FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 0-24848
East Texas Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2559089
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification number)
1200 South Beckham, Tyler, Texas 75701
(Address of principal executive offices) (Zip code)
(903) 593-1767
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [ x ] Yes [ ] No
The number of shares of the registrant's common stock ($.01 par value)
outstanding as of June 30, 1999, was 1,392,853.
<PAGE>
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
June 30, 1999
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition, June 30, 1999
(Unaudited) and September 30, 1998
Consolidated Statements of Income, (Unaudited) three months and nine
months ended June 30, 1999, and June 30, 1998
Consolidated Statement of Changes in Stockholders' Equity, (Unaudited)
nine months ended June 30, 1999
Consolidated Statements of Cash Flows, (Unaudited) nine months ended
June 30, 1999, and June 30, 1998
Notes to (Unaudited) Consolidated Financial Statements, June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Changes In Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters To a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
<PAGE>
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1999
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
East Texas Financial Services, Inc. (the "Company") was formed in September of
1994 for the purpose of acquiring all of the common stock of First Federal
Savings and Loan Association of Tyler (the "Association"), concurrent with its
conversion from the mutual to stock form of ownership. The Company completed its
initial public stock offering of 1,215,190 shares of $.01 par value common stock
on January 10, 1995. The Company utilized approximately one half of the net
stock sale proceeds to acquire all of the common stock issued by the
Association. For additional discussion of the Company's formation and intended
operations, see the Form S-1 Registration Statement (No. 33-83758) filed with
the Securities and Exchange Commission and the Company's annual report on Form
10-KSB for the fiscal year ended September 30, 1998, also filed with the
Commission.
The financial statements presented in this Form 10-QSB reflect the consolidated
financial condition and results of operations of the Company and its wholly
owned subsidiary, First Federal Savings and Loan Association of Tyler.
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS June 30, 1999 September 30, 1998
------------- ------------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 700,340 $ 592,363
Interest-bearing deposits with banks 2,995,408 1,104,695
Interest-earning time deposits with financial institutions 2,559,617 1,959,617
Federal funds sold 0 129,187
Investment securities available-for-sale 3,509,689 0
Mortgage-backed securities available-for-sale 32,839,921 12,810,165
Investment securities held-to-maturity (estimated market
value of $31,856,963 at June 30, 1999, and
$30,115,954 at September 30, 1998) 31,996,016 29,766,844
Mortgage-backed securities held-to-maturity (estimated
market value of $6,499,597 at June 30, 1999
and $11,088,555 at September 30, 1998) 6,380,517 10,940,500
Loans receivable, net of allowance for credit losses of $231,971
at June 30, 1999 and $233,180 at September 30, 1998 63,309,037 61,119,047
Accrued interest receivable 1,156,568 978,378
Federal Home Loan Bank stock, at cost 2,138,800 789,100
Premises and equipment 2,643,508 2,273,067
Foreclosed real estate, net of allowance of $-0- 0 34,500
Mortgage servicing rights 268,071 216,879
Other assets 638,086 1,303,120
------------- -------------
Total Assets $ 151,135,578 $ 124,017,462
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits $ 1,887,603 $ 1,528,374
Savings and NOW deposits 13,714,731 10,504,973
Time deposits 72,098,938 74,610,310
------------- -------------
Total deposits 87,701,272 86,643,657
FHLB advances 42,282,763 14,945,852
Advances from borrowers for taxes and insurance 582,951 844,188
Federal income taxes
Current (37,562) -0-
Deferred 99,305 31,618
Accrued expenses and other liabilities 646,622 1,168,453
------------- -------------
Total liabilities 131,275,351 103,633,768
------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(continued)
June 30, 1999 September 30, 1998
------------- ------------------
(Unaudited)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value, 500,000
shares authorized, none outstanding
Common stock, $0.01 par value, 5,500,000 shares authorized,
1,884,492 shares issued and 1,392,853 outstanding 18,845 18,845
Additional paid-in-capital 12,319,624 12,319,624
Deferred compensation - RRP shares (126,080) (213,366)
Unearned employee stock ownership plan shares (543,564) (543,564)
Unrealized gain/(loss) available-for-sale securities (net) (15,406) (64,974)
Retained earnings (substantially restricted) 13,730,902 13,661,392
Treasury stock, 491,639 shares at cost (5,524,094) (4,794,263)
------------- -------------
Total stockholder's equity 19,860,227 20,383,694
------------- -------------
Total liabilities and stockholders' equity $ 151,135,578 $ 124,017,462
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Nine Months
Ended June 30, Ended June 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME Loans receivable:
First Mortgage $ 1,099,806 $ 1,137,446 $ 3,327,777 $ 3,424,340
Consumer and other loans 101,023 60,995 260,141 131,083
Securities available for sale:
Investment securities 4,030 11,546 56,220 41,859
Mortgage-backed securities 416,196 145,433 992,788 314,507
Securities held to maturity:
Investment securities 564,969 422,663 1,450,009 1,223,087
Mortgage-backed securities 115,175 243,422 432,185 839,190
Deposits with banks 31,185 58,664 115,181 190,550
----------- ----------- ----------- -----------
Total interest income 2,332,384 2,080,169 6,634,301 6,164,616
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,051,220 1,096,740 3,180,472 3,325,875
FHLB advances 475,237 167,030 1,032,074 350,878
----------- ----------- ----------- -----------
Total interest expense 1,526,457 1,263,770 4,212,546 3,676,753
----------- ----------- ----------- -----------
Net interest income before
provision for loan losses 805,927 816,399 2,421,755 2,487,863
Provision for loan losses 0 0 0 0
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 805,927 816,399 2,421,755 2,487,863
----------- ----------- ----------- -----------
NONINTEREST INCOME
Gain(loss) on sale of interest-earning assets 22,437 37,230 127,502 100,675
Loan origination and commitment fees 17,930 14,245 64,988 56,015
Loan servicing fees 23,667 19,874 53,400 68,798
Gain on foreclosed real estate (352) (6,911) (50) (6,351)
Other 16,543 13,692 76,792 35,330
----------- ----------- ----------- -----------
Total noninterest income 80,225 78,130 322,632 254,467
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(continued)
Three Months Nine Months
Ended June 30, Ended June 30,
(Unaudited) (Unaudited)
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NONINTEREST EXPENSE
Compensation and benefits 543,784 463,006 1,572,468 1,415,800
Occupancy and equipment 195,827 47,084 310,718 140,843
SAIF deposit insurance premium (27,533) 14,417 (1,069) 42,862
Loss on foreclosed real estate 0 0 2,069 0
Other 88,250 173,060 402,571 470,015
----------- ----------- ----------- -----------
Total noninterest expense 800,328 697,567 2,286,757 2,069,520
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes 85,824 196,962 457,630 672,810
Income tax expense (benefit) 36,974 73,913 175,630 247,662
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 48,850 $ 123,049 $ 282,000 $ 425,148
=========== =========== =========== ===========
Earnings per common share $ .04 $ .09 $ .21 $ .29
Earnings per common share - assuming dilution .04 .08 .21 .28
