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 SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended September 30, 1996
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:
Nasdaq National Market
--------------------------------------------
(Name of each exchange on which registered)
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. [X]
State the issuer's revenues for its most recent fiscal year: $8,435,000.
<PAGE>
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
asked prices of such stock on the Nasdaq National Market as of December 11, 1996
was $12.8 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 11, 1996, there were issued and outstanding 1,079,285
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, 1996.
Part III of Form 10-KSB - Portions of Proxy Statement for 1997 Annual
Meeting of Stockholders.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
<PAGE>
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").
All references to the Company, unless otherwise indicated, at or before January
10, 1995 refer to the Association. 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 quoted on the
Nasdaq National Market 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 and loan production
office, each of which is located in Tyler, Texas, and a branch office located in
Whitehouse, Texas. At September 30, 1996, the Company had total assets of $114.4
million, deposits of $91.7 million and stockholders' equity of $20.9 million.
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. To a lesser extent, the Company also
originates commercial real estate, one- to four-family construction,
multi-family 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, 1996, 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'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 passbook
and money market accounts, NOW checking 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.
<PAGE>
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-K 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 result of any revisions which may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Lending Activities
General. Historically, the Company originated fixed-rate one- to
four-family mortgage loans. In the early 1980's, the Company began the
origination of adjustable-rate mortgage ("ARM") loans for retention in its
portfolio, in order to increase the percentage of loans in its portfolio with
more frequent repricing or shorter maturities than fixed-rate mortgage loans.
The Company has continued to originate fixed-rate residential mortgage loans in
response to consumer demand. The Company underwrites all of its fixed-rate
residential mortgage loans under secondary market guidelines allowing them to be
saleable primarily to the Federal National Mortgage Association ("FNMA") with
the servicing retained, without recourse, in order to generate fee income and
reduce the Company's exposure to changes in interest rates. See "--Loan
Portfolio Composition" and "--One- to Four-Family Residential Mortgage Lending."
The Company's primary focus in lending activities is on the origination
of loans secured by first mortgages on owner-occupied one- to four-family
residences. To a lesser extent, the Company originates loans secured by
commercial real estate, one- to four-family construction, multi-family and
consumer loans. At September 30, 1996, the Company's net loans held in portfolio
totalled $47.9 million which constituted 41.9% of the Company's total assets. At
that date, the Company had no loans held for sale.
<PAGE>
The Loan Committee, 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 has the responsibility for the
supervision of the Company's loan portfolio with an overview by the full Board
of Directors. Loans may be approved by the Loan Committee, depending on the size
of the loan, with all loans subject to ratification by the full Board of
Directors. Loans in excess of $500,000 require full board approval. In addition,
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, 1996, the maximum amount which the Company could
have lent to any one borrower and the borrower's related entities was
approximately $2.6 million. At September 30, 1996, 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 $828,000 at September 30, 1996, and was secured by a country
club located in Tyler, Texas. The Company had no other loans or lending
relationships in excess of $500,000 at September 30, 1996. See
"Regulation--Federal Regulation of Savings Associations." At September 30, 1996,
the next two largest loans and lending relationships totalled $385,000 and
$370,000, each of which was comprised of a loan secured by commercial real
estate. The $370,000 loan was originated in 1992 as part of the sale of a real
estate owned property at a 90% loan to value ratio. At September 30, 1996, the
loan had a loan to value ratio of approximately 60%. At September 30, 1996 each
of these loans was performing in accordance with its respective repayment terms.
<PAGE>
Loan Portfolio Composition. The following information concerning 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.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994 1993
-----------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family
residences..................... $ 42,773 85.98% $34,947 81.55% $28,074 77.32% $ 28,927 73.93%
Commercial...................... 3,458 6.95 4,387 10.24 5,001 13.77 5,757 14.71
Construction.................... 1,806 3.63 1,879 4.38 1,175 3.24 2,258 5.77
Multi-family.................... 701 1.41 724 1.69 743 2.05 761 1.94
-------- ------ ------- ------ -------- ------ -------- -------
Total real estate loans....... 48,738 97.97 41,937 97.86 34,993 96.38 37,703 96.35
-------- ------ ------- ------ -------- ------ ------- -------
Other Loans:
Loans secured by deposits....... 500 1.00 404 0.94 830 2.28 620 1.58
Home improvement................ 455 0.92 451 1.05 444 1.22 579 1.48
Commercial business............. 54 0.11 63 0.15 42 0.12 231 .59
-------- ------ ------- ------ -------- ------ --------- ------
Total other loans............. 1,009 2.03 918 2.14 1,316 3.62 1,430 3.65
-------- ------ ------- ------ ------- ------- -------- ------
Total loans................. 49,747 100.00% 42,855 100.00% 36,309 100.00% 39,133 100.00%
-------- ====== ------- ====== ------- ====== -------- ======
Less:
Loans in process................ 1,514 777 639 892
Deferred fees and discounts..... 19 22 33 65
Allowance for loan losses....... 289 296 300 181
Loans held for sale............. --- --- --- 9,312
-------- ------ ------- -------
Net portfolio loans......... $ 47,925 $41,760 $35,337 $ 28,683
======== ======== ======= ========
<PAGE>
<CAPTION>
September 30,
-----------------------
1992
-----------------------
Amount Percent
-------- ------
<S> <C> <C>
Real Estate Loans:
One- to four-family
residences..................... $ 31,724 74.75%
Commercial...................... 6,423 15.14
Construction.................... 1,526 3.60
Multi-family.................... 969 2.28
-------- ------
Total real estate loans....... 40,642 95.77
-------- ------
Other Loans:
Loans secured by deposits....... 804 1.89
Home improvement................ 829 1.96
Commercial business............. 162 .38
-------- ------
Total other loans............. 1,795 4.23
-------- -----
Total loans................. 42,437 100.00%
-------- ======
Less:
Loans in process................ 763
Deferred fees and discounts..... 108
Allowance for loan losses....... 122
Loans held for sale............. 4,839
--------
Net portfolio loans......... $ 36,605
========
</TABLE>
<PAGE>
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------
1996 1995 1994 1993
--------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family residences.............. $29,635 59.57% $ 24,313 56.73% $25,292 69.66% $ 27,395 70.02%
Commercial.................................. 2,610 5.25 2,739 6.39 3,166 8.72 4,055 10.36
Multi-family................................ 701 1.41 724 1.69 743 2.05 761 1.94
Construction.............................. 1,806 3.63 295 0.69 --- --- --- ---
------- ------ -------- ----- ------- ---- -------- ----
Total fixed-rate real estate loans....... 34,752 69.86 28,071 65.50 29,201 80.43 32,211 82.32
------- ------ -------- ----- ------- ------ -------- -----
Other loans:
Loans secured by deposits................... 500 1.00 404 0.94 830 2.28 620 1.58
Home improvement............................ 455 0.92 451 1.05 444 1.22 579 1.48
Commercial business......................... 54 0.11 63 0.15 42 0.12 231 .59
------- ------ -------- ----- ------- ------ ------- ------
Total other fixed-rate loans............. 1,009 2.03 918 2.14 1,316 3.62 1,430 3.65
------- ------ -------- ------ ------- ------ ------- ------
Total fixed-rate loans .............. 35,761 71.89 28,989 67.64 30,517 84.05 33,641 85.97
------- ------ -------- ----- ------- ------ -------- -----
Adjustable-Rate Loans
Real estate:
One- to four-family residences.............. 13,138 26.41 10,634 24.81 2,782 7.66 1,532 3.91
Commercial.................................. 848 1.70 1,648 3.85 1,835 5.05 1,702 4.35
Construction loans.......................... 0 0.00 1,584 3.70 1,175 3.24 2,258 5.77
Multi-family................................ --- --- --- --- --- --- --- ---
------- ---- -------- ---- ---- ---- -------- ------
Total adjustable-rate real estate loans.. 13,986 28.11 13,866 32.36 5,792 15.95 5,492 14.03
------- ------ -------- ------ ------ ------ -------- -------
Total loans.......................... 49,747 100.00% 42,855 100.00% 36,309 100.00% 39,133 100.00%
------- ====== -------- ====== ------ ====== -------- =======
Less:
Loans in process............................. 1,514 777 639 892
Deferred fees and discounts.................. 19 22 33 65
Allowance for loan losses.................... 289 296 300 181
Loans held for sale.......................... --- --- --- 9,312
------- -------- ------ ---------
Net portfolio loans.................. $47,925 $ 41,760 $35,337 $ 28,683
======= ======== ======= ========
<PAGE>
<CAPTION>
September 30,
-----------------------
1992
-----------------------
Amount Percent
------ -------
<S> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family residences.............. $ 30,237 71.26%
Commercial.................................. 4,530 10.67
Multi-family................................ 969 2.28
Construction.............................. --- ---
-------- -------
Total fixed-rate real estate loans....... 35,736 84.21
-------- ------
Other loans:
Loans secured by deposits................... 804 1.89
Home improvement............................ 829 1.96
Commercial business......................... 162 .38
-------- ------
Total other fixed-rate loans............. 1,795 4.23
Total fixed-rate loans .............. 37,531 88.44
-------- ------
Adjustable-Rate Loans
Real estate:
One- to four-family residences.............. 1,487 3.50
Commercial.................................. 1,893 4.46
Construction loans.......................... 1,526 3.60
Multi-family................................ --- ---
-------- ------
Total adjustable-rate real estate loans.. 4,906 11.56
-------- -------
Total loans.......................... 42,437 100.00%
-------- ======
Less:
Loans in process............................. 763
Deferred fees and discounts.................. 108
Allowance for loan losses.................... 122
Loans held for sale.......................... 4,839
--------
Net portfolio loans.................. $ 36,605
=========
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at September 30, 1996. 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.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------------------------------------------------
One- to Four-Family Other Residential Nonresidential Construction
--------------------- --------------------- -------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------------------- --------------------- -------------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Periods
Ending September 30,
1997........................ $ 2,180 7.90% $326 8.00% $ 548 10.04% $1,806 8.39%
1998........................ 735 7.32 0 0.00 1,025 8.20 0 0.00
1999........................ 771 8.13 0 0.00 99 8.80 0 0.00
2000........................ 4,568 7.72 0 0.00 562 9.25 0 0.00
2001........................ 4,034 7.12 0 0.00 507 9.16 0 0.00
2002........................ 2,974 8.09 0 0.00 47 9.00 0 0.00
2003 to 2006................ 3,544 8.33 75 10.00 132 9.50 0 0.00
2007 to 2016................ 20,906 7.87 191 8.60 538 8.07 0 0.00
2017 and following.......... 3,061 9.46 109 9.75 0 0.00 0 0.00
-------- --- ------- ------
Total.............. $42,773 $701 $3,458 $1,806
==== ====== ======
<CAPTION>
Other Loans Total
----------------------------------------------
Amount Weighted Amount Weighted
Average Average
Rate Rate
---------------------- -------------------
<S> <C> <C> <C> <C>
Due During Periods
Ending September 30,
1997........................ $ 429 7.46% $ 5,289 8.26%
1998........................ 123 7.32 1,883 7.80
1999........................ 52 9.62 922 8.29
2000........................ 46 9.67 5,176 7.85
2001........................ 65 9.24 4,606 7.37
2002........................ 63 10.19 3,084 8.15
2003 to 2006................ 135 9.13 3,886 8.43
2007 to 2016................ 96 8.40 21,731 7.88
2017 and following.......... 0 0.00 3,170 9.47
------ -------
Total.............. $1,009 $49,747
====== =======
</TABLE>
<PAGE>
The total amount of loans due after September 30, 1997 which have
predetermined interest rates was $33.0 million while the total amount of loans
due after such date which have floating or adjustable interest rates was $11.5
million.
One- to Four-Family Residential Mortgage Lending. The Company focuses
its lending efforts primarily on the origination of conventional loans for the
acquisition of owner-occupied, one- to four-family residences. At September 30,
1996, the Company's one- to four-family residential mortgage loans totalled
$42.8 million, or 86.0% 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, 1996, the Company originated $20.4 million and $4.8
million 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 $7.7 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 year annual adjustments, and
recently began to offer ARMs with 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.
<PAGE>
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,
1996, the Company had $3.5 million and $701,000, respectively, of commercial
real estate and multi-family loans, which represented 6.95% and 1.41%,
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 $1.8 million, or 3.6% of its gross loan portfolio in construction
loans as of September 30, 1996. 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 presold. 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 loans in process are performed by
the Company's staff. At September 30, 1996, none of the Company's construction
loans were to builders for the construction of pre-sold residences and $1.8
million, or 100% of gross construction loans, were to builders for the
construction of residences which had not been pre-sold.
<PAGE>
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 the
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 and Commercial Business Lending. The Company offers loans
secured by savings deposits and home improvement loans. Substantially all of the
Company's consumer loans are originated in its primary market area. These loans
are originated on a direct basis.
At September 30, 1996, the Company's consumer loan portfolio totalled
$955,000, or 1.92% of its total gross loan portfolio. All consumer loans are
currently originated with fixed rates of interest.
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, at September 30, 1996, three loans, totalling $14,000, or approximately
1.5% of the consumer loan portfolio, was 60 days or more delinquent. There can
be no assurance that delinquencies will not increase in the future.
<PAGE>
At September 30, 1996, the Company also had $54,000 in commercial
business loans outstanding, or less than one percent of the Company's total loan
portfolio. The Company's commercial business lending activities have encompassed
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. Management does not contemplate significantly increasing its
commercial business lending activity.
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.
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 office.
In fiscal 1996, the Company originated $25.2 million of loans, compared
to $19.8 million and $21.7 million in fiscal 1995 and 1994, respectively.
Management attributes the increase in originations to continued lower interest
rates and economic conditions in the Tyler area and new loan products. In fiscal
1996, $21.1 million of loans and mortgage-backed securities were repaid compared
to $12.5 million and $16.4 million in fiscal 1995 and 1994 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. 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 $7.7
million, $5.2 million and $14.2 million during the years ended September 30,
1996, 1995 and 1994, 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 $40.1
million, $37.2 million and $37.5 million at September 30, 1996, 1995 and 1994,
respectively.
<PAGE>
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."
<PAGE>
The following table shows the loan and mortgage backed and related
securities origination, purchase, sale and repayment activities of the Company
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family ............... $ 4,841 $ 9,923 $ 3,874 3,340 $ 1,438
- multi-family ...................... -- -- -- -- --
- commercial ........................ -- -- 416 132 --
-------- -------- -------- -------- --------
Total adjustable-rate .................... 4,841 9,923 4,290 3,472 1,438
-------- -------- -------- -------- --------
Fixed-rate:
Real estate - one- to four-family ............... 20,208 9,736 16,836 17,824 13,576
- multi-family ...................... -- -- -- -- 1,857
- commercial ........................ 170 -- -- -- 1,951
Consumer ........................................ 4 3 312 802 678
Commercial business ............................. -- 138 242 148 135
-------- -------- -------- -------- --------
Total fixed-rate ......................... 20,382 9,877 17,390 18,774 18,197
-------- -------- -------- -------- --------
Total loans originated ................... 25,223 19,800 21,680 22,246 19,635
-------- -------- -------- -------- --------
Purchases:
Mortgage-backed securities ...................... 913 38,172 13,116 11,992 4,016
-------- -------- -------- -------- --------
Sales and repayments:
Real estate - one- to four-family ............... 7,718 5,191 14,233 12,216 6,888
Mortgage-backed securities ...................... -- -- 43,886 4,529 --
-------- -------- -------- -------- --------
Total sales .............................. 7,718 5,191 58,119 16,745 6,888
Principal repayments - loans .................... 11,434 8,087 10,001 13,457 12,492
Principal repayments - mortgage-backed securities 9,648 4,371 6,424 8,193 8,657
-------- -------- -------- -------- --------
Total reductions ......................... 28,800 17,649 74,544 38,395 28,037
-------- -------- -------- -------- --------
Increase (decrease) in other items, net ......... 37 (159) (104) (200) (288)
-------- -------- -------- -------- --------
Net increase (decrease) .................. $ (2,627) $ 40,164 $(39,852) $ (4,357) $ (4,674)
======== ======== ======== ======== ========
</TABLE>
<PAGE>
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. At 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 interest
income on the loan is taken out of current income. Each account is handled on a
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
type, amount and percentage of type at September 30, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For: Total Loans Delinquent
--------------------- ----------------------
60-89 Days 90 Days and Over 60 Days and Over
------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 38 $1,135 2.6% 12 $ 449 1.1% 50 $1,584 3.7%
Consumer ............ 2 13 1.4 1 1 0.1 3 14 1.5
-- ------ --- -- ------ --- -- ------ ---
Total ......... 40 $1,148 2.4 13 $ 450 0.9 53 $1,598 3.3
== ====== === == ====== === == ====== ===
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ...................... $449 $294 $295 $445 $426
Commercial real estate ................... 1 -- -- -- --
---- ---- ---- ---- ----
Total ................................. 450 294 295 445 426
---- ---- ---- ---- ----
Accruing loans delinquent more than 90 days:
One- to four-family ...................... -- 12 12 21 --
---- ---- ---- ---- ----
Total ................................. -- 12 12 21 --
---- ---- ---- ---- ----
Foreclosed assets:
One- to four-family ...................... -- 90 -- 59 33
Commercial real estate ................... -- -- -- -- --
---- ---- ---- ---- ----
Total ................................. -- 90 -- 59 33
---- ---- ---- ---- ----
Total non-performing assets ................ $450 $396 $307 $525 $459
==== ==== ==== ==== ====
Total as a percentage of total assets ...... 0.39% 0.34% 0.27% 0.45% 0.40%
==== ==== ==== ==== ====
</TABLE>
For the year ended September 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $41,000. The amount that was included in
interest income on such loans was $30,000 year ended September 30, 1996.
Classified assets totalled $999,218 year ended September 30, 1996.
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.
<PAGE>
Other Assets of Concern. As of September 30, 1996, there was
approximately $146,000 in net book value 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 has caused management to have some
doubts as to the ability of the borrowers to comply with present loan repayment
terms and which may result in the future inclusion of such item in the
non-performing asset categories. Other assets of concern consist of six one-to
four-family residences. All of these loans are being monitored by the Company
due to periodic delinquencies. See "-- Allowance for Loan Losses."
