-----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, PGXKWV30aWDbudvY3nrkKT/4FsIC7+ipSiDKu8hlgrpeYV/o3pbDau40gW08qRYb gkbXqoV6KilsYIJ6S0KBhw== 0000914317-99-000763.txt : 19991230 0000914317-99-000763.hdr.sgml : 19991230 ACCESSION NUMBER: 0000914317-99-000763 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-24848 FILM NUMBER: 99782993 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 10KSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIE EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from __________________ to ___________________ Commission file number: 0-24848 EAST TEXAS FINANCIAL SERVICES, INC. (Name of small business issuer as specified in its charter) Delaware 75-2559089 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No. 1200 South Beckham Avenue, Tyler, Texas 75701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (903) 593-1767 -------------- Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES [ X ] NO [ ]. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State the issuer's revenues for its most recent fiscal year: $9,453,000. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the closing bid and ask prices of such stock on the OTC Electronic Bulletin Board as of December 9, 1999 was $9.4 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.) As of December 8, 1999, there were issued and outstanding 1,162,320 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-KSB - Portions of Annual Report to Stockholders for the fiscal year ended September 30, 1999. Part III of Form 10-KSB - Portions of Proxy Statement for 2000 Annual Meeting of Stockholders. Transitional Small Business Disclosure Format: YES [ ]. NO [ X ] . PART I Item 1. Description of Business General East Texas Financial Services, Inc. (the "Company") is a Delaware corporation organized in 1994 to be the savings and loan holding company of First Federal Savings and Loan Association of Tyler ("First Federal" or the "Association"). First Federal was founded in 1923 as a Texas chartered institution and converted in 1939 to a federally chartered mutual savings and loan association. The Company owns all of the outstanding stock of the Association issued on January 10, 1995, in connection with the completion of its conversion from the mutual to the stock form of organization (the "Conversion"). Unless the context otherwise requires, all references herein to the Association or the Company include the Company and Association on a consolidated basis. The Company's common stock is traded on the OTC Electronic Bulletin Board under the symbol "ETFS." The Company and the Association are subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision, Department of the Treasury ("OTS") and by the Federal Deposit Insurance Corporation ("FDIC"). The Association is a member of the Federal Home Loan Bank ("FHLB") System and its deposits are insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent permitted by the FDIC. The Company serves its primary market area, East Texas with a concentration in Smith County, through its main office, a full service branch location and loan production office, which are located in Tyler, Texas, a loan production office located in Lindale, Texas and a full service branch located in Whitehouse, Texas. At September 30, 1999, the Company had total assets of $153.7 million, deposits of $87.5 million, borrowings from the FHLB of Dallas of $45.1 million, and stockholders' equity of $18.4 million. Subsequent to September 30, 1999, the Company announced that it had entered into a definitive agreement providing for the merger of Gilmer Financial Services, Inc. and its wholly owned subsidiary, Gilmer Savings Bank, FSB, into the Company. Gilmer Savings Bank, FSB, located approximately 40 miles from Tyler in Upshur County, had approximately $38.4 million in assets, $25.4 million in deposits and $3.9 million in stockholders' equity at September 30, 1999. It operates with one office in Gilmer, Texas and approximately 13 employees. The transaction is subject to Gilmer Financial Services, Inc. stockholders approval and regulatory approval. The Company expects to complete the acquisition in the first quarter of 2000. The principal business of the Company consists of attracting retail deposits from the general public and investing those funds primarily in one- to four-family residential mortgage loans. The Company also originates commercial real estate, one- to four-family construction, multi-family, commercial and consumer loans. The Company also purchases mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. At September 30, 1999, substantially all of the Company's real estate mortgage loans (excluding mortgage-backed securities) were secured by properties located in Texas, with most of them located in the Company's primary market area. See "--Originations, Purchases and Sales of Loans." The Company has initiated an expansion into full-service commercial banking products and services. In April 1999, the Company began offering new products and services that include commercial and consumer loans, debit and credit cards, an ATM machine and cards and safe deposit boxes. The goal of the expansion is to better serve the Company's existing customers, to attract new customers, to diversify into lending products with higher yields and shorter terms, and to increase non-interest income. The Company has established a new branch office location in its primary market and has hired additional commercial and consumer personnel to develop commercial and consumer products and services. The Company's revenues are derived primarily from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from service charges and loan originations, gains on sales of loans and mortgage-backed securities, and loan servicing fee income. The Company does not originate loans to fund leveraged buyouts, and has no loans to foreign corporations or governments. The Company currently offers a variety of deposit accounts having a wide range of interest rates and terms. The Company's deposits include personal and business checking accounts, passbook and money market accounts and certificate accounts with terms ranging from one month to five years. The Company solicits deposits in its primary market area and does not accept brokered deposits. The Company has recently begun utilizing its borrowing privileges as a member of the FHLB of Dallas. The Company borrows funds from the FHLB of Dallas to fund long term loans and to invest in mortgage-backed securities. "See Mortgage-Backed Securities, Sources of Funds, and Borrowings." The executive offices of the Company are located at 1200 South Beckham Avenue, Tyler, Texas 75701. The telephone number at that address is (903) 593-1767. Forward-Looking Statements When used in this Form 10-KSB or future filings by the Company with the Securities and Exchange Commission, in 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 results 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. Lending Activities General. The Company primarily originates fixed-rate and adjustable-rate one- to four- family mortgage loans. In response to consumer demand, the Company generally originates fixed-rate residential loans. The Company underwrites the majority of its fixed-rate residential mortgage loans using secondary market guidelines allowing them to be saleable primarily to Fannie Mae, without recourse. Loans are usually sold with servicing being retained. See"--Loan Portfolio Composition" and "--One- to Four-Family Residential Mortgage Lending." The Company's predominant lending activity is the origination of loans secured by first mortgages on owner-occupied one- to four-family residences. The Company also originates loans secured by commercial real estate, one- to four-family construction, multi-family, commercial and consumer loans. At September 30, 1999, the Company's net loans held in portfolio totaled $67.3 million, which constituted 43.7% of the Company's total assets. At that date, the Company had no loans held for sale. The Loan Committee is comprised of Director L. Lee Kidd (Chairman), President Gerald W. Free, Senior Vice President-Lending Joe C. Hobson, Chief Financial Officer Derrell W. Chapman, Treasurer William L. Wilson and Vice President-Compliance/Marketing M. Earl Davis. The Commercial and Consumer Loan Committee is comprised of President Gerald W. Free, Chief Financial Officer Derrell W. Chapman, Vice President Stephen W. Horlander, Vice President John R. Mills, and Vice President - Compliance/Marketing M. Earl Davis. The committees have the primary responsibility for the supervision of the Company's mortgage loan portfolio with an overview by the full Board of Directors. Loans may be approved by the committees, depending on the size of the loan, with all loans subject to ratification by the full Board of Directors. Any single loan in excess of $500,000 must be approved by the full Board of Directors. In addition, the full Board of Directors must approve any single loan which would result in an accumulation of loans in either direct or indirect liability to a single borrower of $1,500,000. Foreclosure actions or the taking of deeds-in-lieu of foreclosure are subject to oversight by the Board of Directors. The aggregate amount of loans that the Company is permitted to make under applicable federal regulations to any one borrower, including related entities, or the aggregate amount that the Company could have invested in any one real estate project, is generally the greater of 15% of unimpaired capital and surplus or $500,000. See "Regulation--Federal Regulation of Savings Associations." At September 30, 1999, the maximum amount that the Company could have lent to any one borrower and the borrower's related entities was approximately $2.8 million. At September 30, 1999, the Company had no loans or lending relationships with an outstanding balance in excess of this amount. The largest amount outstanding to any one borrower, or group of related borrowers, was approximately $2.5 million at September 30, 1999. It was secured by a first lien on a commercial real estate property and was for the construction of a retail shopping center. The next largest lending relationship outstanding at September 30, 1999 was for $1.2 million to a manufacturing firm in Tyler, Texas. It was secured by a commercial real estate property, equipment, receivables, and two automobiles in Tyler. At September 30, 1999, the next three largest lending relationships totaled $604,000, $572,000, and $515,000 respectively. The $604,000 loan was secured by a first lien on several duplex rental properties in Smith and Van Zandt counties. The $572,000 loan was secured by several duplexes and residential properties in Tyler Texas. The $515,000 loan was secured by a first lien on a commercial estate property being operated as a restaurant in Tyler, Texas, two automobiles and equipment. At September 30, 1999, all of these loans were performing in accordance with their respective repayment terms. The Company had no other lending relationships in excess of $500,000 at September 30, 1999. Loan Portfolio Composition. The following information sets forth the composition of the Company's loan portfolios in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts, allowances for losses and loans held for sale) as of the dates indicated.
September 30, ---------------------------------------------------------------------- 1999 1998 1997 Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real estate loans: One- to four- family $55,940 80.98 % $52,298 83.34 % $49,412 83.88 % Other residential property 451 0.65 551 0.88 569 0.97 Home equity and improvement 3,763 5.45 2,971 4.73 563 0.96 Nonresidential 2,330 3.37 4,106 6.54 4,023 6.83 Construction loans 3,988 5.77 2,256 3.60 3,600 6.11 ------- ----- ------ ----- ------- ----- Total real estate loans 66,472 96.23 62,182 99.09 58,167 98.75 ------- ----- ------ ----- ------- ----- Other loans: Consumer loans (other than home equity and improvement) 1,465 2.12 403 0.64 488 0.83 Commercial loans 1,142 1.65 168 0.27 252 0.42 ------- ----- ------ ----- ------- ----- Total other loans 2,607 3.77 571 0.91 740 1.25 ------- ----- ------ ----- ------- ----- Total loans $69,079 100.00 % 62,753 100.00 % 58,907 100.00 % ====== ====== ====== Less: Loans in process 1,528 1,373 1,506 Deferred fees and discounts 31 28 18 Allowance for loan losses 270 233 273 ------ ------ ------- Total loans receivable, net 67,250 61,119 57,110 Less: Loans held for sale 0 0 0 -------- ------- ------- Net portfolio loans $ 67,250 $61,119 $57,110 ======== ======= =======
The following table shows the composition of the Company's loan portfolio by fixed and adjustable rate at the dates indicated.
September 30, --------------------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans Real estate loans: One- to four-family residences $48,172 69.73 % $41,730 66.50 % $36,708 62.32 % Other residential 451 0.65 551 0.88 569 0.97 Home equity and improvement 3,763 5.45 2,971 4.73 563 0.96 Nonresidential 1,861 2.41 3,838 6.12 3,595 6.10 Construction loans 3,988 5.77 2,256 3.60 3,600 6.11 ------- ------ ------- ------ ------- ------ Total fixed-rate real estate loans 58,036 84.01 51,346 81.82 45,035 76.45 ------- ------ ------- ------ ------- ------ Other Loans: Consumer loans (other than home equity and improvement) 1,465 2.12 403 0.64 488 0.83 Commercial loans 1,142 1.65 168 0.27 252 0.43 ------- ------ ------- ------ ------- ------ Total other fixed-rate loans 2,607 3.77 571 0.91 740 1.26 ------- ------ ------- ------ ------- ------ Total fixed-rate loans 60,643 87.79 51,917 82.73 45,775 77.71 ------- ------ ------- ------ ------- ------ Adjustable-Rate Loans Real estate loans: One- to four-family residences 7,768 11.25 10,568 16.84 12,704 21.57 Other residential 0 0.00 0 0.00 0 0.00 Nonresidential 469 0.97 268 0.43 428 0.73 Construction loans 0 0.00 0 0.00 0 0.00 ------- ------ ------- ------ ------- ------ Total adjustable-rate real estate loans 8,436 12.21 10,836 17.27 13,132 22.29 ------- ------ ------- ------ ------- ------ Total loans 69,079 100.00 % 62,753 100.00 % 58,907 100.00 % ====== ====== ======
Less: Loans in process 1,528 1,373 1,506 Deferred fees and discounts 31 28 18 Allowance for loan losses 270 233 273 ------ ------- ------ Total loans receivable, net 67,250 61,119 57,110 ------- ------- ------ Less: Loans Held For Sale 0 0 0 ------- ------- ------- Net Portfolio Loans $67,250 $61,119 $57,110 ======= ======= =======
The following schedule illustrates the interest rate sensitivity of the Company's loan portfolio at September 30, 1999. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate --------------------------------------------------------------------------- Consumer and 1 - 4 Family, Commercial (other Home equity and than home equity improvement Other Residential Nonresidential Construction and improvement Total Loans ------------------- ------------------ --------------- ---------------- ---------------- ----------------- Due During Weighted Weighted Weighted Weighted Weighted Weighted Periods Ending Average Average Average Average Average Average September 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate ------------- ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- 2000 $ 3,164 7.61 % $ 0 0.00 % $ 220 8.75 % $ 2,460 7.86 % $ 1,252 8.36 % $ 7,096 7.86 % 2001 2,911 7.28 0 0.00 85 7.86 0 0.00 358 7.82 3,354 7.35 2002 1,546 8.04 291 7.63 12 9.00 0 0.00 431 8.64 2,280 8.10 2003 1,437 7.50 0 0.00 83 9.50 0 0.00 94 8.09 1,614 7.64 2004 862 7.95 0 0.00 23 7.88 0 0.00 260 7.13 1,145 7.76 2005 661 8.47 0 0.00 275 7.77 0 0.00 130 8.50 1,066 8.29 2006 to 2009 6,753 7.69 70 7.75 1,632 8.16 0 0.00 82 9.22 8,537 7.80 2009 to 2019 40,321 7.39 90 7.75 0 0.00 0 0.00 0 0.00 40,411 7.39 2020 and following 2,048 9.12 0 0.00 0 0.00 0 0.00 0 0.00 2,048 9.12 --------- ------ ------- ------- ------ -------- Total $ 59,703 $ 451 $ 2,330 $ 2,460 $2,607 $ 67,551 ========= ===== ======= ======= ====== ========= Less: Deferred fees 31 and discounts Allowance 270 for loan losses --------- Total loans receivable, net $ 67,250 ---------
The total amount of loans due after September 30, 2000 which have predetermined interest rates is $54.6 million while the total amount of loans due after such date which have floating or adjustable interest rates is $5.6 million. One- to Four-Family Residential Mortgage Lending. The Company's predominant lending activity is the origination of conventional loans for the acquisition of owner-occupied, one- to four-family residences. At September 30, 1999, the Company's one- to four-family residential mortgage loans totaled $55.9 million, or 81.0% of the Company's gross loan portfolio. The Company originates these loans primarily from referrals from real estate agents, existing customers, walk-in customers, builders and from responses to the Company's marketing campaign, directed primarily to individuals in its market area. The Company currently originates fixed-rate and ARM loans. During the year ended September 30, 1999, the Company originated $29.6 million and $911,000 of fixed-rate mortgage and adjustable rate mortgage loans, respectively, which were secured by one- to four-family residences. During the same period, the Company sold $10.2 million of fixed-rate real estate loans which were secured by one- to four-family residences. The Company currently originates one- to four-family residential mortgage loans in amounts up to 95% of the appraised value of the security property and generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company's exposure to or below 80% of such value. The terms of such loans are generally for up to a maximum term of 30 years. Interest charged on these mortgage loans is competitively priced according to local market conditions. The Company currently offers ARMs with one, three and five year initial terms with adjustments occurring annually thereafter, as well as loans that adjust once after five or seven years. All of the annually adjusting ARM loans currently adjust at a margin over the yield on the one-year Constant Maturity Treasury Securities Rate. Initial rates on the three and five year ARMs and adjusted rates on the five and seven-year ARM products are currently based upon the rate of a United States Treasury Note with a comparable term. ARM loans offered by the Company generally provided for up to a 200 basis point annual cap and a lifetime cap of 500 or 600 basis points greater than the initial rate. ARM loans may not adjust below the initial rate. As a consequence of using caps, the interest rates on the ARMs may not be as rate sensitive as the Company's cost of funds. Borrowers of adjustable rate loans are qualified at the fully indexed rate of interest. The Company has not experienced difficulty with the payment history for these loans. In underwriting one- to four-family residential real estate loans, the Company evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Company are appraised by independent fee appraisers approved and qualified by the Board of Directors. The Company generally requires borrowers to obtain title insurance and fire, property and flood insurance (if required) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a "due on sale" clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. Commercial Real Estate and Multi-Family Residential Lending. The Company engages in multi-family and commercial real estate lending, including permanent loans secured primarily by apartment buildings, office buildings, and retail establishments in the Company's primary market area. At September 30, 1999, the Company had $2.3 million and $451,000, respectively, of commercial real estate and multi-family loans, which represented 3.4% and .7% respectively, of the Company's gross loan portfolio. Generally, commercial and multi-family real estate loans originated by the Company are fixed-rate loans. To a lesser extent, the Company originates adjustable-rate loans, with annual adjustments based upon either the one year Constant Maturity Treasury Securities Rate or the Chase Manhattan Prime Rate, subject to limitations on the maximum annual and total interest rate increase or decrease over the life of the loan. Commercial real estate loans typically do not exceed 80% of the appraised value of the property securing the loan. The Company analyzes the financial condition of the borrower, the borrower's credit history, the reliability and predictability of the net income generated by the property securing the loan and the value of the property itself. The Company generally requires personal guaranties of the borrowers in addition to the security property as collateral for such loans and personal financial statements on an annual basis. Appraisals on properties securing commercial and multi-family real estate loans originated by the Company are generally performed by independent fee appraisers approved by the Board of Directors. Loans secured by multi-family and commercial real estate are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Commercial real estate and multi-family loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial real estate and multi-family properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. Construction Lending. The Company engages in residential construction lending, with $4.0 million, or 5.8% or its gross loan portfolio in construction loans as of September 30, 1999. The Company offers loans to owner-occupants and builders for the construction of one- to four-family residences. Currently, such loans are offered with terms to maturity of up to nine months and in amounts generally up to 80% of the appraised value of the security property. The Company's construction loans require the payment of interest only on a quarterly basis. The Company generally makes permanent loans on the underlying property consistent with its underwriting standards for one- to four-family residences. The Company also offers loans to a few selected builders in its primary market area to build residential properties in anticipation of the sale of the house or where the house has been pre-sold. Such loans are made for a term of nine months. The Company usually disburses funds on construction loans directly to the builder at certain intervals based upon the completed percentage of the project and inspections of the loans in process are performed by the Company's staff. Construction lending generally affords the Company an opportunity to receive interest at rates higher than those obtainable from residential lending. Nevertheless, construction lending is generally considered to involve a higher level of credit risk than one- to four-family residential lending since the risk of loss on construction loans is dependent largely, upon the accuracy of the initial estimate of the individual property's value upon completion of the project and the estimated cost (including interest) of the project. If the cost estimate proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to permit completion of the project. In addition, to the extent the borrower is unable to obtain a permanent loan on the underlying property, the Company may be required to modify or extend the terms of the loan. In an effort to reduce these risks, the application process includes a submission to the Company of accurate plans, specifications and costs of the project to be constructed. These items are also used as a basis to determine the appraised value of the subject property. Loans are based on a lesser of current appraised value and/or the cost of construction (land plus building). Construction loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Consumer Loans. The Company offers home equity and home improvement loans and all types of consumer loans to individuals. Substantially all of the Company's consumer loans are originated in its primary market area. These loans are primarily originated on a direct basis. At September 30, 1999, the Company's consumer loan portfolio totaled $5.2 million, or 7.60% of its total gross loan portfolio. Home equity loans accounted for $3.8 million of the total. All consumer loans are currently originated with fixed rates of interest. The Company made the decision to begin offering home equity loans during the fiscal year ended September 30, 1998. 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 borrower's equity in the property, the maximum allowed by Texas law. Loan terms of up to 15 years are offered at interest rates that are fixed for the term of the loan. The Company made the decision to begin offering a full line of consumer loans in conjunction with the opening of its new full service branch office location in 1999. The Company primarily originates its consumer loans on a direct basis, however, it also began accepting indirect automobile loans from an existing commercial customer in 1999. Such loans are approved by the Company prior to acceptance, are underwritten using the same criteria as its direct loans, and are made without recourse to the originator. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards employed by the Company for consumer loans include an application, a determination of the applicant's payment history on other debts, employment stability and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Although the level of delinquencies in the Company's consumer loan portfolio has historically been low, there can be no assurance that delinquencies will not increase in the future as the Company increases the size of its consumer loan portfolio. Commercial Business Loans. At September 30, 1999, the Company had $1.1 million in commercial loans outstanding, or 1.7 percent of the Company's total loan portfolio. The Company's commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance inventory and equipment. Generally, the Company's commercial business lending has been limited to borrowers headquartered, or doing business, in the Company's market area. The Company anticipates significantly increasing its consumer and commercial business lending activity during the next fiscal year. Management believes that a sufficient demand for small to medium size commercial business loans exists in the Tyler market to warrant expanding its efforts in commercial lending. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business itself. Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed Securities Real estate loans are generally originated by the Company's staff of salaried loan officers. Loan applications are taken and processed at its main office and its loan production offices. In fiscal 1999, the Company originated $30.5 million of loans, compared to $31.3 million and $24.7 million in fiscal 1998 and 1997, respectively. Management attributes the sustained lending activity to continued lower interest rates and economic conditions in the Tyler area. In fiscal 1999, $25.1 million of loans and mortgage-backed securities were repaid, compared to $27.5 million and $18.2 million in fiscal 1998 and 1997, respectively. The Company currently sells its fixed-rate one- to four-family residential mortgage loans with maturities of greater than 15 years, without recourse, to FNMA, generally on a servicing retained basis. Sales of whole loans generally are beneficial to the Company since these sales may generate income at the time of sale, produce future servicing income, provide funds for additional lending and other investments and increase liquidity. The Company sold whole loans in aggregate amounts of $10.2 million, $10.0 million and $4.7 million during the years ended September 30, 1999, 1998, and 1997, respectively. The Company sells loans pursuant to forward sales commitments and, therefore, an increase in interest rates after loan origination and prior to sale should not adversely affect the Company's income at the time of sale. In periods of economic uncertainty, the Company's ability to originate large dollar volumes of real estate loans may be substantially reduced or restricted with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company's ability to sell loans may substantially decrease as potential buyers (principally government agencies) reduce their purchasing activities. When loans are sold, the Company typically retains the responsibility for servicing the loans. The Company receives a fee for performing these services. The Company serviced for others mortgage loans amounting to $43.8 million, $42.6 million, and $39.4 million at September 30, 1999, 1998, and 1997, respectively. From time to time, the Company has purchased whole loans or loan participations consistent with its loan origination underwriting standards. The company does not currently purchase loans because there is sufficient product available for origination but will consider favorable purchase opportunities as they arise. In addition, the Company purchases mortgage-backed securities, consistent with its asset/liability management objectives to complement its mortgage lending activities. The Board believes that the slightly lower yield carried by mortgage-backed securities is somewhat offset by the lower level of credit risk and the lower level of overhead required in connection with these assets, as compared to one- to four-family, non-residential, multi-family and other types of loans. See "--Mortgaged-Backed Securities." The following table shows the loan and mortgage backed and related securities originations, purchase, sale and repayment activities of the Company for the periods indicated.