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED
June 30, 1999
Common Stock Unearned Unallocated Unrealized
and Additional RRP ESOP Gain(loss) on Retained Treasury
Paid in Capital Shares Shares AFS Securities Earnings Stock
--------------- ------ ------ -------------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1998 $ 12,338,469 $(213,366) $(543,564) $(64,974) $13,661,392 $(4,794,263)
Comprehensive income:
Net Income 282,000
Unrealized holding gains 49,568
Comprehensive income
Deferred compensation
amortization 87,286
Purchase of treasury stock
at cost (729,831)
Payment of cash dividends 212,490
Balance June 30, 1999 $ 12,338,469 $(126,080) $(543,564) $(15,406) $13,730,902 $(5,524,094)
============ ========= ========= ======== =========== ===========
<CAPTION>
Total
Comprehensive Stockholder'
Income Equity
------ ------
<C> <C>
Balance September 30, 1998 $ $20,383,694
Comprehensive income:
Net Income 282,000 282,000
Unrealized holding gains 49,568 49,568
---------
Comprehensive income $ 331,568
=========
Deferred compensation
amortization 87,286
Purchase of treasury stock
at cost (729,831)
Payment of cash dividends 212,490
Balance June 30, 1999 19,860,227
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
June 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 282,000 $ 425,148
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred loan origination fees 5,042 3,660
Amortization of premiums and discounts on investment
securities, mortgage-backed securities, and loans 118,528 100,344
Amortization of deferred compensation 87,286 87,286
Compensation charge related to release of ESOP shares 50,319 94,014
Depreciation 83,647 72,410
Deferred income taxes 39,381 (81,255)
Stock dividends on FHLB stock (56,100) (41,800)
Origination of mortgage servicing rights (106,128) (80,916)
Amortization of mortgage servicing rights 54,936 32,592
Net (gain) loss on sale of:
Securities held to maturity 0 0
Foreclosed real estate 2,069 0
Fixed assets 0 0
Net loss on disposal of fixed assets 0 3,889
Other assets 0 0
Loans (21,374) (19,759)
Loans held for sale 0 0
Proceeds from loan sales 8,751,313 6,805,150
Originations of loans held for sale 0 0
Proceeds from sale of fixed assets 0 0
(Increase) decrease in:
Accrued interest receivable (178,190) (51,399)
Other assets 665,034 (490,540)
Accrued loan loss 1,208 0
Increase (decrease) in:
Federal income tax payable (37,562) 89,741
Accrued expenses and other liabilities (521.831) (733,960)
Capitalized interest on time deposits 0 0
Net cash provided (used) by operating activities 9,219,578 6,214,605
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months End
June 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from investing activities
Purchases of interest earning time deposits $ (600,000) $ (295,617)
Net decrease (increase) in fed funds sold 129,187 753,847
Purchases of obligations - U.S. Govt. and agencies
held to maturity (11,986,719) (15,031,688)
Proceeds from maturity of time deposits 0 295,573
Proceeds from sale of securities held to maturity 0 0
Proceeds from maturities of obligations - U.S. Govt
and agencies held to maturity 9,725,000 9,000,000
Proceeds from sale of obligations of U.S. Govt
and agencies held to maturity 0 0
Proceeds from redemption of FHLB stock 270,100
Purchases of FHLB stock (1,293,600) 0
Purchases of investment securities available-for-sale (3,561,793) 0
Purchases of mortgage-backed securities available-for-sale (24,545,208) (7,598,697)
Purchases of mortgage-backed securities held to maturity 0 0
Principal payments on mortgage-backed securities available for sale 4,571,801 1,686,740
Principal payments on mortgage-backed securities held to maturity 4,544,859 5,601,036
Net originations and principal collections on loans (10,977,321) (11,615,043)
Capitalized acquisition cost related to foreclosed real estate 0 (2,737)
Proceeds from sale of foreclosed real estate 32,432 2,594
Proceeds from sale of fixed assets 0 0
Expenditures for premises and equipment (454,202) (3,700)
------------- ------------
Net cash provided (used) by investing activities (34,415,564) (16,937,592)
------------- ------------
Cash flows from financing activities: Net increase (decrease) in:
Non-interest bearing deposits, savings, NOW accounts 3,568,987 1,174,753
Time deposits (2,511,372) (2,051,617)
FHLB Advances 250,300,669 77,701,500
Repayment of FHLB Advances (222,963,758) (69,574,472)
Advances from borrowers for taxes and insurance (261,237) (266,052)
Dividends paid to stockholders (208,782) (177,111)
Purchase of treasury stock (729,831) 0
Proceeds from sale of common stock 0 0
------------- ------------
Net cash provided (used) by financing activities 27,194,676 6,807,001
------------- ------------
Net increase (decrease) in cash and cash equivalents 1,998,690 (3,915,986)
Cash and cash equivalents at beginning of the period 1,697,058 6,931,133
------------- ------------
Cash and cash equivalents at end of the period $ 3,695,748 $ 3,015,147
============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months End
June 30,
(continued)
1999 1998
------------- -------------
<S> <C> <C>
Supplemental disclosure:
Cash paid for:
Interest on deposits $ 1,671,547 $ 1,652,209
Income taxes $ 149,969 $ 4,589
Transfers from loans to real estate
acquired through foreclosures $ 0 $ 244,229
Loans charged off to loan loss reserves $ 1,280 $ 39,181
Recoveries credited to loan loss reserves $ 72 $ 0
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments which are, in the
opinion of management, necessary for fair presentation. These financial
statements have not been audited by an independent accountant. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations for interim
reporting. The Company believes that the disclosures are adequate to make the
information not misleading. However, these financial statements should be read
in conjunction with the financial statement and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended September 30, 1998.
The financial data and results of operations for interim periods presented may
not necessarily reflect the results to be anticipated for the complete year.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share for the three months and nine months ended June 30,
1999 and 1998, has been computed based on net income divided by the weighted
average number of common shares outstanding during the period. For the three
months ended June 30, 1999 and 1998, the weighted average number of shares
outstanding totaled 1,311,317 and 1,441,868, shares respectively. For the nine
months ended June 30, 1999 and 1998, the weighted average number of shares
outstanding totaled 1,346,919 and 1,441,868 shares respectively.
Earnings per common share - assuming dilution, for the three months and nine
months ended June 30, 1999 and 1998, has been computed based on net income
divided by the weighted average number of common shares outstanding. In
addition, it includes the effects of all dilutive potential common shares that
were outstanding during the period. For the three months ended June 30, 1999 and
1998, the weighted average number of shares outstanding for earnings per share
assuming dilution totaled 1,338,365 and 1,499,546, shares respectively. For the
nine months ended June 30, 1999 and 1998, the weighted average number of shares
outstanding for earnings per share - assuming dilution totaled 1,365,419 and
1,495,531, shares respectively.
For both earnings per share and earnings per common share - assuming dilution
and as prescribed by the American Institute of Certified Public Accountants
Statement of Position 93-6 ("SOP 93-6") Employer's Accounting for Employees
Stock Ownership Plans, the weighted average number of shares outstanding does
not include unallocated Employee Stock Ownership Plan ("ESOP") shares.