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 classifies
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, 1996, the Company had
classified $999,218 assets as substandard, none as doubtful, and none as loss.
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.
<PAGE>
Real estate properties acquired through foreclosure are recorded at
lower of cost or fair 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, 1996, the Company had a total allowance for loan
losses of $289,000 or 64.2% of non-performing loans. 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.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 296 $ 300 $ 181 $ 122 $ 183
Charge-offs:
One- to four-family ......... 7 4 2 1 43
Multi-family ................ -- -- -- -- 9
Commercial real estate ...... -- -- -- -- --
----- ----- ----- ----- -----
Total charge-offs ......... 7 4 2 1 52
----- ----- ----- ----- -----
Recoveries .................... -- -- -- -- --
----- ----- ----- ----- -----
Net charge-offs ............... (7) (4) (2) (1) (52)
Additions charged to operations -- -- 121 60 (9)
----- ----- ----- ----- -----
Balance at end of period ...... $ 289 $ 296 $ 300 $ 181 $ 122
===== ===== ===== ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period .02% 0.01% 0.01% ---% 0.13%
===== ===== ===== ===== =====
Ratio of net charge-offs during
the period to average non-
performing assets 1.66% 1.14% 0.48% 0.20% 4.00%
===== ===== ===== ===== =====
</TABLE>
<PAGE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ------------------- ------------------ -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............ $ 102 85.98% $ 80 81.55% $ 90 77.32% $ 107 73.93% $ 35 74.75%
Multi-family................... --- 1.41 --- 1.69 4 2.05 --- 1.94 --- 2.28
Commercial real estate......... --- 6.95 --- 10.24 29 13.77 31 14.71 87 15.14
Construction or
development.................. --- 3.63 --- 4.38 -- 3.24 --- 5.77 --- 3.60
Consumer....................... --- 2.03 --- 2.14 7 3.62 --- 3.65 --- 4.23
Unallocated.................... 187 --- 216 --- 170 --- 43 --- --- ---
----- ------ ---- ------ ---- ------ ----- ------ ----- ------
Total.................... $ 289 100.00% $296 100.00% $300 100.00% $ 181 100.00% $ 122 100.00%
===== ====== ==== ====== ==== ====== ===== ====== ===== ======
</TABLE>
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, 1996, the Company had two investment portfolios, one
consisting of mortgage-backed securities and the other consisting principally of
U.S. Government obligations. These investments were made in order to generate
income and because these securities carry a low risk weighting for OTS
risk-based capital purposes and satisfy OTS liquid-asset requirements. See
"Regulation--Capital Requirements" and "--Liquidity."
At September 30, 1996, the Company's investment securities totalled
$30.1 million or 26.4% of total assets and mortgage-backed securities totalled
$24.9 million or 21.8% of total assets. All of the Company's investment
securities and mortgage-backed securities were classified as held to maturity at
September 30, 1996. For information regarding the amortized cost and market
values of the Company's investment securities portfolio, see Note 3 of the Notes
to Consolidated Financial Statements. At September 30, 1996, the weighted
average term to maturity or repricing of the investment securities portfolio,
excluding FHLB stock, was 1.4 years. For information regarding the amortized
cost and market values of the Company's mortgage-backed securities portfolio,
see Note 4 of the Notes to Consolidated Financial Statements.
<PAGE>
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 as an alternative to 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 FNMA and FHLMC. The FNMA and FHLMC certificates are modified
pass-through mortgage-backed securities that represent undivided interests in
underlying pools of fixed-rate, or certain types of adjustable rate,
single-family residential mortgages issued by these government-sponsored
entities. FNMA and FHLMC generally provide the certificate holder a guarantee of
timely payments of interest, whether or not collected. The Company has held
securities issued by GNMA in prior years, but held no GNMA securities at
September 30, 1996.
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 FNMA, FHLMC 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 GNMA 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. Because the rising interest rate environment has
altered the prepayment speeds of its mortgage-backed securities thus increasing
their average life, the Company decided to restructure its balance sheet during
fiscal 1994 and sell its entire mortgage-backed securities portfolio. The
proceeds were reinvested in adjustable rate and/or short maturity
mortgage-backed securities consistent with its asset/liability objectives.
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- --------------- ----------------- ----------------- ------------------
Amortized % of Amortized % of Amortized % of Amortized % of Amortize % of
Cost Total Cost Total Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held
to maturity:
GNMA ............................ $ -- ---% $ -- ---% $ -- ---% $16,611 44.66% $15,133 39.72%
FHLMC ........................... 20,289 81.33 27,015 80.07 -- -- 14,193 38.16 13,149 34.51
FNMA ............................ 4,569 18.31 6,573 19.48 -- -- 5,941 15.97 9,328 24.48
------- ----- ------- ------ ----- ---- ------- ----- ------- -----
Subtotal ..................... 24,858 99.64 33,588 99.55 -- -- 36,745 98.79 37,610 98.71
Unamortized premium, net .......... 91 0.36 153 0.45 -- -- 449 1.21 492 1.29
------- ------ ------- ------ ----- ---- ------- ------ ------- ------
Total mortgage-backed securities $24,949 100.00% $33,741 100.00% $ -- ---% $37,194 100.00% $38,102 100.00%
======= ====== ======= ====== ===== ==== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at September 30, 1996.
<TABLE>
<CAPTION>
Due in
------------------------------------------- Total
5 Years 5 to 10 10 to 20 Over 20 Balance
or Less Years Years Years Outstanding
------- ----- ----- ----- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
FHLMC........................................... $5,832 $ --- $ --- $14,517 $20,349
FNMA............................................ --- --- --- 4,600 4,600
------ --- --- ------- -------
Total......................................... $5,832 --- --- $19,117 $24,949
====== === === ======= =======
Weighted average yield.......................... 7.05% ---% ---% 7.10% 7.08%
</TABLE>
<PAGE>
The following table sets forth the composition of the Company's
investment securities, excluding mortgage-backed securities, at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. government securities............... $ 1,998 5.23% $ 1,996 5.20% $ --- ---%
Federal agency obligations............... 28,141 73.61 28,267 73.68 --- ---
Other investment securities.............. --- --- --- --- --- ---
------- ----- ------- ----- ---
Total investment securities.............. 30,139 78.84 30,263 78.88 --- ---
------- ----- ------ ----- ----- ------
Average remaining life of investment
securities................................ 1.4 years 1.3 years
Other interest-earning assets:
FHLB stock............................... 949 2.48 893 2.33 839 1.09
Interest-bearing deposits with banks(1).. 6,658 17.42 6,515 16.97 75,185 97.89
Other overnight deposits(2).............. 480 1.26 697 1.82 785 1.02
------- ----- ------ ----- ------- ------
Total other interest-earning assets... 8,087 21.16 8,105 21.12 76,809 100.00
------- ----- ------ ----- ------- ------
Total investment securities, FHLB
stock and other interest-earning
assets.................................... $38,226 100.0% $38,368 100.00% $76,809 100.00%
======= ===== ======= ====== ======= ======
- -------------------------------------
(1) Includes investments in insured certificates of deposit.
(2) Includes securities purchased under agreement to resell and federal funds
sold.
</TABLE>
<PAGE>
The following table sets forth the composition and maturities of the
Company's investment securities portfolio at September 30, 1996.
<TABLE>
<CAPTION>
Total
Investment Securities
Less Than 1 to 3 3 to 5 Over 5 No Stated Amortized Market
1 Year Years Years Years Maturity Cost Value
------ ----- ----- ----- -------- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. government securities............. $ 1,999 $ --- $ --- $ --- $ --- $ 1,999 $ 2,007
Federal agency obligations............. 11,527 14,539 2,074 --- --- 28,140 28,108
Other securities....................... --- --- --- --- --- --- ---
------- ------- ------ ------- ------- --------- -------
Total investment securities......... $13,526 $14,539 $2,074 $ --- $ --- $ 30,139 $30,115
======= ======= ====== ======= ======= ========= =======
Weighted average yield................... 6.71% 6.03% 5.86% 0.00% 0.00% 6.32%
</TABLE>
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 from
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 the following types of deposit 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.
<PAGE>
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 decreased from $92.5 million at September
30, 1995 to $91.7 million at September 30, 1996. Management believes that the
decrease in deposits was due to its decision not to pay the highest rates in the
local market. 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.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1996 1995 1994
--------------------- ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and Savings Deposits:
Non-interest checking................. $ 2,890 3.15% $ 2,692 2.91% $ 2,876 2.81%
NOW accounts ......................... 1,514 1.65 1,467 1.59 1,633 1.60
Passbook accounts..................... 3,010 3.28 2,906 3.14 3,049 2.98
Money market accounts................. 6,575 7.18 6,140 6.64 8,368 8.19
------- ------ ------- ------ ------- ------
Total non-certificates............ 13,989 15.26 13,205 14.28 15,926 15.58
------- ------ ------- ------ ------- ------
Certificates:
0.00 - 3.99%..................... --- --- 222 0.24 30,464 29.81
4.00 - 4.99%..................... 18,669 20.37 21,570 23.32 42,244 41.33
5.00 - 5.99%..................... 52,775 57.58 46,612 50.40 11,179 10.94
6.00 - 6.99%..................... 4,147 4.52 8,605 9.31 2,014 1.97
7.00 - 7.99%..................... 2,081 2.27 2,245 2.43 316 0.31
8.00 - 8.99%..................... --- --- 15 0.02 57 0.06
9.00% and over.................... --- --- --- --- --- ---
------- ------ ------- ------ ------- ------
Total certificates................ 77,672 84.74 79,269 85.72 86,274 84.42
------- ------ ------- ------ ------- ------
Total Deposits........................ $91,661 100.00% $92,474 100.00% $102,200 100.00%
======= ====== ======= ====== ======== ======
</TABLE>
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................ $ 92,474 $ 102,200 $ 102,349
Deposits ....................... 16,039 16,264 22,452
Withdrawals .................... 19,009 26,951 24,274
Interest credited .............. 2,157 961 1,673
--------- --------- ---------
Ending balance ................. $ 91,661 $ 92,474 $ 102,200
========= ========= =========
Net increase (decrease) ........ $ (813) $ (9,726) $ (149)
========= ========= =========
Percent increase (decrease) .... (0.88)% (9.52)% (0.15)%
========= ========= =========
</TABLE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of September 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 5.00- 6.00- 7.00- 8.00% or Percent
3.99% 4.99% 5.99% 6.99% 7.99% Greater Total of Total
----- ----- ----- ----- ----- ------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
December 31, 1996 .......... $ 0 $ 7,021 $11,512 $ 377 $ 0 $ 0 $18,910 24.36%
March 31, 1997 ............. 0 6,107 11,257 161 0 0 17,525 22.56
June 30, 1997 .............. 0 2,401 6,715 461 0 0 9,577 12.33
September 30, 1997 ......... 0 2,251 7,002 20 0 0 9,273 11.94
December 31, 1997 .......... 0 708 2,004 347 10 0 3,069 3.95
March 31, 1998 ............. 0 0 4,313 559 75 0 4,947 6.37
June 30, 1998 .............. 0 0 2,631 0 44 0 2,675 3.44
September 30, 1998 ......... 0 0 2,725 0 7 0 2,732 3.52
December 31, 1998 .......... 0 119 2,011 0 15 0 2,145 2.76
March 31, 1999 ............. 0 62 1,239 210 6 0 1,517 1.95
June 30, 1999 .............. 0 0 698 175 0 0 873 1.12
September 30, 1999 ......... 0 0 233 25 0 0 258 0.33
Thereafter ................. 0 0 435 1,812 1,924 0 4,171 5.37
------- ------- ------- ------- ------- ------- ------- -----
Total ................... $ 0 $18,669 $52,775 $ 4,147 $ 2,081 $ 0 $77,672 100.00%
======= ======= ======= ======= ======= ======= ======= ======
Percent of total............. 0% 24.03% 67.95% 5.34% 2.68% 0.00%
== ===== ===== ==== ==== ====
</TABLE>
<PAGE>
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, 1996.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of less
than $100,000 ................ $ 9,733 $10,391 $10,786 $19,489 $50,399
Certificates of deposit of
$100,000 or more ............. 9,177 7,134 8,064 2,898 27,273
------- ------- ------- ------- -------
Total certificates of deposit . $18,910 $17,525 $18,850 $22,387 $77,672
======= ======= ======= ======= =======
</TABLE>
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.
The Association has had no borrowings or FHLB advances during the past
five years.
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 $2.3
million at September 30, 1996, 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, 1996, 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
<PAGE>
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 June 30, 1995, and August 17, 1990, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in the near
future. When these examinations are conducted by the OTS and the 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 find the
operations of the OTS. The Association's OTS assessment for the fiscal year
ended September 30, 1996, 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 from 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
non-residential 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, 1996, the Association's
lending limit under this restriction was $2.6 million. First Federal is in
compliance with the loans-to-one-borrower limitation.
<PAGE>
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, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
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, ranging from .23% to .31% of
deposits, 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 or 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 will be 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.
<PAGE>
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27% with a minimum annual assessment of $2,000. The SAIF
rates, however, were not adjusted. As a result of these revisions, BIF members
will generally pay lower premiums.
On September 30, 1996, federal legislation was enacted that requires
the Savings Association Insurance Fund ("SAIF") to be recapitalized with a
one-time assessment on virtually all SAIF-insured institutions, such as the
Bank, equal to 65.7 basis points on SAIF-insured deposits maintained by those
institutions as of March 31, 1995. This SAIF assessment, which is to be paid to
the FDIC by November 27, 1996, is approximately $645,000 and has been accrued by
the First Federal at September 30, 1996.
As a result of the SAIF recapitalization, the FDIC has proposed to
amend its regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective October 1, 1996 through December 31, 1996, the FDIC has
proposed that the SAIF insurance premium for all SAIF-insured institutions that
are required to pay the Financing Corporation (FICO) obligation, such as the
Bank, be reduced to a range of 18 to 27 basis points from 23 to 31 basis points
per $100 of domestic deposits. The Bank currently qualifies for the minimum SAIF
insurance premium of 23 basis points. The FDIC has also proposed to further
reduce the SAIF insurance premium to a range of 0 to 27 basis points per $100 of
domestic deposits, effective January 1, 1997. Management cannot predict whether
or in what form the FDIC's final regulation may be promulgated.
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, 1996, the Association had intangible assets
consisting of Deferred Tax Assets of $130,825.
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.
<PAGE>
At September 30, 1996, the Association had tangible capital of $17.5
million, or 15.3% of adjusted total assets, which is approximately $15.8 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, 1996, the
Association had intangible assets of $130,825.
At September 30, 1996, the Association had core capital equal to $17.5
million, or 15.3% of adjusted total assets, which is $14.0 million above the
minimum leverage ratio requirement of 3% 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, 1996, the
Association had no capital instruments that qualify as supplementary capital and
$289,000 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 no such
exclusions from capital and assets at September 30, 1996.
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 weight 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 an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires 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
<PAGE>
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 provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. 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, 1996, First Federal had total risk based capital of
$17.8 million (including $17.5 million in core capital and no qualifying
supplementary capital) and risk-weighted assets of $40.1 million (including no
converted off-balance sheet assets); or total risk based capital of 44.2% of
risk-weighted assets. This amount was $14.5 million above the 8% requirement in
effect on that date.
The OTS and the 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
risked-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.
<PAGE>
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 purchased in the Conversion.
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 by existing stockholders of those persons purchasing shares in
the Conversion.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
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. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as First Federal, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. First Federal may
pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
<PAGE>
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 Operation-Liquidity and Capital Resources."
This liquid asset ratio requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At September 30, 1996, the Association was in compliance with
both requirements, with an overall liquid asset ratio of 47.6% and a short-term
liquid assets ratio of 5.7%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Association is in compliance with
these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
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. Such assets
primarily consist of residential housing related loans and investments. At
September 30, 1996, 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
<PAGE>
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 August 1995 and received a rating of
"Outstanding."
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.
<PAGE>
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 acquires 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 a 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.
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 non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1996, 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."
<PAGE>
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, 1996, First Federal had $949,000 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 4.77% and were 6.00% for fiscal year
1996.
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, 1996, dividends paid by the
FHLB of Dallas to First Federal totalled $55,000, which constitute a $1,000
increase over the amount of dividends received in fiscal year 1995. The $14,000
dividend received for the quarter ended September 30, 1996 reflects an
annualized rate of 5.89%, or 11 basis points below the rate for fiscal 1996.
Federal and State Taxation
Savings associations such as the Association that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had
been 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 for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election). 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.
<PAGE>
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period. No representation
can be made as to whether First Federal will meet the 60% test for subsequent
taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. For the
year ended September 30, 1996, the Association was precluded from using the
percentage bad debt deduction. Under the percentage of taxable income method,
the maximum allowable addition to the Association's reserve under qualifying
real property loans was limited to $122,641, or 8% of taxable income. However,
this amount was not available to be used as an addition to the reserve since the
balance in the reserve before the current year addition $2.80 million was
greater than the Association's base year reserve amount $2.78 million. Further,
even if the percentage of taxable income method had been available, the addition
to the reserve was further limited by the fact that the Association's surplus
and reserves at October 1, 1995, the beginning of the current tax year, was
greater than 12% of withdrawable accounts at September 30, 1996. The 6% and 12%
limitations also may limit the Association's ability to use the percentage of
taxable income method in the future.
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur 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
management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
<PAGE>
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. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
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, 1996, the Association's Excess for tax purposes
totalled approximately $2.7 million.
The Association files federal income tax returns on a fiscal year basis
using the accrual method of accounting. The Company intends to file consolidated
federal income tax returns with the Bank. Savings associations, such as the
Association, that file federal income tax returns as part of a consolidated
group are required by applicable Treasury regulations to reduce their taxable
income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
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.
Change in Accounting for Income Taxes. SFAS No. 109 was issued by the
FASB in early 1992 and is required for fiscal years beginning after December 15,
1992. SFAS No. 109 requires a change from the deferred method to the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Under the deferred method, deferred taxes were
recognized using the tax rate applicable to the year of the calculation and were
not adjusted for subsequent changes in tax rates. The Association elected to
adopt SFAS No. 109 in fiscal 1993, and has reported the cumulative effect of the
change in the method of accounting for income taxes as of October 1, 1992, in
the Company's Consolidated Statement of Income.