Year Ended September 30, ------------------------------------ 1999 1998 1997 -------- -------- -------- (Dollars in Thousands) Originations by type: Adjustable rate: Real estate - one- to four-family $ 130 $ 861 $ 1,874 - other residential 0 0 0 - commercial 221 0 0 Non-real estate - consumer 0 0 0 - commercial business 560 0 0 -------- -------- -------- Total adjustable-rate 911 861 1,874 -------- -------- -------- Fixed rate: Real estate - one- to four-family 27,086 27,740 21,170 - other residential 160 0 0 - commercial 1,205 2,506 1,592 Non-real estate - consumer 583 52 54 - commercial business 549 140 0 -------- -------- -------- Total fixed-rate 29,583 30,438 22,816 -------- -------- -------- Total loans originated 30,494 31,299 24,690 -------- -------- -------- Purchases: Real estate - one- to four-family 0 0 0 - other residential 0 0 0 - commercial 0 0 0 Non-real estate - consumer 0 0 0 - commercial business 0 0 0 -------- -------- -------- Total loans purchased 0 0 0 Mortgage-backed securities (excluding REMICs and CMOs) 0 2,482 4,982 REMICs and CMOs 26,076 9,031 0 -------- -------- -------- Total purchases 26,076 11,513 4,982 -------- -------- --------
Sales and Repayments: Real estate - one- to four-family 10,237 10,032 4,740 - multi-family 0 0 0 - commercial 0 0 0 Non-real estate - consumer 0 0 0 - commercial business 0 0 0 -------- -------- -------- Total loans sold 10,237 10,032 4,740 Mortgage-backed securities 0 0 0 -------- -------- -------- Total sales 10,237 10,032 4,740 Principal repayments - Loans 14,096 17,421 10,742 Principal repayments - mortgage-backed Securities 11,009 10,069 7,416 -------- -------- -------- Total reductions 35,342 37,522 22,898 -------- -------- -------- Increase (decrease) in other items, net (147) (38) (30) -------- -------- -------- Net increase (decrease) $ 21,081 $ 5,252 $ 6,744 ======== ======== ========
Asset Quality Generally, when a borrower fails to make a required payment on real estate secured loans and other loans by the 17th day after such payment is due, the Company institutes collection procedures by mailing a delinquency notice. The customer is contacted again by telephone or letter when the delinquency is not promptly cured. In most cases delinquencies are cured promptly; however, if a loan secured by real estate or other collateral has been delinquent for more than 80 days, a final letter is sent or a telephone call is made demanding payment and the customer is requested to make arrangements to bring the loan current or, if the situation merits, a 30 day foreclosure notice is sent to the borrower. Once a payment is 90 days past due, a 30 day foreclosure notice is sent (if not previously sent) and, unless satisfactory arrangements have been made, immediate repossession or foreclosure procedures will commence. Generally, when a loan becomes delinquent 90 days or more, or when the collection of principal or interest becomes doubtful, the Company will place the loan on a non-accrual status and, as a result, previously accrued by unpaid interest income on the loan is taken out of current income. Each account is handled on an individual basis. The loan will be transferred back to an accrual status if the borrower brings the loan current. The following table sets forth the Company's loan delinquencies by number, amount and percentage of loan category at September 30, 1999.
Loans Delinquent for: -------------------------------------------------------------- -------------------------------------- 60 - 89 Days 90 Days and Over Total Loans Delinquent 60 Days or More ------------------------------ ----------------------------- -------------------------------------- Percent Percent Percent of Loan of Loan Of Loan Number Amount Category Number Amount Category Number Amount Category ------ ------ -------- ------ ------ -------- ------ ------ -------- (Dollars in Thousands) Real Estate: One- to four-family 22 $799 1.43 % 21 $386 0.69 % 43 $1,185 2.12 % Other residential 0 0 0.00 0 0 0.00 0 0 0.00 Home equity and Improvement 1 8 0.21 1 16 0.43 2 24 0.64 Non-residential 0 0 0.00 0 0 0.00 0 0 0.00 Construction loans 0 0 0.00 2 366 14.88 2 366 14.88 Consumer loans 1 15 1.02 0 0 0.00 1 15 1.02 Commercial loans 0 0 0.00 0 0 0.00 0 0 0.00 -- ---- ---- -- ---- ----- -- ------ ---- Total 24 $822 1.22 % 24 $768 1.14 % 48 $1,590 2.36 % == ==== ==== == ==== ==== == ====== ====
Non-Performing Assets. The table below sets forth the amounts and categories of non-performing assets in the Company's loan portfolio. At all dates presented, the Company had no troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates). Foreclosed assets include assets acquired in settlement of loans.
September 30, --------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in Thousands) Non-accruing loans: One- to four-family $768 $187 $306 Other loans 0 0 4 ---- ---- ---- Total 768 187 310 ---- ---- ---- Accruing loans delinquent more than 90 days: One- to four-family 0 6 0 ---- ---- ---- Total 0 6 0 ---- ---- ---- Foreclosed assets: One- to four-family 0 35 0 ---- ---- ---- Total 0 35 0 ---- ---- ---- Total non-performing assets $768 $228 $310 ==== ==== ==== Total as a percentage of total assets 0.50% 0.18% 0.27% ==== ==== ====
For the year ended September 30, 1999, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $57,322. The amount was included in interest income on such loans was $36,468 for the year ended September 30, 1999. Classified Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings association will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When a savings association classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings association classified problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the association's Regional Director at the regional OTS office, who may order the establishment of additional general or specific loss allowances. In connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Company regularly reviews the loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations. On the basis of management's review of its assets, at September 30, 1999, the Company had classified $1.1 million assets as substandard, none as doubtful, and none as loss. Classified assets and non-performing assets differ in that classified assets may include loans less than 90 days delinquent. Also, assets guaranteed by governmental agencies such as the Veterans Administration or the Federal Housing Administration are not included in classified assets but are included in non-performing assets. Other Assets of Concern. As of September 30, 1999, there were approximately $272,000 of assets classified by the Company because of known information about the possible credit problems of the borrowers or the cash flows of the security property that caused management to have some doubts as to the ability of the borrowers to comply with present loan repayment terms and which could result in the future inclusion of such item in the non-performing asset categories. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at the lower of cost or fair market value, less estimated disposition costs. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged-off to the allowance for loan losses at the time of transfer. Valuations are periodically updated by management, and if the value declines, a specific provision for losses on such property is established by a charge to operations. Although management believes that it uses the best information available to determine the allowance, unforeseen market conditions could result in adjustments, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Company's allowance will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. At September 30, 1999, the Company had a total allowance for loan losses of $270,000, which equaled 35.2% of nonperforming loans, .40% of total loans and .18% of total assets. See Note 1 of the Notes to Consolidated Financial Statements. The following table sets forth an analysis of the Company's allowance for loan losses.
Year Ended September 30, ----------------------------- 1999 1998 1997 ----- ----- ----- (Dollars in Thousands) Balance at beginning of period $ 233 $ 273 $ 289 Charge-offs: One- to four-family (2) (40) (26) Other loans 0 0 (1) ----- ----- ----- Total charge-offs (2) (40) (27) ----- ----- ----- Recoveries: One- to four-family 0 0 6 Other loans 39 0 0 ----- ----- ----- Total recoveries 39 0 6 ----- ----- ----- Net charge-offs 37 (40) (21) Additions charged to operations 0 0 5 ----- ----- ----- Balance at end of period $ 270 $ 233 $ 273 ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding during the period 0.06 % (0.07) % (0.04)% ===== ===== ===== Ratio of net charge-offs during the period to average non-performing assets 7.43 % (14.87) % (5.53)% ===== ===== =====
The distribution of the Company's allowance for losses on loans at the dates indicated is summarized as follows:
September 30, 1999 1998 1997 -------------------------------- -------------------------------- ------------------------------ Percent Percent Percent of Loans of Loans of Loans Loan in Each Loan In Each Loan In Each Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category Loan Loss By to Total Loan Loss By to Total Loan Loss By to Total Allowance Category Loans Allowance Category Loans Allowance Category Loans --------- -------- ----- --------- -------- ----- --------- -------- ----- (Dollars in Thousands) One- to four-family $ 62 $ 55,940 80.98 % $ 52 $ 52,298 83.34 % $ 88 $ 49,412 83.88 % Other residential 0 451 0.65 0 551 0.88 0 569 0.97 Home equity and improvement 1 3,763 5.46 0 0 0.00 0 0 0.00 Commercial real estate 0 2,330 3.37 0 4,106 6.54 0 4,023 6.83 Construction 17 3,988 5.77 0 2,256 3.60 0 3,600 6.11 Commercial and Consumer 0 2,607 3.77 0 3,542 5.64 0 1,303 2.21 Unallocated 190 0 0.00 181 0 0.00 185 0 0.00 -------- ------- ------- ---- ------- ------- ----- ------- -------- Total $ 270 $ 69,079 100.00 % $ 233 $ 62,753 100.00 % $ 273 $ 58,907 100.00 % ======= ======== ====== ===== ======== ====== ====== ======== ======
Investment Activities Generally, the investment policy of the Company is to invest funds among various categories of investments and maturities based upon the Company's need for liquidity, asset/liability management policies, investment quality and marketability, liquidity needs and performance objectives. At September 30, 1999, the Company had two investment portfolios, one consisting primarily of adjustable rate mortgage-backed securities and the other consisting principally of fixed rate debentures. Both portfolios consisted primarily of U.S. Government or U.S. Government Agency obligations and to a lesser extent, corporate debt securities. These investments were made in order to generate income and, because these securities generally carry a low risk weighting for OTS risk-based capital purposes, to satisfy OTS liquid-asset requirements. See "Regulation - Capital Requirements" and "--Liquidity." At September 30, 1999, the Company's fixed rate investment securities totaled $36.4 million or 23.7% of total assets. Approximately $30.5 million of the portfolio was in U. S. Government Agency obligations and $5.9 million was in corporate debt securities with investment grade ratings of BBB+ or higher. Mortgage-backed securities totaled $38.7 million or 25.2% of total assets. For information regarding the amortized cost, market and accounting classification values of the Company's investment securities portfolio, see Note 2 of the Notes to Consolidated Financial Statements. At September 30, 1999, the weighted average term to maturity or repricing of the investment securities portfolio, excluding FHLB stock, was 3.4 years. For information regarding the amortized cost, market values and accounting classification of the Company's mortgage-backed securities portfolio, see Note 3 of the Notes to Consolidated Financial Statements. Mortgage-Backed Securities. The Company purchases mortgage-backed and related securities to complement its mortgage lending activities. The Company began making significant purchases of mortgage-backed and related securities in 1991 to supplement home mortgage originations for its portfolio. Management determined that such investments would produce relatively higher risk-adjusted yields for the Company when compared to other investment securities and substituted for loan originations, in light of the competition for home mortgages in the Company's market area. The Company has emphasized mortgage-backed and related securities with high credit quality, high cash flow, low interest-rate risk, high liquidity and acceptable prepayment risk. The Company's mortgage-backed and related securities portfolio consists primarily of securities issued under government-sponsored agency programs, including those of Ginnie Mae, Fannie Mae and Freddie Mac. The securities consist of modified pass-through mortgage-backed securities that represent undivided interest in underlying pools of fixed-rate, or certain types of adjustable rate, single-family residential mortgages issued by these government-sponsored entities and collateralized mortgage obligations (debt obligations of the issuer backed by mortgage loans as mortgage-backed securities). The securities generally provide the certificate holder a guarantee of timely payments of interest, whether or not collected. Mortgage-backed securities generally yield less than the loans that underlie such securities, because of the cost of payment guarantees or credit enhancements that reduce credit risk to holders. Mortgage-backed securities are also more liquid than individual mortgage loans and may be used to collateralize obligations of the Company. In general, mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac and certain AAA- or AA-rated mortgage-backed pass-through securities are weighted at no more than 20% for risk-based capital purposes, and mortgage-backed securities issued or guaranteed by Ginnie Mae are weighted at 0% for risk-based capital purposes, compared to an assigned risk weighting of 50% to 100% for whole residential mortgage loans. These types of securities thus allow the Company to optimize regulatory capital to a greater extent than non-securitized whole loans. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. The following table sets forth the composition of the Company's mortgage-backed securities at the dates indicated.
September 30, ---------------------------------------------------------- 1999 1998 1997 -------------- -------------- --------------- Book % of Book % of Book % of Value Total Value Total Value Total ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Mortgage-backed securities available-for-sale U.S. Government agency pass- through mortgage-backed securities $ 2,918 7.54 % $ 4,217 17.76 % 4,200 18.66 % U.S. Government agency collateralized mortgage obligations 29,731 76.82 8,360 35.20 0 0.00 -------- --------- ------- -------- --------- ------ Subtotal 32,649 84.36 12,577 52.95 4,200 18.66 Mortgage-backed securities held-to-maturity U.S. Government agency pass-through mortgage-backed securities 5,764 14.89 10,878 45.80 18,085 80.35 -------- ------- ------- -------- --------- -------- Subtotal 5,764 14.89 10,878 45.80 18,085 80.35 -------- ------- ------- -------- --------- -------- Unamortized premium (discounts), net 288 0.74 296 1.25 223 0.99 -------- -------- -------- -------- --------- -------- Total mortgage-backed securities $ 38,701 100.00 % $ 23,751 100.00 % $ 22,508 100.00 % ======== ======== ======== ======== ========= ========
The following table sets forth the contractual maturities of the Company's mortgage-backed securities at September 30, 1999.
Due In Total Mortgage-Backed Securities --------------------------------------------------------------- 5 Years 5 to 10 10 to 20 Over 20 Amortized Market or Less Years Years Years Cost Value ------- ----- ----- ----- ---- ----- (Dollars in Thousands) Mortgage-backed securities available-for-sale U.S. Government agency pass-through mortgage-backed securities $ 0 $0 $275 $ 2,769 $ 3,044 $ 3,010 U.S. Government agency collateralized mortgage obligations 0 0 0 29,957 29,957 29,884 ---- -- ---- ------- ------- ------- Total available-for-sale 0 0 275 32,726 33,001 32,894 ---- -- ---- ------- ------- ------- Mortgage-backed securities held-to-maturity U.S. Government agency pass-through mortgage-backed securities 134 0 0 5,673 5,807 5,950 ---- -- ---- ------- ------- ------- Total mortgage-backed securities $134 $0 $275 $38,399 $38,808 $38,844 ==== == ==== ======= ======= ======= Weighted average yield 6.42% 0.00% 6.61% 6.08% 6.09%
The following table sets forth the composition of the Company's investment securities, excluding mortgage-backed securities, at the dates indicated.
September 30, ----------------------------------------------------------------------------- 1999 1998 1997 -------------------- ----------------------- ---------------------- Book % of Book % of Book % of Value Total Value Total Value Total ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Investment securities available-for-sale Corporate debt $ 5,919 14.05 % $ 0 0.00 % $ 0 0.00 % ---------- ------- --------- -------- --------- ---------- Subtotal 5,919 14.05 0 0.00 0 0.00 ---------- ------- --------- -------- --------- ---------- Investment securities held-to-maturity U.S. government securities 0 0.00 2,505 7.42 2,511 7.65 Federal agency obligations 30,481 72.37 27,262 80.78 20,547 62.64 ---------- ------- --------- -------- --------- ---------- Subtotal 30,481 72.37 29,767 88.20 23,058 70.29 ---------- ------- --------- -------- --------- ---------- Total investment securities 36,400 86.42 29,767 88.20 23,058 70.29 ---------- ------- --------- -------- --------- ---------- Average remaining life of investment 3.4 yrs 2.6 yrs 1.4 yrs securities Other interest-earning assets: FHLB stock 2,283 5.42 789 2.34 1,006 3.07 Interest-bearing deposits with banks(1) 3,436 8.16 3,064 9.08 7,988 24.35 Other overnight deposits(2) 0 0.00 129 0.38 754 2.29 ---------- ------- --------- -------- --------- ---------- Total other interest-earning assets 5,719 13.58 3,982 11.80 9,748 29.71 ---------- ------- --------- -------- --------- ---------- Total investment securities, FHLB stock and other interest-earning assets $ 42,119 100.00 % $ 33,749 100.00 % $ 32,806 100.00 % ========= ======= ======== ======== =========== =======
(1) Includes investments in insured certificates of deposit. (2) Includes securities purchased under agreement to resell and federal funds sold. The following table sets forth the composition and maturities of the Company's investment securities portfolio as of September 30, 1999.
At September 30, 1999 ----------------------------------------------------------------------------------- No Less Than 1 to 3 3 to 5 Over Stated Total Investment 1 Year Years Years 5 Years Maturity Securities Amort Amort Amort Amort Amort Amort Market Cost Cost Cost Cost Cost Cost Value ---- ---- ---- ---- ---- ---- ----- (Dollars in Thousands) Investment securities available-for-sale Corporate debt 0 998 5,038 0 0 6,036 5,919 Investment securities held-to-maturity Federal agency obligations 4,998 2,990 20,497 1,996 0 30,481 29,949 --------- --------- ---------- -------- -------- ---------- -------- Total investment securities $ 4,998 $ 3,988 $ 25,535 $ 1,996 $ 0 $ 36,517 $ 35,868 ========= ========= ======== ======== ======== ======== ======== Weighted average yield 6.17% 6.09% 6.09% 6.11% 0.00% 6.10%
The OTS has issued guidelines regarding management oversight and accounting treatment for securities, including investment securities, loans, mortgage-backed securities and derivative securities. The guidelines require thrift institutions to reduce the carrying value of securities to the lesser of cost or market value unless it can be demonstrated that a class of securities is intended to be held to maturity. Sources of Funds General. The Company's primary sources of funds are deposits, amortization and prepayment of loan principal, borrowings, interest earned on, maturation and sales of investment securities and short-term investments, and net earnings. Borrowings may be used on a short-term basis to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, and may be used on a longer-term basis to support expanded lending activities or to increase the effectiveness of the Company's asset/liability management program. In this regard, in order to enhance both the return on the capital raised in the Conversion and its interest rate spread, the Company may utilize advances form the FHLB of Dallas and attempt to match the maturities of such liabilities with assets such as mortgage-backed securities having similar effective maturities but higher yields compared to the rate paid on such advances. Deposits. The Company offers consumer and commercial checking accounts, passbook savings, NOW checking accounts, money market deposit accounts and certificates of deposit. The Company solicits deposits from its market area and does not accept brokered deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The Company relies primarily on competitive pricing policies, advertising and customer service to attract and retain these deposits. The variety of deposit accounts offered by the Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. In this regard, deposits increased only marginally from $86.6 million at September 30, 1998 to $87.5 million at September 30, 1999. Based on its experience, the Company believes that its deposits are relatively stable sources of funds. However, the ability of the Company to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by the Company for the periods indicated.
September 30, ----------------------------------------------------------------- 1999 1998 1997 ------------------ --------------------- -------------------- Percent Percent Percent Amount of Total Amount Of Total Amount Of Total -------------------- ---------------------- --------------------- Transactions and Savings Deposits: (Dollars in Thousands) Non-interest checking $2,022 2.31 % $ 1,528 1.76 % $ 1,882 2.13 % Interest checking 7,537 8.62 1,312 1.51 1,279 1.44 Savings accounts 2,628 3.00 3,032 3.50 5,681 3.03 Money market accounts 4,800 5.48 6,162 7.11 5,812 6.56 ------- -------- --------- ------- --------- -------- Total non- certificates 16,987 19.41 12,034 13.89 11,654 13.16 ------- -------- --------- ------- --------- -------- Certificates: 0.00 - 3.99% 0 0.00 434 0.50 383 0.43 4.00 - 4.99% 26,466 30.23 14,753 17.03 15,163 17.12 5.00 - 5.99% 40,293 46.03 53,641 61.91 54,522 61.57 6.00 - 6.99% 3,440 3.93 3,857 4.45 4,756 5.37 7.00 - 7.99% 354 0.40 1,914 2.21 2,073 2.35 8.00 - 8.99% 0 0.00 11 0.01 0 0.00 ------- -------- --------- ------- --------- -------- Total Certificates 70,553 80.59 74,610 86.11 76,897 86.84 ------- -------- --------- ------- --------- -------- Total Deposits $87,540 100.00 % $ 86,644 100.00 % $ 88,551 100.00 % ======= ======== ========= ======= ========= ========
The following table sets forth the savings flows at the Company during the periods indicated.
Year Ended September 30, -------------------------------------- 1999 1998 1997 ------- -------- -------- (Dollars in Thousands) Opening balance $86,644 $ 88,551 $ 90,768 Deposits 13,727 25,131 14,394 Withdrawals 14,819 29,302 18,823 Interest credited 1,988 2,264 2,212 ------- -------- -------- Ending balance $87,540 $ 86,644 $ 88,551 ======= ======== ======== Net increase (decrease) $ 896 $ (1,907) $ (2,217) ======= ======== ======== Percent increase (decrease) 1.03% (2.15)% (2.44)% ======= ======== ========
The following table shows rate and maturity information for the Company's certificates of deposit as of September 30, 1999.
7.00- 0.00- 5.00- 6.00- Or Percent 4.99% 5.99% 6.99% Greater Total Of Total ----- ----- ----- ------- ----- -------- (Dollars in Thousands) December 31, 1999 $ 6,948 $ 13,957 $ 433 $ 0 $ 21,338 30.24% March 31, 2000 5,574 5,928 2,100 0 13,602 19.28% June 30, 2000 3,047 6,145 239 0 9,431 13.37% September 30, 2000 4,912 6,671 0 0 11,583 16.42% December 31, 2000 1,976 1,938 536 0 4,450 6.31% March 31, 2001 922 1,948 0 0 2,870 4.07% June 30, 2001 953 1,654 0 0 2,607 3.70% September 30, 2001 988 930 0 0 1,918 2.72% December 31, 2001 134 27 0 15 176 0.25% March 31, 2002 396 0 0 74 470 0.67% June 30, 2002 0 0 32 123 155 0.22% September 30, 2002 0 0 0 27 27 0.04% Thereafter 616 1,095 100 115 1,926 2.73% -------- -------- -------- ------ --------- -------- Total $ 26,466 $ 40,293 $ 3,440 $ 354 $ 70,553 100.00% ======== ========= ======== ====== ========= ======== Percent of total 37.51% 57.11% 4.88% 0.50% ======== ========= ======== =======
The following table indicates the amount of the Company's certificates of deposit and other deposits by time remaining until maturity as of September 30, 1999.
Maturity -------------------------------------------------------- Over Over 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 Months Total ------- ------ ------ --------- ----- Certificates of deposit less than $100,000 $12,442 $ 8,172 $ 9,518 $14,164 $44,296 Certificates of deposit of $100,000 or more 8,896 5,430 11,496 435 26,257 ------- ------- ------- ------- ------- Total certificates of deposit $21,338 $13,602 $21,014 $14,599 $70,553 ======= ======= ======= ======= =======
Borrowings. The Company has the ability to use advances from the FHLB of Dallas to supplement its deposits when the rates are favorable. As a member of the FHLB of Dallas, the Company is required to own capital stock and is authorized to apply for advances. Each FHLB credit program has its own interest rate, which may be fixed or variable, and includes a range of maturities. The FHLB of Dallas may prescribe the acceptable uses to which these advances may be put, as well as limitations on the size of the advances and repayment provisions. During the fiscal year ended September 30, 1999, the Company continued borrowing funds through the FHLB of Dallas advance program. The Company used the proceeds to invest in adjustable rate mortgage-backed securities with yields greater than the cost of the advance. The intent of the program is to make better use of the Company's excess capital by increasing the overall size of the Company's balance sheet. The advances used in the program are short-term, usually 30-35 days. The rates of the advances, which are established by the FHLB of Dallas, generally are linked to comparable short term U.S. Treasury interest rates or a short term index such as the 30 day London Interbank Offering Rate (LIBOR). The Company invests the advance proceeds in a dollar-for-dollar matching program in adjustable mortgage-backed pass-through securities and collateralized mortgage obligations. The program is designed to achieve a positive spread between the cost of the advances and the investment yield. The mortgage-backed securities are held in an "available-for-sale" accounting classification. See "Mortgage-Backed Securities" and "Sources of Funds." In addition, the Company utilized advances from the FHLB to fund a portion of its single family mortgage loans originated during the year. The following table sets forth the maximum month-end balance of FHLB Advances, securities sold under agreements to repurchase and other borrowings for the periods indicated.
Year Ended September 30, ----------------------------------------- 1999 1998 1997 ----------------------------------------- (Dollars In Thousands) Maximum Balance: FHLB Advances $ 45,058 $ 14,946 $ 4,195 Securities sold under agreements to repurchase 0 0 0 Other borrowings 0 0 0 Average Balance: FHLB Advances $ 31,086 $ 9,724 $ 2,621 Securities sold under agreements to repurchase 0 0 0 Other borrowings 0 0 0
The following table sets forth certain information as to the Association's borrowings at the dates indicated.