See Part II, Item 6 - Exhibits for a detailed presentation of the earnings per
share calculation for the three month and nine month periods ended June 30, 1999
and 1998.
<PAGE>
NOTE 3 - SECURITIES
The carrying values and estimated market values of investment securities
available-for-sale as of June 30, 1999, by type of security are as follows:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
---------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Rate $3,500,000 $69,089 $ 13,602 $ (45,798) $3,509,689
Adjustable Rate 0 0 0 0 0
---------- ------- -------- ----------- ----------
$3,500,000 $69,089 $ 13,602 $ (45,798) $3,509,689
---------- ------- -------- ----------- ----------
</TABLE>
The weighted average yield on the investment security available-for-sale
portfolio was 6.06% for the quarter ended June 30, 1999.
The amortized cost and estimated market values of investment securities
held-to-maturity as of June 30, 1999, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Debt securities:
U. S. Treasury $ 1,499,930 $ 6,111 $ 0 $ 1,506,041
U. S. government agency
30,496,086 50,246 195,410 30,350,922
----------- -------- ----------- -----------
Total debt
securities $31,996,016 $ 56,357 $ 195,410 $31,856,963
----------- -------- ----------- -----------
</TABLE>
<PAGE>
The amortized cost and estimated market values of investment securities
held-to-maturity as of June 30, 1999, by contractual maturity are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 5,509,478 $ 5,544,534
Due after one year through two
years 3,995,467 4,016,768
Due after two years through three years 1,000,000 989,530
Due after three years through five years 21,491,071 21,306,131
----------- -----------
Total debt securities $31,996,016 $31,856,963
----------- -----------
</TABLE>
As of June 30, 1999, approximately $22,500,000 of the securities had call
options exercisable at the discretion of the issuer. Such call dates varied
between September 1999 and June 2001.
As of June 30, 1999, the weighted average yield on the Company's investment
security held-to-maturity portfolio was approximately 6.00% while the Company's
overall investment portfolio, including securities held-to-maturity, investment
securities available-for-sale, overnight deposits and interest earning time
deposits with other financial institutions was approximately 5.90%.
The carrying values and estimated market values of mortgage-backed and related
securities available-for-sale as of June 30, 1999, by type of security are as
follows:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fixed Rate $ 1,478,332 $ 0 $ 9,306 $ (16,224) $ 1,452,802
Adjustable Rate 31,082,565 267,392 1,517 38,679 31,387,119
----------- ----------- ----------- ------------ -----------
$32,560,897 $ 267,392 $ 10,823 $ 22,455 $32,839,921
----------- ----------- ----------- ------------
</TABLE>
<PAGE>
The carrying values and estimated market values of mortgage-backed and related
securities held-to-maturity as of June 30, 1999, by type of security are as
follows:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Rate $ 363,836 $ 0 $ 179 $ 363,657 $ 363,881
Adjustable Rate 5,968,914 55,350 7,404 6,016,860 6,135,716
---------- ------- ---------- ---------- ----------
$6,332,750 $55,350 $ 7,583 $6,380,517 $6,499,597
---------- ------- ---------- ---------- ----------
</TABLE>
The overall yield on the Company's mortgage-backed securities portfolios as of
June 30, 1999, was approximately 5.91%.
NOTE 4 - CURRENT ACCOUNTING ISSUES
SFAS No. 130 In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS ) No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in general purpose financial
statements. Comprehensive income includes net income and several other items
that current accounting standards require to be recognized outside of net
income.
SFAS No. 130 requires companies to display comprehensive income in its financial
statements, to classify items of comprehensive income by their nature in their
financial statements and to display accumulated balances of comprehensive income
in stockholders' equity separately from retained earnings and addition paid-in
capital.
The Statement is effective for fiscal years beginning after December 31, 1997.
The Company adopted the Statement as required.
SFAS No. 131 In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure About
Segments of and Enterprise and Related Information. The Statement requires
entities to report certain information about their operating segments in a
complete set of financial statements. It requires them to report certain
enterprise-wide information about their products and services, activities in
different geographic regions and their reliance on major customers, and to
disclose certain segment information in their interim financial statements.
The Statement is effective for fiscal years beginning after December 15, 1997.
The Company has determined that it has no reporting obligations under this
statement. The Company adopted the Statement as required.
<PAGE>
SFAS No. 132 In February of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard (SFAS) No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132
revises current disclosures for employers' disclosures for pensions and other
postretirement benefit plans. It standardizes the disclosure requirements for
these plans to the extent possible, and it requires additional information about
changes in the benefit obligations and the fair value of plan assets that are
expected to enhance financial analysis. It does not change measurement or
recognition standards for these plans.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
The Company anticipates changing the disclosure requirements of its defined
benefit pension plan as a result of the statement. The Company has no other
postretirement benefit plans. The Company adapted the statement as required.
SFAS No. 133 In June of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives in the statement of financial position at fair
value. The Company currently does not invest in any derivative instruments or
hedging activities as defined in this Statement.
The Statement is effective for fiscal years beginning after June 15, 1999. The
Company adopted the Statement as required.
NOTE 5 - STOCK OPTION AND INCENTIVE PLAN
The 1995 Stock Option and Incentive Plan (the "Stock Option Plan") provides for
awards in the form of stock options, stock appreciation rights, limited stock
appreciation rights, and restricted stock.
Options to purchase shares of common stock of the Company may be granted to
selected directors, officers and key employees. The number of shares of common
stock reserved for issuance under the stock option plan was equal to 121,519 or
10% of the total number of common shares issued pursuant to the conversion. The
option exercise price cannot be less than the fair market value of the
underlying common stock as of the date of the option grant, and the maximum
option term cannot exceed ten years. Awards vest at a rate of 20% per year
beginning at the date of the grant. The Company plans to use treasury stock for
the exercise of options. The following is a summary of changes in options
outstanding:
<TABLE>
<CAPTION>
<S> <C>
Options outstanding
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
Granted -0-
Exercised at $14.125 per share (1,056)
Forfeited and expired -0-
Balance, September 30, 1997 100,276
=======
</TABLE>
<PAGE>
On March 25, 1998, the Company completed a 3 for 2 stock split in the form of a
50% dividend. As a result of the split, the number of outstanding options,
option price, options exercisable at year end, and shares available for future
grants were adjusted as follows:
<TABLE>
<CAPTION>
<S> <C>
Options outstanding
Balance, September 30, 1997 150,411
Granted -0-
Exercised at $9.42 per share (1,568)
Forfeited and expired -0-
Balance, September 30, 1998 148,843
=======
Options exercisable at June 30, 1999 under stock option plan 86,807
=======
Shares available for future grants 27,162
</TABLE>
During the nine months ended June 30, 1999, no options were exercised, issued,
or forfeited.