<PAGE>
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 1996 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
from 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.
<PAGE>
Employees
The Company had 25 full-time employees and two part-time employees as
of September 30, 1996, 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, 1996.
Derrell W. Chapman, age 38, 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.
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.
Joe C. Hobson, age 43, 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.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC 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 were required, during the fiscal year ended September 30, 1996, the
Company complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners.
<PAGE>
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 a loan production office located in Tyler. The
following table sets forth information relating to each of the Company's
properties as of September 30, 1996.
<TABLE>
<CAPTION>
Total
Owned Approximate
Year or Square Book
Location Acquired Leased Footage Value
- -------- -------- ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Main Office:
1200 South Beckham
Tyler, Texas 1962 Owned 10,000 $ 432
Full-Service Branch:
107 Highway 110 North
Whitehouse, Texas 1984 Owned 2,500 278
Loan Agency:
4550 Kinsey Drive
Tyler, Texas 1994 Owned 2,200 151
</TABLE>
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 data base 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, 1996 was $50,000.
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, through the
solicitation of proxies or otherwise during the quarter ended September 30,
1996.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Page 27 of the Company's 1996 Annual Report to Stockholders is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 6 through 27 of the Company's 1996 Annual Report to Stockholders
are incorporated herein by reference.
Item 7. Financial Statements
Pages 29 through 34 of the Company's 1996 Annual Report to Stockholders
are 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 22, 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
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, 1996, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with.
<PAGE>
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 22 , 1997, 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 Owners 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 22, 1997,
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 22, 1997, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
or Exhibit
Regulation Number
S-B Exhibit Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security *
holders, including debentures
9 Voting Trust Agreement None
10 Material contracts *
11 Statement re: computation of per share earnings 11
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted None
to vote of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
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.
</TABLE>
<PAGE>
(b) Reports on Form 8-K
There was one report on Form 8-K filed during the quarter ended
September 30, 1996 regarding the following matters:
1. a) Report dated August 1, 1996.
b) Item 5 - Reporting the issuance of a press release announcing the
earnings for the quarter ended June 30, 1996.
c) No financial statements were filed.
<PAGE>
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 30, 1996 By: /s/Gerald W. Free
-----------------
Gerald W. Free, 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, President, Chief Jack W. Flock, Chairman
Executive Officer and Director of the Board
(Principal Executive Officer)
Date: December 30, 1996 Date: December 30, 1996
/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 30, 1996 Date: December 30, 1996
/s/James W. Fair /s/Charles R. Halstead
- ---------------- ----------------------
James W. Fair, Director Charles R. Halstead, Director
Date: December 30, 1996 Date: December 30, 1996
/s/L. Lee Kidd /s/H. H. Richardson, Jr.
- -------------- ------------------------
L. Lee Kidd, Director H. H. Richardson, Jr., Director
Date: December 30, 1996 Date: December 30, 1996
/s/Jim M. Vaughn, M.D.
- ----------------------
Jim M. Vaughn, M.D.
Date: December 30, 1996
<TABLE>
<CAPTION>
Exhibit 11
EAST TEXAS FINANCIAL SERVICES, INC.
Statement re: Computation of Per Share Earnings
Fiscal Year Ended September 30, 1996
Total Shares
Total Shares Unallocated ESOP For EPS
Issued Shares* Calculation
------ ------- -----------
<S> <C> <C> <C>
September 30, 1995 1,256,387 88,148 1,168,239
October 31, 1995 1,256,387 88,148 1,168,239
November 30, 1995 1,256,387 88,148 1,168,239
December 31, 1995 1,193,568 88,148 1,105,420
January 31, 1996 1,193,568 88,148 1,105,420
February 29, 1996 1,193,568 88,148 1,105,420
March 31, 1996 1,193,568 88,148 1,105,420
April 30, 1996 1,133,890 88,148 1,045,742
May 31, 1996 1,133,890 88,148 1,045,742
June 30, 1996 1,133,890 88,148 1,045,742
July 31, 1996 1,133,890 88,148 1,045,742
August 31, 1996 1,079,285 88,148 991,137
September 30, 1996 1,079,285 76,321 1,002,964
----------
14,103,466
Divided by: 13
Weighted average
shares outstanding: 1,084,882
Net income of $457,876 divided by:
weighted average shares outstanding
of 1,084,882 $ 0.42
===========
* In accordance with SOP 93-6, unallocated ESOP shares not committed to
be released were not considered as outstanding.
</TABLE>
Exhibit 13
East Texas Financial Services, Inc. and Subsidiary
Table of
Contents
Selected Financial Data
Letter to Shareholders
Glossary
Management's Discussion and Analysis of
Financial Condition and Results
of Operations:
Summary
Results of Operations
Net Income
Interest Income
Interest Expense
Net Interest Income
Provision for Loan Losses
Other Operating Income
Operating Expense
Income Tax Expense
Financial Condition
Balance Sheet Summary
Loans
Mortgage-Backed Securities
Investment Securities
Interest Rate Sensitivity
Asset Quality
Liquidity and Capital Position
Impact of Accounting Pronouncements
Impact of Inflation and Changing Prices
Market Price of Common Stock
Report of Independent Accountants
Consolidated Financial Statements
Notes To Consolidated Financial Statements
Corporate Directory
Shareholder Reference
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data
(Dollars in Thousands, except share data) 1996 1995 1994 1993 1992
- ----------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
At September 30,
Total assets $ 114,373 $ 117,077 $ 114,935 $ 115,728 $ 115,370
Loans receivable, net
Held for sale 0 0 0 9,312 4,839
Held in portfolio 47,925 41,760 35,337 28,683 36,605
Investment securities - held-to-maturity 30,139 30,263 0 26,985 7,069
Mortgage-backed securities -
held-to-maturity 24,949 33,741 0 37,194 38,102
Deposits 91,661 92,474 102,200 102,349 103,227
Stockholders' equity 20,931 23,146 11,458 12,217 11,059
Common shares outstanding 1,079,285 1,256,387 N.A. N.A. N.A.
Book value per share 19.39 18.42 N.A. N.A. N.A.
For The Year Ended September 30,
Net interest income $ 3,552 $ 3,658 $ 3,040 $ 2,967 $ 2,769
Provision for loan losses 0 0 121 61 (9)
Other operating income 371 299 (2,118) 705 389
Operating expenses 3,200 2,335 1,981 1,700 1,684
Net income 458 1,071 (759) 1,158 1,015
Selected Financial Ratios
Return on average assets (1) 0.75 % 0.40 % 0.92 % (0.66) % 1.00 % 0.86 %
Return on average equity (1) 3.93 2.08 5.47 (6.41) 9.95 9.62
Interest rate spread (average) 2.27 2.49 2.33 2.32 2.11
Net interest margin 3.16 3.21 2.67 2.66 2.47
Ratio of interest-earning assets to
interest- bearing liabilities 122.23 119.13 110.08 109.61 107.29
Operating expenses to average assets (1) 2.21 2.77 2.01 1.72 1.47 1.43
Efficiency ratio (1)67.10 84.10 59.70 61.70 50.70 53.80
Net interest income to operating expenses (1) 1.39 x 1.11 x 1.57 x 1.47 x 1.71 x 1.65 x
Asset Quality Ratios
Non-performing assets to total assets 0.39 % 0.34 % 0.27 % 0.45 % 0.40 %
Non-performing loans to total loans
receivable 0.94 0.95 0.87 1.38 1.11
Allowance for loan losses to
non-performing loans 64.22 74.75 97.72 34.48 26.58
Allowance for loan losses to total loans 0.60 0.71 0.85 0.48 0.29
Allowance for loan losses to total assets 0.25 0.25 0.26 0.16 0.11
<PAGE>
<CAPTION>
Selected Financial Data (continued)
(Dollars in Thousands, except share data) 1996 1995 1994 1993 1992
- ----------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Regulatory Capital Ratios (Association only)
Total capital to total assets 15.39 % 14.40 % 9.97 % 10.56 % 9.59 %
Tangible capital ratio 15.30 14.40 9.97 10.56 9.59
Core capital ratio 15.30 14.40 9.97 10.56 9.59
Risk-based capital ratio 44.23 43.44 31.06 37.32 31.93
(1) 1996 without the SAIF special assessment
</TABLE>
<PAGE>
To Our Shareholders:
On behalf of your Board of Directors, we take pleasure in presenting to you the
second annual report of East Texas Financial Services, Inc., the holding company
of First Federal Savings and Loan Association of Tyler.
The year ended September 30, 1996, was a challenging year. There were events
beyond the control of the Board of Directors that had a profound influence on
the earnings of the Company.
Action by the United States Congress to recapitalize the Savings Association
Insurance Fund had the greatest effect on earnings during the year. The Board
had expected a decline in net income as a result of the recapitalization. We did
not know when, if, or how much the special assessment would be. The assessment
totaled approximately $645,000 for First Federal. It is unfortunate that this
thrift, like most thrift institutions today, was not part of the savings and
loan crisis of the 1980's and yet was asked to recapitalize the fund with this
special assessment. However, we believe the sacrifice made today will help
insure the long-term viability of the entire banking industry. With the
recapitalization of the fund behind us and the proposed reduction in annual SAIF
premiums, deposit insurance expense of the Company should decrease substantially
in the future.
The Company had net income for the fiscal year ending September 30, 1996, of
$457,876 or $.42 per share, based on 1,084,882 weighted average shares
outstanding for the year. This compared to net income of $1,070,829 or $.95 per
share, for the year ending September 30, 1995.
If the effects of the one-time special assessment were not considered, net
income and earnings per share would have approximated $884,000 and $.81 per
share, respectively. Without the special assessment, the decrease in net income
was primarily the result of a 9.4% increase in total non-interest expense
resulting from additional expenses related to the Company's 1995 stockholder
approved Stock Option and Recognition and Retention Plans, as well as a 2.9%
decrease in net interest income after provision for loan losses. A 2.4% increase
in non-interest income, resulting from additional loan fee income and gains on
the sale of loans, helped offset the decline in net interest income and increase
in non-interest expense.
We are pleased to report that the Company's asset quality continues to remain
strong. At year end, ratios for non-performing loans and assets and delinquency
ratios compared favorably to the prior year and to our peer group.
We are extremely pleased with the increased lending activity experienced during
the year. The $25.2 million in loans made during the year was a record for the
Association and was a result of the continued strength of the real estate market
in Tyler and the surrounding communities, as well as the efforts of a dedicated
and hard-working staff.
Stockholders' equity totaled $20.9 million at September 30, 1996, or 18.3%, of
total assets, compared to $23.1 million or 19.8% of total assets at September
30, 1995, a $2.2 million decrease. The decrease in stockholders' equity was
<PAGE>
primarily a result of the Company's decision to repurchase, in the open market,
approximately 179,000 shares of Company stock during the year. The Board of
Directors believes that the repurchase of our shares represents an attractive
investment opportunity which will benefit the Company and our shareholders. At
year end, the Company owned 177,102 shares of treasury stock at an average price
of $15.79 per share, for a total of $2.8 million.
Capital levels for the Company's wholly owned subsidiary, First Federal Savings
and Loan Association of Tyler, were reported at year end as 15.3% for both
tangible and core capital ratios, well in excess of the minimum required levels
of 1.5% and 3.0% respectively. The Association's risk-based capital ratio was
44.2% of risk-weighted assets at September 30, 1996, as compared to the minimum
8.0% regulatory requirement. At year end, the Association was considered a
"well-capitalized" institution.
To the extent we experience continued decreases in the overall level of interest
rates during 1997, we will be faced with the challenge of dealing with increased
prepayments of existing higher rate mortgage loans and mortgage-backed
securities. Also, if long-term rates approach historical lows once again, we can
expect more loan customers to seek fixed rate long-term mortgages which we are
not currently placing into portfolio. Conversely, interest rates paid on
deposits will decrease but at a slower pace due to the competition for deposits
in our market. The result could be that our net interest margin and net interest
income could decline slightly.
As we enter 1997, the Company's major focus will be to improve core earnings. We
will continue to monitor expenses and seek new products and services which will
create fee income for the Company. The Company is recognized by local builders,
realtors, and customers as an innovative lender who is willing, after careful
research, to offer new loan products and the most competitive rates.
We are excited about the future of East Texas Financial Services, Inc. The
strong capital position allows us to continue to seek ways to grow the Company.
Your Board is committed to the long term viability, prosperity and continued
profitability of East Texas Financial Services, Inc.
We thank each of our shareholders for their strong support and commitment to the
Company and we invite you to attend our second annual stockholders meeting, to
be held on Wednesday, January 22, 1997, at 2:00 p.m. in our home office located
at 1200 S. Beckham Avenue in Tyler, Texas. We would be pleased to have every
shareholder attend the meeting. Please return the enclosed proxy at your
earliest convenience, whether or not you plan to attend.
We wish each of you a joyous holiday season and our desire is that you and the
Company will have a prosperous new year.
Sincerely,
Jack W. Flock Gerald W. Free
Chairman of the Board President and Chief Executive Officer
<PAGE>
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.
<PAGE>
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.
<PAGE>
Management's Discussion and Analysis
of Financial Condition and
Operating Results
SUMMARY
East Texas Financial Services, Inc. (the "Company") is a Delaware corporation
organized in September of 1994, as the holding company for First Federal Savings
and Loan Association of Tyler (the "Association").
On January 10, 1995, the Company issued 1,215,190 shares of common stock as part
of its initial public stock offering. On July 26, 1995, the Company issued an
additional 41,197 shares of common stock to fund the issuance of shares of stock
granted in the Company's 1995 Recognition and Retention Plan. At September 30,
1995, 1,256,387 shares of common stock were outstanding.
During the fiscal year ended September 30, 1996, the Company completed three
stock repurchase programs totaling 179,192 shares, or approximately 15% of the
Company's outstanding shares. The Company issued 2,090 shares of treasury stock
in conjunction with exercises of stock options under the Company's 1995 Stock
Option and Incentive Plan. At September 30, 1996, the Company had outstanding
1,079,285 shares of stock and held 177,102 shares of treasury stock at an
average price of $15.79 per share. The closing stock price on that date was
$15.50 per share. The high and low prices for the year were $17.00 and $14.00
respectively.
Additionally, the Company declared and paid three quarterly cash dividends of
$.05 per share for a total of $170,337. Based on the September 30, 1996, closing
stock price of $15.50 per share, the annualized dividend amount of $.20 per
share would equal an annual dividend rate of 1.29%.
At September 30, 1996, the Company reported total assets of $114.4 million,
compared to $117.1 million at September 30, 1995. Loans receivable totaled $47.9
million at September 30, 1996, up $6.1 million from the $41.8 million reported
at September 30, 1995, an increase of 14.6%. The increase was a result of a
record year for loan originations. The Company originated approximately $25.2
million in loans during the fiscal year ended September 30, 1996.
Investment and mortgage-backed securities totaled $55.1 million at September 30,
1996, compared to $64.0 million at September 30, 1995. The decrease was a result
of increased prepayments on the adjustable rate portion of the portfolio as
interest rates remained lower during the year and borrowers refinanced to fixed
rate mortgages.
Total deposits declined $813,000 to $91.7 million at September 30, 1996,
compared to $92.5 million at September 30, 1995. Competition for certificates of
deposit remained strong during the year.
<PAGE>
Stockholders' equity was $20.9 million at September 30, 1996, representing 18.3%
of total assets and a book value per share of $19.39. At September 30, 1996, the
Association's capital levels were well in excess of the minimum requirements and
the Association was considered a "well capitalized" institution.
RESULTS OF OPERATIONS
Net Income
1996 and 1995 Comparison
Net income totaled $458,000, or $.42 per share, for the year ended September 30,
1996, compared to $1.1 million, or $.95 per share, for the year ended September
30, 1995.
The decline in net income was due primarily to an $865,000 increase in total
non-interest expense to $3.2 million for the year ended September 30, 1996,
compared to $2.3 million for the year ended September 30, 1995. The increase was
primarily the result of the one-time special assessment charged to all Savings
Association Insurance Fund ("SAIF") insured thrift institutions in order to
recapitalize the SAIF insurance fund. The Company's portion of the one-time
assessment was approximately $645,000, before the effects of income taxes were
considered. Additionally, net interest income declined by $105,000 to $3.6
million for the fiscal year ended September 30, 1996, compared to $3.7 million
for 1995.
Partially offsetting the increase in non-interest expense and decrease in net
interest income were a $72,000 increase in total non-interest income, primarily
as a result of additional gains on the sale of mortgage loans after the adoption
of SFAS No. 122, Accounting for Originated Mortgage Servicing Rights, and a
$286,000 decrease in income tax expenses from $551,000 for the year ended
September 30, 1995, to $265,000 for the year ended September 30, 1996.
For the year ended September 30, 1996, return on average assets was .40%,
compared to .92% for the prior year. Return on average stockholders' equity
equaled 2.08% for 1996, compared to 5.47% for 1995.
If the effects of the special SAIF assessment were not considered, net income
and earnings per share would have been approximately $884,000 and $.81 per share
respectively, while return on average assets and return on average stockholders'
equity would have approximated .75% and 3.93% respectively for 1996.
1995 and 1994 Comparison
For the year ended September 30, 1995, net income totaled $1.1 million, or $.95
per share, a 241.1% increase over the $(759,000) loss reported in 1994.
<PAGE>
The increase in net income was due primarily to increases in net interest income
after provisions for loan losses to $3.7 million in 1995 compared, to $2.9
million in 1994, and total non-interest income to $299,000 in 1995, compared to
$(2.1) million in 1994. The increases in net interest income and total
non-interest income were offset in part by increases in total non-interest
expense to $2.3 million in 1995, compared to $2.0 million in 1994, and income
tax expense to $551,000 in 1995, compared to a benefit of $421,000 in 1994.
For the year ended September 30, 1995, the Company reported a return on average
assets of 0.92%, as compared to the negative (0.66)% in 1994. Return on average
stockholders' equity equaled 5.47% for 1995, as compared to a negative (6.41)%
for 1994.