Year Ended September 30, -------------------------------------- 1999 1998 1997 --------- --------- -------- (Dollars In Thousands) FHLB Advances $ 45,058 $ 14,946 $ 4,195 Securities sold under agreements to repurchase 0 0 0 Other borrowings 0 0 0 --------- --------- -------- Total Borrowings $ 45,058 $ 14,946 $ 4,195 ========= ========= ======== Weighted average interest rate of FHLB Advances 5.51 % 5.55 % 5.54 % Weighted average interest rate of securities sold under agreements to repurchase 0.00 % 0.00 % 0.00 % Weighted average interest rate of other Borrowings 0.00 % 0.00 % 0.00 %
Subsidiary Activities As a federal savings and loan association, First Federal is permitted by OTS regulations to invest up to 2% of its assets or approximately $3.0 million at September 30, 1999, in the stock of, or unsecured loans to, service corporation subsidiaries. First Federal may invest an additional 1% of its assets in service corporations where such additional funds are used for inner-city or community development purposes. At September 30, 1999, the Association did not have any subsidiaries. REGULATION General First Federal is a federally chartered savings and loan association, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, the Association is subject to broad federal regulation and oversight extending to all its operations. First Federal is a member of the FHLB of Dallas and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As the savings and loan holding company of First Federal, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Company and other holding companies is to protect subsidiary savings associations. The Association is a member of the Savings Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the two deposit insurance funds administered by the FDIC, and the deposits of First Federal are insured by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Association. Certain of these regulatory requirements and restrictions affecting First Federal and the Company are discussed below or elsewhere in this document. Federal Regulation of Savings Associations The OTS has extensive authority over the operations of savings associations. As part of this authority, First Federal is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and the FDIC. The last regular OTS and FDIC examinations of First Federal were as of April 27, 1998 and August 17, 1990, respectively. Under agency scheduling guidelines, another examination will be initiated within the next 12-18 months. When these examinations are conducted by the OTS and FDIC, the examiners may require the Association to provide for higher general or specific loan loss reserves. All savings associations are subject to a semi-annual assessment, based upon the savings association's total assets, to fund the operations of the OTS. The Association's OTS assessment for the fiscal year ended September 30, 1999 was $36,000 The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Association and the Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. In addition, the investment, lending and branching authority of First Federal is prescribed by federal laws and it is prohibited form engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by nonresidential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. The Association is in compliance with the noted restrictions. The Association's general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At September 30, 1999, the Association's lending limit under this restriction was $2.8 million. First Federal is in compliance with the loans-to-one-borrower limitation. The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan. Insurance of Accounts and Regulation by the FDIC First Federal is a member of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 of core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. The premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points. However, SAIF-insured institutions are required to pay a Financing Corporation (FICO) assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s, equal to approximately 6 basis points for each $400 in domestic deposits, while BIF-insured institutions pay an assessment equal to approximately 1.5 basis points for each $100 in domestic deposits. The assessment is expected to be reduced to approximately 2 basis points on January 1, 2000, when BIF-insured institutions fully participate in the assessment. These assessments, which may be revised based upon the level of BIF and SAIF deposits will continue until the bonds mature in the year 2017. Regulatory Capital Requirements Federally insured savings associations, such as First Federal, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital for calculating compliance with this requirement. At September 30, 1999, the Association had no intangible assets that were required to be deducted from tangible capital. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks or engaged in certain other activities solely as agent for its customers are "includable" subsidiaries that are consolidated for capital purposes in proportion to the association's level of ownership. For excludable subsidiaries the debt and equity investments in such subsidiaries are deducted from assets and capital. The Association currently has no subsidiaries. At September 30, 1999, the Association had tangible capital of $17.4 million, or 11.3% of adjusted total assets, which is approximately $15.1 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. As a result of the prompt corrective action provisions discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. At September 30, 1999, the Association had core capital equal to $17.4 million, or 11.3% of adjusted total assets, which is $11.2 million above the minimum leverage ratio requirement of 4% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At September 30, 1999, the Association had no capital instruments that qualify as supplementary capital and $270,000 of general loss reserves, which was less than 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. First Federal had exclusions from capital and assets totaling $4,000 at September 30, 1999. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by a insurer approved by the Fannie Mae or Freddie Mac. OTS regulations also require that every savings association with more than normal interest rate risk exposure to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation may be completed. Any savings association with less than $300 million in assets and a total capital ratio in excess of 12% is exempt from this requirement unless the OTS determines otherwise. On September 30, 1999, First Federal had total risk based capital of $17.7 million (including $17.4 million in core capital and no qualifying supplementary capital) or total risk based capital of 27.9% of risk-weighted assets. This amount was $12.6 million above the 8% requirement in effect on that date. The OTS and FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risk-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more of additional specified actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a conservator or receiver. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on First Federal may have a substantial adverse effect on the Association's operations and profitability and the value of the common stock of the Company. Company stockholders do not have preemptive rights, and therefore, if the Company is directed by the OTS or the FDIC to issue additional shares of Common Stock, such issuance may result in the dilution in the percentage of ownership of the Company held by the existing stockholders of the Company. Limitations on Dividends and Other Capital Distributions OTS regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as the Bank, that before and after the proposed distribution remain well-capitalized, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. The Bank may pay dividends in accordance with this general authority. Savings institutions proposing to make any capital distribution need not submit written notice to the OTS prior to such distribution unless they are a subsidiary of a holding company or would not remain well-capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or purpose to exceed these net income limitations must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. Liquidity All savings associations, including First Federal, are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. For a discussion of what First Federal includes in liquid assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources," contained in the Annual Report to Shareholders. This liquid asset ratio requirement may vary from time to time depending upon economic conditions and savings flows of all savings associations. Qualified Thrift Lender Test All savings associations, including First Federal, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternate, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans and investments. At September 30, 1999, the Association met the test and has always met the test since its effectiveness. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "--Holding Company Regulation." Community Reinvestment Act Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Association, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch by First Federal. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Association may be required to devote additional funds for investment and lending in its local community. The Association was examined for CRA compliance in February 1997 and received a rating of "Needs Improvement." As a result of the February 1997 CRA examination, the Association's Board of Directors implemented a loan program designed to lend money to low to moderate income borrowers and targeted to specific census tract locations that were considered low to moderate income areas. The program, entitled Housing Assistance Program (HAP) initially set aside $500,000 to reach low to moderate income borrowers. The Association significantly relaxed its normal loan underwriting guidelines in order to qualify the applicants. The HAP program was successful and the Association was able to loan all of the designated funds in approximately six months. In 1999, the Board set aside $300,000 to lend to low to moderate income borrowers. The Company was able to loan all of the designated amount. As a result of the Association's lending efforts to low to moderate income areas and borrowers, the Association received a "satisfactory" rating on its April 6, 1998 CRA examination. Transactions with Affiliates Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of the Association include the Company and any company, which is under common control with the Association. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. First Federal's Subsidiaries are not deemed affiliates, however; the OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals. Holding Company Regulation The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the holding company acquired control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than First Federal or any other SAIF-insured savings association) would become subject to such restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. If the Association fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "--Qualified Thrift Lender Test." The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. On November 12, 1999, the Gramm-Leach-Bliley Act, which modernizes the financial services industry by, among other things, permitting banking, insurance and securities companies to combine, was signed into law. It is unclear what impact this legislation will have on the Association, although the anticipated creation of larger and stronger financial services competitors could materially affect the Association. The Act did eliminate the unitary savings and loan holding company; however, the Company was grandfathered. Federal Securities Law The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors, and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At September 30, 1999, First Federal was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. See "--Liquidity." Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System First Federal is a member of the FHLB of Dallas, which is one of 12 regional FHLBs, that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures, established by the board of directors of the FHLB, which are subject to the regulation and oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, First Federal is required to purchase and maintain stock in the FHLB of Dallas. At September 30, 1999, First Federal had $2,283,000 in FHLB stock, which was in compliance with this requirement. In past years, first Federal has received substantial dividends on its FHLB stock. Over the past five calendar years such dividends have averaged 5.91% and were 5.48% for fiscal year 1999. Under federal law the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of First Federal's FHLB stock may result in a corresponding reduction in First Federal's capital. For the fiscal year ended September 30, 1999, dividends paid by the FHLB of Dallas to First Federal totaled $86,000, which constitutes a $32,000 increase over the amount of dividends received in fiscal year 1998. The $30,000 dividend received for the quarter ended September 30, 1999 reflects an annualized rate of 5.50%, or two basis points above the rate for fiscal 1999. Federal and State Taxation Savings associations such as the Association that meet certain conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to establish reserves for bad debts and to make annual additions thereto which may, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction is computed under the experience method. Under the experience method, the bad debt reserve deduction is an amount determined under a formula based generally upon the bad debts actually sustained by the savings association over a period of years. In August 1996, legislation was enacted that repealed the percentage of taxable income method of accounting used by many thrifts, including the Association, to calculate their bad debt reserve for federal income tax purposes. As a result, large thrifts such as the Association must recapture that portion of the reserve that exceeds the amount that could have been taken under the experience method for post-1987 tax years. The recapture may be deferred over a six-year period, the commencement of which will be delayed until the first taxable year beginning after December 31, 1997, provided the institution meets certain residential lending requirements. The Company elected to recapture the total amount of its excess reserves of approximately $7,000 in the fiscal year ended September 30, 1997. In addition to the regular income tax, corporations, including savings associations such as the Association, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. To the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the association's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of September 30, 1999, the Association's Excess for tax purposes totaled approximately $2.7 million. The Association files federal income tax returns on a fiscal year basis using the accrual method of accounting. The Company files a consolidated federal income tax returns with the Association. The Association has been audited by the IRS with respect to federal income tax returns for the tax years through December 31, 1988. With respect to years examined by the IRS, any deficiencies have been satisfied. In the opinion of management, any examination of still open returns would not result in a deficiency, which could have a material adverse effect on the financial condition of the Bank. Texas Taxation. The State of Texas does not have a corporate income tax, but it does have a corporate franchise tax. Prior to January 1, 1992 savings and loan associations had been exempt from the corporate franchise tax. The tax for the year 1999 is the higher of 0.25% of taxable capital (usually the amount of paid in capital plus retained earnings) or 4.5% of "net taxable earned surplus." "Net taxable earned surplus" is net income for federal income tax purposes increased by the compensation of directors and executive officers and decreased by interest on obligations guaranteed by the U.S. government. Net income cannot be reduced by net operating loss carryforwards form years prior to 1991, and operating loss carryovers are limited to five years. Delaware Taxation. As a Delaware Company, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware. Competition The Company faces strong competition, both in originating loans and in attracting deposits. Competition in originating loans comes primarily from other commercial banks, savings associations, credit unions and mortgage bankers making loans secured by real estate located in the Company's market area. The Company competes for loans principally on the basis of the quality of services it provides to borrowers, interest rates and loan fees it charges, and the types of loans it originates. The Company attracts all of its deposits through its retail banking offices, primarily from the communities it serves. Therefore, competition for those deposits is principally from other commercial banks, savings associations and brokerage houses located in the same communities. The Company competes for these deposits by offering deposit accounts at competitive rates and convenient business hours. The Company's primary market area covers Smith County, Texas. There are 14 commercial banks, one savings association and 13 credit unions which compete for deposits and loans in the Company's primary market area. The Company estimates its share of the residential mortgage loan market and savings deposit base to be not more than 15% and 5%, respectively. Employees The Company had 34 full-time employees and 5 part-time employee as of September 30, 1999, none of whom was represented by a collective bargaining agreement. The Company believes that its relations with its personnel have been good. Executive Officers Who Are Not Directors The following is a description of the Company's and the Association's executive officers who were not also directors as of September 30, 1999. Derrell W. Chapman, age 41, is Vice President, Chief Operating Officer and Chief Financial Officer of the Company and the Association. He has held such positions with the Company since its formation and the Association since 1989. Mr. Chapman was appointed an Advisory Director in 1998. Prior to his employment with the Association, Mr. Chapman was Vice President and Controller of Jasper Federal Savings and Loan Association, located in Jasper, Texas. Mr. Chapman is a certified public accountant. Joe C. Hobson, age 46, is Senior Vice President--Lending of the Association, a position he has held since 1992. Mr. Hobson has served the Association in various capacities since 1975. Item 2. Description of Property The Company conducts its business at its main office and a drive-through facility located in Tyler, Texas, a full service branch office located in Whitehouse, Texas and loan production offices located in Tyler and Lindale, Texas. The following table sets forth information relating to each of the Company's properties as of September 30, 1999.
Total September 30, 1999 Owned Approximate Net Building Net Year or Square and Book Location Acquired Leased Footage Land Equipment Value - -------- -------- ------ ------- ---- --------- ----- (Dollars In Thousands) Main Office: 1200 South Beckham 1962 Owned 10,000 $ 92 $432 $ 524 Tyler, Texas Full-Service Branches: 107 Highway 110 North 1984 Owned 2,500 158 113 271 Whitehouse, Texas 7205 South Broadway 1998 Owned n/a 1,246 385* 1,631 Tyler, Texas Loan Agencies: 4550 Kinsey Drive 1994 Owned 2,200 34 126 160 Tyler, Texas 904 South Main 1997 Leased 1,200 0 21 21** Lindale, Texas ------ ----- ------ Totals $1,530 $1,077 $2,607 ====== ====== ======
* Equipment only - building leased. ** Leasehold improvements. The Company believes that its current facilities are adequate to meet the present and foreseeable needs of the Association and the Company, subject to possible future expansion. The Company maintains an on-line database with a service bureau servicing financial institutions. The net book value of the data processing and computer equipment utilized by the Company at September 30, 1999 was $150,000. Item 3. Legal Proceedings The Company is involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing the Company in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year, through the solicitation of proxies or otherwise during the year ended September 30, 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Page 23 of the Company's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 6. Management's Discussion and Analysis or Plan of Operation Pages 6 through 29 of the Company's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 7. Financial Statements Pages 35 through 40 of the Company's 1999 Annual Report to Stockholders is incorporated herein by reference. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors Information concerning Directors of the Company is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 26, 2000, a copy of which will be filed not later than 120 days after the close of the fiscal year. Executive Officers Information regarding the business experience of the executive officers of the Company and the Association who are not also directors contained in Part I of this Form 10-KSB is incorporated herein by reference. Compliance with Section 16(a) Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Bank's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports are required, during the fiscal year ended September 30, 1999, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with, except that Mr. Kidd inadvertently failed to timely file Form 4 to report two transactions. Mr. Kidd reported the transactions on a Form 4 dated September 24, 1999. Item 10. Executive Compensation Information concerning executive compensation is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 26, 2000, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 11. Security Ownership of Certain Beneficial Owner and Management Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 26, 2000, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 12. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 26, 2000, a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits
Reference to Prior Filing or Exhibit Number Attached Regulation Document Hereto ---------- -------- ------ 3(a) Articles of Incorporation * 3(b) Amended and Restated By-Laws *** 4 Instruments defining the rights of security * holders, including debentures 10 Material contracts (a) Employment Contract between Gerald W. * Free and the Association (b) Employment Contract between Derrell W. * Chapman and the Association (c) Employment Contract between Joe C. * Hobson and the Association (d) 1995 Stock Option and Incentive Plan ** (e) Recognition and Retention Plan ** 11 Statement re: computation of per share earnings 11 13 Annual Report to Security Holders 13 21 Subsidiaries of Registrant 21 23 Consents of Experts and Counsel 23 27 Financial Data Schedule 27 99 Additional Exhibits None
* Filed as exhibits to the Company's Form S-1 registration statement (File No. 33-83758) filed on September 6, 1994 pursuant to Section 5 of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. ** Filed as exhibits to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1996 (File No. 0-24848). These previously filed documents are hereby incorporated herein by reference in accordance with item 601 of Regulation S-B. *** Filed as exhibits to the Company's 8-K, dated August 23, 1999. These previously filed documents are hereby incorporated herein by reference in accordance with item 601 of Regulation S-B. (b) Reports on Form 8-K A Form 8-K, dated August 4, 1999, was filed during the quarter ended September 30, 1999 to report the issuance of a press release by the Company announcing a cash dividend and earnings for the quarter ended June 30, 1999. A Form 8-K, dated August 23, 1999, was filed during the quarter ended September 30, 1999, to announce the completion of the Company's stock repurchase program and to announce the revision of the Company's By-Laws. A Form 8-K, dated September 3, 1999, was filed during the quarter ended September 30, 1999 to report that they had received an unsolicited, non-binding expression of interest in acquiring the Company from ETFS Acquisition Co. SIGNATURES Pursuant to the requirements of Section 15(d) of the Securities 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: December 29, 1999 By: /s/Gerald W. Free -------------------------------- Gerald W. Free, Vice Chairman, President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /s/Gerald W. Free /s/Jack W. Flock - ----------------- ---------------- Gerald W. Free, Vice Chairman, Jack W. Flock, President, Chief Executive Officer Chairman of the Board and Director (Principal Executive Officer) Date: December 29, 1999 Date: December 29, 1999 /s/Derrell W. Chapman /s/M. Earl Davis - --------------------- ---------------- Derrell W. Chapman, Vice President, M. Earl Davis, Director Chief Operating Officer and Chief Financial Officer (Principal Financial And Accounting Officer) Date: December 29, 1999 Date: December 29, 1999 /s/James W. Fair /s/Charles R. Halstead - ---------------- ---------------------- James W. Fair, Director Charles R. Halstead, Director Date: December 29, 1999 Date: December 29, 1999 /s/L. Lee Kidd /s/H. H. Richardson, Jr. - -------------- ------------------------ L. Lee Kidd, Director H. H. Richardson, Jr., Director Date: December 29, 1999 Date: December 29, 1999 /s/Jim M. Vaughn, M.D. - ---------------------- Jim M. Vaughn, M.D., Director Date: December 29, 1999 EX-11 2 EXHIBIT 11 Statement re: Computation of Per Share Earnings
EAST TEXAS FINANCIAL SERVICES, INC. Statement re: Computation of Per Share Earnings Fiscal Year Ended September 30, 1999 Total Shares Unallocated Total Shares Outstanding ESOP Shares For EPS Calculation ----------- ----------- ------------------- September 30, 1998 1,464,056 81,536 1,382,520 October 31, 1998 1,464,056 81,536 1,382,520 November 30, 1998 1,464,056 81,536 1,382,520 December 31, 1998 1,464,056 81,536 1,382,520 January 31, 1999 1,464,056 81,536 1,382,520 February 28, 1999 1,392,853 81,356 1,311,317 March 31, 1999 1,392,853 81,356 1,311,317 April 30, 1999 1,392,853 81,536 1,311,317 May 31, 1999 1,392,853 81,536 1,311,317 June 30, 1999 1,392,853 81,536 1,311,317 July 31, 1999 1,388,020 81,536 1,306,484 August 31, 1999 1,294,420 81,536 1,212,884 September 30, 1999 1,294,420 66,313 1,228,107 Weighted average number of shares outstanding for the year ended September 30, 1999, for earnings per share calculation 1,324,358 Stock options outstanding at September 30, 1999: 147,276 ------- Exercise price of stock options: $9.42 per share --------------- Average stock price for the 12 month period ended September 30, 1999 $11.693 -------
12 Months Ended Basic Earnings Per Share September 30, - ------------------------ ------------- 1999 1998 ---- ---- Income available to common stockholders $297,990 $560,946 ======== ======== Weighted average number of common shares outstanding for basic EPS calculation 1,324,358 1,431,623 ========= ========= Basic Earnings Per Share $.23 $.39 ==== ==== Diluted Earnings Per Share Income available to common stockholders $297,990 $560,946 ======== ======== Weighted average number of common shares outstanding for basic EPS calculation 1,324,358 1,431,623 ========= ========= Weighted average common shares issued under stock options plans 148,451 150,019 Less weighted average shares assumed repurchased with proceeds (98,134) (98,755) Weighted average number of common shares outstanding for diluted EPS calculation 1,374,675 1,482,887 Basic Earnings Per Share $.22 $.38 ==== ====
EX-13 3 EXHIBIT 13 Annual Report to Security Holders East Texas Financial Services, Inc. and Subsidiary T a b l e o f C o n t e n t s Selected Financial Data 2 Letter to Shareholders 3 Glossary 5 Management's Discussion and Analysis of Financial Condition and Operating Results 6 Forward Looking Information 6 General 6 Results of Operations Net Income 7 Interest Income 9 Interest Expense 13 Net Interest Income 14 Provisions for Loan Losses 15 Other Operating Income 16 Operating Expense 17 Income Tax Expense 19 Financial Condition Balance Sheet Summary 20 Loans 21 Mortgage-Backed Securities 23 Investment Securities 24 Deposits and Borrowings 24 Interest Rate Sensitivity 25 Asset Quality 27 Liquidity and Capital Position 28 Impact of Accounting Pronouncements 29 Year 2000 Compliance Assessment 31 Impact of Inflation and Changing Prices 32 Market Price of Common Stock 33 Report of Independent Accountants 34 Consolidated Financial Statements 35 Notes To Consolidated Financial Statements 41 Corporate Directory 67 Shareholder Reference 68 East Texas Financial Services, Inc. and Subsidiary
Selected Financial Data (Dollars in Thousands, except share data) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- At September 30, - ---------------- Total assets $ 153,725 $ 124,017 $ 115,949 $ 114,373 $ 117,077 Loans receivable, net 67,250 61,119 57,110 47,925 41,760 Investment securities - available-for-sale 5,919 0 0 0 0 Investment securities - held-to-maturity 30,481 29,767 23,058 30,139 30,263 Mortgage-backed securities - available-for-sale 32,894 12,810 4,356 0 0 Mortgage-backed securities - held-to-maturity 5,807 10,941 18,152 24,949 33,741 Deposits 87,540 86,644 88,551 90,768 92,474 FHLB Advances 45,058 14,946 4,195 0 0 Stockholders' equity 18,419 20,384 20,879 20,931 23,146 Common shares outstanding 1,294,420 1,464,056 1,026,366 1,079,285 1,256,387 Book value per share 14.23 13.92 20.34 19.39 18.42 For The Year Ended September 30, - -------------------------------- Net interest income $ 3,231 $ 3,298 $ 3,419 $ 3,552 $ 3,658 Provision for loan losses 0 0 5 0 0 Other operating income 358 361 302 371 299 Operating expenses 3,141 2,768 2,523 3,200 2,335 Net income 298 561 767 458 1,071 Selected Financial Ratios - ------------------------- Return on average assets 0.21% 0.46% 0.67% 0.40% 0.92% Return on average equity 1.51 2.72 3.67 2.08 5.47 Interest rate spread (average) 1.81 2.00 2.21 2.27 2.49 Net interest margin 2.41 2.83 3.12 3.16 3.21 Ratio of interest-earning assets to interest-bearing liabilities 113.80 119.58 122.29 122.23 119.13 Operating expenses to average assets 2.26 2.31 2.19 2.77 2.01 Efficiency ratio 91.21 78.96 69.24 84.10 59.70 Net interest income to operating expenses 1.03 X 1.20 x 1.35 X 1.11 x 1.57 x Asset Quality Ratios - -------------------- Non-performing assets to total assets 0.50% 0.18% 0.27% 0.39% 0.34% Non-performing loans to total loans receivable 1.14 0.37 0.54 0.94 0.95 Allowance for loan losses to non-performing loans 35.16 102.19 88.06 64.22 74.75 Allowance for loan losses to total loans 0.40 0.38 0.48 0.60 0.71 Allowance for loan losses to total assets 0.18 0.18 0.24 0.25 0.25 Regulatory Capital Ratios (Association only) - -------------------------------------------- Total capital to total assets 11.22% 14.91% 15.21% 15.39% 14.40% Tangible capital ratio 11.30 14.95 15.20 15.30 14.40 Core capital ratio 11.30 14.95 15.20 15.30 14.40 Risk-based capital ratio 27.94 38.29 40.22 44.23 43.44