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
The outstanding advances from the FHLB consisted of the following at June 30,
1999:
<TABLE>
<CAPTION>
Maturity Balance Rate
-------- ------- ----
<S> <C> <C>
07/06/1999 $ 1,959,759 4.85%
07/06/1999 $ 8,000,000 4.85%
07/06/1999 $ 3,000,000 4.85%
07/06/1999 $ 22,270,000 4.85%
12/31/2004 $ 255,024 6.09%
01/03/2005 $ 116,215 6.03%
01/01/2013 $ 469,788 6.09%
01/01/2013 $ 446,389 6.13%
02/01/2013 $ 442,958 5.91%
03/03/2014 $ 1,026,861 5.45%
04/01/2014 $ 988,197 5.97%
05/01/2014 $ 1,346,772 5.66%
06/01/2014 $ 1,024,800 5.90%
07/01/2014 $ 936,000 6.38%
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock and deposit accounts in the FHLB, mortgage
collateral, securities collateral, and other collateral.
<PAGE>
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
June 30, 1999
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The principle business of the Company is that of a community-oriented financial
institution attracting deposits from the general public and using such deposits
to originate one- to four-family residential loans and, to a lesser extent,
commercial real estate, one- to four-family construction, multi-family and
consumer loans. These funds have also been used to purchase mortgage-backed
securities, U. S. government and agency obligations and other permissible
securities. The Company also borrows funds from the Federal Home Loan Bank of
Dallas ("FHLB") to fund loans and to purchase securities. The ability of the
Company to attract deposits is influenced by a number of factors, including
interest rates paid on competing investments, account maturities and levels of
personal income and savings. The Company's cost of funds is influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are influenced by the demand for real estate loans and other
types of loans, which is in turn affected by the interest rates at which such
loans are made, general economic conditions affecting loan demand, the
availability of funds for lending activities, economic conditions and changes in
real estate values.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and the interest paid on deposits and borrowings. Results
of operations are also affected by the Company's provision for loan losses and
the net gain (loss) on sales of interest earning assets and loan fees. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
The Company has expanded its product lines to include commercial and consumer
loans, debit and credit cards, an ATM machine and cards, safe deposit boxes, and
a full range of business and personal checking and deposit accounts. With the
introduction of new products and services, the Company opened an additional
full-service office located in South Tyler.
The start-up costs associated with the new product lines and the expansion will
be significant and the Company does not anticipate the new branch office to be
profitable immediately. However, management believes that the long-term future
of the Company is dependent upon the success of this change.
<PAGE>
FINANCIAL CONDITION
Total assets were $151.1 million at June 30, 1999, a $27.1 million increase from
the $124.0 million reported at September 30, 1998, the Company's most recent
fiscal year end. The increase in total assets was the result of a $20.0 million
increase in mortgage-backed securities available-for-sale, a $3.5 million
increase in investment securities available-for-sale, a $2.2 million increase in
investment securities held-to-maturity, a $2.5 million increase in
interest-earning deposits with banks and a $2.2 million increase in loans
receivable. The increases were partially offset by a $4.6 million decline in
mortgage-backed securities held to maturity.
At June 30, 1999, loans receivable totaled $63.3 million, compared to $61.1
million at September 30, 1998. The increase in loans receivable was primarily
the result of the Company's decision to continue to place all of it's 15 year
and shorter maturity mortgage loans into portfolio. In addition, the Company's
commercial and consumer loan portfolio increased by approximately $2.0 million
from September 1998 to June 1999. The increase was a result of the Company's
decision , in April 1999, to begin offering consumer and commercial loans.
The Company continued to offer home equity loans and as of June 30, 1999, the
Company had approximately $3.6 million in home equity and home improvement loans
outstanding.
The increase in the mortgage-backed securities available-for-sale portfolio was
primarily the result of the Company's decision to continue its program of
borrowing funds from the FHLB and investing the proceeds into mortgage-backed
and similar securities in an effort to achieve a positive margin on the
transaction. At June 30, 1999, the portfolio totaled $32.8 million, compared to
$12.8 million at September 30, 1998. At June 30, 1999, the average yield on the
securities in the program was approximately 5.72% while the cost of the FHLB
advance was approximately 4.85%, resulting in a pre-tax interest rate spread of
87 basis points.
Subject to favorable interest rates, the Company intends to continue the plan of
borrowing funds from the Federal Home Loan Bank ("FHLB") and invest the proceeds
in adjustable rate mortgage-backed securities to be held in an
available-for-sale accounting classification. The purpose of the program is to
leverage a portion of the Company's excess capital and to achieve a rate of
return on the difference in the rate earned on the securities and the cost of
the advances. The success of the program will be dependent upon several factors,
including the Company's ability to purchase adjustable rate securities that will
maintain a positive margin above the FHLB advance rates. The Company intends to
primarily borrow funds from the FHLB with terms of approximately thirty days and
invest in mortgage-backed securities with interest rate adjustment frequencies
that vary between one month and one year.
The investment security available-for-sale portfolio consists of corporate debt
securities. The corporate debt securities have a fixed rate and term. The
Company invests only in investment grade corporate debt with varying maturities
and ratings. All corporate debt securities have maturities of less than or equal
to five years. The yield on the investment security available-for-sale portfolio
was 6.06% at June 30, 1999.
<PAGE>
At June 30, 1999, the investment securities held-to-maturity portfolio totaled
$32.0 million, compared to $29.8 million at September 30, 1998. At June 30,
1999, the overall yield on the portfolio was approximately 6.00%, compared to
6.01% at September 30, 1998. At June 30, 1999, the portfolio contained $5.5
million in securities with remaining terms until maturity of less than one year,
$4.0 million with remaining maturities of one through two years, $1.0 million
with remaining maturities of two through three years and $21.5 million with
remaining maturities of three through five years. Approximately $22.5 million of
the investment securities are callable at the discretion of the issuer, and the
call dates range from September 1999 to June 2001.
The Company's mortgage-backed securities held-to-maturity portfolio totaled $6.3
million at June 30, 1999, compared to $10.9 million at September 30, 1998. The
decrease in mortgage-backed securities held-to-maturity was primarily due to
principal payments received on the portfolio during the period. Continued lower
long-term interest rates could continue to influence borrower decisions to
refinance the adjustable rate mortgage loans underlying the Company's
mortgage-backed securities held-to-maturity portfolio. The result would be a
continued decrease in the balances reported in this asset category. The weighted
average yield on the portfolio was approximately 6.96% at June 30, 1999.
Total deposits were $87.7 million at June 30, 1999, a $1.1 million increase from
the $86.6 million reported at September 30, 1998. The Company's cost of deposits
was approximately 4.90% at June 30, 1999, and the overall cost of funds,
including FHLB advances, was approximately 4.94%.
The Company reported $42.2 million in borrowed funds at June 30, 1999, an
increase of $27.3 million from the $14.9 million reported at September 30, 1998.
Approximately $32.8 million of the borrowed funds were used to invest in
mortgage-backed securities available-for-sale as part of the Company's wholesale
funded arbitrage program. The advance had a remaining term of less than 30 days
and had an interest rate of 4.85%. Approximately $7.7 million was used to fund
the wholesale loan arbitrage of 15 year loans at an average rate of 5.06%, with
the remaining $1.7 million in advances used to fund a portion of the Company's
commercial real estate loan portfolio at a weighted average cost of
approximately 6.05%.