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income Analysis
Year Ended September 30,
------------------------------------------------------------------------------------------------
1996 1995 1994
Interest Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------------------------------ ------------------------------- -------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 44,406 $ 3,641 8.20 % $ 39,306 $ 3,387 8.61 % $ 36,149 $ 3,143 8.70 %
Mortgage-backed securities 28,912 2,000 6.92 31,144 1,708 5.48 37,130 2,033 5.48
Investment securities 38,155 2,368 6.21 42,659 2,802 6.57 39,788 1,624 4.08
FHLB stock 917 55 6.00 861 54 6.27 818 34 4.16
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning $112,390 $ 8,064 7.18 % $ 113,970 $ 7,951 6.98 % $ 113,885 $ 6,834 6.00 %
assets (1) ======= ========= ==== ========= ========= ==== ========= ========= ====
Interest-bearing liabilities:
Demand accounts $ 2,401 $ 0 0.00 % $ 2,358 $ 0 0.00 % $ 2,204 $ 0 0.00 %
NOW accounts 1,468 30 2.04 1,544 31 2.01 1,667 34 2.04
Savings accounts 2,948 88 2.99 2,901 83 2.86 3,370 78 2.32
Money market checking 6,329 213 3.37 6,865 210 3.06 9,483 252 2.66
Certificate accounts 78,807 4,181 5.31 82,003 3,969 4.84 86,734 3,430 3.96
Borrowings 0 0 0.00 0 0 0.00 0 0 0.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing $ 91,953 $ 4,512 4.91 % $ 95,671 $ 4,293 4.49 % $ 103,458 $ 3,794 3.67 %
liabilities ====== ========= ==== ========= ========= ==== ========= ========= ====
Net interest income $ 3,552 $ 3,658 $ 3,040
========= ========= =========
Net interest rate spread (2) 2.27 % 2.49 % 2.33 %
==== ==== ====
Net earning assets $ 20,437 $ 18,299 $ 10,427
====== ========= =========
Net yield on average interest
earning assets (3) 3.16 % 3.21 % 2.67 %
==== ==== ====
Average interest-earning
assets to average
interest-bearing 122.23 % 119.13 % 110.08 %
liabilities ====== ====== ======
- ------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process, loss
reserves and premiums or discounts.
(2) Net interest rate spread represents the difference between the average yield
on interet-earning assets and the average cost of interest-bearing liabilites.
(3) Net yield on interest-earning assets represents annualized net interest
income as a percentage of average interest-earnings assets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rate/Volume Analysis
Year Ended September 30,
----------------------------------------------------------------------------------------------
1995 vs 1996 1994 vs 1995 1993 vs 1994
------------------------------ ------------------------------ ------------------------------
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to Increase
----------------- -------------------
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
----------------- ---------- ------------------- ---------- ----------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 439 $ (185) $ 254 $ 275 $ (31) $ 244 $ (80) $ (230) $ (310)
Mortgage-backed (122) 414 292 (325) 0 (325) (28) (55) (83)
securities
Investment securities (296) (138) (434) 117 1,061 1,178 129 223 352
FHLB stock 4 (3) 1 2 18 20 1 6 7
------- ------- ---------- ------ ------- ---------- ------- ------- ----------
Total interest- $ 25 $ 88 $ 113 $ 69 $ 1,048 $ 1,117 $ 22 $ (56) $ (34)
earning assets ======== ======= ========== ======= ======== ========== ======= ======= ==========
Interest-bearing liabilities:
NOW accounts $ (2) $ 1 $ (1) $ (3) $ 0 $ (3) $ 2 $ (5) $ (3)
Savings deposits 1 4 5 (11) 16 5 3 (14) (11)
Money market checking (16) 19 3 (70) 28 (42) (30) (18) (48)
accounts
Certificate accounts (155) 367 212 (187) 726 539 100 (146) (46)
======= ======= ========== ====== ======= ========== ======= ======= ==========
Total interest- $ (172) $ 391 $ 219 $ (271) $ 770 $ 499 $ 75 $ (183) $ (108)
bearing liabilities ======= ======= ========== ====== ======== ========== ======= ======= ==========
Net change in interest income $ (106) $ 618 $ 74
========== ========== ==========
Net interest income $ 3,552 $ 3,658 $ 3,040
========== ========== ==========
</TABLE>
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 of the Company's loans receivable
and investment securities and mortgage-backed securities portfolios. The
Company's loans receivable portfolio is primarily 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.
<PAGE>
Currently, all fixed rate and term one- to four-family mortgage loans with final
maturities of more than fifteen years are sold into the secondary market upon
origination. Fixed rate and term loans with maturities of fifteen years or less
and with interest rates of greater than 7.25% are placed into portfolio. All
adjustable rate loans are held in portfolio.
A significant portion of interest income is also derived from the Company's
investment and mortgage-backed securities portfolios, which averaged $67.1
million, or 59.7%, of average interest earning assets during 1996. The
investment securities portfolio is comprised of U. S. Treasury and agency
securities with a weighted average maturity of 1.4 years. With portions of the
<PAGE>
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, 76.6% 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.
For the fiscal year ending September 30, 1997, the level of interest income will
be dependent upon the Company's ability to reinvest scheduled and unscheduled
cash flows from maturing or prepaying interest-earning assets. Approximately
$13.5 million in investment securities are scheduled to mature during 1997,
principle prepayments on mortgage-backed securities should approximate $10.0
million during the year and scheduled and unscheduled principal payments on the
Company's loan portfolio will provide additional challenges for reinvesting the
cash flows. Also, a period of lower interest rates could have the effect of
increasing prepayments on the loan and mortgage-backed securities portfolios.
Interest income in 1997 will be dependent upon the Company's ability to meet
targeted portfolio loan projections. In the event loan projections are not met,
cash flow will be reinvested in investment and mortgage-backed securities at
yield significantly less than those of portfolio loans and less than current
yields on the cash flow. The net effect would be a decline in interest income
for the year.
1996 and 1995 Comparison
Interest income totaled $8.1 million for the year ended September 30, 1996, up
$113,000 or 1.4% from $8.0 million in 1995. The additional income was a result
of a 20 basis point increase in the Company's average yield on earning assets
from 6.98% in 1995, to 7.18% in 1996, which more than offset a decline in
average interest-earning assets from $114.0 million in 1995, to $112.4 million
in 1996. The composition of the Company's interest-earning assets continued to
change throughout fiscal 1996 as more loans were placed into portfolio and were
funded by principal prepayments on mortgage-backed securities and maturing
investment securities. As a result, interest income from loans receivable
totaled $3.6 million for the year ended September 30, 1996, up $254,000 from the
$3.4 million in 1995, despite the fact that the average yield on the loan
portfolio declined from 8.61% in 1995, to 8.20% in 1996. An increase in the
average loans receivable balance outstanding to $44.4 million in 1996, from
$39.3 in 1995 (a 13.0% increase), more than offset the decline in yield.
Interest on mortgage-backed securities increased $292,000 from $1.7 million
reported for 1995 to $2.0 million during 1996. The increase was primarily due to
a 144 basis point increase in the average yield on the portfolio from 5.48% in
1995 to 6.92% in 1996 as the adjustable rate portion of the portfolio reached a
fully indexed status in 1996. However, with lower interest rates, the adjustable
rate portion of the portfolio continued to experience significant principle
pre-payments during 1996. The average balance on the mortgage-backed securities
portfolio declined $2.2 million, from $31.1 million in 1995, to $28.9 million in
1996.
The average yield on the Company's investment securities portfolio was 6.21% for
the year ended September 30, 1996, as compared to 6.57% in 1995. Also, the
average balance in the portfolio declined from $42.7 million from 1995, to $38.2
<PAGE>
million during 1996. As a result, interest income on investment securities
declined to $2.4 million in 1996 from $2.8 million in 1995.
1995 and 1994 Comparison
The Company's interest income totaled $8.0 million for the year ended September
30, 1995, up $1.1 million, or 16.3%, from $6.8 million in 1994. The increase was
driven by an increase in the Company's average yield on interest-earning assets
to 6.98% for 1995 as compared to 6.00% in 1994. The increase in the average
weighted yield was a direct result of the Company's investment portfolio
restructuring undertaken in 1994. The earnings on the investment portfolio, $2.8
million in 1995, compared to $1.6 million in 1994, was due primarily to the
higher rates achieved in the restructured portfolio. In fact, 93.8% of the
increase in net interest income in 1995 as compared to 1994 was attributable to
changes in the yield as compared to changes in the volume of interest-earning
assets. Average interest-earning assets totaled $114.0 million for 1995 as
compared to $113.9 million for 1994.
The average yield on the Company's investment portfolio was 6.57% for the year
ended September 30, 1995, as compared to 4.08% for 1994, a 249 basis point
increase. This increase was a result of the Company's restructuring of its
investment security portfolio in 1994. The Company sold its entire investment
security portfolio during August and September 1994, and reinvested all of the
proceeds into fixed rate U. S. Treasury and agency debentures with maturities of
one to three years. The reinvestment, at the peak of short term interest rates
in late 1994, allowed the Company to construct a portfolio of higher rate
securities, some of which have yields in excess of 7.00%. Additionally, the
average outstanding balance of the investment securities portfolio increased
$2.9 million to $42.7 million for 1995, as compared to $39.8 million for the
prior year.
Interest income from loans receivable increased to $3.4 million in 1995, as
compared to $3.1 million in 1994, a 7.8% increase despite the fact that the
average yield on the portfolio declined slightly to 8.61% in 1995, as compared
to 8.70% in 1994. The Company's emphasis on portfolio lending in 1995 helped
increase the average balance outstanding on loans receivable to $39.3 million
during 1995, as compared to $36.1 million in 1994, an 8.7% increase.
Partially offsetting the increases in interest income from investment securities
and loans receivable was a decrease in interest earning on mortgage-backed
securities. Interest income from mortgage-backed securities declined to $1.7
million in 1995, as compared to $2.0 million in 1994, a 16.0% decrease.
This decrease was attributable to a decline in the average balance outstanding,
from $37.1 million in 1994, to $31.1 million in 1995, as the Company reduced its
mortgage-backed securities portfolio and increased its investment securities
portfolio during the balance sheet restructuring. The average yield on
mortgage-backed securities remained unchanged at 5.48% for both 1995 and 1994.
<PAGE>
Interest Expense
The Company's interest expense is dependent upon the pricing and volume of its
interest-earning liabilities, comprised primarily of certificates of deposit
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. Competition for
certificate of deposit accounts continues to have an impact on the Company's
ability to control interest expense. Aggressive pricing by several large
regional banking organizations forced the Company to pay somewhat higher rates
for deposits during 1996.
1996 and 1995 Comparison
The Company's overall cost of interest-bearing liabilities increased 42 basis
points to 4.91% for the year ended September 30, 1996, compared to 4.49% in
1995. As a result and despite the fact that average interest-bearing liabilities
declined $3.7 million to $92.0 million in 1996, from $95.7 million in 1995, the
Company's total interest expense increased $219,000 to $4.5 million in 1996,
from $4.3 million in 1995.
A $212,000 increase in interest paid on certificates of deposit, from $4.0
million in 1995, to $4.2 million in 1996, accounted for substantially all of the
increase in interest expense for the year. The increase in interest on
certificates of deposit was primarily the result of a 47 basis point increase in
the average rate paid on the accounts from 4.84% in 1995, to 5.31% in 1996,
despite the fact that average balances outstanding on certificate accounts
declined to $78.8 million in 1996, from $82.0 million in 1995 as the Company
continued its policy of not paying the highest rates of interest for deposits in
the local market.
1995 and 1994 Comparison
Early in 1995, management made the decision to not pay the highest rate in the
local market for deposits. The result was that the Company's average outstanding
balance in deposits declined to $95.7 million in 1995, down $7.8 million or 7.5%
from the $103.5 million reported for 1994. Approximately $1.9 million of the
decrease was attributable to withdrawals from deposit accounts to purchase stock
in the Company's initial public stock offering on January 10, 1995.
Despite not paying the highest rates in its market, the Company's overall cost
of interest-bearing liabilities increased 82 basis points to 4.49% for 1995, as
compared to 3.67% for 1994, due to the rise in rates during 1994, the full
effect of which was evidenced in 1995. Total interest expense on
interest-bearing liabilities was $4.3 million for 1995, compared to $3.8 million
for 1994, a 13.2% increase. This increase was primarily attributable to an
increase in the weighted average rate paid on certificate of deposit accounts.
Although the average balance outstanding on certificate of deposit accounts
decreased to $82.0 million during 1995, as compared to $86.7 million in 1994,
the weighted average rate on certificates of deposit increased 88 basis points
from 3.96% in 1994, to 4.84% in 1995.
<PAGE>
Net Interest Income
Net interest income is the Company's principle 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.
1996 and 1995 Comparison
Net interest income totaled $3.6 million for the fiscal year ended September 30,
1996, down $106,000 or 2.9%, from the $3.7 million reported for the year ended
September 30, 1995.
The decline in net interest income was primarily the result of the $219,000
increase in interest expense which in turn was the result of a significant
increase, 42 basis points, in the Company's overall cost of interest-bearing
liabilities, as the Company paid more competitive interest rates on certificates
of deposit during 1996.
During the year ended September 30, 1996, average net interest spread was 2.27%,
compared to 2.49% for 1995. At September 30, 1996, the Company's net interest
spread was 2.42%, down 22 basis points from the 2.64% at September 30, 1995.
Despite the drop in net interest spread, average net interest margin was down
only five basis points from 3.21% in 1995, to 3.16% during 1996 because the
Company's ratio of average interest-earning assets to average interest-bearing
liabilities increased to 122.23% in 1996, from 119.13% in 1995.
1995 and 1994 Comparison
For the year ended September 30, 1995, the Company recorded net interest income
of $3.7 million, up $618,000 or 20.3%, over the $3.0 million reported for 1994.
The increase was attributable to the Company's 1994 investment portfolio
restructuring into higher short term securities and the earnings generated from
the proceeds received in the Company's initial public stock offerings in January
of 1995.
The Company's average net interest spread increased to 2.49% for the year ended
September 30, 1995, compared to 2.33% for 1994, as a result of the balance sheet
restructuring and the earnings from proceeds received in the stock sale. At
September 30, 1995, the Company reported a net interest spread of 2.64%,
compared to 2.04% at September 30, 1994.
Further, the Company's average net interest margin increased to 3.21% for the
year ended September 30, 1995, as compared to 2.67% for the year ended September
30, 1994. For 1995, the Company's ratio of average interest-earning assets to
average interest-bearing liabilities increased to 119.13%, compared to 110.08%
for 1994, reflecting the proceeds received in the sale of common stock as a
source of funds on which the Company does not pay interest expense and are
available for investing in interest-earning assets.
<PAGE>
Provisions 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.
1996 and 1995 Comparison
During the years ended September 30, 1996, and September 30, 1995, no additional
provisions for loan losses were made. Management made the decision, based upon
the type and quality of loans currently being placed into portfolio, to maintain
the current level of allowance for losses on loans.
Non-performing assets to total assets were .39% at September 30, 1996, compared
to .34% at September 30, 1995. Non-performing loans to loans receivable equaled
.94% at September 30, 1996, compared to .95% at September 30, 1995. Allowances
for loan losses as a percentage of non-performing loans was 64.22% at year end,
compared to 74.75% at September 30, 1995. Allowances for loan losses to total
loans receivable declined to .60% at September 30, 1996, from .71% at September
30, 1995, as the Company's loan portfolio increased during the year.
1995 and 1994 Comparison
As a result of continued improvement in the quality of the Company's assets,
management made the decision to make no additional provisions for loan losses
during the year ended September 30, 1995. Based upon its assessment factors and
despite loans receivable increasing during the year, management made the
decision that the current level of allowances for loan losses was adequate.
During 1994, as the volume of portfolio loans continued to increase, management
made the decision to increase its allowance for loan losses by charging an
additional $121,000 to provisions for loan losses.
Non-performing assets to total assets equaled .34% at September 30, 1995, as
compared to .27% for 1994. Non-performing loans to total loans receivable
equaled .95% at September 30, 1995, as compared to .87% at September 30, 1994.
The Company's allowance for loan losses to non-performing loans was 74.75% at
year end, as compared to 97.72% for the prior year and the allowance for loan
losses to total loans receivable was .71% at September 30, 1995, compared to
.85% at September 30, 1994.
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.
<PAGE>
1996 and 1995 Comparison
Other operating income totaled $371,000 in 1996, up $72,000 from the $299,000
reported for 1995.
Loan origination fees increased to $84,000 for the year ended September 30,
1996, compared to $66,000 for 1995, primarily as a result of the increased
number of loans made during the year. Net gains on the sale of loans totaled
$116,000 for 1996, up $61,000 from the $55,000 reported in 1995. The increase
was a result of a full year of applying the accounting requirements of SFAS No.
122, Accounting For Mortgage Servicing Rights, compared to a partial year in
1995. See "Impact of Accounting Requirements".
Partially offsetting the increases in loan origination fees and gains on sale of
loans was a $19,000 decrease in loan servicing fees from $130,000 in 1995, to
$111,000 in 1996. The decrease resulted from the Company's decision to continue
placing more loans into portfolio and selling more loans into the secondary
market. Additionally, on the loans that are now sold, SFAS No. 122 requires that
originated mortgage servicing rights recorded at the time of sale be amortized
against loan servicing fee income. See - "Impact of Accounting Pronouncements".
1995 and 1994 Comparison
The Company reported other operating income of $299,000 in 1995, as compared to
$(2.1) million in 1994. The negative other operating income reported in 1994 was
a result of the Company's decision to restructure its investment and
mortgage-backed securities portfolios. As part of the plan to restructure its
portfolios, the Company sold approximately $74.6 million in investment and
mortgage-backed securities and recorded losses of approximately $2.4 million.
Loan origination and loan servicing fee income totaled $66,000 and $130,000,
respectively, in 1995, down slightly from the $93,000 and $144,000 reported in
1994. The decreases resulted from the Company's decision to concentrate more on
portfolio lending throughout 1995 and sell fewer loans into the secondary market
than in 1994.
Operating Expenses
Operating expenses are comprised of compensation and benefits, occupancy and
equipment and general and administrative expense, together with FDIC insurance
premiums.