East Texas Financial Services, Inc. and Subsidiary To Our Shareholders Just as we reported to you a year ago, the Company continues to undergo significant changes as we attempt to solve the difficulty of declining net interest margins, competition, regulation, and the many other challenges of operating a traditional thrift institution in this current environment. Continued narrowing of the difference in short and long-term interest rates causes downward pressure on our net interest margins and net interest income. Competition from traditional banks, savings and loans, credit unions, and non-depository financial institutions continues to provide formidable challenges to our Company. Even the Year 2000 date change has taken an enormous amount of time that could have been spent on more profitable endeavors. However, I can report to you that your board and management have taken decisive and specific action to bring about a solution to those challenges. You are already aware of some of the things that we have undertaken and we will discuss them as well others of which you may not be aware. As we reported one year ago, the Company made the commitment in 1998 to expand our lines of business to include more banking products. Additional locations, experienced consumer and commercial bankers, and expanded products and services would be necessary to change the direction of the Company from a traditional thrift to a full service community bank. In April 1999, we opened our new full service location in the rapidly growing area of south Tyler and introduced a full complement of banking products and services in that office, as well as in our other two full service locations. We knew it would be very costly to reshape the way we had done business for the past 74 years and we knew it would not happen overnight. It takes time and money to re-tool any business. But we can report to you that we are beginning to see encouraging signs of a new direction for the Company. Part of the decline in earnings for the current year is directly related to the start-up costs associated with the changes we have made. We estimate that approximately $250,000, on an after tax basis, in net expenses during the current year are directly related to the new office and new lines of business introduced. If we add that together with our reported net income for the year, our net income as compared to 1998 would have been about the same. We are encouraged about the direction we are now going. As of November 1999, we estimate that our new office location has approximately $3.6 million in both deposits and loans and we had commitments to loan another $3.0 million. Further, our net margin on the loans and deposits at our new location is approximately 3.85%, well above our current levels. We estimate that the new location will be profitable in approximately six to nine months, at current growth levels. In other matters, we continued to repurchase stock during the year, acquiring 171,203 shares of stock at an average price of approximately $12.90 per share. At year-end, we held 590,072 treasury shares at an average price of $11.84 per share. We ended the year with 1,294,420 shares outstanding and a book value per share of approximately $14.23. Subsequent to year-end, we purchased another 132,100 shares at a price of $14.25 per share consistent with the then current market. We do not anticipate that additional stock repurchases will be part of our operating strategy in 2000. We still believe that repurchasing shares is one of our most effective methods for increasing the value of your investment; however, the projected capital levels at our banking subsidiary may preclude us from so doing for a period of time. We continued to make use of our excess capital in 1999 by expanding our wholesale funded investment security arbitrage. At year-end, we had borrowed approximately $33.0 million, as compared to $14.0 million at September 30, 1998, in short term advances from the Federal Home Loan Bank of Dallas and invested the proceeds in adjustable rate securities and achieved a positive margin on the transaction. We do not expect to continue to increase the size of this program during 2000, again, because of the projected capital levels of our banking subsidiary. Finally, we are extremely pleased to report that on November 15, 1999 we entered into a definitive agreement providing for the merger of $38 million Gilmer Savings Bank, FSB into our Company. We believe that we can bring an enhanced array of products to the Gilmer market that will complement their current operations and that the merger allows us to expand our markets and continue our growth strategy. We view this as an opportunity to enhance the value of your investment. We believe that the merger can be accretive to the Company's earnings within the first full year of operations. We will create approximately $2.1 million of intangible assets in the transaction; however, we believe that extensive expense reductions are possible due to the similarities of the two companies. We hope to be able to complete the acquisition in the first quarter of 2000. As always, we invite you to attend our annual meeting of stockholders. The meeting will be held at 2:00 p.m. on January 26, 2000 at the offices of the Company, 1200 South Beckham, Tyler, Texas. We are confident about the changes we have made and the direction the Company is moving. We are committed to the long- term success of the Company and to maximizing the long-term value of your investment. Sincerely, /s/Jack W. Flock /s/Gerald W. Free - ---------------- ----------------- Jack W. Flock Gerald W. Free Chairman of the Vice-Chairman, President Board of Directors and Chief Executive Officer East Texas Financial Services, Inc. and Subsidiary G l o s s a r y BOOK VALUE PER SHARE Indicates the amount of stockholders' equity attributable to each outstanding share of common stock. It is determined by dividing total stockholders' equity by the total number of common shares outstanding at the end of a period. EARNINGS PER SHARE Indicates the amount of net income attributable to each share of common stock. It is determined by dividing net income for the period by the weighted average number of common shares outstanding during the same period. EFFICIENCY RATIO A measure of operating efficiency determined by dividing total operating expenses by the sum of net interest income after provisions for loan losses and non-interest income, excluding net gains or losses on sale of assets. INTEREST RATE SENSITIVITY A measure of the sensitivity of the Company's net interest income to changes in market interest rates. It is determined by analyzing the difference between the amount of interest-earning assets maturing or repricing within a given time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. INTEREST RATE SPREAD The difference between the average yield earned on the Company's interest-earning assets and the average rate paid on its interest-bearing liabilities. NET INTEREST INCOME The dollar difference between the interest earned on the Company's interest-earning assets and the interest paid on its interest-bearing liabilities. NET INTEREST MARGIN Net interest income as a percentage of average interest-earning assets. NET PORTFOLIO VALUE The present value of future expected cash flows on interest-earning assets less the present value of future expected cash flows on interest-bearing liabilities. NON-PERFORMING ASSETS Loans on which the Company has discontinued accruing interest or are delinquent more than ninety days and still accruing interest, and foreclosed real estate. RETURN ON AVERAGE ASSETS A measure of profitability determined by dividing net income by average assets. RETURN ON AVERAGE STOCKHOLDERS' EQUITY A measure of profitability determined by dividing net income by average stockholders' equity. East Texas Financial Services, Inc. and Subsidiary Management's Discussion and Analysis of Financial Condition and Operating Results Results of Operations Forward-Looking Information Except for the historical information contained herein, the matters discussed in the Annual Report may be deemed to be forward-looking statements that involve risks and uncertainties, including statements that are other than statements of historical facts, and the other risks detailed from time to time in the Company's SEC reports, including the report on Form 10-KSB, for the year ended September 30, 1999. Readers are advised that various factors, including, but not limited to - changes in law, regulations or generally accepted accounting principles; East Texas's competitive position within its market area; increasing consolidation within the banking industry; certain customers and vendors of critical systems or services failing to comply with Year 2000 programming issues; unforeseen changes in interest rates; any unforeseen downturns in the local, regional or national economies - could cause East Texas' actual results or circumstances for future periods to differ materially from those indicated or projected. These forward-looking statements represent the Company's judgment as of the date of this Report. The Company disclaims, however, any intent or obligation to update these forward-looking statements. General The principal business of the Company consists of attracting retail deposits from the general public and investing those funds primarily in one- to four-family residential mortgage loans. The Company also originates commercial real estate, one- to four-family construction, multi-family, consumer and commercial loans. The Company also purchases mortgage-backed securities and invests in U.S. Government and agency obligations and other permissible investments. The Company's revenues are derived primarily from interest earned on loans, mortgage-backed securities and investments and, to a lesser extent, from service charges and loan originations, gains on sales of loans and mortgage-backed securities, and loan servicing fee income. The Company currently offers a variety of deposit accounts having a wide range of interest rates and terms. The Company's deposits include personal and business checking accounts, passbook and money market accounts and certificate accounts with terms ranging from one month to five years. The Company solicits deposits in its primary market area and does not accept brokered deposits. Net Income 1999 and 1998 Comparison Net income totaled $298,000, or $.23 in basic earnings per share for the year ended September 30, 1999, compared to $561,000, or $.39 in basic earnings per share for the year ended September 30, 1998. On a diluted basis, earnings per share was calculated at $.22 and $.38 for the years ended September 30, 1999 and 1998 respectively. Both per share earnings reflect the results of the Company's three for two stock split in the form of a 50% stock dividend in 1998. The decrease in net income was primarily attributable to a $373,000 increase in non-interest expense to $3.1 million for the year ended September 30, 1999, compared to $2.8 million for the year ended September 30, 1998. Additionally, a $66,000 decline in net interest income after provision for loan losses to $3.2 million for the year ended September 30, 1999 from $3.3 million for the year ended September 30, 1998 contributed to the overall decline in net income. The decline in net interest income and the increase in non-interest operating expense were partially offset by a $179,000 decline in income tax expense. For the year ended September 30, 1999, the Company reported a return on average assets of approximately .21%, compared to .46% for the year ended September 30, 1998. Return on average stockholders' equity was 1.51% for the year ended September 30, 1999, compared to 2.72% for the year ended September 30, 1998. 1998 and 1997 Comparison Net income was $561,000, or $.39 in basic earnings per share for the year ended September 30, 1998, compared to $767,000, or $.52 in basic earnings per share for the year ended September 30, 1997. On a diluted basis, earnings per share was calculated at $.38 and $.51 for the years ended September 30, 1998 and 1997 respectively. Per share earnings for the year ended September 30, 1997 were restated for comparative purposes as a result of the Company's three for two stock split in the form of a 50% stock dividend completed in 1998. The decrease in net income was primarily attributable to a $245,000 increase in non-interest expense to $2.8 million for the year ended September 30, 1998, compared to $2.5 million for the year ended September 30, 1997. Additionally, a $117,000 decline in net interest income after provision for loan losses from $3.4 million for the year ended September 30, 1997 to $3.3 million for the year ended September 30, 1998 contributed to the overall decline in net income. Partially offsetting the increase in non-interest expense and the decline in net interest income after provision for loan losses was a $59,000 increase in non-interest income from $302,000 for the year ended September 30, 1997 to $361,000 for the year ended September 30, 1998. In addition, a $98,000 decrease in income tax expense from $427,000 for the year ended September 30, 1997 to $329,000 for the year ended September 30, 1998 offset the decline in net income. For the year ended September 30, 1998, the Company reported a return on average assets of approximately .46%, compared to .67% for the year ended September 30, 1997. Return on average stockholders' equity was reported as 2.72% for the year ended September 30, 1998, compared to 3.67% for the year ended September 30, 1997. The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.
Net Interest Income Analysis Year Ended September 30, --------------------------------------------------------------------------------------------------- 1999 1998 1997 Interest Interest Interest Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate --------------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest-earning assets: Loans receivable $ 62,494 $ 4,810 7.70% $ 60,563 $ 4,771 7.88% $ 52,192 $ 4,191 8.03% Mortgage-backed securities 33,179 1,995 6.00 22,665 1,526 6.73 22,412 1,564 6.98 Investment securities 36,704 2,204 6.01 32,249 1,913 5.93 34,165 2,080 6.09 FHLB stock 1,576 86 5.48 905 54 5.92 972 57 5.86 -------- ------- ------- -------- ------- ------- --------- ------- ------- Total interest-earning assets (1) $133,953 9,095 6.79 $116,382 8,264 7.10% $ 109,741 $ 7,892 7.19% ======== ======= ======= ======== ======= ======= ========= ======= ======= Interest-bearing liabilities: Non-Interest Checking $ 1,358 $ 0 0.00% $ 1,284 $ 0 0.00% $ 1,285 $ 0 0.00% Interest Checking 3,660 125 3.43 1,427 29 2.03 1,448 29 2.00 Savings accounts 2,842 85 3.01 2,852 86 3.02 2,913 87 2.99 Money market 5,824 197 3.38 5,905 197 3.34 6,099 209 3.43 Certificate accounts 72,940 3,831 5.25 76,138 4,114 5.40 77,146 4,101 5.32 Borrowings 31,086 1,626 5.23 9,724 540 5.55 850 47 5.53 -------- ------- ------- -------- ------- ------- --------- ------- ------- Total interest-bearing liabilities $117,710 $ 5,864 4.98% $ 97,330 $ 4,966 5.10% $ 89,741 $ 4,473 4.98% ======== ======= ======= ======== ======= ======= ========= ======= ======= Net interest income $ 3,231 $ 3,298 $ 3,419 ======= ======= ======= Net interest rate spread 1.81% 2.00% 2.21% ======= ======= ======= Net earning assets $ 16,243 $ 19,052 $ 20,000 ======== ======== ========= Net interest margin 2.41% 2.83% 3.12% ======= ======= ======= Average interest-earning assets to Average interest-bearing liabilities 113.80% 119.58% 122.29% ======= ======= =======
- ------------------------------ (1) Calculated net of deferred loan fees, loan discounts, loans in process, loss reserves and premiums or discounts. The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates.
Rate/Volume Analysis Year Ended September 30, ----------------------------------------------------------------------------------------------- 1999 vs 1998 1998 vs 1997 1997 vs 1996 ----------------------------- ------------------------------ -------------------------------- Increase Increase Increase (Decrease) (Decrease) (Decrease) Due to Total Due to Total Due to Total ----------------- Increase ----------------- Increase -------------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease) ----------------- --------- ----------------- ---------- -------------------- -------- (Dollars in Thousands) (Dollars in Thousands) Interest-earning assets: Loans receivable $ 152 $ (113) $ 39 $ 672 $ (92) $ 580 $ 638 $ (88) $ 550 Mortgage-backed securities 708 (239) 469 18 (56) (38) (450) 14 (436) Investment securities 264 27 291 (117) (50) (167) (248) (40) (288) FHLB stock 40 (8) 32 (4) 1 (3) 3 (1) 2 -------- ------- ------- ------- -------- ------- -------- --------- -------- Total interest-earning assets $ 1,164 $ (333) $ 831 $ 569 $ (197) $ 372 $ (57) $ (115) $ (172) ======== ======= ======= ======= ======== ======= ======== ========= ======== Interest-bearing liabilities: Interest checking $ 45 $ 51 $ 96 $ 0 $ 0 $ 0 $ 0 $ (1) $ (1) Savings deposits (1) 0 (1) (2) 1 (1) (1) 0 (1) Money market checking accounts (3) 3 0 (7) (5) (12) (8) 4 (4) Certificate accounts (173) (110) (283) (54) 67 13 (88) 8 (80) Borrowings 1,186 (100) 1,086 491 2 493 47 0 47 -------- ------- ------- ------- -------- ------- -------- --------- -------- Total interest-bearing liabilities $ 1,054 $ (156) $ 898 $ 428 $ 65 $ 493 $ (50) $ 11 $ (39) ======== ======= ======= ======= ======== ======= ======== ========= ======== Net change in interest income $ (67) $ (121) $ (133) ======= ======= ======== Net interest income $ 3,231 $ 3,298 $ 3,419 ======= ======= ========
Interest Income Interest income is dependent upon the composition and dollar amounts of the Company's interest-earning assets, the yield on those assets and the current level of market interest rates. Interest income is generated by the earnings on the Company's loans receivable, investment securities and mortgage-backed securities portfolios. The Company's loans receivable portfolio has historically been comprised of fixed rate, single family residential mortgages and, to a lesser extent, adjustable rate single family mortgages and other real estate loans of both fixed and adjustable rates. In the fiscal year ended September 30, 1999, the Company made the decision to expand its line of lending products to include consumer and commercial loans and to re-emphasize its commercial real estate lending program. The decision to expand its lending products was made to increase the overall yield on the Company's loan portfolio with shorter-term higher yielding loans. Generally, all fixed rate one- to four-family mortgage loans with final maturities of more than fifteen years are sold into the secondary market upon origination. Depending upon the mortgage rate, fixed rate loans with maturities of fifteen years or less may be placed into portfolio or sold into the secondary market. All adjustable rate and all consumer and commercial loans are held in portfolio. Approximately 47% of interest income is derived from the Company's investment and mortgage-backed securities portfolios. The investment securities portfolio is comprised of U. S. Treasury securities, U.S. agency securities and corporate bonds with portions of the portfolio scheduled to mature on a staggered basis. The portfolio provides liquidity for the Company's operations and additional flexibility with regard to asset and liability management. Additionally, a substantial portion of the mortgage-backed securities portfolio is comprised of securities that have interest rate adjustment frequencies of either six months or one year. The remainder of the portfolio is comprised of fixed rate securities all having final maturities of less than five years. 1999 and 1998 Comparison Total interest income was $9.1 million for the year ended September 30, 1999, an increase of $832,000 or 10.1% from the $8.3 million reported for the year ended September 30, 1998. The increase in interest income was primarily due to a $17.6 million increase in average interest earning assets from $116.4 million for the year ended September 30, 1998 to $134.0 million for the year ended September 30, 1999. The increase in interest income due to the increase in average interest earning assets was partially offset by a decline in the average yield on interest earning assets from 7.10% for the year ended September 30, 1998 to 6.79% for the year ended September 30, 1999. The increase in average interest earning assets was primarily the result of a $10.5 million increase in average mortgage-backed securities from $22.7 million for the year ended September 30, 1998 to $33.2 million for the year ended September 30, 1999. Interest income from mortgage-backed securities increased $468,000 to $2.0 million for the year ended September 30, 1999 from $1.5 million for the year ended September 30, 1998. The average yield on the Company's mortgage-backed securities portfolio declined to 6.01% for the year ended September 30, 1999 from 6.73% for the year ended September 30, 1998. The increase in mortgage-backed securities was a direct result of the Company's decision to continue to increase the size of its wholesale funding and investment arbitrage program. The purpose of the program is to utilize excess capital by increasing the size of the balance sheet through wholesale funding sources and investing the proceeds primarily in adjustable rate securities at a positive margin. The program totaled $33.0 million at September 30, 1999 and was earning an after-tax margin of approximately 40 basis points. The Company's decision to increase or decrease the size of the program will be determined by the success of its retail lending operations. If the Company is successful in increasing its loan portfolio, the arbitrage program may be decreased in size. The size of the program could also be limited by the Association's capital levels. The decline in the overall yield on the mortgage-backed securities portfolio was the result of adjustable rate securities prepaying during the year. Even though interest rates remained relatively stable during the year, older securities with higher interest rates either declined in yield or the underlying loans in the securities prepaid as borrowers moved into fixed rate lending products. See -- "Financial Condition - Mortgage-backed Securities." The increase in average interest earning assets was also partially due to a $4.5 million increase in average investment securities from $32.2 million for the year ended September 30, 1998 to $36.7 million for the year ended September 30, 1999. In addition, the increase in interest income was partially due to an increase in the average yield on the Company's investment securities portfolio to 6.01% for the year ended September 30, 1999 from 5.93% for the year ended September 30, 1998. The increase in the size of the investment securities portfolio resulted as the Company deployed excess liquidity. The portfolio size is primarily determined by the availability of excess liquidity that the Company can not currently place into loans. During the year ended September 30, 1999, the Company made the decision to begin investing a portion of the portfolio's proceeds into corporate debt securities. See - "Financial Condition - Investment Securities." The purpose was to enhance the overall yield on the portfolio and thereby total interest income. The increase in the overall yield on the portfolio was primarily due to the change in the composition of the portfolio and to, to a lesser extent, the increase in the overall level of interest rates late in the fiscal year ended September 30, 1999. An increase in average loans receivable balances from $60.6 million for the year ended September 30, 1998 to $62.5 million for the year ended September 30, 1999 also contributed to the increase in average interest earning assets. The increase in average loans receivable was a result of the Company's decision to continue to place all 15 year and shorter one- to four-family loans into portfolio. The Company began a program during the year to fund its production of one- to four-family mortgage loans and its home equity loans with advances from the Federal Home Loan Bank of Dallas. Even though during the year interest rates on one- to four-family loans declined to levels that the Company historically has not placed into portfolio, the ability to match fund the loans with borrowings at a positive margin allowed the Company's overall loan portfolio to increase during the year. In addition, the Company began making commercial and consumer loans during the year, which are all placed into portfolio. The average yield on the Company's loan portfolio declined to 7.70% for the year ended September 30, 1999 from 7.88% for the year ended September 30, 1998. To the extent that the Company can continue to increase the size of its commercial and consumer loan portfolio and manage the inherent additional credit risk associated with such products, it anticipates that the overall yield on the loan portfolio could improve or at least remain higher than if the Company continued to originate predominately one- to four-family loans. At September 30, 1999, the Company had approximately $2.8 million in commercial and consumer loan with a weighted-average yield of approximately 8.50%. See -- "Financial Condition - Loans". For the fiscal year ending September 30, 2000, the Company's ability to continue to increase its one- to four-family loans receivable portfolio will be primarily dependent upon the overall level of interest rates. Declines in interest rates could have the effect of increasing prepayments on the Company's existing mortgage portfolio if customers refinance their mortgages at lower interest rates or refinance with other lenders. In addition, the Company's ability to increase its one- to four-family loan portfolio will be dependent upon the Company's ability to meet its loan production targets, which are in turn primarily dependent upon the continued strong economic environment experienced in the Company's market over the past several quarters. 1998 and 1997 Comparison The Company reported total interest income of $8.3 million for the year ended September 30, 1998, an increase of $372,000 or 4.7% from the $7.9 million reported for the year ended September 30, 1997. The increase in interest income was a direct result of a $6.7 million increase in average interest earning assets from $109.7 million for the year ended September 30, 1997 to $116.4 million for the year ended September 30, 1998 which was only partially offset by a nine basis point decline in the average yield on interest earning assets from 7.19% for the year ended September 30, 1997 to 7.10% for the year ended September 30, 1998. The increase in average interest earning assets was primarily the result of an $8.4 million increase in average loans receivable balances outstanding from $52.2 million for the year ended September 30, 1997 to $60.6 million for the year ended September 30, 1998. As a result, interest income on loans receivable increased by $580,000 or 13.8% from $4.2 million for the year ended September 30, 1997 to $4.8 million for the year ended September 30, 1998. The increase in average loans receivable balances was a direct result of the Company's decision to continue placing into portfolio all fixed rate one- to four-family loans with terms of 15 years or less and with interest rates of greater than 7.00%. For most of the year ended September 30, 1998, interest rates on mortgage loans in the Company's market allowed the Company to continue this policy. In addition, the Company began making home equity loans in 1998, the first year allowed under Texas law. All home equity loans currently meet the Company's criteria for placing real estate related loans into portfolio. As a result of both conditions, the Company was able to substantially increase its loans receivable portfolio during 1998. As long term interest rates continued to decline during 1998 and mortgage rates on one- to four-family loans fell below 7.00%, the Company elected, towards the end of the fiscal year, to begin selling its 15-year and shorter one- to four-family loans into the secondary market. The Company continued to place all home equity loans into portfolio throughout the year. Offsetting the increase in interest income on loans receivable was a $117,000 decline in interest on the Company's short term U.S. Treasury and agency portfolio and a $38,000 decline in interest income on the Company's mortgage-backed securities portfolio. During the fiscal year ended September 30, 1998, the Company elected to continue to increase its wholesale arbitrage program, by borrowing funds from the Federal Home Loan Bank of Dallas and investing in mortgage-backed securities. As a result, despite increased prepayments on its mortgage-backed securities portfolio as interest rates continued to decline, the Company was able to increase its mortgage-backed securities portfolio to $23.8 million at September 30, 1998 from $22.5 million at September 30, 1997. In fact, the average balance outstanding in the portfolio increased slightly to $22.7 million for the year ended September 30, 1998 from $22.4 million for the year ended September 30, 1997. As interest rates continued to decline throughout the year and the loans underlying the mortgage-backed securities refinanced into lower interest rates, the overall yield on the Company's mortgage-backed securities portfolio declined approximately 25 basis points from 6.98% for the year ended September 30, 1997 to 6.73% for the year ended September 30, 1998. The decline in average yield accounted for the overall decline in interest income on mortgage-backed securities for the year ended September 30, 1998. The average balance in the Company's U.S. Treasury and agency portfolio declined approximately $2.0 million from $34.2 million for the year ended September 30, 1997 to $32.2 million for the year ended September 30, 1998. In addition as the overall level of interest rates decreased during the year and securities matured and were replaced with lower yielding securities, the average yield on the portfolio decreased to approximately 5.93% for the year ended September 30, 1998 from 6.09% for the year ended September 30, 1997. The result was an overall decline in interest income from the portfolio of approximately $167,000. Interest Expense The Company's interest expense is dependent upon the pricing and volume of its interest-bearing liabilities, comprised primarily of certificates of deposit and borrowed funds and, to a lesser extent, savings accounts, NOW accounts and money market accounts. The level of interest expense depends upon the composition, pricing and dollar amount of the Company's interest-bearing liabilities, competition for deposits and the current level of market interest rates. 1999 and 1998 Comparison Total interest expense was $5.9 million for the year ended September 30, 1999, compared to $5.0 million for the year ended September 30, 1998, an $898,000 or 18.1% increase. The increase was primarily attributable to a $20.4 million increase in average interest-bearing liabilities from $97.3 million for the year ended September 30, 1998 to $117.7 million for the year ended September 30, 1999. Partially offsetting the increase in interest expense that resulted from the increase in average interest-bearing liabilities was a 12 basis point decline in the Company's overall cost of interest-bearing liabilities from 5.10% for the year ended September 30, 1998 to 4.98% for the year ended September 30, 1999. The increase in average interest-costing liabilities was due to the Company's decision to continue its investment security arbitrage and its decision to begin funding a portion of its loan portfolio with borrowings from the Federal Home Loan Bank of Dallas. At September 30, 1999, total borrowings were $45.1 million, a $30.1 million increase from the $14.9 million at September 30, 1998. Total deposit accounts also increased slightly to $87.5 million at September 30, 1999 from $86.6 million at September 30, 1998. The decline in the Company's average cost of funds was partially attributable to the increase in transaction and savings accounts that resulted from the Company's focus on commercial and consumer banking and the opening of its new location in Tyler during the year. Such transaction accounts, which included personal and business checking accounts, NOW accounts, Money Market accounts and savings accounts totaled approximately $17.0 million at September 30, 1999, a $5.0 million increase over the $12.0 million at September 30, 1998. See - "Financial Condition - Deposits and Borrowings." 1998 and 1997 Comparison Total interest expense increased approximately $494,000 to $5.0 million for the year ended September 30, 1998, compared to $4.5 million for the year ended September 30, 1997. The increase was primarily attributable to an increase in average interest-bearing liabilities from $89.7 million for the year ended September 30, 1997 to $97.3 million for the year ended September 30, 1998. The Company's overall cost of interest-bearing liabilities, despite a general decline in the level of interest rates throughout the year, actually increased by approximately 12 basis points from 4.98% for the year ended September 30, 1997 to 5.10% for the year ended September 30, 1998. The increase in average interest-bearing liabilities was directly attributable to the Company's decision to continue its wholesale funding arbitrage through the Federal Home Loan Bank of Dallas. During the year ended September 30, 1998, the Company increased its borrowings from the Federal Home Loan Bank of Dallas to $14.9 million at September 30, 1998 from $4.2 million at September 30, 1997. The Company's total deposit accounts declined slightly from $88.6 million at September 30, 1997 to $86.6 million at September 30, 1998. The increase in average cost of funds was primarily attributable to continued competitive pressure in the Company's local market for certificate of deposit accounts and the cost of the Federal Home Loan Bank of Dallas borrowings. Net Interest Income Net interest income is the Company's principal source of earnings, and is directly affected by the relative level, composition and pricing of interest sensitive assets and liabilities. These factors are, in turn, affected by current economic conditions and the overall level of interest rates. 