Stockholders' equity totaled $19.8 million at June 30, 1999, a decrease of
$620,000 from the $20.4 million reported at September 30, 1998. The decrease was
primarily attributable to the $730,000 increase in treasury stock, the payment
of cash dividends in the amount of $212,000 and a $50,000 decrease in net
unrealized losses on securities available-for-sale. The decrease was partially
offset by net income of $282,000 reported for the nine months ended June 30,
1999, and a $87,000 decrease in deferred compensation.
At June 30, 1999, the Company reported a book value per share of $14.26 based on
1,392,853 net outstanding shares. During the nine months ended June 30, 1999,
the Company repurchased 71,203 shares of treasury stock at an average price of
$10.25 per share. The result was an increase in the number of shares held as
treasury stock to 491,639 at an average cost of $11.24 per share.
<PAGE>
RESULTS OF OPERATIONS
The Company's net income is dependent primarily upon net interest income, the
difference or spread between the average yield earned on loans and investments
and the average rate paid on deposits, as well as the relative amounts of such
assets and liabilities. The Company, like other financial intermediaries, is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different times, or on a different basis, than
its interest earning assets.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998
General. Net income for the three months ended June 30, 1999 was $48,850 or $.04
per share, a decrease of $74,199 from the $123,049 or $.09 per share reported
for the three months ended June 30, 1998. The decrease in net income was
attributable to a $10,000 decline in net interest income after provision for
loan losses and a $103,000 increase in total non-interest expense. The decline
in net interest income and the increase in noninterest expense was partially
offset by a $2,000 increase in noninterest income and a $37,000 decrease in
income tax expense.
Net Interest Income. For the quarter ended June 30, 1999, net interest income
before provision for loan losses totaled $806,000, a decrease of $10,000 from
the $816,000 reported for the quarter ended June 30, 1998. On an annualized
basis, the $806,000 in net interest income for the current quarter was
approximately 2.44% of average interest earning assets and 2.34% of average
total assets. For the quarter ended June 30, 1998, the $816,000 in net interest
income was approximately 2.83% of average interest earning assets and 2.74% of
average total assets. Average interest earning assets were approximately $137.4
million for the quarter ended June 30, 1999, compared to $115.4 million for the
quarter ended June 30, 1998.
The decline in net interest income, despite the fact that average interest
earning assets increased by approximately $16.7 million, was primarily the
result of continued period of minimal differences in short term and long term
interest rates. Cash flow from the Company's interest earning assets has
increased over the past several quarters as mortgage borrowers have elected to
refinance their mortgages. In addition, scheduled maturities and call options of
the investment securities portfolios have also provided additional challenges
for reinvesting cash flow in this current interest rate environment. The result
has been, despite growth in interest-earning assets, a yield on the Company's
average interest-earning assets that declined from 7.08% for the quarter ended
June 30, 1998 to 6.79% for the quarter ended June 30, 1999 as the cash flow has
been reinvested at lower interest rates.
Interest rates on the Company's primary source of funds, certificates of
deposit, have not decreased as rapidly as interest rates have fallen. Continued
competition for deposits in the Company's market has compelled the Company to
continue to pay higher interest rates in order to maintain current deposit
levels. For the quarter ended June 30, 1999, the $1.1 million in interest
expense on deposits was, on an annualized basis, approximately 4.81% of average
interest costing deposits, compared to 4.99% for the same quarter in 1998. On an
annualized basis, the $1.5 million in total interest expense, reported for the
quarter ended June 30, 1999, was approximately 5.01% of average interest costing
liabilities outstanding for the quarter. For the quarter ended June 30, 1998,
the $1.3 million in total interest expense was approximately 5.08% of average
interest costing liabilities.
<PAGE>
Total interest income was $2.3 million for the quarter ended June 30, 1999, an
increase of $252,000 from the $2.1 million reported for the same quarter in
1998. Interest income on loans-receivable totaled $1.2 million or 7.68% of
average loans receivable balances outstanding for the quarter ended June 30,
1999. For the three months ended June 30, 1998, interest income on
loans-receivable was approximately 7.80% of average loans receivable balances.
The Company recently implemented a wholesale loan arbitrage program. The
program, designed to leverage a portion of the Company's excess capital, allows
the Company to portfolio 15-year loans with lower interest rates. The loans are
funded with a combination of long-term amortizing and short term advances from
the FHLB. As a result, the Company has been able to increase its loans
receivable portfolio and maintain interest income from loans receivable despite
lower mortgage rates. The growth has been at marginal yields at less than the
average in the portfolio and the result has been a decline in the average yield
on the portfolio. However, the goal of the program is to increase overall net
interest income.
Interest income from mortgage-backed securities available-for sale totaled
$417,000 for the three months ended June 30, 1999, compared to $145,000 for the
three months ended June 30, 1998. The increase in interest income is a direct
result of the increase in the average balance outstanding during the comparable
quarters from $9.6 to $27.5 million. Interest income from this portfolio is part
of the Company's plan to borrow funds from the FHLB and invest in
mortgage-related securities in an effort to achieve a margin on the difference
in the investment yield and the cost of the borrowings from the FHLB. The yield
on the portfolio was approximately 5.72% at June 30, 1999. [See "Financial
Condition"]
Interest income from the investment securities held-to-maturity portfolio
totaled $565,000 for the three months ended June 30, 1999, compared to $423,000
for the same quarter in 1998. The increase was primarily the result of an
increase in the average balance outstanding in the portfolio from $27.1 million
for the three months ended June 30, 1998 to $29.5 million for the three months
ended June 30, 1999.
Interest income from the mortgage-backed securities held-to-maturity portfolio
totaled $115,000 for the three months ended June 30, 1999, compared to $243,000
for the same period in 1998. Continued cash flow from prepayments on the
adjustable rate securities in the portfolio was redirected into the Company's
lending operations and its investment securities held-to-maturity portfolio to
replace matured or called investment securities. The result was a decline in
interest income from the portfolio.
Interest paid to depositors totaled $1.1 million for the three months ended June
30, 1999, down $46,000 from the $1.1 million for the three months ended June 30,
1998. Average deposit balances declined $403,000 from $87.8 million for the
quarter ended June 30, 1998 to $87.4 million for the quarter ended June 30,
1999.
Interest on FHLB advances was $475,000 for the three months ended June 30, 1999,
compared to $167,000 for the same period in 1998. The increase was a direct
result of the continued increase in total FHLB advances in the Company's
wholesale investment security arbitrage and its program to match fund 15 year
loans with advances.
Provision For Loan Losses. The Company made no provision for loan losses for the
quarter ended June 30, 1999 or for the quarter ended June 30, 1998. [See -
"Asset Quality"]
<PAGE>
Noninterest Income. Noninterest income totaled $80,000 for the three months
ended June 30, 1999, compared to $78,000 for the same period in 1998, a $2,000
increase.
The increase was primarily the result of a $4,000 increase in loan origination
and commitment fees and a $4,000 increase in loan servicing fees. Gains on sales
of interest earnings assets declined to $22,000 for the three months ended June
30, 1999, from $37,000 for the three months ended June 30, 1998. Fewer loans
were sold into the secondary market as the Company implemented its program of
portfolioing all 15-year and shorter loans.
