized basis for the $1.6 million reported for the nine months ended June 30, 1997. Interest income on mortgage-backed securities held-to-maturity was $839,000 for the nine months ended June 30, 1998, compared to $1.2 million for the nine months ended June 30, 1997. The decline in interest income on the portfolio was primarily the result of a decline in the average balance outstanding in the portfolio from $19.9 million for the nine months ended June 30, 1997 to $12.5 million for the nine months ended June 30, 1998. The Company re-directed cash flow from the portfolio into its lending operations. The average yield on the portfolio increased to 7.29% for the nine month period ended June 30, 1998 from 6.92% for the nine month period ended June 30, 1997. The increase in the overall yield on the portfolio, despite an overall decline in the general level of interest rates, was attributable to the adjustable rate features of the securities in the portfolio. The portfolio is predominately made up of adjustable rate mortgage-backed securities. The securities have an interest rate that is determined by a spread or margin over an index rate. A portion of the securities in the portfolio when purchased had discounted initial coupon rates. Over the past several quarters, despite an overall decline in interest rates, the coupon rates and consequently the yields on the securities have increased. However, the adjustable rate feature of the underlying loans in the securities, the higher coupon rates on such loans, and lower rates of interest on fixed interest mortgage loans have caused borrowers on the underlying loans to seek out opportunities to refinance their mortgages. The result has been an increase in the cash flow from the portfolio and resulted in the decline in the average balances in the portfolio. Interest expense was $3.7 million for the nine months ended June 30, 1998, an increase of $362,000 from the $3.3 million reported for the nine month period ended June 30, 1997. An increase in average interest costing liabilities, including advances from the FHLB, from $91.3 million for the nine months ended June 30, 1997 to $100.0 million for the nine months ended June 30, 1998 primarily accounted for the increase in interest expense. The $3.7 million in interest expense reported for the nine month period ended June 30, 1998 was approximately 4.90% on an annualized basis of average interest costing liabilities, compared to 4.84% on an annualized basis for the same period in 1997. Non-Interest Income. Non-interest income was $254,000 for the nine months ended June 30, 1998, compared to $216,000 for the nine months ended June 30, 1997. The increase in income was directly attributable to additional gains on sales of interest earning assets and additional loan origination fees. Gains on sales of interest earning asset totaled $101,000 for the nine month period ended June 30, 1998, compared to $44,000 for the nine months ended June 30, 1997. The increase was a direct result of the fact that more loans were sold into the secondary market during the current period and more gains on sales of loan were reported. At certain times during the nine months ended June 30, 1998, interest rates on the 15-year loans being made by the Company fell below 7.00%. The Company elected to sell such loans into the secondary market, which resulted in additional gains on sales of loans. In addition, loan origination and commitment fees were $56,000 for the nine months ended June 30, 1998, compared to $46,000 for the nine months ended June 30, 1997. Non-Interest Expense. Non-interest expense was reported as $2.1 million for the nine month period ended June 30, 1998, a $175,000 increase from the $1.9 million reported for the nine months ended June 30, 1997. The increase in non-interest expense was primarily the result of a $145,000 increase in compensation and benefits expense from $1.3 million for the nine months ended June 30, 1997 to $1.4 million for the nine months ended June 30, 1998 and $40,000 in due diligence expenses incurred during the period. The increase in compensation and benefits expense was essentially the result of additional compensation for new employees added in 1997 in conjunction with the opening of a new loan production office by the Company. Also, additional expense associated with the funding of the Company's defined benefit pension plan and additional expenses associated with the Company's Employee Stock Ownership Plan accounted for a portion of the increase. Occupancy and equipment expense totaled $141,000 for the nine months ended June 30, 1998, compared to $113,000 for the nine months ended June 30, 1997. The increase was attributable to additional expenses associated with the opening of a new loan production office and the installation of a computer network linking all of the Company offices, both in late 1997. Provision For Income Taxes. The Company incurred federal income tax expense of $248,000 or 36.8% of pre-tax