1999 and 1998 Comparison Net interest income after provision for loan losses totaled $3.2 million for the year ended September 30, 1999, a $66,000 or 2.0% decline from the $3.3 million reported for the year ended September 30, 1998. During the year ended September 30, 1999, the Company's average net interest spread was approximately 1.81%, compared to 2.00% for the year ended September 30, 1998. The Company's net interest margin on average interest earning assets was approximately 2.41% for the year ended September 30, 1999, compared to 2.83% for the year ended September 30, 1998. The continued decline in the Company's net interest margin was one of the primary reasons for the Company's decision to expand its lending operations to include commercial and consumer loans. To the extent the Company can replace lower yielding assets such as investment and mortgage-backed securities with higher yielding commercial and consumer loans and minimize losses on the riskier loan portfolio, it expects an improvement in its net interest margin. 1998 and 1997 Comparison Net interest income after provision for loan losses totaled $3.3 million for the year ended September 30, 1998, a $117,000 or 3.4% decline from the $3.4 million reported for the year ended September 30, 1997. During the year ended September 30, 1998, the Company's average net interest spread was approximately 2.00%, compared to 2.21% for the year ended September 30, 1997. The Company's net interest margin on average interest earning assets was approximately 2.83% for the year ended September 30, 1998, compared to 3.12% for the year ended September 30, 1997. Continued competitive pressure for interest rates on certificates of deposit, refinancing of mortgage loans, and a "flat" interest rate environment contributed to the decline in the Company's net interest spread and net interest margin for the year. Provision for Loan Losses The Company's provision for loan losses is determined by management's periodic assessment of the adequacy of the allowance for loan losses. Management's assessment of the desired level of the allowance for loan losses is affected by factors such as the composition of the loan portfolio and the risk characteristics of various classes of loans, the current level of non-performing loans, economic conditions and real estate values, as well as current regulatory trends. 1999 and 1998 Comparison The Company made no provision for loan losses during the year ended September 30, 1999 or the year ended September 30, 1998. The quality of the Company's loan portfolio contributed to the decision to make no additional provisions for loan losses during the years ended September 30, 1999 and September 30, 1998. In addition, a $39,000 recovery on a previously recorded deficiency judgement was added back to the reserve for loan losses in 1999. Non-performing assets to total assets were .50% at September 30, 1999, compared to .18% at September 30, 1998. Non-performing loans to total loans receivable totaled 1.14% at September 30, 1999, compared to .37% at September 30, 1998. The Company's allowance for loan losses as a percentage of loans receivable equaled .40% at September 30, 1999, compared to .38% at September 30, 1998 while allowance for loan losses as a percentage of non-performing loans was 35.16% at September 30, 1999, compared to 102.19% at September 30, 1998. See - "Asset Quality". The Company expects to make additions to its loan loss reserves during the fiscal year ending September 30, 2000. Changes to the composition of the Company's loan portfolio to include a greater percentage of commercial and consumer loans will determine the timing and amount of additional loan loss reserves and additional provisions for loan losses. 1998 and 1997 Comparison For the year ended September 30, 1998, the Company made no provision for loan losses, compared to $5,000 for the year ended September 30, 1997. The continued strength of the economy in the Company's market and the continued quality of its loan portfolio contributed to the decision to make no additional provisions for loan losses during the year ended September 30, 1998 and only $5,000 for the year ended September 30, 1997. Non-performing assets to total assets were down to .18% of total assets at September 30, 1998, compared to .27% at September 30, 1997. Non-performing loans to total loans receivable totaled .37% at September 30,1998, compared to .54% at September 30, 1997. The Company's allowance for loan losses as a percentage of loans receivable equaled .38% at September 30, 1998, compared to .48% at September 30, 1997 while the allowance for loan losses as a percentage of non-performing loans increased to 102.19% at September 30, 1998 from 88.06% at September 30, 1997. Other Operating Income Other operating income consists primarily of fee income from service charges, origination fees and servicing fees on the Company's loan portfolio, gains or losses on the sale of loans and fees from transaction accounts. 1999 and 1998 Comparison Other operating income was $358,000 for the year ended September 30, 1999, a decrease of $3,000 from the $361,000 for the year ended September 30, 1998. The decrease in other operating income was primarily the result of a $14,000 decrease in loan servicing fees to $57,000 for the year ended September 30, 1999, compared to $70,000 for the year ended September 30, 1998. Net gains on sales of loans also declined by $7,000 to $146,000 for the year ended September 30, 1999 from $153,000 for the year ended September 30, 1998. The decline in loan servicing fees was primarily the result of a continued decrease in the Company's overall loan servicing margins as older loans with higher servicing margins continued to pay off even though total loans serviced for others increased from $42.6 million at September 30, 1998 to $43.8 million at September 30, 1999. In addition, net gains on sales of loans and loan servicing fees declined as the result of fewer loans being sold into the secondary market as the Company continued to hold the majority of its loans in portfolio. Offsetting a portion of the declines in gains on sales of loans and loan servicing fees, was a $9,000 increase in loan origination and commitment fees and a $9,000 increase in other non-interest income. The increase in loan origination and commitment fees was the result of the continued volume of one- to four-family loans made by the Company during the year. The Company expects other non-interest income to increase during the year ending September 30, 2000. The introduction of consumer and commercial checking accounts in 1999, a planned introduction of personal checking accounts with overdraft privilege, and a "free" checking account are expected to increase the Company's fee income from such products. 1998 and 1997 Comparison Other operating income equaled $361,000 for the year ended September 30, 1998, an increase of $59,000 from the $302,000 reported for the year ended September 30, 1997. The increase in other operating income was primarily the result of an $81,000 increase in gains on sales of loans to $153,000 for the year ended September 30, 1998, compared to $72,000 for the year ended September 30, 1997. As interest rates on mortgage loans fell below the Company's threshold for placing such loans into its loan portfolio in the fiscal year ended September 30, 1998, the Company began selling more loans into the secondary market. The result was additional gains on the sale of such loans both on a cash basis and under Statement of Financial Accounting Standards No. 122, Accounting For Mortgage Servicing Rights. SFAS No. 122 requires that the present value of the estimated servicing income from a loan sold be recorded as a gain on the sale of the loan. The recorded gain on the sale of the loan is subsequently amortized over the estimated life of the loan against loan servicing fee income. Proceeds from the sale of mortgage loans totaled approximately $10.1 million during the year ended September 30, 1998, compared to $4.8 million for the year ended September 30, 1997. Gains on the sale of loans due to originated mortgage servicing rights totaled $120,000 for the year ended September 30, 1998, compared to $58,000 for the year ended September 30, 1997. Cash gains on the sale of loans totaled $32,000 and $14,000 for the years ended September 30, 1998 and 1997 respectively. Offsetting a portion of the additional gains on sales of loans into the secondary market was a $25,000 decline in loan servicing fees to $70,000 for the year ended September 30, 1998, compared to $95,000 for the year ended September 30, 1997. The decline in loan servicing fees resulted primarily from additional amortization of originated mortgage servicing rights on previously recorded loans that were paid off or refinanced during the year. Loans serviced for others totaled $42.6 million at September 30, 1998, compared to $39.4 million at September 30, 1997. Loan servicing fee income before the reduction for the amortization of originated mortgage servicing rights totaled $123,000 for the year ended September 30, 1998, compared to $124,000 for the year ended September 30, 1997. However, the amortization of previously recorded mortgage servicing rights totaled $53,000 for the year ended September 30, 1998, compared to $29,000 for the year ended September 30, 1997. The net result was a decline in loan servicing fee income, despite the fact that loan balances serviced for others increased during the year. Operating Expenses Operating expenses are comprised of compensation and benefits, occupancy and equipment and general and administrative expense, together with FDIC insurance premiums. 1999 and 1998 Comparison Operating expenses increased substantially for the fiscal year ended September 30, 1999 compared to 1998. The increase was a direct result of the additional expenses associated with the opening of the Company's new office and the Company's expansion of its lines of business to include commercial and consumer lending and other banking products. In April of 1999, the Company opened a new full service banking office in Tyler designed primarily to attract commercial and consumer deposits and focus on commercial and consumer lending. The office is staffed with 8 full time and 2 part time employees. For the fiscal year ended September 30, 1999, the Company estimates that non-interest expense, directly associated with the new office location, totaled approximately $312,000. Such expenses accounted for approximately 84% of the increase in the Company's non-interest expense for the year. The Company estimates that operating expenses associated with the new location will total $400,000 on an annual basis. Total non-interest expense was $3.1 million for the year ended September 30, 1999, a $373,000 or 13.5% increase from the $2.8 million reported for the year ended September 30, 1998. The increase in total non-interest expense was primarily the result of a $194,000 increase in compensation and benefits expense, a $110,000 increase in occupancy and equipment expenses and a $82,000 increase in miscellaneous operating expenses. The increase in compensation and benefits expense was primarily the result of additional employees associated with the new office location and an increase in funding costs on the Company's defined benefit pension plan. Occupancy and equipment expense totaled $302,000 for the year ended September 30, 1999, compared to $192,000 for the year ended September 30, 1998. The increase was primarily due to additional expense associated with the new office location. The increase in other operating expenses was primarily the result of additional advertising expense made in conjunction with the new office. Total non-interest expense as a percentage of average total assets was 2.26% for the year ended September 30, 1999, compared to 2.31% for the year ended September 30, 1998. The Company's efficiency ratio was 91.21% for the year ended September 30, 1999, compared to 78.96% for the year ended September 30, 1998. 1998 and 1997 Comparison Operating expenses totaled $2.8 million for the year ended September 30, 1998, a $245,000 or 9.7% increase from the $2.5 million reported for the year ended September 30, 1997. The increase in total non-interest expense was primarily the result of a $165,000 increase in compensation and benefits expense, a $34,000 increase in occupancy and equipment expenses and a $63,000 increase in miscellaneous operating expenses. The increase in the Company's efficiency ratio was primarily due to the increased operating expense associated with the new branch office and additional consumer and commercial banking products added in 1999. As additional net interest income and non-interest income increases with the growth of the new branch office and additional lending activity, the Company anticipates an improvement in its efficiency ratio. However, the Company's operating expenses may continue at historically high levels through 2000 until such growth can be achieved and the expense reductions from the proposed merger are accomplished. The increase in compensation and benefits expense was the result of an $85,000 increase in salaries paid to employees, a $50,000 increase in funding costs on the Company's defined benefit pension plan and a $20,000 increase in expenses associated with the release of shares under the Company's ESOP. The increase in salaries paid to employees was due to additional lending personnel added to the Company's staff during 1997. Compensation expense for such employees were for a twelve month period in fiscal 1998 compared to only a portion of fiscal 1997. The additional pension expense was also the result of additions to the Company's staff and increased funding requirements as participants in the plan receive salary increases and increase their length of employment. The additional ESOP expense was due to the accounting requirements of American Institute of Certified Public Accountants Statement of Operating Procedures No. 93-6. Under this procedure, ESOP expense is determined by the number of shares released during the year and the average fair market value of the Company's stock. The average fair market value of the Company's stock increased in 1998 as compared to 1997. Occupancy and equipment expense totaled $192,000 for the year ended September 30, 1998, compared to $157,000 for the year ended September 30, 1997. The increase was primarily due to additional depreciation expense associated with the addition of computer and other equipment added to the Company's operations in 1998. The Company anticipates significant increases in its operating expenses in 1999 with the introduction of its commercial and consumer lines of business. Total non-interest expense as a percentage of average total assets was 2.31% for the year ended September 30, 1998, compared to 2.19% for the year ended September 30, 1997. The Company's efficiency ratio was 78.96% for the year ended September 30, 1998, compared to 69.24% for the year ended September 30, 1997. Income Tax Expense Income tax expense is comprised of federal income tax. The Company does not incur any state or local income tax liability. 1999 and 1998 Comparison Income tax expense totaled $151,000 for the year ended September 30, 1999 or 33.6% of pre-tax income, compared to $329,000 or 37.0% of pre-tax income for the year ended September 30, 1998. The decrease in income tax expense was attributable to the reduction in pre-tax income from $890,000 for the year ended September 30, 1998 to $449,000 for the year ended September 30, 1999. 1998 and 1997 Comparison Income tax expense totaled $329,000 for the year ended September 30, 1998 or 37.0% of pre-tax income, compared to $427,000 or 35.8% of pre-tax income for the year ended September 30, 1997. The decrease in income tax expense was attributable to the reduction in pre-tax income from $1.2 million for the year ended September 30, 1997 to $890,000 for the year ended September 30, 1998. Financial Condition Balance Sheet Summary During the year ended September 30, 1999, total assets increased by $29.7 million or approximately 24.0% to $153.7 million at September 30, 1999, from $124.0 million at September 30, 1998. Cash and cash equivalents increased only slightly from $1.7 million at September 30, 1998 to $2.0 million at September 30, 1999. Because of continued cash flow throughout the year, the Company made an effort to keep such balances at low levels and keep most of its liquidity portfolio invested in securities with higher yields. In 1999, the Company moved a portion of its investment securities portfolio into corporate debt securities. The change was designed to achieve a higher yield on a portion of the Company's short-term investment securities portfolio that would otherwise be invested in comparable term U.S. Treasury or agency securities. The investment securities portfolio increased from $29.8 million at September 30, 1998 to $36.4 million at September 30, 1999, which included $5.9 million in corporate debt securities. Mortgage-backed securities held-to maturity, which are primarily adjustable rate securities, continued to decline throughout the year as the Company elected to not invest additional assets in these types of securities. The ability of the underlying mortgage loans to quickly repay when customers elect to refinance their mortgages and the necessity of paying premiums on such securities was the reason for the decision to discontinue placing additional assets in these securities. Mortgage-backed securities available-for-sale increased substantially as the Company continued its wholesale arbitrage program. Net loans receivable increased $6.2 million or approximately 10.0% from $61.1 million at September 30, 1998 to $67.3 million at September 30, 1999. The increase was the result of the Company's decision to continue to place into portfolio most of its one- to four-family mortgage loans and the introduction of commercial and consumer loans in 1999, all of which were placed into portfolio. Total deposits increased to $87.5 million at September 30, 1999 from $86.7 million at September 30, 1998. However, transaction account deposits as a percentage of total deposits increased during the year. The opening of the Company's new full service branch office and the introduction of additional business and personal checking account products accounted for the increase. Advances from the Federal Home Loan Bank of Dallas continued to increase as the Company continued its wholesale securities arbitrage program. Such borrowings increased to $45.1 million at September 30, 1999 from $14.9 million at September 30, 1998. Stockholder's equity decreased by $2.0 million to $18.4 million at September 30, 1999 from $20.4 million at September 30, 1998. The decrease was the result of cash dividends paid to stockholders during the year and Company stock that was repurchased during the year. Loans Loans receivable totaled $67.3 million at September 30, 1999, a $6.2 million or 10.0% increase over the $61.1 million at September 30, 1998. The increase in loans outstanding was highlighted by increases in one- to four-family, home equity and improvement, interim construction on one- to four-family properties, and consumer and commercial loans. One- to four-family loans totaled $55.9 million at September 30, 1999, an increase of $3.6 million over the $52.3 million reported at September 30, 1998. The increase was the result of the Company's continued strategy of placing all one- to four-family loans with final maturities of 15 years or less into portfolio. During 1999, such were loans were the predominant choice of borrowers in the Company's market. The Company also continued to place all adjustable rate one- to four-family loans into portfolio. At September 30, 1999, one- to four-family loans equaled approximately 81.0% of the Company's total loans-receivable portfolio. During the year, even as interest rates on one- to four-family loans decreased to levels that would not normally be held in portfolio, the Company elected to continue to place such loans into the portfolio. The loans were funded with a combination of advances from the Federal Home Loan Bank of Dallas. Approximately 75% of each loan was funded with an amortizing fixed rate advance that matched the terms of the loan. The advance included a built-in prepayment speed to mirror the estimated prepayments on the loan. The remaining 25% of the loan was funded with a short-term advance of approximately 30 days. The program was designed to allow the Company to continue to place quality one- to four-family loans into its loan portfolio. It allowed the Company to increase total loans receivable and total assets and thereby utilize more of the Company's excess capital. The program achieved a positive margin on the transaction and minimized the interest rate risk associated with placing lower interest rate one- to four-family loans into portfolio by funding such loans with a combination of advances that replicated the Company's normal retail deposit base. During the fiscal year ending September 30, 2000, the Company intends to continue to originate one- to four-family loans. The ability of the Company to place such loans into portfolio will be dependent on the overall level of interest rates and thereby rates on one- to four-family loans. If interest rates increase, the Company will place the loans into portfolio and fund the loans with liquidity. If interest rate remain at lower levels, the Company may continue to fund the loans with advances from the Federal Home Loan Bank, depending upon the Company's overall capital to asset ratio and the available margin on the transaction. Home equity and improvement loans increased to $3.8 million at September 30, 1999 from $3.0 million at September 30, 1998 and equaled approximately 5.5% of the total loan portfolio. The Company expects, depending upon customer demand, to continue to increase the size of this portfolio in the fiscal year ending September 30, 2000. Gross one- to four-family interim construction loans were $4.0 million at year-end, compared to $2.3 million at September 30, 1998. The increase in volume of such loans was the result of the continued strength of the economy in the Company's market and the Company's increased efforts to attract these loans. The Company intends to continue to promote the financing of interim construction loans on one- to four-family properties. The ability to maintain or increase the volume of such loans will also be dependent upon the overall level of interest rates and the economic condition of the real estate market in Tyler and the surrounding areas. In April of 1999, the Company opened a new full service branch office location in south Tyler. The focus of the new office is on consumer and commercial banking relationships. The decision to open the new office and introduce new products was based on continued declines in the Company's net interest margin resulting from traditional real estate related lending and traditional certificate of deposit funding sources. The new office location, in the fastest growing area of Tyler, was the focal point of the Company's efforts to expand into more banking lines of business in all of its locations. With the introduction of a full line of personal and commercial loans, as well as traditional residential lending, the Company expects to achieve higher net interest margins on such products. As of September 30, 1999, the Company reported $2.6 million in consumer and commercial loans outstanding, compared to $571,000 at September 30, 1998. The increase was a direct result of the Company's decision to add the additional lines of business at each of its full service office and to open the new office. Such loans totaled approximately 3.8% of the Company's loan portfolio at September 30, 1999. The Company intends to increase the size of its consumer and commercial loan portfolio significantly in the fiscal year ending September 30, 2000. An aggressive calling program on local businesses and realtors by its commercial loan officers and expanded marketing efforts for consumer loans will be used to achieve targeted loan goals.
Loan Portfolio Analysis September 30, ---------------------------------------------------------------------------------- 1999 1998 1996 Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------------- (Dollars in Thousands) Real estate loans: One- to four-family residences $ 55,940 80.98% $ 52,298 83.88% $ 49,412 83.88% Other residential 451 0.65 551 0.97 569 .97 Home equity and improvement 3,763 5.45 2,971 563 0.96 Nonresidential 2,330 3.37 4,106 6.83 4,023 6.83 Construction loans 3,988 5.77 2,256 6.11 3,600 6.11 --------- --------- -------- --------- --------- ------- Total real estate loans 66,472 96.23 62,182 97.79 57,604 97.79 --------- --------- -------- --------- --------- ------- Other loans: Consumer Loans 1,465 2.12 403 0.64 488 0.83 Commercial Loans 1,142 1.65 168 0.27 455 0.42 --------- --------- -------- --------- --------- ------- Total other loans 2,607 3.77 571 0.91 1,009 1.25 --------- --------- -------- --------- --------- ------- Total loans 69,079 100.00% 62,753 100.00% 58,907 100.00% ========= ======== ========= Less: Loans in process 1,528 1,373 1,506 Deferred fees and discounts 31 28 18 Allowance for loan losses 270 233 273 --------- -------- --------- Total loans receivable, net 67,250 61,119 57,110 Less: Loans held for sale 0 0 0 --------- -------- --------- Net portfolio loans $ 67,250 $ 61,119 $ 57,110 ========= ======== =========
Mortgage-backed Securities At September 30, 1999, the Company reported $38.7 million in mortgage-backed securities, a $15.0 million or 62.9% increase from the $23.8 million reported at September 30, 1998. Mortgage-backed securities in an available-for-sale classification were $32.9 million at September 30, 1999, compared to $12.8 million at September 30, 1998. Mortgage-backed securities in a held-to-maturity classification were $5.8 million at year-end, compared to $10.9 million at September 30, 1998. The weighted-average yield on the entire portfolio was approximately 6.09% at September 30, 1999. The increase in available-for-sale mortgage-backed securities was the direct result of the Company's decision to continue its program of borrowing wholesale funds from the Federal Home Loan Bank of Dallas and investing the proceeds in primarily adjustable rate securities. The securities have interest rate adjustment frequencies of either monthly, quarterly, semi-annually or annually. The interest rates earned on the securities are determined by an index and generally have a margin above the index of 100 to 225 basis points. The index is typically based upon market interest rates such as the one-year U.S. Treasury rate or the one, three, or six-month LIBOR. The predominant adjustment frequency is monthly and the adjustment is linked to the one month LIBOR. At year-end, the program totaled approximately $33.0 million and was earning an after tax margin of approximately 40 basis points. The Federal Home Loan Bank advances are generally for terms of 30 to 35 days and interest rates, which are established by the Federal Home Loan Bank, are based on short-term market interest rates such as the one-month U.S. Treasury bill or the one-month LIBOR. The Company does not anticipate a significant increase in the size of the program during the fiscal year ending September 30, 2000. Investment Securities Investment securities totaled $36.4 million at September 30, 1999, a $6.6 million or 22.3% increase over the $29.8 million reported at September 30, 1998. The increase in the size of the portfolio was the result of continued cash flow from the Company's loan and mortgage-backed securities portfolios. The investment securities portfolio is utilized primarily to invest excess liquidity that can not be otherwise invested in loans. In an effort to increase the overall yield on the portfolio, the Company made the decision to place a portion of the portfolio in corporate debt securities during the year. At September 30, 1999, the securities totaled approximately $5.9 million or 16.2% of the total portfolio. Such securities have final maturities varying between two and five years and are fixed rate and non-callable. All of the corporate debt securities are rated as "investment grade" and the Company generally purchases no more than $500,000 of any one issuer's debt. Yields on such securities are generally higher than those normally achieved on comparable U. S. Treasury and U. S. Agency Securities. To the extent that the Company can increase its loan portfolio in 2000, the Company does not anticipate significant increases in the investment securities portfolio. However, continued excessive cash flow from the Company's other interest-earning assets due to prepayments may cause the Company to place funds into this portfolio. Deposits and Borrowings Total deposits were reported as $87.5 million at September 30, 1999, an increase of $895,000 from the $86.6 million reported at September 30, 1998. Certificate of deposit accounts continued to be the predominant type of deposit in the portfolio. However, with the introduction of additional consumer and commercial banking products 1999, the Company was able to increase transaction type accounts during the year. At September 30, 1999, balances on personal and business checking, savings, and money market accounts totaled approximately $17.0 million, compared to $12.0 million at September 30, 1998. The Company expects to continue to increase the amount of transaction type accounts during the year ending September 30, 2000. At September 30, 1999, advances from the Federal Home Loan Bank totaled $45.1 million, compared to $14.9 million at September 30, 1998. The increase was the result of the Company's decision to continue its wholesale arbitrage program of borrowing short term advances and investing the proceeds in adjustable securities and also using these advances to fund a portion of its one- to four-family loan portfolio. Interest Rate Sensitivity Interest rate sensitivity is a measure of the extent to which the Company's net interest income and net portfolio value may be affected by future changes in market interest rates. Numerous assumptions, primarily future changes in interest rates, changes in cash flows on assets and liabilities and future product preferences of customers, which are affected by assumptions about future pricing of products, are required to arrive at the approximation of the net interest income impact. The Company also monitors interest rate risk by measuring the difference between rate sensitive assets and rate sensitive liabilities that mature or reprice within a given time period, adjusted for the effects of estimated prepayments and early withdrawals on interest sensitive assets and liabilities. Certain deficiencies are inherent in the assumptions and methods used to calculate the Company's level of interest rate sensitivity. For example, changes in the overall levels of interest rates could affect prepayment and early withdrawal assumptions used in the calculations. Also, interest rates on certain assets and liabilities may change in advance of or lag behind changes in market rates. In an attempt to ensure that interest rate risk is maintained within limits established by the Board of Directors, management presently monitors and evaluates the potential impact of interest rate changes upon the market value of the Association's equity and the level of its net interest income on a quarterly basis. Management conducts this analysis with an asset and liability management simulation model using estimated prepayment rates for various classes of interest sensitive assets and estimated decay rates for interest-bearing NOW accounts, money market accounts and savings accounts. The assumptions used may not be indicative of future withdrawals of deposits or prepayments on loans and mortgage-backed securities. The following table presents First Federal's analysis of its net portfolio value and net interest income under various instantaneous changes in interest rates at September 30, 1999.