Noninterest Expenses. Noninterest expenses totaled $800.000 for the three months
ended June 30, 1999, compared to $698,000 for the three months ended June 30,
1998.
The increase in noninterest expense was the result of an $81,000 increase in
compensation and benefits expense from $463,000 for the three months ended June
30, 1998 to $544,000 for the three months ended June 30, 1999. Also, there was a
$149,000 increase in occupancy and equipment expense from $47,000 for the three
months ended June 30, 1998 to $196,000 for the three months ended June 30, 1999.
The increase in both compensation and benefits expense and occupancy and
equipment expense were the result of additional compensation for the staffing of
a new full-service office opened for business during the current year. Also,
additional expenses associated with the funding of the Company's defined benefit
pension plan and additional expenses associated with the Company's Employee
Stock Ownership Plan accounted for a portion of the increase in compensation and
benefits expense. The Company estimates that the additional expenses associated
with the opening of the new office and expenses associated with introducing
additional banking products are approximately $35,000 per month. Based on
projected net interest income margins and noninterest income, the Company
believes that the new office location will become profitable at approximately
$15 million in assets. At June 30, 1999 the new location had approximately $3
million in assets and commitments to loan an additional $4 million.
Provision For Income Taxes. The Company incurred federal income tax expense of
$37,000 or 42.9% of pre-tax income for the three months ended June 30, 1999,
compared to $74,000 or 37.5% of pre-tax income for the three months ended June
30, 1998.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998
General. For the nine months ended June 30, 1999, the Company reported net
income of $282,000 or $.21 per common share and $.21 per common share - assuming
dilution, compared to $425,000 or $.29 per common share and $.28 per common
share - assuming dilution for the nine months ended June 30, 1998. The decrease
in net income was attributable to a $66,000 decline in net interest income after
provisions for loan losses and a $217,000 increase in noninterest operating
expenses, which were partially offset by a $68,000 increase in noninterest
income and a $72,000 decrease in income tax expense.
<PAGE>
Net Interest Income. For the nine months ended June 30, 1999, net interest
income after provisions for loan losses totaled $2.4 million, a decrease of
$66,000 from the $2.5 million reported for the nine months ended June 30, 1998.
On an annualized basis, the $2.4 million in net interest income after provisions
for loan losses for the current period was approximately 2.44% of average
interest earning assets and 2.35% of average total assets. For the nine months
ended June 30, 1998, the $2.5 million in net interest income after provisions
for loan losses was approximately 2.87% of average interest earning assets and
2.78% of average total assets on an annualized basis. Average interest earning
assets were approximately $132.1 million for the nine months ended June 30,
1999, compared to $115.4 million for the nine months ended June 30, 1998.
Total interest income was $6.6 million or 6.69%, on an annualized basis, of
average interest earning assets for the nine months ended June 30, 1999,
compared to $6.2 million or 7.12% of average interest earning assets for the
nine months ended June 30, 1998. The increase in total interest income is
attributable to the increase in average outstanding balance of interest earning
assets. The decline in average yield on interest earning assets was a result of
continued lower interest rates and a continued narrowing of the difference in
short and long term interest rates. Cash flow from the Company's interest
earning assets are being redeployed in lower yielding assets in the current
interest rate and the result is a decline in the average yield on the Company's
interest earning asset portfolio.
Interest income on loans receivable totaled $3.6 million for the nine months
ended June 30, 1999, unchanged from the $3.6 million reported for the nine
months ended June 30, 1998. The continued level of interest income on loans
receivable, despite a decline in the average yield on the portfolio, was a
direct result of the increase in balances outstanding in the portfolio as the
Company continued its policy of placing into portfolio the majority of the loans
it originates. Average loans receivable increased to $62.2 million for the nine
months ended June 30, 1999 from $59.4 million for the nine months ended June 30,
1998. For the nine months ended June 30, 1999, the $3.6 million in interest
income on loans receivable, on an annualized basis, was approximately 7.65% of
average loans receivable, compared to 7.98% for the nine months ended June 30,
1998.
Interest income from mortgage-backed securities available-for sale totaled
$993,000 for the nine months ended June 30, 1999, compared to $315,000 for the
nine months ended June 30, 1998. Interest income from this portfolio is part of
the Company's program, begun in June of 1997, to borrow funds from the FHLB and
invest in mortgage-related securities in an effort to achieve a positive margin
on the difference in the investment yield and the cost of the borrowings. At
June 30, 1999, the Company had approximately $32.8 million invested in the
program. [See "Financial Condition"]
Interest income on investment securities held-to-maturity totaled $1.5 million
for the nine months ended June 30, 1999, compared to $1.2 million for the nine
months ended June 30, 1998. The increase in interest income on the portfolio was
the result of a $4.8 million increase in the average balance outstanding, as the
Company diverted excess cash flow into these securities. For the nine months
ended June 30, 1999, the $1.5 in interest income, on an annualized basis, was
approximately 6.26% of the average balance outstanding, compared to 6.26% for
the $1.2 million reported for the nine months ended June 30, 1998.
<PAGE>
Interest income on mortgage-backed securities held-to-maturity was $432,000 for
the nine months ended June 30, 1999, compared to $839,000 for the nine months
ended June 30, 1998. The decline in interest income on the portfolio was
primarily the result of a decline in the average balance outstanding in the
portfolio from $15.3 million for the nine months ended June 30, 1998 to $8.7
million for the nine months ended June 30, 1999. The Company redirected cash
flow from the portfolio into its lending operations, its investment securities
available-for-sale portfolio, and its investment securities held-to-maturity
portfolio. The adjustable rate feature of the underlying loans in the
securities, the higher coupon rates on such loans, and lower rates of interest
on fixed interest mortgage loans have caused borrowers on the underlying loans
to seek out opportunities to refinance their mortgages. The result has been an
increase in the cash flow from the portfolio, which resulted in the decline in
the average balances in the portfolio.
Interest expense was $4.2 million for the nine months ended June 30, 1999, an
increase of $536,000 from the $3.7 million reported for the nine month period
ended June 30, 1998. An increase in average interest costing liabilities,
including advances from the FHLB, from $96.4 million for the nine months ended
June 30, 1998 to $115.8 million for the nine months ended June 30, 1999
primarily accounted for the increase in interest expense. The $4.2 million in
interest expense reported for the nine month period ended June 30, 1999 was, on
an annualized basis, approximately 4.85% of average interest costing
liabilities, compared to the $37 million or 5.09% of average interest costing
liabilities for the same period in 1998.
Noninterest Income. Noninterest income was $323,000 for the nine months ended
June 30, 1999, compared to $254,000 for the nine months ended June 30, 1998. The
increase in income was directly attributable to additional gains on sales of
interest earning assets, additional loan origination fees, and other income. The
increase in other income was a result of a one time collection of a deficiency
judgment on a previously foreclosed real estate owned property of approximately
$30,000.