income for the nine months ended June 30, 1998, compared to $330,000 or 37.1% of pre-tax income for the nine months ended June 30, 1997. ASSET QUALITY At June 30, 1998, the Company's non-performing assets totaled $502,000 or .41% of total assets, compared to $310,000 or .27% of total assets at September 30, 1997. At June 30, 1998, non-performing assets were comprised of twenty-one (21) loans, the largest of which was $47,000, secured by one (1) single family dwelling and two (2) foreclosed single family real estate properties in the amount of $204,700. Non-performing loans at June 30, 1998, equaled $297,000 or .48% of loans receivable, compared to $310,000 or .54% of loans receivable at September 30, 1997. Classified assets totaled $811,000 or .66% of total assets at June 30, 1998, compared to $904,000 or .78% of total assets at September 30, 1997. 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, 1998, were deemed to be "substandard". No assets were classified "doubtful" or "loss" as of such date. The Company's allowance for loan losses totaled $234,000 at June 30, 1998, a decrease of $35,000 from September 30, 1997. The allowance for loan losses as a percentage of loans receivable equaled .38% at June 30, 1998, compared to .48% at September 30, 1997. The decrease was a result of the Company's acquisition of a foreclosed real estate property. The property was appraised at acquisition and the balance was written down to its estimated "fair value." 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. Current Office of Thrift Supervision regulations require the Association to maintain, at a minimum, cash and eligible investments, in an amount not less than 4.0% of net withdrawable savings accounts and borrowings payable on demand or in one year or less. Liquid assets include cash on hand, unpledged demand deposits, certain time deposits, and, U. S Government and agency obligations. The Association maintains a liquid asset ratio above the minimum required level of the Office of Thrift Supervision. At June 30, 1998, the Association's liquid asset ratio equaled 40.0%. 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, 1998, the Association had outstanding commitments to extend credit on $2.9 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 $21.2 million at June 30, 1998, an increase of $306,000 from the $20.9 million reported at September 30, 1997. The increase was primarily a result of the $425,000 net income for the nine months ended June 30, 1998, less $182,000 in cash dividends paid during the nine month period. As of June 30, 1998, the Company's reported book value per share, using total stockholders' equity of $21.2 million (net of the cost of unallocated ESOP and RRP shares) and 1,539,461 outstanding shares of common stock (the total issued shares including unallocated ESOP and RRP shares, less treasury shares), equaled $13.76 per share. Subsequent to the quarter ended June 30, 1998, the Company announced its intention to pay a cash dividend of $.05 per share on August 26, 1998, to stockholders of record at August 12, 1998. 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, 1998, the Association's actual and required capital amounts under each of the three requirements were as follows: - Tangible Capital (stockholders' equity) was $18.2 million or 14.9% of total assets, exceeding the minimum requirement of 1.5% by $16.4 million. - Core Capital (Tangible capital plus certain intangible assets) was $18.2 million or 14.9% of total assets, exceeding the minimum requirement of 4.0% by $13.3 million. - Risk-based Capital (Core capital plus general loan and valuation allowances less an adjustment for capitalized mortgage servicing rights) equaled $18.5 million of 38.5% of risk weighted assets, exceeding the minimum requirement of 8.0% of risk weighted assets by $14.6 million. At June 30, 1998, the Association was 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. YEAR 2000 ISSUE The Year 2000 or Century Date Change issue is a result of computer programs being written using two digits rather than four digits to define the applicable year. A computer system's inability to recognize the date "00" as the year 2000 or if the system recognized the date "00" as the year 1900, could result in a system failure or miscalculations causing disruptions of operations. The Company outsources its primary computer processing functions. The Company has established a management committee to identify all of its systems potentially affected by the year 2000 and to ensure that re-programming of affected systems is completed. The committee will also be responsible for testing all company computer systems and ensuring that all third-party computer system vendors complete Year 2000 remediation. The Company believes that the Year 2000 issue will not pose a significant operational problem. However, it is possible that non-compliant third-party computer systems that fail to successfully address this issue could adversely affect the Company. EAST TEXAS FINANCIAL SERVICES, INC. AND SUBSIDIARY FORM 10-QSB JUNE 30, 1998 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, 1998, the Company filed a report on Form 8-K on April 29, 1998, to report the issuance of a press release dated April 23, 1998, announcing the Company's intention to pay, on May 27, 1998, a cash dividend of $.05 per share for the quarter ended March 31, 1998, to stockholders of record on May 13, 1998. During the quarter ended June 30, 1998, the Company filed a report on Form 8-K on April 29, 1998, to report the issuance of a press release dated April 23, 1998, announcing the Company's earnings for the quarter ended March 31, 1998. 