Net Portfolio Value Net Interest Income ----------------------------------------- ----------------------------------------- Change In Interest Rates Estimated Amount Of Percent Net Interest Amount Of Percent Of (basis points) NPV Change Of Change Income Change Change - ---------------- ----------- ------------ ------------ ----------- ----------- ------------ (Dollars in Thousands) +300 13,273 (6,743) (34)% 3,322 (112) (3.3)% +200 16,321 (3,695) (18) 3,404 (30) (0.9) +100 18,555 (1,461) (7) 3,453 19 (6.0) 0 20,016 3,434 -100 20,956 940 5 3,204 (230) (6.7) -200 21,386 1,370 7 3,118 (316) (9.2) -300 21,750 1,734 9 3,116 (318) (9.3)
The table indicates that First Federal's estimated net portfolio value is approximately $20.0 million or 12.9% of the market value of assets at September 30, 1999. The estimated net portfolio value is approximately $2.8 million more than First Federal's reported net worth of $17.2 million, which is approximately 11.6% of total assets. In addition, under a worst case scenario of a 300 basis point immediate and permanent increase in interest rates, First Federal's estimated net portfolio value would only decline by 34% to $13.3 million and would still be approximately 9.0% of market value of assets. The table also shows that First Federal's net interest income, in an unchanged rate scenario, would approximate $3.4 million and would only vary by $318,000 or 9.3%, under changes in the level of interest rates up to 300 basis points. Asset Quality The following table sets forth an analysis of the Company's allowance for loan losses:
Year Ended September 30, ----------------------------------------- 1999 1998 1997 1996 ----- ----- ----- ----- (Dollars in Thousands) Balance at beginning of period $ 233 $ 273 $ 289 $ 296 Charge-offs: One- to four-family (2) (40) (26) (7) Other loans 0 0 (1) 0 ----- ----- ----- ----- Total charge-offs (2) (40) (27 (7) ----- ----- ----- ----- Recoveries: One- to four-family 0 0 6 0 Other loans 39 0 0 0 ----- ----- ----- ----- Total recoveries 39 0 6 0 ----- ----- ----- ----- Net charge-offs/recoveries 37 (40) (21) (7) Additions charged to operations 0 0 5 0 ----- ----- ----- ----- Balance at end of period $ 270 $ 233 $ 273 $ 289 ===== ===== ===== ===== Ratio of net charge-offs/recoveries during the period to Average loans outstanding during the period 0.06% (0.07)% (0.04)% (0.02)% ===== ===== ===== ===== Ratio of net charge-offs/recoveries during the period to Average non-performing assets 7.43% (14.87)% (5.53)% (1.66)% ===== ===== ===== =====
At September 30, 1999, non-performing assets were $768,000 or .50% of total assets, compared to $228,000 or .18% of total assets at September 30, 1999. At September 30, 1999, non-performing assets were comprised of non-accruing loans, all of which were one- to four-family residential loans, the largest of which was $230,000. All of the Company's multi-family, commercial real estate, construction and commercial and consumer loans were performing at year-end. The Company's allowance for loan losses totaled $270,000 at September 30, 1999, an increase of $37, 000 from $233,000 at September 30, 1998. At September 30, 1999, the Company's allowance for loan losses was .40% of loans receivable, compared to .38% at September 30, 1998, and was 35.16% of non-performing loans at September 30, 1999, compared to 102.19% at September 30, 1998. The increase in the allowance for loan losses was due to a recovery on a previously filed deficiency judgement in the amount of $39,000. Depending upon the success of the Company in increasing its consumer and commercial loan portfolios in 2000, it may make additions to its allowance for loan losses. The following table presents the amounts and categories of non-performing assets of the Company:
September 30, ---------------------------------- 1999 1998 1997 1996 ---- ---- ---- ---- (Dollars in Thousands) Non-accruing loans: One- to four-family $768 $187 $306 $449 Other loans 0 0 4 1 ---- ---- ---- ---- Total 768 187 310 450 ---- ---- ---- ---- Accruing loans delinquent more than 90 days: One- to four-family 0 6 0 0 ---- ---- ---- ---- Total 0 6 0 0 ---- ---- ---- ---- Foreclosed assets: One- to four-family 0 35 0 0 ---- ---- ---- ---- Total 0 35 0 0 ---- ---- ---- ---- Total non-performing assets $768 $228 $310 $450 ==== ==== ==== ==== Total as a percentage of total assets 0.50% 0.18% 0.27% 0.39% ==== ==== ==== ====
Liquidity and Capital Position The Company's principal sources of funds are deposits from customers, advances from the FHLB, amortization and prepayments of loan principal (including mortgage-backed securities), maturities of securities, sales of loans and operations. The Company uses its liquidity and capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and loan commitments, maintain liquidity and pay operating expenses. At September 30, 1999, the Company had outstanding commitments to extend credit on $6.5 million of loans. Cash and cash equivalents totaled $2.0 million at September 30, 1999, compared to $1.7 million at September 30, 1998. The primary use of funds during the year was to fund loan originations, purchase securities, and purchase treasury stock. The primary source of funds during the year was from maturing investment securities and payments on mortgage-backed securities and loans and borrowings from the FHLB. Management believes that it has adequate resources to fund all of its current commitments. During the fiscal year ended September 30, 1999, the Company repurchased 171,203 shares of stock at an average price of $12.90 per share. The Company also re-issued 1,567 shares of treasury stock in conjunction with the exercise of stock options during the year under the Company's 1995 Stock Option and Incentive Plan. At September 30, 1999, the Company owned 590,072 shares of treasury stock at an average price of $11.84 per share. The Company ended the year with 1,294,420 shares outstanding. The closing stock price on that date was $14.00 per share. The high and low prices for the year were $14.625 and $8.125 respectively. The Company continued its current dividend policy by declaring and paying four quarterly cash dividends of $.05 per share for a total of $281,639 during the year. Based on the September 30, 1999 closing stock price of $14.00 per share, the annualized dividend amount of $.20 per share would equal an annual dividend rate of 1.43%. Total stockholders' equity equaled $18.4 million at September 30, 1999, a decrease of $2.0 million from the $20.4 million reported at September 30, 1998. As of September 30, 1999, the Company's reported book value per share, using a total stockholders' equity of $18.4 million (net of unallocated ESOP and RRP shares) and 1,294,420 outstanding shares of common stock (the total outstanding shares including unallocated ESOP and RRP shares), equaled $14.23 per share. At September 30, 1999, First Federal's actual and required capital amounts under each of the three requirements were as follows: - Tangible Capital (stockholders' equity plus certain intangible assets) was $17.4 million, or 11.30% of total assets, exceeding the minimum requirement of 1.5% by $15.1 million. - Core Capital (tangible capital plus certain intangible assets) was $17.4 million, or 11.30% of total assets, exceeding the minimum requirements of 4.0% by $11.2 million. - Risk-based capital (core capital plus general loan and valuation allowances) equaled $17.7 million, or 27.94% of risk weighted assets, as of September 30, 1999, exceeding the minimum requirement of 8.0% of risk weighted assets by $12.6 million. At September 30, 1999, First Federal met all of the requirements to be considered a "well capitalized" institution under the Federal Deposit Insurance Corporation Improvement Act. Impact of Accounting Pronouncements SFAS NO. 128 -- In February 1997, the FASB issued 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 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. The Company adopted the statement effective October 1, 1997. 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 effective October 1, 1998. 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 does not currently have any reporting requirements under the standard. The Company adopted the Statement effective October 1, 1998. 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 has changed the disclosure requirements of its defined benefit pension plan as a result of the statement. The Company has no other postretirement benefit plans. SFAS No. 133 -- In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments that are embedded in other contracts, and for hedging activities. It generally provides for the matching of the timing of gain or loss recognition on the hedging instruments with the recognition of either the changes in the fair value of the hedged asset or liability, or the earnings effect of the hedged forecasted transaction. The statement is effective for all fiscal quarters for all fiscal years beginning after June 15, 2000. The Company has not determined the effects, if any, that the Statement will have on its financial statements. The Company expects to adopt the statement in Fiscal 2000. Year 2000 Compliance Assessment 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. The possibility that a computer system may recognize "00" as the year 1900 rather than the year 2000, could result in a system failure or miscalculations causing disruptions of operations. The Company has established a management committee to identify all of its systems potentially affected by the year 2000 and to ensure that reprogramming of affected systems is completed. The committee is responsible for testing all Company computer systems and ensuring that all third party computer system vendors complete Year 2000 remediation. Financial institution regulators have increased their focus upon Year 2000 compliance issues and have issued guidance concerning the responsibilities of senior management and directors. Federal banking agencies have asserted that Year 2000 testing and certification is a primary safety and soundness issue in conjunction with regulatory examinations and, thus, that an institution's failure to properly address Year 2000 issues could result in supervisory action, including the reduction of an institution's supervisory ratings, the denial of applications for approval of mergers or acquisitions, or the imposition of civil monetary penalties. As of September 30, 1999, the Company had taken the following steps: o Established a senior management team to coordinate Year 2000 issues; o Completed an inventory of application and system software; o Initiated and verified Year 2000 compliance by third party software vendors; o Identified any large customers that may be affected by the Year 2000 issue; o Tested all personal and network computers used by the Company for Year 2000 compliance; o Designed test scripts and tested the Company's third party major data processing service provider; o Reviewed the results from the Company's major data processing service provider's proxy testing of application systems. o Notified customers about the risks of Year 2000; o Implemented a business resumption plan as it relates to the Year 2000 issue that will interface with the Company's Disaster Recovery Plan. Based upon the Company's own internal testing and the results of proxy testing by the Company's major data processing service provider, the Company believes that the risk that the major data processing service provider will not be Year 2000 compliant is low. The Company has also received correspondence from all other third party software providers that indicate that all of such software will be Year 2000 compliant. The Company has budgeted approximately $25,000 for its Year 2000 program. As of September 30, 1999, the Company has expensed or is aware of future expenditures totaling approximately $15,000. The Company has developed a business resumption plan that will interface with its existing Disaster Recovery and Contingency Plan. Such plan addresses the likelihood that major systems, other than the Company's major data processing service provider, will not be available. Major systems include but are not limited to telephone, electrical, transportation and other similar systems. The business resumption plan addresses cash and liquidity needed to meet customer demands as the year 2000 approaches. Impact of Inflation and Changing Prices The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted account principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative power of money due to inflation. Most of the Company's assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or at the same magnitude as the prices of goods and services. Market Price of Common Stock At September 30, 1999, the common stock of East Texas Financial Services, Inc. traded on the OTC Bulletin Board under the symbol "ETFS". On such date, the Company had 1,294,420 shares outstanding and approximately 275 stockholders of record. The following table sets forth the cash dividends paid per share and the high, low and closing prices for the fiscal periods indicated:
High Low Close Dividends ---- --- ----- --------- Fiscal 1999 First Quarter $10.45 $ 8.12 $ 9.88 $0.05 Second Quarter $12.13 $ 8.38 $11.00 $0.05 Third Quarter $14.13 $10.13 $14.13 $0.05 Fourth Quarter $14.63 $12.50 $14.00 $0.05 High Low Close Dividends ---- --- ----- --------- Fiscal 1998 First Quarter $15.83 $12.92 $15.83 $0.05 Second Quarter $15.83 $14.00 $15.00 $0.05 Third Quarter $16.25 $14.22 $15.00 $0.05 Fourth Quarter $15.50 $13.00 $13.25 $0.05
Report of Independent Accountants Board of Directors and Shareholders East Texas Financial Services, Inc. Tyler, Texas We have audited the accompanying consolidated statements of financial condition of East Texas Financial Services, Inc. and Subsidiary as of September 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of East Texas Financial Services, Inc. and Subsidiary as of September 30, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. /s/Bryant & Welborn L.L.P - ------------------------- Bryant & Welborn L.L.P Tyler, Texas November 16, 1999, except for Note 18, which is as of November 26, 1999
East Texas Financial Services, Inc. and Subsidiary Consolidated Statements of Financial Condition September 30, 1999 and 1998 1999 1998 ------------- ------------- Assets Cash and due from banks $ 1,019,937 $ 592,363 Interest-bearing deposits due from banks 974,627 1,104,695 ------------- ------------- Total cash and cash equivalents 1,994,564 1,697,058 Interest-earning time deposits 2,461,617 1,959,617 Federal funds sold -0- 129,187 Securities available-for-sale 5,918,750 -0- Securities held-to-maturity (fair value of $29,948,866 in 1999 and $30,115,954 in 1998) 30,481,413 29,766,844 Mortgage-backed securities available-for-sale 32,893,809 12,810,165 Mortgage-backed securities held-to-maturity (fair value of $5,949,914 in 1999 and $11,088,555 in 1998) 5,806,975 10,940,500 Loans, net of allowance for loan losses of $270,039 in 1999 and $233,180 in 1998 67,250,334 61,119,047 Accrued interest receivable 1,167,245 978,378 Federal Home Loan Bank stock, at cost 2,283,000 789,100 Premises and equipment, net 2,607,213 2,273,067 Foreclosed real estate, net -0- 34,500 Mortgage servicing rights, net 266,010 216,879 Other assets 593,991 1,303,120 ------------- ------------- Total assets $ 153,724,921 $ 124,017,462 ============= ============= 1999 1998 ------------- ------------- Liabilities and Stockholders' Equity Liabilities: Noninterest-bearing $ 2,021,914 $ 1,528,374 Interest-bearing 85,517,925 85,115,283 ------------- ------------- Total deposits 87,539,839 86,643,657 Advances from Federal Home Loan Bank 45,057,877 14,945,852 Advances from borrowers for taxes and insurance 823,755 844,188 Federal income taxes Current -0- -0- Deferred 108,184 31,618 Accrued expenses and other liabilities 1,775,938 1,168,453 ------------- ------------- Total liabilities 135,305,593 103,633,768 ------------- ------------- Commitments and contingencies 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 1,294,420 outstanding 18,845 18,845 Additional paid-in capital 12,397,167 12,319,624 Deferred compensation - RRP shares (96,985) (213,366) Unearned employee stock ownership plan shares (442,059) (543,564) Retained earnings (substantially restricted) 13,675,391 13,661,392 Accumulated other comprehensive income (loss) (148,174) (64,974) Treasury stock, at cost, 590,072 shares at September 30, 1999, and 420,436 shares at September 30, 1998 (6,984,857) (4,794,263) ------------- ------------- Total stockholders' equity 18,419,328 20,383,694 ------------- ------------- Total liabilities and stockholders' equity $ 153,724,921 $ 124,017,462 ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
East Texas Financial Services, Inc. and Subsidiary Consolidated Statements of Income Years Ended September 30, 1999, 1998, and 1997 1999 1998 1997 ---------- ---------- ---------- Interest income Loans receivable: First mortgage loans $4,644,373 $4,665,915 $4,104,554 Consumer and other loans 165,845 104,721 86,614 Securities available-for-sale 237,935 53,616 57,360 Securities held-to-maturity 1,910,894 1,687,024 1,803,994 Mortgage-backed securities available-for-sale 1,460,232 473,084 52,207 Mortgage-backed securities held-to-maturity 534,255 1,053,114 1,511,985 Deposits with banks 141,966 226,256 275,517 ---------- ---------- ---------- Total interest income 9,095,500 8,263,730 7,892,231 ---------- ---------- ---------- Interest expense Deposits 4,237,906 4,425,979 4,425,797 Advances from Federal Home Loan Bank 1,626,225 540,094 46,752 ---------- ---------- ---------- Total interest expense 5,864,131 4,966,073 4,472,549 ---------- ---------- ---------- Net interest income 3,231,369 3,297,657 3,419,682 Provisions for loan losses -0- -0- 5,000 ---------- ---------- ---------- Net interest income after provision for loan losses 3,231,369 3,297,657 3,414,682 ---------- ---------- ---------- Noninterest income Net gain on sale of loans 146,113 152,603 71,888 Net realized gain on sale of investment securities -0- -0- 1,381 Loan origination and commitment fees 82,607 74,086 65,990 Loan servicing fees 56,622 70,417 94,969 Other 72,600 63,535 67,906 ---------- ---------- ---------- Total noninterest income 357,942 360,641 302,134 ---------- ---------- ---------- 1999 1998 1997 ---------- ---------- ---------- Noninterest expense Compensation and benefits 2,037,691 1,843,610 1,678,962 Occupancy and equipment 301,821 191,671 157,488 SAIF deposit insurance premium 51,916 56,471 80,462 Loss on foreclosed real estate 4,075 12,911 5,538 Other 745,193 663,416 600,772 ---------- ---------- ---------- Total noninterest expense 3,140,696 2,768,079 2,523,222 ---------- ---------- ---------- Income before provision for income taxes 448,615 890,219 1,193,594 Income tax expense 150,625 329,273 426,819 ---------- ---------- ---------- Net income $ 297,990 $ 560,946 $ 766,775 ========== ========== ========== Basic earnings per common share $ .23 $ .39 $ .52 ========== ========== ========== Diluted earnings per common share $ .22 $ .38 $ .51 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
East Texas Financial Services, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended September 30, 1999, 1998, and 1997 Net Deferred Unearned Compensation Employee Other Additional Recognition Stock Accumulated Common Paid-in Retained Treasury & Retention Ownership Comprehensive Stock Capital Earnings Stock Plan Plan Shares Income Total --------------------------------------------------------------------------------------------------- Balance at September 30, 1996 $12,564 $12,112,516 $12,811,881 $(2,797,013) $(446,129) $(763,206) $20,930,613 Comprehensive income: Net income 766,775 766,775 Net change in unrealized gain on mortgage-backed securities available-for- sale net of deferred taxes of $7,991 $ 15,512 15,512 ----------- Total comprehensive income 782,287 Deferred compensation amortization 116,381 116,381 Release of employee stock ownership plan shares 112,592 112,592 Appreciation in employee stock ownership plan shares released 84,363 84,363 Purchase of treasury stock at cost (53,964 shares) (951,116) (951,116) Exercise of stock options (1,045 shares) (2,351) 17,112 14,761 Cash dividends of $0.20 per share (210,513) (210,513) --------------------------------------------------------------------------------------------------- Balance at September 30, 1997 12,564 12,196,879 13,365,792 (3,731,017) (329,748) (650,614) 15,512 20,879,368 Common stock split effected in the form of a dividend 6,281 (6,281) -0- Comprehensive income: Net income 560,946 560,946 Net change in unrealized gain (loss) on mortgage-backed securities available-for- sale net of deferred taxes of $41,462 (80,486) (80,486) ------------ Total comprehensive income 480,460 Deferred compensation amortization 116,382 116,382 Release of employee stock ownership plan shares 107,050 107,050 Appreciation in employee stock ownership plan shares released 122,745 122,745 Purchase of treasury stock at cost (76,973 shares) (1,080,369) (1,080,369) Exercise of stock options (1,568 shares) (2,352) 17,123 14,771 Cash dividends of $0.20 per share (256,713) (256,713) --------------------------------------------------------------------------------------------------- Balance at September 30, 1998 18,845 12,319,624 13,661,392 (4,794,263) (213,366) (543,564) (64,974) 20,383,694 (continued) East Texas Financial Services, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended September 30, 1999, 1998, and 1997 Net Deferred Unearned Compensation Employee Other Additional Recognition Stock Accumulated Common Paid-in Retained Treasury & Retention Ownership Comprehensive Stock Capital Earnings Stock Plan Plan Shares Income Total --------------------------------------------------------------------------------------------------- Comprehensive income: Net income $ 297,990 $ 297,990 Net change in unrealized gain (loss) on mortgage-backed and other securities available-for- sale net of deferred taxes of $42,861 $ (83,200) (83,200) ------------ Total comprehensive income 214,790 Deferred compensation amortization 116,381 116,381 Release of employee stock ownership plan shares 101,505 101,505 Appreciation in employee stock ownership plan shares released 77,543 77,543 Purchase of treasury stock at cost (171,203 shares) (2,207,706) (2,207,706) Exercise of stock options (1,567 shares) (2,352) 17,112 14,760 Cash dividends of $0.20 per share (281,639) (281,639) --------------------------------------------------------------------------------------------------- Balance at September 30, 1999 $18,845 $12,397,167 $13,675,391 $(6,984,857) $ (96,985) $(442,059) $(148,174) $18,419,328 ===================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
East Texas Financial Services, Inc. and Subsidiary Consolidated Statements of Cash Flows Years Ended September 30, 1999, 1998, and 1997 1999 1998 1997 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 297,990 $ 560,946 $ 766,775 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred loan origination fees (7,008) (2,474) (486) Amortization of premiums and discounts on investment securities, mortgage-backed securities, and loans 149,823 136,080 106,306 Amortization of deferred compensation 116,381 116,382 116,382 Amortization of mortgage servicing rights 73,517 52,710 28,730 Compensation charge related to release of ESOP shares 81,841 132,587 99,747 Depreciation 121,836 96,236 68,952 Provision for loan losses and losses on real estate -0- -0- 5,000 Deferred income taxes 119,426 (54,829) 250,743 Stock dividend on FHLB stock (86,200) (53,500) (57,200) Net (gain) loss on sale of: Investment securities held-to-maturity: Obligations-U.S. Govt. and agencies -0- -0- (1,381) Loans held for sale (23,465) (32,108) (13,908) Equipment -0- 2,512 (9,563) Foreclosed real estate 2,826 2,124 -0- Proceeds from sale of loans 10,260,097 10,064,554 4,753,985 Originations of loans held for sale (10,236,632) (10,032,446) (4,740,077) (Increase) decrease in: Accrued interest receivable (188,867) (92,995) 45,274 Other assets 709,129 (444,973) (441,331) Increase (decrease) in: Federal income tax payable -0- -0- (5,044) Accrued expenses and other liabilities 607,485 (145,548) (438,386) ------------- ------------- ------------- Net cash provided by operating activities 1,998,179 305,258 534,518 ------------- ------------- ------------- Cash flows from investing activities: Net (increase) decrease in interest-earning time deposits (502,000) (394,044) 98,000 Net (increase) decrease in fed funds sold 129,187 624,660 (273,562) Purchases of securities available-for-sale (6,045,737) -0- -0- Purchases of securities held-to-maturity (13,972,031) (18,765,094) (6,495,391) Proceeds from maturities of securities held-to-maturity 13,225,000 12,000,000 12,500,000 Proceeds from sales of obligations - U. S. Govt. and agencies held-to-maturity -0- -0- 1,000,937 Purchases of mortgage-backed securities available-for-sale (26,075,873) (11,513,223) (4,469,653) Principal payments on mortgage-backed securities available-for-sale 5,896,141 2,862,783 129,747 Purchases of mortgage-backed securities held-to-maturity -0- -0- (512,122) Principal payments on mortgage-backed securities held-to-maturity 5,113,178 7,206,392 7,286,201 Purchases of FHLB stock (1,407,700) -0- -0- Proceeds from redemption of FHLB stock -0- 270,100 -0- Net increase in loans (6,099,036) (4,073,492) (9,591,071) Proceeds from sale of foreclosed real estate 6,431 30,670 401,595 Acquisition costs related to foreclosed real estate -0- (346) -0- Proceeds from sales of equipment -0- -0- 17,500 Expenditures for premises and equipment (455,982) (1,248,504) (230,016) Origination of mortgage servicing rights (122,648) (120,495) (57,979) ------------- ------------- ------------- Net cash used by investing activities (30,311,070) (13,120,593) (195,814) ------------- ------------- -------------
(continued)
East Texas Financial Services, Inc. and Subsidiary Consolidated Statements of Cash Flows Years Ended September 30, 1999, 1998, and 1997 1999 1998 1997 ------------- ------------- ------------- Cash flows from financing activities: Net increase (decrease) in: Deposits $ 896,182 $ (1,906,992) $ (2,217,021) Advances from borrowers (20,433) (37,497) (35,537) Proceeds from note payable to bank 500,000 -0- -0- Principal payments on note payable to bank (500,000) -0- -0- Proceeds from advances from Federal Home Loan Bank 359,656,964 114,351,500 13,104,841 Payments of advances from Federal Home Loan Bank (329,544,939) (103,600,648) (8,909,841) Purchase of treasury stock at cost (2,207,706) (1,080,369) (951,116) Exercise of stock options 14,760 14,771 14,761 Dividends paid (281,639) (256,713) (210,513) ESOP loan repayment 97,208 97,208 97,208 ------------- ------------- ------------- Net cash provided by financing activities 28,610,397 7,581,260 892,782 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 297,506 (5,234,075) 1,231,486 Cash and cash equivalents at beginning of year 1,697,058 6,931,133 5,699,647 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 1,994,564 $ 1,697,058 $ 6,931,133 ============= ============= ============= Supplemental disclosure of cash flow information Cash paid for: Interest on deposits $ 2,251,084 $ 2,161,979 $ 2,213,797 Interest on FHLB advances and other borrowed funds 1,475,054 521,896 42,233 Income taxes 158,488 173,358 415,820 Transfers from loans to real estate acquired through foreclosures 8,758 246,620 482,578 Loans made to facilitate the sale of REO 34,000 140,000 60,800