Gains on sales on interest earning assets totaled $128,000 for the nine month
period ended June 30, 1999, compared to $101,000 for the nine months ended June
30, 1998. Loan origination and commitment fees were $65,000 for the nine months
ended June 30, 1999, compared to $56,000 for the nine months ended June 30,
1998. The increases were directly attributable to additional lending activity of
the Company during the current period and to the fact that during the first
three months of the nine month period ended June 30, 1999, the Company sold more
loans into the secondary market than during the comparable period in 1998.
Offsetting the increases in noninterest income was a $15,000 decline in loan
servicing fees from $69,000 for the nine months ended June 30, 1998 to $53,000
for the nine months ended June 30, 1999. The decline in loan servicing fees
resulted as the Company charged-off previously recorded origination mortgage
servicing rights income as loans sold and serviced were refinanced.
Noninterest Expense. Noninterest expense was reported as $2.3 million for the
nine month period ended June 30, 1999, a $217,000 increase from the $2.1 million
reported for the nine months ended June 30, 1998.
<PAGE>
The increase in noninterest expense was primarily the result of a $157,000
increase in compensation and benefits expense from $1.4 million for the nine
months ended June 30, 1998 to $1.6 million for the nine months ended June 30,
1999. The increase in compensation and benefits expense was the result of
additional compensation for additional staff employed at the Company's new
office location. Also, additional expenses associated with the funding of the
Company's defined benefit pension plan and additional expenses associated with
the Company's Employee Stock Ownership Plan accounted for a portion of the
increase.
Occupancy and equipment expense totaled $311,000 for the nine months ended June
30, 1999, compared to $141,000 for the nine months ended June 30, 1998. The
increase was attributable to additional expenses associated with the opening of
the new full-service office.
Provision For Income Taxes. The Company incurred federal income tax expense of
$176,000 or 38.4% of pre-tax income for the nine months ended June 30, 1999,
compared to $248,000 or 36.8% of pre-tax income for the nine months ended June
30, 1998.
ASSET QUALITY
At June 30, 1999, the Company's non-performing assets totaled $387,000 or .26%
of total assets, compared to $228,000 or .18% of total assets at September 30,
1998. At June 30, 1999, non-performing assets were comprised of fourteen (14)
loans, the largest of which was $104,000, secured by a single family dwelling.
Non-performing loans at June 30, 1999 equaled $387,000 or .61% of loans
receivable, compared to $228,000 or .37% of loans receivable at September 30,
1998.
Classified assets totaled $596,000 or .39% of total assets at June 30, 1999,
compared to $570,000 or .46% of total assets at September 30, 1998.
Classified assets and non-performing assets differ in that classified assets may
include loans less than ninety (90) days delinquent. Also, assets guaranteed by
government agencies such as the Veterans Administration and the Federal Housing
Administration are not included in classified assets but are included in
non-performing assets. All classified assets at June 30, 1999, were deemed to be
"substandard". No assets were classified "doubtful" or "loss" as of such date.
The Company's allowance for loan losses totaled $232,000 at June 30, 1999, a
slight decrease from the $233,000 at September 30, 1998. The allowance for loan
losses as a percentage of loans receivable equaled .37% at June 30, 1999 and
.38% at September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits from customers, advances
from the FHLB, amortization and prepayment of loan principal (including
mortgage-backed securities), maturities of securities, sales of loans and
operations.
Current Office of Thrift Supervision regulations require the Association to
maintain, at a minimum, cash and eligible investments, in an amount of not less
than 4.0% of net withdrawable savings accounts and borrowings payable on demand
or in one year or less. Liquid assets include cash on hand, unpledged demand
<PAGE>
deposits, certain time deposits, and, U. S Government and agency obligations.
The Association maintains a liquid asset ratio above the minimum required level
of the Office of Thrift Supervision. At June 30, 1999, the Association's liquid
asset ratio equaled 36.6%.
The Association uses its liquidity and capital resources principally to meet
ongoing commitments to fund maturing certificates of deposit and loan
commitments, maintain liquidity and pay operating expenses. At June 30, 1999,
the Association had outstanding commitments to extend credit on $5.2 million of
real estate loans.
Management believes that present levels of liquid assets are sufficient to meet
anticipated future loan commitments as well as deposit withdrawal demands.
Total stockholders' equity equaled $19.9 million at June 30, 1999, a decrease of
$523,000 from the $20.4 million reported at September 30, 1998. The decrease was
the result of the $730,000 increase in treasury stock and the $212,000 cash
dividend paid during the quarter. The decrease was offset by the $282,000 net
income reported for the nine month period ended June 30, 1999, an $87,000
decrease in deferred compensation, and a $50,000 increase in unrealized losses
on available-for-sale securities.
As of June 30, 1999, the Company's reported book value per share, using total
stockholders' equity of $19.7 million (net of the cost of unallocated ESOP and
RRP shares) and 1,392,853 outstanding shares of common stock (the total issued
shares including unallocated ESOP and RRP shares, less treasury shares), equaled
$14.26 per share.
Subsequent to the quarter ended June 30, 1999, the Company announced its
intention to pay a cash dividend of $.05 per share on August 25, 1999, to
stockholders of record at August 11, 1999.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), Congress imposed a three part capital requirement for thrift
institutions. At June 30, 1999, the Association's actual and required capital
amounts under each of the three requirements were as follows:
- - Tangible Capital (stockholders' equity) was $17.8 million or 11.8% of total
assets, exceeding the minimum requirement of 1.5% by $15.5 million.
- - Core Capital (Tangible capital plus certain intangible assets) was $17.9
million or 11.8% of total assets, exceeding the minimum requirement of 4.0% by
$11.8 million.
- - Risk-based Capital (Core capital plus general loan and valuation allowances
less an adjustment for capitalized mortgage servicing rights) equaled $18.0
million of 30.9% of risk weighted assets, exceeding the minimum requirement of
8.0% of risk weighted assets by $13.4 million.
At June 30, 1999, the Association was considered a "well capitalized"
institution under the prompt corrective action requirements of the Federal
Deposit Insurance Corporation Improvement Act of 1991.
<PAGE>
YEAR 2000 ISSUE
The Year 2000 or Century Date Change issue is a result of computer programs
being written using two digits rather than four digits to define the applicable
year. A computer system's inability to recognize the date "00" as the year 2000
of if the system recognized the date "00" as the year 1900, could result in a
system failure or miscalculations causing disruptions of operations. The Company
outsources its primary computer processing functions.
The Company has established a management committee to identify all of its
systems potentially affected by the year 2000 and to ensure that reprogramming
of affected systems is completed. The committee is responsible for testing all
company computer systems and ensuring that all third party computer system
vendors complete Year 2000 remediation.
The Company has undergone three examinations from its primary regulatory
authority, the OTS. The Company received satisfactory ratings on all exams.
During the remainder of 1999, the Company will focus its Year 2000 efforts on
customer awareness and liquidity planning. The Company will be involved in
training its employees to answer customer inquiries about Year 2000 issues and
will continue to advise its customers about the Company's ongoing efforts.