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: July 31, 1998 /s/ Gerald W. Free ------------------ Gerald W. Free Vice Chairman, President and CEO (Principal Executive Officer) Date: July 31, 1998 /s/ Derrell W. Chapman ----------------------- Derrell W. Chapman Vice President/COO/CFO (Principal Financial and Accounting Officer) EXHIBIT 11.0 EX-11 2 COMPUTATIONS OF EARNINGS PER SHARE Three Months Ended June 30, 1998 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- March 31, 1998 1,539,461 97,593 1,441,868 April 30, 1998 1,539,461 97,593 1,441,868 May 31, 1998 1,539,461 97,593 1,441,868 June 30, 1998 1,539,461 97,593 1,441,868 Weighted average number of shares outstanding for the quarter ended June 30, 1998, for earnings per share calculation 1,441,868 Stock options outstanding at June 30, 1998: 150,411 ------- Exercise price of stock options: $9.42 per share --------------- Average stock price for three month period: ended June 30, 1998 $15.279 ------- Three Months Ended ------------------ June 30, -------- Basic Earnings Per Share 1998 1997 - ------------------------ ---- ---- Income available to common stockholders $123,049 $190,911 ======== ======== Weighted average number of common shares outstanding for basic EPS calculation $1,441,868 $1,448,973 =========== ========== Basic Earnings Per Share $.09 $.13 ==== ==== Diluted Earnings Per Share Income available to common stockholders $123,049 $190,911 ======== ======== Weighted average number of common shares outstanding for basic EPS calculation 1,441,868 1,448,973 Weighted average common shares issued under stock option plans 150,411 151,981 Less weighted average shares assumed repurchased with proceeds (92,733) (121,844) -------- --------- Weighted average number of common shares outstanding for diluted EPS calculation 1,499,546 1,479,110 ========= ========= Diluted Earnings Per Share $.08 $.13 ==== ==== COMPUTATIONS OF EARNINGS PER SHARE Nine Months Ended June 30, 1998 Less Total Shares Unallocated Shares Used For Outstanding ESOP Shares EPS Calculation ----------- ----------- --------------- September 30, 1997 1,539,461 97,593 1,441,868 October 31, 1997 1,539,461 97,593 1,441,868 November 30, 1997 1,539,461 97,593 1,441,868 December 31, 1997 1,539,461 97,593 1,441,868 January 31, 1998 1,539,461 97,593 1,441,868 February 28, 1998 1,539,461 97,593 1,441,868 March 31, 1998 1,539,461 97,593 1,441,868 April 30,1 998 1,539,461 97,593 1,441,868 May 31, 1998 1,539,461 97,593 1,441,868 June 30, 1998 1,539,461 97,593 1,441,868 Weighted average number of shares outstanding for the quarter ended June 30, 1998, for earnings per share calculation 1,441,868 Stock options outstanding at June 30, 1998: 150,411 ------- Exercise price of stock options: $9.42 per share --------------- Average stock price for nine month period: ended June 30, 1998 $14.645 ------- Nine Months Ended ----------------- June 30, -------- Basic Earnings Per Share 1998 1997 - ------------------------ ---- ---- Income available to common stockholders $425,148 $559,934 ======== ======== Weighted average number of common shares outstanding for basic EPS calculation $1,441,868 $1,482,256 =========== ========== Basic Earnings Per Share $.29 $.38 ==== ==== Diluted Earnings Per Share Income available to common stockholders $425,148 $559,934 ======== ======== Weighted average number of common shares outstanding for basic EPS calculation 1,441,868 1,482,256 Weighted average common shares issued under stock option plans 150,411 151,981 Less weighted average shares assumed repurchased with proceeds (96,748) (126,606) -------- --------- Weighted average number of common shares outstanding for diluted EPS calculation 1,495,531 1,507,631 ========= ========= Diluted Earnings Per Share $.28 $.37 ==== ==== 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, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JUN-30-1998 853,232 2,161,915 0 0 10,176,556 41,593,744 41,879,863 61,960,737 233,670 122,593,829 87,673,785 10,505,000 1,413,041 1,817,028 0 0 12,564 21,172,411 122,593,829 3,555,424 2,418,642 190,550 6,164,616 3,325,875 3,676,753 2,487,863 0 0 2,069,520 672,810 672,810 0 0 425,148 .09 .08 7.13 205,247 0 0 321,477 272,851 36,744 0 236,107 65,806 0 170,301
-----END PRIVACY-ENHANCED MESSAGE-----