The accompanying notes are an integral part of the consolidated financial statements. East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Summary of Significant Accounting Policies East Texas Financial Services, Inc. (the Company) was organized in January 1995 as the holding company for its wholly-owned subsidiary, First Federal Savings and Loan Association of Tyler (the Association) in connection with the Association's conversion from a federally chartered mutual savings and loan association to a federally chartered stock savings and loan association. On January 10, 1995, the Company completed it's initial public offering and sold 1,215,900 shares at $10 per share to a tax-qualified employee stock ownership plan, eligible account holders of record, and other members of the Association. The cost of the conversion and stock offering was accounted for as a reduction of the proceeds from the issuance of common stock of the holding company. Upon closing of the stock offering, the holding company purchased all common shares issued by the Association for $5,750,000. This transaction was accounted for in a manner similar to the pooling of interests method. The Association offers customary banking services, including acceptance of checking, saving, and time deposits and the making of mortgage, commercial, and consumer loans to customers located primarily in Tyler and Smith County, Texas, and surrounding areas. The Association operates under a federal savings and loan charter and is subject to regulations by the Office of Thrift Supervision. Principles of consolidation - The consolidated financial statements include the accounts of East Texas Financial Services, Inc. and its wholly-owned subsidiary, which owns all of the Association's premises. All intercompany transactions and balances have been eliminated in consolidation. Cash and cash equivalents - For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, deposits due from banks, and interest-bearing deposits due from banks. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities - Securities that management has both the positive intent and ability to hold to maturity are classified as securities held-to-maturity and are carried at cost, adjusted for amortization of premium or accretion of discounts using the interest method. Securities that may be sold prior to maturity for asset/liability management purposes, or that may be sold in response to changes in interest rates, to changes in prepayment risk, to increase regulatory capital or to other similar factors, are classified as other similar securities available-for-sale and carried at fair value with any adjustments to fair value, after tax, reported as a separate component of shareholders' equity. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary have resulted in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Securities purchased for trading purposes are held in the trading portfolio at fair value, with changes in fair value included in noninterest income. Interest and dividends on securities, including the amortization of premiums and the accretion of discounts, are reported in interest and dividends on securities using the interest method. Gains and losses on the sale of securities are recorded on the trade date and are calculated using the specific-identification method. Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. The Company did not have any loans held for sale on hand at September 30, 1999, 1998, or 1997. 41 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Summary of Significant Accounting Policies, continued Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Discounts and premiums are amortized to income using the interest method. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. Loans are generally classified as nonaccrual when there exists reasonable doubt as to the full, timely collection of interest or principal of the loan (usually when a loan is delinquent for greater than 90 days). Uncollectible interest on loans that is contractually past due is charged off, or an allowance is established based on management's periodic valuation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. Allowance for loan losses - The allowance for loan losses is established through charges to operations in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. The adequacy of the allowance for loan losses is periodically evaluated by the Company. Such evaluation includes a review of loans on which full collectibility may not be reasonably assured and considers the estimated value of the underlying collateral on the loan, current and anticipated economic conditions, and other factors, which in management's judgment deserve recognition. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, losses may ultimately be incurred in amounts different from management's current estimates. Additionally, the Association is subject to regulatory examinations and may be directed to record loss allowances by regulatory authorities. Adjustments to the allowance for estimated losses will be reported in the period such adjustments become known or are reasonably estimable. The Association's most recent regulatory examination, dated April 1998, did not result in an increase to the allowance for loan losses. Federal Home Loan Bank stock - The FHLB stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula and is carried at cost. Premises and equipment - Land is carried at cost. Buildings, furniture, fixtures, and equipment are carried at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets on a straight-line basis. Maintenance and repairs are charged to operating expense, and renewals and betterments are capitalized. Gains or losses on dispositions are reflected currently in the statement of income. 42 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Summary of Significant Accounting Policies, continued Foreclosed real estate - Real estate acquired in settlement of loans is initially recorded at the lower of the outstanding loan balance or fair value. Fair value is defined as the amount of cash or cash-equivalent value of other consideration that a real estate parcel would yield in a current sale between a willing buyer and a willing seller - that is, in other than a forced or liquidation sale. The resulting loss, if any, is charged to the allowance for loan losses. Subsequent to foreclosure, real estate is carried at the lower of its new cost basis or fair value minus selling costs. Costs of improvements to property are capitalized. Operating expenses, including depreciation, of such properties, net of related income, and gains and losses on disposition are included in current operations. Recognition of gain on sale of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. Under certain circumstances, the gain, or a portion thereof, is deferred until the necessary criteria are met. Mortgage servicing rights - For originated mortgage servicing rights, the Company allocates the net cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Fair values are based on quoted market prices in active markets for loans and loan servicing rights. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income which approximates the level-yield method. The Company stratifies mortgage servicing rights based on one or more of the predominant risk characteristics of the underlying loans. The Company periodically evaluates the carrying value of the mortgage servicing rights in relation to the present value of the estimated future net servicing revenue based on management's best estimate of remaining loan lives. Impairment is recognized through a valuation allowance for an individual stratum, and the amount of impairment is the amount by which the mortgage servicing rights for a stratum exceed their fair value. Income taxes - Deferred tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the differences between the book and tax bases of the various statement of financial condition assets and liabilities and gives current recognition to changes in tax rates and laws. Advertising - The Company expenses the costs of advertising the first time the advertising takes place. Financial instruments - All derivative financial instruments held or issued by the Company are held or issued for purposes other than trading. In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded. Impact of New Accounting Standards - Effective October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS No.130), Reporting Comprehensive Income. All comparative financial statements provided for the earlier periods have been reclassified to reflect application of the provisions of this Statement. Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, and gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. 43 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Summary of Significant Accounting Policies, continued Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the Company consists solely of unrealized gains or losses on available for-sale securities. The adoption of SFAS No. 130 had no effect on the Company's net income or stockholders' equity. Effective October 1, 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes new standards for determining a reportable segment and for disclosing information regarding each segment. The Company currently has no operating segments that meet the quantitative criteria to be considered reportable segments; therefore, the adoption of SFAS No. 131 had no effect on the Company's net income, stockholders' equity, or disclosure requirements. Effective October 1, 1998, the Company adopted SFAS No. 132, Employers' Disclosures about Pensions and Other Post Retirement Benefits, which revises employers' disclosures about pensions and other post retirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other post retirement benefits to the extent practicable and requires additional information on changes in benefit obligation and fair values of plan assets that will facilitate financial analysis. The adoption of SFAS No. 132 had no effect on the Company's net income or stockholders' equity. As of October 1, 1998, the Company had adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, with an effective date of October 1, 1999. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, Deferral of the Effective Date of SFAS No. 133. This statement defers the adoption of SFAS No. 133 by one year. The adoption of this statement will not have a material impact on the Company's financial position or results of operations. Reclassifications - Certain amounts previously reported in the financial statements for 1998 and 1997 have been reclassified to facilitate comparability with 1999. These reclassifications had no effect on net income or stockholders' equity. Note 2 - Investment Securities The amortized cost and fair values of investment securities available-for-sale, consisting of corporate obligations, are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- ------- ----------- ----------- September 30, 1999 $ 6,036,189 $ 1,508 $ (118,947) $ 5,918,750 ============== ======= =========== =========== September 30, 1998 $ -0- $ -0- $ -0- $ -0- ============== ======= =========== ===========
44 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 2 - Investment Securities, continued The amortized cost and fair values of investment securities held-to-maturity, consisting of U.S. Government and agency obligations, are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- September 30, 1999 $30,481,413 $ 14,819 $ (547,366) $29,948,866 =========== =========== =========== =========== September 30, 1998 $29,766,844 $ 349,110 $ -0- $30,115,954 =========== =========== =========== ===========
The following is a summary of amortized cost and fair value of investment securities held-to-maturity at September 30, 1999, by contractual maturity:
Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 5,999,122 $ 6,012,650 Due after one year through five years 23,485,222 22,981,216 Due after five years through ten years 997,069 955,000 Due after ten years -0- -0- ----------- ----------- $30,481,413 $29,948,866 =========== ===========
Information related to sales of investment securities for 1999, 1998, and 1997 is as follows:
1999 1998 1997 ---- ---- ---------- Debt securities: Sales proceeds $-0- $-0- $1,000,937 Amortized cost -0- -0- 999,556 ---- ---- ---------- Realized gain (loss) $-0- $-0- $ 1,381 ==== ==== ==========
The Company's management sold securities during the year ended September 30, 1997, since the securities were within sixty days of maturity. It was management's determination that changes in market interest rates would not have significantly affected the securities' fair value. 45 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 3 - Mortgage-backed Securities The amortized cost and fair values of mortgage-backed securities available-for-sale are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ September 30, 1999: U.S. government agency pass-through certificates $ 3,043,701 $ 3,040 $ (37,141) $ 3,009,600 U.S. government agency collateralized mortgage obligations 29,957,175 105,867 (178,833) 29,884,209 ------------ ------------ ------------ ------------ $ 33,000,876 $ 108,907 $ (215,974) $ 32,893,809 ============ ============ ============ ============ September 30, 1998: U.S. government agency pass-through certificates $ 4,529,973 $ -0- $ (79,722) $ 4,450,251 U.S. government agency collateralized mortgage obligations 8,378,638 51,670 (70,394) 8,359,914 ------------ ------------ ------------ ------------ $ 12,908,611 $ 51,670 $ (150,116) $ 12,810,165 ============ ============ ============ ============
There were no sales of mortgage-backed securities available-for-sale for 1999, 1998, and 1997. The following is a summary of the amortized cost and fair value of mortgage-backed securities available-for-sale at September 30, 1999, by contractual maturity. These contractual maturities do not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
Amortized Fair Cost Value ------------ ----------- Due in one year or less $ -0- $ -0- Due after one year through five years -0- -0- Due after five years through ten years -0- -0- Due after ten years 33,000,876 32,893,809 ------------ ----------- $ 33,000,876 $32,893,809 ============ ===========
46 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 3 - Mortgage-backed Securities, continued The amortized cost and fair values of mortgage-backed securities held-to-maturity are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- ------------- September 30, 1999: U.S. government agency pass-through certificates $ 5,806,975 $ 145,901 $ (2,962) $ 5,949,914 ============= ============= ============= ============= September 30, 1998: U.S. government agency pass-through certificates $ 10,940,500 $ 148,897 $ (842) $ 11,088,555 ============= ============= ============= =============
There were no sales of mortgage-backed securities held-to-maturity for 1999, 1998, or 1997. The following is a summary of the amortized cost and fair value of mortgage-backed securities held-to-maturity at September 30, 1999, by contractual maturity. These contractual maturities do not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
Amortized Fair Cost Value ---------- ---------- Due in one year or less $ 133,603 $ 133,354 Due after one year through five years -0- -0- Due after five years through ten years -0- -0- Due after ten years 5,673,372 5,816,560 ---------- ---------- $5,806,975 $5,949,914 ========== ==========
47 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 4 - Loans Receivable Loans receivable are summarized as follows:
1999 1998 ------------ ------------ First mortgage loans (principally conventional): Principal balances: Secured by one-to-four family residences $ 58,676,335 $ 54,752,183 Secured by other residential property 459,841 550,666 Secured by nonresidential property 1,727,395 4,106,448 Construction loans 3,987,586 2,255,867 ------------ ------------ 64,851,157 61,665,164 Less: Undisbursed portion of loans (1,528,107) (1,373,029) Net deferred loan origination fees (30,969) (28,098) ------------ ------------ Total first mortgage loans 63,292,081 60,264,037 ------------ ------------ Consumer and other loans: Principal balances: Loans to depositors, secured by savings 801,084 403,381 Commercial 4,837,544 167,869 Consumer 451,699 -0- Home improvement 580,902 516,940 ------------ ------------ Total consumer and other loans 6,671,229 1,088,190 ------------ ------------ Less: Allowance for loan losses (270,039) (233,180) Unadvanced loan funds (2,442,937) -0- ------------ ------------ $ 67,250,334 $ 61,119,047 ============ ============
A summary of the changes in the allowance for loan losses is as follows (charge-offs include transfers to allowance for losses on real estate acquired in settlement of loans):
1999 1998 1997 ------------- ------------- ------------- Balance at beginning of year $ 233,180 $ 272,851 $ 289,120 Provision charged to income -0- -0- 5,000 Charge-offs and recoveries, net 36,859 (39,671) (21,269) ------------- ------------- ------------- Balance at end of year $ 270,039 $ 233,180 $ 272,851 ============= ============= =============
The Company does not have any loans which are considered troubled debt restructured loans as defined by SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring. As of September 30, 1999 and 1998, in the opinion of management, there are no loans which should be considered as impaired as defined by SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure. 48 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 4 - Loans Receivable, continued At September 30, 1999 and 1998, the Company had discontinued the accrual of interest on nonperforming loans aggregating approximately $767,668 and $187,279, respectively. Net interest income for 1999, 1998, and 1997 would have been higher by $20,854, $3,963, and $8,768, respectively, had interest been accrued at contractual rates on the nonperforming loans. The Company has no commitments to lend additional funds to debtors whose loans are nonperforming. Certain officers, directors, and employees were indebted to the Association in the aggregate amount of $542,196 and $438,595 as of September 30, 1999 and 1998, respectively. In the opinion of management, these loans were substantially on the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers and did not involve more than a normal risk of collectibility or present any other unfavorable features to the Association. A summary of the activity of loans to directors and executives in excess of $60,000 is as follows:
1999 1998 ------------- ------------- Balance, beginning of year $ 438,595 $ 475,212 New loans 201,400 -0- Repayment (97,799) (36,617) ------------- ------------- Balance, end of year $ 542,196 $ 438,595 ============= =============
Note 5 - Loan Servicing The principal balances of loans serviced for investors are not included in the consolidated statement of financial condition. Information related to mortgage loans serviced for investors is summarized as follows:
September 30, -------------------------------- 1999 1998 ------------ ------------ Principal balance $ 43,797,931 $ 42,566,350 Custodial escrow balance 917,487 965,653
The following is an analysis of the changes in loan servicing rights capitalized:
1999 1998 ------------ ------------ Balance, beginning of year $ 216,879 $ 149,094 Addition 122,648 120,495 Amortization (73,517) (52,710) ------------ ------------ Balance, end of year $ 266,010 $ 216,879 ============ ============
49 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 6 - Accrued Interest Receivable Accrued interest receivable is summarized as follows:
1999 1998 ----------- ----------- Investment securities $ 609,027 $ 453,895 Mortgage-backed securities 210,113 184,151 Loans receivable 379,194 351,437 Allowance for uncollectible interest (31,089) (11,105) ----------- ----------- $ 1,167,245 $ 978,378 =========== ===========
Note 7 - Foreclosed Real Estate The Company has acquired various properties through loan foreclosures. At September 30, 1999 and 1998, the properties are summarized as follows:
1999 1998 ------------- ------------- Residential $ -0- $ 34,500 ============= =============
There was no activity in the allowance for real estate losses during 1999, 1998, and 1997. Note 8 - Premises and Equipment Premises and equipment are summarized as follows:
1999 1998 ----------- ----------- Land $ 1,529,489 $ 1,523,439 Buildings and premises 1,199,913 949,263 Furniture, fixtures, and equipment 652,241 452,959 Autos 58,742 58,742 ----------- ----------- 3,440,385 2,984,403 Less accumulated depreciation 833,172 (711,336) ----------- ----------- $ 2,607,213 $ 2,273,067 =========== ===========
Certain premises and equipment are leased under operating leases. Rental expense was $43,332 in 1999, $7,350 in 1998, and $3,662 in 1997. 50 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 8 - Premises and Equipment, continued Future minimum rental commitments under noncancelable leases are: 2000 $ 69,522 2001 19,401 2002 9,686 2003 10,361 2004 11,070 Thereafter 17,577 -------- $137,617 ======== Note 9 - Other Assets Other assets are summarized below:
1999 1998 ---------- ---------- Principal receivable on mortgage-backed securities $ 86,856 $ 381,748 Prepaid federal income tax 151,133 23,842 Funds due from sales of loans -0- 776,625 Prepaid expenses 208,287 88,554 Outstanding drafts 107,246 -0- Other 40,469 32,351 ---------- ---------- $ 593,991 $1,303,120 ========== ==========
Note 10 - Deposits The aggregate amount of accounts with a minimum denomination of $100,000 was approximately $26,256,387 and $28,712,775 at September 30, 1999 and 1998. At September 30, 1999, scheduled maturities of certificates of deposit are as follows: 2000 $55,953,983 2001 11,844,854 2002 827,594 2003 882,517 2004 939,427 Thereafter 105,041 ----------- $70,553,416 =========== 51 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 10 - Deposits, continued Interest expense on deposits is summarized as follows:
1999 1998 1997 ---------- ----------- ----------- Demand deposits $ -0- $ -0- $ -0- Savings and NOW deposits 407,788 303,617 324,480 Time deposits 3,830,118 4,122,362 4,101,317 ---------- ----------- ----------- $4,237,906 $ 4,425,979 $ 4,425,797 ========== =========== ===========
The Association held deposits of approximately $3,868,437 and $3,403,167 for related parties at September 30, 1999 and 1998, respectively. Note 11 - Advances from Federal Home Loan Bank The outstanding advances from the FHLB consisted of the following at September 30, 1999 and 1998:
Maturity 1999 Rate 1998 Rate - --------------- ------------- ----- ------------- ----- October 2, 1998 $13,150,000 5.38% October 7, 1999 $33,374,700 5.37% October 7, 1999 2,575,000 5.37% December 31, 2004 253,172 6.09% 260,412 6.09% January 3, 2005 111,803 6.03% 129,059 6.03% January 1, 2013 464,181 6.09% 486,106 6.09% January 1, 2013 441,077 6.13% 461,845 6.13% February 1, 2013 437,647 5.91% 458,430 5.91% March 3, 2014 994,488 5.45% April 1, 2014 957,581 5.97% May 1, 2014 1,304,801 5.66% June 1, 2014 993,165 5.90% July 1, 2014 916,921 6.38% August 1, 2014 665,681 6.37% September 1, 2014 839,560 6.59% October 1, 2014 728,100 6.86% ----------- ----------- $45,057,877 $14,945,852 =========== ===========
52 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 11 - Advances from Federal Home Loan Bank, continued Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB), advances are secured by all stock and deposit accounts in the FHLB, mortgage collateral, securities collateral, and other collateral. In addition to the assets pledged under the FHLB's blanket floating lien, specific mortgage-backed securities are also pledged as collateral for the advances, at September 30, 1999, as follows: Carrying value $2,342,619 Estimated fair value 2,342,874 Note 12 - Pension Plan The Company has a qualified, noncontributory defined benefit retirement plan covering substantially all of its employees. Benefits are based on years of service and the employee's highest average rate of earnings for the five consecutive years during the last ten full years before retirement. The benefits are reduced by a specified percentage of the employee's social security benefits. An employee becomes fully vested upon completion of five years of qualifying service. It is the policy of the Company to fund the maximum amount that can be deducted for federal income tax purposes. The following table sets forth the plan's funded status and amounts recognized in the Company's statements of financial condition at September 30:
1999 1998 1997 ----------- ----------- ----------- Change in benefit obligation: Benefit obligation at beginning of year $ 2,364,813 $ 2,145,930 $ 1,856,303 Service cost 151,965 144,524 106,287 Interest cost 171,504 157,582 139,094 Actuarial (gain) loss (40,059) (6,790) 128,207 Benefits paid (76,283) (76,283) (77,831) Expenses paid (150) (150) (6,130) ----------- ----------- ----------- Benefit obligation at end of year 2,571,790 2,364,813 2,145,930 ----------- ----------- ----------- Change in plan assets: Fair value of plan assets at beginning of year 2,149,711 2,035,418 1,907,532 Actual return on plan assets 381,110 37,623 128,928 Employer contribution 201,134 153,103 82,919 Benefits paid (76,283) (76,283) (77,831) Expenses paid (150) (150) (6,130) ----------- ----------- ----------- Fair value of plan assets at end of year 2,655,522 2,149,711 2,035,418 ----------- ----------- ----------- Funded status 83,732 (215,102) (110,512) Unrecognized net actuarial loss 214,645 480,213 361,361 Unrecognized prior service cost 94,063 101,422 108,781 Unrecognized net transition obligation (asset) (318,510) (351,490) (384,470) ----------- ----------- ----------- (Accrued) prepaid pension cost $ 73,930 $ 15,043 $ (24,840) =========== =========== ===========
53 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 12 - Pension Plan, continued A summary of the components of income follows:
1999 1998 1997 --------- --------- --------- Service cost-benefits earned during the year $ 151,965 $ 144,524 $ 106,287 Interest cost on projected benefit obligation 171,504 157,582 139,094 Return on plan assets (168,945) (172,048) (151,525) Net asset gain recognition 13,344 8,783 -0- Amortization of unrecognized net asset (32,980) (32,980) (32,980) Amortization of prior service cost 7,359 7,359 7,359 --------- --------- --------- Net periodic pension cost $ 142,247 $ 113,220 $ 68,235 ========= ========= =========
Assumptions used in the accounting for the pension plan were as follows:
1999 1998 1997 ----- ----- ----- Weighted average discount rate 7.50% 7.50% 8.00% Rate of increase in future compensation levels 5.00% 5.00% 5.00% Expected long-term rate of return on assets 8.00% 8.00% 8.00%
The Company contributed $201,134, $153,103, and $82,919 to the plan in 1999, 1998, and 1997, respectively. Note 13 - Income Taxes The Company and the Association file a consolidated federal income tax return. The consolidated provision for income taxes for 1999, 1998, and 1997 consists of the following:
1999 1998 1997 --------- --------- --------- Current (benefit) $ 31,199 $ 384,102 $ 176,076 Deferred (benefit) 119,426 (54,829) 250,743 --------- --------- --------- $ 150,625 $ 329,273 $ 426,819 ========= ========= =========
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent to income before income taxes as a result of the following:
1999 1998 1997 --------- --------- --------- Expected income tax expense at statutory tax rate of 34% $ 152,528 $ 302,674 $ 405,822 Other (1,903) 26,599 20,997 --------- --------- --------- $ 150,625 $ 329,273 $ 426,819 ========= ========= ========= Effective tax rate 34% 37% 36% ========= ========= =========