1996 and 1995 Comparison
Operating expenses were directly impacted by the one-time special assessment,
mandated by the U. S. Congress, and charged to all SAIF insured institutions
during the year. The Company's portion of the assessment was approximately
$645,000.
Operating expenses were $3.2 million for the year ended September 30, 1996, an
$865,000 increase over the $2.3 million reported for 1995. Without the special
assessment, total operating expenses would have been $2.6 million, or
approximately $220,000 or 9.4% increase over 1995. An increase in compensation
<PAGE>
and benefits expense of $203,000 or 14.6% from $1.4 million in 1995, to $1.6
million in 1996, accounted for most of the increase in total non-interest
expense other than the special assessment.
The increase in compensation and benefits expense primarily resulted from
additional expenses associated with the Company's ESOP and 1995 Recognition and
Retention Plan. ESOP compensation expense for 1996 totaled $182,000 compared to
$118,000 in 1995, as more shares were released in 1996 than in 1995. Expenses
associated with the 1995 Recognition and Retention Plan were $116,000 for 1996,
a full year, as compared to $19,000 for two months in 1995.
In addition, other operating expenses increased $50,000, from $536,000 in 1995,
to $586,000 in 1996, from additional state franchise tax expense, charitable
contributions and miscellaneous expenses related to year end reporting
requirements.
Total non-interest expense as a percentage of average assets was 2.77% for the
year ended September 30, 1996, compared to 2.01% for 1995. If the one time
special SAIF assessment were not considered, operating expenses to average total
assets would have been approximately 2.21% in 1996.
The Company's efficiency ratio, which considers operating expenses as a
percentage of net interest income and other operating income (excluding gains or
losses on sales of assets), was 84.1% in 1996, compared to 59.7% in 1995.
Without the special SAIF assessment, the ratio would have been 67.1% in 1996, an
increase over 1995 due primarily to additional non-interest expenses.
1995 and 1994 Comparison
Operating expenses totaled $2.3 million in 1995, representing 2.01% of average
total assets, as compared to $2.0 million in 1994, or 1.72%, of average total
assets. The $354,000 or 17.9% increase was primarily attributable to increased
compensation and benefits expense, up $213,000 or 18.2%, to $1.4 million for
1995, as compared to $1.2 million in 1994.
The increased compensation and benefits expense resulted primarily from the
implementation, as part of the Company's initial public stock offering in
January of 1995, of an employee stock ownership plan ("ESOP"). ESOP compensation
expense for the year ended September 30, 1995, totaled $118,000. Compensation
and benefits expense also increased with the adoption on July 26, 1995, of the
Recognition and Retention Plan for directors and certain officers of the
Company. Compensation expense related to the Recognition and Retention Plan
totaled $19,000 for the year. Additionally, net periodic pension costs for the
Company's defined benefit pension plan increased $27,000 to $123,000 in 1995, as
compared to $96,000 in 1994.
Other general and administrative expenses totaled $536,000 for the year ended
September 30, 1995, as compared to $430,000 for 1994, reflecting additional
expenses as a public company.
The Company's efficiency ratio improved to 59.7% in 1995, as compared to 61.7%
in 1994.
<PAGE>
Income Tax Expense
Income tax expense is comprised of federal income tax. The Company does not
incur any state or local income tax liability.
1996 and 1995 Comparison
Income tax expense was $265,000 or 36.7% of pre-tax income of $723,000 in 1996,
compared to $551,000 or 34.0% of pre-tax income of $1,622,000 in 1995.
1995 and 1994 Comparison
In 1995, income tax expense totaled $551,000 as compared to an income tax
benefit of $421,000 for 1994. The tax benefit reported in 1994 was a result of
the pre-tax net operating loss resulting from the losses incurred in the
Company's balance sheet restructuring. For 1995, income tax expense equaled
34.0% of the $1.6 million in pre-tax income.
FINANCIAL CONDITION
Balance Sheet Summary
The decision to repurchase shares of common stock in the open market had a
significant impact on the Company's balance sheet during the year. In 1996, the
Company announced and successfully completed three different stock repurchase
programs for a total of 179,192 shares, or approximately 15% of the shares
outstanding. The shares were acquired at an average price of approximately
$15.77 per share. The shares were placed into treasury stock to be used for
general corporate purposes including issuance of shares in conjunction with the
Company's stock option plans. At September 30, 1996, the Company held 177,102
shares of treasury stock at an average cost of $15.79 per share for a total of
$2.8 million. The use of cash to purchase treasury stock accounted for
substantially all of the $2.7 million decrease in the total assets from $117.1
million at September 30, 1995, to $114.4 million at September 30, 1996.
The balance sheet was also affected by the Company's decision to continue
placing into portfolio the majority of loans originated during the year. Total
loans receivable were $47.9 million at year end, compared to $41.8 million at
September 30, 1995.
The Company experienced significant prepayments on its mortgage-backed
securities portfolio during 1996. With many of the underlying loans on the
adjustable rate securities reaching a fully indexed status and with interest
rates on fixed rate loans at lower levels, many borrowers chose to refinance
their mortgages which resulted in the increased prepayments. The mortgage-backed
securities portfolio totaled $24.9 million at September 30, 1996, compared to
$33.7 million at September 30, 1995. The cash flow from the prepayments was used
to fund loan originations and the treasury stock purchases.
<PAGE>
Competition for certificate of deposit balances continued throughout the year.
As a result, and with the Company's decision to not pay the highest rates in the
market, total deposits declined $813,000 from $92.5 million at September 30,
1995, to $91.7 million at September 30, 1996.
<PAGE>
Loan Portfolio Anaylsis
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
Amount Percent Amount Percent Amount Percent
------------------- ------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family ....... $42,773 85.98 % $34,947 81.55 % $28,074 77.32 %
residences
Other residential property 701 1.41 724 1.69 743 2.05
Nonresidential property ... 3,458 6.95 4,387 10.24 5,001 13.77
Construction loans ........ 1,806 3.63 1,879 4.38 1,175 3.24
------- ----- ------- ----- ------- -----
Total real estate loans . 48,738 97.97 41,937 97.86 34,993 96.38
------- ----- ------- ----- ------- -----
Other loans:
Loans secured by deposits . 500 1.00 404 0.94 830 2.28
Home improvement .......... 455 0.92 451 1.05 444 1.22
Commercial ................ 54 0.11 63 0.15 42 0.12
------- ----- ------- ------ ------- -----
Total other loans ....... 1,009 2.03 918 2.14 1,316 3.62
------- ----- ------- ------ ------- -----
Total loans ............... 49,747 100.00 % 42,855 100.00 % 36,309 100.00 %
====== ======= ======
Less:
Loans in process .......... 1,514 777 639
Deferred fees and discounts 19 22 33
Allowance for loan losses . 289 296 300
------- ------- ------
Total loans receivable, net 47,925 41,760 35,337
Less:
Loans held for sale ....... 0 0 0
------- ------- ------
Net portfolio loans ..... $47,925 $41,760 $ 35,337
======= ======= ==========
</TABLE>
Loans
During 1996, the Company continued to focus its efforts on mortgage lending,
specifically one- to four-family home loans. The Company originated $25.1
million in one- to four-family loans, substantially all of the $25.2 million in
total loans originated during the year. Of the total loans originated, $7.7
million, or 30.6%, were sold into the secondary market while $17.5 million, or
69.4%, were placed into portfolio. As a result, the Company's loans receivable
portfolio increased to $47.9 million at September 30, 1996, from $41.8 million
at September 30, 1995, a $6.2 million, or 14.8%, increase, which combined with
1995's increase, equals a 35% increase in the Company's loan portfolio over the
past two years.
<PAGE>
The Company continued its policy of placing into portfolio all fifteen year
amortizing loans made with interest rates above 7.25%. Fixed rate loans totaled
$20.4 million, or 80.8% of loans originated during the year and 72.3% of loans
placed into portfolio during the year. Adjustable rate loans originated in 1996
totaled $4.8 million, or approximately 19.2% of all loans originated and 27.7%
of loans placed into portfolio.
At September 30, 1996, one- to four-family loans totaled $42.8 million, or 86.0%
total loans receivable, compared to $34.9 million or 81.6% at September 30,
1995. At year end, the loan portfolio was comprised of $35.8 million, or 71.9%,
fixed rate loans and $14.0 million, or 28.1%, in adjustable rate loans.
Mortgage-backed Securities
At September 30, 1996, mortgage-backed securities totaled $24.9 million, down
$8.8 million, or 26.1%, from the $33.7 million reported at September 30, 1995.
All of the securities were in a held-to-maturity category. The decrease in
balances outstanding was a result of the increased principle prepayments on the
adjustable rate portion of the securities as more borrowers on the underlying
adjustable rate loans of the securities elected to refinance into fixed rate
loans due to current lower interest rates. At September 30, 1996, approximately
$19.1 million, or 76.6% of the portfolio, was in securities with adjustable
rates as compared to $27.7 million, or 82.3%, at September 30, 1995.
The remaining $5.8 million of the portfolio at September 30, 1996, was comprised
of fixed rate securities with final maturies of less than five years.
The Company utilizes the mortgage-backed securities portfolio as an alternative
to its lending operations and the adjustable rate nature of the majority of the
portfolio helps balance the inherent interest rate risk in the fixed rate loan
portfolio and aides the Association in meeting its Qualified Thrift Lender Test
under Office of Thrift Supervision regulations. A continued period of lower
interest rates could have the effect of increasing the expected principle
prepayments on the portfolio and could result in lower yields on the proceeds as
they are invested at lower interest rates.
Investment Securities
At September 30, 1996, the Company's portfolio of fixed rate and term investment
securities totaled $30.1 million, a decrease of only $125,000 from the $30.3
million reported at September 30, 1995. All of the securities were in a
held-to-maturity category and had a weighted average yield of approximately
6.32%. All of the securities had final maturities of less than five years, with
$13.5 million, or 44.9% of the portfolio, scheduled to mature in less than one
year.
At September 30, 1996, other interest-earning assets totaled $8.1 million and
were comprised of overnight deposit accounts with the Federal Home Loan Bank of
Dallas and other financial institutions, as well as insured certificates of
deposit with less than three years to maturity.
<PAGE>
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the extent to which the Association'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 Association 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 assumed in the calculations. Also, interest rates on
certain assets and liabilities may change in advance of or lag behind changes in
market rates.
In order to enhance the match between the maturities and repricing dates of its
interest-earning assets with the maturities and repricing dates of its
interest-bearing liabilities, management has emphasized the origination of
mortgage loans with one, three, and five year adjustable rate features and by
selling into the secondary market all fixed rate loans with maturities of
greater than fifteen years. Also, management invests in short term investment
securities and money market investments with maturities of less than five years.
Additionally, the Company's mortgage-backed securities portfolio consists
primarily of adjustable rate securities with interest rate adjustment
frequencies of six months or one year.
The Office of Thrift Supervision adopted a final rule in August of 1993
incorporating an interest rate risk component into the risk-based capital rules.
Under the rule, an institution with a greater than normal level of interest rate
risk will be subject to a deduction of its interest rate component from total
capital for purposes of calculating the risk-based capital requirement. An
institution with greater than normal interest rate risk is defined as an
institution that would suffer a loss of net portfolio value exceeding 2.0% of
the estimated market value of its assets in the event of a 200 basis point
increase or decrease in interest rates.
Net portfolio value is the difference between incoming and outgoing discounted
cash flows from assets, liabilities and off-balance sheet contracts. A resulting
change in net portfolio value of more than 2.0% of the estimated market value of
an institution's assets will require the institution to deduct from its capital
50% of that excess change when calculating regulatory capital ratios. The
effective date of the rule has been postponed by the Office of Thrift
Supervision until further notice. Further, institutions with less than $300
million in total assets and a risk-based capital ratio of greater than 12.0% are
generally exempt from the requirements of the rule and exempt from filing
information with the Office of Thrift Supervision necessary to calculate the
component. Under the current rule, the Association would not be subject to the
interest rate risk component.
<PAGE>
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 the Association's analysis of its net portfolio
value and net interest income under various instantaneous changes in interest
rates at September 30, 1996.
<TABLE>
<CAPTION>
Net Portfolio Value Net Interest Income
----------------------------------------- -------------------------------------------
Change In
Interest Rates Estimated Amount Of Percent Net Amount Of Percent Of
(basis points) NPV Change Of Change Income Change Change
- ---------------- ----------- ----------- ------------ ----------- ----------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
+400 $ 14,148 $(5,341) (27.4)% $3,469 (14) (0.4)%
+300 15,646 (3,843) (19.7) 3,463 (20) (0.6)
+200 17,032 (2,457) (12.6) 3,481 (2) (0.1)
+100 18,217 (1,272) (6.5) 3,498 15 0.4
0 19,489 3,483
-100 20,797 1,308 6.7 3,341 (142) (4.1)
-200 21,021 1,532 7.8 3,243 (240) (6.9)
-300 22,213 2,724 14.0 3,567 84 2.4
-400 23,529 4,040 20.7 3,655 172 4.9
</TABLE>
The table indicates that the Association's estimated net portfolio value (market
value of assets less market value of liabilities) is approximately $19.5 million
or 16.8% of market value of assets at September 30, 1996. The estimated net
portfolio value is approximately $1.9 million more than the Association's
reported net worth of $17.6 million, which is approximately 15.4% of total
assets. In addition, under a worst case scenario of a 400 basis point immediate
and permanent increase in interest rates, the Association's estimated net
portfolio value would only decline by 27.4% to $14.1 million and would still be
approximately 13.2% of market value of assets.
The table also shows that the Association's net interest income, in an unchanged
rate scenario, would approximate $3.5 million and would only vary by $240,000 or
6.9%, under changes in the level of interest rates up to 400 basis points. As of
September 30, 1996, the Association met all of its Board of Director-established
limits for both changes in net portfolio value and net interest income.
<PAGE>
Asset Quality
At September 30, 1996, non-performing assets were $450,000 or .39% of total
assets, compared to $396,000 or .34% of total assets at September 30, 1995. At
September 30, 1996, non-performing assets were comprised entirely of
non-accruing loans, all except one loan were one- to four-family residential
loans. All of the Company's multi-family, commercial real estate and
construction loans were performing at year end.
The Company's allowance for loan losses totaled $289,000 at September 30, 1996,
down $7,000, the net chargeoffs for the year, from $296,000 at September 30,
1995. At September 30, 1996, the Company's allowance for loan losses was .60% of
loans receivable, compared to .71% at September 30, 1995, and was 64.2% of
non-performing loans at September 30, 1996, compared to 74.8% at September 30,
1995.
The following table sets forth an analysis of the Company's allowance for loan
losses:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------
1996 1995 1994 1993
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ............... $ 296 $ 300 $ 181 $ 122
Charge-offs:
One- to four-family ....................... 7 4 2 1
----- ----- ----- -----
Total charge-offs ..................... 7 4 2 1
----- ----- ----- -----
Recoveries: .................................. 0 0 0 0
----- ----- ----- -----
Total recoveries ...................... 0 0 0 0
----- ----- ----- -----
Net charge-offs .............................. (7) (4) (2) (1)
Additions charged to operations .............. 0 0 121 60
----- ----- ----- -----
Balance at end of period ..................... $ 289 $ 296 $ 300 $ 181
===== ===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.02 % 0.01 % 0.01 % 0.00 %
===== ===== ===== =====
Ratio of net charge-offs during the period to
average non-performing assets ............. 1.66 % 1.14 % 0.48 % 0.20 %
===== ===== ===== =====
</TABLE>
<PAGE>
The following table presents the amounts and categories of non-performing assets
of the Company:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ..................... $449 $294 $295 $445
Other loans ............................. 1 0 0 0
---- ---- ---- ----
Total ............................... 450 294 295 445
---- ---- ---- ----
Accruing loans delinquent more than 90 days:
One- to four-family ..................... 0 12 12 21
---- ---- ---- ----
Total ............................... 0 12 12 21
---- ---- ---- ----
Foreclosed assets:
One- to four-family ..................... 0 90 0 59
---- ---- ---- ----
Total ............................... 0 90 0 59
---- ---- ---- ----
Total non-performing assets ................ $450 $396 $307 $525
==== ==== ==== ====
Total as a percentage of total assets ...... 0.39 % 0.34 % 0.27 % 0.45 %
==== ==== ==== ====
</TABLE>
Liquidity and Capital Position
The Company's principal sources of funds are deposits from customers,
amortization and prepayments of loan principal (including mortgage-backed
securities), maturities of securities, sales of loans and operations.
Current Office of Thrift Supervision regulations require cash and eligible
investments (liquid assets), in an amount equal to 5.0% of net withdrawable
savings deposits and borrowings payable on demand or within five years or less
during the preceding month, be held by the Association. Liquid assets include
cash, certain time deposits, and U. S. Government and agency securities having
maturities of less than five years. At September 30, 1996, the Association's
liquid asset ratio equaled 47.6%.
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, 1996, the
Company had outstanding commitments to extend credit on $2.3 million of single
family residential loans.
Cash and cash equivalents totaled $5.7 million at September 30, 1996, compared
to $6.2 million at September 30, 1995. The primary use of funds during the year
was to fund loan originations, purchase securities, and purchase treasury stock.
<PAGE>
The primary source of funds during the year was from maturing investment
securities and prepayments on mortgage-backed securities and loans. Management
believes that it has adequate resources to fund all of its current commitments.
Total stockholders' equity equaled $20.9 million at September 30, 1996, a
decrease of $2.2 million from the $23.1 million reported at September 30, 1995.
The decrease in total stockholders' equity resulted primarily from the Company's
$2.8 million repurchase of its stock and the payment of approximately $170,000
in cash dividends, offset by the $458,000 in net income reported for the year
ended September 30, 1996.
As of September 30, 1996, the Company's reported book value per share, using a
total stockholders' equity of $20.9 million (net of unallocated ESOP and RRP
shares) and 1,079,285 outstanding shares of common stock (the total outstanding
shares including unallocated ESOP and RRP shares), equaled $19.39 per share.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), Congress imposed a three part capital requirement for thrift
institutions. At September 30, 1996, the Association's actual and required
capital amounts under each of the three requirements were as follows:
- Tangible Capital (stockholders' equity plus certain intangible
assets) was $17.5 million, or 15.3% of total assets, exceeding the
minimum requirement of 1.5% by $15.8 million.