The Company believes that the risk that the major data processing service
provider will not be Year 2000 compliant is low. The Company has also received
correspondence from all other third party software providers that indicate that
all of such software will be Year 2000 compliant.
The Company has budgeted approximately $25,000 for its Year 2000 program. As of
June 30, 1999, the Company has expensed or is aware of future expenditures
totaling approximately $10,000.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB or future filings by the Company with the
Securities and Exchange Commission, the Company's press releases or other public
or shareholder communications or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project",
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
<PAGE>
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1999
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There are no material legal proceedings to which the Company or the
Association is a party or of which any of their property is subject. From
time-to-time, the Association is a party to various legal proceedings
incident to the conduct of its business.
Item 2. Changes In Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submissions Of Matters To A Vote Of Security Holders
----------------------------------------------------
None.
Item 5. Other Information.
------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are filed herewith:
Exhibit 11.0 - Computation of Earnings Per Share
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, the Company filed a report on
Form 8-K on May 4, 1999, to report the issuance of a press release
dated April 30, 1999, announcing the Company's intention to pay, on May
26, 1999, a cash dividend of $.05 per share for the quarter ended March
31, 1999, to stockholders of record on May 12, 1999.
<PAGE>
During the quarter ended June 30, 1999, the Company filed a report on
Form 8-K on May 4, 1999, to report the issuance of a press release
dated April 30, 1999, announcing the Company's earnings for the quarter
ended March 31, 1999.
During the quarter ended June 30, 1999, the Company filed a report on
Form 8-K on June 10, 1999, to report the issuance of a press release
dated June 9, 1999, announcing the Company's intention to rescind the
stock repurchase program announced January 29, 1999 and to announce a
new stock repurchase program.
<PAGE>
SIGNATURES
----------
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
East Texas Financial Services, Inc.
Date: August 11, 1999 /s/ Gerald W. Free
------------------
Vice Chairman, President and CEO
(Principal Executive Officer)
Date: August 11, 1999 /s/ Derrell W. Chapman
-----------------------
Vice President/COO/CFO
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT 11.0
<PAGE>
COMPUTATIONS OF EARNINGS PER SHARE
Three Months Ended
June 30, 1999
Less
Total Shares Unallocated Shares Used For
Outstanding ESOP Shares EPS Calculation
----------- ----------- ---------------
March 31, 1999 1,392,853 81,536 1,311,317
April 30, 1999 1,392,853 81,536 1,311,317
May 30, 1999 1,392,853 81,536 1,311,317
June 30, 1999 1,392,853 81,536 1,311,317
Weighted average number of shares outstanding for
the quarter ended June 30, 1999, for earnings
per share calculation 1,311,317
---------
Stock options outstanding at June 30, 1999: 148,843
-------
Exercise price of stock options: $9.42 per share
---------------
Average stock price for three month period:
ended June 30, 1999 $11.512
-------
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
June 30,
--------
Basic Earnings Per Share 1999 1998
----------- -----------
<S> <C> <C>
Income available to common stockholders $ 48,850 $ 123,049
=========== ===========
Weighted average number of common shares
outstanding for basic EPS calculation 1,311,317 1,441,868
=========== ===========
Basic Earnings Per Share $ .04 $ .09
=========== ===========
Diluted Earnings Per Share
Income available to common stockholders $ 48,850 $ 123,049
=========== ===========
Weighted average number of common shares
outstanding for basic EPS calculation 1,311,317 1,441,868
Weighted average common shares issued
under stock option plans 148,843 150,411
Less weighted average shares assumed
repurchased with proceeds (121,795) (92,733)
----------- -----------
Weighted average number of common shares
outstanding for diluted EPS calculation 1,338,365 1,499,546
=========== ===========
Diluted Earnings Per Share $ .04 $ .08
=========== ===========
</TABLE>
<PAGE>
COMPUTATIONS OF EARNINGS PER SHARE
Nine Months Ended
June 30, 1999
Less
Total Shares Unallocated Shares Used For
Outstanding ESOP Shares EPS Calculation
----------- ----------- ---------------
September 30, 1998 1,464,056 81,536 1,382,520
October 31, 1998 1,464,056 81,536 1,382,520
November 30, 1998 1,464,056 81,536 1,382,520
December 31, 1998 1,464,056 81,536 1,382,520
January 31, 1999 1,464,056 81,536 1,382,520
February 28, 1999 1,392,853 81,536 1,311,317
March 31, 1999 1,392,853 81,536 1,311,317
April 30, 1999 1,392,853 81,536 1,311,317
May 31, 1999 1,392,853 81,536 1,311,317
June 30, 1999 1,392,853 81,536 1,311,317
Weighted average number of shares outstanding for
the quarter ended June 30, 1999, for earnings
per share calculation 1,346,919
---------
Stock options outstanding at June 30, 1999: 148,843
-------
Exercise price of stock options: $9.42 per share
---------------
Average stock price for nine month period:
ended June 30, 1999 $10.757
-------
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
June 30,
--------
Basic Earnings Per Share 1999 1998
- ------------------------ ----------- -----------
<S> <C> <C>
Income available to common stockholders $ 282,000 $ 425,148
=========== ===========
Weighted average number of common shares
outstanding for basic EPS calculation 1,346,919 1,441,868
=========== ===========
Basic Earnings Per Share $ .21 $ .29
=========== ===========
Diluted Earnings Per Share
Income available to common stockholders $ 282,000 $ 425,148
=========== ===========
Weighted average number of common shares
outstanding for basic EPS calculation 1,346,919 1,441,868
Weighted average common shares issued
under stock option plans 148,843 150,411
Less weighted average shares assumed
repurchased with proceeds (130,343) (96,748)
----------- -----------
Weighted average number of common shares
outstanding for diluted EPS calculation 1,365,419 1,495,531
=========== ===========
Diluted Earnings Per Share $ .21 $ .28
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF EAST TEXAS FINANCIAL SERVICES, INC., AT
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 700,340
<INT-BEARING-DEPOSITS> 5,555,025
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,349,610
<INVESTMENTS-CARRYING> 38,376,533
<INVESTMENTS-MARKET> 38,356,560
<LOANS> 63,541,008
<ALLOWANCE> 231,971
<TOTAL-ASSETS> 151,135,578
<DEPOSITS> 87,701,272
<SHORT-TERM> 35,229,759
<LIABILITIES-OTHER> 1,291,316
<LONG-TERM> 7,053,004
0
0
<COMMON> 18,845
<OTHER-SE> 19,841,382
<TOTAL-LIABILITIES-AND-EQUITY> 151,135,578
<INTEREST-LOAN> 3,587,918
<INTEREST-INVEST> 3,046,383
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,634,301
<INTEREST-DEPOSIT> 3,180,472
<INTEREST-EXPENSE> 4,212,546
<INTEREST-INCOME-NET> 2,421,755
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,286,757
<INCOME-PRETAX> 457,630
<INCOME-PRE-EXTRAORDINARY> 457,630
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 282,000
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 6.70
<LOANS-NON> 387,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 123,000
<ALLOWANCE-OPEN> 231,971
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 231,971
<ALLOWANCE-DOMESTIC> 49,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 182,271
</TABLE>