54 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 13 - Income Taxes, continued Deferred tax assets and liabilities included in the statement of financial condition at September 30 consist of the following:
1999 1998 --------- --------- Deferred tax assets: Allowance for loan losses $ 66,945 $ 66,945 Net unrealized loss on market value adjustment to mortgage-backed securities available-for-sale 76,332 33,471 Deferred compensation 29,834 28,373 Unrealized gain on loans held for sale -0- 25,992 Other 9,694 8,471 --------- --------- 182,805 163,252 --------- --------- Deferred tax liabilities: FHLB stock (40,698) (11,390) Mortgage servicing rights (90,444) (73,739) Depreciable assets (40,466) (36,241) Unrealized loss on loans held for sale (12,521) -0- Pension liability (106,860) (73,500) --------- --------- (290,989) (194,870) --------- --------- Net deferred tax asset (liability) $(108,184) $ (31,618) ========= =========
No valuation allowance for deferred tax assets was recorded as of September 30, 1999 and 1998, as management believes that the amounts representing future deferred tax benefits will more likely than not be recognized since the Company is expected to have sufficient taxable income of an appropriate character within the carryback and carryforward period as permitted by the tax law to allow for utilization of the future deductible amounts. Retained earnings at September 30, 1999 and 1998, includes approximately $2,692,722, for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $915,525 at September 30, 1999 and 1998. Note 14 - 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. 55 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 14 - Stock Option and Incentive Plan, continued Options to purchase shares of common stock of the Company may be granted to selected directors, officers, and key employees. The number of shares of common stock reserved for issuance under the stock option plan was equal to 182,278 or 10% of the total number of common shares issued pursuant to the conversion. The option exercise price cannot be less than the fair market value of the underlying common stock as of the date of the option grant, and the maximum option term cannot exceed ten years. Awards 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, 1997 100,276 Increase due to 3 for 2 stock split 50,135 Granted -0- Exercised at $9.42 per share (1,568) Forfeited and expired -0- ------- Balance, September 30, 1998 148,843 Granted -0- Exercised at $9.42 per share (1,567) Forfeited and expired -0- ------- Balance, September 30, 1999 147,276 ======= Options exercisable at year end under stock option plan 116,258 ======= Shares available for future grants 27,162 =======
Stock appreciation rights ("SARs") may be granted under the Option and Incentive Plan giving the participant the right to receive the excess of the market value of the shares on the date exercised over the exercise price. Upon exercise, the participant will receive either cash or shares as determined by the Company. Limited SARs may be granted which are exercisable only for a limited period of time in the event of a tender or exchange offer for shares of holding company stock. Payment upon exercise of a limited SAR shall be in cash. No SARs or limited SARs have been granted. Restricted stock may also be granted under the Option and Incentive Plan, subject to forfeiture if the participant fails to remain in the continuous service of the Company. The time period for such restriction may be removed or accelerated at the Company's discretion. 56 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 15 - Employee Stock Ownership Plan (ESOP) In conjunction with the stock conversion, the Company established an ESOP for eligible employees. Employees with at least one year of employment and who have attained the age of twenty-one are eligible to participate. The ESOP borrowed funds in the amount of $972,080 from the Company to purchase 145,823 common shares issued in the conversion. Collateral for the loan is the common stock purchased by the ESOP. The ESOP loan is payable in quarterly principal payments of $24,302 over a ten-year period plus interest at an annual rate of 7.93%. In accordance with generally accepted accounting principles, the unpaid balance of the ESOP loan on the Association's books and the related receivable on the holding company's books have been eliminated in the consolidated statement of financial condition. The cost of shares not committed to be released and unallocated shares is reported as a reduction of stockholders' equity. Shares are released to participants' accounts under the shares allocated method. The Company intends to make annual contributions to the ESOP in an amount to be determined annually by the Board of Directors, but not less than the amount required to pay any currently maturing obligations under loans made to the ESOP. The Company will not make contributions if such contributions would cause the Company to violate its regulatory capital requirements. Company contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan will be allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after five years of credited service. Prior to the completion of five years of credited service, a participant who terminates employment for reasons other than death, retirement (or normal retirement), or disability will not receive any benefit under the ESOP. Forfeitures will be reallocated among the remaining participating employees, in the same proportion as contributions. Benefits may be payable in the form of stock or cash upon termination of employment. ESOP compensation expense for the years ended September 30, 1999, 1998, and 1997, totaled $179,049, $229,795, and $196,955, respectively. The fair value of unearned ESOP shares at September 30, 1999 and 1998, totaled $928,340 and $1,080,339, respectively. Following is a summary of ESOP shares at September 30:
1999 1998 ------- ------- Shares allocated 77,520 63,713 Shares committed to be released -0- -0- Unearned 66,311 81,534 ------- ------- Total 143,831 145,247 ======= =======
Note 16 - Recognition and Retention (RRP) On July 26, 1995, the stockholders approved the Company's formation of a RRP which was authorized to award 4%, or 72,912 shares (48,608 shares prior to stock split), of the total shares of common stock issued in the conversion. On July 26, 1995, the RRP awarded 61,796 shares (41,197 shares prior to stock split) of common stock to directors and employees in key management positions in order to provide them with a proprietary interest in the Company in a manner designed to encourage such employees to remain with the Company. 57 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 16 - Recognition and Retention (RRP), continued Unearned compensation of $581,908, representing the shares' fair market value of $14.125 per share at the date of award, will be charged to income on a straight-line basis over the five-year vesting period as the Company's directors and employees perform the related future services. The unamortized balance, which is comparable to deferred compensation, is reflected as a reduction of stockholders' equity. The Company recognized $116,382 as compensation and benefits expense relating to this plan for the years ended September 30, 1999, 1998, and 1997. Note 17 - Earnings per Common Share Basic earnings per common share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period, adjusted retroactively for a 3 for 2 stock split in the form of a stock dividend, which was authorized by the Board of Directors on February 18, 1998, to shareholders of record as of March 11, 1998. Diluted earnings per share reflect per share amounts that would result if dilutive potential common stock had been converted to common stock. The following reconciles amounts reported in the financial statements:
1999 1998 1997 ------------------------------------ ------------------------------------ ------------------------------------ Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------------------------------ ------------------------------------ ------------------------------------ Income from continuing operations $ 297,990 $ 560,946 $ 766,775 Less preferred stock dividends -0- -0- -0- ---------- ---------- ---------- Income available to common stockholders - basis earnings per share 297,990 1,324,359 $ 0.23 560,946 1,431,623 $ 0.39 766,775 1,470,358 $ 0.52 Effect of dilutive securities: Options -0- 50,317 -0- 51,266 -0- 29,122 ---------- --------- - ---------- --------- ---------- --------- Income available to common stockholders - diluted earnings per share $ 297,990 1,374,676 $ 0.22 $ 560,946 1,482,889 $ 0.38 $ 766,775 1,499,480 $ 0.51 ========== ========= ======= ========== ========= ======= ========== ========= =======
58 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 18 - Subsequent Event At the October 27, 1999, directors' meeting, a cash dividend of $0.05 was declared. This dividend is to holders of record on November 9, 1999, and payable on November 23, 1999. On November 16, 1999, the Company announced the execution of a definitive agreement to purchase 100% of the outstanding stock of Gilmer Financial Services, Inc., the holding company for Gilmer Savings Bank of Gilmer, Texas. The transaction is valued at approximately $6,000,000. At September 30, 1999, Gilmer Savings Bank had approximately $38,400,000 in total assets, $25,400,000 in deposits, and $3,900,000 in stockholders' equity, all of which is unaudited. The transaction is subject to the approval of the shareholders of Gilmer Financial Services, Inc., as well as banking regulators, and is expected to close in the first quarter of 2000. On November 26, 1999, the Company purchased 132,100 shares of its common stock, representing approximately ten percent of the outstanding shares, for $1,882,430. Note 19 - Significant Group Concentration of Credit Risk The Company invests a portion of its cash in deposit accounts with various financial institutions in amounts which may exceed the insured amount of $100,000. The Company has not experienced any losses on these investments which typically are payable on demand. The Company performs ongoing evaluations of the financial institutions in which it invests deposits and periodically assesses its credit risk with respect to these accounts. At September 30, 1999 and 1998, the Company had $974,627 and $1,104,695, respectively, on deposit with the Federal Home Loan Bank of Dallas, and $657,734 and $533,610, respectively, on deposit with Bank of America (formerly Nations Bank of Texas). Note 20 - Financial Instruments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and condition obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount and nature of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Such collateral includes primary real estate. The Company has not been required to perform on any financial guarantee during the past two years. The Company has not incurred any losses on its commitments in either 1999 or 1998. 59 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 20 - Financial Instruments, continued The Association had outstanding commitments to originate loans as follows:
September 30, 1999 September 30, 1998 ---------------------------------------- ---------------------------------------- Fixed Variable Fixed Variable Rate Rate Total Rate Rate Total ---------- ---------- ---------- ---------- ---------- ---------- First mortgage $5,294,566 $1,200,000 $6,494,566 $4,114,767 $ -0- $4,114,767 Consumer and other loans -0- -0- -0- -0- -0- -0- ---------- ---------- ---------- ---------- ---------- ---------- $5,294,566 $1,200,000 $6,494,566 $4,114,767 $ -0- $4,114,767 ========== ========== ========== ========== ========== ==========
Note 21 - Fair Value of Financial Instruments Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company's financial instruments at September 30, 1999 and 1998. Cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair value. Interest-earning time deposits. Fair values for time deposits are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates. Available-for-sale and held-to-maturity securities. Fair values for securities, excluding restricted equity securities, are based on available quoted market prices. If quoted market prices are unavailable, fair values are based on quoted market prices of comparable instruments. Available-for-sale securities are carried at their aggregate fair value. Loans receivable. Fair values for loans receivable are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Federal Home Loan Bank stock. The fair value of stock in the Federal Home Loan Bank of Dallas is estimated to be equal to its carrying amount, since it is not a publicly traded equity security, has an adjustable dividend rate, and transactions in the stock have been executed at the stated par value. 60 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 21 - Fair Value of Financial Instruments, continued Deposit liabilities. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit (CDS) approximate their fair values at the reporting date. Fair values for fixed-rate CDS are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Borrowings. The estimated fair value of the FHLB advance is based upon the discounted value of the difference between contractual rates and current market rates for similar agreements. Advance from borrowers for taxes and insurance. The carrying amount of escrow accounts approximate fair value. Accrued interest. The carrying amounts of accrued interest approximate their fair values. Off-balance-sheet instruments. Commitments to extend credit were evaluated and fair value was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The estimated fair values of the Company's financial instruments were as follows at:
September 30, 1999 September 30, 1998 ------------------------------- ------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------- -------------- ------------- -------------- Financial assets: Cash and cash equivalents $ 1,994,564 $ 1,994,564 $ 1,697,058 $ 1,697,058 Interest-earning time deposits 2,461,617 2,453,000 1,959,617 1,988,000 Securities available-for-sale 5,918,750 5,918,750 -0- -0- Securities held-to-maturity 30,481,413 29,948,866 29,766,844 30,115,954 Mortgage-backed securities available-for-sale 32,893,809 32,893,809 12,810,165 12,810,165 Mortgage-backed securities held-to-maturity 5,806,975 5,949,914 10,940,500 11,088,555 Loans receivable, net 67,250,334 67,520,000 61,119,047 64,421,000 Accrued interest receivable 1,167,245 1,167,245 978,378 978,378 Federal Home Loan Bank stock 2,283,000 2,283,000 789,100 789,100 Financial liabilities: Deposit liabilities 87,539,839 87,539,000 86,643,657 87,374,000 Advances from Federal Home Loan Bank 45,057,877 44,776,000 14,945,852 15,058,000 Advances from borrowers for taxes and insurance 823,755 823,755 844,188 844,188
The carrying amounts in the preceding table are included in the statement of financial condition under the applicable captions. The contract or notional amounts of the Company's financial instruments with off-balance-sheet risk are disclosed in Note 21. 61 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 22 - Regulatory Matters The Association is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Association and the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier 1 capital to riskweighted assets (as defined in the regulations), Tier 1 capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined). Management believes, as of September 30, 1999, that the Association meets all capital adequacy requirements to which it is subject. As of September 30, 1999, the most recent notification from the Office of Thrift Supervision categorized the Association as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Association must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and tangible capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------- ----------------- ------------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- ------ ----- ------ ----- (dollars in thousands) As of September 30, 1999: Total risk-based capital (to risk-weighted assets) $ 17,654 27.9% >$5,055 > 8.0% >$6,319 > 10.0% - - - - Tier 1 capital (to risk-weighted assets) $ 17,388 27.5% >$2,528 > 4.0% >$3,792 > 6.0% - - - - Tier 1 capital (to adjusted total assets) $ 17,388 11.3% >$6,155 > 4.0% >$7,694 > 5.0% - - - - Tangible capital (to adjusted total assets) $ 17,388 11.3% >$2,308 > 1.5% >$2,308 > 1.5% - - - - As of September 30, 1998: Total risk-based capital (to risk-weighted assets) $ 18,784 38.3% >$3,926 > 8.0% >$4,907 > 10.0% - - - - Tier 1 capital (to risk-weighted assets) $ 18,555 37.8% >$1,963 > 4.0% >$2,944 > 6.0% - - - - Tier 1 capital (to adjusted total assets) $ 18,555 14.9% >$4,965 > 4.0% >$6,206 > 5.0% - - - - Tangible capital (to adjusted total assets) $ 18,555 14.9% >$1,862 > 1.5% >$1,862 > 1.5% - - - -
62 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 23 - Stockholders' Equity Federal regulations require that, upon conversion from a mutual to stock form of ownership, a "liquidation account" be established by restricting a portion of retained earnings for the benefit of eligible savings account holders who maintain their savings accounts with the Association after conversion. In the event of complete liquidation (and only in such event), each savings account holder who continues to maintain his savings account shall be entitled to receive a distribution from the liquidation account after payment to all creditors, but before any liquidation distribution with respect to capital stock. This account will be proportionately reduced for any subsequent reduction in the eligible holders' savings accounts. Federal regulations impose limitations on the payment of dividends and other capital distributions, including, among others, that the Association may not declare or pay a cash dividend on any of its stock if the effect thereof would cause the Association's capital to be reduced below the amount required for the liquidation account or the capital requirements imposed by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the Office of Thrift Supervision (The "OTS"). Note 24 - Compensated Absences Employees of the Company are entitled to paid vacation after one year of employment. The vacation time does not vest; therefore, no accrual for vacation was recorded due to the immateriality. Sick leave is not accrued because it does not vest. The costs of these compensated absences are recognized when paid. Note 25 - Interest and Dividends on Investment Securities Dividends on Federal Home Loan Bank stock of $86,385, $53,616, and $57,360 were received for the years ended September 30, 1999, 1998, and 1997, respectively. Interest income received from investment securities for the years ended September 30, 1999, 1998, and 1997 was taxable. 63 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 26 - Other Noninterest Income and Expense Other noninterest income and expense amounts are summarized as follows:
1999 1998 1997 -------- -------- -------- Other noninterest income: Loan late charges $ 29,009 $ 29,127 $ 25,346 Bank service charges and fees 33,044 21,773 22,345 Other 10,547 12,635 20,215 -------- -------- -------- $ 72,600 $ 63,535 $ 67,906 ======== ======== ======== Other noninterest expense: Advertising and promotion $ 79,799 $ 34,895 $ 28,023 Data processing 133,581 99,501 89,203 Professional fees 68,526 72,634 77,953 Supervisory examination 36,109 36,307 35,697 Printing, postage, stationery, and supplies 81,939 54,660 51,634 Telephone 27,712 22,519 18,136 Insurance and bond premiums 49,237 52,332 60,877 Loan servicing expenses 35,116 42,246 22,268 Franchise taxes 94,316 94,363 94,545 Other 138,858 153,959 122,436 -------- -------- -------- $745,193 $663,416 $600,772 ======== ======== ========
Note 27 - Condensed Parent Company Only Financial Statements The following condensed statements of financial condition as of September 30, 1999 and 1998, and related condensed statements of income and statements of cash flows for the years ended September 30, 1999 and 1998, should be read in conjunction with the consolidated financial statements and the related notes.
1999 1998 ----------- ----------- STATEMENT OF FINANCIAL CONDITION Assets: Cash $ 529,813 $ 975,288 Note receivable - ESOP Trust 510,342 607,550 Investment in the Association 17,337,121 18,703,457 Receivable from subsidiary 63,016 118,102 Prepaid expenses 2,867 5,611 ----------- ----------- Total assets $18,443,159 $20,410,008 =========== ===========
64 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 27 - Condensed Parent Company Only Financial Statements, continued
1999 1998 ------------ ------------ Liabilities: Other liabilities $ 23,831 $ 26,314 ------------ ------------ Stockholders' Equity: Common stock 18,845 18,845 Additional paid-in capital 12,397,167 12,319,624 Retained earnings 13,675,391 13,661,392 Treasury stock (6,984,857) (4,794,263) Unearned ESOP shares (442,059) (543,564) Deferred compensation - RRP shares (96,985) (213,366) Net unrealized gain on available-for-sale securities, net of tax (148,174) (64,974) ------------ ------------ Total stockholders' equity 18,419,328 20,383,694 ------------ ------------ Total liabilities and stockholders' equity $ 18,443,159 $ 20,410,008 ============ ============ STATEMENT OF INCOME Income: Equity in earnings of Association $ 438,145 $ 709,330 Interest income 45,920 53,730 ------------ ------------ Total income 484,065 763,060 ------------ ------------ Expenses: Management expenses paid to subsidiary 130,500 130,500 Franchise tax expense 48,624 50,295 Professional fees 28,089 43,843 Other 26,521 53,917 ------------ ------------ Total expenses 233,734 278,555 ------------ ------------ Income before federal income taxes 250,331 484,505 Federal income taxes (benefit) (47,659) (76,441) ------------ ------------ Net income $ 297,990 $ 560,946 ============ ============
65 East Texas Financial Services, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 27 - Condensed Parent Company Only Financial Statements, continued
1999 1998 ----------- ----------- STATEMENT OF CASH FLOWS Cash flows from operating activities: Net income $ 297,990 $ 560,946 Equity in earnings of the Association, net of dividends 1,384,641 (709,330) Decrease in prepaid expenses 2,744 821 Increase (decrease) in other liabilities (2,483) 1,222 ----------- ----------- Net cash provided (used) by operating activities 1,682,892 (146,341) ----------- ----------- Cash flows from investing activities: ESOP loan repayment 97,208 97,208 (Increase) decrease in receivable from subsidiary 55,086 (39,200) ----------- ----------- Net cash provided by investing activities 152,294 58,008 ----------- ----------- Cash flows from financing activities: Proceeds from note payable to bank 500,000 -0- Principal payments on note payable to bank (500,000) -0- Net proceeds from issuance of common stock 193,924 239,127 Purchase of treasury stock at cost (2,207,706) (1,080,369) Sale of treasury stock for exercise of stock options 14,760 14,771 Dividends paid (281,639) (256,713) ----------- ----------- Net cash used by financing activities (2,280,661) (1,083,184) ----------- ----------- Net decrease in cash and cash equivalents (445,475) (1,171,517) Cash and cash equivalents at beginning of year 975,288 2,146,805 ----------- ----------- Cash and cash equivalents at end of year $ 529,813 $ 975,288 =========== =========== Supplemental disclosure of cash flow information Cash paid for: Interest on borrowed funds $ 5,500 $ -0- Income taxes -0- -0- Receivable from subsidiary for ESOP shares issued 77,544 122,745
66 Corporate Directory East Texas Financial Services, Inc. Board of Directors* Jack W. Flock Gerald W. Free Jim M. Vaughn, M.D. James W. Fair Chairman of Vice Chairman, Retired Physician Real Estate Investment the Board President and Chief Investments Oil and Gas Interests Of Counsel to Executive Officer Ramey & Flock, P. C. L. Lee Kidd M. Earl Davis Charles R. Halstead H. H. Richardson, Jr. Oil and Gas Interests Vice President Geologist President Compliance and Oil and Gas Interests H. H. Richardson, Jr. Marketing of the Construction Company Association
Officers Gerald W. Free Derrell W. Chapman ** Sandra J. Allen Vice Chairman, Vice President and Corporate Secretary President and Chief Chief Operating and Executive Officer Chief Financial Officer First Federal Savings and Loan Association of Tyler Officers Gerald W. Free Derrell W. Chapman ** Joe C. Hobson Sandra J. Allen Vice Chairman, Vice President and Sr. Vice President Corporate Secretary President and Chief Chief Operating and Mortgage Lending Executive Officer Chief Financial Officer William L. Wilson M. Earl Davis Elizabeth G. Taylor Stephen W. Horlander Treasurer and Vice President Vice President Vice President Controller Compliance and Mortgage Loan Officer Commercial Lending Marketing John R. Mills Earlene Cool Vice President Assistant Treasurer Consumer Lending
* Directors of the Company also serve as directors of the Association **Advisory Director 67 Shareholder R e f e r e n c e Executive Offices 1200 South Beckham Avenue Tyler, Texas 75701 SEC Counsel Silver, Freedman and Taff, L.L.P. 1100 New York Avenue, N.W. Washington, D.C. 20005-3934 Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, N.J. 07016 Independent Auditors Bryant and Welborn, L.L.P. 601 Chase Drive Tyler, Texas 75701 Investor Relations Shareholders, analysts and others seeking information about East Texas Financial Services, Inc., are invited to contact: Gerald W. Free, Vice Chairman, President and CEO or Derrell W. Chapman, Vice President and COO, CFO at (903) 593-1767 (903) 593-1094 (Fax) Copies of the Company's earnings releases and other financial publications, including the annual report on Form 10-KSB filed with the Securities and Exchange Commission, are available without cost upon request. Annual Meeting of Shareholders January 26, 2000, at 2:00 p.m. Company Offices 1200 South Beckham Avenue Tyler, Texas 68 EX-21 4 EXHIBIT 21 Subsidiaries of the Registrant
SUBSIDIARIES OF THE REGISTRANT Ownership Percentage State of Parent Subsidiary of Organization Incorporation ------ ---------- --------------- ------------- East Texas Financial First Federal Savings 100% United States Services, Inc. and Loan Association of Tyler
The financial statements of the Registrant are consolidated with its subsidiary. EX-23 5 EXHIBIT 23 Consent of Expert Board of Directors East Texas Financial Services, Inc. 1200 S. Beckham Tyler, Texas 75701 Members of the Board: We consent to the incorporation by reference in this Registration Statement on Form S-8 of East Texas Financial Services, Inc. (the "Company") of our report on the financial statements included in the Company's Annual Report on Form 10-KSB for the year ended September 30, 1999, filed pursuant to the Securities Exchange Act of 1934, as amended. /s/ Bryant & Welborn L.L.P. --------------------------- Bryant & Welborn L.L.P. Tyler, Texas December 29, 1999 EX-27 6
9 YEAR SEP-30-1999 SEP-30-1999 1,019,937 3,436,244 0 0 38,812,559 36,288,388 35,898,780 67,520,373 270,039 153,724,921 87,539,839 35,949,700 2,707,877 9,108,177 0 0 18,845 18,400,483 153,724,921 4,810,218 4,143,316 141,966 9,095,500 4,237,906 5,864,131 3,231,369 0 0 3,140,696 448,615 297,990 0 0 297,990 .23 .22 1.81 768,000 0 0 272,000 233,180 2,000 39,000 270,039 80,000 0 190,000
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