- Core Capital (tangible capital plus certain intangible assets) was
$17.5 million, or 15.3% of total assets, exceeding the minimum
requirements of 3.0% by $14.0 million.
- Risk-based capital (core capital plus general loan and valuation
allowances) equaled $17.8 million, or 44.2% of risk weighted assets, as
of September 30, 1996, exceeding the minimum requirement of 8.0% of
risk weighted assets by $14.5 million.
At September 30, 1996, the Association met all of the requirements to be
considered a "well capitalized" institution under the Federal Deposit Insurance
Corporation Improvement Act.
Impact of Accounting Announcements
SFAS No. 107 In December 1991, the Financial Accounting Standards Board issued
SFAS No. 107, Disclosures About Fair Value of Financial Instruments. SFAS No.
107 requires all entities to disclose, in financial statements or the notes
thereto, the fair value of financial instruments, both assets and liabilities
recognized and not recognized in the statement of financial condition, for which
it is practicable to estimate fair value. SFAS No. 107 was effective for
financial statements of institutions with assets greater than $150 million
issued for years ending after December 15, 1992, and for financial statements
issued for years ending after December 15, 1995, for institutions with assets of
less than $150 million. Substantially all of the assets of the Company are
financial instruments and will be required to be disclosed upon adoption of the
statement. The Company adopted the statement for the fiscal year ending
September 30, 1996.
<PAGE>
SFAS No. 119 SFAS No. 119 Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments, requires disclosure about the amount,
nature, and terms of derivative financial instruments such as futures, forward,
swap and option contracts, and other financial instruments with similar
characteristics that are not subject to SFAS No. 105 because they do not result
in off-balance sheet risk of accounting loss. The effective date of the
pronouncement was for fiscal years ending after December 15, 1994, except for
entities with less than $150 million in total assets. For those entities, the
Statement is effective for financial statements issued for fiscal years ending
after December 15, 1995. The Company adopted the Statement for the fiscal year
ending September 30, 1996. The adoption did not have a material effect on the
financial statements of the Company.
SFAS No. 121 In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 applies to all entities and to long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and to long-lived assets and certain identifiable intangibles
to be disposed of. SFAS No. 121 does not apply to financial instruments,
long-term customer relationships of a financial institution, mortgage and other
servicing rights, deferred acquisition costs, or deferred tax assets. Under the
provisions of SFAS No. 121, an entity shall review long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 applies to financial statements issued for fiscal
years beginning after December 15, 1995, with earlier application encouraged.
The Company adopted the statement for the fiscal year ending September 30, 1996.
The adoption of SFAS No. 121 did not have a material impact on the Company's
financial condition or the results of its operations for the fiscal year ended
September 30, 1996.
SFAS No. 122 Statement of Financial Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights, modified the treatment of the capitalization of
servicing rights by mortgage banking enterprises (including banks and thrift
institutions involved in selling loans into the secondary market and retaining
mortgage loan servicing rights). SFAS No. 22, by amending SFAS No. 65,
prescribes a single procedure for the capitalization of mortgage servicing
rights acquired either through loan origination or through transactions where a
mortgage banking enterprise buys the servicing rights. SFAS No. 122 further
provides guidance for considering possible impairment of the capitalized value
of mortgage servicing rights.
SFAS No. 122 applies prospectively to financial statements presented for fiscal
years beginning after December 15, 1995. However, earlier application is
encouraged as of the beginning of a fiscal year for which annual financial
statements have not been issued or as of the beginning of an interim period
within that fiscal year for which interim financial statements have not been
issued.
The Company adopted SFAS No. 122 as of July 1, 1995. The effect of this adoption
was to increase reported gains on sales of loans where servicing is retained and
to decrease servicing fee income as capitalized mortgage servicing assets are
amortized over an estimated life of the loan against servicing income. The
overall impact to Company's earnings will be dependent on the volume of loans
originated and sold into the secondary market which is determined by management
based upon the coupon rates and terms of loans originated which is in turn
affected by the general level of interest rates and competition for loans in the
<PAGE>
Company's local market. A continued period of lower interest rates would have
the effect of increasing the number of loans originated and sold into the
secondary market while significant increases in the overall level of interest
rates would allow more loans to be held in portfolio which are not subject to
SFAS No. 122.
At September 30, 1996, the Company had outstanding capitalized mortgage
servicing rights of $120,000.
SFAS No. 123 In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-Based Compensation which established a fair
value based method of accounting for stock-based compensation plans. It
encourages entities to adopt that method in place of the provisions of APB
opinion No. 25, Accounting for Stock Issued to Employees, for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer or the employer insures liabilities to employees in amounts based on
the price of its stock. It permits entities to continue to use the intrinsic
value method included in APB No. 25, but regardless of the method used to
account for the compensation cost associated with stock option and similar
plans, its requires employers to show significant expanded disclosures,
including the pro forma amount of net income (and earnings per share) as if the
fair value-based method were used to account for stock-based compensation.
The Company adopted the Statement for the fiscal year beginning October 1, 1996.
It will continue to use the accounting methods presented in APB No. 25 for
recognition requirements. SFAS No. 123 disclosure requirements would be
applicable to any new stock option plans issued in subsequent years.
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.
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 the acceptance of new products, the impact of
competitive products and pricing, 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, 1996. Actual strategies and results in future periods may
differ materially from those currently expected. 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.
<PAGE>
Market Price of Common Stock
East Texas Financial Services, Inc. trades on The Nasdaq National Market under
the symbol "ETFS". At September 30, 1996, the Company had 1,079,285 shares
outstanding and approximately 500 stockholders of records.
The following table presents the cash dividends per share paid and the high/low
price range and closing prices for the fiscal periods indicated:
<TABLE>
<CAPTION>
High Low Close Divdends
---- --- ----- --------
<S> <C> <C> <C> <C>
Fiscal 1996
First Quarter $17.00 $15.125 $16.25 -0-
Second Quarter $16.75 $14.50 $14.81 $0.05
Third Quarter $15.75 $14.50 $14.63 $0.05
Fourth Quarter $15.50 $14.00 $15.50 $0.05
High Low Close Dividends
---- --- ----- ---------
Fiscal 1995
First Quarter N.A. N.A. N.A. -0-
Second Quarter $12.25 $10.25 $12.00 $0.00
Third Quarter $14.75 $11.50 $14.00 $0.00
Fourth Quarter $16.50 $13.75 $15.50 $0.00
</TABLE>
<PAGE>
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, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years ended September 30, 1996.
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, 1996 and 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the Company
changed the accounting for mortgage servicing rights on July 1, 1995.
Tyler, Texas
November 12, 1996
<PAGE>
<TABLE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition
September 30, 1996 and 1995
Assets 1996 1995
------------ ------------
<S> <C> <C>
Cash and due from banks $ 704,615 $ 537,326
Interest-bearing deposits due from banks 4,995,032 5,702,510
------------ ------------
Total cash and cash equivalents 5,699,647 6,239,836
Interest-earning time deposits 1,663,573 882,000
Federal funds sold 480,285 626,596
Investment securities held-to-maturity
(fair value of $30,114,685 in 1996 and $30,505,193 in 1995) 30,138,744 30,263,495
Mortgage-backed securities held-to-maturity
(fair value of $25,383,579 in 1996 and $34,314,627 in 1995) 24,948,793 33,741,155
Loans receivable, net 47,925,067 41,760,272
Accrued interest receivable 930,657 1,056,326
Federal Home Loan Bank stock, at cost 948,500 893,400
Premises and equipment, net 970,184 1,020,965
Foreclosed real estate, net of allowances of $-0- in 1995 -0- 90,000
Deferred income taxes 130,825 -0-
Mortgage servicing rights, net 119,845 41,473
Other assets 416,816 461,072
------------ ------------
Total assets $114,372,936 $117,076,590
============ ============
<PAGE>
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities:
Demand deposits $ 2,889,861 $ 2,692,259
Savings and NOW deposits 11,099,604 10,512,930
Other time deposits 77,671,666 79,268,616
------------ ------------
Total deposits 91,661,131 92,473,805
Advances from borrowers for taxes and insurance 917,222 978,583
Federal income taxes
Current 5,044 38,682
Deferred -0- 62,474
Accrued expenses and other liabilities 858,926 376,651
------------ ------------
Total liabilities 93,442,323 93,930,195
------------ ------------
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,
1,256,387 shares issued and 1,079,285 outstanding at
September 30, 1996 and 1,256,387 issued
and outstanding at September 30, 1995 12,564 12,564
Additional paid-in capital 12,112,516 12,048,775
Deferred compensation - RRP shares (446,129) (562,511)
Unearned employee stock ownership plan shares (763,206) (881,477)
Retained earnings (substantially restricted) 12,811,881 12,529,044
Treasury stock, at cost, 177,102 shares (2,797,013) -0-
------------ ------------
Total stockholders' equity 20,930,613 23,146,395
------------ ------------
Total liabilities and stockholders' equity $114,372,936 $117,076,590
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended September 30, 1996, 1995, and 1994
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Loans receivable:
First mortgage loans $ 3,564,258 $ 3,299,246 $ 3,042,342
Consumer and other loans 77,456 87,570 101,272
Investment securities 2,129,362 2,017,702 1,365,788
Mortgage-backed securities 2,000,439 1,707,505 2,032,987
Deposits with banks 292,525 838,656 292,130
----------- ----------- -----------
Total interest income 8,064,040 7,950,679 6,834,519
Interest expense
Deposits 4,511,934 4,293,359 3,794,518
----------- ----------- -----------
Net interest income 3,552,106 3,657,320 3,040,001
Provisions for loan losses -0- -0- 120,623
----------- ----------- -----------
Net interest income after
provision for loan losses 3,552,106 3,657,320 2,919,378
----------- ----------- -----------
Noninterest income
Net gain (loss) on sale of loans 116,316 55,135 (110,355)
Net realized loss on sale of investment securities -0- (9,042) (1,108,256)
Net realized loss on sale of mortgage-backed
securities -0- -0- (1,192,638)
Loan origination and commitment fees 83,769 66,247 93,442
Loan servicing fees 110,576 130,271 143,748
Other 60,156 56,660 56,252
----------- ----------- -----------
Total noninterest income 370,817 299,271 (2,117,807)
----------- ----------- -----------
Noninterest expense
Compensation and benefits 1,586,838 1,384,377 1,171,470
Occupancy and equipment 154,321 167,558 162,624
SAIF deposit insurance premium 867,859 237,305 213,036
Loss on foreclosed real estate 4,826 9,875 3,870
Other 586,067 535,670 430,119
----------- ----------- -----------
Total noninterest expense 3,199,911 2,334,785 1,981,119
----------- ----------- -----------
<PAGE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended September 30, 1996, 1995, and 1994
(continued)
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before provision for income taxes 723,012 1,621,806 (1,179,548)
Income tax expense (benefit) 265,136 550,977 (420,558)
----------- ----------- -----------
Net income (loss) $ 457,876 $ 1,070,829 $ (758,990)
=========== =========== ===========
Earnings per common share $ .42 $ .95
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 1996, 1995, and 1994
Deferred Unearned
Compensation Employee
Additional Recognition Stock
Common Paid-in Retained Treasury $ Retention Ownership
Stock Capital Earnings Stock Plan Plan Shares Total
----- ------- -------- ----- ---- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 ... $ 12,217,205 $ 12,217,205
Net income (loss) ............... (758,990) (758,990)
Balance at September 30, 1994 ... 11,458,215 11,458,215
Net income ...................... 1,070,829 1,070,829
Net proceeds from common
stock issued in stock con-
version .......................$ 12,152 $ 11,439,533 $ (972,150) 10,479,535
Issuance of common stock
to the recognition and
retention plan ................ 412 581,496 $(581,908) -0-
Deferred compensation
amortization .................. 19,397 19,397
Release of employee stock
ownership plan shares ......... 90,673 90,673
Appreciation in employee
stock ownership plan shares
released ...................... 27,746 27,746
------- ------------ ------------ ------------ --------- ----------- -----------
Balance at September 30, 1995 12,564 12,048,775 12,529,044 (562,511) (881,477) 23,146,395
<PAGE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 1996, 1995, and 1994
(continued)
Deferred Unearned
Compensation Employee
Additional Recognition Stock
Common Paid-in Retained Treasury $ Retention Ownership
Stock Capital Earnings Stock Plan Plan Shares Total
----- ------- -------- ----- ---- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net income ...................... 457,876
Deferred compensation
amortization .................. 116,382 116,382
Release of employee stock
ownership plan shares ......... 118,271 118,271
Appreciation in employee
stock ownership plan shares
released ...................... 63,741 63,741
Purchase of treasury stock
at cost (179,192 shares) ...... $ (2,831,237) (2,831,237)
Exercise of stock ............... (4,702) 34,224 29,522
options (2,090 shares)
Cash dividends of $0.15
per share ..................... (170,337) (170,337)
-------- ----------- ------------ ------------ --------- --------- -----------
Balance at September 30, 1996 $ 12,564 $12,112,516 $ 12,811,881 $ (2,797,013) $(446,129) $(763,206) $20,930,613
======== =========== ============ ============ ========= ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
On October 17, 1996, the Company announced the declaration of a cash dividend of
$.05 per share to stockholders of record on November 13, 1996, payable on
November 27, 1996.
<PAGE>
<TABLE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 1996, 1995, and 1994
1996 1995 1994
----------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 457,876 $ 1,070,829 $ (758,990)
Adjustments to reconcile net income to net
cash provided by operating activities:
amortization of deferred loan origination fees (2,988) (11,877)
Amortization of premiums and discounts on
investment securities, mortgage-backed
securities, and loans 201,336 (99,187) 146,582
Amortization of deferred compensation 116,382 19,397 -0-
Amortization of mortgage servicing rights 15,618 1,173 -0-
Compensation charge related to
release of ESOP shares 84,805 45,513 -0-
Depreciation 74,424 74,792 70,039
Provision for loan losses and
losses on real estate -0- -0- 120,623
Deferred income taxes (193,299) (149,677) 63,422
Stock dividend on FHLB stock (55,100) (54,100) (34,200)
Net (gain) loss on sale of:
Investment securities held for sale:
Obligations-U.S. Govt. and agencies -0- -0- 901,723
Mortgage-backed securities -0- -0- 1,189,169
Other securities -0- -0- 158,794
Investment securities:
Obligations-U.S. Govt. and agencies -0- 9,042 (6,124)
Mortgage-backed securities -0- -0- 3,469
Other securities -0- -0- 53,863
Loans held for sale (22,326) (12,489) 110,355
Foreclosed real estate -0- -0- (4,543)
Equipment 4,101 (2,261) -0-
Proceeds from sale of loans 7,740,431 5,202,995 14,185,665
Originations of loans held for sale (7,718,105) (5,190,506) (12,265,779)
(Increase) decrease in:
Accrued interest receivable 125,669 (838,958) 506,581
Other assets 44,255 969,247 (973,659)
Increase (decrease) in:
Federal income tax payable (33,638) 38,682 -0-
Accrued expenses and other liabilities 482,275 162,276 16,363
---------- ------------- ------------
Net cash provided by operating activities 1,321,716 1,234,891 3,451,406
------------ ------------ ------------
continued
<PAGE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 1996, 1995, and 1994
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of interest-earning time deposits $ (977,573) $ (882,000) $ -0-
Maturities of interest-earning time deposits 196,000 -0- -0-
Net decrease in fed funds sold 146,311 158,575 2,398,756
Purchases of obligations - U.S. Govt.
and agencies held for sale -0- -0- (977,351)
Proceeds from sales of obligations -
U.S. Govt. and agencies held for sale -0- -0- 27,688,812
Purchases of mortgage-backed
securities held for sale -0- -0- (1,802,609)
Principal payments on mortgage-
backed securities held for sale -0- -0- 1,918,141
Proceeds from sales of mortgage-
backed securities held for sale -0- -0- 40,825,990
Purchases of other securities held for sale -0- -0- (68,964)
Proceeds from sales of other
securities held for sale -0- -0- 6,042,186
Purchase of investment securities
held-to-maturity (11,633,820) (62,097,829) (16,099,048)
Proceeds from maturities of investment
securities held-to-maturity 11,615,000 23,000,000 3,885,000
Proceeds from sales of obligations -
U. S. Govt. and agencies held-to-maturity -0- 8,984,062 2,510,313
Purchases of mortgage-backed securities
held-to-maturity (913,080) (38,171,881) (11,313,705)
Principal payments on mortgage-
backed securities held-to-maturity 9,647,677 4,371,143 4,505,393
Proceeds from sales of mortgage-backed
securities held for investment -0- -0- 1,764,168
Purchases of other securities held for investment -0- -0- (5,196,091)
Proceeds from sales of other
securities held for investment -0- -0- 8,049,616
Net change in loans receivable (6,071,127) (6,578,073) 539,917
Proceeds from sale of foreclosed real estate (680) 79,851 64,501
Acquisition costs related to
foreclosed real estate -0- (503) (2,091)
Expenditures for premises and equipment (27,744) (201,531) (45,464)
Origination of mortgage servicing rights (93,990) (42,646) -0-
------------ ------------ ------------
Net cash provided (used) by investing activities 1,886,974 (71,380,832) 64,687,470
------------ ------------ ------------
continued
<PAGE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 1996, 1995, and 1994
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits,
savings, and NOW accounts $ 784,276 $ (2,721,473) $ (1,794,835)
Time deposits (1,596,950) (5,099,094) 1,646,449
Advances from borrowers (61,361) 129,124 34,606
Net proceeds from issuance of common stock -0- 9,545,685 -0-
Purchase of treasury stock at cost (2,831,237) -0- -0-
Exercise of stock options 29,522 -0- -0-
Dividends paid (170,337) -0- -0-
ESOP stock purchase -0- (972,150) -0-
ESOP loan repayment 97,208 72,906 -0-
------------- ------------- --------------
Net cash provided (used) by financing activities (3,748,879) 954,998 (113,780)
------------- ------------ --------------
Net increase (decrease) in cash
and cash equivalents (540,189) (69,190,943) 68,025,096
Cash and cash equivalents at
beginning of year 6,239,836 75,430,779 7,405,683
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,699,647 $ 6,239,836 $ 75,430,779
============= ============= =============
Supplemental disclosure:
Cash paid for:
Interest on deposits $ 2,354,934 $ 3,332,359 $ 2,095,010
Income taxes $ 492,083 $ 411,452 $ 216,066
Transfers from investment securities
to securities held for sale $ -0- $ -0- $ 27,618,560
Transfers from mortgage-backed
securities held for investment
to held for sale $ -0- $ -0- $ 42,137,148
Transfers from other securities held
for investment to held for sale $ -0- $ -0- $ 6,132,016
<PAGE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 1996, 1995, and 1994
(continued)
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Transfers from loans held for sale
to loans receivable portfolio $ -0- $ -0- $ 7,281,497
Transfers from loans to real estate
acquired through foreclosures $ -0- $ 173,548 $ 104,293
Loans made to facilitate the sale
of REO $ 84,000 $ -0- $ 103,400
Issuance of common stock to RRP $ -0- $ 581,908 $ -0-
Deposit accounts converted to
purchase common stocks $ -0- $ 1,906,000 $ -0-
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Use of Estimates - East Texas Financial
Services, Inc. ("Holding Corp."), is a savings and loan holding company for its
wholly-owned subsidiary, First Federal Savings and Loan Association of Tyler
("Association"), collectively referred to as the Company.
The Company is principally engaged in the business of attracting retail deposits
from the general public and investing those funds in first mortgage
single-family residential loans and in mortgage-backed securities. In addition,
the Company originates residential construction loans, commercial real estate
loans, and consumer loans and services loans for others.
The Holding Corp. was incorporated on September 6, 1994, and on January 10,
1995, acquired all of the common stock of the Association upon its conversion
from a mutual to a stock savings and loan. The consolidated financial statements
in 1996, 1995, and 1994 include the accounts of the Holding Corp. and its
subsidiary after elimination of all significant intercompany balances. Prior to
completion of the aforementioned conversion, the financial statements include
the accounts of the Association.
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 disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand,
amounts deposited with other financial institutions, and short-term investments
with original maturities of three months or less. Short-term investments are
carried at cost.
Securities - The Company adopted Statement of Financial Accounting Standards No.
115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities
on October 1, 1994. Since at that time the Company did not have any securities,
there was no cumulative effect on stockholders' equity or operations for the
change in accounting.
Marketable debt securities, consisting of mortgage-backed securities and U.S.
Government and agency obligations held to maturity, are carried at cost and
adjusted for amortization of premiums and accretion of discounts as the Company
has the intent and ability to hold them to maturity. Premiums and discounts are
amortized using the interest method.
Trading account securities are carried at market value. Realized and unrealized
gains and losses on trading account securities are recognized in the statement
of income as they occur. The Company had no trading account securities during
1996, 1995, or 1994.
Available-for-sale securities are carried at market value. Unrealized gains and
losses net of tax are recognized in the statement of stockholders' equity.
Realized gains and losses are recognized in the statement of income as they
occur. The Company had no available-for-sale securities during 1996, 1995, or
1994.
<PAGE>
Management reviews the Company's financial position, liquidity, and future plans
in evaluating the criteria for classifying securities. Securities are classified
among categories at the time the securities are purchased. Declines in the fair
value of individual held-to-maturity securities below their cost that are other
than temporary would result in write-downs of the individual securities to their
fair value. Management believes that none of the unrealized losses should be
<PAGE>
considered other than temporary.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies, continued
At September 30, 1996 and 1995, the Company had no outstanding commitments to
sell or purchase securities or mortgage-backed securities.
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, 1996, 1995, or 1994.
Loans Receivable - Loans receivable are stated at unpaid principal balances less
the allowance for loan losses, undisbursed portion of loans, and net deferred
loan origination fees and discounts.
The Company adopted Statement of Financial Accounting Standards No. 114 (SFAS
114), Accounting by Creditors for Impairment of a Loan as of October 1, 1995.
Under the new standard, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
and related allowance for loan losses is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or based on
the fair value of the collateral if the loan is collateral dependent. As
permitted by SFAS 114, smaller-balance homogeneous loans consisting of
residential mortgages and consumer loans are evaluated for reserves collectively
based on historical loss experience.
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 August 1995, did not result in an increase to the
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.
<PAGE>
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
<PAGE>
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.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies, continued
Loan Origination Fees and Related Costs - Loan fees received are accounted for
in accordance with Statement of Financial Accounting Standards No. 91 (SFAS 91),
Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. Loan fees and certain direct
loan origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans.
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.
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.
Mortgage Servicing Rights - On July 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 122 (SFAS 122), Accounting for Mortgage
Servicing Rights. SFAS 122 requires that the Company recognize as separate
assets rights to service mortgage loans for others, regardless of how those
mortgage servicing rights are acquired. This eliminates the distinction between
purchased servicing rights, which are capitalized, and originated servicing
rights, for which no value could be capitalized under the previous standard.
SFAS 122 prohibits retroactive application. The adoption of SFAS 122 increased
gain on sale of loans by approximately $93,990 in 1996 and $42,646 in 1995. SFAS
122 also requires that capitalized mortgage servicing rights be evaluated for
impairment based on the fair value of those rights on a disaggregated basis.
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.
<PAGE>
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.
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies, continued
Income Taxes - Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
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.
Fair Values of Financial Instruments - Statement of Financial Accounting
Standards No. 107 (SFAS 107), Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial condition.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
SFAS 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
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.
Investments and mortgage-backed securities. Fair values for securities are based
on quoted market prices.
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.
<PAGE>
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.
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies, continued
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
Advance from borrowers for taxes and insurance. The carrying amount of escrow
accounts approximate fair value.
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.
Earnings Per Common Share - Primary earnings per common share is computed by
dividing net income by the weighted average number of common shares outstanding.
When dilutive, stock options are included as share equivalents using the
treasury stock method. ESOP shares that have not been committed to be released
are not considered outstanding for the computation of primary and fully diluted
earnings per share for the years ended September 30, 1996 and 1995, in
accordance with Statement of Position (SOP) 93-6, Employers' Accounting for
Employee Stock Ownership Plans. The weighted average number of common shares
outstanding during 1996 and 1995 were 1,084,822 and 1,129,030, respectively.
Primary and fully-diluted earnings per share were the same for 1996 and 1995.
Impact of New Accounting Standards - In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The Company is required to adopt SFAS 121
for the Company's fiscal year beginning October 1, 1996. The adoption of SFAS
No. did not have a material impact on the Company's financial position or
results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based
Compensation, which establishes accounting and reporting standards for
stock-based employee compensation plans. The Company adopted the disclosure
requirements of SFAS 123 for the fiscal year beginning October 1, 1996, and will
continue to use the accounting methods prescribed in Accounting Principles Board
No. 25 for recognition requirements. SFAS 123 disclosure requirements would be
applicable to any new stock option plans issued in subsequent years.
Reclassifications - Certain amounts previously reported in the financial
statements for 1995 and 1994 have been reclassified to facilitate comparability
with 1996. These reclassifications had no effect on net income or stockholders'
equity.
<PAGE>
Note 2 - Conversion of the Association
The Association completed a conversion from a mutual to a stock savings and loan
association on January 10, 1995. Simultaneous with the conversion was the
formation of the Holding Corp., incorporated in the State of Delaware. The
initial issuance of shares of common stock in the Holding Corp. on January 10,
1995, was 1,215,900 shares at $10 per share and was accomplished through an
offering 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 Corp. Upon closing of the stock
offering, the Holding Corp. purchased all common shares issued by the
<PAGE>
Association for $5,750,000. This transaction was accounted for in a manner
similar to the pooling of interests method.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 2 - Conversion of the Association, continued
The following schedule summarizes the issuance of common stock by the Holding
Corp. in the conversion:
<TABLE>
<CAPTION>
<S> <C>
Deposit accounts converted to purchase stock $ 1,906,000
Stock issued to ESOP 972,150
Proceeds received from other investors 9,273,750
-----------
12,151,900
Conversion costs (700,215)
-----------
$ 11,451,685
===========
</TABLE>
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 3 - Investment Securities
The amortized cost and fair values of investment securities held-to-maturity
consisting of U.S. Government and agency obligations, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1996 $30,138,744 $ 117,550 $ 141,610 $30,114,685
=========== =========== =========== ===========
September 30, 1995 $30,263,495 $ 241,698 $ -0- $30,505,193
=========== =========== =========== ===========
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 3 - Investment Securities, continued
The following is a summary of amortized cost and fair value of investment
securities held-to-maturity at September 30, 1996, by contractual maturity:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -----------
<S> <C> <C>
Due in one year or less ................... $ 13,525,399 $13,592,625
Due after one year through five years ..... 16,613,345 16,522,060
Due after five years through ten years .... -0- -0-
Due after ten years ....................... -0- -0-
------------- ----------
$ 30,138,744 $30,114,685
============= ===========
</TABLE>
There were no sales of investment securities for 1996.
Information related to sales of investment securities for 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Debt securities:
Sales proceeds $ 8,984,062 $2,510,313
=========== ==========
Gross gains $ -0- $ 6,124
Gross losses (9,042) -0-
----------- ----------
Net gains (losses) $ (9,042) $ 6,124
=========== ==========
Other equity securities:
Sales proceeds $8,049,616
==========
Gross gains $ 6,960
Gross losses (60,823)
----------
Net gains (losses) $ (53,863)
==========
</TABLE>
The Company's management sold securities during the year ended September 30,
1995, 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.
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 3 - Investment Securities, continued
On May 31, 1994, the Company transferred its entire investment portfolio from
held for investment to held for sale. All investments were sold as of September
30, 1994. Information relating to sales of investment securities held for sale
is as follows:
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
Debt securities:
Sales proceeds $ 27,688,812
=============
Gross gains $ -0-
Gross losses (901,723)
-------------
Net gains (losses) $ (901,723)
=============
Mortgage-backed securities:
Sales proceeds $ 40,825,990
=============
Gross gains $ 1,359
Gross losses (1,190,528)
-------------
Net gains (losses) $ (1,189,169)
=============
Other equity securities:
Sales proceeds $ 6,042,186
=============
Gross gains $ -0-
Gross losses (158,794)
-------------
Net gains (losses) $ (158,794)
=============
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 4 - Mortgage-Backed Securities
The amortized cost and fair values of mortgage-backed securities
held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1996:
FHLMC Certificates $20,349,015 $ 401,769 $ 84,296 $20,666,488
FNMA Certificates 4,599,778 117,313 -0- 4,717,091
----------- ----------- ----------- -----------
$24,948,793 $ 519,082 $ 84,296 $25,383,579
=========== =========== =========== ===========
September 30, 1995:
FHLMC Certificates $27,108,392 $ 437,073 $ 24,895 $27,520,570
FNMA Certificates 6,632,763 161,294 -0- 6,794,057
----------- ----------- ----------- -----------
$33,741,155 $ 598,367 $ 24,895 $34,314,627
=========== =========== =========== ===========
</TABLE>
There were no sales of mortgage-backed securities held-to-maturity for 1996 or
1995. The Company had no mortgage-backed securities held-to-maturity at
September 30, 1994.
The following is a summary of the amortized cost and fair value of
mortgage-backed securities held-to-maturity at September 30, 1996, by
contractual maturity. These contractual maturities do not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 2,146,431 $ 2,132,309
Due after one year through five years 3,685,949 3,620,782
Due after five years through ten years -0- -0-
Due after ten years 19,116,413 19,630,488
------------- -------------
$ 24,948,793 $ 25,383,579
============= =============
</TABLE>
<PAGE>
Information related to sales of mortgage-backed securities held for investment
is as follows:
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
Sales proceeds $ 1,764,168
=============
Gross gains $ -0-
Gross losses (3,469)
-------------
Net gain (loss) $ (3,469)
=============
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable
<TABLE>
<CAPTION>
Loans receivable are summarized as follows:
1996 1995
------------ ------------
<S> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured by one-to-four family residences .. $ 42,772,758 $ 34,947,063
Secured by other residential property ..... 701,092 723,532
Secured by nonresidential property ........ 3,458,273 4,387,046
Construction loans ........................ 1,805,700 1,878,650
------------ ------------
48,737,823 41,936,291
Less:
Undisbursed portion of loans ................. (1,513,956) (776,979)
Net deferred loan origination fees ........... (18,514) (21,503)
------------ ------------
Total first mortgage loans ................ 47,205,353 41,137,809
------------ ------------
Consumer and other loans:
Principal balances:
Loans to depositors, secured by savings ... 499,914 404,264
Commercial ................................ 54,305 63,452
Home improvement .......................... 454,615 450,547
------------ ------------
Total consumer and other loans ............ 1,008,834 918,263
------------ ------------
Less allowance for loan losses ................. (289,120) (295,800)
------------ ------------
$ 47,925,067 $ 41,760,272
============ ============
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year ...... $ 295,800 $ 300,000 $ 181,372
Provision charged to income ....... -0- -0- 120,623
Charge-offs and recoveries, net ... (6,680) (4,200) (1,995)
--------- --------- ---------
Balance at end of year ............ $ 289,120 $ 295,800 $ 300,000
========= ========= =========
</TABLE>
<PAGE>
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, 1996 and 1995, 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.
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 5 - Loans Receivable, continued
At September 30, 1996 and 1995, the Company had discontinued the accrual of
interest on nonperforming loans aggregating approximately $450,337 and $293,529,
respectively. Net interest income for 1996, 1995, and 1994 would have been
higher by $18,130, $13,394, and $15,500, 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 $547,445 and $586,904 as of September 30, 1996 and 1995,
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:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Balance, beginning of year .............. $ 564,264 $ 931,906
New loans ............................... 13,375 147,439
Repayment................................ (47,573) (605,167)
Other ................................... -0- 90,086
--------- ---------
Balance, end of year .................... $ 530,066 $ 564,264
========= =========
</TABLE>
Note 6 - 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:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Principal balance ........... $40,111,101 $37,235,123 $37,518,742
Custodial escrow balance .... $ 1,232,078 $ 1,424,705 $ 1,449,791
</TABLE>
<PAGE>
The following is an analysis of the changes in loan servicing rights
capitalized:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Balance, beginning of year ...... $ 41,473 $ -0-
Addition ........................ 93,990 42,646
Amortization .................... (15,618) (1,173)
--------- ---------
Balance, end of year ............ $ 119,845 $ 41,473
========= =========
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 7 - Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Investment securities ..................... $ 400,254 $ 485,828
Mortgage-backed securities ................ 244,552 308,710
Loans receivable .......................... 303,981 275,182
Allowanace for or uncollectible
interest ................................. (18,130) (13,394)
----------- -----------
$ 930,657 $ 1,056,326
=========== ===========
</TABLE>
Note 8 - Foreclosed Real Estate
The Company has acquired various properties through loan foreclosures. The
properties are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C>
Residential property $ -0- $ 90,000
Less allowance for losses -0- -0-
---------- -----------
$ -0- $ 90,000
========= ===========
</TABLE>
There was no activity in the allowance for real estate losses during 1996, 1995,
and 1994.
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 9 - Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Land - main location ---- $ 91,503 $ 91,503
Office building - main location 10-30 years 622,592 611,818
Furniture, fixtures, and equipment
main location 5-15 years 295,736 341,354
Autos 5 years 38,864 38,864
Land - branch ---- 157,500 157,500
Office building - branch 10-30 years 192,689 192,688
Furniture, fixtures, and equipment -
branch 5-15 years 62,067 64,452
Land - loan agency ---- 33,500 33,500
Office building - loan agency 39 years 121,500 121,500
----------- ----------
1,615,951 1,653,179
Less accumulated depreciation (645,767) (632,214)
----------- ----------
$ 970,184 $1,020,965
=========== ==========
</TABLE>
Note 10 - Other Assets
Other assets are summarized below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Funds due from sales of loans .............. $302,525 $353,675
Prepaid expenses ........................... 104,734 102,945
Other ...................................... 9,557 4,452
-------- --------
$416,816 $461,072
======== ========
</TABLE>
<PAGE>
Note 11 - Deposits
The aggregate amount of accounts with a minimum denomination of $100,000 were
approximately $27,273,394 and $26,343,645 at September 30, 1996 and 1995.
At September 30, 1996, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 55,285,454
1998 13,423,053
1999 4,792,971
2000 3,714,389
2001 440,133
Thereafter 15,666
-------------
$ 77,671,666
=============
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ----------- -----------
<S> <C> <C> <C>
Demand deposits $ -0- $ -0- $ -0-
Savings and NOW deposits 331,326 323,474 364,410
Time deposits 4,180,608 3,969,885 3,430,108
----------- ----------- -----------
$ 4,511,934 $ 4,293,359 $ 3,794,518
=========== =========== ===========
</TABLE>
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.
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 12 - Pension Plan, continued
The following table sets forth the plan's funded status and amounts recognized
in the Company's statements of financial condition at September 30:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested ................................. $ 1,247,505 $ 1,292,908 $ 1,245,908
Nonvested .............................. 91,899 106,373 76,127
----------- ----------- -----------
$ 1,339,404 $ 1,399,281 $ 1,322,035
=========== =========== ===========
Projected benefit obligation for
service rendered to date .................... $(1,856,303) $(1,996,728) $(1,832,175)
Plan assets at fair value, primarily
certificates of deposit and U.S. ............
government securities ....................... 1,907,532 1,787,739 1,677,057
----------- ----------- -----------
Plan assets in excess (shortfall)
of benefit obligation ....................... 51,229 (208,989) (155,118)
Unrecorded net loss from past
experience different from that
assumed and effects of changes in
assumptions ................................. 210,557 494,174 525,192
Prior service cost not yet recognized
in periodic pension cost .................... 116,140 123,499 130,858
Unrecognized net assets at 10-1-88
being recognized over 20.658 years .......... (417,450) (450,430) (483,410)
----------- ----------- -----------
(Accrued) prepaid pension cost ................ $ (39,524) $ (41,746) $ 17,522
=========== =========== ===========
A summary of the components of income follows:
<CAPTION>
<S> <C> <C> <C>
Service cost-benefits earned during
the year .................................... $ 125,062 $ 122,048 $ 100,578
Interest cost on projected benefit
obligation .................................. 133,210 125,199 116,254
Actual return on plan assets .................. (93,592) (146,118) (95,057)
Net asset gain (loss) deferred for
later recognition ........................... (31,484) 28,485 (19,112)
Amortization of unrecognized net asset ........ (32,980) (32,980) (32,980)
Amortization of prior service cost ............ 7,359 7,359 7,359
Amortization of loss .......................... 14,487 19,026 18,638
----------- ----------- -----------
Net periodic pension cost ..................... $ 122,062 $ 123,019 $ 95,680
=========== =========== ===========
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 12 - Pension Plan, continued
Assumptions used in the accounting for the pension plan were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate .......... 7.00% 7.00% 7.00%
Rate of increase in future
compensation levels .................. 5.00% 5.00% 5.00%
Expected long-term rate of return
on assets ............................ 7.00% 7.00% 6.00%
</TABLE>
The Company contributed $124,284 and $63,751 to the plan in 1996 and 1995,
respectively. There was no contribution during 1994 due to over funding in prior
years.
Note 13 - Income Taxes
The Company files its consolidated federal income tax return on a fiscal year
basis. If certain conditions are met in determining taxable income, the Company
is allowed a special bad debt deduction based on a percentage of taxable income
(presently 8%) or on specified experience formulas. Because of statutory
limitations, no special bad debt deduction was allowed for the years ended
September 30, 1996, 1995, and 1994.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Current (benefit) ........ $ 458,435 $ 700,654 $(483,980)
Deferred (benefit) ....... (193,299) (149,677) 63,422
--------- --------- ---------
$ 265,136 $ 550,977 $(420,558)
========= ========= =========
</TABLE>
<PAGE>
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 and
cumulative effect of change in accounting for income taxes as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Expected income tax (benefit) expense
at statutory tax rate of 34% ....... $ 245,828 $ 551,414 $(401,046)
Unrealized loss on loans held for sale -0- 50,096 (43,719)
Tax bad debt deduction based on a
percentage of taxable income ....... -0- -0- 12,147
Other ................................ 19,308 (50,533) 12,060
--------- --------- ---------
$ 265,136 $ 550,977 $(420,558)
========= ========= =========
Effective tax rate ................... 37% 34% (36%)
========= ========= =========
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
SAIF assessment ...................... $ 219,538 $ -0-
Allowance for loan losses ............ 62,829 62,829
Deferred compensation ................ 19,798 6,595
Accrued expenses ..................... -0- 17,953
Other ................................ 6,178 6,973
--------- --------
308,343 94,350
--------- --------
Deferred tax liabilities:
FHLB stock ........................... (65,586) (46,852)
Mortgage servicing rights ............ (40,747) (14,101)
Depreciable assets ................... (32,030) (32,506)
Unrealized loss on loans held for sale (24,401) (35,302)
Pension liability .................... (14,754) (28,063)
--------- --------
(177,518) (156,824)
--------- --------
Net deferred tax asset (liability) ...... $ 130,825 $ (62,474)
========= =========
</TABLE>
No valuation allowance for deferred tax assets was recorded as of September 30,
1996 and 1995, 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, 1996 and 1995, 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, 1996 and 1995.
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.
<PAGE>
Options to purchase shares of common stock of the Company may be granted to
selected directors, officers, and key employees. The number of shares of common
stock reserved for issuance under the stock option plan was equal to $121,519 or
10% of the total number of common shares issued pursuant to the conversion. The
option exercise price cannot be less than the fair market value of the
underlying common stock as of the date of the option grant and the maximum
option term cannot exceed ten years. Awards vest at a rate of 20% per year
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 14 - Stock Option and Incentive Plan, continued
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:
<TABLE>
<CAPTION>
<S> <C>
Options outstanding
Balance, September 30, 1994 -0-
Granted at $14.125 per share 103,441
Exercised, forfeited and expired -0-
-------
Balance, September 30, 1995 103,411
Granted -0-
Exercised at $14.125 per share (2,090)
Forfeited and expired -0-
-------
Balance, September 30, 1996 101,321
=======
Options exercisable at year end under stock option plan 18,594
=======
Shares available for future grants 18,108
=======
</TABLE>
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 Corp.
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.
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 97,215 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
<PAGE>
the ESOP loan on the Association's books and the related receivable on the
Holding Corp.'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 participant's 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
<PAGE>
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.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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.
The American Institute of Certified Public Accountants issued Statement of
Position 93-6 (SOP 93-6), Employers' Accounting for Employee Stock Ownership
Plans, in November 1994. The Company adopted this statement for the year ended
September 30, 1995. The adoption of SOP 93-6 did not have a significant effect
on the Company's financial statements.
ESOP compensation expense for the years ended September 30, 1996 and 1995,
totaled $182,013 and $118,419 respectively. The fair value of unearned ESOP
shares at September 30, 1996 and 1995, totaled $1,182,976 and $1,366,294
respectively. Following is a summary of ESOP shares at September 30:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Shares allocated ............................. 20,894 9,067
Shares committed to be released .............. 0 0
Unearned ..................................... 76,321 88,148
------ ------
Total ........................................ 97,215 97,215
====== ======
</TABLE>
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 48,608 shares, of the total shares of
common stock issued in the conversion. On July 26, 1995, the RRP awarded 41,197
shares 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.
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 and $19,397 as
compensation and benefits expense relating to this plan for the years ended
September 30, 1996 and 1995.
Note 17 - Financial Instruments
<PAGE>
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.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 17 - Financial Instruments, continued
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.
SFAS 107 does not permit financial institutions to take into account the value
of long-term relationships with depositors, commonly known as core deposit
intangibles, when estimating the fair value of deposit liabilities. These
intangibles are considered to be separate intangible assets that are not
financial instruments. Nonetheless, financial institutions' core deposits have
typically traded at premiums to their book values under both historical and
current market conditions.
Likewise, SFAS 107 does not permit financial institutions to take into account
the value of the cash flows and income stream derived from its portfolio of
loans serviced for others. See Note 6 to the consolidated financial statements
for information related to the portfolio of residential mortgage loans serviced
for others.
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 1996 or 1995.
<PAGE>
The estimated fair values of the Company's financial instruments were as follows
at:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ..................... $ 5,699,647 $ 5,699,647
Interest-earning time deposits ................ 1,663,573 1,661,800
Securities held-to-maturity ................... 30,138,744 30,114,685
Mortgage-backed securities held-to-maturity ... 24,948,793 25,383,579
Loans receivable, net ......................... 47,925,067 48,453,000
Accrued interest receivable ................... 930,657 930,657
Federal Home Loan Bank stock .................. 948,500 948,500
Financial liabilities:
Deposit liabilities ........................... 91,661,131 93,080,000
Advances from borrowers for taxes and insurance 917,222 917,222
</TABLE>
<PAGE>
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 19.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 18 - 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, 1996 and 1995, the Company had $4,994,869 and $5,633,006,
respectively, on deposit with the Federal Home Loan Bank of Dallas, and
$1,031,510 and $1,005,914, respectively, on deposit with Nations Bank of Texas.
The Company grants real estate and consumer loans to customers primarily in
Tyler, Texas and surrounding area of East Texas. The Company's loan portfolio is
substantially (97%) secured by real estate, and its ability to fully collect its
loans is dependent upon the real estate market in this region. The Company
typically requires collateral sufficient in value to cover the principal amount
of the loan. Such collateral is evidenced by mortgages on property held and
readily accessible to the Company.
Note 19 - Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements.
The Company had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
----------------------------------------- ----------------------------------------
Fixed Variable Fixed Variable
Rate Rate Total Rate Rate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
First mortgage $1,883,475 $ 464,150 $2,347,625 $ 518,300 $1,823,549 $2,341,849
Consumer and
other loans -0- -0- -0- -0- -0- -0-
---------- ---------- ---------- ---------- ---------- ----------
$1,883,475 $ 464,150 $2,347,625 $ 518,300 $1,823,549 $2,341,849
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Note 20 - 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 possibly additional
discretionary-- actions by regulators that, if undertaken, could have a direct
material effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
<PAGE>
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. Management
believes, as of September 30, 1996, that the Association meets all capital
adequacy requirements to which it is subject.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 20 - Regulatory Matters, continued
As of September 30, 1996, 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 regulatory tangible capital equal to 1.5%
of adjusted total assets, a minimum 5% core/leverage capital ratio, a minimum 6%
Tier 1 risk-based ratio, and a minimum 10% total risk- based capital to be
considered well capitalized. There are no conditions or events since that
notification that management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Total Risk-Based Capital
(to Risk-Weighted Assets) $17,754 44.2% $ 3,211 8.0% $ 4,014 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) $17,465 43.5% $ 1,605 4.0% $ 2,408 6.0%
Tier 1 Capital
(to Adjusted Total Assets) $17,465 15.3% $ 4,569 4.0% $ 5,712 5.0%
Tangible Capital
(to Adjusted Total Assets) $17,465 15.3% $ 1,714 1.5% $ 1,714 1.5%
As of September 30, 1995:
Total Risk-Based Capital
(to Risk-Weighted Assets) $17,155 43.4% $ 3,160 8.0% $ 3,950 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) $16,860 42.7% $ 1,580 4.0% $ 2,370 6.0%
Tier 1 Capital
(to Adjusted Total Assets) $16,860 14.4% $ 4,683 4.0% $ 5,854 5.0%
Tangible Capital
(to Adjusted Total Assets) $16,860 14.4% $ 1,756 1.5% $ 1,756 1.5%
</TABLE>
<PAGE>
As of September 30, 1996, legislation was enacted requiring a one-time
assessment on savings institutions for SAIF premiums, based on SAIF insured
deposits as of March 31, 1995. In accordance with the Financial Accounting
Standards Board's Emerging Issues Task Force, the Company's assessment of
$645,701 was accrued and is included in accrued expenses and other liabilities
as of September 30, 1996.
Note 21 - Compensated Absences
<PAGE>
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.
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 22 - Interest and Dividends on Investment Securities
The following categories of interest income on investment securities are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Federal Home Loan Bank stock
Dividends .................... $ 55,329 $ 54,235 $ 34,253
Securities held-to-maturity
Taxable interest income ....... 2,074,033 1,963,467 1,331,535
---------- ---------- ----------
$2,129,362 $2,017,702 $1,365,788
========== ========== ==========
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 23 - Other Noninterest Income and Expense
Other noninterest income and expense amounts are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Other noninterest income:
Loan late charges ......................... $ 25,825 $ 25,802 $ 25,127
Bank service charges and fees ............. 22,503 20,943 26,382
Other ..................................... 11,828 9,915 4,743
-------- -------- --------
$ 60,156 $ 56,660 $ 56,252
======== ======== ========
Other noninterest expense:
Advertising and promotion ................. $ 36,983 $ 28,541 $ 31,593
Data processing ........................... 86,716 89,033 86,850
Professional fees ......................... 80,434 67,090 42,988
Supervisory examination ................... 36,435 36,327 36,207
Printing, postage, stationery, and supplies 43,829 49,913 54,561
Telephone ................................. 18,884 18,839 15,495
Insurance and bond premiums ............... 61,261 59,575 41,904
Loan servicing expenses ................... 20,686 21,325 9,046
Franchise taxes ........................... 94,304 82,492 30,451
Other ..................................... 106,535 82,535 81,024
-------- -------- --------
$586,067 $535,670 $430,119
======== ======== ========
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 24 - Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition as of September 30,
1996 and 1995, and related condensed statements of income and statements of cash
flows for the years ended September 30, 1996 and 1995, should be read in
conjunction with the consolidated financial statements and the related notes.
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION 1996 1995
------------ -------------
<S> <C> <C>
Assets:
Cash ................................... $ 2,021,050 $ 4,812,891
Note receivable - ESOP Trust ........... 801,966 899,174
Investment in the Association .......... 18,041,989 17,424,744
Receivable from subsidiary ............. 78,834 47,142
Prepaid expenses ....................... 5,196 -0-
------------ ------------
Total assets ............................... $ 20,949,035 $ 23,183,951
============ ============
Liabilities:
Other liabilities ...................... $ 18,422 $ 37,557
------------ ------------
Stockholders' Equity:
Common stock ........................... 12,564 12,564
Additional paid-in capital ............. 12,112,516 12,048,774
Retained earnings ...................... 12,811,881 12,529,044
Treasury stock ......................... (2,797,013) -0-
Unearned ESOP shares ................... (763,206) (881,477)
Deferred compensation - RRP shares ..... (446,129) (562,511)
------------ ------------
Total stockholders' equity ................. 20,930,613 23,146,394
------------ ------------
Total liabilities and stockholders' equity . $ 20,949,035 $ 23,183,951
============ ============
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 24 - Condensed Parent Company Only Financial Statements, continued
<TABLE>
<CAPTION>
STATEMENT OF INCOME 1996 1995
----------- ------------
<S> <C> <C>
Income:
Equity in earnings of Association .... $ 498,973 $ 1,098,006
Interest income ...................... 69,700 54,843
----------- -----------
Total income ............................. 568,673 1,152,849
----------- -----------
Expenses:
Franchise tax expense ................ 55,405 52,852
Professional fees .................... 44,858 26,129
Other ................................ 31,705 16,885
----------- -----------
Total expenses ........................... 131,968 95,866
----------- -----------
Income before federal income taxes ....... 436,705 1,056,983
Federal income taxes (benefit) ........... (21,171) (13,846)
----------- -----------
Net income ............................... $ 457,876 $ 1,070,829
=========== ===========
</TABLE>
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 24 - Condensed Parent Company Only Financial Statements, continued
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS 1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 457,876 $ 1,070,829
Equity in earnings of the Association .................. (498,973) (1,098,006)
Increase in prepaid expenses ........................... (5,196) -0-
Increase (decrease) in other liabilities ............... (19,136) 37,557
------------ ------------
Net cash provided (used) by operating activities (65,429) 10,380
------------ ------------
Cash flows from investing activities:
Purchase of common stock of the Association ............ -0- (5,750,000)
ESOP loan origination .................................. -0- (972,080)
ESOP loan repayment .................................... 97,208 72,906
Increase in receivable from subsidiary ................. (31,692) -0-
------------ ------------
Net cash provided (used) by investing activities 65,516 (6,649,174)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock ............. 180,124 11,451,685
Purchase of treasury stock at cost ..................... (2,831,237) -0-
Sale of treasury stock for exercise of stock options ... 29,522 -0-
Dividends paid ......................................... (170,337) -0-
------------ ------------
Net cash provided (used) by financing activities (2,791,928) 11,451,685
------------ ------------
Net increase (decrease) in cash and cash equivalents ........ (2,791,841) 4,812,891
Cash and cash equivalents at beginning of year .............. 4,812,891 -0-
------------ ------------
Cash and cash equivalents at end of year .................... $ 2,021,050 $ 4,812,891
============ ============
Supplemental cash flow information:
Income tax paid ........................................ $ -0- $ 1,399
Receivable from subsidiary for ESOP
RRP shares issued .................................... $ 63,742 $ 47,142
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
East Texas Financial Services, Inc. and Subsidiary
Corporate Directory
East Texas Financial Services, Inc.
Board of Directors*
<S> <C> <C> <C>
Jack W. Flock Gerald W. Free Jim M. Vaughn, M.D. James W. Fair
Chairman of President and Retired Physician Real Estate Investment
the Board Chief Executive Investments Oil and Gas Interests
Of Counsel to Officer of the
Ramey & Flock, P. C. Association
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
President and Vice President and Corporate Secretary
Chief Executive Chief Operating and
Officer Financial Officer
First Federal Savings and Loan Association of Tyler
Officers
Gerald W. Free Derrell W. Chapman Joe C. Hobson Sandra J. Allen
President and Vice President and Sr. Vice President Corporate Secretary
Chief Executive Chief Operating and Mortgage Lending
Officer Financial Officer
William L. Wilson M. Earl Davis Elizabeth G. Taylor Marcia R. Shelton
Treasurer and Vice President Vice President and Assistant Secretary
Controller Compliance and Loan Officer and Loan Officer
Marketing
Earlene Cool
Assistant Treasurer
* Directors of the Company also serve as directors of the Association
</TABLE>
<PAGE>
Shareholder
Reference
Executive Offices
1200 South Beckham Avenue
Tyler, Texas 75701
Legal 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, 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 upon request.
Annual Meeting of Shareholders
January 22, 1997, at 2:00 p.m.
Company Offices
1200 South Beckham Avenue
Tyler, Texas
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
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.
</TABLE>
Exhibit 23
[GRAPHIC-LOGO] BRYANT & WELBORN, L.L.P Leon Welborn, C.P.A.
CPA Certified Public Accountants Leah Weatherly, C.P.A.
601 Chase Drive, Tyler, Texas 75701 Jerry Garrett, C.P.A.
Tel. (903) 561-4041 Fax (903) 561-4048
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, 1996, 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 26, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 704,615
<INT-BEARING-DEPOSITS> 7,363,220
<FED-FUNDS-SOLD> 480,285
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 55,087,537
<INVESTMENTS-MARKET> 55,498,264
<LOANS> 47,925,067
<ALLOWANCE> 289,000
<TOTAL-ASSETS> 114,372,936
<DEPOSITS> 91,661,131
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,781,192
<LONG-TERM> 0
0
0
<COMMON> 12,564
<OTHER-SE> 20,918,049
<TOTAL-LIABILITIES-AND-EQUITY> 114,372,936
<INTEREST-LOAN> 3,641,714
<INTEREST-INVEST> 4,129,801
<INTEREST-OTHER> 292,525
<INTEREST-TOTAL> 8,064,040
<INTEREST-DEPOSIT> 4,511,934
<INTEREST-EXPENSE> 4,511,934
<INTEREST-INCOME-NET> 3,552,106
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,199,911
<INCOME-PRETAX> 723,012
<INCOME-PRE-EXTRAORDINARY> 457,876
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 457,876
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.18
<LOANS-NON> 450,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 549,000
<ALLOWANCE-OPEN> 296,000
<CHARGE-OFFS> 7,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 289,000
<ALLOWANCE-DOMESTIC> 102,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 187,000
</TABLE>
